2. Asset Liability Management (ALM)
• ALM is the practice of managing various risks that arise due
to mismatches between the assets and liabilities of the bank.
• It is a mechanism to address the risk faced by a bank due to
a mismatch between assets & liabilities either due to
liquidity or change in interest rates.
• Bank and other financial institutions provide services which
expose them to various kinds of risk like credit risk, interest
risk and liquidity risk.
• ALM models enables institutions to measure and monitor
risk and provide suitable strategies for their management.
3. Definition:
ALM is continuously arranging and rearranging the assets and liabilities of the bank
with out infringing liquidity and safety of the bank and with the purpose of
maximizing the bank’s profit.
What is liquidity?
The ability of the bank to fulfill of its obligations, and after doing so having enough
cash to do its normal daily banking business.
What is safety?
The ability of the bank’s “share holder’s equity” to absorb the future possible losses
that may arise and after doing so having enough share holder’s equity to run the
bank and to comply with the minimum capital requirements.
4. Risks in Banking
Interest Rate Risk:
Risk that arises when the interest income of the bank is sensitive to the interest rate
fluctuations.
Credit Risk :
Risk that arises due to the possibility of a default/delay in the repayment obligation
by the borrowers of funds.
Liquidity risk :
Risk that arises due to the mismatch in the maturity patterns of the assets and
liabilities.
Treasury management risk :
Risk to the banks due to changes in cash flows in its deposit and credit structure that
requires an obligation to maintain liquidity.
5. Operational risk:
Risk arising out of fluctuations in day to day operations of the banks.
Market risk:
Risk of events reducing the return expectation of bank’s capital contributors.
Foreign Exchange/Currency Risk:
Risk that arises due to unanticipated fluctuation in exchange rates.
Contingency risk:
Risk that arises due to the presence of off balance sheet items such as guarantees,
letters of credit, underwriting commitments etc.
6. But under ALM, risks that are typically managed are;
ALM:
Maturity matching of assets and
liabilities of various time horizons.
ALM Objectives:
1. Liquidity Risk Management
2. Interest Rate Risk Management
3. Currency Risk Management
4. Profit planning and Growth
projections
7. • When a bank provides the long term loans from much shorter maturity funds, the
situation is called asset-liability mismatch.
• If the capital of banks being small when compared to its asset structure, any change in
asset structure is likely to prove dangerous to the bank’s profitability.
• Banks need to examine the effect of changes in capital to changes in the asset
structure simultaneously to enhance overall profits.
• An effective Asset Liability Management Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as
to attain a predetermined acceptable risk/reward ratio.
10. Need for ALM
• Globalization of financial markets
• Deregulation of interest rates
• Diversification of ALM products
• Healthy competition in banking sector
• Multi-currency balance sheet
• Integration of markets
• Narrowing of NII/NIM
13. Tools used by banks for ALM
ALM Information Systems
ALM Organization
ALM Process
14. ALM Information Systems
• Usage of real-time information system to gather the information about the maturity
and behavior of loans and advances made by all other branches of a bank.
ALM Organization
• The board should have overall responsibilities and should set the limit for liquidity,
interest rate, foreign exchange and equity price risk.
ALM Process
15. Statement of Structural Liquidity
All assets and liabilities to be reported as per their maturity profile into 10
maturity bucket.
1. 1 day
2. 2-7 days
3. 8-14 days
4. 15-28 days
5. 29 days to 3 months
6. Over 3 months up to 6 months
7. Over 6 months up to 1 year
8. Over 1 year to 3 years
9. Over 3 years to 5 years
10. Above 5 years
16. RBI guidelines on structural liquidity statement
• Main focus should be on short-term mismatches viz., 1-day, 2-7 days, 8-14 days
and 15-28 days.
• Maturing liabilities = Cash outflows; Maturing Assets = Cash inflows.
• The negative gap during 1 day, 2-7 days, 8-14 days and 15-28 days time-bucket
should not exceed 5%, 10%, 15% and 20% respectively.
• The SSL to be reported to RBI, once a month (3rd Wednesday of every month).
• Liability mismatch: Outflows are more than inflows; Asset mismatch: Inflows are
more than outflows.
17. Interest rate risk analysis
• Traditional Gap analysis is considered to be a suitable method to measure the interest rate
risk.
• Gap analysis measures the mismatches between rate sensitive liabilities and rate sensitive
assets (including off-balance sheet positions).
• Interest rate gaps may be identified in the following time buckets;
1. 1-28 days
2. 29 days and up to 3 months
3. 3-6 months
4. 6 months – 1 year
5. 1 year – 3 years
6. 3 years – 5 years
7. Over 5 years
19. Individuals - Minor Accounts
- Individual customers are allowed to open accounts with bank.
- As per Sec. 11 of the Indian Contract Act, 1872 ‘any person less than 18 years of age, even by
a day, would be a minor in law’.
- It further states that “every person is competent to contract who is of the age of at least 18 and
who is sound mind and is not disqualified from contracting by any law to which he is subject”.
- The essence of this is that minor is not competent to enter into a contract.
- Incase of minor, a banker would open a joint account with the natural guardian.
- However, to encourage the habit of savings, bank open minor accounts in the name of a minor.
20. - Such minor accounts are opened subject to certain conditions like;
# the minor should be of minimum age of 10 years to operate deposit accounts.
# Should be literate.
# No overdraft is allowed in such accounts
# Two minors cannot open a joint account.
# The father is the natural guardian for opening minor account, but RBI has authorized
mother also to sign as guardian.
- Opening of minor’s account needs certain formalities, viz.,
# Introduction from an existing account holder or identity, age and residence proof and ID
card from the school etc.
- Usually, the account should be operated by the guardian on behalf of the minor, whose
date of birth and date of major (attaining 18 years) are recorded in ledger account. After
attaining 18 years, the guardian is not allowed to operate the account any further, without
confirmation from the minor (who is now major).
21. • If the guardian dies during the minority, then the balance can be paid to the minor after his
attaining major.
• If the minor account holder dies, the balance is payable to the natural guardian, as he
becomes the absolute owner of it.
• The term natural guardian does not include stepmother or stepfather.
22. Individuals - Joint Account Holders
• A joint account is an account opened by two or more persons.
• While opening the account, an account opening should be signed by all the account holders.
• Instructions for operating the account may be any one of the following;
• Either or Survivor
• Both Jointly
• Former or Survivor.
• Any change in the operation of accounts should be signed by all the account holders.
• The instructions for operations in the account will come to end in cases of insanity, insolvency,
death of any of the joint holders. The operation of the account will be stopped.
• Any of the account holder can stop the payment of a cheque issued by other joint account
holder.
23. • On death of any of the joint account holders, the survivors are entitled for the whole
amount.
• Nominations can be entertained for payments of balance in the case of death of all joint
account holders.
• No right of set off can be exercised in the case of a joint account for the amounts due to
the bank in an individual capacity.
24. Hindu Undivided Family (HUF)
• HUF is a unique entity recognized under the Hindu Customary law as comprising of a ‘Karta’
(Senior-most male member of the family), his sons and grandsons or even great grandsons in a
lineal descending order, who are ‘Coparceners’ (who have undivided share in the estate of
HUF).
• The right to manage the HUF and its business vests only in the Karta and he acts on behalf of
all the coparceners such that his actions are binding on each of them to the extent of their shares
in the HUF property. The Karta and other coparceners may possess self-acquired properties
other than the HUF property but these cannot be clubbed together for the HUF dues.
• The distinction of HUF from Partnership firm is that in partnership, all partners are individually
or collectively liable to outsiders for the dues of the partnership and all their individual assets,
apart from the assets of the partnership, would be liable for attachment for partnership dues.
Contrarily, in HUF business, the individual properties of the coparceners are spread from
attachment for HUF dues.
25. • The Karta has an implied authority to avail loan and execute the necessary documents. To
be a safer side the loan documents should be signed by all the adult male members.
• The Karta has the power to transfer an asset, provided it is made for legal necessity or for
the benefit of the estate.
• Names of male minor coparceners should be kept on record and their guardians must sign
the documents on their behalf.
• Withdrawal of one of the coparceners does not put the existence of the firm in jeopardy.
26. Partnership Firm Account:
• Sec. 4 of Indian Partnership Act 1932 defines a partnership as a relationship existing between
persons who have agreed to share the profits of a business carried on by all or any of them
acting for all.
• Registration of partnership is optional except in the states of Gujarat and Maharastra where it is
compulsory.
• While opening an account, the partnership letter should be signed by all the major partners,
stating the nature of business, names and addresses of all partners along with operative
instructions as to who will operate the account.
• In case of any internal dispute among the partners, if any of them gives notice of stoppage of
operation, then the account would only be operative by all the partners jointly.
27. • Partners are mutual agents and can bind the firm by their acts. It applies to sleeping or
secret partner also.
• When there is an addition into the partnership, the old account can be continued, if the
balance in the account is credit. But when there is a debit balance, the old account should
be closed and a new account should be opened so that the liability is crystallized and the
future credits are not adjusted against old liabilities/dues.
• Death of a partner dissolves the partnership firm automatically. In order to determine the
liability of the deceased partner, the banker should close the account of the firm and
secure a letter of administration from the court.
28. Limited Companies
• Company is a legal entity and can open accounts in the same way as any other person.
• There are three types of companies; Public Ltd. – Private Ltd. – Government company.
• Public Ltd: It has minimum 7 members and a maximum of unlimited members, with the
minimum paid-up capital of Rs. 5 lakh (Sec.3 (i) (iv) of the Companies Act, 1956).
• Private Ltd: It has to have a minimum of 2 members and maximum of 200 As per 2015
amendment) with a minimum paid-up share capital of Rs.1 lakh (This is removed. Now
no minimum Share capital). Maximum number does not include members who are in
employment of the company. For banking business, maximum members allowed is 20
(Sec.3 (i) (iii) of the companies Act, 1956).
• Government Companies: Minimum 51% of shares are held by Government. The word
Ltd. Is not required to follow the company’s name in such companies.
29. The company should furnish the following for opening of accounts with banks;
• Certified copies of memorandum and articles of association and certificate of incorporation.
• Names of directors of the company as stated in the articles.
• For Public Ltd. Company, a copy of certificate of commencement of business issued by
Registrar Of Companies (ROC).
• Copy of resolution appointing the bank as company’s bank and names of the persons authorized
to operate the account.
• The specimen signature of all authorized officials who would operate the account.
• Companies balance sheet incase of existing company.
• Death of the authorized signatories does not demand the stoppage of payments, since the
company is in existence.
• Introduction is not necessary for opening company account.
• A cheque payable to the company should never be deposited in the personal account of directors,
as it would amount to negligence under sec. 131 of NI Act, 1881.
30. Trusts
• A Trust is a relationship where a person (trustee) hold property for the benefit of another
person(s) (beneficiary) in such a way that the real benefit of the property accrues to the
beneficiary or serves the object of the trust.
• The person who accepts the confidence is known as Trustee. The person for whose
benefit, the confidence is accepted is called the beneficiary. The instrument for which the
trust is created is called ‘Trust Deed’.
• A trust is generally created by a trust deed and all concerned matters are governed by the
Indian Trusts Act, 1882.
31. A banker should exercise extreme care while conducting the trust accounts, to avoid
committing breach of Trust;
- A Trustee cannot delegate his powers to other trustees, nor can all trustees by
common consent delegate their powers to outsiders.
- The funds in the name of the trust cannot be used for crediting in the trustee’s
account, nor for liquidating the debts standing in the name of the trustee.
- The Trustee cannot raise loan without the permission of the court, unless permitted by
the Trust deed.
32. Rules of Opening an Account:
1. Copy of trust deed is to be examined to ascertain the power and functions of the
trustees.
2. In case of two or more trustees, unless specifically stated all the trustees will operate the
account jointly.
3. On the death of one or more trustees, the authority will be vested in the remaining
trustees. When all the Trustees are dead or retired, new trustees will be appointed by
court.
4. The insolvency of the trustee is not the insolvency of the Trust.
5. Trustee(s) cannot delegate the powers, unless specifically authorized by the trust deed.
6. Charitable Trusts are required to be registered with the Charity Commissioner under the
Public Trust Act. Copy of registration certificate should be obtained, before opening
such an account.
33. Cooperative Societies
• Cooperative societies are required to open accounts only with these banks which are
recognized for this purpose (under the Co-operative Society Act).
• The following documents should be obtained while opening their account;
• Certificate of registration of the society under the Cooperative Society Act.
• Certified copy of the by-laws of the society.
• Resolution of the managing committee of the society prescribing the conditions for the
conduct of the account.
• List of the members of the managing committee with the copy of the resolution electing them
as the committee members.
34. Government and Public Bodies
• Central Government transactions are governed by Central Government Compilation of
Treasury Rules and Account Codes.
• State Government transactions are governed by State Financial Handbook of the state.
• The main functions of bank in conducting government consists of paying, receiving,
collecting and remitting money on behalf of the government departments.
• Banks, while opening the accounts of government and public bodies, should obtain a copy
of letter of authority issued by competent authority for opening of account.
• Government departments are authorized to issue cheques within drawing limit permitted
to them.
36. Background
• The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become a
serious concern.
• The banks’ capacity to lend has been severely affected because of mounting NPAs.
• Total NPA of Indian banks as on 31st March 2018 was Rs.10.36 lakh crores of which
PSU banks share is 80%. This has come down to Rs.8.09 lakh crores at the end of
September 2020 (Source: Economic Times, dated 2nd Feb 2021).
Cited from
www.knoema.com
37. What is Non-performing Assets?
• In simple terms, an asset is tagged as Non-Performing Assets (NPA) when it
ceases to generate income for the lender.
• NPA shall be declared as a loan or advances where;
• Installment of principal or interest remain overdue for a period exceeding 90
days in respect of a Term loan.
• The account remains ‘out of order’ for a period of more than 90 days, relating
to cash credit or Bank overdraft.
• The bill remains unsettled for a period of more than 90 days in respect of a
purchased or a discounted bill.
38. Types of NPA
There are 3 major types of NPA.
• Sub-standard: The account holder belonging to this category don’t pay three
installment continuously after 90 days and up to 1 year. The bank has to make 10%
provisions (unsecured loans – 20%) of funds for this category to meet the losses
generated from NPA from their profit.
• Doubtful NPA: Doubtful NPA are classified into three sub categories:
• 20% provision is made by the banks for D1 i.e. up to 1 year.
• 30% provision is made by the banks for D2 i.e. up to 2 year.
• 100% provision is made by the banks for D3 i.e. up to 3 year.
• Loss Assets: When the account holder belongs to this category 100% provision is
made by the banks to write off their accounts. After this, the assets are delivered to
recovery agents for the purpose of sale.
39. Reasons behind NPA
• Default of a loan intentionally
• Frequent Shuffle of Govt. policies
• Customer has taken the loan for non-performing business
• Loans sanctioned for agricultural purposes have high uncertainty due to poor
yield, poor climate, natural calamities, infection etc.
• Negligent pre-enquiry by the bank for sanctioning the loan to a customer.
40. Effects of NPA
• Continuous draining of Bank’s profit
• Banks may charge higher interest rate on some products to compensate Non Performing Assets.
• Economy will be negatively affected.
• Negative impact on Bank’s goodwill
• Adverse growth of Bank’s equity value
• Restricted cash flow by bank due to provision of fund created against NPA.
41. Gross NPA and Net NPA
• Gross NPA is advance which is considered irrecoverable, for whom the bank has
made provisions, and which is still held in bank’s book of accounts.
• Net NPA is obtained by deducting items like interest due but not recovered, part
payment received and other income kept in suspense account from gross NPA.
42. Current Indian Scenario:
• Consistently rising NPAs have become serious concern for Indian banking system
today.
• The major reason for this is slowing economic activity as it have impacted
viability of project investments, thus affecting revenue streams and in turn their
ability to service debt.
• Asset quality of public sector banks remain a concern with gross NPA at 9.3% in
as on Sept 2019 as against 4.4% in 2013-14.
43. NPA Management (The Need To Balance Credit Quality With Growth)
• The 2008 financial crisis was a turning point in the history of the financial world for
many reasons, the most important being the heightened awareness and concerns around
asset quality.
• Every step of the lending process, from customer verification, profile risk assessment to
collateral valuation came under the scanner.
• Indian Banks today are in a phase of rapid growth, with a credit to deposit ratio of 66.4%
for the FY 2020 against 75%a for the FY 2012. The credit growth has touched a record
low of 5.6% in financial year 2021 (source: www. reuters.com, retrieved on 30th April
2021).
• Banks are faced with the challenging task of maintaining/increasing credit off-take to fuel
GDP growth, while also ensuring quality is not compromised.
• Banks have been managed to bring down bad loans to 7.5% in March 2021 (Source:
Times of India, dated 02.07.2021)
44. • In this era of global connectivity and quick transmission of shocks, banks need to monitor
asset quality very closely to ensure smooth functioning and spot any aberrations.
• Banks today have started adopting many predictive and pre-emptive strategies to improve
asset quality to specifically minimize NPA levels.
• Predictive Analytics has been effectively used in some cases to score customers, based on
behavioural and demographic /psychographic parameters.
• These scores are considered to be a fairly accurate indicator of expected repayment
behaviour and determine credit eligibility. This can be used effectively to decide whether
or not an asset product is to be cross-sold to a customer.
• Credit Information Bureau India Limited’s (CIBIL) scores, attempt to provide this kind of
data even at an inter-bank level.
45. Strategies used in NPA management
• Accountability
• Corporate Governance
• Stricter NPA recovery
• Credit Risk Management – sensitivity analysis and banks should build safe guards
against external risks
• Asset Reconstruction company
46. Conclusion:
• Smart Management of the asset lifecycle can enable Banks to not just be
compliant, but over the long term, also help adjust their credit policy, product
portfolio and lending processes in a bid to reduce bad loans.
• From a regulatory perspective, NPA data helps in building an accurate picture of
asset quality which in turn becomes a useful input in macroeconomic policy
making
48. Who is a Customer?
A Customer, for the purpose of this policy is defined as;
a). A person or an entity that maintains an account and/or has a business
relationship with the bank.
b). One on whose behalf the account is maintained (i.e. the beneficial owner).
c). Beneficiary of transactions conducted by professional intermediaries such as
stock brokers, Charted accountants, solicitors, etc., as permitted under the law and
any person or entity connected with a financial transaction.
49. Key elements of KYC Policy
• Customer Acceptance Policy
• Customer Identification Procedures
• Monitoring of Transactions
• Risk Management
50. A. Customer Acceptance Policy
The bank will:
a) Classify customers into various risk categories based on risk perception.
b) Decide on acceptance criteria for each category of customers.
c) Accept customers after verifying their identity as laid down in Customer Identification
Procedures.
d) Not open accounts in the name of anonymous/fictitious/benami persons.
e) Strive not to inconvenience the general public who desire to transact banking
business.
51. B. Customer Identification Procedure
• Identifying the customer and verifying his/her identity by using reliable, independent
source documents, data or information.
• Emphasis has been made on verifying customer identity not only at the time of
establishing banking relationship but also at the time of executing a transaction and
whenever the bank has a doubt about the authenticity of previously obtained data.
• Information on nature of business activity, location, mode of payments, volume of
turnover, Social and Financial status etc., will be collected for completing the profile
of customer.
52. • Customers will be classified into three risk categories namely high, medium and low
risk categories, based upon the risk perception. The risk categorization will be
reviewed periodically.
• An indicative list of documents / information to verify identity, address and other
features suggested is given below.
For individuals:
For name and Identity;
- Passport - PAN card - Voter Identity card - Driving License - Identity
card (subject to bank’s satisfaction) and – letter from recognized public authority or public
servant verifying the identity and residence of the customer – Adhar card
53. For correct permanent address;
- Telephone bill - Bank account statement- Electricity bill - Ration card - Letter from
Employer (subject to the bank’s satisfaction).
For Companies:
- Certificate of incorporation and MOA & AOA - Power of Attorney granted to its
managers, office employees to transact business on its behalf - PAN allotment letter –
Tel.No/Fax.No – Telephone bill.
For partnership firms:
- Registration certificate - Partnership deed - Power of Attorney granted to a partner or
employee to transact on behalf of partnership firm - Telephone bill.
54. For Trusts and Foundations:
- Certification of registration - Power of Attorney granted to transact business on its
behalf - Any officially valid documents to identify the trustees - Telephone bill.
Relaxation for small customers:
If a person is not able to produce documents mentioned, a relaxation is extended if;
a. Balance is not exceeding Rs. 50,000 in all their account taken together, and
b. The total credit in all the account taken together is not expected to exceed Rs.1,00,000
in a year.
55. C. Monitoring of Transactions
• Transactions will be monitored by considering the risk profile off the account.
• Special attention will be give to all complex, unusually large transactions and all
unusual patterns.
• After the due diligence at the appropriate level in the bank, transactions of
suspicious nature are notified under the Prevention of Money laundering (PML)
Act, 2002.
56. D. Risk Management
• Banks has to establish an appropriate framework covering proper management
oversight, systems, controls and other related matters.
• Bank’s internal audit of compliance with KYC policy will provide an independent
evaluation of the same including legal and regulatory requirements.
• The compliance in this regard will be placed before the audit committee of the
board at quarterly intervals.
• All employees training programmes will have a module on KYC standards. So
that all employees are adequately trained in KYC procedures.
59. Introduction
• Banks are the financial intermediaries, who mobilizes the resources (money) of the public
and lend to various sectors of the economy thereby making profit.
• The money mobilized from the public by way of deposit is repayable as and when
demanded by the depositors.
• Therefore, bankers take utmost care to see that the money lent to various types of
borrowers is repaid as per the repayment schedule along with interest.
• In order to safeguard the advance, bankers normally take securities, on which they fall
back in case the borrowers commit default.
60. • In practice, the securities offered by the borrowers are of different types. They may be
immovable security, movable security, debts etc.
• Immovable securities: The land and buildings, Machineries embedded to earth etc.
• Movable securities: Goods, Vehicles, Furniture, Gold ornaments, machineries etc.
• Debts: Accounts receivables etc.
• Whatever be the nature of securities, banker, while taking them as security has to ensure
that;
61. • They are salable, whenever the need arises, as in case of default by the borrowers.
• The value of securities should be ascertainable at any point of time from reliable sources.
• The value is not subject to heavy fluctuation; otherwise banks have to fix higher percentage
of margin.
• They are easily transferrable with out, as far as possible, going through legal formalities.
• Classification of security may be as primary security and collateral security.
62. • Primary security is one that is regarded as the main cover for an advance; generally, assets
against which advance is made. For example, Stock for cash credits, Machinery for term
loans.
• Collateral security is security other than the primary security lodged by borrower or by a
third party.
1. Land and Buildings:
• Not self-liquidating in nature.
• If bank wants to sell the property for recovery of its advances, it can do so through legal
process.
• Normally, banks have to file a suit before the civil court for recovery, if the amount due in
loan account is less than Rs.10 lakhs.
63. • The bank has to file a suit before the Debt Recovery Tribute (DRT), if the loan due is 10
lakhs and above.
• However, under the provisions of the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, banks can sell
immovable properties taken, by way of mortgage without intervention of the court after
observing the formalities mentioned in the Act.
• Because of this (SARFAESI) right of sale without court intervention, this type of security
has gained importance now and viewed with favour by banks.
• The nature of charge created with this type of security is mortgage.
64. • Examining the title of the property by the bank lawyer.
• To ascertain the property stands good on name of the borrower.
• valid and marketable
• free from all encumbrances and not subject to any litigation
• Documents to be called for from the mortgagor
• Sale of deed/ gift deed/will/partition deed conveying the title in favour of borrower.
• Parent documents to ascertain the flow of Title.
• Encumbrance certificate, normally for 13 years.
• Tax receipts to evidence the possession of the property by the proposed mortgager.
• Search report, if the immovable property belongs to a Joint stock company.
• Advocates opinion
65. • Valuation of the property
- Valuation should be conservative, realistic and should be on forced sale basis.
The following points are considered in fixing the valuation;
The nature of construction.
Age of building and its present strength
Taxes paid
Value of the site
Its location
Rent yield
Area of the land and building
Cost of construction
66. 2. Goods
- Banks advances routinely against the security of goods such as agricultural goods,
raw material, semi finished goods and finished goods.
- The nature of charge created may be either pledge or hypothecation.
- When the possession of goods is transferred to the banker, the nature of charge created is
pledge.
- When the possession of goods is not transferred to the banker, the nature of charge created is
hypothecation.
- Precautions for advance against goods: Ownership verification through invoice, good
demand for goods, Age of stock, Adequate insurance against risk.
- Inspection and Stock audit - an effective credit monitoring tool.
67. 3. Documents of Title to Goods:
Sec 2(4) of sale of Goods Act defines a document of title to goods as “a document
used in the ordinary course of business as a proof of possession or control of goods
authorizing either by endorsement or delivery, the possessor of the documents to transfer or
receive the goods thereby represented”.
- The documents are easily transferable (mere endorsement) and formalities involved are
minimum.
- Possibility of fraud and dishonesty (since the bill of ladding or railway receipt or a
warehouse–keepers certificate, does not certifies or guarantee the correctness, the banker
will have no remedy against the carrier or warehouse keeper, if they turn out to be
worthless).
68. 4. Advances against Life insurance policies
- Policy must be in force and the premium paid up to date.
- Policy should be original, duly stamped and signed by the issuer.
- The policy should be free from restrictive clause.
- The insurance company should be admitted to the age of the assured.
- Generally children endowment life policies and policies taken out
specifically for purposes like estate duty are not accepted as security.
- The assignment on the policy or on separate stamped paper should
be obtained and it should be witnessed by a person. Nominee under the
policy need not join in assigning the policy as nomination under the policy
is automatically cancelled in the event of assignment of the policy.
- In case of death of the assured, the assignee becomes entitled to
receive the policy amount. When the advance is repaid, the policy has to be
reassigned in favour of the policy holder.
69. 5. Advances against shares
Advances against share should be for productive purposes and not against
speculative purpose. Banks provide either demand loan or overdraft loan against the
security of shares.
The nature of charge created while making advances against shares is a pledge.
Now banks insist that shares should be in demat form while advancing. No loan can be
given against the shares of a private limited company.
As per sec 19(2) of Banking Regulation Act, 1949, no banking company should
hold shares in any company, whether as a pledgee, mortgagee or absolute owner, of an
amount exceeding 30% of the paid-up share capital of that company or 30% of its own
paid-up share capital and reserves, whichever is less.
70. • Regulatory limits of the banks Exposure to capital market: Banks aggregate exposure
limit to capital market across all asset class should not exceed 5% (subject to change as
per RBI instruction) of the total outstanding advances.
• Loans against the security of shares, debentures, PSU bonds to individual should not
exceed Rs.10 lakhs per individual borrower, if the securities are held in physical form.
In case of demat form, maximum loan limit is Rs.20 lakhs.
6. Loans against Book debts
Book debts are the claims arising out of credit sale. Credit sale can be effected in
two ways:
i. By drawing bills ii. By debiting purchaser accounts.
The total bills outstanding is called ‘Bills Receivables’ and the total of debit balance in
the purchaser’s account is called ‘Account Receivable’.
71. • Accounts receivables are called book debts. This represents amount receivables from others
on the account of business transactions.
• Risks in lending upon accounts receivables are; the account may be fictitious, old or
disputed. Integrity of the borrower should be considered even it may not warrant risk.
• Factoring, Forfeiting, Overdraft, cash credit (against hypothecation) are the modes of
financing book debts. Integrity, Credit worthiness and verification of book debts to be
ascertained and fulfilled.
7. Loans against Term deposits
- Normally bank lend 90% of the deposit value as loan. Interest will be 1% or 2% higher then
deposit interest rate. No loans on name of Minor deposits.
8. Loan against Gold ornaments
The amount of loan depends on market value of gold.
73. Introduction
• The concept of Priority Sector Lending (PSL) was introduced mainly with the
intention to ensure that the higher assistance from banking system to those sectors of
the economy which have not received adequate support of institutional finance.
• RBI identifies priority sector as:
i. Agriculture
ii. Small Scale Industries (SSI)
iii. Small road and water transport operations
iv. Small business
v. Professional and self-employed person
vi. Education
vii. Housing
viii. Micro-credit and
ix. Weaker sections
74. • RBI monitors the PSL made by commercial banks through periodical return received
from banks.
• The banks have been adhering to RBI guidelines without insisting adequate security
and have supplied advances to priority and other neglected sections of society at a
concessional rate of interest. As a result, the proportion of advances to priority sector
have increased from 15% at the time of bank nationalization to more than 40% now.
• On the basis of recommendations of C. S. Murthy working group, the guideline for
PSL is revised on April 30, 2007. The target of 40% on net bank credit (NBC) for
domestic banks and 32% for foreign banks were fixed. (Now 40% for foreign banks
with more than 20 branches in India).
75. Categories of Priority Sector and Description of Loans
• Another working group under the chairmanship of Shri S Ghosh was set up to review the
definition of PSL and identify targets fixed in respect of various categories and sub-
category for both Public sector banks and foreign banks. The broad categories are;
1. Agriculture
a. Direct Finance:
- Finance to individual farmers (including Self help Group(SHG))
- Crop loans and horticulture
- Advances up to Rs. 10 lakhs against pledge/hypothecation for a period not
exceeding 12 months.
- Short-term loans to Sugar mills, Agro-processing units and agri-exporters.
- Working capital and term loans for agriculture and allied activities.
76. - Loans to small and marginal farmers for purchase of land for agriculture purposes.
- Loans to distressed farmers indebted to non-institutional lenders, against
appropriate collateral.
- Loans granted for pre-harvest, post-harvest activities such as grading, sorting,
spraying, weeding and transportation.
b. Indirect Finance:
- Loans to food and agro based processing units with investment in plant and
machinary up to Rs. 10 crore.
- Loans to NBFCs for on lending to individual farmers.
- Credit purchases and distribution of fertilizes, pesticides, seeds etc.
- Finance for setting-up Agri business centres.
- Finance for Hire-purchase schemes for distribution of agricultural machineries.
77. 2. Small enterprises
a. Direct Finance
b. Indirect Finance
3. Other small business enterprises
4. Micro Credit
5. State sponsored Organizations for SCs/STs
6. Education
7. Housing – RBI announces hike in limits for affordable housing (Rs.28L to Rs.35L in
Metropolitan city and Rs.20 L to Rs.25L in other centres) – overall cost of dwelling unit in
metro and other centres not to exceed Rs.45L and Rs. 30L respectively). Source: Economic
Times dated 7th June 2018.
8. Weaker sections
9. Export credit
(Refer – ‘Banking law and practice’, Sukhvinder Mishra, page 868 to 875)
Guidelines for Priority Sector Loans ( Refer – ‘Banking law and practice’, Sukhvinder
Mishra, page 876 to 884) – very important
78. Major issues in Priority Sector Lending
• Low Profitability (due to rigid target setting and concessional loans).
• High NPAs
• Government interference
• Transaction cost (Sanctioning and monitoring large number of small
advances is time consuming and manpower intensive)
80. Financial Inclusion
• Financial inclusion or inclusive financing is the delivery of financial services at
affordable costs to sections of disadvantaged and low-income segments of society.
• An estimated 2.5 billion working-age adults globally have no access to the types of
formal financial services delivered by regulated financial institutions.
• The Reserve Bank of India (RBI) set up the Khan Commission in 2004 to look into
financial inclusion and the recommendations of the commission were incorporated into
the mid-term review of the policy (2005–06).
81. Why Financial Inclusion in India is Important ?
1. Creating a platform for inculcating the habit to save money.
The lower income category has been living under the constant shadow of financial
stress mainly because of the absence of savings.
The absence of savings makes them a vulnerable lot. Presence of banking services
and products aims to provide a critical tool to inculcate the habit to save.
Capital formation in the country is also expected to be boosted once financial
inclusion measures materialize, as people move away from traditional modes of parking
their savings in land, buildings, bullion, etc.
82. 2. Providing formal credit avenues
So far the unbanked population has been vulnerably dependent of informal
channels of credit like family, friends and moneylenders.
Availability of adequate and transparent credit from formal banking channels shall
allow the entrepreneurial spirit of the masses to increase outputs and prosperity in the
countryside.
A classic example of what easy and affordable availability of credit can do for the
poor is the micro-finance sector.
3. Plug gaps and leaks in public subsidies and welfare programmes
A considerable sum of money that is meant for the poorest of poor does not
actually reach them.
Government is therefore, pushing for direct cash transfers to beneficiaries through
their bank accounts rather than subsidizing products and making cash payments.
83. Indian Scenario on Financial Inclusion:
• RBI exhorted the banks with a view to achieving greater financial inclusion to make
available a basic "no-frills" banking account.
• Reserve Bank of India’s vision for 2020 is to open nearly 600 million new customers'
accounts and service them through a variety of channels by leveraging on IT.
• However, illiteracy and the low income savings and lack of bank branches in rural areas
continue to be a roadblock to financial inclusion in many states and there is inadequate
legal and financial structure.
84. • The government of India recently announced “Pradhan Mantri Jan Dhan Yojna” a national
financial inclusion mission.
• In India, RBI has initiated several measures to achieve greater financial inclusion, such as
facilitating no-frills accounts and GCCs (Green Channel Counters) for small deposits and
credit. Some of these steps are:
• Opening of no-frills accounts: Basic banking no-frills account is with nil or very low
minimum balance as well as charges that make such accounts accessible to vast sections of the
population. Banks have been advised to provide small overdrafts in such accounts.
85. • Relaxation on know-your-customer (KYC) norms: KYC requirements for opening bank
accounts were relaxed for small accounts in August 2005, by stipulating that introduction by an
account holder who has been subjected to the full KYC drill would suffice for opening such
accounts. The banks were also permitted to take any evidence as to the identity and address of
the customer to their satisfaction. It has now been further relaxed to include the letters issued
by the Unique Identification Authority of India containing details of name, address and
Aadhaar number.
• Engaging business correspondents (BCs):In January 2006, RBI permitted banks to engage
business facilitators (BFs) and BCs as intermediaries for providing financial and banking
services. The BC model allows banks to provide doorstep delivery of services, especially cash
in - cash out transactions, thus addressing the last-mile problem. The list of eligible individuals
and entities that can be engaged as BCs is being widened from time to time. With effect from
September 2010, for-profit companies have also been allowed to be engaged as BCs.
86. Financial Inclusion Index
On June 25, 2013, CRISIL, India's leading credit rating and research company
launched an index to measure the status of financial inclusion in India. The index- Inclusix-
along with a report, was released by the Finance Minister of India, P. Chidambaram at New
Delhi. CRISIL Inclusix is a one-of-its-kind tool to measure the extent of inclusion in India,
right down to each of the 632 districts.
CRISIL Inclusix is a relative index on a scale of 0 to 100, and combines three
critical parameters of basic banking services — branch penetration, deposit penetration,
and credit penetration —into one metric. It contains the first regional, state-wise, and
district-wise assessments of financial inclusion ever published and the first analysis of
trends in inclusion over a three-year timeframe. Some key conclusions from the study are:
87. • The all-India CRISIL Inclusix score of 58.0 in 2016 is high, and there are clear signs of
progress – this score has improved from 35.4 in 2009.
• Deposit penetration is the key driver of financial inclusion – the number of savings
accounts (624 million), is almost four times the number of loan accounts (160 million).
• 618 out of 632 districts reported an improvement in their scores during 2009-2011.
• The top three states and Union Territories are Puducherry, Chandigarh, and Kerala; the top
three districts are Pathanamthitta (Kerala), Karaikal (Puducherry), and Thiruvananthapuram
(Kerala).
• Total Deposit accounts in India -164.6 crore (as of 2016)
• Total credit accounts in India – 19.6 crore
88. Controversy
Financial inclusion in India is often closely connected to the aggressive micro credit
policies that were introduced without the appropriate regulations oversight or consumer
education policies.
The result was consumers becoming quickly over-indebted to the point of committing
suicide, lending institutions saw repayment rates collapse after politicians in one of the country's
largest states called on borrowers to stop paying back their loans, threatening the existence of the
entire 4 billion a year Indian microcredit industry
