project on banking by gopal kumar

8/14/2019 Project on Banking by Gopal Kumar

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A

Project Study Report

On

Recent Trends in Indian Banking

________________________________________________________________________

_

Submitted in partial fulfillment for the

Award of degree of

Master of Business Administration

Submitted by:- Submitted To:-

GOPAL KUMAR UCHITA KAUSHIK

MBA Part I

2008-2010

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Shri Balaji College of Engineering and Technology,

Benad road, Jaipur

Preface

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Acknowledgement

I express my sincere thanks to my project guide, Mr./Dr./Ms./Mrs. Uchita Kaushik

Designation Deptt. For guiding me right form the

inception till the successful completion of the project. I sincerely acknowledge

him/her/them for extending their valuable guidance, support for literature, critical

reviews of project and report and above all the moral support he/she/they had

provided to me with all stages of this project.

I would also like to thank the supporting staffSBCET department, for their help and

co-operation throughout our project.

(Signature of Student)

Name of the Student

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Executive Summary

Banking industry in India has evolved lately under the impact of the stimulus packagesannounced by the Government. According to the Annual Policy 2008-09 of the ReserveBank of India (RBI), the central bank, key monetary aggregates have witnessed somegrowth in 2008-09. This is reflected in the changing liquidity positions arising from domesticand global financial conditions and the policy initiatives taken by the government. Also,reserve money variations during 2008-09 have largely reflected an increase in currency incirculation and reduction in the cash reserve ratio (CRR) of banks.

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Index / Contents

S.No. Title Page No.

1. Introduction 6

2. Meaning of Bank 7

3. Reserve Bank of India 8

4. Recent trends 9

4.1 Nationalization of bank 9

4.2 Lead bank scheme 10

4.3 Regional rural bank 11

4.4 Credit guarantee 12

4.5 Foreign exchange business 13

4.6 Credit to priority sector 14

4.7 Nationalization of RBI 15

4.8 Innovative banking 16

4.9 E-banking 17

4.10 Anytime, anywhere banking 18

4.11 Mobile banking 19

4.12 Assets and Liability Mgt. banking Computerization of bank 20

4.13 Computerization of bank 21

5. Bank loan 22

6. Non-performing asset 23

6.1 General Methods of Management of NPAS 24

8 Some common misconceptions 25

9

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1. Introduction

The first bank of limited liability managed by Indians was Qudh commercial bank

founded in 1881, Subsequently Punjab national bank (PNB) was established in

1894.

Indian banking sector started as early as the eighteenth century. One of the most

credible banks in the country, the State Bank of India (SBI) was established in 1806.

Today, a whole gamut of banks and financial institutions comprise the banking

industry, with 88 scheduled commercial banks, 29 private banks, 27 public sector

banks and around 31 foreign banks.

Public sector banks enjoy a relatively large share in the total banking assets,

approximately 78 % For example, SBI enjoys a strong network in the country with

about 9000 branches, and is constantly making efforts to improve its services and

customer outlook.

One of the recent initiatives that the bank has taken include setting up a smart card

facility in Uttar Pradesh that will directly help the beneficiaries of the National Rural

Employment Guarantee Act (NREGA). The project was rolled in the Unnao district of

the state on a pilot basis. With this SBI expects to cover about one crore

beneficiaries in collaboration with the government of UP.

According to a market research company, the banking industry in India is expected

to grow at a compound annual growth rate (CAGR) of about 23.3 percent till 2011.

According to O.P. Bhatt, the chairman of SBI, the bank will open 1000 branches

covering 100000 villages in the next financial year. The bank is said to have

collected $5.54billion in December 2008, which was the highest collection by any

bank in India in that month.

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2. Meaning of bank

The bulk of all money transactions today involve the transfer of bank deposits.

Depository institutions, which we normally call banks, are at the very center of our

monetary system.

Banking means the accepting for the purpose of landing or investment of deposits of

money from the public, repayable on demand or otherwise and withdrawal by

cheque, draft or others.

The monetary base is created by the Fed when it buys securities for its own

portfolio. Bank deposits themselves are not base money; rather they are claims on

base money. A bank must hold reserves of base money in order to meet its

depositors' cash withdrawals and to cover the checks written against their accounts.

Reserves comprise a bank's vault cash and what it holds on deposit at the Fed,

known as Fed funds. The Fed requires banks to maintain reserves of at least 10%

of theirdemand deposits, averaged over successive 14-day periods.

The supplyof reserves changes whenever base money enters or leaves the bankingsystem. This occurs when the Fed buys or sells securities or when the public

deposits or withdraws cash from banks. The demand for reserves changes

whenever total demand deposits change, which occurs when banks increase or

decrease aggregate lending. The Fed controls the Fed funds rate by adjusting the

supply of reserves to meet the demand at its target interest rate. It does so by

adding or draining reserves through its open market operations.

The reserve requirement applies only to the bank's demand deposits, not its term or

savings deposits. Thus when a bank depositor converts funds in a demand deposit

into a term or savings deposit, he frees up the reserves that were held against the

demand deposit. The bank can then use those reserves in several ways. For

example, it can hold them to back further lending, buy interest-earning Treasury

securities, or lend them to other banks in the Fed funds market.

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3. Reserve bank of India

This annual policy statement for 2009-10 is set in the context of exceptionally

challenging circumstances in the global economy. The crisis has called into question

several fundamental assumptions and beliefs governing economic resilience and

financial stability. What started off as turmoil in the financial sector of the advanced

economies has snowballed into the deepest and most widespread financial and

economic crisis of the last 60 years. With all the advanced economies in a synchronized

recession, global GDP is projected to contract for the first time since the World War II,

anywhere between 0.5 and 1.0 per cent, according to the March 2009 forecast of the

International Monetary Fund (IMF). The World Trade Organization (WTO) has forecastthat global trade volume will contract by 9.0 per cent in 2009.

Governments and central banks around the world have responded to the crisis through

both conventional and unconventional fiscal and monetary measures. These measures

have been criticized for their size, timing, sequencing and design as also, more

importantly, for their economic and ideological underpinnings. The most voluble criticism

has been that purely national responses are inadequate to address a virulent globalcrisis. In recognition of a pressing need for global co-ordination and co-operation,

particularly in order to inspire the trust and confidence of economic agents around the

world, leaders of the G-20 group of nations met twice in the last six months. At their

recent meeting in early April 2009, the G-20 leaders collectively committed to take

decisive, coordinated and comprehensive actions to revive growth, restore stability of

the financial system, restart the impaired credit markets and rebuild confidence in

financial markets and institutions.

RBI Initiatives for Customers

Apart from the bank rate cuts announced in the stimulus packages, cash withdrawals

from bank will not attract tax from April 1, 2009 following abolition of the banking

cash transaction tax (BCTT) in the Union Budget 2008-09. The total collection of

BCTT stood at US$ 120.36 million in 2008-09. Also, inter-ATM usage transaction

became free of charges effective April 1, 2009.

Exchange rate used: 1 USD = 49.8417 INR

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4. Recent trends

4.1 Nationalization of Banks

It is the biggest trend of Indian banking at present is transfer of ownership in present

day banking public sector has become dominant.

It was initiated in 1955, when the imperial bank of India was nationalized & renamed

as SBI at present we have 27 public sector banks comprising of SBI, 14 commercial

banks, nationalized on July 19, 1964 and 6 commercial banks nationalized on april6,

1980. As a result of merger of new bank of India with PNB in 1993 number stands

now 27.

The Nationalization of Banks in 1969 has been one of the significant economic,

political and social events of Post Independent India. Apart from the fact that it had

the imprint of the personality of Mrs. Indira Gandhi, it has several significances which

merit attention.

The first one was the intervention of the state in the functioning of the banking sector

itself. The ownership of the State gave a new confidence to the savers and being

backed by a sovereign the normal suspicions associated with the capabilities of the

bankers in the private sector were gone.

Banking ceased to be selective. The entry barriers that existed for customers to

bank, social economic and political were lowered. This resulted in a massive

quantitative expansion of the bank customer base as well as in the nature of services

provided.

The reach of banking widened. Absence of concern for profitability and targeting

made banks to expand rapidly in un-banked areas thereby the entire country was

linked to banking activity.

The expansion of banks also expanded the economy. The entire infrastructure that

required was built by themselves or by the citizens for their use.

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4.2 Lead Bank Scheme

This scheme was introduce in 1969 on the recommendation of Nariman committee

under this scheme each bank has been assigned certain district areas the concerned

bank is called as lead bank.

Banking reforms etched on global integration have the potential of distancing the

socio-economic goals of the country, notwithstanding the 8.5-9% growth attained

during the last three years. The recent review of priority sector requirements and

fresh guidelines to banks issued by the RBI has to be reinforced with appropriate

review mechanisms. In the broad scheme of things what it omitted to review was the

working of Lead Bank Scheme (LBS), which had its focus in the 1970s on branch

expansion in rural areas and in the 90s on Service Area Planning that was given a

go-by post-2000.

The focus is shifting fast to ensuring financial inclusion and a host of other issues

pertaining to credit for the farm and SME sectors. But the way the LBS is currently

under implementation is not different from what it was two and half decades ago.

The district collector as chairman witnesses a laborious and routine review of thetargets set for government programs like the SGSY, credit targets under SC Action

Plan, Tribal Sub-Plan, identification of target groups by various agencies and non-

implementation of targets for various reasons that get repeated meeting after

meeting and with similar excuses.

The system of lead bank scheme and associated district-level coordination

committees of bankers has apparently become inactive. The lead bank scheme

needs to be re-invigorated with clear guidelines on respecting the bankers

commercial judgments even as they fulfill their sartorial targets. Various committees

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4.3 Regional Rural Bank

On the recommendation of banking commission (1972), 5 RRB were established on

Oct. 2, 1975.

The principle objective was to provide financial assistance to small & marginal

farmers as well as rural workers for the development of rural economy in Jan., 2006.

The institution of regional rural bank (RRBs) was created to meet the excess

demand for institutional credit in the rural areas, particularly among the economically

and socially Marginalized sections.

The importance of the rural banking in the economic development of a country

cannot be overlooked. As Gandhi ji said Real India lies in villages, and village

economy is the backbone of Indian economy. Without the upliftment of the rural

economy as well as the rural people of our country, the objectives of economic

planning cannot be achieved.

In order to provide access to low-cost banking facilities to the poor, the Narasimham

Working Group (1975) proposed the establishment of a new set of banks, as

institutions which "combine the local feel and the familiarity with rural problems which

the cooperatives possess and the degree of business organization, ability to mobilize

deposits, access to central money markets and modernized outlook which the

commercial banks have".

The RRBs were established with a view to developing the rural economy by

providing, for the purpose of development of agriculture, trade, commerce, industry

and other productive activities in the rural areas, credit and other facilities,

particularly to small and marginal farmers, agricultural labours, artisans and small

entrepreneurs, and for matters connected therewith and incidental thereto

The reform phase supplanted this understanding with a singular focus on

commercial profitability for the RRBs. In a sense, the reforms of the RRBs were no

different from there forms of the commercial banks.

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4.4 Credit Guarantee

April 1971, Credit guarantee was established.

It was established in order to encourage the banks to grant loans to SME, taxi driver,

petty traders & small borrowers.

Loans to small-scale sector can create big opportunities. Industrial sector acts as a

pump-primer for economic development in majority of the developed and developing

nations and India is no exception. SSI sector is an important segment of the Indian

economy accounting for around 95 per cent of the industrial units in the country.

SSI sector is an important segment of the Indian economy accounting for around 95

per cent of the industrial units in the country.

For a credit facility having tenure of 5 years the incidence of guarantee and annual

service fee for CGTSI cover works out to less than 1.3%. Also if the hassles of

creation of security, its maintenance and insurance, etc. are also taken into account

then the overall impact is even lesser.

Government of India and the Small Industries Development Bank of India (SIDBI)

took the initiative of designing the guaranteeing mechanism for ensuring collateral

security free loans to Small Entrepreneurs, SSIs and Tiny Units. Thus, Credit

Guarantee Fund Scheme for small industries was formally launched in August 2000.

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4.5 Foreign Exchange Business

Indian banks have also started dealing in foreign exchange till very recently.

Foreign exchange business was done only by foreign bank in India.

We accept NRO deposit in the form of Savings, Current or Term Deposit. For Non

Resident Ordinary Account (NRO) Term deposit A/c the period is from 15 days to 10

years & minimum amount of deposit is rs.1000.

Account can be opened jointly with any other Non-Resident Indian or ResidentIndian. Nomination facility is available.

Withdrawals for local payments or payments abroad out of current income in India

net of applicable taxes are allowed.

Loans up to Rs.20 Lakhs against deposits are available for purposes other than

relending / carrying agriculture/ plantation activity.

REVISED - Applicable Rates for NRE Deposits with effect from 1st May 2009

Tenor Rate of Interest

1Yr to less than 2Yrs 3.64

2Yrs to less than 3Yrs 3.24

3 Yrs 3.64

A person resident in India may open a RFC (Domestic) account in India out of

foreign exchange acquired by him in the form of currency notes, travelers cheques

etc. This account can be in the form ofCurrent account only.

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4.6 Credit to priority sector

After 1969 commercial banks started giving enough loans to priority sector including

agriculture, SME.

In 1969, share of priority sector in total credit was 15% but now it is around about

40% - 50%

The year-on-year (y-o-y) aggregate bank deposits stood at 21.2 per cent as on

January 2, 2009. Bank credit touched 24 per cent (y-o-y) on January 2, 2009 as

against 21.4 per cent on January 4, 2008. The year-on-year (y-o-y) growth in non-

food bank credit at 23.9 per cent as on January 2, 2009 was higher than that of 22.0

per cent as on January 4, 2008. Increase in total flow of resources from the banking

sector to the commercial sector was also higher at 23.4 per cent as compared with

21.7 per cent a year ago. The incremental credit-deposit ratio rose to 81.4 per cent

as on January 2, 2009, as against 63.1 per cent as on January 4, 2008. Also, during

2008-09 so far, the total flow of resources to the commercial sector from banks stood

at US$ 58.83 billion upto January 2, 2009. Scheduled commercial banks credit to

the commercial sector expanded by 27.0 per cent (y-o-y) as on November 21, 2008,as compared with 23.1 per cent a year ago.

There has been variation in credit expansion across bank groups. Credit expansion

as on January 2, 2009 for public sector banks stood at 28.6 per cent, scheduled

commercial banks (SCBs) including the regional rural banks (RRBs) at 24 per cent,

foreign banks at 6.9 per cent and private sector banks at 11.8 per cent, according to

the Annual Policy for 2008-09 of Reserve Bank of India.

Several measures initiated by the Reserve Bank have resulted in banks reducing

their deposit and lending rates between November 2008 and January 2009. The

range for deposit rates for public sector banks varied from 5.25 to 8.5 per cent,

foreign at 5.25 to 7.75 per cent and private sector banks at 4 to 8.75 per cent. In the

post-crisis quarter caused due to collapse of Lehman Brothers, large corporate like

Infosys moved their deposits to State Bank of India (SBI), the country's largest bank.

Infosys has revealed that it transferred deposits of nearly US$ 200.61 million fromICICI Bank to SBI last year.

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4.7 Nationalization of RBI

After independence it was failed that nationalization of reserve bank was essential

for overall economic growth of the country.

According reserve bank was nationalized on Jan 1st,1949.

After nationalization RBI has been able to work more effectively.

Reserves comprise funds on deposit at the Fed plus vault cash. A bank can hold

adequate reserves and still be insolvent if its total assets, including loans and

securities, do not cover its liabilities. However a bank in good standing can alwaysborrow in the money market or at the Fed to meet its reserve requirements.

Both the Government and the Reserve Bank responded to the challenge of

minimizing the impact of crisis on India in co-ordination and consultation. The

Reserve Bank shifted its policy stance from monetary tightening in response to the

elevated inflationary pressures in the first half of 2008-09 to monetary easing in

response to easing inflationary pressures and moderation of growth engendered by

the crisis.

A minimum level of reserves was once regarded as necessary to ensure that a bank

could meet the withdrawal of deposits. However experience has shown that a well-

run monetary system can operate successfully with no minimum reserve

requirements.

In view of the persistent monetary overhang, the RBI has found it necessary to

moderate monetary expansion and plan for reduced monetary growth. In the 2007-

08 policy, the indicative target for M3 growth was 17.0 - 17.5 per cent and for the

latest 2008-09 policy, it is 16.5-17.0 percent as against the average of over 21 per

cent during 2005-08.

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4.8 Innovative Banking

It refers to incorporation of new ideas, strategy, methodologies & procedure in day to

day functioning of banks like ATM, Credit Card facility.

Initiated in 1992 as Pilot Project by NABARD The Apex Bank for Rural Finance

Three fold Objective of the Project: To Evolve Supplementary Credit Strategies for

Meeting the Credit Needs of the Poor by Combining the Flexibility, Sensitivity and

Responsiveness of the Informal Credit System with the Strength of Technical &

Administrative Capabilities and Financial Resources of Formal Financial Institutions.

To encourage banking activity, both on the thrift and credit sides, in a segment of the

population that the formal financial institutions usually find it difficult to reach.

RBI Working Group (1996) made it a mainstream financial activity for all banking

institutions SHG promotion, formation and nurturing by Self Help Promotion

Institutions (SHPIs).

SHPIs usually NGO; but also other development agencies, government institutions

and departments and also bank themselves. Linkage with bank for credit.

Interest rates in agriculture an issue, whereas in micro finance and for micro

enterprises rates do not seem to matter.

Governments directive on interest rate at 7% for agriculture But breakeven costs

range between 9 and 11% for commercial and cooperative banks

Rural and poor clients can be provided financial services at market determined termsand in doing so banks can still take care to their viability.

Credit Card cum Pass Book for Farmer.

Unlimited withdrawals and repayments.

Flexibility to Farmers to choose right time.

Credit for ancillary activities also included.

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4.9 E-Banking

It refers to basic banking transactions by customers round the clock globally through

electronic media.

It is the application of IT infrastructure with latest equipments & solutions to facilitate

smooth & efficient payment &settlement improved customer service and others.

Indian banks are trying to make your life easier. Not just bill payment, you can make

investments, shop or buy tickets and plan a holiday at your fingertips.

In fact, sources from ICICI Bank tell us, "Our Internet banking base has been

growing at an exponential pace over the last few years. Currently around 78 per cent

of the bank's customer base is registered for Internet banking."

Internet banking (also referred as e banking) is the latest in this series of

technological wonders in the recent past involving use of Internet for delivery of

banking products & services.

Internet banking is changing the banking industry and is having the major effects on

banking relationships. Banking is now no longer confined to the branches were one

has to approach the branch in person, to withdraw cash or deposit a cheque or

request a statement of accounts.

In true Internet banking, any inquiry or transaction is processed online without any

reference to the branch (anywhere banking) at any time.

Providing Internet banking is increasingly becoming a "need to have" than a "nice to

have" service.

The net banking, thus, now is more of a norm rather than an exception in many

developed countries due to the fact that it is the cheapest way of providing banking

services.

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4.10 Anytime, anywhere banking

The banking industry is witnessing a Paradigm Shift. Familiar terms like DD or TT are

now pass A/c and new terms like RTGS, STP, E-pay, Demat, CTS, SEFT, ECS, etc are

taking over, in the process baffling the average customer. The system of payments,

settlements and banking are becoming increasingly electronic, on-line and paperless.

Now banks are depending more and more on technology to be able to meet all

demands of customers. Technology is becoming imperative in banking for providing

convenience in product delivery, increasing productivity and performance.

Remember the days when 'banking hours' used to actually restrict access to your bank

account? When it would take hours to get a demand draft made just to transfer small

sums to an adjacent city?

A good banker is too easy to find

Compare the traditional banking facilities of a few decades ago with the prevailing,

technology driven set up and you will find an enormous gap between the two concepts.

It is this enormous gap that the banking sector has managed to successfully span inslightly over a decade and this has been almost entirely thanks to the IT-enabled

systems and processes. Today telecom is at the heart of every modern banking service.

Automated Teller Machines or ATMs have become an integral part of our lives.

Providing convenience banking at any time of the day or night, they are an essential

ingredient for the survival of people living and working in metros like Mumbai.

If you take ATMs out of the equation, a large number of Mumbaikars would probably

never be able to carry out even basic banking transactions like withdrawing funds and

depositing cheques. With late night strategy sessions and early morning meetings being

the norm rather than the exception, replenishing cash during the lunch break or while

returning home has become an integral part of most people's schedules.

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4.11 Mobile Banking

It refers to that system of banking where a person sitting miles away can inquiry and

check his/her saving a/c & can do transaction with the help of mobile phone.

The account that travels with you". This is needed in today's fast business

environment with unending deadlines for fulfillment and loads of appointments to

meet and meetings to attend. With mobile banking facilities

With mobile banking facilities, one can bank from anywhere, at anytime and in any

condition or anyhow. The system is either through SMS or through WAP. (Check out

for SMS Banking under different head).

Mobile Banking is the hottest area of development in the banking sector and is

expected to replace the credit/debit card system in future.

In past two years, mobile banking users have increased three times if we compare

the use of either debit card or credit card. Moreover 85-90% mobile users do not own

credit cards.

Mobile banking uses the same infrastructure like the ATM solution. But it is

extremely easy and inexpensive to implement. It reduces the cost of operation for

bankers in comparison to the use of ATMs.

Using compact HTML and WAP technologies, the following operations can be

conducted through advanced mobile phones which can is further viewed on

channels such as the Internet via the Channel Manager.

Bill payments Fund transfers

Check balances

Any many more which is also available in SMS Banking

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12.12 Asset Management Banking

Commercial banks differ widely in how they manage liquidity. A small bank derives itsfunds primarily from customer deposits, normally a fairly stable source in the aggregate. Itsassets are mostly loans to small firms and households, and it usually has more deposits

than it can find creditworthy borrowers for. Excess funds are typically invested in assetsthat will provide it with liquidity such as Fed funds loaned and U.S. government securities.The holding of assets that can readily be turned into cash when needed, is known as assetmanagementbanking.

Liability Management Banking

In contrast, large banks generally lack sufficient deposits to fund their main business --dealing with large companies, governments, other financial institutions, and wealthyindividuals. Most borrow the funds they need from other major lenders in the form of short

term liabilities which must be continually rolled over. This is known as liability management,a much riskier method than asset management. A small bank will lose potential income ifgets its asset management wrong. A large bank that gets its liability management wrongmay fail.

Key to Liability Management

The key to liability management is always being able to borrow. Therefore a bank's mostvital asset is its creditworthiness. If there is any doubt about its credit, lenders can easilyswitch to another bank. The rate a bank must pay to borrow will go up rapidly with theslightest suspicion of trouble. If there is serious doubt, it will be unable to borrow at any

rate, and will go under. In recent years, large banks have been making increasing use ofasset management in order to enhance liquidity, holding a larger part of their assets assecurities as well as securitizing their loans to recycle borrowed funds.

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4.13 Computerization of bank

Computerization became popular in the western countries right from the Sixties. Main

Frames were extensively used both by the Public Institutions and Major Private

Organizations. In the Seventies Mini Computer became popular and Personal Computers in

early Eighties, followed by introduction of several software products in high level language

and simultaneous advancement in networking technology. This enabled the use of personal

computers extensively in offices & commercial organisations for processing different kinds

of data.

However in India organised Trade Unions were against introduction of computers in Public

Offices. Computerisation was restricted to major scientific research organizations and

Technical Institutes and defence organizations. Indian Railways first accepted

computerisation for operational efficiency.

The Electronics Corporation of India Ltd. was set up in 1967 with the objective of research

& development in the fields of Electronic Communication, Control, instrumentation,

automation and Information Technology. CMC Ltd (Computer Maintenance Corporation of

India Ltd.) was established in 1976 to look after maintenance operations of Main Frame

Computers installed in several organisations in India, to serve the gap, when IBM left India,

due to the directive of the then Central Government.

In the Private Sector the first major venture was TCS (Tata Consultancy Services) which

started functioning from 1968. In the year 1980 a few batch-mates of IIT Delhi pioneered

the effort to start a major education centre in India to impart training in Information

Technology and their efforts resulted in the setting up of NIIT in 1981. Aptech Computer

Education was established in 1986 following the experiment of NIIT.

Before large scale computerisation, computer education became popular in India and

coveted by bright students, when several Engineering Colleges and Technical Institutes

introducing Post Graduate Degree courses in Computer Engineering. The booming

hardware and software industry in the West attracted Indian students and many of them

migrated for better opportunities to the U.S.A. and settled there. We have today the

paradox of India being one of the major powers possessing diverse talents in fields of

software development.

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5. Bank Loan

Thanks to swelling competition in the housing loan industry, the home loan process

in India has become considerably streamlined. Despite shaking off the tag of a long and

tedious documentation process, the housing loan procedure still requires one to go

through certain mandatory stages.

After choosing a particular home loan, the customer submits the application form to

the housing finance company (HFC) along with other relevant documents as required by

the HFC. They comprise documents to establish income, age, residence, employment,

investments, etc. The customer also needs to hand over a cheque for payment of an up

front (non -refundable) processing fee of about 0.5-1% of the loan amount to the HFC.

In the next stage, HFCs validate the information provided by the customer on the

application form. They usually conduct checks on the residential address of the

customer, the place of employment of the customer, and credentials of the employer.

Some HFCs may insist on a personal interview with the customer and perform a

reference check on the references provided by the customer on the application form.

After due appraisal of customer profile, a sanction letter is issued which contains

details such as loan amount, rate of interest, annual / monthly reducing balance, tenor of

the loan, mode of repayment and general terms and conditions of the loan.

The customer is required to leave the entire set of original documents pertaining to

the property being purchased with the HFC as security for the loan amount sanctioned.These documents remain in the custody of the HFC till the time the loan is fully repaid.

Once the documents are handed over to the HFC, they send all the documents for a

thorough legal scrutiny.

Prior to disbursement, the HFC also conducts a site visit to the customer's property

to ensure that all construction norms have been adhered to properly.

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6. Non-performing asset

An asset which ceases to generate income of the bank is called non-performing

asset. The past due amount remaining uncovered for the two quarter consequently

the amount would be classified as NPA for the whole year.

After nationalization, the initial mandate that banks were given was to expand their

branch network, increase the savings rate and extend credit to the rural and SSI

sectors. This mandate has been achieved admirably. Since the early 90s the focus

has shifted towards improving quality of assets and better risk management. The

directed lending approach has given way to more market driven practices.

The Narasimhan Committee has recommended prudential norms on income

recognition, asset classification and provisioning. In a change from the past, Income

recognition is now to on an accrual basis but when it is actually received. Past

problems faced by banks were o a great extent attributable to this.

Classification of what an NPA is has changed with tightening of prudential norms.

Currently an asset is non-performing if interest or installments of principal due

remain unpaid for more than 180 days.

A Man without money is like a bird without wings, the Rumanian proverb insists the

importance of the money. A bank is an establishment, which deals with money. The

basic functions of Commercial banks are the accepting of all kinds of deposits and

lending of money. In general there are several challenges confronting the

commercial banks in its day today operations. The main challenge facing the

commercial banks is the disbursement of funds in quality assets (Loans and

Advances) or other wise it leads to Non-performing assets.

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6.1 GENERAL METHODS OF MANAGEMENT OF NPAS:

The management of NPA is the difficult task in practice. Management of NPAs means, how

to settle the NPAs account in the books. In simple it focuses on the methods of settlement

of NPAs account. The methods are differs from bank to bank. The following paragraph

explains some general methods of Management of NPAs by the banks. The same

information is given in the chart.

General Methods of Management of NPAs

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General Methods of Management of NPAs

Compromise

Legal remedies

Regular Training Program

Recovery Camps

Write offs

Spot Visit

Rehabilitation of potentially viable

units

Other Methods


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Some Common Misconceptions

Where does all the money go when stock prices plummet?

This question mistakes the monetary value of stocks for money itself. Stock prices simplyreflect the current market value of the shares. At the end of the day, buyers own moreshares and less money, while sellers own fewer shares and more money. Their aggregatefinancial wealth may be higher or lower, but the total amount of money they own remainsunchanged in these transactions.

The government causes inflation when it prints too much money.

Money is literally printed by the government only to meet the demand for portable currency,i.e. Federal Reserve notes. The notes are issued to banks in exchange for deposits thebanks hold at the Fed. The public acquires the notes in exchange for their own deposits at

banks. The amount of currency issued is no more and no less than the public desires tohold as wallet money or rainy day money. It has no bearing on inflation.

Banks lend the money of their depositors.

When banks issue loans, they create new deposits without disturbing existing deposits.That is precisely what causes the money supply to grow, and is what distinguishes banklending from all other types of lending. A non-bank intermediary like a finance companylends what it has on deposit at a bank. It cannot create new deposits as a bank is able to

do.

When a bank receives a new deposit, it can issue a new loan for ten times thatamount.

The bank can loan that much only if its reserves at the Fed, including the amount receivedwith the new deposit, is sufficient to cover a check written by the borrower for the fullamount of the loan. It will lose that much in reserves to the payee bank when the checkclears.

Bank reserves ensure that funds will be available for withdrawals by depositors.

Minimum reserve requirements on banks were once viewed as a protection for depositors.Many countries now impose no reserve requirement on their banks. Banks must holdsufficient reserves to cover withdrawals by depositors. But a solvent bank that istemporarily short of reserves can borrow them from the central bank or in the moneymarket. Conversely a bank can hold ample reserves and still be insolvent. Protection fordepositors against default is provided by deposit insurance, not by the reserves of thebanks.

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project on banking by gopal kumar

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