CAPSULE ON GROUP DISCUSSION - CBOA

CAPSULE ONGROUP DISCUSSION

(60 MOST IMPORTANT TOPICS)

COMPILED BYSanjay Kumar Trivedy (Divisional Manager )

Canara Bank, Government Link Cell, Nagpur, PGNS Complex, Modi No. 3, First Floor,Sitabuldi, Nagpur-440012,: 0712 – 2522271,2522272 / 07774069639

E-mail: [email protected]; [email protected]

Compiled by Sri Sanjay Kumar Trivedy, Divisional Manager, Govt. Link Cell, Nagpur 1

INDEX

SI.No

CONTENTS Page No.

1. GROUP DISCUSSION TECHNIQUES & SELECTED TOPICS 02-13

2. BANKING BUSINESS STRATEGY 14-29

3. MOST IMPORTANT GD TOPICS ( 1-46 = 46 TOPICS) 30-131

4. IMPORTANT RBI SPEECHES FOR GD ( 47-60 =14 TOPICS ) 131-197


1. GROUP DISCUSSION

Group Discussion Tips (GD) :

A group discussion (GD) is a simulated exercise. The note attempts to present a few tips on GD and howto handle them to ensure a positive outcome. Here's how most group discussions work: Normally groupsof 8-10 candidates are formed into a leaderless group, and are given a specific situation to analyze anddiscuss within a given time limit.The group may be given a case study and asked to come out with a solution for a problem. The group maybe given a topic and asked to discuss on the same. A panel will observe the proceedings and evaluate themembers of the group.

ObjectiveOne needs to know what one's objective in the group is. A good definition of your objective is - to benoticed to have contributed meaningfully in an attempt to help the group reach the right consensus. Whatdoes this essentially mean?The first implication is that you should be noticed by the panel. Merely making a meaningful contributionand helping the group arrive at a consensus is not enough. You have to be seen by the evaluating panel tohave made the meaningful contribution. What does that mean in practice?You must ensure that the group hears you. If the group hears you, so will the evaluator. That does not meanthat you shout at the top of your voice and be noticed for the wrong reasons.

You have to be assertive. If you are not a very assertive person, you will have to simply learn to beassertive for those 15 minutes. Remember, assertiveness does not mean being bull-headed, arrogant oraggressive.And most importantly, you have to make your chances. Many group discussion participants often complainthat they did not get a chance to speak. The fact is that in no group discussion will you get a chance tospeak. There is nothing more unacceptable in a

GD than keeping one's mouth shut or just murmuring things which are inaudible.Participate in as many practice GDs as possible before you attend the actual GD. There is nothing likepractice to help you overcome the fear of talking in a GD.

The second important implication is that making just any sort of contribution is not enough. Yourcontribution has to be meaningful. A meaningful contribution suggests that You have a good knowledgebase .You are able to put forth your arguments logically and are a good communicator.The quality of what you said is more valuable than the quantity. There is this myth amongst many groupdiscussion participants that the way to succeed in a group discussion is by speaking loudly and at greatlength. One could not be more wrong. You must have meat in your arguments. Therefore, think thingsthrough carefully.

Always enter the room with a piece of paper/pad and a pen. In the first two minutes jot down as many ideasas you can.When you jot down points, keep these in mind. If it is a topic where you are expected to take a stand, sayfor example, "Should India sign the Comprehensive Test Ban Treaty?" note down points for both sides ofthe argument. It will be useful on two counts -One, if you do not start the GD and are not amongst the first five speakers and find that everyone in thegroup is talking for the topic, then it makes sense to take the alternate approach and oppose the topic evenif you initially intended to talk for the topic.Second, it helps to have knowledge of how group members who take a stand diametrically opposite toyours will put forth their arguments and be prepared with counter arguments.

Everybody else will state the obvious. So highlight some points that are not obvious. The different


perspective that you bring to the group will be highly appreciated by the panel. Some pointers on beingrelevant while having a different perspective are:Be careful that the "something different" you state is still relevant to the topic being debated. Can you takethe group ahead if it is stuck at one point?Can you take it in a fresh and more relevant direction?

The last implication is that you must be clearly seen to be attempting to build a consensus.Gaining support or influencing colleagues is the mantra adopted by many a successful Business Leaders.Nobody expects a group of ten intelligent, assertive people, all with different points of view on acontroversial subject to actually achieve a consensus. But what matters is "Did you make attempts to builda consensus?"The reason why an attempt to build a consensus is important is because in most work situations you willhave to work with people in a team, accept joint responsibilities and take decisions as a group.You must demonstrate the fact that you are capable and inclined to work as part of a team.

Group Discussion(GD) - Dos and Don’tsThe tips given below are applicable in any GD. The only difference between most other GDs and the GDsconducted during campus recruitments is the intensity of the competition. Be as natural as possible. Do nottry and be someone you are not. Be yourself. A group discussion is your chance to be more vocal. Theevaluator wants to hear you speak. Take time to organize your thoughts. Think of what you are going tosay.Seek clarification if you have any doubts regarding the subject. Don't start speaking until you have clearlyunderstood and analyzed the subject. Work out various strategies to help you make an entry: initiate thediscussion or agree with someone else's point and then move onto express your views. Opening thediscussion is not the only way of gaining attention and recognition. If you do not give valuable insightsduring the discussion, all your efforts of initiating the discussion will be in vain.

Your body language says a lot about you - your gestures and mannerisms are more likely to reflect yourattitude than what you say.Language skills are important only to the effect as to how you get your points across clearly and fluently.Be assertive not dominating; try to maintain a balanced tone in your discussion and analysis.Don't lose your cool if anyone says anything you object to. The key is to stay objective: Don't take thediscussion personally.Always be polite: Try to avoid using extreme phrases like: Ì strongly object' or Ì disagree'. Instead tryphrases like: Ì would like to share my views on…' or Òne difference between your point and mine…' or"I beg to differ with you"

Brush up on your leadership skills; motivate the other members of the team to speak (this surely does notmean that the only thing that you do in the GD is to say "let us hear what our friend here has to say," or"Raghu, let us hear your views" - Essentially be subtle), and listen to their views. Be receptive to others'opinions and do not be abrasive or aggressive.If you have a group of like-minded friends, you can have a mock group discussion where you can learnfrom each other through giving and receiving feedback. Apart from the above points, the panel will alsojudge team members for their alertness and presence of mind, problem-solving abilities, ability to work as ateam without alienating certain members, and creativity.

Group Discussion(GD) - Skills EvaluatedGroup discussion is an important dimension of the selection process. Any organization requires students towork with others for effective functioning. In today's context, the educational institutes and organizationsare interested in team players rather than individual contributors. During the Group Discussion, the panelessentially evaluates the candidate's potential to be a leader and also his/her ability to work in teams.Remember that organizations are typically on the look out for candidates who will inspire to lead andsucceed and for that you need to be a good team player. Here is a sample list of skills assessed during agroup discussion:

Leadership skills: Ability to take leadership roles and ability to lead, inspire and carry the team along to


help them achieve group's objectives.Example: To be able to initiate the group discussion, or to be able toguide the group especially when the discussion begins losing relevance or try to encourage all members toparticipate in the discussion.

Communication skills: The participating candidates will be assessed in terms of clarity of thought,expression and aptness of language. One key aspect is listening. It indicates a willingness to accommodateothers views. Example: To be able to use simple language and explain concepts clearly so that it is easilyunderstood by all. You actually get negative marks for using esoteric jargons in an attempt to show-offyour knowledge.

Interpersonal skills:This is reflected in the ability of the individual to interact with other members of thegroup in a brief situation. Emotional maturity and balance promotes good interpersonal relationships. Theperson has to be more people centric and less self-centered. Listening skill is an important requisite.Example: To remain cool even when someone provokes you with a personal comment, ability to remainobjective, ability to empathize, non-threatening and more of a team player.

Persuasive skills: Ability to analyze and persuade others to see the problem from multiple perspectiveswithout hurting the group members. Example: While appreciating someone else's point of view, you shouldbe able to effectively communicate your view without overtly hurting the other person.

Problem solving skills:Ability to come out with divergent and offbeat solutions and use one's owncreativity.Example: While thinking of solutions, don't be afraid to think of novel solutions. This is a high- risk high-return strategy.

Conceptualizing skills :The ability to grasp the situation, take it from the day to day mundane problemlevel and apply it to a macro level.Example: At the end of the discussion, you could probably summarizethe findings in a few sentences that present the overall perspective.

Group Discussion(GD) - Common MistakesWise men learn from others mistakes, while the less fortunate, from their own. Here's a list of the mostcommon mistakes made during group discussions:

Emotional outburst : Simran was offended when one of the male participants in a group discussion madea statement on women generally being submissive while explaining his point of view. When Simran finallygot an opportunity to speak, instead of focusing on the topic, she vented her anger by accusing the othercandidate for being a male chauvinist and went on to defend women in general. What Simran essentiallydid was to Deviate from the subject Treat the discussion as a forum to air her own views.Lose objectivity and make personal attacks. Her behaviour would have been perceived as immature and de-motivating to the rest of the team.

Quality Vs Quantity : ASHOK believed that the more he talked, the more likely he was to get through theGD. So, he interrupted other people at every opportunity. He did this so often that the other candidates gottogether to prevent him from participating in the rest of the discussion. Assessment is not only on yourcommunication skills but also on your ability to be a team player.Evaluation is based on quality, and not on quantity. Your contribution must be relevant. The mantra is"Contributing meaningfully to the team's success." Domination is frowned upon. Egotism Showing off

Rama kant was happy to have got a group discussion topic he had prepared for. So, he took pains toproject his vast knowledge of the topic. Every other sentence of his contained statistical data - "20% ofcompanies; 24.27% of parliamentarians felt that; I recently read in a report that..." and so on so forth. Soon,the rest of the team either laughed at him or ignored his attempts to enlighten them as they perceived thathe was cooking up the data. Exercise restraint in anything. You will end up being frowned upon if youattempt showing-off your knowledge. Facts and figures need not validate all your statements. Its youranalysis and interpretation that are equally important - not just facts and figures.


You might be appreciated for your in-depth knowledge. But you will fail miserably in your people skills.Such a behavior indicates how self-centered you are and highlights your inability to work in an atmospherewhere different opinions are expressed.

Get noticed - But for the right reasons : Nandi Varman knew that everyone would compete to initiate thediscussion. So as soon as the topic - "Discuss the negative effects of India joining the WTO" - was readout, he began talking. In his anxiety to be the first to start speaking, he did not hear the word "negative" inthe topic. He began discussing the ways in which the country had benefited by joining WTO, only to bestopped by the evaluator, who then corrected his mistake.False starts are extremely expensive. They cost you your employment. It is very important to listen andunderstand the topic before you air your opinions. Spending a little time analyzing the topic may provideyou with insights which others may not have thought about. Use a pen and paper to jot down your ideas.Listen! It gives you the time to conceptualize and present the information in a better manner. Somemistakes are irreparable. Starting off the group discussion with a mistake is one such mistake, unless youhave a great sense of humor.

Managing one's insecurities : Archana was very nervous. She thought that some of the other candidateswere exceptionally good. Thanks to her insecurity, she contributed little to the discussion. Even when shewas asked to comment on a particular point, she preferred to remain silent. Your personality is also beingevaluated. Your verbal and non verbal cues are being read.Remember, you are the participant in the GD; not the evaluator. So, rather than evaluating others and yourperformance, participate in the discussion. Your confidence level is being evaluated. Decentcommunication skills with good confidence are a must to crack the GDs. Focus on your strengths and donot spend too much time thinking about how others are superior or inferior to you. It is easy to pick upthese cues from your body language.

SOME TIPS ON GROUP DISCUSSION

Tips on GROUP DISCUSSIONTo help you better we have compiled a list of points that you should keep in mind while you participate ina group discussion.Group discussions are an important part of the selection process for admission into a B-School of yourchoice. You have passed the intelligence test, with GD, your oratory and communication skills along withyour problem solving skills will be tested.Let’s read about the points that you should keep in mind:

1) Adequate matter/ Subject matter is essential : You should have subject knowledge and be well awareof the latest happenings around you, not just in India but around the world as well. To be in a betterposition, make sure that you have in-depth knowledge on the subject. Subject knowledge is a pre-requisitewhile you are preparing for a group discussion because you will then have the power to steer theconversation to whichever direction you want to. If you can memorize some relevant data, it will be anadded advantage.

2) Make Sure you Read Widely: Being an avid reader will help you in group discussions. Last minutepreparations you are strictly a no no, while you are preparing for group discussions. You should read over aperiod of time. Reading not only adds to your knowledge database, but enhances your vocabulary skills aswell. Plus reading over a period of time, helps in your understanding of a particular subject/ topic better.

3) Choose Magazines that are Rich in Content: Always opt for magazines that are content rich and notjust full of advertisements. Often magazines have columns which are promoting a particular institute etc.Avoid such magazines, do some research and buy the best that will be beneficial for you in the long run.

4) Be Aware of Topics that are Repeated: Often, there are topics which re-appear with minute changesand minor variations. Be aware of such topics well in advance so that you have ample time to prepare forthe same. For example the issues of terrorism, gender inequality, poverty, Ayodhya conflict, liberalizationand privatization, reservations in educational institutions etc often appear as GD topics. Make sure you


know these topics well and can come up with some unique, insightful points along with dates, stating facts.

5) Work on your Communication Skills: You should be well versed in your communication skills. Youshould have a good vocabulary and a decent command over English. Much before your actual groupdiscussion, rehearse well. You can sit with a group of friends and choose a topic and indulge in a friendlybanter. Not only will this increase your knowledge, you will be a better speaker by the time it is time foryour GD.

6) Listen to the Topic Given During GD Carefully: Listen to the topic carefully and understand it... Bealert and vigilant. Sometimes, the topic may be really simple but the manner in which it is presented to you,can be baffling. The first thing that you should do after hearing the topic is by structuring it on the sheetthat is given to you to make notes. Make a rough sketch of the points that you would like to speak aloud.You will be at an advantage if you open the discussion, but then beware of what you speak. Deviating fromthe main topic, or passing strong statements like ‘I agree/ or disagree …’ should be avoided. Your strategyshould be to test the waters and make a generic statement relevant to the topic. If you can, back it up byrelevant data.

7) Try and Maintain a Balance in your Tone: Besides what you are saying, remember that the panelistsare observing your body language as well. If you do not agree with the other student’s point of view, do notraise your tone in objection. Listen to his point of view and instead of dismissing it upfront, try and draw acommon ground. .

8) Listening Skills are Essential: Carefully listen to what others have to say. Just speaking throughout thediscussion doesn’t make you smart, you should also give others a chance to speak. Try and listen tohim/her, respect their view point too. If the speaker is making an eye-contact with you remember toacknowledge him by saying “yes, you agree” or just by nodding your head, so that the speaker is aware thathis listeners are listening to him and paying full attention. This will also show that you are vigilant and arean active participant in the discussion.

9) Body Gestures are very Important: The panelists observe the way you sit and react in the course ofthe discussion. . Body gestures are very important, because your body language says a lot about you.In aGD, sit straight, avoid leaning back on to the chair or knocking the table with pen or your fingers. Also, donot get distracted easily. For example, if the door in room you are sitting in opens, do not look back to seewho it is , this will show how distracted you are.

10) Be the first and also the Last to Speak: As mentioned earlier, initiating a GD is an advantage.Closing it too also adds brownie points. If you can grab the opportunity to close the discussion, then youshould summarize it. If the group has not reached a conclusion try concluding it .

People remember approximately : 10% of what they hear ,50% of what they see ,70% of what theysay ,90% of what they do

Roles of Discussion Leaders1. Create an inclusive environmentOpportunities for reflection:What do the participants bring to the group? (“Characteristics that may give you a unique perspective”)Self-awareness; awareness of others: What do I bring to the group? What surprises or challenges me?What behaviors am I most familiar or comfortable with?What behaviors challenge me?Dos and Don’ts:Do:Allow participants to introduce themselves – you can even set up an ice breaker to have pairs of studentsintroduce each other.Be clear up front about expectations and intentions amongst participants and the facilitator.Use inclusivelanguage. Ask for clarification if unclear about a participant’s intent or question.Treat participants withrespect and consideration.


Develop an awareness for barriers for learning (cultural; social; experiential, etc).Provide sufficient timeand space for participants to gather their thoughts and contribute to discussions.Provide opportunities forparticipants to pair-share.Don’t:Use certain conventions or language that will exclude certain groups from understanding the context of thediscussion, or make them feel uncomfortable. Assume participants all have the same expectations when thegroup first convenes.Over-generalize behavior or have stereotypical expectations of participants(tokenism).Use (or allow others to use) disrespectful language or tone, or disrespectful non-verbalcommunication.Convey a sense of self-importance or superiority.Allow only the dominant or more verbalparticipants to take over the conversation.Discourage alternate views or counter-arguments.Try to be someone else- be yourself.

2. Keep discussions constructive and positiveMake the discussion functional by clarifying the goals of each session to the group.Establish ground rules:– Share personal experiences rather than make general statements about groups of people (stereotyping).– Ask dominant participants to allow others to speak.– Give all participants a voice- at the start highlight the value of a diversity of perspectives as an essentialpart of the process.– Go over constructive and destructive group behaviors at the start of the course / workshop.– Request that if participants challenge others’ ideas, they back it up with evidence, appropriateexperiences, and/or appropriate logic. Try to keep the group on task without rushing them.If the groupstarts to veer in the direction of negativity and/or pointless venting, ask them how they would like toaddress this.Step back when a group is functional/functioning – help participants become independent learners; takecontrol of their learning.

3. Encouraging participantsEncouraging participation can be accomplished by : Writing participants’ comments on thewhiteboard.Asking follow-up questions, and paraphrasing the comments for everyone to ponder. Acombination of initiating andprobing questions can be an effective approach to bring out participants’ ideasfurther.Asking the contributor for further clarification and/or elaboration.Re-visiting past contributions andincorporating them into subsequent discussions.Encouraging others to add their reactions or ideas to buildon someone’s comment.Not being afraid to admit your own ignorance or confusion if you don’t knowsomething – invite others to provide resources, and use the opportunity to discuss with the group how onemight go about researching the issue.Discomfort and silence are ok, but balance with a clearly stated context and purpose.

Potential Problems in Discussions (adapted from: Center for Integration of Research, Teaching andLearningHandbook, accessed July 2008 at www.cirtl.net/Diversity/Resources/)Maintaining discussions often means dealing as smoothly as possible with the problems that arise. Here aresome common problems with suggestions for how to deal with them.

The participant who talks too much: A way to approach the dominant participant and pull in non-participants is to redirect the discussion to another person or another topic. Alternatively, you may wish toreframe their comments, making them viable additions to the discussion. Facilitators might also ask one ormore members of the group to act as observers for a few sessions, reporting back their observations to thegroup. Perhaps assigning the avid talker to the observer role would help the person developsensitivity. Another approach is to break down the group into still smaller task groups.

The member who will not talk: A way to approach non-participants is to provide opportunities forsmaller group discussions or pair-share discussions. Smaller groups may help put some students at ease. Asecond strategy is to ask opinion questions occasionally (e.g., “How do you feel about this?”). This may


encourage participation by reducing participants’ fear of answering incorrectly. Another strategy is to haveparticipants write out their answers to a question. Having the words written out may make it easier for ashy or fearful person to speak up.

The discussion that turns into an argument: In good discussions, conflicts will sometimes arise. If suchconflicts are left ambiguous, they may cause continuing trouble. Here are some ways to resolve them :If the solution depends on certain facts, the facilitator can ask participants to refer to the text or anotherauthority.If there is an experimentally verified answer, the facilitator can use the opportunity to review the methodby which the answer could be determined.If the question is one of values, the facilitator may use theoccasion to help participants become aware of the values involved.The facilitator can list both sides of theargument on the board.The facilitator can take a strong position as moderator, preventing participants frominterrupting each other or speaking simultaneously. She or he can lay ground rules for discussion, such asasking participants to focus conflict on ideas rather than people and to resist being judgmental.

Unclear or hesitant comments :The facilitator can encourage participants making unclear contributions togive examples and factual evidence of their points. The facilitator can also restate points for verification orrejection by the participants, or give enthusiastic nonverbal cues and patience.

The discussion that goes off track : Some facilitators keep discussions on track by listing the questions orissues they want to cover on the board or summarizing the discussion on the board as it proceeds. Stoppingand asking a participant to summarize where the discussion is at the point it appears to go off track mayalso help.

The student who attacks the facilitator : When participants argue for the sake of argument, facilitatorswill usually lose if they take the bait. Participants or students who attack often want attention, so simplygiving them some recognition while firmly moving on often takes care of the problem. If participants aresimply trying to embarrass the facilitator, they may seek to make him or her defensive with such commentsas, “How do you really know that…?” or “You’re not really saying that…?” Such questions can be handledby playing boomerang. The facilitator might say, “What I’m saying is…, but now I'd like you to share yourperspective.” Turning the question back to the questioner forces him or her to take responsibility for his orher opinion. Other ways to handle these situations include:

Confrontation : Facilitators can confront the questioner with their reactions to his or her behavior. “I’muncomfortable with the imprecision of your questions. What I really hear you saying is...”

Active listening :Facilitators can paraphrase the message they heard and check out the accuracy of theirassumptions before responding.

Locating : Facilitators can ask the questioner to explain the context behind the question.

Reframing : The focus can be on clarifying the assumptions behind the person’s argument and theninviting her or him to see alternative possibilities.

Deferring : Often, the best strategy is to invite participants to come up after the session and arrange for atime to talk about the disagreement further, and then move the discussion on to another topic.

MOST IMPORTANT TOPICS FOR GROUP DISCUSSION

1. "BALANCE BETWEEN PROFESSIONALISM AND FAMILY"2. Inflation is inevitable in our developing country or Inflation is a pre requisite for economic

development3. Money is required to earn more money.4. Business And Ethics Can't / Don't Go Together


5. Rupee Depreciation (Impact on various industries)6. Growth Vs Inflation (RBI stand on the policy rates)7. Rupee Depreciation (Impact on various industries)8. Rising NPAs of the Indian Banks9. Use of Force by Banks to Recover Loans10. How do you see the impact of Rupee Depreciation?11. How good is FDI in Retail in India?12. How is Globalization affecting Indian economy?13. Impact of Public Private Partnership in Infrastructural development14. Role of FDI in Indian Economy / Foreign Investment should encouraged.15. Corruption16. Can service Sector be the rail of Indian Economic development17. Private sector vs Public Sectors18. Need for developing women Entrepreneurs in India19. Strategy for reducing Stress Assets / NPA20. Making a branch as a Profit Centre21. Implementation of Customer Relationship Management policy to gain business / Customer service22. Credit Off – take at Branch level23. Marketing of Banking Products / Retail products / Technology Products24. Turn out of a Branch25. Strategy for Fee based Income & CASA mobilization26. Inspection Gradation improvement of a branch / Darpan Software27. Social Intelligence is most important for Survival28. Corporate social Responsibility29. Should public sector Banks Privatize / Merger & Acquisition is only Mantra for survival of banks /

All banks should merged into Single BankingCorporation like LIC.30. Basel II & Basel III – its after effects/ Implications on Banking system of India31. Loss Making Branches should be closed or merged32. Salary of bank employee should linked with Profitability or output.33. Priority Sector Concept Should be abolished.34. Banking Hour should increase to get business35. Five days banking in a week will improve output & efficiency of Staff36. Single window concept will help in Improving Customer service37. Cost reduction in branch / bank38. CRR & SLR are useful tools to Curb Inflations39. How to increase MSME Finance of your branch40. Role of specialised branches to gain banking business41. Priority sector really helped Agril. & MSME banking Business42. Right to work must be made fundamental right.43. Frequent Write off of agril. Loans will affect the stability of banking Growth44. Retirement age should be increased to 65 years45. Interest rate on deposit should linked with Inflation46. How to face/ reduce Cyber fraud / crime.47. Cross Selling / Third party product business of the future of bank48. Inflation based RBI monetary & credit policy

.

SAMPLE GD TOPICS

1.India - the NexGen superpower

For India has the mass labour and production which can take India to a next level.- India has already put a stamp of authority in the IT sector and is ready to reach the worldstage to find a place in manufacturing. India has entrepreneurship and leadership capabilities which are of utmost importance in


creating a successful nation and a super power.- Economic liberalization has resulted in the rise of the growth rates of the middles classwhich is a good indication for India.Against- India has shown a slowdown in economy which has really affected its chances of becominga super power.- It also depends on how one defines super power. India is still under massive povertyand unemployment which again looms over India's development.- Corruption in India is deterrent and is one of the major causes of India's faltered growth. Infrastructure such as rails, roads is still of major concern in India and it needs to bedealt with.- Politicians are creating a vacuum in the society with their deep buried corruption.

2. Is Inflation always harmful?For- Inflation is a measure of economy whether shrinking or growing but mostlyinflation results in shrinking of the economy.- It results in increase in prices of the day to day commodities.

- It also increases the interest rates, loans and other means by which the people areborrowing or lending money. Thus, hurting regular people more. It creates confusion, uncertainty leading to less investment and lowinternational competitiveness.- It leads to decline in income called as stagnant wage growth.Against- Inflation is not harmful as it acts as a symptom for growing economy. Inflation allows prices of various commodities to adjust according to the budget of theconsumers. It results in people or the seller making good amount of profit which in turn boosts theeconomy.

3. Should agricultural subsidies be stopped?

Agriculture is the primary occupation of our country. It is the backbone of India as 70% ofour population is engaged in this occupation and whole country is dependent on agriculturewhether they are living in urban areas or rural areas for their living.For

- Agricultural subsidies should be stopped as they are not reaching to the poor farmers.

There is no use of these subsidies as they make rich farmers more rich and the poor onespoorer. There should be other substitutes for subsidies. Even after providing the subsidies the farmers are abondoning their land and moving tocities. The government should make agriculture an attractive profession.- Rather than giving subsidies, the government should help the farmers with a better infrastructurelike means of irrigation and getting their produce to the market.

One of the reasons for farmers to abandon their lands is that they do not get good cost fortheir produce. The government should help in better organization of the market so that itbecomes accessible to the farmers.

Against Government should provide farmers with more subsidies in order to improve their livingconditions.

- Agriculture is a seasonal occupation i.e. farmers work only during the non rainy season.Thus it does not provide enough income to the farmers to sustain for the whole year. New policies related to subsidies should be made and applied in an efficient manner inorder to help the farmers to earn a good income to elevate their standard.

- The condition of farmers in our country is deteriorating day by day. To stabilize the state offarmers' government need to take some important steps by providing them with enoughsubsidies.- Subsidizing helps in tackling food prices and reducing trade deficit as it improves foodsupply

Agricultural subsidies should not be stopped but it should be done in an efficient manner sothat the needed farmers or poor farmers who are not financially stable can get these facilitiesand their situation can be improved. Government should have all the details of farmers and onthe basis of that list distribution should be done. They should provide subsidies category wise.


Improvement in the agricultural sector is one step towards the development of our country.

4.Is Fiscal Consolidation possible without plan expenditure cuts?

The government plans various strategies to control the fiscal deficit and to stop theaccumulation of debt that burdens the economy. The steps taken are for fiscalconsolidation. It is a vital process as it minimizes the inflationary impulse in the economy.Also, it makes sure that the current account deficit does not rise too high. The governmentremains in a position to achieve debt sustainability. If it is not done, it can lead toprolonged slowdown in the nation. So, how it should be done? Government should onlyfocus on non-planned expenditure cut or should also take planned expenditure intoaccount. Is Fiscal Consolidation possible without plan expenditure cut?

Yes The main problem connected with fiscal deficit is not plan expenditure but it is the non-plan revenue expenditure, more specifically subsidies. Apart from the non-plan revenue expenditure, the second problem is non-plan capitalexpenditure in which the government allocates funds to provide loans to public enterprises.It needs special attention as the money is constantly poured in loss making units adding tofiscal woes. Until and unless, the government brings the subsidies in control, the problem of fiscaldeficit is not going to get solved. The focus should be on the disinvestments as it is one of the most important ways toreduce the fiscal deficit. It is important to lower the cost of bureaucracy to achieve fiscal consolidation.Again, it is an integral part of non-planned expenditure. No Planned expenditure cannot be ignored as many a times it happens that the governmentdoesn't spend all the money allocated under planned expenditure to have a positive impacton fiscal numbers.

Revenue expenditure is the main culprit behind the fiscal deficit and it falls under bothplan and non-planned categories. Like non-planned expenditure, planned expenditure has also not shown any respite in lastyear, and therefore big or small it can't be ignored. Planned and non-planned expenditure when combined forms total expenditure, and for

fiscal consolidation all the aspects have to be analyzed and controlled.

Planned expenditure is done for the development and completion of various projects which if are nothandled efficiently can lead to further fiscal problems.

Conclusion Fiscal deficit has remained a major problem in India. The new government wants to control therising fiscal deficit. The falling oil prices will go a long way to help the present government in achievingits target. However, it is important to understand that the planned and non-planned expenditure bothneed to be controlled for smooth fiscal consolidation process. Undoubtedly, non-planned expenditureaccounts for a larger deficit compared to planned expenditure but it doesn't imply that plannedexpenditure cut should be ruled out completely.

5. Planning Commission & Neeti AayogEver since its establishment in 1950, the Planning Commission failed to deliver useful resultsdespite having a pack of personnels with technical skills which is usually not available to anyother government body. Not a complete change in the planning commission body but a revivalof the dormant is necessary. This is basically what PM Narendra Modi seeks to do with thereplacement of Planning Commission with Neeti Aayog. All the CMs of the states are in favor ofthis decision, the milestone of which was laid down by the PM in his first Independence Dayspeech. The planning commission's failure to deliver its designated duties towards thedevelopment of the nation had always raised questions and criticisms and this change was isundeniably essential.

Differences between the Planning Commission and Neeti Aayog:1. Structure: The Planning Commission has the prime minister as the ex officio Chairman, anda Deputy Chairman, who is given the rank of a full Cabinet Minister. Some Cabinet Ministerswith certain important portfolios act as ex officio members of the Commission. The newlyplanned Neeti Aayog is designated to be a knowledge and innovation hub with the PrimeMinister at its head. There shall be a vice-chairman who will be the real executive head to firmup long and short term perspective plans. The Chief Ministers will be part of decision-making


and implementation of plans.

2. Better allotment: Unlike the old Planning Commission, Neeti Aayog will have combination offour divisions - Inter-state council, plan evaluation office, the Unique Identification Authority ofIndia and the Direct Benefit Transfer department. All the divisions would have experts from theCentre and state governments and also experts from the industry.

3. Power to states: The states will have better role to play in the development schemes planned by theNeeti Aayog. Giving powers to respective states to have a say in the proposed plans will allow theimplementation of better plans designated especially to meet the requirements of different states.Planning Commission was more focused on the centre. Modi's evaluation that development of states isnecessary for the development of the nation is a wise decision to act upon. "Decentralizing of powerand planning" as mentioned by Arun Jaitley is indeed necessary for India.

4. Cooperative federalism: Neeti Aayog will include cooperative federalism, abandoning theincremental approach. Modi said that the process of policy planning has to change from"top to bottom" to "bottom to top." This approach is certainly lacking in the old PlanningCommission and is perhaps the one that India needs the most. The older system does notfollow the federal structures. It simply bounds the state to follow the terms dictated bythe centre.5. Better utilization of funds: Misuse of central funds has been the biggest drawbacks of theplanning commission. The Planning Commission was criticized for spending Rs. 35 lakh torenovate two blocks of toilets, while presenting a very low and questionably impracticalverge of poverty of a monthly consumption of Rs. 859.6 in urban and Rs. 672.8 in ruralareas. Neeti Aayog is said to devise policy and new mechanisms to improve Centre-Statecoordination for effective utilization of central funds of worth Rs. 3,00,000 crore in 2014-15.

6. State-centre relations: Neeti Aayog is designated to solve state-centre issues and anysuch issues will be handled by the new body with direct interactions between centre andstate. Unlike Planning Commission, Neeti Aayog is said to augment state-centre relations.Conclusion:The differences are huge and the "Team India" concept is indubitably necessary fordeveloping Asia's third-largest economy. Scraping the old to revive the new is somethingthat should have been done long back but the Congress Government decided to blindlyabide by the Nehruvian policies or maybe was clumsy enough to enact upon this plan.

6. Smaller businesses and start-ups have more scope for professional growth.In today's time when the population is increasing, there is dearth of job opportunities.Students after getting good education are starting their own career by getting into smallstart up business. This is a new way of proving themselves.For

- Smaller businesses and start ups give more scope for professional growth. - The amountfor investment in start up businesses less.- It provides job opportunities to various unemployed people.

- More experience is gained as we get to know each and everything by doing every task.- One can gain knowledge and professional growth with the progress of any type of smallbusiness.Against

- Irrespective of the size of start up business money is required to set a business. If aperson is not financially sound then there is less chances of his/her professional growth. Start up business does not speed up immediately. A person needs to work very hardin order to prove himself. - Some experience is very important prior starting anybusiness. A job in a top company is much better option than struggling with a new business.- There are lots of professional growth opportunities in various good companies.There are lots of job opportunities in the private sector. Professionals who seek to have agrowth in their career can either work in companies or can start their own business. In thestart up business a person is his own boss and take cares of all the activities. He growsprofessionally also as he advances with the business.

7. Impact of GlobalizationGlobalization can be broadly defined as social, political and economic changes that we alladapt do. The strong currency rates, constructions, trading etc are all consequences ofglobalization.Positive Impact

A better economy — it introduces rapid development of the capital market


Introducing new technologies- the new technologies and progress in telecommunication,introduction of satellites, mobiles etc are all results of globalization.The new scientific research patterns are all results of globalization. Living standards arerisen.Globalization introduces better trade. This is because more people are employed. This

increases productivity.Apart from economical aspect, globalization has also brought an impact on political

and cultural domain.Culturally speaking, globalization has brought in different ideologies, and thought

process amongst people.

Politically speaking, onset of western democratic system has, an impact on politics.Negative Impact

Along with positive impact, there is negative too. Globalizationbrings fear as well. Because of too much flow of capital amongst countries, it introduces unfairand immoral distribution of income.

Another fear is loosing national integrity. Because of too much exchange of trade, money etcindependent domestic policies are lost.Mental pressure on companies that causes many people to loose their jobs.


2. BANKING BUSINESS STRATEGY

STRATEGY TO REDUCE NPA / STRESS ASSETS

ACTION PLAN:

Before formulating the strategy for reducing NPA's, a diagnostic study must be conducted toascertain the reasons for high percentage of non-performing advances (NPAs). Thereafter, ABCanalysis should be undertaken to identify the critical areas, which should focus the activities tobe monitored by the Branch Head and those activities which can be delegated to the AsstManager and Loans Officers.

Positive Intentions (+ive), Negative Intentions (-lye)The information collected in the above formats will be converted into intelligence for drawing out thestrategies and the action plan.

TWO PRONGED STRATEGY:a) Increasing fresh advances and ensuring that they remain performing advances i.e. checking the

slippage into nonperformance category.b) Recovery and adjustment of non-performing advances.

A) INCREASING FRESH ADVANCES:SWOT analysis will be undertaken to aSsess the potential of credit off-take and also identify theindustries / business ventures on the basis of products and services and also the changing environment.The survey done by Development Financial Institutions will be consulted as these provide adequateinformation.STEPWISE ACTION PLANa) Scanning the area and preparing the profile of existing units / potential - sunrise areas in agriculture,

industry, infrastructure, housing, retail.lending.b) Identifying Govt. agencies where there can be bulk credit off-take i.e., Indirect financing through

corporations, boards and other agencies.c) Credit off-take through automobile financing and financing to consumers for white good durablesd) .Lending to stock brokers / investors against shares of blue chip companies in demat form.e) All existing A - Category ( high value standard category) borrowers will be contacted and motivated

for introducing new borrowers / facilitating switch over to our banks.f) Quantitative targets will be fixed and progress reviewed on monthly basis.

B) RECOVERY AND ADJUSTMENT OF NON - PERFORMING ADVANCES:Since Head Office has fixed the targets for reducing the NPA percentage, as such the strategy at thebranch level should clearly spell out the time frame. The target will be bifurcated on monthly basis so thatcorrective steps can be taken if the degree of variation in actual results and targets fixed is large.

STEP - I : SEGMENTATION OF BORROWAL ACCOUNTSa) Experience indicates that the number of accounts in the category of Rs.50 lac and above is very small

but percentage of amount involved in this category is very high. As such, this category of accountswill be monitored at personal level on daily / weekly basis.

Accounts in the category of below Rs. 50 lac but up to Rs. 10 lac are small but amount involved will behigh Accounts in the category of below Rs. 10 lac will be very large but percentage of amountinvolved will be less. As such, loan officer will be assigned the task for recovery and overall reviewwill be undertaken by the manager and senior manager on personally level on monthly basis.

The.theme behind the above strategy /classification is that, even if by monitoring and follow up, few verylarge accounts are shifted into performing category, the percentage of NPA's will reduce substantially.

STEP - II: CLASSIFICATION OF ACCOUNTS ON THE BASIS OF VIABILITY ANDINTENTION OF THE BORROWERThe underlying idea is to develop structured action approach so that broad guidelines are provided to themanager and the loan officer for monitoring and follow-up. For this purpose the NPA accounts will beclassified into four heads:a) NPA accounts which are viable and intention of the borrower is positive.b) NPA accounts which are non-viable and intention of the borrower is positivec) NPA accounts which are viable but intention of the borrower is negative.d) NPA accounts which are non-viable but intention of the borrower is negative.

STEP - III: STRUCTURED ACTION APPROACHA) NPA ACCOUNTS WHICH ARE VIABLE AND INTENTIONS ARE POSITIVE.a) Reschedulement / restructuring and where enhancement of limit is required, the same will be done on

priority basis. •b) Need - based enhancement be done by taking adequate collaterals / third party guarantee.


B) NPA ACCOUNTS WHICH ARE NON-VIABLE AND INTENTIONSARE POSITIVE Borrowers will be encouraged for compromise / one timesettlement (OTS).

C) NPA ACCOUNTS WHICH ARE VIABLE BUT INTENTIONS ARE NEGATIVEEfforts will be made through guarantors / other influential person for regularisation of the account andthereafter adjustment of the accounts.13) NPA ACCOUNTS WHICH ARE NON-VIABLE BUT INTENTIONSARE NEGATIVE Here bank has no options but to go in for recoverythrough following actions:a) Criminal Action - Where security has been sold / misappropriated.b) Civil Suit / Debt Recovery Tribunal / Actions under SARFAESI Act for possession of the securities

and thereby liquidation of outstandings.

HOW TO INCREASE PROFITABILITYWith the entry of Foreign / Private sector banks, competition in the banking sector has intensified putting aseverepressure on profitability. The 'Spread' or NIM (Net interest margin) is shrinking. As such, it has becomenecessary tofocus on profit as a key to survival in the competitive environment.Profitability = 'SPREAD' + Other Income - Other Expenses,WhereSpread = Interest Charged - Interest PaidAny exercise on increasing profitability has essentially to concentrate on following critical areas:a) Increasing Interest charged.b) Reducing Interest paid.c) Increasing Other Income / fee based income.d) Reducing or rationalisation of expenditure.STRATEGIES FOR INCREASING INTEREST CHARGED:a) Change in Advances - Mix: Lending to those sectors / segments where bank can charge higher rate ofinterest.b) Reducing NPA and recovery of Bad debts.c) Compromise / One Time Settlement (OTS) for recovery of non-viable cases.d) Plugging of revenue leakages.STRATEGIES FOR REDUCING INTEREST PAID:a) Change in Deposit-Mix (Increasing low cost deposits i. e, saving and current deposit)b) Increasing float / pipe line deposits (as

remittance etc.) STRATEGIES FORINCREASING OTHER INCOME:

a) Increasing non-fund based / fee based business.b) Cross-Selling of the products.c) Effective Cash managementd) Investment in high-yielding securities.e) Handling of Merchant Banking business with focus on Issue Management / float funds and fee

based income. STRATEGIES FOR REDUCING OR RATIONALISATION OFEXPENDITURE: Rationalizing of expenses such as telephone, electricity, stationery etc.

CUSTOMER RELATIONSHIP MANAGEMENT

ACTION PLAN :

Customer Relationship Management (CRM) is a customer driven business strategy designed tooptimize profitability, revenue and customer satisfaction. CRM is also a paradigm shift from"product centric and mass marketing" to "customer centric" way of business. CRM involvesrelationship marketing, which is to establish, maintain, enhance (long term) the relationship withthe customers and other partners so that the objectives of the parties involved are met. This isachieved by mutual exchange and fulfilment of promises.CRM is based on the short-term orientation of the management with focus on achieving the followingobjectives:a) Attract new Customers.b) Increase Sales per customer.c) Reduce Costs through optimization of business process.d) Improve Customer relationship/increase loyalty.


CRM has a number of positive effects on the running of a bank. It provides management with aclear picture of the business, facilitating decision-making. Using a common architecture and datamode, customer information can be shared faultlessly between front-end staff facing thecustomers to deliver services and the back-office staff who structure the deals. Front-end staff ofa bank can profile a customer, create and maintain a customer account with contacts, manageactivities, and explore business development possibilities. Similarly, a call center agent canmaintain client data / information, produce call notes, replies to customer inquiries, and addressand track customer service requests.In a nutshell, implementation of the CRM concept in banks can result in the following advantages:a) Speed and accuracy in information analysis.b) Foundation for organization-wide data and information.c) Understanding customer behaviour.d) Facilitating Business process re-engineering.e) Multiple products — credit deposits, investment, insurance etc.f) Multiple distribution channels — branch, Internet, call center, field sales etc.g) Multiple customers group — customers, small business, corporation etc.

IMPLEMENTATION STRATEGY:

a) Motivation for Bank staffThe first step in implementation of CRM in banks is to motivate and train the staff to do so. Themotivation must come from the side of the management in the form of regular training inbehavioural and functional aspect of banking.b) Change of Mind-set and Customer ClassificationChange of mind-set of staff members is very important. It should be realized that all customersare not equal. Customer profitability varies from person to person/context to context and not allcustomers are evenly desirable for the banks. Banks must differentiate their customers based onthe 'value criteria' i.e. how valuable the customer is? Value is nothing but the profit the customeradds to the bank's account. Put simply, a more profitable customer is a 'high value' customer anda less profitable customer is a 'low value' customer. A bank's CRM system must also capturecustomers' taste, preference, behaviour, living style, age, education, cultural background, andphysical and psychological characteristics, sensitivity etc., while differentiating them by thevalue criteria into low 'and high value customers. By combining the profitability potential of agiven customer and his/her personality profile including their expectations, customers can begrouped into four categories as follows:

1) Low value / less profitable customer desiring high-grade service.2) Low value / less profitable customer with potential to become high value in incoming days.3) High value ! more profitable customer desiring high-grade service.4) High value more profitable customer requiring low-grade service.

Once the banks differentiate their customers vis-a-vis the profitability and their other traits, itbecomes easy for banks to customize their services and offerings to maximize the overall valueof their customer portfolio.

c) Ambiance for Banking

The customers are comfortable going to banks that have a customer friendly environment. It maybe due to the vast expansion of the premises, personal cubicles created, plush interiors, softfurniture, etc. Some banks go to the extent of playing soft music, setting up coffee shops, displaywork of art, etc., to create the right ambiance for a perfect CRM.

d) Customer RetentionRetention of old customers is more profitable than acquiring new ones. Happy and satisfied old customerbrings in many other new customers. It has been realised that it pays more to keep your existing customercontent, which results in cross selling and purchase of products.

SUGGESTIONS:a) The banks can be made more customers friendly.b) Top management and senior executives must be committed and dedicated so that the lower employees

are adequately motivated to implement better CRM.c) More funds to be allotted for implementation of IT, which not only speeds up transactions for

customers but also avoids unnecessary friction between employees and customers.d) It pays to appoint well-educated, young, smart, highly trained and motivated relationship managers.e) The bank employees must be informed about new products and services at regular intervals. The

communication channel needs to be more efficient between the management and employees.Handbooks can be printed and circulated for this purpose.

f) The preparation of customers profile is very necessary to have a customer data base.g) Data mining needs to be dope at regular intervals for effective cross selling of products.h) Bank employees of all cadres need to be trained in effective implementation of CRM.i) The net banking concept needs to be tapped fully by banks. Computerisation needs to be done in more


and more branches and they also should be connected through computer network, e-mail, etc.j) The belief that banks have poor customer relationship needs to be shattered by improving their image,

wide publicity and campaigning by the media which will help to a great extent.k) The efficient employees who have effectively implemented CRM need to be rewarded within the

limits of the management. It has been revealed that untimely transfers and lack of rewards are themain factor that discourages practicing better CRM by employees. The management can work upschemes to award cash prizes or give additional points for promotion to those employees maintaininggood relations with customers.

I) New products are to be lalinched keeping in view the services offered by foreign banks.m) Unlike the traditional approach where customers are acquired through mass media advertising, CRM

normally gets its customers through referrals.

CREDIT OFF – TAKE AT BRANCH LEVEL

BACKGROUND :Budget is not just allocation or fixing targets. It is consultative and participative exercise done by the HeadOffice and concerned Branch Managers in an open atmosphere. Lot of home -work goes into the wholeexercise. Branch Head, is supposed to have good idea of business environment and potential of his targetarea. Apart from this, past performance is also available in the form of statements. Historical data onrecovery, quality, NPAs, court cases, compromises etc. is also available. The most important informationthat is crucial in business performance is the quality of staff and management of personnel, which dependto a large extent, on the attitude of Branch Head, Zonal Head, and other officers as well as the status ofindustrial relations at the branch.

OBJECTIVES:To ensure credit off-take to the targeted level, the principle underlined is that the Decision shouldtranscend:a) The Safety and Security of advances.b) Profitability aspect of advances.c) Spread of risk branch wise, product wise, area wise and customer wise for reducing concentration of

risk exposure.

HOMEWORK BEFORE TAMING BECOSION :

The ABC analysis will be undertaken with the focus on the past data of the existing branches regardingboth quantity and quality of advances and also the potential available, product-wise and customer-wiseand area-wise.The first step in the analysis of data will be to identify top hundred borrowers who are in the Standardcategory. They can be classified into manufacturers, exporters, wholesalers, retailers and others. Ameeting/calls will be conducted / made, with these 100 borrowers with the purpose of assessing theirfuture business requirements i.e. the enhancement of limits required by them. Even top 100 depositors willbe identified and honored. Their business requirements will be assessed.The services of these 100 top borrowers will be utilized in identifying a chain. of new trade borrowers whohave good reputation in the market and are also availing huge limits from other banks. The existingborrowers will also be used to persuade / motivate the new chain of borrowers to switch over to our bank.Different trade associations dealing in different products will be contacted through the top 100 tradeborrowers and potential borrowers having huge borrowings with other bank will be identified for take-over.Identification of potential traders / dealers, through professionals such as Chartered Accountants, CostAccountants, Tax Consultants etc., who are not dealing with our bank. The capacity, expertise andexperience of. the staff dealing in advances will be assessed. If need be, a workshop for reinforcement ofadvances skills will be organized for the dealing staff.

FIXATION OF TARGETS:The allocation of the targets will be done on the basis of mix of Customer-wise, Product-wise,Area-wise and Branch-Wise to ensure spread of risk.

CUSTOMER WISE:Customer specific targets can be set on the basis of the homework undertaken. While allocatingtargets, it will be broadly kept in mind that 60% of the targets should be earmarked for the existingtop good borrowers and 40% for new borrower identified through existing top borrowers, tradeassociations and by the branch managers.

PRODUCT WISE:

While allocating the targets, the nature of the product will be kept in view on the basis ofcharacteristics such as perishability, price fluctuation, and demand forecasts. Further, a balancewill be maintained so as to ensure against overexposure in a particular product segment. It has tobe ensured that adequate collaterals/third party guarantees are taken invariably. In exceptional


cases, the specific clearance will be necessary from the region.

AREA WISE:There are some trading activities confined to some areas. For example, apple, potato, kinnow,vegetables like tomato, cauliflower, onion, garlic, ginger etc., such areas may have a number ofwholesale dealers, commission agents, arhtias. The budget can be conveniently allocated to thebranches in those areas. Past experience, NPAs and other qualitative aspects would of course bekept in view.

BRANCH - WISE:

There may be branches where specific products are traded like steel, furniture, constructionmaterial, timber, horticulture products and cash crops. Products specific budgets can be consideredif past data about quality and recovery etc. is available.Some branches have predominance of wholesale traders, being historically established at thetowns/cities to serve as the source of supply to the remote places. These branches are havingpotential provided the past experience of trade advances has been satisfactory. While selectedbranches, specific areas and specific products would always be in sharp focus, no branch would beallowed to feel neglected and, similarly, no branch having no potential would be unnecessarilyburdened. So, while all the above three considerations will be kept in mind, selectivity will guidethe exercise.

MARKETING OF RETAIL BANKING PRODUCTS

Retail Banking is a composite activity encompassing the banking products and services speciallydesigned for meeting the ongoing requirements of 'individual' customer. An individual customerdevelops banking habit mainly for three purposes, namely:For making Investments,For raising loans, and

For availing any of the subsidiary services.

Retail banking, therefore, becomes complete only when all these financial needs of an individualcustomer are met to his utmost satisfaction under one roof.Retail Banking is being increasingly focused in Indian. Banking industry today mainly due to highmargin and low risk nature of the business coupled with the, increasing pace of consumerism inIndia. Other factors, such as, increased' economic activity, increase in purchasing power of theconsumers, especially that of the younger generation, a huge middle class population, innovationsin technology and low interest rate regime have contributed to growth of retail financing.With increasing competition, 'spread' in the Indian banking industry is under strain. As such, banksneed to shift their focus to innovative products and services, which are profitable. If banks intendto prosper, profitability of products and customer should become buzz word for them.

MARKETING STRATEGIES'Marketing' is a composite activity, which includes market study, designing of products, deliveringand ensuring proper after sales services. In a 'race' it is the 'pace' that counts and for attaining a'winning pace', marketing strategies have to be designed. Latest technology can be used by banksto target products to the right potential customers, by maintaining a database of customer profilesand their likely financial needs. Data mining has to be strengthened, as it will help banks informulating products for specific set of customers.

The first step in designing the strategy is to identify the target customers and target products for whichmarket segmentation exercise has to be undertaken.a) Market Segmentation: Segmentation of existing as well as potential retail clientele into housewives,

professionals, salaried personnel, workers, company executives, businessmen, farmers be done toidentify the needs of the target group and facilitate structuring financial products I services to matchtheir needs. Further, the same data can be utilized for evolving different techniques of marketingdepending on the target groups.

b) Central Data Base: Bank should build up a central database to contain the profile of all high valueretail clientele. Communication (either as seasonal greetings or for highlighting the significantmeasures for improved services, new products) through 'e' mail / postal mode should be sent at regularintervals from the corporate office itself directly to those high value customers identified by themarketing team stationed at all key delivery units.

c) Financial Super Market: In view of the exposure of Indian customers to global products and servicesthey have become more demanding, and they want fast, convenient and hassle-free services frombanks in India. The traditional

loyalty and inertia associated with the Indian consumer is changing very fast. As such the success of retailmarketing largely depend on how banks understand its customers and the market. Development of skillsfor managing customers has become of crucial importance,if banks of today have to survive.Bank should become a 'one stop shop' for all the banking needs and services. For the retailers investing in


low cost deposit schemes, add-on benefits like demand drafts, funds transfer facility, Anywhere Banking,ATM cards, name printedcheque books, monthly statement of accounts (direct to residence / office), Customer terminal (installed attheir. premises), concessional collection charges, Mobile Banking, Internet Banking, Depository services,Portfolio Management Service, standing instructions, Insurance products should be extended either atconcessional or nil cost. A cost study should be conducted to introduce a business linked tariff structurefor all these services. All these services with technology should instill in the customer a sense of pride inbanking with us.d) Retail Financing as Core Activity: Banks should prepare a list of preferred areas of retail finance

town-wise, keeping the potential in view. SWOT analysis will help in identifying high profile townsfrom retail lending point of view. This will help in making focussed attention on retail financing bybanks in specific potential areas. Ground work required for retail financing will involve:

Operational Manuals: To ensure uniformity and facilitate faster appraisal and decision making,operational manual has to be developed by banks. With this staff members at the grass roots level willnot violate norms and by pass systems and procedures.

Credit Scoring & Loan Pricing model: To enable the frontline staff to take quick credit decisions, anefficient credit scoring and loan pricing system has to be designed. This will strengthen creditappraisal and post- sanction monitoring systems.

Centralised Processing: To have a competitive edge and gain the critical mass in the high volume

game, the processing activity can be centralized. Processing excellence is crucial to sales and service

quality.e) Portfolio Management Services: A retail investor still prefers 'safety' to 'returns' and hence Banks arethe ultimate choice. Series of failures elsewhere have already made the investors lean towards the Banks.Bank can have portfolio management services for the retail investors so that they can have all investmentoptions under one roof. Target Approach: Targets can be fixed for all the units & teams dispensing retail banking products. Well-Trained Marketing Teams: A product can be got sold in this highly competitive environment

only through committed well-trained marketing teams. Exclusive marketing teams specially trainedfor this purpose should be stationed in all key places to ensure market presence and penetration. In allother places, the people at the delivery unit themselves should form the marketing team.

Brand Equity: Customer preference, under the present environment, is towards branded items. Brandequity should be created for all retail banking products and services through regular road shows,seminars, advertisements, exhibitions, market penetration.

Pricing of Products and Services: For retail lending schemes, it is always the "cost" and 'care' thatcounts and these two aspects haunt the minds of retail borrowers. Rate of interest for the loans underretail lending should be rather based on the risk profile and where the credit risk is low or nil, the rateof interest should be the lowest and for others uniform guidelines for graded interest rates beintroduced.

Feedback: A system for regular interaction and feedback from the retail 'customers be evolved tofacilitate constant review and fine-tuning of strategies.

Non-Cash Incentives: Norms for non-cash incentives be evolved for the teams doing excellentbusiness in retail banking.

Frill Benefits / Add-ons: All schemes under 'Retail lending" be insurance linked and proceduralformalities to be reduced. Norms for 'Back ended interest rebate' for prompt repayments be alsoevolved to make the schemes still more attractive and customer friendly.

TURN AROUND OF A BRANCHMIND SET – UP :The first step is to undertake the diagnostic study of the reasons the branch is running into loss. This willinclude scanning of the environment identifying the business potential and drawing up a strategy for turn-around of the branch.The ABC analysis both for deposits and advances will be undertaken. The target area will be scanned andall business potential entities I groups will be identified and quantified. Different associations / agencieswill be used as a business promotion vehicle. Micro-analysis will be undertaken on a time frame 'basis.Target will be fixed and efforts made to achieve the same in the time schedule.STEP - WISE ANALYSIS WILL FOCUS ON:a) Scanning the area and preparing the profile of existing units / potential - sunrise areas in agriculture,

industry, infrastructure, housing, retail lending.b) Identifying Govt. agencies where they can be bulk credit off-take i.e., Indirect Financing through

corporations, boards and other agencies.c) Credit off-take through automobile financing and financing to consumers for white good durables,

Lending to Stock Brokers / investors against shares of blue chip companies in demat form.


d) All existing 'A' — Category (standard category) borrowers will be contacted and motivated forintroducing new borrowers / facilitating switch over to our banks.

e) Quantitative targets will be fixed and progress reviewed on monthly basis.The profitability could be achieved in two ways. Firstly, by earning more income, and secondly, byreducing or rationalizing expenditure.

We can work on the following lines, keeping in mind our location.

A) Income Oriented Activities;

B) Expenditure Saving Activities;,

C) Generation of Income through competitive services;

D) Recovery Aspect.

A) INCOME ORIENTED ACTIVITIES:

The first step is to short list income generating sectors. The target area will be scanned and businesspotential activities such as schools, colleges, universities, .trade associations, industries, business venturesetc., will be listed. The activities should be focused keeping in mind following features:

(a) Identification of existing SMALL/Medium Industrial Unit Situated in the Area.

We should identify the SSI and other medium industries, which are working successfully in the area andare having their accounts with other banks. The details can be obtained from District Industries Centre. Alist of successful small and medium industries working in the area could be obtained. The existing 'Acategory borrowers be pursued to introduce new good borrowers so that bank can facilitate them to switchover to your bank.

(b) Facilities to Road Transport Operators:

In the similar way, automobile dealers of buses; trucks and auto rickshaws could be contacted. If possible, asmall advertisement display of the bank could be placed near their showrooms, with their consent.Assistance could be given to such road transport operators of the area. The well-established schools andcolleges working in the area could also be contacted. Such institutions require vehicles for transportingtheir students.(c) Assistance to Distributors and Wholesale Traders

•Bank can approach various authorized dealers, distributors and other wholesale traders who have well-established business. They could be requested to switch over to our bank. Their proposal could be gotsanctioned frOm the higher authorities, if not within the vested powers of the branch manager. Suchfinance carry higher rate of interest and is collaterally well secured. The traders are financially sound andthe possibility of the accounts becoming sticky, is very less because they have a wide spread network ofretail outlets for their sales.

(d) Assistance for HousingHousing loan is yet another important segment. It is a long-term income-yielding sector. Well reputedcontractors; builders and architects could be contacted to know about the prospective customers.Municipal authorities could also be helpful in this purpose. Subsequently, the parties could be contacted toavail housing finance from our branches.

B) EXPENDITURE SAVING ASPECTS: it is very common phrase that penny saved is the pennyearned. We may have to put some extra efforts for earning extra income: But we can save a lot with a bitof care and proper management. The things, which appear very minor and petty in nature, go a long way inlot of savings. These even, are capable to turn loss-bearing units into profit earning units. Some of theimportant aspects where wastage could be avoided are as follows:

a) Over staffing could be avoided.b) Staff should be properly utilized.c) Switches of fans and tubes should be at the nearest point to the working officer so that lights could be

switched off as soon as the staff leaves.d) Misuse of Bank's vehicles should be checked.e) Proper log registers should be maintained and checked immediately on the return of the concerned

employees. Vehicles should be properly got serviced at regular intervals so that wear and tear isreduced and fuel consumption is optimum.

f) The articles, which are not in use, should be disposed-off with the prior sanction of the higherauthorities. These should not be dumped unnecessarily.

g) Record keepers and other subordinate staff members should be advised to maintain stationery properly.h) The sub standard article should not be purchased because they require regular repairing, and ultimately

result into loss and inconvenience.i) The expenditure bearing articles should be replaced with new economical gadgets and articles.C) COMPETITIVENESS IN BANK'S SERVICES: Within the prescribed limit, branch can bringcompetitiveness in some of the services. For example, with prior permission, bank draft charges, lockerscharges etc. could be conveniently re-fixed which may yield more income but do not effect service. If the


charges levied by the bank are on higher side with comparison to other banks operating in the area, thecase could be taken up with the higher authorities for the reduction of the same.D) RECOVERY ASPECT: Recovery of sticky and overdue loan accounts should be given top priority.Such accounts affect adversely the working of the branch in two ways. Such accounts should be shortlisted and field staff be given necessary instructions to maintain a regular and constant touch with thedefaulters. Legal aspects should also not be delayed. Efforts should be made to get the recoveries throughcompromise. Such proposals should be forwarded to the higher authorities at priority level

HOW TO IMPROVE INSPECTION / AUDIT GRADATION OF YOUR BRANCH

The first step to handle the audit / inspection report is to prioritise the irregularities / discrepancy.Irregularities 1 discrepancies which are of serious and very sensitive nature and can cause financial loss tothe bank, has to be given the top most priority and efforts will be made to rectify the same instantly. Themonitoring and follow - up of irregularities has to be done on daily basis by the branch head himself. Theirregularities be classified as follows:a) Section wise listing of irregularities: First of all the irregularities should be sorted out section wise. The

departments, like deposits and advances, which are looked after by more than one officer, the lists ofthe irregularities should be made as per sub sections or as per work handled by the different officers.This would make it convenient to refer to the records, recording the irregularities removed and in someother aspects as well.

b) Picking up the Experienced Staff for Removal of Irregularities: Well -experienced staff members shouldbe listed, sector or business wise for removal of the irregularities. Technical officers or field staff couldbe taken up for irregularities related to the field job where we have to approach the customers.

c) Prioritizing the Irregularities: All the irregularities should be separately listed according to the gravityor the seriousness. Top priority irregularities pertaining to limitation, wrong documentation, stockreports, cash department and so on should be given personal attention. A proper follow up should bemaintained. .

d) Issue of Office order for removal of irregularities; A proper office order be issued to get theirregularities removed in a time bound frame. The officer order should also indicate the time forsubmission of progress made in this effort, i.e. weekly, fortnightly etc.

FOLLOW – UP :a) Monitoring: The concerned employees be asked to submit their report to the Assistant Manager, who, in

turn will submit the consolidated report to the incumbent incharge. The incumbent incharge may submitthe progress report to the controlling officer accordingly.

b) Instructions for Future: It is more important that the irregularities are not repeated in future. The staffmembers working on different seats should be asked in writing to follow the prescribed procedurestrictly in letter and spirit. This will reduce the number of irregularities to a considerable low. Thechecking officials or officers should be asked to do proper checking.

c) System of individual diarising the pendencies: A system should be adopted that pendencies pertainingto incomplete work be diarised by the individual Officers seat wise. The officer working on the seatshould maintain the dairy on daily basis. The same should be completed at the particular date noted inthe diary. Most of the irregularities occur because they slip out of mind.

HUMAN RESOURCE MANAGEMENTHuman Resource Management (HRM) broadly refers to a positive approach to the management of anorganization's people who individually and collectively contribute to the achievement of sustainablecompetitive advantage. It basically refers to the management and development of the employees, to matchwith the business strategy of the organization.The FIRM philosophy is based on positive commitment towards the development of employees forensuring their growth, development and performance to enhance human capital in the bank. The HRMmodel is composed of policies that promote mutual growth for achieving mutual goals coupled with mutualresponsibilities and rewards, which in turn will yield both better economic performance and greater humandevelopment.

AIMS OF HRM IN CHANGING ENVIRONMENT

HRM is seen as a partner aligned to business strategy, not only participating in setting performanceobjective of anyemployee but also creating development opportunity to achieve them.

To enable management to achieve organisational objectives through its workforce. To foster commitment in employees which will facilitate to gain competitive advantage. To establish an environment in which the latent creativity of the workforce will be unleashed. To achieve "strategic fit" between business strategy and HRM so that there is consistency between

policy goals of HRM and that of the business.KEY STRATEGIC ISSUES IN HRMFrom the intervention strategy perspective, HRM must contextually respond to thefollowing issues: ORGANISING PEOPLE TO WORK EFFECTIVELY


A key starting point for effective human resource management is to build an organisational structure that isdesigned specially to carry out the bank's mission and strategy. The first and foremost task of HRM inbanks, therefore, would be to organize its people so as to enable them to work effectively.OPTIMIZE THE ORGANISATION STRUCTURE - UP GRADATION OF TECHNOLOGYThe technology up-gradation in the wake of competition has the effect of taking banks to become moreefficient and capable of responding to the market conditions. The business strategies and technology up-gradation has a direct impact on the organisational structure. HRM must be able to re-design organisationalstructure as per external changes, business strategies and one step ahead of the competitor. Work processre-engineering to achieve greater efficiency and cost effectiveness must be attempted.BUILD THE RIGHT SKILLS AND WORK CULTUREBanks must have employees who offer the necessary range of job specific skills and whose attitude towardstheir work and,colleagues enable them to channel their skills and energies into performing productively forbank and its customers.ELIMINATING SKILL GAPIntroduction of newer technologies by itself does not improve performance of banks. Introduction of newtechnologies necessarily involve re-examination of the existing human process so as to deliver betterresults. New technologies need new skills but they do not replace human skills. The centralised corebanking solution package being introduced in banks would necessitate far reaching changes in managerialpractices besides rendering surplus age of employees.RE-LOCATION OF SURPLUS EMPLOYEESFocus of HRM should be to plan for effective relocation and utilisation of displaced employees andeffective use of back office data.BUSINESS PROCESS OUTSOURCINGOutsourcing, which is quite simply the transfer of operational responsibility of business processes,infrastructure management of an IT application to a third party for a fee, is gaining, acceptance amongstcorporates globally so that they can concentrate on their core business i.e. banking.TOTAL ENTERPRISE TRANSFORMATION:Optimal results of technology implementation can be achieved with proper grooming, placements, training,rotation and changing the mind-set of the staff. HR is the key element in implementation of technologysince men have to run, manage, operate and command the technology.BENEFITS OF TOTAL ENTERPRISE TRANSFORMATIONPublic Sector Banks will have the following tangible business benefits by total enterprise transformation.e Enhanced Competitiveness 0 Enhanced Operational Efficiency 0 Enhanced CustomerSatisfaction.* Enhanced Accountability • Better Financial management 0 Better Risk management

MANAGERIAL ROLES

Role is a position, which a person occupies in an organization, defined by the expectations of others(significant groups or individuals), and by himself. Role should be properly defined to avoid ambiguity,overlapping, transgression & stress.

AS A PLANNER: A manager undertakes planning, which envisages goal setting and resource mobilization,essential for achievement of pre-determined and thoughtfully scheduled organisational goals. Appropriatestrategies are worked out with periodical review if and when warranted by environment, particularlycompetition.

AS A PERFORMER: A manager shows commitment and devotion. He sets example by bringing aboutcongruence between personal objectives and organizational goals: He identifies Key Performance Areas(KPAs). His performance is quantifiable and visible. He lays down challenging tasks for himself, aimshigh, puts in hard work and becomes a trailblazer.

AS AN ORGANIZER: A manager is an effective organizer of material and human resources. He ensures toutilize resources economically to give optimum results. He cares for human resources, plans training &development, motivates people, establishes instant and spontaneous rapport with others and createsconducive working climate. He infuses values and reinforces concepts like cost consciousness, total qualitymanagement leadership, responsibility to society, loyalty to organization, fellow feeling among the staff,zeal for intrapreneurship and innovation.

AS A LEADER: A manager develops team, energizes organization and team members, motivates staff,shares knowledge, acts only after full investigation, invites suggestions, accepts change and enforceschange through consultation and persuasion, keen on creativity and encourages creativity in theorganisation, skilled in negotiation and communication. He is also self-confident, obeys codes of ethics &morality, shows high maturity, good listener and skilled in resolution of conflicts. He treats colleagues withrespect. He acts in the true spirit of friend, philosopher and guide (counselor).


AS A MOTIVATOR: A manager knows that people are invaluable resources of the organization. He keepsthem motivated to accomplish goals. He knows that motivation is the resultant behaviour propelled by needarousal. People move from lower level (basic) needs to higher level needs (status and social recognition);they desire to reach a level of self-actualization. A manager, therefore, uses tact and philosophy to create adesire in his colleagues to have a vision of attaining higher goals and work for the same with dedication.

AS A COMMUNICATOR: Makes clear and understandable communications, down the line. InformsController with facts and convincing logic. His communication is effective. He insists on feed-back. Hegladly gives clarification, if sought. His communications are polite but firm and specific. He prefersdiscussing subjects threadbare in meetings. He does not take offence if opposite views are expressed; heremoves fear in meetings.

AS A MONITOR: He ensures compliance through statements and returns. He insists on feedback.Achievement of budgeted levels is appreciated liberally and negative variance is taken as opportunity tolook into the environmental / hindering factors for suitable remedial actions, which he suggests. He offerssupport, if any, required.

AS A CHANGE AGENT & CATALYST: Changes take place regularly, sometimes abruptly, both internallyand externally. He explains changes and their consequences; invites reactions, allays fears and persuades toaccept changes for better results. Rationale is explained, holistic position described in global context,ensures acceptance of change willingly.

AS A VISIONARY: Only a visionary manager thinks of extra-ordinary possibilities, he experiments onnew possibilities and allows his subordinates to do likewise. He excuses routine and genuine mistakes.Vision brings about super synergy in the team, which is a force to meet and beat competition and become awinner. Vision infuses confidence and encourages killing instinct, and this is required in today'scompetitive environment.

AS A IMAGE BUILDER: A manager represents an organisation. He builds its image, conducts him self-well, he projects his organization by his good deeds and actions. He has to ensure good working climate,.courtesy on the part of the staff, helpful & supportive attitude of all in the organisation towards the publiccalling at the premises or contacting on telephone etc., prompt & efficient customer service, zero mistakeoperations, prompt reply to communications, tailor-making schemes for certain target groups and sense ofdiscipline on the part of all. He ensures that visit to the organisation is a delight indeed.

AS A COORDINATOR: It is the responsibility of the manager to coordinate different aspects of anorganisation. It is necessary to create the harmony between manpower, available resources and decidestargets for effectiveness, efficiency and growth. All these roles culminate into the role of developer and thisrole can be achieved only by having the concept of 'leading by example'.

WHAT MAKES A GOOD MANAGERPROBLEM SOLUTION (CONFLICT RESOLUTION)

JUDGEMENT SKILL — Distinguishes between what's important or controllable, and between what isnot important or uncontrollable. Identifies who is skilled enough to handle an issue or reconcile aconflict situation. Ensures and priorities within time-frame work.

ANALYTICAL SKILL & INTEGRATIVE ABILITY— Identifies inconsistency in message contents andsubtle relationships in information. Identifies facts from various and unconnected sources, and relatesthem to arrive at conclusions. Familiarizes with concepts.

DECISION MAKING AS CORE ACTIVITY— Considers the relevant facts for developing andevaluating all possible alternatives for solving a problem, habitually draws upon colleagues forsuggestions, affords opportunity to the subordinates to develop. Realistic, practical constraints areconsidered and helping factors identified.

ADAPTABILITY — According to Charles Darwin, "it is not the strongest nor the ablest who survive,but it is the one who adapt to change that survive". A manager performs under less than optimumconditions e.g. unstructured problems, too little time and/or resources, insufficient information,mismatch between individual's skills and job requirements.

PERSONAL IMPACT— Affects others, convinces those holding opposing or neutral positions, pushthrough interest or ideas despite opposition due to personal influence, style, endeavour, and ability tocarry along colleagues. Takes charge of situation quickly, decides.

INTER-PERSONAL SKILLS

COMMUNICATION: Communication instructions and proposals with facts and in clear andunderstandable language, avoids ambiguity, ensures feedback, listens patiently and carefully, holdsmeeting in cordial and encouraging manner and invites suggestions.

MANAGING INDIVIDUALS — Understands management principles and concepts, assistssubordinates and peers involving management experts, to achieve their business and career objectives.Listens to others, acknowledges their strengths, and volunteers to remove their weaknesses. Ensuressupport and guidance, and understands individual differences.


PLANNING AND MANAGING GROUP PERFORMANCE — Formulates participative plans toachieve job objectives as part of organisational objectives, undertakes mid-term review of businessplan, if found unrealistic or unreasonable due to environmental changes, sensitive to group co-operation, productivity and profitability. Sets up quality•circles and pushes forward through team spirittowards zero defect operations.

CONFLICT MANAGEMENT — Objectivity despite stress. Addresses conflict directly andtactually. DIPLOMACY — Negotiates with win-win situation. Tailors approach to take into account the

perceptions, needs or motivation of others, giving reasons and explanations for requests. PERSONALATTRIBUTES

COMMUNICATION — Speaks and writes well. Adapts communication style to suit the audience. Is

easily understood. Ensures two-way communication. Gives clarification, if wanted.

DECISIVENESS —Firm, chooses among alternatives, confronts higher management decisions.

CREATIVITY — Provides/anticipates new perspectives, approaches,

experimentation. ENERGY

ACTIVITY LEVEL — Sustains high level of activity including speed, volume of work accomplished,endurance, balance, composure, civility, and enlightenedleadership.

FLEXIBILITY — Handles challenges. Copes with multiple changing

demands and setbacks. STRATEGIC & OPERATIONAL CONTROL

STRATEGIC & ORGANIZATIONAL AWARENESS — Possesses awareness of interests andobjectives of the organization, develops own plans and actions as part of overall organisational plan.Coordinates with and provides assistance to other units, keeps updated on changes.

ADMINISTRATIVE CONTROL— Prepares plans & tracks; documents the progress of programmes.Designs control systems. Keeps abreast of the details, which support them.

TECHNICAL MANAGEMENT — Ensures more technical expertise on the job than managerialexpertise on the job. Provides current technical skills to subordinates and others to stay competitive inmarket.

el COMPETITIVE ANALYSIS & ASSESSMENT: Environment threat and opportunity analysis isrequired to know the strategy of the competitors and entry of new competitors and comparison of ourresources and strategy with their plans.

MANAGERIAL BLOCKSEach manager is individual and different. He has certain inherent traits, strengths and talents. Often, thesedo not • adequately manifest in his personal or work life; a number of hindering factors come in. These areblocks. Each manager must be aware of the blocks; he must try to overcome them to be effective. Somesuch significant blocks are mentioned below:a) HEALTH: An important contributing factor for effectiveness. Balanced food, good eating habits,

adequate exercises, avoiding smoking, alcohol etc, are essential to maintain good health. Take allpreventive (which is very important) and curative measures for maintaining robust health. Neglect ofhealth often ruins opportunity ofbeing successful. •

b) UNCLEAR SELF-SET GOALS: Be aware of life goals. Have vision, formulate mission statementand lay down definite and realistic goals. Determine priorities. Ambiguities and confusion willcertainly hinder focus and result in ineffectiveness. One should fix one's self-goals & prioritiesdepending on the situations (flexibility of goals) and plan achievement.

c) LACK OF UNDERSTANDING OF ORGANISATIONAL MISSION, OBJECTIVES AND GOALS:Understand them to be effective contributor to organisation. Develop concepts and operationalizerelevant aspects. Involve others. Make compact team. Guide subordinates.

d) DISCONTINUANCE OF SELF-DEVELOPING EFFORTS: Do SWOT analysis periodically. Evolveself-development plan. Reinforce strengths and convert weaknesses into strengths or remove them.Take benefit of organisation's executive development plan.

e) LACK OF ADAPTATION TO CHANGES: Adaptation to change is imperative; it is a matter ofattitude, skill and capability to master the ramifications of change. Disorientation to changes leads toineffectiveness, isolation. Globalisation means constant changes. Adapt to them.

1) INABILITY TO ACCEPT NEGATIVE FEEDBACK: Praise and appreciation are always welcome.Criticism and negative feedback are not generally liked but careful analysis and evaluation go a longway to bring about improvement, resulting in effectiveness.LACK OF CLEAR CUT VALUES: Values are relative terms. These are choices one makes aboutwhat is important and worthwhile in life. The society has values, sometimes-traditional ones. All


organisations have values within the society they serve and these cannot be in opposition to the valuesof the society. A manager must be aware of values. All activities are geared towards organisationalgoals, based on values. No bias is permitted. Secular working ensures uniform systems andprocedures. All concerned are served without discrimination, and promptly, to their satisfaction.LOW - CONFIDENCE: Confidence is a state of mind. Often, low confidence is such a state of mind,which inhibits full exploitation of one's capacity and potential. It results in low self - esteem.Developing self-confidence and banishing doubt are essential to be effective.

i) INABILITY TO REPOSE TRUST AND CONFIDENCE IN OTHERS: Reposing confidence and trustin others takes off heavy burden from the manager. He can then devote all attention to high priorityareas and focus on key tasks. Others trusted by him also feel important and perform better; they add toexperience and become more capable and competitive. Suspicion, mistrust hinders development ofhealthy relationships; effective delegation gets setback. Inadequate contribution by the team results inshort achievement of objectives. The mantra is: trust others, repose confidence in others and enjoyyourself and the organisations the benefits of excellent performance. Manager becomes moreeffective.INABILITY TO COPE WITH STRESS AND STRAIN: Due to complexes, many executives are oftenunable to cope with present day functional and role responsibilities. The capacity to cope with stressand strain is a mental attitude. A manager has to -learn to relax, understand how stress affects mindand health, and adopt release techniques appropriate to his physical and mental condition. However,stress is necessary to bring out the best out of a person.

k) LOW AMBITION: Ambition keeps one highly motivated; it is a powerful driving force. It goads theindividual to accept challenges and achieve results even in adverse circumstances. Lack of ambitionreduces the capacity to compete. Therefore, prompting ambition and setting high standard ofachievement will certainly lead to effectiveness.

I) ATTITUDINAL BLOCKS:Lack of Self Confidence O Lack of Initiative• Despair or DepressionO Inferiority complex• Intolerance O NervousnessO Ego & False Pride O Stage FearO Confusion & Indecision • Wilting under Pressure

POSITIVE ATTITUDEATTITUDE (CONCEPT):Attitude is a state of mind, a kind of mindset. It includes mental postures, conduct, general disposition,feelings, desires, fears, convictions, tastes, aspirations, ambition, etc. A man's actions result from his faithand opinion. Attitude influences an individual's opinion. Attitude is a person's opinion about the facts;facts are not opinion, opinion changes in response to changes in environment (both domestic andinternational). Attitude is a person's readiness to act or react on the basis of the opinions he holds.Attitudes are reinforced habits, internalized since birth, and hence very difficult to change.ATTITUDES CAN BE POSITIVE OR NEGATIVE OR WASTEFUL:The former is creative, enthusiastic, constructive, appreciative, loving, trusting, cooperating, sharing,learning, social responsibility. The latter is destructive, hateful, ruinous, mean, condemnable, distrustful,jealous, disruptive, offensive, etc.FACTORS THAT AFFECT ATTITUDE:

These are primary groups, secondary groups and other reference groups. Precisely stated, these are (i)family, friends, teachers, individuals like role models, (ii) institutions and organisations making up thesociety's structure, (iii) religion, values, various codes including laws and self-discipline including faithand beliefs.CHANGE OF ATTITUDE:

•As per Peter Drucker, "The major obstacle to growth is a manager's inability to change attitudes andbehaviour as fast as the organisation requires". Positive attitude is a quest, constructive thinking andpositive approach to take the right path, essential form effectiveness of human resource for excellence inmultifarious organisational activities.Change can be brought about through adoption of meaningful appraisal system to devise special andstructured counseling as well as training & development programmes to help potential to spring forthblossoming. Change depends upon (i) need for change (motivation), level of learning (education), supportsystem, encouragement, appreciation, and conducive environment.DEVELOPING POSITIVE ATTITUDE; TIPS:Performance on job arena manifests your view on life and general philosophy. So, think and feel positive;negative thinking and feeling makes one sick and diffident. Think positive about self, family,


environment, work, colleagues, and organisation. Undertake SWOT analysis to identify strengths andweaknesses to overcome the latter. Be a winner. Do not get depressed over past. Take responsibility forfailures. Learn from mistakes. Do not be fatalist. Reinforce factors responsible for success to repeatsuccess. Analyse causes for failure and avoid them in future. Take work as mission. Negative thinkingmeans pains. We cannot change others, but we can change ourselves. Avoid ego and false sense of pride.Nobility & humility is great virtue, imbibe it.POSITIVE ATTITUDE BRINGS FORTH SATISFYING RESULTS:Competence is the cumulative effect of knowledge and skills. Performance is the product of competenceand attiytdel Positive attitude is, therefore, necessary for achieving goals. Get maximum out of life,including official life.

POSITIVE ATTITUDE OFFERS A BOUQUET OF BENEFITS (REWARDS / PAY-OFFS):It results in increased productivity, fosters team spirit, helps solving problems, quality improvement,creates and maintains congenial atmosphere, breed's loyalty, enhances profits, generates healthy andimproved inter-personal relations, reduces stress, helps individual to become useful and contributingmembers of the organisation, develops pleasing personality of an individual, and helps the individual torelate to others willingly for contribution to society through excellent performance at the job where one isposted.Developing positive attitude is the exclusive responsibility of the individual himself. It depends uponhim and him only to think positive, act positive and feel positive. Even in the most disturbing andturbulent situation, there is always a silver lining. Modern organisations provide various kinds of jobs,job rotation, adopt constructive approach in appraising the performance, use the latest technology,provide training in skills and educational inputs by organising in-house programmes or deputations toinstitutions outside. WTO regime is ushering in free trade era, domestic economy is getting integratedwith international economy and structural changes in society and economy are in the offing. Prepare toface the challenges; develop capabilities and competitiveness. Remain positive.

TEAM BUILDINGWHAT CONSTITUTES A TEAM: A game has a number of players; it is a team, Players fix theirpositions, co-operate and coordinate with each other to win the game. This means that a team is comprisedof energetic people who are committed to work in unison for achievement of common objectives. Thesuccess gives the members pleasure and the organisation better results. EFFECTIVE TEAM HASCERTAIN CHARACTERISTICS: These are discussed below briefly:OUTPUT: The team has to deliver the goods. The result is the test of the team. It proves capability of theteam as a whole to achieve results as per the objectives of the organisations. The desired results cannot beachieved by the individuals working in isolation. Learning from games, modern managements have laiddown the technique of team building where the individuals enjoy the work as a group and rejoice at thesuccess collective. The result is very good.

a) OBJECTIVES: A team knows the objective as winning the game. Similarly, the team in theorganisation must also know and understand the objectives very clearly so that they can workcollectively -to achieve the objectives. The team members get opportunity of discussing the strategiesand other aspects of plan to achieve excellence.

b) ENERGY: Members of a team derive strength from one another and create synergy. Each memberobeys his captain or leader. In formal organisations, manager is formally appointed; he has to.developthe qualities of leadership to carry his team members along.

c) STRUCTURE: While playing any game, the players are assigned a position on the ground. The groundis having definite measurement and markings. Similarly,- each organisation creates a structure for theteam which includes space, rules and regulations, system of discipline, training, scale of remuneration,objectives, meetings, discussions, decisions, budget, action plan, system of monitoring and mid-termreview etc. The organisations lay down details on control, leadership, procedures, roles, organisations,support system etc. with adequate flexibility, orderliness, extent of responsibility and clear directions.

d) ATMOSPHERE: A distinctive spirit, allowing for openness, support, mutuality and

collaboration. BENEFITS OF TEAM BUILDING:

MANAGEMENT OF COMPLEXITY: Complex situations are creatively managed.

RAPID RESPONSE: Close-knit teams respond promptly & energetically.

HIGH MOTIVATION: Higher level needs motivate the team for recognition and self-actualization.

HIGH QUALITY DECISIONS: Mature teams make better quality decisions than most brilliantindividuals do.Members' level of commitment to team's mission is much higher, sometimes ideal.


COLLECTIVE STRENGTH: Synergy influences organization & environment; better achievement.

MOTIVATIONMotivation is an inner urge, which compels the person to work, Motivation is a general term applying to the entire class of NEEDS, DESIRES, WANTS, DRIVES,

IMPULSES, WISHES etc.It is an inner state that energizes, activates or moves and that directs or channels behaviour towards Goal -a goal directed activity.Motives are 'WHY' of Behaviour.Motive 'WITHIN' - Goal 'OUTSIDE'.NEEDS => LEADS TO => WANTS => CAUSES => TENSION => GIVES RISE TO => MOTIVATIONFOR ACTION => RESULTS IN => PERFORMANCE => YIELDS => SATISFACTION.THEORIES ON MOTIVATIONAbraham Maslow's Hierarchy of Needs Theory holds that there is hierarchy of five needs - physiological(biological), safety (security and protection), social (acceptance and friendship), esteem (self-respect andstatus) and self-actualization {the drive to become what one is capable of becoming). As each need issequentially satisfied, the next need becomes dominant.a) Frederick Herzberq's Motivation Hygiene approaches or Two-Factor theory holds that there are two sets

of motivating factors. In one set there are the hygiene or maintenance factors, which are related to thejob content (circumstances, working conditions, policies, administration and inter-personnel relations).The absence of these factors results in dissatisfaction. In the other set are the satisfier or motivators,which are related to the content of the job (achievement, recognitiOn for accomplishment, challengingwork, increased responsibility, growth and development).

b) Victor H. Vroom's Expectancy Theory suggests that people are motivated to reach a goal if they thinkthat the goal is worthwhile and can see that their activities will help them to achieve the goal.

c) McClelland Theory Achievement Motivationd) McGregor Theory X & Theory Y - Theory X states that people work only due to fear of punishment

and close supervision and. monitoring is must. In contrast, theory Y states that work is as natural asplay. There is no need to use power. People will decide their own objectives.

e) Alderfer's ERG Theory: Alderfer classifies needs into three categories namely growth needs,relatedness needs and existence needs.

TRANSACTIONAL ANALYSIS (TA):

Eric Berne developed the concept of Transactional Analysis (TA), which is a method of analysing andunderstanding behaviour. Transactional Analysis is a tool to help:

(a) Better understanding of own and other's behaviour,

(b) Improve the interpersonal relationship / communication,

(c) Development of Art of effective communication.

TA is an outgrowth of earlier Freudian psychology. Sigmund Freud was the first to suggest that there arethree sources within the human personality that stimulate, monitor and control behaviour. The Freudian 'I','ego' and 'superego' have been made simple by TA by replacing with three ego states of mind which has norelationship with the age: PARENT (nurturing, critical, controlling); ADULT (logical, reasonable, rational and unemotional behaviour, characterized by problem-solving

analysis and rational decision making); and CHILD ego (emotional behaviour, happy child and destructive child).While motivation reflects wants, motivators are the identified rewards or incentives, which sharpens thedrive to satisfy these wants. Satisfaction refers to the contentment experienced when a want is satisfied.Motivation implies -a drive towards an outcome and satisfaction is experienced when the outcome has beenachieved.Under the concept of Transactional Analysis, four personality traits have been developed:a) I am OK, You are OKb) I am OK, Your are not OK.c) I am not OK, You are OK.d) I am not OK, You are not OK.The best personality behaviour is I am OK, You are OK

DELIVERING CUSTOMER DELIGHTHuman beings are unique and complex entities. Each develops his/her own self-image, likes and dislikes.


So is the case with our customers. Each of the customers has different features, characteristics andexpectations - unique in one's own way:Global Customers: Often our customers operate in more than one country and their products, services,operations, and their end-users too are spread all over the world. To serve them means, 'thinking global".Technology Oriented Customers: Such customers focus on technology as their change agent whichvirtually governs the dynamics of their daily drills and they execute their plans with long-term leaps. Forserving them we go by the dictum "thinking ahead, thinking competencies".Customers which are Demanding and Competitive:•They judge themselves by making comparisonsas to, what they can do better than their competitors do. How quickly and smartly they stay. Theydetermine their success by positioning ahead in the market arena. In their case, it means to us "thinkingbusiness".Constantly Benchmarking Customers: They believe in setting standards not to stick to them as theyconsider them minimum, only to be raised consistently and quickly. Reaching global benchmarks is a giventhing for them. Measuring quality, finding ways of removing or reducing defects and pursuing excellenceconstantly are ongoing commitment for them. They make us do "thinking metrics, thinking excellence'.Cost Focussed Customers: Business today is more conscious of pressure on bottom lines. Reducingcosts, improving operational efficiencies are the things of the day. For such customers, we commit"thinking cost-effective solutions".HOW TO PROCEED TO SATISFY OUR CUSTOMERS?

We must adopt a policy of collaboration / partnership with our customers to deliver the needed andperceived business solutions. The following propellers are indispensable in this regard:a) A matching mindset: We have to develop a mindset that not only brings about understanding ofcustomers' needs and expectations but also dig deep to empathize with the customers' latent expectationsneeded relevant technologies and business goals. We can then succeed to deliver solutions with genuinepassion.b) Honouring Delivery Schedule: Solutions have not only to be need-specific but also time-specific.Looking for ways to deliver solutions not just on time but ahead of time is the core of success in servingcustomers.c) Reservoir of Competencies to Lead: Highly competent professionals with rich domaincompetencies to understand the business of customers better must be in position. The technical team has tobe supported to develop solutions for the customers, recognizing fully well that customers seek solutions,not technology.d) Cutting down on Cost: Rupee saved is rupee earned. The solutions, processes, and people should allbe bottomline-focussed. Twin strategies of cost reduction and cost savings go hand-in-hand. These lead to.a discernible increase in operational efficiencies, resulting in increasing value for the customers'shareholders.e) Value Addition: Adding value enhances customer delight. Endeavour to add value to every facet of thecustomer interaction has to. be a permanent feature. Think of value addition to customer, relevant existingprocess, new plan, innovative idea etc.MEASURE AND DELIGHT APPROACH: Quality benchmarking being ongoing process means goingbeyond global benchmarks such as ISO 9001-2000, SEI-CMM Level 5 and other standard requirements.The goal should be to constantly raise the bar. Measurements monitoring, modifying and excelling help toapply the best quality practices for the customers.

PROBLEM SOLVING & DECISION MAKINGWith the integration of Indian economy with the rest of the world, the pace of changes in the environmenthas increased, leading to an increase in organization problems. Dynamic management of an organizationdemands understanding the change, nature of change and the direction of the change. Manager by theprocess of decision-making undertakes to minimize the impact of changes and increase effectiveness forachieving organizational objectives. Decision-making is the process of selecting a course of action fromamong several alternatives. It is selection of the best possible alternative for the solution of a givenproblem.STEPS OF DECISION MAKINGa) Problem Identification - Problems arise due to disparity between ' what is' and ' what should be'. Thethreats of environmental changes also create decision problem. A manager should identify and define thereal problem in a straight way. A problem well defined is half solved.The problem should be classified on the following basis: Nature of the decision, i.e. whether it is strategiINGc or routine. Impact of the decision on the various functions of the business. Futurity of the decision. Periodicity of the decision, and Limiting or strategic factors relevant to the decision.

b) Diagnosing the Problem: Diagnosing the problem is knowing the real cause of the gap between whatis and what should be. The problem should be understood in terms of its elements, its magnitude, its


urgency, its course, and its relations with other problems. All pertinent facts and information must becollected and analysed to diagnose the problem quickly and correctly.c) Developing Alternatives: A manager, while making decision, should search for various alternatives,which should be identified and analysed. There is a no problem of decision making if there is only oneway of solving a problem. A wide range of alternatives increases the freedom of decision maker. Howeversuch alternatives should not be considered which are not possible to be accomplished due to a limitingfactors.d) Selection of Best Alternative: After evaluation of the various alternatives, the decision maker has toselect the best alternative or that alternative which contributes maximum to the given objectives. It shouldbe ensured that the decision taken is practicable, stable and it is not creating another problem.e) Implementation Decision: It implies laying down of derivative plans and their communication to allconcerned who are responsible for its implementation within a given timeframe.f) Follow-Up: The implementation of the decision should be constantly monitored. No matter howscientific it is, decision-making has no guarantee that it is hundred percent correct. It may be defective andmay cause loss to the organization.As such its progress should be watched carefully to minimise the chances of loss. If the decision taken isnot yielding the desired results, necessary changes should be made in the decision or its implementation.Thus an effective follow-up may control the major deviation in time.One of the best ways to analyze the decision is to use the most common Decision Trees approach.Decision Trees depict, in the form of a tree, the decision points, chance events, and probability involved invarious courses that might be undertaken. This approach makes it possible to see atleast the majoralternatives and the fact that subsequent decision may depend upon events in the future.

BENCHEMARKINGThe purpose of benchmarking is to improve the organisation's competitive position and its learningabilities. It embodies the spirit of being humble enough to admit that someone else is better at something,and wise enough to learn how to match and even surpass.OPERATIONALLY DEFINED, BENCHMARKING IS

Finding and implementing best practices,

An ongoing process of measuring and improving company's products, service and practices againstthose companies

that distinguish themselves in that same category of performance.8 The first step in creating the recognition that changes and improvements areneeded.

WHY IS BENCHMARKING VALUABLE?Benchmarking helps in three ways: Providing breakthrough insights by examining superior management practices. Inspiring people by demonstrating: "We can't ..... but others are..." Setting objective targets by highlighting the gaps between "us" and "them".Benchmarking as quality tool is simple to apply and does not require advance and sophisticated techniques.More importantly, this process can provide an external stimulus to encourage a reflective environment ofcontinuous learning. Benchmarking facilitates learning: A powerful learning experience such asbenchmarking can be a vehicle for creating sustainable business solutions. This type of learning parallelsPeter Senge's description of a learning organisation as one that is continually expanding its capacity tocreate its future.


3.MOST IMPORTANT GD TOPICS ( 46 Topics )

1. India and the Age of Acceleration

We live in a world which is changing at an increasingly rapid pace. One may call our era theAge of Acceleration, an age where the only constant seems to be the certainty of even morechange.What explains this constant flux that now rules our lives? It is mainly the acceleration wewitness in technological advancement. The computing power of a micro-chip in our mobilephones is equivalent to several acres of main– frame computers that would have beenrequired a generation ago. The volume of data and the speed with which it can move acrossvast spaces is difficult to comprehend. And yet, scientists tell us, we are still far fromreaching the limits of this technology. There are other domains where potentially disruptivetechnologies are in the making. These include nanotechnology, advanced materials, bio-sciences and artificial intelligence.These developments are pushing the frontiers of knowledge into largely uncharted territory.We do not know how they will interact with social, political and psychological systems thatchange only slowly. Human beings are seduced by novelty, but they are reassured byfamiliarity. Technological change has altered our global landscape. The recent global financialand economic crisis was, in a real sense, caused by the mismatch between the scale oftechnological change and the adaptability of institutions of both domestic and globalgovernance. What is worth noting is that recovery can never be a return to the pre-crisisterrain. And yet that is what we seem to be seeking. Unless we find new instruments ofgovernance, we are doomed to suffer similar crises in the future, perhaps even worse thanthe last. An altered landscape, which is still in the throes of further change, is no longeramenable to being managed by the tools that were fashioned to deal with an altogetherdifferent environment. Yet our predisposition to familiarity and precedent makes us reluctantto down these tools and look for new ones.The emerging landscapeLet me point to some of the characteristics of the emerging landscape. It is, in my view,dominated by three critical domains, a terrestrial domain that is increasingly defined by themaritime space, an extra-terrestrial domain which is space-related and lastly, extendingboth along the terrestrial and extra-terrestrial, cyber space.As a globalised economy has become more entrenched, as the interconnectedness andintegration of economies across the world continues apace, the maritime sphere becomes acritical factor, impacting directly on the overall security of nations. Ocean-going trade nowconstitutes well over 90% of total trade. The dependence on maritime trade is even morecompelling, if we consider the movement of energy resources, particularly oil, and otherstrategic commodities such as iron ore, coal and, more recently, rare earths. Resourcesecurity is now integrally linked to maritime security.The maritime domainThe maritime domain is also in flux. The melting of Arctic ice due to global warming, forexample, is opening up new and much shorter sea routes between Europe and Asia,reducing shipping distance by over 40%. From just over 4 cargo vessels in 2010, thenumber using the North-East passagealong the Russian Arctic coast reached over 200 last summer. New ports and infrastructureare planned along the Russian and Norwegian Arctic coasts. If the current trends continue, itis estimated that over 25% of world shipping may be traversing this route, instead oftraditional passage through the Suez Canal by 2030.The Arctic may also hold over 40% ofthe world‘s known energy and mineral resources, which the melting of ice is makingaccessible. The economic profile of the Arctic littoral countries, in particular, the US, Russia,Canada, Norway and Denmark, would increase and so will their strategic importance.Whether this will retard or even reverse the current ongoing shift in the centre of gravity ofglobal power to the Asia and Pacific region, remains to be seen, but cannot be ruled out.The critical role of the maritime domain also implies that countries which can deploysignificant maritime capabilities and which can project power over vast ocean spaces, will be


the more influential nations of the future, not those who continue to allocate resources tolarge and increasingly less effective land forces and weaponry.The domain of spaceLet me now turn to the domain of space. Much of the world‘s communication systems, itsinformation and media infrastructure, navigation and surveillance systems and resourcesurvey platforms are based in space. The number of operational satellites orbiting in spacehas grown from just a handful 50 years ago to about 5,000 now. These spacebased assetsare indispensable to modern economies, but they are also vulnerable. This was broughthome to the world by China‘s unannounced ASAT test in 2007. The space domain is nowcompletely woven into the fabric of our lives on earth, though few of us fully comprehendthis reality. In the none too distant future, space travel may become as ubiquitous as airtravel today. The colonization of other planets, the exploitation of rich and rare minerals thatlie buried in their soil and their use as remote platforms for future explorations of outerspace, are no longer in the realm of fantasy. It stands to reason that countries that havemastery in space sciences and ambitions programmes for future growth, will be significantplayers in any future world order.Let me now turn to cyber space, which is a complex hybrid of both terrestrial as well asextra-terrestrial domains. It is terrestrial in the sense that it is dependent upon a vast anddense network of fibre-optic cables that gird our planet, embedded both in land as well asunder sea. It is extra-territorial because it is also connected to all the space-based systemsreferred to earlier. The virtual reality which cyber space creates and maintains, depends uponboth land (including maritime) based and space based platforms which are interconnectedand enmeshed in a complex and continually expanding system. Again, it is difficult tocomprehend how much our day-to-day living and functioning currently is dependent uponthis interconnected cyber space. And yet it is only a little over 50 years since the satelliteage was born and only 30 years since personal computers and portable phones came intoexistence. The worldwide internet which created a global cyber-space is only a little over ageneration old. Many of us have lived through an era where there were no televisions, letalone computers, mobile phones or the internet. And yet today, we cannot conceive of amodern economy and a modern society in which cyber space is not an indispensable andpervasive reality.This also implies that countries with advanced cyber-capabilities will possess a mostpowerful instrument both for economic advancement and enhancing national security. It isa resource which is unique because it is not material or tangible. It is nevertheless a virtualnetwork that no nation or society can opt out of and survive as a viable entity.Interconnectedness is no longer a choice. It is a fundamental condition of modern living andinterconnectedness is most visibly manifest in cyber space.India, an influential actorSo where does India belong in this transformed landscape? India is, and will remain, aninfluential actor in the emerging global order, precisely because it has demonstratedcapabilities in all the three critical domains I referred to. It is already a maritime power witha strong regional though as yet modest global reach. These capabilities are expanding,though not as significantly as a long-term strategy would dictate. It is one of the handful ofspace powers and, despite frugal resources, it has developed sophisticated capabilities whichare comparable to the best in the world. And lastly, in cyber-space, India has a well-established and internationally acknowledged capability which marks it out as one of thehandful of countries that can deploy both defensive and offensive capabilities. It is preciselythese capabilities which provide India with the opportunity to lead the world into creatingglobal governance structures that are based, not on the competitive principle, but on anunderstanding that only collaborative responses will be able to deal with the inter-linkedchallenges posed by these emerging domains. India has a stake in the norms and standardswhich such global regimes will eventually adopt. But, since India is, and will remain, a keyplayer in each of these domains, the world, too, has a stake in India being a part and parcelof these regimes. India‘s absence from these regimes will make them ineffective. This is apowerful leverage in our hands but we will need a careful well thought-out long-termstrategy to use it to be able to shape the emerging global order.


I recognize that the current state of our country does not match the potential that ourcapabilities in the three critical domains provide us with. Nor is it certain that we willcontinue to develop these capabilities as technologies advance to ever higher realms. I dobelieve, however, that it is more likely that India will advance, though perhaps in fits andstarts, because it is a plural, diverse and extraordinarily interactive society. The mobile, theinternet and other social media, are enabling Indians to converse and interact with oneanother and with citizens across borders, on a scale that is unprecedented. The innatecreativity and innovative spirit of India‘s peoples is being unleashed on an unprecedentedscale. Harnessing this extraordinary energy will require leadership which understands thealtered landscape in which we live and leads in putting in place institutions and processesthat are appropriate to this changing landscape. We have an advantage in that we are notalready locked into a pattern of energy and resource intensive economic developmentmodel which characterises China and much of the world today. This is a model whichbelongs to the past. The future will be built upon its deconstruction. India has anopportunity to fashion a model of development which draws upon its democratic impulses &its store of capabilities in the new domains, and helps shape a global order that promotescollaborative responses to cross-cutting issues, rather than the competitive outcomes thatbelong to a world that no longer exists. In becoming the thought leader in this respect,India will find its own place in the world, its own destiny.

2. EXCELLENCE IN BUSINESS QUALITATIVE BUSINESS GROWTH

KEY POINTS:

Campaign management Process Management in the Branch Brand Building through Customer Service, service recovery & Complaint redressal On site & Off site Customer meetings Participating in local Fairs/Melas Catch Them Young- Approaching schools for student accounts for acquiring early

mind share of the future customers. Marketing & sales Use of Data mining for in house marketing Cross selling & Up selling Using various reports for Augmenting Liability Segment (CASA Focus)

Asset SegmentYou need to think big. You need to act fast. You need to have great toughness and hugeguts. You will have to be unrealistically persistent and wildly courageous.

Ask yourself how I reengineer my Balance Sheet and P/L so that I can maximize my Profit?

Can you summarize your Branch‘s strategy in 35 words or less? If so, would yourTeam members also know it? You cannot have spectacular results without definingyour strategy? While forming such strategy, you must take in to account potential inyour area and strength and weaknesses of peer Banks.

Do SWOT analysis of your Branch / Organization. Leverage the strengths. Endeavour for enhancing usage of Alternate delivery channels. Focus on proper appraisal of Credit proposal.

Bank has largest overseas presence. Endeavour to take advantage of this andEnhance FOREX Business.

Focus on total performance. Total Performance means each unit will contribute, eachemployee will contribute.

Briefing everyday:


Every day brief your team/staff at start of the day for few minutes to decide day‘s priorities

and strategies.

Observing Market:

When you run a business, you should not only know what you are doing but alsowhat

your competitors are up to.Such information will help you to know where you stand

compare to competitors

Do not be an armchair manager- move in the market.

Another important observation is to see customer‘s response to competitor‘s products.This will help you in understanding requirement of market and expectations of customer.

3.CASA – A THRUST AREA FOR THE BANK

CASA deposits play a vital role in determining cost of deposit and ultimately NIM andprofitability. Banks are now required to have a robust liquidity coverage ratio of morethan 60 % which during the present year will be required to be raised to 70% from01.01.2016. CASA and RTD are fundamental components taken into account forcomputation of LCR. Hence, it is essential that Bank has to strengthen its machinerytowards CASA / low cost deposits resource mobilization through its wide network ofbranches with contribution from all. Our CASA ratio has been the lowest among the peerbanks. As a result we have the higher cost of deposit which is affecting our NIM andprofitability.

The 4 pillars to have a better market share under CASA are :

I. Excellent Customer Service

II. Seamless technological support and hassle free delivery

III.Good network of branches

IV. Bouquet of CASA products for every population segmentFrom corporate level, following steps have been initiated to address andensure the above: I.Involvement of all staff members:Counter is the first interface point for customers. To ensure delightful experience bycustomers at branch level, it was felt necessary to involve all staff members in our driveto enlarge CASA ratio. Hence, various incentive campaigns like revival of inoperativeaccounts, Shikhar Sameep, Shikhar Century, MISSION CASA etc. were launched duringthe year rolling out monetary incentive for staff. Objectives of the campaigns were towiden customer base by adding quality accounts, attracting HNIs/NRIs, up scaling theexisting customers and revival of relationship of valuable inoperative accounts.

Also, during the year CASA teams have been formed at all Circles and Branches to make theentire team vibrant and contribute their might. A novel concept of reaching all units andstaff was implemented by involving all Cluster / Overseeing Executives at the Circles.II. Technology front:

Introduction of various innovative CASA products during FY 2015 for the customers tomake them feel convenient and experience delight of using our services at variousdelivery points. To name a few : a) Online account opening extended to Non Residents;b) Extended RD Dhanvarsha and SB Powerplus to NRIs; c) Collection of e-Donation toTemples/Trust; d) Fee collection of Institutions e) f) Online account opening extendedfor Recurring Deposits and Fixed Deposits etc.

III.Delivery Points & Networking:

By opening more than 1900 new branches and 3500 ATMs and more number of e-lounge/e-kiosks during the last two years delivery points have been enlarged in terms


of reach as well as convenience. To ensure that service delivery is smooth at all thesetouch points, fresh young workforce have been deployed who are well qualified, techsavvy and energetic. Apart from this specialized & skilled marketing personnel havebeen engaged to reach the untapped potential in the market by proper planning andidentification of target segment. New branches were stimulated for doubling their CASA.Potential branches such as ELBs/ VLBs and SHIKHAR branches were inspired tocontribute more.

IV. Availability of Products for all:Last 2 years have witnessed introduction of various innovative, customer segment specificnew CASA products:

Canara SB Power Plus for premier segment / HNI / NRI SB Customers Canara Privilege Current Account for premier segment of Business Clients Canara Payroll Package SB for employees of Corporate / Institutions Canara Dhanvarsha a flexible Recurring Deposit Account Canara Jeevandhara for senior citizens / Pensioners Canara Junior Saving A/c for Minor Students above 10 years Canara SB Gen Y for attracting young generation customers of premier

educational institutions Canara Defence SB A/c Specially designed for Armed forces / Para-military forces Canara Galaxy SB accounts for Urban & Metro Branches

The purpose was to send a message to public that their Bank understands the need ofeach and every segment of the society and accordingly tailor made products areintroduced for each one of them. After reviewing performance of these products and ongetting feedback from field functionaries, further more market oriented products canbe rolled out, if required. Special emphasis on marketing of new CASA / RTD Productsby the TASC force team comprising MOs/MEs and CASA team of branches and throughCampaigns esp. SB Powerplus and Privilege Current A/c was made during the FY 2015.Branches were advised to cross sell all products by identifying top depositors /customers for improved CASA mobilization.

Added to the above certain attractive Term Deposit schemes like Dhanvarsha RD andShikhar 111, 444 & 555 were also launched with a hope and opportunity to shift customersand deposits from other banks to improve our market share of RTD. The FY 2015 witnesseda robust 33 % growth in RTD.

NRI BURINESS:

During the FY 2015 many initiatives have been undertaken to improve NRI Business

a. 16 additional NRI Service Centres (Total 20) were established to give further boost andfillip to the nonresident deposit base.

b. NRI conclave was conducted covering all the 320 NRI relationship managers at 4 centresand our MD & CEO has also addressed the participants in one of the NRI conclave.Increased Elite NRI branches having NRI business of more than Rs 20.00 crores from 320to 400.

c. NR deposit grew by 24 % thereby increasing the business to Rs 31207 crore fromRs.25227 crore. This helped the Bank to improve its NR deposits share to Total DomesticDeposits from 6 % to 7 %.

d. Share of our Bank's NR deposits improved to 4.21 % from 4.00 % in the industry.

e. NRI / NRO SB power plus introduced and we were able to open 675 accounts plus witha balance of Rs 26.28 Crore.

f. NRE Dhanvarsha RD introduced and mobilized 362 accounts amounting to Rs 1.52Crore.

g. Enabled the SB on-line account opening for NRIs also.


i. Monthly NRI New Bulletin issued in 3 languages containing very pertinent and usefulinformation which was well received by the customers and all the branches. The increasein the NRI Deposit has helped in augmenting the total deposit of the bank and alsoincrease in LCD.

j. We have improved our FCNR deposit significantly by 30.58%. All the Circles arerequired to redouble their efforts to bring in more FCNR Deposits as these as theseforex funds are the base for our financing Customers for PCFC/FCLRNEED OF THE HOUR: MARKETING AND EXCELLENT SERVICE

When we have the desired competitive products in place, delivery channels are reinforcedand broadened and staff members have been incentivized for their involvement to ensureprompt counter service, then effective marketing has to play a significant role.

Development of product by itself will not derive the results. For each product, targetgroup is to be identified and approached differently. The counter staff shall transform toeffective Sales Team. The target group are to be impressed that the product featuressuits their need and to be sold through regular follow up visits. Once the products aresold, post performance and service determine its wider acceptability through mouth tomouth publicity. Satisfied customers work as ambassadors.

It is our ardent duty to make all our field functionaries appreciate the above and takeforward the products to market and ensure its post sales service. They also need toprovide feedback to corporate office, if any improvement/ innovations are required.Benefit of our new branch expansion is to be reaped optimally. Proper functioning of allthe delivery points is to be ensured. Our young brigade of staff should stancethemselves as technology ambassadors and make our Bank technologically more visible.It will be a real success story.

Let's start a new BEGINNING from April itself by providing good counter service. We shall grow by 20 % under CASA with focus on steady growth. Monitoring is shifted to daily average apart from quarter end. New branches opened need to ensure minimum business of Rs. 10 cr. with Rs.5 cr.

under CASA on completion of one year. New Recruits > Shape them as future Managers > Synergize youth energy with

Corporate Business Goal. Specialized Marketing Officers and Marketing Executives support to be utilized for

getting specific accounts of Government Departments, Trusts, Temples, Association,Educational Institutions, Societies, Corporate Salary Accounts, Pension Accounts ofRetirees, Clubs, HNIs, etc. Specific amount is to be factored in the target.

Segment specific products are in place. Popularize all new products and tech services to attract new customers. Revive relationship by targeting valuable Inoperative accounts. Involve all Staff members, develop team spirit. Team Building is the essence of

Organisational Triumph. Shikar Branches shall make handsome contribution for retail growth.

4. SWOT ANALYSIS

A SWOT analysis is a structured planning method used to evaluate the strengths,

weaknesses, opportunities and threats involved in a business. A SWOT analysis can be

carried out for a product, place, industry or person. It involves specifying the objective of

the business venture or project and identifying the internal and external factors that are

favorable and unfavorable to achieve that objective

SWOT analysis aims to identify the key internal and external factors seen as important to

achieving an objective. SWOT analysis groups key pieces of information into two main

categories:


Internal Factors: the strengths and weaknesses internal to the organization STRENGTHS: characteristics that give it an advantage over others.

WEAKNESSES: characteristics that place the disadvantage relative to others.

External Factors: the opportunities and threats presented by the environmentexternal to the organization

OPPORTUNITIES: elements that the project could exploit to its advantage. THREATS: elements in the environment that could cause trouble for the business or

project.Analysis of SWOTs is important because this can help identify the requisite strategy toachieve the desired objective.First, the decision makers should consider whether the objective is attainable, given theSWOTs. If the objective is not attainable a different objective must be selected and theprocess repeated. Users of SWOT analysis need to ask and answer questions that generatemeaningful information for each category (strengths, weaknesses, opportunities, andthreats) to make the analysis useful and find their competitive advantage. SWOT analysismay be used in any decision-making situation when a desired end-state (objective) isdefined. SWOT analysis gives an clear picture of focused area. Each quadrant should havedifferent way of responding likeResponse to the quadrantStrength: - One should just use all the strength for better performance. There is nothingmuch to do in terms of correction.Weakness: The outcome of this quadrant is critical .A branch manager should focus on thestrategy that can convert weakness in to Strength. This should be the core area of operationfor a branch manager.Opportunity: These are the potentials available in the external environment. One cannotimpact them, control or change them. They should be explored for creating more strength. ABranch Manager should keep an eye on this quadrant for making the most of theopportunities for the benefit of the organization.Threat: They are not in control of us. They are available in the external environment. Abranch manager should create a cover against it so that the loss can be minimized.

A Branch Manager should study the branch at a very micro level. All the internal and

external factors need to be studied for developing a robust strategy.

Collect as much as data you can for the study

Spend some time , away from the branch for better results

Prepare the strategy based on SWOT analysis

Prepare a calendar for execution of strategy

Execute the plan

Monitor and control the plan

Review the progress

Repeat the SWOT periodically for better control and desired result

5. Wanted: An independent, accountable RBI

The market seems to be developing a love-hate relationship with new Reserve Bank ofIndia (RBI) governor Raghuram Rajan. On 4 September, the day Rajan took over, BSELtd‘s benchmark equity index Sensex greeted him with a 1.83% rise. Last week, afterhis maiden monetary policy announcement, the Sensex lost 1.85%. On his part, Rajanhas made it clear he prefers to do the right things, not bothering about Facebook likes.In less than three weeks since he took over, Rajan has done quite a few right things.Apart from presenting a smart policy, he has started moving things in RBI in a time-bound manner.

A day before the policy, RBI formally relaxed its norms for banks to open branches inbigger cities—something Rajan had promised on 4 September. Similarly, the UrjitPatel committee, which is to make suggestions to strengthen the monetary policy


framework in three months, is in place. If Rajan keeps his word, RBI will announcenew bank licences by endJanuary. Former finance minister Pranab Mukherjee hadfirst announced the government‘s intention to allow more private entities to set upbanks in February 2010.

As an institution, RBI is known for its impeccable integrity and intellectual honestybut not necessarily for pushing things in a time-bound manner. Many also feel it lacksaccountability. Apart from ensuring price stability with one eye on economic growth,Rajan may need to look at some of the structural issues within the RBI bureaucracy.

A few years ago, the head of a private bank had to approach a deputy governor ofRBI as the central bank had refused to clear his salary structure for over six months.Under the norms, the salaries and bonuses of the chief executive officers (CEOs) ofprivate and foreign banks need the clearance of the regulator. RBI has every right tosay no to anybody, but the practice is to not clear these files for months withoutassigning any reason.

The regulations are also not uniform. For instance, RBI has no role to play in theselection of CEOs of private and foreign banks and their boards but the governorheads the appointment panel that picks the CEOs of public sector banks and RBI hasits representatives on the boards of all public sector banks.

There is no clarity either on the role of RBI‘s board, where the governor the CEO ofthe organization—is the chairman. The committee of the central board, which meetsevery Wednesday, however, has a specific role to play, including dissecting the bankrate. Incidentally, despite the noise it makes for autonomy, one wonders why onlythe ministers in power grace all RBI functions. I can‘t recall a single occasion whenthe leader of the opposition or, say, a former finance minister known for hisintellectual acumen has been invited for any RBI function.

An internal committee of the central bank recently said that its balance sheet shouldbe more transparent by including information such as employee cost and expenseson printing of notes. RBI‘s balance sheet doesn‘t clarify many things. In fact, theCentral Bank of Sri Lanka‘s balance sheet is more transparent than that of RBI.

RBI, in its balance sheet, does not give details of various provisions made; there‘s noclassification of foreign currency assets; and there is no cash flow statement. The SriLankan central bank gives the cash flow statement, classifies its foreign currencyassets including derivatives, and says how much of these assets it is holding till theymature and how much it can trade. It also gives a detailed presentation on how manypension, gratuity and other employee welfare schemes it runs.

For the first time this year, the government appointed two auditors for RBI,apparently without consulting it. Indeed, RBI is a statutory regulatory authority andenjoys independence to carry out functions but an independent audit can onlyenhance its accountability. Incidentally, the Financial Sector Legislative ReformsCommission has recommended that the accounts of all financial regulators shall beaudited by the Comptroller and Auditor General of India.

RBI was set up as a private shareholders‘ bank in British-ruled India in 1935. It wasnationalized in 1949 but there has been no change in its organizational structure.Rajan can play the role of a change agent. To start with, he can allow lateral entry atevery level. Like autonomy, accountability

is also a perception that RBI needs to create in the collective mind of the public.

Snakes and ladders

Two months after the deadline for applications for new banks expired, there havebeen two changes in the list of applicants. One, Value Industries Ltd, a unit ofVideocon Industries Ltd, has withdrawn its application for a banking permit, and two,Chandigarh-based real estate and hospitality company KC Land and Finance Ltd hassought a banking licence. The original list of 26 permit seekers, released by RBI on 1July, did not have this name.

Many are finding the sudden appearance of a new applicant and withdrawal of theVideocon group mysterious. Here is what happened. At some point, Venugopal


Dhoot, chairman of Videocon Industries, was tipped to get into the board of RBI andthis prompted the group to drop the idea of seeking a banking licence to avoid anyconflict of interest. It‘s another story that Dhoot‘s nomination to RBI‘s central boardfinally did not work out.

As far as KC Land is concerned, instead of carrying the application physically to theRBI central office in Mumbai with reams of papers supporting its credentials andexplaining the banking plan, the company apparently sent a relatively briefapplication through post and it was located much later. Hence, the delay in notifyingits name to the public. Those who have been looking for some conspiracy will bedisappointed.

6.Nuts and bolts of financial inclusion

The Nachiket Mor panel calls for an overhaul of the system to reach out to theunbanked.

The Committee on Comprehensive Financial Services for Small Businesses and LowIncome Households chaired by Nachiket Mor submitted its Report on December 31.The expanse of the Report, its vision and depth of analysis backed up by massivedata, is awesome. The instant impression could be summed up as ‗wonderful to thepoint of bewilderment‘.

But each of us commenting on the Report are rather like the ‗Six Blind Men ofHindustan‘. The Mor Report is far too important a document to be consigned to thearchives. The Report deserves serious in-depth examination by policymakers andinstitutions which are likely to implement its recommendations.

Facilitating financial inclusion

The Report highlights that 90 per cent of small businesses have no link with theformal financial sector and 60 per cent of the population does not have afunctional bank account. While the bank credit-GDP ratio is around 70 per cent ofGDP, there are wide regional and district-wise disparities which confirms thatfinancial inclusion has a long way to go.

The Report stresses that savers have difficulties in accessing institutions and with noinstrument providing a positive real rate of return on financial savings, there hasbeen a move away from financial assets to physical assets.

Under the Committee‘s proposed financial structure, there would be two types ofnational banks (one with branches and one with agents), besides wholesale consumerbanks, wholesale investment banks and payments banks. The entry capitalrequirements would be Rs. 500 crore for national banks and Rs. 50 crore for thewholesale banks.

The Report recommends that the cash reserve ratio (CRR) should apply only ondemand deposits. It is envisaged that the statutory liquidity ratio (SLR) will bephased out for national as well as wholesale Banks but this is contingent ongovernment‘s acceptance of market interest rates on its borrowing.

Wholesale banks would not accept deposits below Rs 5 crore and hence would beheavily dependent on inter-bank borrowing from the national banks. Since inter-bankliabilities are not treated as liabilities for purposes of CRR requirements, thewholesale banks will be subjected to a much lower CRR.

Payments Bank

The Committee envisages the setting up of payments banks which will providepayments services and deposit products to small businesses and low incomehouseholds with a maximum deposit of Rs 50,000 per customer. These banks will besubject to reserve requirements. In the case of the SLR, the payments banks will berequired to invest in government securities with a duration of not more than threemonths.

Role of Postal Bank


The Postal Bank is proposed by the Committee as a payments bank. It would be aserious error of policy if the Postal Bank is not granted a fullfledged banking licencefor which it has applied. Given its vast

expanse of offices, unmatched by any other institution, the Postal Bank has to begiven a full-fledged banking licence if financial inclusion is to be meaningful.

Financial sector reforms

The Mor recommendations will require a major revamp of the present financiallegislative framework. Governor Raghuram Rajan has rightly pointed out that beforeimplementing the recommendations of the Financial Sector Legislative ReformsCommission (FSLRC) it will be necessary to settle on the desired financial structure.As such, the FSLRC Report and the Mor Report have to be examined simultaneously.Eager beavers wanting instant implementation of the FSLRC recommendations needto be reined in until a comprehensive examination is undertaken not only bypolicymakers, opinion makers and the operational units but more importantly byParliament. Implementing the recommendations of the FSLRC without Parliamentaryapproval would be, to say the least, highly irregular.

Inclusion framework

The Mor Committee recommends that every resident Indian over the age of 18 yearsshould have a Universal Electronic Bank Account by January 1,

2016 and every low income household and small business should have ‗convenient‘access to formally regulated lenders for credit products at an ‗affordable‘ price.

By January 1, 2016, each district should have a credit-deposit ratio of a minimum of10 per cent, which should be raised rapidly by 10 percentage points each year toreach a minimum of 50 per cent by January 1, 2020. Again, in each district, byJanuary 1, 2016, there should be a minimum total deposits plus investments to GDPratio of a minimum of 15 per cent which should be increased by 12.5 percentagepoints each year to reach a minimum of 65 per cent by January 1, 2020.

The January 1, 2020 targets appear excessively ambitious, but the recommendationin a sense underlines the enormity of the task. To ensure that backward districts getpreferential treatment, the

Committee rightly suggests a weighted district-wise formula in the attainment of thepriority sector targets.

The Mor Report could be considered to be excessively ambitious, but given the taskone has to dare to be bold. I have on a number of occasions stressed the relevanceof the Rajamannar Working Group of the Banking Commission of the 1970s which setout an elaborate legislative framework for linking the organised financial system withthe unorganised indigenous financial sector. Not having such a link is a serious errorof policy.

Will history repeat itself?

Forty five years ago, the late R.K. Hazari, prepared a path-breaking report onconcentration of industrial licensing in the hands of a few industrial houses. Thereport recommended the nationalisation of banks. Soon after nationalisation of banksin 1969, Hazari was inducted into the RBI as Deputy Governor. Will history repeatitself?

7. PMJDY : FINANCIAL INCLUSION & DBF

The government has taken several steps in the last few months to ensure that the PMJDYscheme is leveraged for the larger benefit of the society. The government has done astupendous job in bringing a large percentage of the excluded population under the bankingsector purview so that a host of benefits are available to them including subsidies, socialbenefits, etc. The success of PMJDY has proved to be key enabler for the Direct Benefitstransfer program. PMJDY aims to provide a sustainable platform for Direct Benefits transfer,which will aid in plugging leakages in subsidies and thereby provide savings to the exchequer.The government of India expects Rs.33000 crores to flow into bank accounts in the next one


year. The government intends to transfer the benefits of 27 old schemes to the bank accountsdirectly. So far 19 schemes out of 35 DBT schemes have been rolled out across the country,including MNGREGS in 300 districts.

Under the PMJDY scheme, there is an effort towards linking the bank account to Aadhar. Asof December 2014, over 720 million citizens had been allocated an Aadhar card. ByDecember 2015 the total number of Aadhar enrolments in the country is expected to exceed1 billion. The linking of an Aadhar number with bank accounts makes the job of identificationeasier for the government in order to make welfare payments and subsidies directly into thebank accounts. Through this, the government will ensure that many more schemes utilizethe Direct Benefit Transfer platform to deliver direct benefits to India's poor. This will beremove the need for convoluted routes to deliver affordable products or services to thetarget population.

The prevailing system of subsidy distribution is flawed and inadequate in the absence of auniform stricture governing direct transfer of benefits. At present, the MGNREGA is operatedthrough the panchayats, the Centre and States supply rice, wheat, pulses, cooking oil, sugarand kerosene at heavily subsidized prices through the PDS. Such a mechanism of disbursingsubsidies is ridden with leakages, corruption and inefficiencies, causing a significant loss tothe exchequer.

According to the Economic Survey, about Rs.3.78 lakh crore or 4.2 percent of GDP iscurrently spent on key subsidies. As per the survey, the current system of price subsidies isa leaky bucket. Approximately, three fourths of the subsidized LPG cylinders are used by thericher half of the population; corporation water is subsidized, but 60 percent of the poor gettheir water from public taps; over 15 percent of PDS rice, 54 percent of wheat and 48percent of the sugar is lost in leakages.

Going forward, the combination of Pradhan Mantri Jan Dhan Yojana, Aadhar and Mobilenumber is expected to solve the govt's problems. With Aadhar helping in direct biometricidentification of disadvantaged citizens and Jan Dhan bank accounts and mobile phonesallowing direct transfer of funds into their accounts, it may be possible to cut out all theintermediaries.

Direct benefit transfer has already been launched in LPG, PDS and a few other schemes

DBT for LPG: Along with other benefits to the account holders, the bank accounts openedunder the PMJDY scheme have been linked to transfer the LPG subsidy under the DirectBenefit Transfer Scheme for LPG subsidy (PaHaL). PaHaL was launched on November 15,2014 in 54 districts and in the rest of the country on January 1, 2015. The scheme aimed atpreventing diversions and black marketing of the subsidized cooking gas covers more than65 percent of 15.3 crore LPG consumers in the country and has outperformed similarprograms in other countries such as China, Mexico and Brazil where the maximumbeneficiaries reached were not more than 2.2 crore. The scheme is expected to help thegovernment save 10-15 percent of the INR 40000 crore LPG subsidy by 1st April, thegovernment is targeting 100 percent of LPG subsidies to be routed through bank accounts.

DBT for PDS: In a recent move, the government announced direct cash transfer on PDS(Public distribution system) benefits, so as to address issues related to leakages, blackmarketing and ensure that the money is effectively and efficiently utilized. It is expectedthat the cash transfer could save the exchequer INR 30000 crore every year.Going forward, the DBT is expected to be launched for kerosene, where current subsidiesare in the range of INR 25000-30000 crore. About INR 15000 crore disbursements underMahatma Gandhi Rural Employment Guarantee Scheme (Which has an annual outlay ofINR 33000 crore) are already through bank accounts; The PMJDY is expected to graduallytake the figure closer to 100 percent over the next year or two. Additionally, the funds forthree pension schemes (T9690 crore), 24 scholarship schemes (T5756 crore) and sevenother schemes (Rs.2583 crore) are also being routed through bank accounts. In duecourse of time, it is expected that subsidy payments for food and fertilizers in the tune ofINR 187970 crore will be paid through banks instead of being doled out physically through


shops. Overall, there is a huge potential flow of government subsidies in the range ofnearly Rs.290000 crore. Even if a third of this flows through Jan Dhan accounts, that's asizable volume of nearly Rs.100000 crore.

8. PMJDY : SABKA SATH & SABKA VIKAS

The Prime Ministers Jan Dhan Yojana, (PMJDY) was launched w.e.f 16.08.2014 with theabove objectives in mind. The accounts were permitted to be opened with zero balanceand additionally bundled with following attractive add on benefits.

1. Accident cover against death or permanent disablement up to a limit of T one lakhfor all those account holders who have been provided with Rupay Debit cards,subject to certain eligibility conditions.

2. Life coverage up to T30000 in case of death of the earning member of the family

Apart from the above, the following additional benefits are also will be available to theaccount holders:a) Interest on deposits in PMJDY accounts.

b) No minimum balance required.

c) Easy Transfer of money across India

d) Beneficiaries of Government Schemes will get Direct Benefit Transfer in these accounts.

e) After satisfactory operation of the account for 6 months, an overdraft facility will bepermitted

f) Access to Pension, insurance products. Overdraft facility upto 25000/- is available in onlyone account per household, preferably lady of the household.

The Implementation Model: The scheme will be implemented in twophases as below:Phase I: Phase I (15 Aug, 2014 - 14 Aug, 2015)

Universal access to banking facilities

Providing Basic Banking Accounts for saving & remittance and RuPay Debit card withinbuilt accident insurance cover of T1 lakh and RuPay Card

Financial Literacy ProgrammePhase II (15 Aug, 2015 - 15 Aug, 2018)

Overdraft facility of up to T5000/- after six months of satisfactory performance ofsaving / credit history.

Creation of Credit Guarantee Fund for coverage of defaults in overdraft A/Cs

Micro-Insurance

Unorganized sector Pension schemes like Swavalamban

The Bank was allotted 3962 rural SSAs and 3371 urban wards across the country forconducting household survey and coverage of households with at least one bank account.The work was taken on a war footing and the House hold survey was completed in all theSSAs and Wards by the end of Nov 2014 itself, much ahead of the deadline fined of26.01.2015. In fact Canara Bank was first major Bank to complete the work in such a shorttime.

During the campaign period of PMJDY (16.80.2014 to 26.01.2015) 6038218 accounts wereopened by the Bank. All the accounts have been issued with personalised Rupay Debit Cardsand a pass book.

To reach out to the rural area and to bring the unbanked households to our fold, the Bankhas opened 1804 rural branches as on 31.03.2015 and a whopping 45% of the ruralbranches are financial inclusion branches, tally of which stands at 806 and 2459 Bank Mitraswere also appointed in association with M/s Fino Pay Tech Services and M/s Integra Micro


Systems, the corporate BCs and business partners in implementation of FI. In short, allpossible models were deployed to extend basic banking services in all the allotted SSAs andWards in the implementation of PMJDY.

In short the core of government's development philosophy is “Sab Ka Sath Sab Ka Vikas”.The slogan for the Pradhanmantri Jan Dhan mission is “ Mera Khata Bhagya Vidhaata” whichwhen translated into English means ”My Bank Account The Creator of the GoodFortune”

Canara Bank has been the leader in implementation of Financial Inclusion Plan. The Bankfirmly believes that the financial inclusion has thrown open myriad opportunities to tap thehitherto untapped rural areas both in resource mobilisation and credit expansion. The Bankhas a track record of achieving Targets under all the parameters under the FIP since theplan was rolled out.

Implementation in Mission Mode:

The Bank was allotted 3962 SSAs and 3371 Wards under the Pradhan Mantri Jan DhanYojana. The household survey was conducted and at least one account per unbanked familywas opened well ahead of time lines. On 10th of December, the saturation at all the abovelocations were announced. Department of Financial Services appreciated the Bank for thisperformance.

The bank conducted more than 53487 camps during the first phase of PMJDY and ourfinancial counsellors, Bank Mitras and Branch Managers imparted financial literacy to thevillagers/unbanked households.

Resource mobilisation:

The Bank could open 60.38 Lac accounts during the first phase and mobilize T738 CroreCASA taking the average balance in the newly opened account to T1222.

Innovation, the Key for success:

The following innovative steps were introduced and implemented effectively:

Formed 'Canara Financial Advisory Trust' to take care of the affairs of the FinancialLiteracy Canters (FLCs) of the Bank as well as by RRBs sponsored by the Bank. Pan India,we have 65 FLCs which are managed by the counsellors who are retired Bankers.

Involved FLCs during the Pradhan Mantri Jan Dhan Yojana Saturday camps and MegaCamps for providing financial literacy to the unbanked people.

Our Financial Literacy Centres have educated 17 Lac persons and counselled 2.05 Lacpersons till March 2015.

Brought out a comics book on “Money and Savings” in 9 languages and distributed to 2lakh people through the rural and semi urban branches to reach the rural students andthe farming community. Organized 35 Financial Literacy programmes for 1057 leaders ofNGO/SHG in Tamil Nadu, Karnataka Kerala.

Financial literacy programmes on 'Banking and Finance were organized in 30 rural schoolseach in Agra and Aligarh districts in Uttar Pradesh by distributing the comics books. About30,000 students would be benefitted. Financial Literacy programmes were also organized for 46 teachers in five rural schools in

Chitradurga district, Karnataka who in turn will impart financial literacy to the studentsand upgrade their financial awareness..

Printed “Financial Diary” in Hindi brought out by RBI and distributed to the public throughour rural and semi urban branches reaching 70000 people.

100 Street Plays as a part of Financial Literacy were conducted in the states of Bihar,Orissa Uttar Pradesh and West Bengal.

Financial literacy programme on banking and finance was conducted for the rural GovtSchools in Karnataka state through the use of tablet PC. Organized in 26 schools and


about 5000 students were benefited.

Translated the CD on Financial Literacy brought out by College of AgricultureBanking(CAB), Pune in Tamil, Malayalam and Kannada and sent to the Staff TrainingColleges, RUDSETIs, and RSETIs for use in their training programmes.

An interview based programme on Financial Literacy programme on DBTL and Aadhaarseeding was telecast thrice through DD, Trivandrum to educate the people on the needand importance of DBTL and Aadhaar Seeding.

Financial Literacy programmes on banking and finance broadcast through CommunityRadio station(90.4FM) to cover 8 lakh population in remote rural areas in Karnataka state.

Educated the people of West Bengal and Orissa on safe parking of their funds throughthe paper advertisements.

Brought out 6 TVCs on Financial Literacy educating the public on micro insurance, safeinvestment, GCC, KCCS, BSDA and MSME and telecast during all the episodes of RBIquiz telecast through DD National and DD Sahyadri.

Thirteen Financial Literacy Camps conducted in association with 3 voluntry agencies,wherein 720 participants were trained during the month of January 2015.

A Radio talk and interaction programme on FM radio 'Khaali Purse, kaitumba Hana'meaning empty purse, handful of money) giving all the benefits and details of PMJDY andmotivating the people to do transactions.

Twenty Yakshagana plays were organized to spread financial literacy to the villagers inthe districts of Shimoga and Uttara Kannada. About 4500 villagers were benefitted.

Appointment of Facilitator exclusively for intensifying the Financial Literacy efforts.

Bank has engaged Financial Inclusion Coordinators at different locations to monitor andmotivate the Bank Mitras to involve themselves in Financial Literacy in a big way in theirSSAs and encourage the people to do more transactions.

Trained Bank Mitras through Indian Institute of Banking & Finance & ILFS. They were alsoprovided with extensive training on Banking and Technology aspects by the Bank and theCorporate BC.

Personal visits of General Managers/Deputy General Mangers and other functionaries fromHead Office to all the controlling offices across the country to monitor the progress andconduct of financial literacy camps along with weekly/ monthly camps for accountopening.

Special training to Branch Managers for conducting financial literacy programmes attheir branches/in their

service area.

Training the Bank Mitras:

The Bank provided training to all our Bank Mitras on Financial Inclusion & Pradhan MantriJan Dhan Yojana. It was in addition to the training on using the Micro ATMs. By the time westarted financial literacy camps, they were in a position to convince the village people andensure their participation in the camps in large number.

Special training to our rural branch managers :

Special trainings were conducted for our Rural branch managers to sensitize them on PMJDYand how bring in the unbanked households to our fold.

Involvement of financial literacy centers through our Canara Financial AdvisoryTrust (CFAT): Our Bank has set up a separate trust called Canara Financial Advisory Trustto open the Financial Literacy Centers (FLCS) and disseminate the Financial literacy. Wehave now 65 Financial Literacy Centers which are headed by the retired bankers. TheseFLCs are directly engaged in conducting the Financial literacy Camps on PMJDY, banking &Finance in association with our branches. Upon launching of PMJDY, these centers wereadvised to participate in the PMJDY camps and also to organise village level camps


aggressively. This method was useful in spreading the inputs of PMJDY to the public.Financial literacy months were declared during which literacy camps were held throughoutthe country on daily basis. Banners, posters and leaflets in vernacular languages weresupplied in large numbers to all the branches/ FLCs.

Organization of financial literacy camps on PMJDY in Bihar, Orissa, Uttar Pradeshand West Bengal states through street plays: Street played an important role ineducating the people in remote rural areas of Bihar, Orissa, Uttar Pradesh and WestBengal states. In all 100 street plays were conducted at the states. The main thrust wasfocused on PMJDY with particular reference to benefits of the scheme and minimumformality to comply. The rural people were very enthusiastic in understanding the schemeand its benefits. Lot of publicity was received at the local media on the street plays. Theabove interventions helped the bank to initially open zero balance accounts and convertthem as operating accounts with some balance.

Alongside the implementation, seeding of Aadhar Number of the account holder, opening ofAccounts with Ekyc facility of UIDAI of India which is safe and paperless process etc werealso pushed keeping the Govts long term objective of DBT, cashless economy etc.

Awards and Accolades:

The Bank has received various awards and accolades for the performance under financialliteracy initiatives which also included an appreciation letter by the Deputy Governor of theReserve Bank of India. The bank has also received an award for implementation of PMJDYfrom Federation of Industry Trade & Services (FITS) during the year.

The Road ahead:

Challenges identified in the implementation of the Mission:

Ensuring working of the Micro ATMs of the Bank Mitr on continuous basis and enabling theadd-on modules in the HHMs as and when implemented.

Telecom connectivity: in hilly areas of the country, the telecom network is not reliableand therefore setting up Bank Mitr (Business Correspondent) in these areas andensuring opening of bank accounts is going to be difficult. Co-ordination in publicity andcampaign

Monitoring of Implementation of Financial Inclusion in respect of organisations workingunder NABARD

Financial Literacy to SHGs / JLGs / J L G s beneficiaries.

Financial Literacy to School Children in a big way.

Monitoring of financial inclusion campaign in coordination with SLBC & all the stakeholders

Direct Benefit Transfer of the State schemes in the bank accounts of the beneficiaries

Coordination with all the Banks for Financial Inclusion Activity

Monitoring and follow up of different activities of Financial inclusion

District Administrations Key role in implementation of FI in the districts

District Collector (DC) to act as chairman of District level implementation committee

Lead District Manager (LDM) to act as Secretary to the District ImplementationCommittee

LDM to coordinate with all the Banks in FI implementation in the District

National Payment Corporation of India (NPCI):- Coordination and necessary guidance andsupports to banks for in providing and proper operations of RuPay cards

Ensuring inter-operability among Bank Mitr (Business Correspondent)


Necessary supports to Banks in making available USSD based mobile banking with lowend mobile phones so that customer can avail basic banking services like deposit,withdrawal, fund transfer, balance enquiry etc across the banks. This product may beenabled at Bank Mitr (Business Correspondent) outlets also.

Unique Identification Authority of India (UIDAI): - Convergence of Aadhaar enrolmentwith Bank account opening.

Fast conversion of EID to UID to ensure faster credit to Bank accounts.

Mapping multiple accounts with a single Aadhaar number.

Operationalisation of zero balance accounts

Providing OD facility and monitoring such OD accounts.

Linking Aadhar numbers to the accounts opened under PMJDY.

9. A new framework for monetary policy

The Urjit Patel panel‘s recommendations on institutional reforms should be takenseriouslyThe merit of the Urjit Patel Committee Report to Review and Strengthen the Monetary PolicyFramework (January 2014) is its analytical rigour and clear recommendations on improvingthe efficacy of monetary policy. The Patel Report would become the locus classicus onmonetary policy in India.Key RecommendationsThe key recommendations of the Committee are:The headline Consumer Price Index (CPI) should be the nominal anchor for monetary policyand the Reserve Bank of India (RBI) should make this the predominant objective.

(ii)The nominal anchor for inflation should be set for a two-year horizon at 4 per cent with aband of plus or minus 2 per cent. Since the present CPI inflation is 10 per cent theCommittee recommends a ‗glide path‘ of 8 per cent for January 2015 and 6 per cent forJanuary 2016.

(iii) The Central Government needs to reduce the fiscal deficit to 3.0 per cent of GDP by2016-17. Administered prices, wages and interest rates are impediments to transmission ofmonetary policy and should be eliminated.

(iv) Monetary policy decisions should be vested in a Monetary Policy Committee (MPC)comprising the Governor, the Deputy Governor and Executive Director in charge of monetarypolicy and two external full-time members. The decisions of the MPC will be by voting.Members will be accountable for failure to attain the target—failure being defined as inabilityto attain the target for three successive quarters.

(iv) The real policy rate should be positive. In the first phase the weighted average call ratewould be the operative target and the repo rate would be the single policy rate. The fundsavailable at the repo rate would be restricted and increasingly liquidity would be provided atthe 14 day term repo; longer-term repo auctions should be introduced.

(v) In the second phase, the 14-day repo rate would be the operative target andrecourse to outright two-way open market operations (OMO) would determine liquidity. OMOshould not used to manage yields on government securities.

(vi) There should be a remunerated standing deposit facility at the RBI to sterilise excessliquidity.


(vii) With an independent debt management office, the market stabilisation scheme andcash management bills should be phased out.All sector specific refinance should be phased out as committed to the Asian DevelopmentBank in 1992.The implications of the key recommendations are discussed below.The CPI inflation is quite clearly the appropriate anchor. Those apprehensive of a strong andeffective monetary policy will try to stall this recommendation. The RBI should unequivocallyemphasise, in its policy statements, that CPI inflation would be its nominal anchor. Thegliding to the 4 per cent plus or minus the CPI nominal anchor would be nondisruptive andthe RBI should, continue to stress the 8 per cent CPI inflation for January 2015 and 6 percent for January 2016.The Patel Committee recommends a remunerated standing deposit facility which, unlike thereverse repo, would not require government securities as collateral. While this would allowsterilisation of capital inflows, without any limit it would be detrimental to the RBI balancesheet as there is no provision in the law to ensure that all losses of the RBI will be met bythe government. In the absence of such a legislative clause it would be hazardous tointroduce a remunerated standing deposit facility.The structure and composition of the MPC are pre-eminently suitable. The MPC will have twoexternal full-time members with a fixed three year nonrenewable term. There could be somehierarchical problems about these members questioning executive decisions. The RBI shouldstudy the experience of Korea and other countries which have full-time members in the MPC.

The Financial Sector Legislative Reforms Commission (FSLRC), in its Report (March 2013),envisaged a MPC with two RBI members and five external members nominated by thegovernment; besides the Finance Secretary or Secretary Economic Affairs would also be anon-voting member of the MPC. Such a structure would make the RBI into a vassal state.

There are media headlines that the Patel Committee advocates full autonomy on interestrates. If the RBI is to be accountable it should have some degree of flexibility to attain itsobjectives. C. Rangarajan has argued that all the autonomy the RBI needs is headroom tooperate monetary policy. The RBI would do well to recall the dictum that autonomy is nevergiven, it is earned and taken.

The anatomy of the RBIThe RBI could explore the scope for converting the present Technical Advisory Committeeinto a five member MPC with voting by members as envisaged by the Patel Committee, withtwo External Members who could be members of the RBI Board. This could obviate the needfor legislativechanges which could take years. The Patel Committee endorses the setting up of anindependent Debt Management Office (DMO), but rightly cautions that the RBI‘s OMO shouldbe strictly limited to liquidity requirements and not be a vehicle for enabling governmentborrowing at low interest rates.The FSLRC recommendation that RBI should be a member of the DMO Council as also theManagement Committee is flawed as the Chairman of the DMO is enjoined to obtainingunanimous decisions which would make the RBI monetary policy subservient to the DMO.There should be an open and constructive debate and the FSLRC Report should not betreated as the holy grail. While the Report attempts to provide a legislative framework, thePatel and Mor Committees set out the policy objectives, and hence all three Reports shouldbe examined in a coordinated manner.

10.Bank Privatisation by the Backdoor

The P J Nayak Committee on the governance of bank boards has proposed that the BankNationalisation Act and related legislation be repealed. It wants government shareholding inpublic sector banks to be transferred to a Bank Investment Committee that will be mannedby professional bankers. The report assumes incorrectly that ownership determines boardperformance and that the quality of bank boards, in turn, determines bank performance. Thekey issues at the public sector banks, in fact, are those related to management.


After some two decades of impressive growth and improvement in financial performance,India‘s public sector banks (PSBs) are under stress at themoment, thanks to a slowdown in growth and a rise in nonperforming assets (NPAs). Theyneed a significant amount of capital to sustain growth under the Basel 3 norms for capitaladequacy.The P J Nayak Committee on governance of bank boards in India, constituted by theReserve Bank of India (RBI), has the standard remedy for all ills in the public sector:reduce government involvement and shareholding and eventually privatise. Thecommittee‘s remit was not limited to PSBs but the focus of the report is on these banks.The treatment of governance issues in private banks is rather superficial. This is, of course,not the first committee to advocate the privatisation route for PSBs. That achievementbelongs to the Percy Mistry Committee report of 2007, of which little has been heard since.The committee believes that the financial position is ―fragile‖ (which is something of anexaggeration going by the average return on equity, even in the last three stressed yearsand not just the position at the end of 2013). PSBs, it says, lack a sense of direction andfocus on issues of strategy and risk management. It believes that these problems havearisen because of poor governance. Governance needs to be strengthened. This can happenonly if the government distances itself from governance functions and, ultimately, sheds itsmajority ownership.The committee provides a detailed road map for reaching this destination:

(i) The Bank Nationalisation Act and the State Bank of India (SBI) Act must be repealed andall banks converted into companies under the Companies Act. (ii) Government must transferits holdings in banks to a Bank Investment Company (BIC). Responsibility for governancethus gets transferred to the BIC.

(iii) In Phase I, until the BIC becomes operational, a Bank Boards Bureau comprisingsenior bankers should advise on all appointments, including those of chairmen and executivedirectors.

(iv) In Phase II, when the BIC becomes operational, the governance functions will beexercised by the BIC.

(v) In Phase III, the BIC will transfer the governance functions to the respective bankboards. This could be accompanied by the BIC lowering its stake in PSBs below 50% so thatPSBs are freed from constraints on pay and from the purview of the Central VigilanceCommission and the Right to Information Act.

Although the report does not explicitly recommend this, it hints at the possibility ofgovernment‘s shareholding in the BIC itself falling below 50%. If this happens, it wouldamount to privatisation of the all PSBs.

In what follows, I first critique what I believe are key premises of the report. I will then goon to the important issues in the banking sector that require the government‘s attentionand how these might be addressed.

Premises of ReportThe report rests on a number of premises. Let me take up these one by one.The first is that government ownership renders PSB performance inferior to that of privatebanks: This contention is not supported by the empirical research on the subject. A numberof studies have pointed to convergence in performance of public and private sector banks inthe post-reform period. Bank performance in India has been, to a large extent, ownershipneutral.

The committee bases its contention on figures for a small period. The report has chartsthat cover bank performance in the most recent period 2005-13. These too show a trendtowards convergence in the period 200507 and again in 2011. It is only in theextraordinary slowdown of the 2012 and 2013 that a sharp divergence arises. Some of thisis temporary in nature. We can expect to see it reversed as economic growth improves in


the next two to three years.

It is important also to realise what has caused divergence in performance in the stressedyears. PSBs invested heavily in the infrastructure sectors that drove growth in the goldenperiod of 2004-08. These very sectors have run into problems because of a host of issues,some of which are non-economic in nature.

Some of the best performing private banks have chosen to focus on working capital andretail finance and have ended up with rosy figures. In the very nature of things, PSBscannot have such a narrow focus. It would be unwise to jump to conclusions aboutownership from a comparison of numbers at a given point in time.

Naiveté about ProfessionalsThe second premise is that the performance of banks has to do the quality of governance orthe effectiveness of boards: PSB boards, the report says, are dysfunctional. But so are manyprivate bank boards. Boards, in general, are dysfunctional. Some of the biggest failures inthe financial crisis were the boards of the largest and most reputed banks in the West.It is sheer naiveté to suppose, as the Nayak Committee does, that the mere induction ofprofessionals will bring about a sea change in the functioning of PSBs. The Royal Bank ofScotland, the biggest banking failure in the history of the United Kingdom (UK), had all theprofessional expertise that any bank board could ask for – and yet this very board was amute witness to reckless decisions taken by the management.Public sector bankers will tell you that some of the best contributions to the board come fromthe RBI nominee on the board. Besides, it is not as if the government packs PSB boardsentirely with incompetent persons or that PSB boards today lack professionals. The missingingredient in PSBs today is lack of management depth and competence, a point we will cometo a little later.The third premise holds that board governance can improve only if government is distancedfrom the board: Most people are inclined to believe that PSBs face problems because ofmassive government interference in the sanction of loans. As many PSB bankers will readilytestify, such interference has come down sharply over the years and it is possible for a bankchairman to stand up to it.The committee‘s answer to the governance problem, creating a BIC headed by aprofessional banker and with bankers as directors, is infeasible and misguided. The proposalis misguided because it would vest a group of professionals running the BIC with controlover the entire set of PSBs. The dangers of such concentration of power are so great as tomake one shudder.The proposal is infeasible because the idea that the government as the principalstakeholder, which is accountable to Parliament, should not exercise any control over theboard is unlikely to find political acceptance. Way back in the late 1990s, Vijay Kelkar, whowas then finance secretary, had proposed a holding company for public sectorundertakings (PSUs). The idea remained stillborn. In the case of banks, which still needgovernment funding and that have an implicit government safety net, it is hard to visualisesuch a proposal going through.Problems with the UK ModelIn 2008, the UK government set up the UK Financial Investments (UKFI) in order to manageits stakes in British banks which the government had bailed out. The report cites the UKFI asan appropriate model for India. It contends that UKFI ―is viewed as a buffer between the banks and politicians, and acts as an informed shareholder.Really? The Lex column of Financial Times recently had this to say of the UKFIOne sort of person will start shouting about how UKFI is an indecent figleaf balanced on theangry tumescence of the state’s control. UKFI never votes its shares contrary to itsmaster’s wishes. Other complainants will fume and spit over how UKFI’s ex-bankermanagement would always approve grotesque bonuses for their mates, if the governmentdid not intervene (14 May 2014).Consequent to the bailout, the UK government has had its say in the choice of CEOs inbanks under its ownership as well as the payment of bonuses. This underlines an important


truth that seems to have eluded the Nayak Committee: the government cannot distanceitself from control over banks in which it is the majority shareholder.The report also cites the case of UTI Bank, since changed to Axis Bank. The governmenttransferred its majority stake to a special purpose vehicle and then allowed it to fall below50%. This has generated enormous returns to the government. UTI was a new bank andhence could do things very differently from an existing PSB. It was a small bank, so thegovernment could risk relaxing its control. These are not things that can be replicated with awhole set of larger banks: the risk to systemic stability is too high.The report argues that repealing the Bank Nationalisation and other related Acts andbringing PSBs under the Companies Act is preferable because the Companies Act of 2013has stronger provisions on governance than the existing Acts that cover PSBs. This is arather specious argument. The Securities Exchange Board of India (SEBI) has strengthenedclause 49 of the listing agreement, bringing it in line with the provisions of the CompaniesAct and making it stronger in some respect. PSBs, being listed entities, are covered byclause 49.Employee CompensationThe fourth premise is that the PSBs can fare better only if they have the same level field asprivate banks with respect to employee compensation: This is one of the most-citedarguments for privatisation anywhere in the world. The public sector can never compete withthe private sector for talent, hence privatisation is inevitable.This is not the place to explore the complex issue of pay and performance. It suffices tomake a few points. One, in respect of base pay, it is important to compare cost to company(including pension benefits). When one does that, the difference in pay may not appear asglaring as is generally supposed.Two, in respect of variable pay, there is scope for improvement at PSBs. However, trying tocatch up with the private sector is likely to seriously damage the cost structure of PSBs andrender them uncompetitive.Three, in banking, one must always be alive to the link between executive pay and systemicrisk. The world‘s leading banks showed great performance in the years leading up to 2007and they could well have claimed that it was because they knew how to reward talent. Itturned out that it was precisely the reward system that was a cause of the crisis.The challenge in the Indian banking system may not be just of raising public sector pay toprivate sector levels. It may equally be one of reining in runaway compensation at privatesector banks. The committee has recommended stringent penalties for private banks thatresort to evergreening of accounts to avoid provisions. Has the committee picked upsomething that has not filtered into the public domain?The fifth premise is that the PSBs‘ requirements of capital under Basel 3 are so onerous thatgovernment will not be able to make the contribution required to maintain majorityownership: The committee arrives at this conclusion on the basis of projections that veertowards the pessimistic. For instance, it uses the return on equity of the last three yearswhen there is every likelihood that the outlook for the coming years will be better.In the best case scenario, it projects an annual requirement of government funding of aboutRs 30,000 crore. Other independent forecasts put the figure at closer to Rs 25,000 crore.This is, of course, a high figure but not one that is beyond the capacity of the government ifwe assume a gradual return to a high growth path.That apart, there is no call to lump all PSBs together and propose a onesizefits-all solution –privatisation – for all of them. It would make more sense to distinguish between thestronger and weaker banks. For some banks in the latter category, we could consider adilution in government ownership below 50%.Common Governance IssuesThere are a large number of issues of governance that cut across both the public andprivate sectors in Indian banking. It should be possible to address the problems at mostPSBs within the framework of government ownership. There is nothing about governmentownership that comes in the way of the board of a public sector company beingprofessionalised and empowered. The committee might have looked at the record of thenew prime minister. During Prime Minister Narendra Modi‘s tenure as chief minister, Gujarat


showed that PSU boards could be professionalised and PSUs turned around smartly.The committee says that seven key themes, including strategy and risk management, do notget the attention they deserve at PSB boards. Thecommittee is of the view that private banks table more relevant issues than PSBs. Itsuggests that this could be a factor that private banks‘ superior performance (despite thefact that in both categories of bank, less than 6% of issues tabled related to strategy andrisk mitigation). This weighty conclusion is based on a perusal of the minutes of just oneboard meeting at banks in the sample.The report even has a graph that shows a closer correlation between board issues tabledand returns. One can wager that the committee would have found an even better correlationbetween the quality of boardrooms and bank performance!Three Initiatives for BoardsBoards, in general, are ineffective and this has little to do with ownership or the absence ofadequate expertise or skills on the board. The way forward is not to predicate improvedgovernance on a change of ownership. If owners, public or private, are not doing what ittakes, the regulator must step in. There are three initiatives the regulator might take.One, lay down stringent fit and proper criteria for membership of bank boards and also abroad profile of the skills or expertise needed. (There is a certain composition the RBI nowprescribes but this needs to be updated.)Two, ensure that board members are selected by diverse stakeholders. The central problemtoday is the way the boards are constituted. As long as boards are constituted entirely bythe promoter or management, boards are fated to remain ineffective. We need genuinediversity in the boardroom with representation for institutional and minority shareholders atthe very least.Three, introduce an objective filter in the selection of board members. The Financial ServicesAuthority (FSA) of the UK interviews candidates for board positions in the financial sectorand does not hesitate to reject those found suitable. The time is ripe to consider institutingsuch a process here.Central Problem of ManagementThe central problem at PSBs is not governance by the board. It is one of management.Management is one of the key differentiators between public and private sector banks. Theproblems are well known and were spelt out by a committee headed by A K Khandewal in2012.There is, first, the complete decimation of senior and top management at many PSBsbecause of the hiring freeze that operated for several years. Second, there is poorsuccession planning. We have managers hopping from one PSB to another at theexecutive director and the chairman and managing director levels. Managers occupythese positions without anyfamiliarity with the culture of the bank, and leave just when they have to come to grips withit. This must stop. At the top level, the attempt must be to select from a panel of seniorofficers groomed for the position over a long period of time.Third, there is a lack of expertise in areas such as treasury, wealth management and riskmanagement. In these areas, PSBs should have freedom to hire people on contract from themarket on terms that may not fit into the public sector framework of compensation. Then,there are the nuts and bolts of human resource development that have got neglected:career planning and job rotation; performance management systems; highquality training,etc.The issues of management as well as governance at PSBs can be addressed without beingfixated on the notion that the public sector is congenitally incapable of addressing these.What is required is a combination of political will and decisive regulatory intervention.The Nayak Committee‘s proposal to privatise PSBs has little chance of going through. It willbe fiercely opposed by bank unions as well as political parties. Repealing the various bank-related acts will be difficult, given that the new National Democratic Alliance governmentlacks the numbers in the upper house.Not least, the dangers of handing over the banking system to a clutch of professionals –individuals who are unelected and unaccountable to Parliament – are so great that no


government can contemplate such a course with equanimity. It would be unfortunate if, inburying the privatisation proposal, we also end up burying the live issues of governance andmanagement in the banking system.

11. Foreign direct investment (FDI) in retail sector

Background:- The recent cabinet decision on FDI in retail has triggered protests byopposition and key allies of the ruling United Progressive Alliance (UPA), who are demandinga roll back of the policy. The hourlong meeting held in Parliament House failed to resolve thelogjam in the two Houses as opposition parties, led by BJP and the Left, stuck to their standand demanded rollback of the Cabinet decision to allow 51 per cent FDI in multibrand retail.Though at present only 53 cities with population not less than 10 lakh in the country havebeen identified for FDI As the fourthlargest economy in the world in PPP terms, India is apreferred destination for FDI. During 200010, the country attracted $178 billionas FDI.Favor

a. This will bring modern technology to the country.b. Improve rural infrastructure. It would help build infrastructure and create a

competitive market.c. Reduce wastage of agricultural produce. Enable our farmers to get better prices for

their crops. Consumers will get commodities of daily use at reduced prices.d. Biggest beneficiary of this would be small farmers, who would be able to improve

productivity and realize higher remuneration by selling directly to large organizedplayers and shorten the chain from farm to consumers.

e. Government too stands to gain by this move through more transparent andaccountable monitoring of goods and supply chain management systems. It canexpect to receive an additional US$ 2530 billion by way of taxes

f. Opening of retail can be seen as a solution for food inflation, which has beenconfounding policymakers. FDI in retail would help in building much needed back endinfrastructure. Additionally, he said, INVESTMENTS in cold storage chaininfrastructure would reduce loss of agricultural produce and provide more options tofarmers.

Against

a. Our interest rates today are as high as 14 per cent to 16 per cent how do wecompete with the economies which have a 4 per cent interest rate. Ourinfrastructure our TRADE facilitations our labor laws, all these factors collectivelydon't make India low cost. So do you want India to become a center where we allowforeign companies to come in and set up these large chains which eventuallyinstead of selling domestic products out sourcing internationally the cheapestsources and selling those products. Please remember domestic retail normallysources domestically, international retail sources internationally because theysource from the cheapest sources.

b. Even if big retail companies help the farmers in resurrecting their economy, whatplan does the government has for millions of middlemen who are part of the businessprocess chain that ensures manufactured products reach end users.

c. We engage millions of uneducated and semi educated people at various stages ofretail business spread across towns and cities but we are afraid that Tesco andWalMart will only engage smart and educated workforce in small strength,comparatively. Conclusion

d. Government is taking this decision in good faith. Few persons and lobbies controllingthe rates of food commodities in India. And bringing more competition in market willbring better prices for buyers as well as sellers of commodities. Parties protestingagainst FDIs in retail have choice to not allow FDIs in the states they are ruling.Government should make a regulatory body for the COMMODITY TRADE as we have


for cellular services.We all know that India is a developing country.and to develop India will have to excel inevery field .. be it the competition from foreign markets...Indians are second to none .evenafter so many foreign companies have started their business in India, Indians have notlooked back.. but always stepped further. Well everything in this World have some pros andcons and this is exactly with the FDI . One side we talk of democracy and on the other waywe are against the FDI .FDI is going to bring technology in our country it can improve thecondition of farmers can bring the inflation rate downSupoose in any town there are 100 shops and in these shops on an average four personfrom the family of owner of shop is directly or indirectly employed through that shop.so totalbecome 400 employed people without requiring any specific skill.on other hand on wallmartin town will employ maximum 40 person and only qualified persons.so you can seeemployment status.and at starting they might give lucrative rate to farmers but later on willthey compromise with quality?.no, and every farmer will be forced to sell to retailers at aprice fixed by retailers acvording to quality. only top quality will be supported and other willsuffer very badly.With the coming of the FDI there is a lot of opportunity for the consumer there is a lots ofvariety of product at cheaper rates with the coming of FDI in INDIA lots and lots ofemployment is generated with it help the youth and the nation second reason is thatgovernment will get a tax of 25 billion third reason is that it provide a platform for thefarmer where they get affordable price of their products and minimize the role of middleman who use to take undue advantage fourth reason it allow the foreign currency to cometo india

12.Shortage of capital: Should government's stake in PSU banks be divest ?

As finance minister Arun Jaitley gears up for the budget in the coming weeks, one thornyquestion he will almost certainly have to address is an old one that a number of hispredecessors have faced. To what extent will the government have to pump money intoIndia's public sector banks?Over the next five years, India's public sector banks, the workhorses of the financial system,could face a major shortage of capital. A recent Reserve Bank of India (RBI) committeelooking into the governance of public sector banks has forecast that the state-owned banksrequire anywhere between Rs 2,10,000 crore and Rs 5,87,000 crore by 2018, depending onhow fast their loans to corporates, individuals and farmers grow, and to what extent thoseloans turn into non-performing assets, thus requiring them to be written off. Investmentbanks have their own estimates— Morgan Stanley, for instance, estimates that the bankswill require about Rs 2,98,300 crore by 2019.Changing GovernanceBanks will require the capital for three reasons. Firstly, it is to fund growth in loans. For eachloan they make they have to set aside a proportion of capital. An economic revival will bringin its wake strong demand for loans for investment, and it's in the government's owninterest that banks are in a position to make those loans and have that capital on hand. Butpublic sector banks also need capital to write off bad loans they had made earlier.Banks willneed greater funds to implement new norms relating to how to account for loans and howmuch capital they need to set aside for different categories of loans.Public sector banks, which have weaker internal controls and face political pressures to agreater degree than their private sector counterparts, consequently have steeper bad loanproblems, too. Finally, banks will need greater funds to implement new norms relating tohow to account for loans and how much capital they need to set aside for differentcategories of loans.Raising these funds, though, will require several steps, apart fromlegislative changes. Attracting private capital into public sector banks will need at least somegovernance and structural reforms. The RBI report on bank boards had suggested severalradical moves, including the repealing of existing legislation governing public sector banks,and the creation of an independent bank holding company, which would actually hold thegovernment's equity stake in them.


Handling RiskBut even if this politically controversial step doesn't fructify, there are several moves thegovernment can make to help private sector banks improve governance. As Rana Kapoor,founder and managing director of Yes Bank points out, key reforms include those to theboards of public sector banks.Kapoor points out that public and private sector banks operatewithin the same environment and are subject to the same regulatory conditions, yet theirperformance is different. "In private sector banks, there is a major emphasis on risk and inthe ways that bank boards handle risk and credit approvals."He advocates that an executive credit committee comprising the chairman and senior bankexecutives takes such decisions with any one such executive having a veto over thedecision. "This way there is a spirit of collective decision making that exists," he says. Healso suggests the removal of political appointees from bank boards and the splitting of theposts of the chairman and managing director.The RBI report points to several otherconstraints that public sector banks face as opposed to those from the private sector. Theseinclude dual regulation of such banks by the finance ministry and RBI, the short tenures oftop executives, and the control exercised on banks by the Central Vigilance Commission,which impedes any attempt to take decisions.But the report does caution that "in private sector banks senior management is incentivisedon the basis of bank profitability, and the compensation paid out through stock options — isin substantial measure contingent on the stock price of the bank.There is a potentialincentive to evergreen assets in order that provisions do not make a dent inprofitability."However HN Sinor, a veteran banker who served on numerous RBI committeesand headed the Indian Banks Association, says the ultimate aim should be for governmentto divest its stake substantially from the state-owned banks.Banks will need greater funds to implement new norms relating to how to account for loansand how much capital they need to set aside for different categories of loans."My personalopinion is that the government cannot keep pumping in cash into these banks year afteryear," he said. "They have to take the decision to reduce the stake below 51%. Any othermeasure will be temporary."Simple ChoiceGiven the scale of capital required, Jaitley actually faces an easy choice, especially giventhat the NDA government has a strong majority in parliament. He is in a better position thanmost of his predecessors to push through what economists and bankers have beendemanding for years, which is for the government to divest its stake in public sector banks,and in effect, privatise them.Such a move would be a cataclysmic one for the banking sector— as big in its effects as the nationalisation of banks in 1969.

13. Foreign direct investment (FDI) in retail sector

Background:- The recent cabinet decision on FDI in retail has triggered protests byopposition and key allies of the ruling United Progressive Alliance (UPA), who are demandinga roll back of the policy. The hourlong meeting held in Parliament House failed to resolve thelogjam in the two Houses as opposition parties, led by BJP and the Left, stuck to their standand demanded rollback of the Cabinet decision to allow 51 per cent FDI in multibrand retail.Though at present only 53 cities with population not less than 10 lakh in the country havebeen identified for FDI As the fourthlargest economy in the world in PPP terms, India is apreferred destination for FDI. During 200010, the country attracted $178 billionas FDI.Favor

g. This will bring modern technology to the country.h. Improve rural infrastructure. It would help build infrastructure and create a

competitive market.i. Reduce wastage of agricultural produce. Enable our farmers to get better prices for

their crops. Consumers will get commodities of daily use at reduced prices.j. Biggest beneficiary of this would be small farmers, who would be able to improve


productivity and realize higher remuneration by selling directly to large organizedplayers and shorten the chain from farm to consumers.

k. Government too stands to gain by this move through more transparent andaccountable monitoring of goods and supply chain management systems. It canexpect to receive an additional US$ 2530 billion by way of taxes

l. Opening of retail can be seen as a solution for food inflation, which has beenconfounding policymakers. FDI in retail would help in building much needed back endinfrastructure. Additionally, he said, INVESTMENTS in cold storage chaininfrastructure would reduce loss of agricultural produce and provide more options tofarmers.

Against

e. Our interest rates today are as high as 14 per cent to 16 per cent how do wecompete with the economies which have a 4 per cent interest rate. Ourinfrastructure our TRADE facilitations our labor laws, all these factors collectivelydon't make India low cost. So do you want India to become a center where we allowforeign companies to come in and set up these large chains which eventuallyinstead of selling domestic products out sourcing internationally the cheapestsources and selling those products. Please remember domestic retail normallysources domestically, international retail sources internationally because theysource from the cheapest sources.

f. Even if big retail companies help the farmers in resurrecting their economy, whatplan does the government has for millions of middlemen who are part of the businessprocess chain that ensures manufactured products reach end users.

g. We engage millions of uneducated and semi educated people at various stages ofretail business spread across towns and cities but we are afraid that Tesco andWalMart will only engage smart and educated workforce in small strength,comparatively. Conclusion

h. Government is taking this decision in good faith. Few persons and lobbies controllingthe rates of food commodities in India. And bringing more competition in market willbring better prices for buyers as well as sellers of commodities. Parties protestingagainst FDIs in retail have choice to not allow FDIs in the states they are ruling.Government should make a regulatory body for the COMMODITY TRADE as we havefor cellular services.

We all know that India is a developing country.and to develop India will have to excel inevery field .. be it the competition from foreign markets...Indians are second to none .evenafter so many foreign companies have started their business in India, Indians have notlooked back.. but always stepped further. Well everything in this World have some pros andcons and this is exactly with the FDI . One side we talk of democracy and on the other waywe are against the FDI .FDI is going to bring technology in our country it can improve thecondition of farmers can bring the inflation rate downSupoose in any town there are 100 shops and in these shops on an average four personfrom the family of owner of shop is directly or indirectly employed through that shop.so totalbecome 400 employed people without requiring any specific skill.on other hand on wallmartin town will employ maximum 40 person and only qualified persons.so you can seeemployment status.and at starting they might give lucrative rate to farmers but later on willthey compromise with quality?.no, and every farmer will be forced to sell to retailers at aprice fixed by retailers acvording to quality. only top quality will be supported and other willsuffer very badly.With the coming of the FDI there is a lot of opportunity for the consumer there is a lots ofvariety of product at cheaper rates with the coming of FDI in INDIA lots and lots ofemployment is generated with it help the youth and the nation second reason is thatgovernment will get a tax of 25 billion third reason is that it provide a platform for thefarmer where they get affordable price of their products and minimize the role of middleman who use to take undue advantage fourth reason it allow the foreign currency to cometo india


14.Shortage of capital: Should government's stake in PSU banks be divest ?

As finance minister Arun Jaitley gears up for the budget in the coming weeks, one thornyquestion he will almost certainly have to address is an old one that a number of hispredecessors have faced. To what extent will the government have to pump money intoIndia's public sector banks?Over the next five years, India's public sector banks, the workhorses of the financial system,could face a major shortage of capital. A recent Reserve Bank of India (RBI) committeelooking into the governance of public sector banks has forecast that the state-owned banksrequire anywhere between Rs 2,10,000 crore and Rs 5,87,000 crore by 2018, depending onhow fast their loans to corporates, individuals and farmers grow, and to what extent thoseloans turn into non-performing assets, thus requiring them to be written off. Investmentbanks have their own estimates— Morgan Stanley, for instance, estimates that the bankswill require about Rs 2,98,300 crore by 2019.Changing GovernanceBanks will require the capital for three reasons. Firstly, it is to fund growth in loans. For eachloan they make they have to set aside a proportion of capital. An economic revival will bringin its wake strong demand for loans for investment, and it's in the government's owninterest that banks are in a position to make those loans and have that capital on hand. Butpublic sector banks also need capital to write off bad loans they had made earlier.Banks willneed greater funds to implement new norms relating to how to account for loans and howmuch capital they need to set aside for different categories of loans.Public sector banks, which have weaker internal controls and face political pressures to agreater degree than their private sector counterparts, consequently have steeper bad loanproblems, too. Finally, banks will need greater funds to implement new norms relating tohow to account for loans and how much capital they need to set aside for differentcategories of loans.Raising these funds, though, will require several steps, apart fromlegislative changes. Attracting private capital into public sector banks will need at least somegovernance and structural reforms. The RBI report on bank boards had suggested severalradical moves, including the repealing of existing legislation governing public sector banks,and the creation of an independent bank holding company, which would actually hold thegovernment's equity stake in them.Handling RiskBut even if this politically controversial step doesn't fructify, there are several moves thegovernment can make to help private sector banks improve governance. As Rana Kapoor,founder and managing director of Yes Bank points out, key reforms include those to theboards of public sector banks.Kapoor points out that public and private sector banks operatewithin the same environment and are subject to the same regulatory conditions, yet theirperformance is different. "In private sector banks, there is a major emphasis on risk and inthe ways that bank boards handle risk and credit approvals."He advocates that an executive credit committee comprising the chairman and senior bankexecutives takes such decisions with any one such executive having a veto over thedecision. "This way there is a spirit of collective decision making that exists," he says. Healso suggests the removal of political appointees from bank boards and the splitting of theposts of the chairman and managing director.The RBI report points to several otherconstraints that public sector banks face as opposed to those from the private sector. Theseinclude dual regulation of such banks by the finance ministry and RBI, the short tenures oftop executives, and the control exercised on banks by the Central Vigilance Commission,which impedes any attempt to take decisions.But the report does caution that "in private sector banks senior management is incentivisedon the basis of bank profitability, and the compensation paid out through stock options — isin substantial measure contingent on the stock price of the bank.There is a potentialincentive to evergreen assets in order that provisions do not make a dent inprofitability."However HN Sinor, a veteran banker who served on numerous RBI committeesand headed the Indian Banks Association, says the ultimate aim should be for government


to divest its stake substantially from the state-owned banks.Banks will need greater funds to implement new norms relating to how to account for loansand how much capital they need to set aside for different categories of loans."My personalopinion is that the government cannot keep pumping in cash into these banks year afteryear," he said. "They have to take the decision to reduce the stake below 51%. Any othermeasure will be temporary."Simple ChoiceGiven the scale of capital required, Jaitley actually faces an easy choice, especially giventhat the NDA government has a strong majority in parliament. He is in a better position thanmost of his predecessors to push through what economists and bankers have beendemanding for years, which is for the government to divest its stake in public sector banks,and in effect, privatise them.Such a move would be a cataclysmic one for the banking sector— as big in its effects as the nationalisation of banks in 1969.

15. RISK BASED SUPERVISION – TOOLS FOR RISK MANAGEMENT

Risk Based Supervision (RBS)

The Reserve Bank of India (RBI) has been entrusted with the responsibility of supervisingthe Indian banking system under various provisions of the Banking Regulation Act, 1949and RBI Act, 1934. Presently, this responsibility is discharged by RBI's Department ofBanking Supervision (DBS) for all Scheduled Commercial Banks' excluding Regional RuralBanks, by undertaking onsite examination and offsite surveillance based on CAMELSapproach (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Systems andControls) for domestic banks and CALCS (Capital Adequacy, Asset Quality, Liquidity,Compliance and Systems and Controls) for foreign banks operating in India.The CAMELS framework entailed an elaborate structure of offsite surveillance, AnnualFinancial Inspections (AFIs), Prompt Corrective Action (PCA), and structured meetings withsenior management. The CAMELS/CALCS frameworks were principally performance orientedin nature and assessed riskiness of banks on a point in time basis. Based on internationalsupervisory practices and from the lessons learnt from the global financial crisis, a need tointroduce a risk-focused, forward looking approach to banking supervision was felt for theIndian banking system. Accordingly, RBI has been progressively moving in line with Basel'Core Principles for Effective Banking Supervision'. The existing supervisory framework hasbeen suitably modified towards establishing a Risk Based Supervision (RBS) framework forSCBs in India.

Risk Based Supervision (RBS) is defined as an ongoing process where in risks of a Bank areassessed and appropriate supervisory plans designed and implemented by the supervisors.RBS is thus a structured process which identifies materials and critical risks that a Bank maypotentially face and through a focused supervisory review process, assess the Bank's abilityto manage the potential risks along with its financial vulnerability to adverse outcomes.RBS FRAMEWORKRisk Based Supervisory framework is named as Supervisory Program for Assessment of Riskand capital (SPARC) which is dynamic and forward looking as against the presentcompliance-based and transaction testing approach (CAMELS) under AFI regime. RBI hasidentified our Bank for migration to Risk Based Supervision (RBS) from the year 2014-15.

SUPERVISORY PROGRAM FOR ASSESSMENT OF RISK ASSESSMENT OF RISK ANDCAPITAL (SPARC):The framework for Supervisory Program for Risk and Capital Assessment (SPARC) has beendeveloped to ensure achievement of RBI's supervisory objectives, protection of depositors'interest and ensuring financial health of individual banks/financial institutions. An implicitobjective of RBI's supervisory process is also to ensure financial stability and customerprotection.Under SPARC, a detailed qualitative and quantitative assessment of the bank's risks is madeby RBI on an ongoing basis through a combination of offsite and onsite Risk DiscoveryProcess (RDY).


OBJECTIVES OF RBS:

The ultimate objective of the supervisory process is to ensure that the banks are adequatelycapitalized. The capital held by the bank /required to be held by the bank shouldcommensurate with all the material risk bank undertakes in its business both under Pillar Iand Pillar II.

The main objective of risk-based supervision is to sharpen supervisory focuson:

The activities that pose the greatest risk to the Bank

The assessment of management process to identify, measure, monitor and control risks.

The allocation of supervisory resources according to perceived risk, i.e. focusing resourceson the bank's highest risk or devoting more supervisory efforts to those banks that have ahigh-risk profile. It will, therefore, enable the regulator to target and prioritize the use ofavailable resources.

The supervisor will be better placed to decide on the intensity of future supervision andthe amount and focus of Supervisory action in accordance with the perceived risk profileof the bank.

The supervisor may also focus more attention on banks whose failure couldprecipitate systemic crisis.Risk Based Supervision process focuses on the following aspects.

Continuous collection and submission of financial and non-financial data with a view toenable the regulator to independently perform analysis of raw data through off-sitesurveillance.

Inclusive and regular onsite examination focused on evaluating the risk and controlenvironment within the bank. The inclusive examination process is designed to enable thesupervisor to form an objective view on the probability of failure and impact of failurebased on the existing control framework of the bank.

Thematic and targeted reviews by the supervisor with a view to evaluate, through useof specialists, the impact of systemic risks on the bank and the manner in which thebank is addressing potential high-risk areas.

Increased reliance on the bank's audit and compliance functions to provide transactionalassurance to the supervisor and enable allocation of supervisory resources to high riskareas.

Use of capital add-ons based on the assessment of probability and impact of failure toencourage banks to strengthen their control environment.

Increased engagement between the supervisor and the senior management of the bankwith a view to ensure good corporate governance, transparency and accuracy ofinformation used by senior management for decision making.RBS PROCESS:

The Risk Based Supervision process focuses heavily on off-site surveillance. It is therefore,extremely data intensive and it is envisaged that banks will be able to provide data in aseamless and automated manner to the supervisor on a regular basis. RBI collects datausing multiple forms classified into the following Tranches.

Tranche I: Data pertaining to risk and financial parameters Tranche II : Control environment and governance assessment Tranche III : Compliance assessment

Risk Discovery Offsite: Based on the analysis of data/information submitted by banks, RBIconducts an interim risk assessment wherein preliminary view is formed on the risk profile ofthe bank. At this stage, RBI may call for additional data/information and hold discussion withtop/senior management of the bank.

Risk Discovery - Onsite: On the basis of the interim risk assessment, RBI conducts need


based onsite inspection for supervisory evaluation (ISE). The onsite inspection involvesdiscussion with the key functionaries of the Bank including Board and Senior Managementofficials regarding processes, products, review of policies, procedures, guidelines etc.

Verification of accuracy of data submitted by the bank Review of compliance with regulatory guidelines and accounting standards 8 Review

of effectiveness of the controlsReview of overall board and management oversight and role played by risk management

and internal audit function in the bank.

Capital assessment as envisaged under Pillar II Supervisory Review & Evaluation Process(SREP) of Basel II.

Commissioned Audit/Targeted Review: Wherever additional areas of concern areobserved during the onsite inspection, if deemed appropriate, RBI may also initiate atargeted review/commissioned audit on areas of concern.The Integrated Risk and Impact Scoring Model (IRISc) is used to assess the Bank's risk offailure score as well as impact of failure score. The model depends on the score of theSPARC process and defines a multi tier model to estimate bank risk and impact of failure.

A multi tier, multi-component scorecard based approach Model blends quantitative (objective) and qualitative (supervisory judgment-

subjective) assessment criteria

Risk Profile of the Bank: Based on onsite and offsite risk discovery assessments, RiskProfile of the bank is prepared taking into account granular details.

Quality Assurance and Review: Upon finalization of Risk Profile of a bank, the QualityAssurance Committee of RBI reviews the key elements of the risk profile including thesupervisory rating.

Preliminary Risk Assessment Report (PRAR): After approval by the Quality assurancecommittee, PRAR containing risk assessment, assessed capital available, and requiredcapital add-on is communicated to the bank. PRAR will be discussed in detail by the SeniorSupervisory Manager (SSM) of RBI with the bank management.

Final Risk Assessment report (FRAR) and Risk Mitigation Plan (RMP): FRARcontaining the Supervisory capital prescription, the supervisory rating, supervisory stanceand Risk Mitigation plan (RMP) will be finalized.

Supervisory Meeting: A supervisory meeting will be held by RBI with the top managementof the bank to discuss

the supervisory concerns and action to be taken by the bank, before putting up the RiskProfile of the Bank to the Board of Financial Supervision (BFS).

Supervisory Information: All supervisory information, including the supervisory rating ishighly confidential and rating will be made known only to the bank's senior management.

Supervisory Rating: Supervisory Rating ranges from Good(A) to Very Poor(E) on a fivepoint scale . For those banks with rating of Unsatisfactory(C) and below, RBI computes Add-on capital required for banks, in order to bring those banks risk/probability of failure withinthe acceptable supervisory risk appetite.

Supervisory Stance: The supervisory stance of a bank is determined based on the bank'srisk of failure and impact of failure score matrix. Degree of supervision (Baseline monitoring,close monitoring, active oversight and corrective actions) and periodicity of on-siteinspection will be decided based on above matrix.

CRITICAL SUCCESS FACTORS FOR RBS:

Availability of relevant, comprehensive and quality data

Development and management of specialized skills and expertise in areas like Riskmanagement, Treasury, IT, Corporate credit etc.


Robust Management Information System and Information Technology support.

Effective Risk management, Internal audit and Compliance set up. Risk-return framework and effective Transfer Price

mechanismREQUIREMENTS FOR EFFECTIVE IMPLEMENTATION OF RBS:

Efficacy and quality of internal audit, concurrent audit, reviews and compliance testing.

Efficacy of IT Systems from an internal control and availability of data stand-point.

Quality of Risk Management Systems

Quality of data provided to the supervisor and usage of the same for internal decisionmaking.

Ability to quantify and aggregate risks especially pillar II risks.

Effective planning and contingency planning

Demonstrable integration of the risk and business decision making processes Demonstration of high quality of governance and control

framework. Conclusion:

The roll out of RBS framework is a huge challenge for all the stakeholders in the bankingsystem. The forward looking element that is normally associated with any RBS frameworkalso brings along with it a good deal of subjectivity into the assessment process.In order to ensure that our banking system remains healthy and vibrant, Banks need to rollout to RBS process successfully. The Risk Based Supervision process as it not only helpsBanks identify incipient risks in a timely manner and prepare mitigation plans. It alsoreduces their supervisory and compliance burden.

16. LIQUIDITY COVERAGE RATIO (LCR)

Financial Crisis of 2007-08: Financial market developments have increased thecomplexity of liquidity risk and its management. During the financial crisis that beganin 2007, many banks despite meeting existing capital requirements which was in effectat that time experienced difficulties because of a failure to manage liquidity in aprudent manner The difficulties thus experienced, led to the creation of significantcontagion effects to the financial system, and in the process exposing the lapses on thepart of banks in following the basic principles of liquidity risk management.Interlinking of Global Financial System: With the interlinking of the global financialsystem, it is important that the financial system at large remains prepared to the fullextent to counter future stress liquidity conditions. Keeping this in view, the BaselCommittee designed “Liquidity Coverage Ratio (LCR)” to strengthen the global liquidityregulations with the goal of promoting a more resilient banking sector.

Stock of high quality liquid assets (HOLAs)LCR = ---------------------------------------------------------------- ≥ 100% Net cash outflows for next 30 calendar days under stress

Significance: LCR is designed to ensure that banks maintains an adequate level ofunencumbered HOLAs that can be converted into cash to meet its liquidity needs for a 30calendar day time horizon under a significantly severe liquidity stress scenario.

Requirement & Transition Period: To reduce the repercussion of maintaining 100%LCR and give banks sufficient time to build quality liquid assets and improve theirbusiness model, the Basel Committee has prescribed the LCR requirement in a phasedmanner. Banks initially are required to maintain LCR of 60% from 1st January 2015which will be stepped up by 10% annually to reach 100% by 1st January 2019.

HQLA in India: High quality liquid assets in Indian context primarily consists of cash,


surplus CRR & SLR, 2% of NDTL as MSF & 5% of NDTL as Facility to Avail Liquidity for LCR(FALLCR) as level 1 assets and high rated corporate bonds, equity and others as level 2assets.

Trade-off between HQLA & Outflows: Holding of HOLA has a cost factor in the form ofopportunity foregone on account of low yield earned from these assets than assets createdas advances. The cost can be minimized by reducing the net cash-outflows which may run-off in the next 30 days stress condition.Ways to Reduce Cash-out flows: Reduction in cash-outflows can be achieved byensuring that deposits contracted have a clause which prevents premature withdrawal inthe next 30 days or have no-call option. Cash-

outflows can further be reduced by increasing the retail deposits (i.e,, deposits sourcedfrom natural person) as these deposits are considered to be well diversified withsignificantly lower prematurely withdrawn probability thus lower run-off rate than thedeposits contracted from corporate and financial institutions. It is also important toreduce/limit contractual on/off balance sheet obligations to reduce the cash-outflows asdrawdown's from these obligations are expected to increase under stress condition.

Strategies for Improving the LCR of the Bank

1. Proper Customer Classification: As under stress condition deposits run-off depends uponthe expected behaviour of various customer types, correct classification of customers asper CBS customer type needs to be ensured at the branch level.

2. Focus Retail (Individual) Deposits: Branches needs to improve their retail deposit baseincluding savings bank deposits by improving upon the customer service, propermarketing of the retail deposit products, market research and others.

3. Garnering of more Salary Accounts: Salary accounts provide a cushion of savingsaccounts on which the bank pays a lower interest cost. The salary accounts enhance theretail deposit base of the Bank.

4. Offer best in class services to HNI customers: HNI customers provide the Bank withsubstantial deposit base which again falls under the fold of retail deposits.

Focus on Non-callable Deposits: Bank has introduced non-callable deposits for bulk depositsof Rs. 1 Cr with additional rate of interest which will off-set cost of maintaining surplus SLR.Branches to add more such deposits.

17.COUNTERCYCLICAL CAPITAL BUFFER (CCCB)

Banking business is prone to the impact of boom-bust economic cycles as they haveexposure to many business entities at any given time and the combined effect of theperformance of all these entities is to be borne by the banks in all phases of the economiccycles. Pro-cyclicality is part of economic cycles and this dimension of pro-cyclicalityaccentuates the ill-impacts of economic cycles in a feedback loop, i.e., the cycle becomesself-fulfilling, increasing in size and causing externalities to the economy.When the economy is in upturn, debtors tend to do well and service the loans in time. Theyalso improve their financials as also their credit ratings. This leads to more demand forcredit and banks tend to become aggressive, which could result in relaxation in creditstandards thus there may be excessive credit growth. Despite higher credit growth banks donot need commensurately higher capital as their borrowers have good credit ratings. In thisbackdrop, Banks' loan losses and capital requirements fall below their long-run average andthe need for loan loss provisions are less. As a corollary, Banks' loan losses and capitalrequirements fall below their long-run average and the need for loan loss provisions are less.On the other hand, when the downturn in the economy takes place, credit quality of theborrowers, in general, tends to worsen, the probability of default in servicing the loan out-standings increases, leading to higher levels of Non-Performing Assets. This situation callsfor banks to make higher loan loss provisions and banks record lower levels of overallprofitability.


At the same time, banks are also required to maintain higher capital for the rating down-gradation of their borrowers. With their poor financials, banks do not get external capital tosupport their existing loan portfolio on account of poor financial results. Thus further growthin credit suffers. This results in banks becoming cautious and restricting lending, therebyresulting in the credit contraction risk spilling over to the real sector of the economy. Thissituation may lead to systemic risk which may spiral into economic crisis.The financial crisis of 2007 originated in the banking and the shadow banking sectors in theform of excessive credit growth. When the credit bubble burst, banks were saddled withhuge losses and capital write-offs. Further, banks were also finding it difficult to raiseadditional capital from the market.These losses destabilized the banking sector and sparked a vicious circle, whereby problemsin the financial system contributed to restricting lending to the real sector that then fed backon the banking sector. These interactions of the banking sector with the real economyhighlighted the importance of effects of pro-cyclicality of capital and provisioningrequirements in banking sector.

The issue of pro-cyclicality has an impact on bank capital regulation. Either Basel I orBasel II regulations addresses this pro-cyclicality in their rules. It is felt that thebank capital regulation may amplify business cycle fluctuations. This effect may bemore pronounced during downturns, when banks find it difficult to raise additionalcapital, which results in restricted lending.The issue of pro-cyclicality attracted the attention of G-20 in November 2008 andthe Basel Committee on Banking Supervision (BCBS) was requested to developrecommendations to mitigate pro-cyclicality, including the review of how valuationand leverage, bank capital, excessive compensation, and provisioning practices mayexacerbate cyclical trends. This brought into focus creation of macro-prudential toolsto deal with pro-cyclicality and create countercyclical provisioning and capital buffersto obviate systemic risk.The Basel Committee issued a consultative Document on Countercyclical CapitalBuffer (CCCB) in July 2010 and issued Guidance for national authorities operatingcountercyclical capital buffer as part of the Basel III package in December 2010.The CCCB is a critical component of the Basel III framework. The primary aim of theCCCB regime is to build up a buffer of capital which can be used to achieve thebroader macro-prudential goal of restricting the banking sector from indiscriminatelending in the periods of excess credit growth that have often been associated withthe building up of system-wide risk.The CCCB regime endeavours to ensure that not only the individual banks remainsolvent through a period of stress, but also that the banking sector has capital inhand to help maintain the flow of credit in the economy during economic downturnsand periods of stress. Further, as capital is a more expensive form of funding, thestipulation regarding build-up of capital defences may have the additional benefit ofmoderating excessive credit growth when economic and financial conditions arebuoyant.At the same time, during the period of excessive credit growth, the buffer may actas a moderator from the debtors' perspective as it is likely to raise the cost of credit,and therefore, dampen its demand, and may help to lean against the build-up phaseof the cycle in the first place.The aim of the Countercyclical Capital Buffer (CCCB) regime is twofold. Firstly, itrequires banks to build up a buffer of capital in good times which may be used tomaintain flow of credit to the real sector in difficult times. Secondly, it achievesthe broader macro-prudential goal of restricting the banking sector fromindiscriminate lending in the periods of excess credit growth that have oftenbeen associated with the building up of systemwide risk.Reserve Bank of India issued detailed guidelines on 05.02.2015 on


implementation of CCCB guidelines in India.The CCCB is to be maintained in the form of Common Equity Tier 1 (CET 1) capital orother fully loss absorbing capital only. The amount of the CCCB varies from 0 to2.5% of total risk weighted assets (RWA) of the banks.RBI would announce the decision to trigger with a lead time of 4 quarters. Credit-to-GDP gap is the main indicator in the CCCB framework in India. However, it is not theonly reference point and GNPA growth will also be used in conjunction.Reserve Bank of India shall also look at other supplementary indicators for CCCBdecision such as incremental CD ratio for a moving period of three years (alongwith its correlation with credit-to-GDP gap and GNPA growth), Industry Outlook(IO) assessment index (along with its correlation with GNPA growth) and interestcoverage ratio (along with its correlation with credit-to- GDP gap). Reserve Bankof India may use its discretion to use all or some of the indicators along with thecredit-to-GDP gap While taking the final decision on CCCB.The CCCB framework shall have two thresholds, viz., lower threshold and upperthreshold, with respect to creditto-GDP gap. The lower threshold (L) of the credit-to-GDP gap where the CCCB is activated shall be set at 3 percentage points, provided itsrelationship with GNPA remains significant.

The upper threshold (H) where the CCCB reaches its maximum is kept at 15 percentagepoints of the credit-toGDP gap. Once the upper threshold of the credit-to-GDP gap isreached, the CCCB will remain at its maximum value of 2.5 per cent of RWA, till thetime a withdrawal is signalled by the Reserve Bank of India.

In between 3 and 15 percentage points of credit-to-GDP gap, the CCCB increases graduallyfrom 0 to 2.5 per cent of the RWA of the bank. However, if the credit-to-GDP gap exceeds15 percentage points, the buffer shall remain at 2.5 per cent of the RWA.

The rate of increase would be different based on the level/position of credit-to-GDP gapbetween 3 and 15 percentage points. If the credit-to-GDP gap is below 3 percentagepoints then there will not be any CCCB requirement. The CCCB requirement shallincrease linearly from 0 to 20 basis points when credit-to-GDP gap moves from 3 to 7percentage points. Similarly, for above 7 and up to 11 percentage points range ofcredit-toGDP gap, CCCB requirement shall increase linearly from above 20 to 90 basispoints. Finally, for above 11 and up to 15 percentage points range of credit-to-GDP gap,the CCCB requirement shall increase linearly from above 90 to 250 basis points. Thefollowing table describes the rate of CCCB:

Sl No Credit to GDP Gap CCCB requirement as percentage of RWA

1 Below 3 percent 0.000

2 Between 3 - 4 percent 0.050













14 Above 15 percent 2.500

The same set of indicators that are used for activating CCCB may be used to arrive at thedecision for the release phase of the CCCB. Reserve Bank of India has the discretion foroperating the release phase of CCCB. The entire CCCB accumulated may be released at asingle point in time but the use of the same by banks will not be unfettered and will need tobe decided only after discussion with the Reserve Bank of India.For all banks operating in India, CCCB shall be maintained on a solo basis as well as onconsolidated basis for all banks operating in India.All banks operating in India, both foreign and domestic banks, should maintain capital forIndian operations under CCCB framework based on their exposures in India. Banksincorporated in India having international presence have to maintain adequate capital underCCCB as prescribed by the host supervisors in respective jurisdictions. The banks, based onthe geographic location of their RWA, shall calculate their bank specific CCCB requirement asa weighted average of the requirements that are being applied in respective jurisdictions. IfRBI feels the CCCB requirements in any country is not adequate, then RBI may requireIndian Banks operating in that country to maintain excess capital.Banks will be subject to restrictions on discretionary distributions, which includes dividendpayments, share buybacks and staff bonus payments, if they do not meet the requirementon countercyclical capital buffer.Banks are expected to ensure that their CCCB requirements are calculated and publiclydisclosed with at least the same frequency as their minimum capital requirements asapplicable in various jurisdictions. The buffer should be based on the latest relevantjurisdictional CCCB requirements that are applicable on the date that they calculate theirminimum capital requirement. In addition, when disclosing their buffer requirement, banksmust also disclose the geographic breakdown of their RWAs used in the calculation of thebuffer requirement.Generally RBI would announce the CCCB decisions as part of the first bi-monthly monetarypolicy statement for the year. More frequent communications may be made by the ReserveBank of India, if warranted by changes in economic conditions.While announcing the Annual Credit Policy for the year 2015-16 on 07.04.2015, RBIIndicated that the overall situation does not warrant imposition of CCCB at this point of time.Domestic Systemically Important Banks (D-SIBs)Some banks become systemically important, due to their size, cross-jurisdictional activities,complexity, lack of substitutability and inter-connectedness and such banks are known asSystemically Important Banks (SIBs). The disorderly failure of these banks has the potentialto cause significant disruption to the essential services they provide to the banking systemand to the overall economic activity. Therefore, the continued functioning of SIBs is criticalfor the uninterrupted availability of essential banking services to the real economy. Some ofthe large and highly interconnected financial institutions (SIBs), during the global financialcrisis, faced problems and hampered the orderly functioning of the financial system andnegatively impacted the real economy as well.In many jurisdictions, stances, Government intervention was considered necessary to ensurefinancial stability and cost of public sector intervention and consequential increase in moralhazard required that future regulatory policies should aim at reducing the probability offailure of SIBs and the impact of the failure of these banks.A series of reform measures were unveiled, to improve the resiliency of banks and bankingsystems and in effect Basel III guidelines came into effect. The Basel III guidelines cover allbanks including SIBs. However, the Basel III guidelines are not adequate to deal with risksposed by SIBs. Therefore, additional policy measures for SIBs are necessary to counter thesystemic risks and moral hazard issues posed by SIBs.SIBs are perceived as banks that are Too Big To Fail (TBTF'. In October 2010, the FinancialStability Board (FSB) recommended that all member countries needed to have in place aframework to reduce risks attributable to Systemically Important Financial Institutions(SIFIs) in their jurisdictions.The Basel Committee on Banking Supervision (BCBS) developed an assessment


methodology comprising both quantitative and qualitative indicators to assess the systemicimportance of Global SIFIs (G-SIFIs), along with an assessment of the extent of going-concern loss absorbency capital which could be provided by various proposed instruments.BCBS came out with a framework in November, 2011 for identifying the Global SystemicallyImportant Banks (G-SIBs) and the magnitude of additional loss absorbency capitalrequirements applicable to these G-SIBs.The BCBS also finalized its framework for dealing with Domestic Systemically ImportantBanks (D-SIBs) in October 2012. The D- SIB framework of BCBS focuses on the impact thatthe distress or failure of banks will have on the domestic economy. As opposed to G-SIBframework, D-SIB framework is based on the assessment conducted by the nationalauthorities, who are best placed to evaluate the impact of failure on the local financialsystem and the local economy.D-SIB framework is based on a set of principles, which complement the G-SIB framework,address negative externalities and promote a level-playing field. The principles developed bythe BCBS for D-SIBs provide national discretion in identifying D-SIBs and additional lossabsorbency requirements applicable to them.RBI released the draft framework for dealing with D-SIBs on 02.12.2013 and finalframework for the D-SIBs on 22.07.2014. In the framework finalized, the following areimportant points:The methodology to be adopted by RBI to identify D-SIBs is a two-step process. In the firststep, sample of banks to be assessed for their systemic importance will be decided.Once the sample of banks is selected, detailed study to compute their systemic importancewill be initiated. Based on a range of indicators, a composite score of systemic importancefor each bank in the sample will be computed. The banks having systemic importance abovea threshold will be designated as D-SIBs.D-SIBs would be segregated into different buckets based on their systemic importancescores, and subject to loss absorbency capital surcharge in a graded manner depending onthe buckets, in which they are placed. A D-SIB in lower bucket will attract lower capitalcharge and a D-SIB in higher bucket will attract higher capital charge.Banks will be selected for computation of systemic importance based on the analysis of theirsize based on Basel III Leverage Ratio Exposure Measure as a percentage of GDP.Banks having a size beyond 2% of GDP will be selected in the sample. For this purpose,latest GDP figure at market prices, released by Central Statistical Office, Government ofIndia will be used. Even though the foreign banks in India have smaller balance sheet size, afew large foreign banks would be included in the sample as foreign banks are quite active inthe derivatives market and the specialized services provided by these banks might not beeasily substituted by domestic banks.Assessment methodology: The methodology to be used to assess the systemic importance islargely based on the indicator based approach being used by BCBS to identify G-SIBs. Theindicators to be used to assess domestic systemic importance of the banks are as follows:

Size Interconnectedness Lack of readily available substitutes or financial institution infrastructure; Complexity.

RBI Methodology would give more weight to the size as it is felt that size is the mostimportant indicator of systemic importance. Interconnectedness, substitutability andcomplexity indicators would be divided further into multiple indicators. The weightage given to various indicators

are as below:

Sl. No Indicator Sub-indicator Indicator weight

1 Size Total exposure as defined for use

in Basel III Leverage Ratio

-- 40%

2 Interconnectedness Intra-financial system assets 6.67%

Intra-financial system liabilities 6.67%

Securities outstanding 6.67%

3 Substitutability Assets Under Custody 6.67%


Payments made in INR using RTGS

and NEFT systems 6.67%

Underwritten transactions in

debt and equity markets 6.67%

4 Complexity Notional amount of OTC Derivatives 6.67%

Cross Jurisdictional Liabilities 6.67%

Securities in Held For Trading and

Available for Sale categories 6.67%

Allocation of banks into buckets: Based on the data received from banks in the sample onthe above indicators, systemic importance score will be calculated. For each bank, the scorefor a particular indicator will be calculated by dividing the individual bank amount by theaggregate amount for the indicator summed across all banks in the sample.The score for each category will be multiplied by 1000 in order to express the indicatorscores in basis points. Overall systemic importance of a bank will be computed as weightedaverage scores of all indicators. Thus, the systemic importance score of a bank wouldrepresent its relative importance with respect to the other banks in the sample. Banks thathave scores above a threshold score will be classified as D-SIBs. However, the process ofclassification of a bank as D-SIB will also be guided by qualitative analysis andregulatory/supervisory insights about different banks. Banks will be allocated to differentbuckets based on their systemic importance score.Based on a mix of quantitative analysis and country-specific factors as above, and as per thesupervisory judgment of RBI, a bank with highest systemic importance score would berequired to have 0.8% of its risk weighted assets as additional capital charge in the form ofCET1 capital. Other buckets have been calibrated accordingly.The additional CET1 capital requirement for D-SIBs is presented below:

Bucket Additional CET1 requirement (as a percentage of risk weighted assets)

5 (Empty) 1.00%

4 0.80%

3 0.60%

2 0.40%

1 0.20%

The additional CET1 requirements will be applicable at the level of both solo as well asconsolidated level of the D-SIB, in line with extant capital adequacy provisions. The higherCET1 requirements will be made applicable as an extension of capital conservation buffer. Ifa D-SIB is not able to meet the additional CET1 requirement, it will be subjected torestrictions on distribution of profits and other restrictions as applicable under the Basel IIIframework.If a D-SIB has incorporated its systemic importance in its Internal Capital AdequacyAssessment Process (ICAAP); it will not be required to hold capital twice for the same riskduring the Supervisory Review and Evaluation Process (SREP). The banks designated as D-SIBs will be subjected to more intensive supervision in the form of higher frequency andhigher intensity of on- and offsite monitoring. It is expected that these banks should adoptsound corporate governance of risk and risk management culture.The higher capital requirements to D-SIBs will be applicable from April 1, 2016 in a phasedmanner and would become fully effective from April 1, 2019. The phasing-in of additionalcommon equity requirement will be as follows:

Bucket April 1, 2016 April 1, 2017 April 1, 2018 April 1, 2019

5 (Empty)

4 0.20% 0.40% 0.60% 0.80%

3 0.15% 0.30% 0.45% 0.60%


2 0.10% 0.20% 0.30% 0.40%

1 0.05% 0.10% 0.15% 0.20%

The names of the banks classified as D-SIBs will be disclosed in the month of August everyyear starting from 2015. RBI will also disclose the denominators for each category ofindicators every year so that each and every bank is able to calculate its systemicimportance score.RBI would also disclose the systemic importance score ranges of each bucket. This helpsbanks to compute their own systemic importance scores and would help in capital planningexercise.The assessment methodology for assessing the systemic importance of banks and identifyingD-SIBs will be reviewed on a regular basis at least once in three years.

18. Ways to deliver good customer service

Putting a well-oiled machinery in place will go a long wayCustomer service is core to any organizations success. Businesses create products to attractcustomer attention. However, their long-term success largely gets driven by the servicedelivery architecture that businesses create for their customers to experience what thebusiness has to offer.Mapping customer expectations is the first step towards developingstrong customer service protocols or a strong service delivery architecture.The most important element within the framework is accessibility. Customers today usemultiple screens, which give businesses multi-modal opportunities to enhance accessibilityeconomically. Traditional brick-and-mortar touch points attract huge investments and hencean innovative technique through adoption of technology is paramount.The second important element is responsiveness.We need to understand that it might not be always possible for businesses to prevent allproblems, however they need to know how to recover from such situations and perform toexpectations of their customers. To achieve this, there are five key areas of focus.Mine customer problems and develop strategies to address them: Businesses need to talkabout customer problems internally and analyse them well. The focus should be to identifyfail points and work towards changing process which helps remove such fail points. There isnothing that fits forever. The flexibility to change and managing the change internally tofacilitate process re-innovation is the direction that businesses should focus on. This will alsohelp businesses to anticipate customer recovery needs and train personnel to act timely andappropriately.Create a process that helps them act fast: Customers want their problems to be addressedfast. Defining what is fast is the next step. The answers lies with the customers themselvesand hence mapping customer expectations with problems will help organisations to developprotocols and service delivery mechanisms that can move fast. Businesses need to analysethe processes with respect to three key components.Process elements which are above theline of interaction These are core touch points through which customers interact with thebusiness. These are parts of the process which deliver experience to customers based onwhich customers assess if their experience was good or bad. They learn about the processthrough interaction with employees and who gave them commitment on delivery.Process elements which are between the line of interaction and line of visibility. These areelements through which the customers do not interact, but see how their problem is beingaddressed. These are also a part of the front end, though there no direct interactions. Basedon what they see here, they decide whether commitments made to them will be fulfilled ornot.Process elements which are below the line of visibility These are process elements whichare purely back end and customers have absolutely no idea about them, but might haveperceptions about them or will draw perceptions based on the quality of final delivery.They learn about progress through regular updates that businesses share with theircustomers.Businesses need to work towards refining processes to ensure that they deliverto customer expectations. This approach will help them locate the fail points and how they


should address them. Essentially, the focus is to act fast.Train and empower people, especially the front line personnel: Training is an ongoingprocess, the effectiveness of which largely depends on how well an organisation consumesand acts on customer experiential data. Developing a customer-centric culture is whatorganisations should strive for. Employees need to understand that not only the front linestaff, all employees need to work and contribute towards improving customer service. Toachieve this businesses need to develop a customer connect programme, which will help allemployees to experience customer expectations directly. There is a need to sensitise allemployees, which will ensure that there is believability in processes and there is quickadoption of change that is brought in to improve service delivery. Results of problem-miningand redress strategies should be a key part of the training module.The employees need to be empowered to act. Clear protocols should be created for allproblems and the front line staff should be empowered to offer resolutions which customersexpect in their first contact with the business. Alternative processes should be created sothat the front line staff can use them dependingon the actual situation. Not all decisions can be taken by them, of course, but they should beempowered with at least three levels of decision-making so that service delivery is quick.Close the loop with the customer: Customers appreciate receiving a formal communicationfrom the organisation or a follow-up call to ensure that the service was as per theirexpectations. The results of this exercise should also be shared with all internalstakeholders, as it is important to close the loop within the business as well. The final step inthis process is to develop case studies which employees should be taken through in trainingprogrammes.Monitor continuously customer service delivery: This is the final step in the customerservice delivery process. One important point to remember here is that, while for anyorganisation this is a feedback process, customers see this as a process for them to reportpain points with a clear expectation that timely action would be taken. To ensure that thisis done, businesses need to adopt technology in the enterprise feedback management(EFM) space. It is important that timely interventions are carried out for customers whoare reporting an unfavourable experience, which can be only done when feedback isreported and consumed in real time. EFM empowers an organisation to do exactly thisthrough the following:Multimodal data capturing capability helps customer take part in the initiative when theyhave the time.Real-time reporting of customer feedback, where results can be viewed on automateddashboards; slicing and dicing of data further adds valueIntegration of the reporting platform with the organization’s CRM enables timelyinterventions.A hot alert to process custodians and key business managers ensures immediate visibilityof unfavorable experience, which enables immediate timely interventions directly with thecustomer. Closed look feedback mechanism further enhances the service recovery processand helps in disseminating actions internally. As we move forward with ever evolvingcustomer, technology in the customer service delivery will be an important differentiatorand will support timely service recovery actions.

19. The customer is king. Really ?

If service is core, why outsource it?Business leaders and CEOs always held that customer is king. Peter Drucker, the ultimateguru of management, emphatically stated,The purpose of a business is to create and keep acustomer.Corporations world over spend billions in promoting/branding/ marketing their product orservice. They invest time and resources in understanding what the customer wants, whathas been their experience of using the product or service that is on offer and how delightedthey are in using it. Even with the best of the companies, the practice hardly inspiresconfidence.


Recently, I received a new debit card from a well-known private bank where I have beenbanking for the last decade. In order to use it, I needed a new ATM PIN. I followed theirinstructions to get it at a local ATM, but no dice. So I called their call centre and was told totry the same process at a different ATM.Again, futile. After more attempts and wasting precious time I was finally told by the callcentre person to simply wait for a new set to be delivered to me in seven business days.After 10 days and several rounds of back and forth mails, I received a new password thatworked. Believe me, this is a very successful private bank. And sad as it sounds, at the endof the day, instead of being upset at this delay, I was just happy to have actually receivedthe PIN instead of a Our courier found the door locked SMS from the bank.In another instance, an airline that took my booking cancelled my HyderabadChennai flight amere four days before my departure date. Upon speaking with good old John at the callcentre, who asked me questions from my grandmother’s maiden name to my pet dogs birthdate, I was told that a refund will be posted to my account within a few business days.Afterthree more weeks and a dozen phone calls, the refund was finally posted. Again, much tomy relief that at least the job was done. Perhaps while businesses have taken to heart thefirst part of what Drucker stated, about, Creating customers, somehow, somewhere, theylost track of the Keeping part.Keeping customersThe point I am trying to make is that if the customer is truly king, why is it that such asignificant aspect of customer interface, as customer service and interaction, is beingcompletely outsourced to call centres that are only semi-prepared to deal with thecustomer? Personally, I have nothing against outsourcing. But I have been taught that oneshould never outsource what is critical and core to an organisation’s value creation. Doingthat is like outsourcing interface time with the family. Would you? That’s what companiesdo, when they outsource customer interaction to call centres. Efficient? Yes. Effective? No.Not core areasI am for ruthless outsourcing of non-core even if the cost is more than doing it within. Thelogic being, it is not just the internal cost vs purchase price, but the opportunity of the topmanagement time, which in my view is the scarcest commodity in any organisation.Whatthe companies in the above examples have done is to outsource customer interface andinteraction as a necessary nuisance to be dealt with. Companies agonise over their NPS (NetPromoter Score), but at the end of the day, they hand it off as someone else’s problem.Andultimately, as it gets passed through the ranks, it becomes the custome’s problem. Mostlycall centres are the easiest way to displease customers.Call centres also represent a huge missed opportunity in gaining insights into customerwants and needs.In a business world where Content is King, customer data is becomingmore and more important. Outsourcing them? It’s like asking my EA to attend a parent-teachers day at my daughter,s school.

20. Selling never goes out of fashion

As the world went through various phases of stress, relevance of selling and businessdevelopment was and is being questioned endlessly. Selling has been criticised and malignedin various ways. Some have called it as a fad, some as the game of crooks, some as thetrade of fly by night operators who have vanished after duping gullible buyers. The financialservices industries have borne the major brunt of this impression. Volumes have beenwritten on the subject and best-selling authors like Michael Lewis, Nasim Taleb and othershave thrived on it. Time to examine the issue on facts and experience!A salesman (saleswoman) has never been regarded without some suspicion or with completetrust. Imagine yourself interacting with someone selling you a credit card or insurance. Or,in our Bank, someone is trying to sell the Bank a service or a new cleaning system. What wedo in real life is, we take the information from the sales person, mix it and screen it basedon our information and needs, and then decide for or against buying.At the institution level, smart I-Bankers selling exotic derivative products or paymentprotection insurance or dealers of a Bank selling false information on LIBOR to other dealers


and lenders were a little different. In them, the buyers did not have the full information andknowledge. Mostly driven by greed and fear, the buyers faced disastrous consequences.The world is correcting itself. As is usual during this remediation phase, there is a sales-phobia which has crept in. Considerable investment is being made in upgrading risk-management systems. Compliance divisions and Auditors have become more powerful thanever. People with operational knowledge arebecoming CEOs trumping the ace salesmen. Banks are closing businesses and product lines.Regulators are directly and indirectly asking managements to slow down business growth.Hence the doubt; Is selling relevant today? Should we look for business growth by puttingheads in the market place ; or should we only concentrate on improving facilities, customerservice, product features and processes so that customer experience self generates intomanageable business growth? HSBC for example, has no sales force and concentrates onthe second option above. In SBI, we focus on both sales force and product/processes todrive business To my mind, sales as an activity could never go out of fashion. Yes, we haveto realign and re-energize sales faster and more frequently than ever, but we could ignoresales only at our peril.The evolution of civilisation gives us great clues. Human beings were hunters and gatherersto begin with. When farming was not known, survival depended on what one gathered andwhat one killed! If you did not go out and compete, you were dead. After farming came,humans became clever. They tilled, seeded, tended and harvested. They had the modernequivalent of strategy. They knew to blend ingredients, tools and the sense of timing. Ashunter gatherers human beings lived on their toes from day to day. As farmers they knewto relax and use their brains.Sales is probably a combination of both the above instincts, that of a hunter gatherer andthat of a farmer. The outbound salesmen (We call them Business Development Managers inSBI UK) are the hunter gatherers. They are our feet on the ground, who collect not justbusiness but market intelligence on customer behaviour and competition. Our in branch,back office, marketing and product development staffs are the farmers who complement andsupplement the activities of the out bound sales force. It works smoothly because we coverboth fronts and we match aptitudes of individual staff.A few parting thoughts on Sales. Whatever be the model, it has to be realignedcontinuously, probably faster than ever. The July-August issue of Harvard Business Reviewcarries a few articles under the heading. The new basics of marketing. These articles point tothe importance of big data, deep insights, purposeful positioning and total experience as thefoundation of selling. As I never get tired of telling all of you, data is critical for everythingand more so for effective selling.Remember: Selling can never go out of fashion

21. INPUTS ON MARKETING

THROUGH THE LINE (TTL) – THE INTEGRATED APPROACH TO MARKETING

Today it isn't like the old days when you could toss up a campaign and stuff someproducts into it then sit back and collect leads. Now, in our highly communicative world,you must continually work to provide a consistent presence across many marketingchannels. Organizations today need to take advantage of the many media avenuesavailable and need to work together to present a clear and persistent message to theircurrent and potential customers for which an "Integrated Marketing Approach" paysbetter for their marketing efforts. ‘TTL’ Marketing stands for ‘Through The Line’ Marketing,a kind of marketing which is really an integrated approach, where a company would useboth ATL and BTL marketing methods to reach their customer base and generateconversions. It might seem obvious, although not all marketing campaigns are like this –some are ATL-only and some are BTL –only.

ABOVE THE LINE (ATL)


Above the line (or ATL) is just the opposite of below the line communication. It isadvertising through the typical mass media channels like television, print, outdoor, cinema,etc.

ATL communication is conventional and impersonal in nature. It does not address individualneeds or seeks to induce the audience to take any action. It’s primary objective isawareness and brand building.

Another way of looking at ATL communication as opposed to BTL communication is whetherthe advertising agency will make any commission from the marketing activity. ATLcommunication involves releasing ads in the mass media and thus involves commission forthe agency involved, whereas BTL communication activities don’t involve any media spendand thus no commission for the agency.

Promotional activities carried thorough mass media is above the line promotion,basically constitutes television, newspaper, radio etc. marketing a message memorable toa mass is not an easy task, and it is difficult to tailor a promotion to a specific group oconsumers through ATL production method as it is because it is viewed by a mass publicwith having different needs and of different taste. This method of promotion is expensive.

Advantages of above the line methods of promotion;-

This technique is targeted towards specific audience and for specific purposes.

Uses mass media to promote brands and to reach out the desired and targetedcostumers.

Aimed towards large number of audiences and more effective.

It also involves product demo.

Ensures maximum growth of the product and brands.

Gets in reach of large audience.

BELOW THE LINE (BTL)

Below The Line (BTL) communication is unconventional in nature, done at micro level andforms part of non-media communication. Measures include direct mailing, distribution offlyers, brochures, and usage of sponsorships, public relations, tele-marketing and point ofsale

Interestingly, ATL and BTL terms were coined at Proctor & Gamble in 1954 whereaccountants differentiated advertising agencies’ payments vis-à-vis who undertookpromotional activities other than advertising for fixed fees. Gradually, marketers started todifferentiate activities other than advertisements as separate marketing practice calledBelow the line (BTL).

Today, ATL is used for branding effect, to generate mind share while BTL is used togenerate loyalty and repeat sales. ATL is tailored for mass audience while BTL promotionsare targeted at individual level according to their needs and preferences. ATL promotionsare difficult to measure while BTL are measurable in terms of sales and feedback and itgives marketers valuable insights on their return on investment (ROI). Since BTL focus istargeted and customer centric, it is efficient and cost effective, apt for start-ups.

Social networking sites such as face book, twitter, my space, you tube help generate leadsand enable companies to develop eCRM and use data in a varieties of ways. Though, socialmedia is an integral part of BTL activity today, but it beats even television, audio,magazines in creating brand value in terms of numbers and is way more rewarding.


THROUGH THE LINE (TTL)

“Through the line” refers to an advertising strategy involving both above and below the linecommunications. This strategic approach allows brands to engage with a customer atmultiple points (for example, the customer will see the television commercial, hear theradio advert and be handed a flyer on the street corner). This enables an integratedcommunications approach where consistent messaging across multiple media create acustomer perception.

The advent of social media has blurred the ‘line’ segregating the marketing techniques.These days, companies use an integrated approach involving both ATL and BTL and it iscalled Through the Line (TTL) approach. This approach allows brands to engage with theircustomers at multiple points and thus generate a solid perception regarding the companyand the product, the main aim of Marketing!

ATL Marketing Exmaples

ATL – Above the Line and BTL- Below the Line marketing as we discussed in our previousarticle about what is ATL and BTL are two forms of marketing which companies carry outfor promoting their products. ATL marketing (above the line) refers specifically toadvertisements related to things people can see, However BTL (below the line) refers tothings that happen in the background. ATL has a higher public branding effect, BTL doesnot have that much of a public branding effect

Mass Media - ATL activities

There is image which comes to your mind whenever you think of a big brand, and thatimage can be of a celebrity you saw endorsing the brand or a TV or newspaper commercialyou saw about the brand somewhere, for example think what comes to your mind whenyou think of Pepsi or Coca Cola, these are big brands who goes for intensive ATLMarketing.

Hence Above the line marketing is something in which a company go for building theirbrand and promote their brand to mass audience at a huge cost. Usually companiesgo for ATL Marketing when companies have huge marketing budget and want to acquirebig market. Below are some of the ways in which ATL Marketing activities are done.

TV Commercials - You can advertise your products through Television commercials tobring brand awareness and to build an image about your brand. You can sponsor TV showsand sport events happening on TV to get better results. TV allow for 30 secondscommercial where you should use your commercial to sell your customers an experiencewith your brand, such as a demonstration of how your product is used, a peek at your

inventory, a lookat your venue or

facility ortestimonials frompast customers.

Billboards &Hoardings – You

can place yourAdvertisement on

big billboards on thestreets, orhighways which isfrequentlytraveled and seen

by many people. You


can put your company logo with some catchy line or a celebrity to endorse your brand.

Radio - Advertising on radio will cheaper compared to TV but usually it is used for morelocal audience like city-wise. Radio advertising placements can be purchased on a local,regional or national level, depending on the stations you select and depending on yourbudget.

Newspapers & Magazines - There is huge varieties of newspapers and magazinesavailable today which will help you decide where you want to place your AD and targetthe right audience.

Ultimately what all these ATL marketing activities will create is a mind share, a kind of trustand reliability for your brand in your customer eyes.


22. DIGITAL MARKETING : A STEP FORWARD

DIGITAL MARKETING is the promoting of brands using the Internet, mobile & otherinteractive channels. It is the management and execution of marketing using electronicmedia. It involves the promotion of products & services using digital distribution channelsthat reach consumers in a timely, relevant, personal and cost-effective manner.

Digital channels can have several categories, such as the internet, mobile, digital outdoorsand any form of interactive digital media.

Internet – Email, banner ads, dedicated websites, pop-up ads, sponsored content, paidkeyword search, podcasts, social networks, blogs, wikis & virtual worlds.

Mobile – SMS, mobile web, mobile applications & mobile video.

Digital Outdoors – Video digital display

Interactive digital medium – Television Channels

The objective of Digital Marketing is the Conversion of Visitors into customers andimproving retention of existing customers.

WHY USE DIGITAL MARKETING:

To increase website traffic

To increase brand recognition

To improve search engine rankings

To generate leads

To increase online sales conversions

To improve internal communications

As online tools & analytics are better for direct response

Most economical marketing medium to reach large, astute & knowledgeable audience

TYPES OF DIGITAL MARKETING:

Digital Marketing is a combination of Push and Pull Internet technologies used toexecute marketing campaigns. It provides for immediate reporting and feedback whileusing the internet to both Push and Pull marketing.

There are two different forms of digital marketing:

1. Pull Digital Marketing 2. Push Digital Marketing

1) Pull Digital Marketing: The consumer actively seeks the marketing content, often via web searches or openingan email, text or message.

Websites and blogs are examples of pull digital marketing.

Users have to navigate to the website to view the content.

Search engine optimization is one tactic used to increase activity.

e.g..: Banner ads and Pay Per Click (PPC) searches Pull viewers to a message or anotherviewer refers them, as in “here is content I liked seeing and you might enjoy seeing too”(e.g., viral video)

2. Push Digital Marketing:


The marketer sends a message without the consent of the recipients, such as displayadvertising on websites and news blogs.

Email and text messaging can also be classed as push digital marketing when therecipient has not given permission to receive the marketing message

Push marketing is also known as spam.

Push technologies can deliver content as it becomes available and can be bettertargeted to consumer demographics, although audiences are often smaller, and creationand distribution costs are higher.

e.g.: Search Engine Optimization (SEO), Email, IM, RSS, Social Media, Texting on Mobileand Voice Broadcast are used to Push a message.

Additional Types of Digital Marketing:

Mass Marketing: It is a marketing method that broadcasts a message to a largeaudience. The marketing message is not addressable, and is not easily tracked andmeasured.

Online Marketing: It is a marketing method that uses Internet tools such as email,search engine optimization and banner ads to send marketing messages to consumers.

Mobile Marketing: It is a marketing method that allows marketers to send marketingmessages to consumers through the technologies found on a consumer’s mobile device.Consumers opt into receive messages.

Email Marketing: It is a marketing method that uses email to send a marketingmessage to a targeted audience.

Advantages of Digital Marketing:

It's more affordable to deploy than traditional marketing and advertising.

It goes from planning to execution more quickly.

It gives fans/viewers/readers a chance to share your content.

It's easier to change or stop a digital marketing campaign after it starts.

It gives the brand more time and space to tell its story.

It is cost effective as compared to other traditional marketing media tools.

It is easy to track as it has high degree of measurability.

It can attract genuine prospects.

Digital marketing campaigns are easier to attach to other campaigns.

Digital marketing campaigns have longer shelf lives.

Importance of Digital Marketing:

Digital media is so pervasive that consumers have access to information any time and anyplace they want it. Gone are the days when the messages people got about your productsor services came from you and consisted of only what you wanted them to know. Digitalmedia is an ever-growing source of entertainment, news, shopping and social interaction,and consumers are now exposed not just to what your company says about your brand,but what the media, friends, relatives, peers, etc., are saying as well. And they are morelikely to believe them than you. People want brands they can trust, companies that knowthem, communications that are personalized and relevant, and offers tailored to theirneeds and preferences.

Three Keys to Digital Marketing Success:

There are three keys to digital marketing success:

1. Manage complex customer relationships across a variety of channels – both digitaland traditional.


2. Respond to and initiate dynamic customer interactions.3. Extract value from big data to make better decisions faster.

A. Manage Customer Relationships Across All Channels

Digital marketing and its associated channels are important – but not to the exclusion ofall else. It’s not enough to just know your customers; you must know them better thananybody else so you can communicate with them where, when and how they are mostreceptive to your message. To do that, you need a consolidated view of customerpreferences and expectations across all channels – Web, social media, mobile, direct mail,point of sale, etc. Marketers can use this information to create and anticipate consistent,coordinated customer experiences that will move customers along in the buying cycle. Thedeeper your insight into customer behavior and preferences, the more likely you are toengage them in lucrative interactions.

B. Enable Dynamic, Relevant Customer Interactions

Only advanced analytics can produce the kind of perceptive, timely insights you need todevelop highly targeted marketing campaigns that will resonate with customers. It’s thespeed and immediacy of digital combined with the power of advanced analytics that makeit possible to measure, monitor and test campaign performance on the fly to learn whatworks and what doesn’t. You can then apply what you learn immediately by makingadjustments to improve the customer experience and campaign ROI. And build whatyou’ve learned back into your campaign system so your campaigns keep getting betterand better.

C. Extract Value from Big Data to Make Better Decisions

Marketers are often unable to access and use all the data necessary to get the bestinsights, and are often forced to use subsets or samples, which compromise modelaccuracy. To make the best decisions, you need access to all customer data(preferences, demographics, lifetime value, etc.) and marketing data (response rates,campaign performance, resource allocation, etc.) in a shared workspace. A unifiedcustomer data model can link touch point behavior and customer experience data withcustomer contact history, regardless of channel. And having an all-inclusive view willgive you the information you need to make the best strategic and tactical decisions.

Strengths of Digital Marketing:

a) Branding

b) Acquisition/ Direct Response

c) Dynamic/ Interactive

d) Measurable/ Accountable

Opportunities of Digital Marketing:

a) Incremental Revenues

b) Reduced Cost of Marketing & Promotion

c) Enhanced Brand Image

d) Better Customer Relationship Management

e) Better Measurement & Performance AnalysisChallenges Facing Digital Marketers:

Proliferation of digital channels: - Consumers use multiple digital channels and avariety of devices that use different protocols, specifications and interfaces – and theyinteract with those devices in different ways and for different purposes.

Intensifying competition: - Digital channels are relatively cheap, compared with


traditional media, making them within reach of practically every business of every size.As a result, it’s becoming a lot harder to capture consumers’ attention.

Exploding data volumes: - Consumers leave behind a huge trail of data in digitalchannels. It’s extremely difficult to get a handle on all that data, as well as find theright data within exploding data volumes that can help you make the right decisions.

How Digital Marketing helps in Banking:

Marketing New Products: Electronic posters utilising a digital signage solution can becentrally designed, created and managed at headquarters and uploaded to every plasma,LED or LCD TV screen around the company at the touch of a button, relieving the costs ofman hours, shipping and printing; strengthening brand image at POS too. By utilisingzoning features it is then possible to provide appropriate and timely content to everyoperational region, ensuring only relevant products and offers are displayed in each branchutilising local language and detail.

On the other side of the scale, the ability to share administration control around thebusiness enables individual branches to update selected aspects of the digital signagedisplays. For example, this would allow a local branch manager to access individual textboxes or layouts in a signage playlist, enabling them to add locally specific details thatmay not be available at head office; opening times, appointment schedules or details ofupcoming events, ensuring the bank maintains a local feel.

Having the appropriate content is vital; ensuring that there is a constant flow of newmaterial is the only way to ensure the solution has the desired impact and effect. Bylinking local control with central management a bank will effectively have two flows ofcontent to ensure the signage stays fresh, meaning a branch or head office can takematters into their own hands when needed, preventing the frustration of stagnantmarketing and outdated news.

Staff Training: To compliment this process, and by utilizing a fully customizable digitalvideo streaming and archiving solution, banks can upload any new advertising, training orpromotional material to a video portal then quickly and simply send a link via email to allbranch staff around the world. This email can include full details of the offer, major pricepoints and benefits to the customer. Coupling this activity with a digital signage campaign,where still and interactive posters are intercut with adverting in-branch, any bank cancreate a simple and speedy means to launch new products and services globally. Byembedding these messages intoevery working environment and creating awareness with the customer it is easy tomaximize the return on investment on a solution and also the selling opportunities inbranch.

By granting staff access to video resources, and through the use of video as a resource fortraining, any organization can ensure that staff are constantly looked after professionally,ensuring there is a core philosophy of Continuing Professional Development (CPD) withinthe workplace with very little reliance on man hours. Adding these improvements to theprocesses by which training is supplied will aid in compliance and ensure that all staff isfully trained and aware of up-to-date legislation and law.

The Customer Experience: Banks across the world have tried to create a more relaxing,enjoyable and memorable experience for customers, trying to emulate a soft and warmretail environment rather than the traditionally formal and corporate atmosphere of thebanks of days gone by. However, for all the modern decor and comfort you can supply,when a customer is in a waiting room prior to seeing an advisor it is an opportunity tomake them feel at ease and both entertain and inform a captive audience.

Utilising a TV screen in any waiting area showing live news or TV, with occasional breaksto show an advert or promotional clip can ensure a longer than expected wait is a


pleasant experience. Integrating an IPTV solution with a Digital Signage system will alsoenable the ability to overlay messaging, logos and customer updates onto the TV picture,ensuring your brand is represented and marketed to your customers at all timesthroughout their visit.

23. PR ACTIVITIES

Public Relations is a strategic communication process that builds mutually beneficialrelationships between organizations and their publics. While the earliest definitionsemphasized press and publicity; more modern definitions incorporate the concepts of“engagement” and “relationship building.” Publicity is communication written and producedby public relations professionals intended to create a favorable public image for a client.Publicity usually takes the form of text, audio and video news releases about an individualor organization distributed to newspapers, magazines, radio and television stations,Internet sites and other forms of media. While there may be production costs, the clientand the public relations professional also try a “no fee” for placement of the information inmedia. This is called free media which focus target customers as news items thanadvertisement.

Public relations projects are planned and sustained to establish and maintain goodwill andmutual understanding between an organization and its publics (including stake holders). Inan advertisement, the advertiser has full control of the message all the way to theaudience while the public relations professional has control only until the message isreleased to media gatekeepers who make decisions about whether to pass it on to theaudience and in what form.

OBJECTIVES OF PR

Building Product/ Service Awareness – When introducing a new product or re-launching an existing product/ service, marketers can use a PR element that generatesconsumer attention and awareness through media placements and special events

Stimulating Demand – A positive article in a newspaper, on a TV news show ormentioned on the Internet, often results in a discernable increase in product sales.

Reinforcing the Brand identity– In many companies the public relations function is alsoinvolved with brand reinforcement by maintaining positive relationships with keyaudiences, and thereby aiding in building a strong image. Today it is ever more importantfor companies and brands to build a good image. A strong image helps the company buildits business and it can help the company in times of crises as well.

PR TOOLS

Press Release

Press Release basically communicates Important announces/ Initiatives, Launch of aproduct/ service/ campaign, Signing of MoU/ Agreement, Visit of a dignitary/ Importantofficials/ Celebration of National Days/ Milestones, etc.

Special Events

These run the gamut from receptions to elegant dinners to stunts. Special events can bedesigned to reach a specific narrow target audience, such as individuals interested incollege savings plans to major events like a Pan india canvas competition. This eventcaptures the attention of an audience in the immediate area, but also attracts theattention of mass media such as TV news and major newspapers, which provide broadreach. As with all PR programs,special event planners must work hard to ensure the program planned conveys the correct


message and image to the target audience.

Organizing Interviews/ Facilitating panel discussions

Companies and brands ensure the presence of celebrities or important personalities(National/ local) for important day functions and organize interviews/ panel discussions in-line with the Organization’s objectives.

Sponsorships

Companies and brands use sponsorships to help build goodwill and brand recognition byassociating with an event or group. Marketers can examine sponsorship opportunities tofind those that reach target groups, fit within a specified budget and provide sponsorshipbenefits that suit the marketer’s objectives. The variety of sponsorship levels include dataon event audience, exposure opportunities, including signage, T-shirts, publicannouncement, title sponsors, receptions and much more. These information is used tohelp match sponsorship opportunities with the company’s objectives.

Details to be considered before opting for a sponsorship are: Determining organizer’sbackground, Ascertaining past-response to the event in general, Identifying targetaudience, determining potential business development/ lead generation, whetherparticipation is long term or occasional and what would Bank gain from the activity as awhole.

Press Coverage

News articles related to an organization or a Brand that is covered by Newspaper can bemajorly divided into two sections: Special columns (Specific news regarding opening of anew branch or a specific achievement compared to peers, etc.) and General column(Referring to the name of the organization or Brand with reference to a common news or acommon event). In case of Press coverage it is important to look into the News paperwhich comes out with the news, its popularity, its name, its credibility, nature of news etc.

24 x 7 Banking – ADC’s

As the banking landscape becomes more competitive, the global economic scenarioremains challenging and consumers are able to spend lesser time. Banking is becomingmore dynamic than ever. Banks have to be able to manage risk, costs and yet attractclients with newer services. Banks need to build an ecosystem which enables their clientsto interact across multiple access channels.

It is hard to find a bank which does not offer online banking. Within the next couple ofyears, it will be hard to find a bank which does not offer mobile banking. For most banks,they are seen as complementary to branches, but they are likely to be the primarychannels for transactions and for customer service.

Technology is not only making banking convenient for customers, it has also allowedbanks to expand their businesses faster and bring down costs. The cost of servicing acustomer is the highest at a branch followed by ATMs, online and mobile phones.Banks have started opening unmanned electronic branches offering most of the bankingservices, beyond regular banking hours. Customers can do real-time cash deposits,withdraw money, deposit cheques and get instant receipts, transfer funds, open fixeddeposits and generate bank statements at these branches. These also offer account-related information through internet banking and video conference.

ADCs have evolved gradually and adapt to serve consumer needs at their convenience.ADC serves as an alternate to complement the existing delivery channels. At this stage, itcannot be considered as a replacement to the existing structured delivery channels, butrather as an advanced interface to leverage the use of any service that is also being


offered through conventional channels. ADC has proven its ability to meet consumer’sexpectations by ensuring accuracy, convenience, and timeliness in service 24/7.

But at the same time ADCs must be backed by reliable technology and banks have toensure data trafficking, server capacity, privacy issues, and disaster recovery sites.Technologies should be under continuous review and evaluation to avoid any adversesituations that could affect customer satisfaction.

As the Internet becomes an inevitable part of life, and usage of mobile technology isbooming, it is of vital importance for banks to embrace digital channels as both sales andservice platforms. Technology has enabled banking to be a round the clock business. Therehas been an inexorable growth in online banking around the world, with penetration ratesreaching over 80% of adults in some countries using online banking regularly. We are atan earlier stage of development in mobile banking, but given the ubiquity of mobilephones, and the fact that most banks will have a full suite of mobile banking serviceswithin the next few years, rapid growth here is also inevitable.

Alternate Delivery Channels are the way forward in more ways than one and Banks havealso invested a fortune in streamlining the processes for the same. Also the differentiationto the customer would be on How customized the services are and that should be the nextbattle field in the Banking Arena. Having said so, we also cannot deny the fact that BranchBanking is the cornerstone in Indian context and will remain to be so for quite some time.But customer retention and acquisition is only possible by offering 24/7 services usingADC’s and hence giving the customer the Power he is longing for.

Bank of Baroda is in the process of expanding alternative delivery channels exponentially.The bank will set up more e-lobbies, ATMs and other card-swiping terminals across thecountry during the current financial year. E-Lobby is fully computerized Electronic Lobbyoperational 24X7 .It is a novel concept which provides virtual banking to provide all theessential banking facilities under one roof even at the odd hours. We have opened 35 e-lobbies where customers can withdraw and deposit cash or cheque, get the passbookupdated and transact business through Net banking. The purpose of the same is to meetthe diverse needs of different customers. More than 56 per cent of transactions arehappening through alternative delivery channels and this will go up to 65 per cent by theend of this financial year.

Each one of us is a Brand Ambassador of our Bank and the onus lies on us to educate thecustomers about the benefits of Alternate Delivery Channels to enhance the customerexperience of banking with us and thereby delivering Banking Delight.

24. THE NEW SOLUTION SELLINGS

It takes skill and experience to make a complex sale happen. It is an amazing talent tounderstand how to weave together all of the parts and moving pieces of a sale. It is anart to understand the challenging nature of all of the people involved in a sale who arerequired to be in agreement or “on the same page” to make deals happen. A professionalsalesperson is practicing an art that is partly skill, talent and a bit of luck as well.

Therefore it’s rightly said that Selling is an Art. It is also a complex, challenging, and formany, a very rewarding profession. Like an artist, becoming an accomplished salesprofessional takes time and experience. It is no different from any other profession. Yes,for each and everyone they are artists in their own right. Art takes many forms like theability and confidences to make that cold call and does it well. For our canvass in our salesopportunity, our paint is the solution.

"So what is the definition of the word solution? The typical response is, "An answer to aproblem." Many may agree with this response, but feel it's important to expand thedefinition. Not only does the problem need to be acknowledged by the Customer, but


both the customer and salesperson must also agree on the answer. So a solution is amutually agreed-upon answer to a recognized problem. In addition, a solution must alsoprovide some measurable improvement to the customer.

Today rejection has become a part of selling or rather a 1st step in selling. Therefore, wehave to accept the fact that if we can handle 1000 rejections then only we can become theperfect sales personnel.

Sales is all about Law of Averages, more no. of Prospective customers is equal to moresales and ultimately results into profits. So therefore it’s important to define milestonesthat can be measured and forecasted

It’s a process that starts with Identifying the Prospective customers-Getting anappointment – Understanding the needs of the Customer –Based on his needs discussingour Bank’s various Products-Helping the customer to take the right decision - Generating alead from the Customer -closing the deal.

Some Simple Steps to increase the sales call;

1. List down the names of the prospects: As we know that having a data of potentialcustomers is treated as raw materials for you to begin your sales activity.

2. Every day from this list make sure that you contact a minimum of 5 people not only toinform about your products but also to collect a minimum of 3 references through thesecalls i.e. (5+3). This activity will not only help you in adding up numbers to your listbut also will give you a higher conversion probability.

3. On every 5th day of the week make sure that you have made enough appointments tomake up your next week with alternate timing option for every lead generated.

4. While making a sales call its advisable to avoid making open ended questions whilefixing up a meeting and always keep an alternate option ready, like when can we meetup for thediscussion ? Instead of this, we can meet up to discuss the same on Tuesday at 4pm oron Wednesday at 6pm, which suits you best?

5. Above all, always keep in mind to understand the customer’s needs and priorities andaccordingly discuss the product feature which suits his needs at the best.

6. After the discussion ask him 3 Questions;

What did you like the best in the product? Then once he shares his view shake handand say even I had liked the same. This will definitely give him a personal touchwith you. Also try to discuss the Importance of Financial planning and how it helpshis families in the long run.

Sharing some of the real examples with the customer helps us to understand hisneeds.

While fixing up the timing for the final closing giving an alternate option for theMeeting which includes collecting documents required for the same

7. After Selling the product is very important to provide after-sales service which is thekey to get Success in sales .After sales service not only gives a platform to build therapport with the customer but also helps to get more leads through the samecustomer. Today Word of Mouth is said to be the effective form of Marketing whichaffects the sales numbers on the sheet.

Therefore Solution selling helps in building a relationship of trust between the customerand our Bank also it can be helpful to change the analogy of the marketing process.


Instead of “selling” to people, try to provide solution to them and to continue with this ourfocus is towards building a deeper understanding, along with new insights into thecustomer’s world, in order to strengthen the solution that we are selling.

25. CUSTOMER SERVICE - KEY TO BUSINESS GROWTH

To ensure timely and speedy redressal of complaints received from the public eitherdirectly over telephone, Call Centre, E-mail, Letter or through PMO / Ministry of Finance/Directorate of Public Grievances / RBI / IBA / Banking Ombudsman etc.,. Circles to lodgeall the complaints received through letters, E-Mail and telephone into CPGRS package.

Based on the Recommendations of the Damodaran Committee, IBA

and also as per the instructions of the Ministry of Finance, the bank has

developed an in-house package for the online redressal system ofgrievances namely CPGRS (Canara Public GrievanceRedressal System).

The same is made available in the Banks website. This enables the customers to register their complaintsonline.

To place an information about analysis of customer complaints to Top Executives/Board.

To explore ways and means to improve the quality of the service rendered to our clientelewith effective administration.

To ensure the implementation of various guidelines received from the regulatorsregarding Customer Service.

To acknowledge all the complaints immediately and to redress all complaints within 3days.

If not redressed within 3 days, for reasons beyond control, it should be redressed within 7days.

If it exceeds 7 days, reasons must be explained, and the complaint must not beoutstanding beyond 15 days.

To monitor Banking Ombudsman Complaints by logging into RBI Secured package andredressing the complaints within time schedule. Not to give opportunity to receive Awardfrom Banking Ombudsman.

To reduce the Banking Ombudsman cases to the barest minimum position.

Branches have been advised to ensure maximum number of redressal and check the freshinflow in any category by logging into the CPGRS package under SSO every day.

Circles have been advised to redress the complaints lodged in CPGRAMS (Portal ofGovernment of India where public can register their complaints) and CPGRS packageimmediately and report NIL position at the end of each month.

To integrate all the complaints received from call centre into CPGRS package so that allthe complaints can be pooled at a single point and the same can be redressed withconcerted efforts.

Advised the visiting Executives to interact with customers and staff to study customerrelated issues and initiate measures for reducing the number of complaints.

Advised Circles to provide on the job training to frontline staff in handling customerservice and enhance their skills in handling tech related products.

To conduct quarterly standing committee meeting at all Circle Offices by inviting selectcustomers on rotation basis. To activate Branch level Customer Service Committee at allbranches.

Our Call Centre ( 18004250018) is registering the online complaints in 8 languages(namely Kannada, Tamil, Telugu, Malayalam, Marathi, Bengali, Hindi and English)thereby even an illiterate/rural customers can register their complaints.


Instructed the Circles to take timely and appropriate demonstrative action where themisbehavior with the customers has been observed.

Circles to conduct incognito visit to branches to study the level of customer service, andto comply with the observations made by RBI/BCSBI Officials during their incognito visitsat the branches. .

To create awareness about the BCSBI Codes, which is published in our website and toissue the BCSBI Codes in local languages to all the existing customers on demand and toall new customers at the time of opening of accounts. To include these codes in thewelcome kit provided to customers.

To conduct training programme for BCSBI Codes for all employees of the bank throughStaff Training Colleges.

Circle Heads should endeavour to promote faith of the customers in the internal redressalmechanism of the bank, we have well built architecture/ escalation mechanism forensuring the same.

Branches should redress any grievance referred to them within the timeframe. Any matterbeyond the purview of branches /C O, be escalated to CCSO for decision.

Bank has put in place, Customer Grievance Redressal, Cheque collection, Dishonourof Cheques, Compensation policies. All circles to compensate customers as per policy.This will obviate the customers approaching outside fora for redressal.

The details of Customer complaints received and redressed during the Year 2014-15

Sl. No. Particulars GeneralComplaints

ATM

Complaints

BO Cases CDRF CPGRAMS Total

A Number of complaintspending at the beginning

of the Year 31 372 93 765 04 1265

B Number of complaintsreceived during the Year 8528 98214 1553 86 455 108836

C Number of complaintsredressed during the Year 8549 98012 1458 91 457 108567

D Number ofcomplaints pending

at the end of theYear

10 574 188 760 02 1534

Out of the above, Except Banking Ombudsman cases and CDRF cases other complaintshave been redressed.

26.PROJECT SHIKHAR : A NEW APPROACH BUSINESS PROCESS RE-ENGINEERING

To accelerate growth in business, profitability, low cost deposits & clientele base andorient towards customer centric services, Bank has initiated a major BPR venture.“PROJECT SHIHKHAR” is one such program rolled out by the Bank for bringing aboutdesired changes in our branch banking set-up.The Bank has appointed M/s Boston Consultancy Group as Management Consultants tosuggest ways and means of carrying out this transformational exercise. Shikhar FIVESTAR JOURNEY was launched during May 2014 and so far, 636 branches have attained“Shikhar 1 Star” status. Of these, 260 branches have attained “Shikhar 2 Star” level.The objective of the journey is to rejuvenate and revitalize, by focusing on certain keyinitiatives and using alternate delivery channels in the form of ATMs, Pass BookUpdating Machine (PUM) and Cash Acceptance Machine (CAM) Kiosks coupled withprovision of Queue Management System (QMS).The proven concept of Single Window services has been adopted to offer uninterrupted


services to the customer at a single touch point for rapport with the customer and delightfulbanking experience to develop leads for business growth of the branch.Shikhar branches are focussing upon the following key deliverables:

Pleasing branch ambience and provision for customer area and discussion room Improved navigability and hassle free operations for the branch clientele Reduced Turn Around Time for transactions 24/7 Banking service through E-Lounge / Net Banking / Mobile Banking Increase in CASA & Fee income Higher sales Focus and increased lead generation for business growth Equitable distribution of work load amongst SWO-Tellers, enhanced product

knowledge for lead generation & build team spirit. Overall Shikhar branch transformation exercise seeks to maximize the benefit for all

the stakeholders Viz Customers, Bank and Staff

27.Mission 2020: Banks Need to be Cautiously Optimistic

By 2020, there will be a need for at least 40,000–50,000 additional branches and 1,60,000ATMs.The top 5 percent households, mostly in the metros and Tier I cities, will account for30 percent of the total disposable income.Bank mortgages will cross Rs 40 trillion.Withincreased access to Internet, mobile banking will come of ageInvestment banking will grow 10 times.The above predictions about Indian banks in 2020 are based on a study by the BostonConsulting Group (BCG) and Federation of Indian Chambers of Commerce and Industry(FICCI) India’s apex chamber representing over 500 industry associations. There is anindication of growth, but underlying it is the need for a new business model that wouldensure satisfactory services for the next-gen customers. Driven by the potential oftechnology and increased pressure for prioritising convenience and needs of smart agecustomers, banks have got to prepare themselves for a new-age hi-tech banking.Challenges 2020There is a need to evaluate both opportunities and challenges. The BCG study highlights twofundamental challenges that threaten to impair the growth of banks in the coming decade-Financial inclusion and Human resource challenge in the public sector.Prime MinisterNarendra Modi on August 15 this year announced a national mission of financial inclusioncalled Pradhan Mantri’s Jan-Dhan Yojana, a program that envisions bank accounts for allIndians. By 2015, the target is 75 mn accounts.“There are millions of families who have mobile phones, but no bank accounts. We have tochange this. The change will commence from this point,” he said.If banks have to create abusiness model for financial inclusion, they need to take into consideration the economicpolicies. For them, a lot depends on rural infrastructure and economic growth. They can’t actin silos.The BCG study states that banks’ initiatives have to be supplemented with comprehensivepublic sector initiatives for rural infrastructure development. NABARD could be repositionedfor this role.RBI governor Raghuram Rajan feels that for financial inclusion to be a success,banks must offer products that are relevant for the poor. “In order to draw in the poor, theproducts should address their needs — a safe place to save, a reliable way to send andreceive money, a quick way to borrow in times of need or to escape the clutches of themoney lender, easy to understand life and health insurance and an avenue to engage insavings for the old age.”Overall, it requires collaborative efforts and analysts say there is a need for transformationin the thinking.“By far the biggest challenge is one of altering the mindset — of banks, policymakers and bank customers, both potential and existing,” says writer C. R. L. Narasimhan inThe Hindu.Another challenge the banks need to deal with is the shortage of skills. The BCG study warnsagainst the growing number of retiring senior and middle management employees by 2020.That leads to the need for re-skilling and retaining fresh talent. Unless banks gear up withrelevant training and efforts towards hiring the right talent, they will certainly be left far


behind in the competition.

Significance of tech: Biometric credit cardsRaghuram Rajan says that banks need to think over using technology to make theirProducts, Price and Protection relevant for their customers. Technology may help inunderstanding customer profiles and keeping customers informed. On the use of biometrictechnology in the IDRBT to establish the identity of individuals,he said the biometric technology can help in making transactions with bank cards relativelysafe. Right now, there is a fear off the debit/cards getting into the hands of wrong personvery easily.Mobile transactionsGartner says that Indian banking and securities companies will spend Rs 47,000 crore on ITproducts and services in 2014, an increase of more than 10% over 2013.That indicates howbanks are coping with rising mobile banking trends. The BCG study says even if 25–30percent of mobile users have GPRS / 3G activated; there would be 250 million to 300 millioncustomers who would access banking services over the mobile.“From June 2013 to June2014, we have more than tripled our per month value of transactions from Rs. 3,332 millionto over Rs.10,000 million – which is the first for any bank in India,” says an ICICIspokesperson in an article by Wharton university.Technology has given an edge for banks totake their services forward, but at the same time, they need to be cautiously optimistic.

28.Lessons from India’s debt crisis

Cronyism and regulatory forbearance are reasons behind the debt problemOver the past year, this newspaper has highlighted the worsening debt profile of Indiancompanies. Recent data show that there has been only a slight improvement this year, andIndia’s bad debt burden continues to be the economy’s Achilles heel, preventing a rapidrecovery. But rather than pushing for quick fixes, policymakers need to acknowledge andcorrect the mistakes of the past which has led to the debt pile-up.At first glance, India’s debtproblem appears to have become less acute. But as a recent Mark to Market column byMobis Philipose pointed out, the concentration of debt in stressed sectors such as steel,power, and infrastructure remain worryingly high. A year ago, nearly one in three companieshad a net debt exceeding their market capitalization. Less than one in five belong to thatcategory today but they account for a whopping 57% of the total debt of all firms for whichdata was available. Corporate debt levels in India are among the higher side in Asia, andbank balance sheets among the most strained.India’s external debt figures are also worrying. According to the annual report of the ReserveBank of India (RBI), India’s external debt-to-GDP (gross domestic product) ratio rose 1.3percentage points to 23.3% in the year ending March 2014 over the previous year. Short-term debt (by residual maturity) as a proportion of overall debt was 40%, as of March. It islikely that the level of external debt has gone up in the current fiscal year owing to anoverseas borrowing binge by companies. Many of these firms, particularly in the powerand utilities sector may not have hedged their positions adequately, posing systemic risks, arecent report by the Bank of International Settlements warned.Both India’s domestic and external debt vulnerabilities are concentrated in a handful oflarge conglomerates in the power, materials, and infra sectors which expanded atbreakneck speed during the boom years. It does not appear to be a coincidence that manyof these firms are politically connected, and that the bulk of the bad debt burden has beenshouldered by state-owned banks, which have been vulnerable to manipulation by NewDelhi. But cronyism is only one reason for the bad debt problem. Regulatory forbearance inthe immediate aftermath of the great financial crash in 2008 is also to blame, since suchforbearance merely postponed the day of reckoning for indebted firms and hid the trueleverage levels.Even now, it is very difficult to take the reported debt numbers at face value given thatbanks still have a lot of leeway to postpone recognition of bad debt. An examination ofUnited Bank of India’s balance sheet by analysts at Barclays Capital showed that there were


no signs of stress before the sudden spike in bad assets of the bank earlier this year.Thereare three key takeaways from India’s debt crisis. First, the governance and management ofbanks in India need urgent overhaul. Banks must follow more transparent accountingstandards, and RBI must take a closer look at their lending mechanisms. State-owned banksneed special attention, and they must be insulated from political pressures. The Nayakcommittee recommendations on reforming state-owned banks should be taken up withoutfurther ado.Second, rules for promoters have been far too soft for far too long, and that needs tochange. RBI has already tightened norms for wilful defaulters, and according to a recentBusiness Standard report, the capital markets watchdog, Securities and Exchanges Board ofIndia might join force to make it difficult for such defaulters to access the capital markets.Such steps are welcome but we need more.Third, we must resist the temptation for anykind of bailouts, whether it is through special packages for stressed sectors or through stateowned asset reconstruction companies. It does not take long for private debt problems toturn into public debt problems, and we must avoid that trap. The deterioration in assetquality of state owned banks means that the heavy burden of refinancing them has alreadyfallen on the taxpayer’s shoulders. It will be unfair to burden the taxpayer further.

29. Full convertibility is on its way

While it appears the RBI is paving the way for capital account convertibility, does it presageboom-time for Money-Launderers?The RBI’s executive director, G Padmanabhan, is the latest to express the view that India’smove towards capital account convertibility (CAC) is inevitable. This follows similarstatements expressed by the minister of state for finance, Jayant Sinha, as well as thegovernor, Raghuram Rajan.These views surprised many, given the fragile corporatebalance sheets, the state of Indian banks, the vulnerability of the currency and theexternal sector once US starts hiking interest rates, and the threat of black money. Whilethere is no denying that these factors will impede a move towards full CAC in the nextcouple of years, the RBI and the finance ministry are laying the ground for the long term.Over the last few years, the building blocks for full CAC have been put in place.Rulesgoverning exchange traded currency derivatives have been tweaked to encourage greaterparticipation, interest rate futures and offshore rupee bonds have been issued, and anoffshore financial centre will soon be set up in the country. It is obvious that the RBIgovernor knows what he wants. Even in his first speech, Rajan had talked about“internationalisation of the Indian rupee” as one of his goals.The driving factorsThe reason why the RBI and the finance ministry are pitching for currency convertibility isnot difficult to see. India is expected to record among the fastest rates of economic growthin the next two decades. According to data put out by the US department of agriculture,India will be the third largest economy by 2030, at $6.6 trillion, after the US and China.When a country is gearing up for this, full CAC will be one of the driving factors. But we arestill years away from complete CAC. So what are the pre-conditions for this change?Internationalization of the rupee: Most economies with full CAC have currencies that areused internationally to trade and settle monetary transactions, held not just by residents ofthe country but by citizens of other nations too.Internationalization wards off a steep sell-off in a currency since it is held widely andinvestors would not want the value of their holding to erode. For instance, China is one ofthe largest holders of US treasury securities. So China would think twice about dumpingdollars, even if it expects the dollar to depreciate, as it would affect the value of its holdingof US treasury securities. It is only in the last few years that the rupee is becoming moreacceptable as a medium ofexchange in transactions involving residents. Making other nationals use the rupee as amedium of exchange will, therefore, take time.Setting up an IFC: The development of anoffshore financial centre helps a currency move towards internationalisation faster. As globalcompanies and investors set up shop in offshore financial centres located within the country,


their familiarity and comfort level with the country increases, making them more willing touse it as a medium of exchange. The government has set the ball rolling on this front withthe GIFT city being set up in Gujarat. But it will take at least five years before it achieves thescales of other successful IFCs such as Hong Kong or Dubai.Overseas market for rupeebonds: Rupee bonds issued overseas will also help increase the holding of rupee-linked orrupee-denominated instruments in the hands of overseas investors.The RBI has taken the first step in setting up this market by allowing Indian companies toraise offshore rupee bonds. Indian Railways has been among the first to queue up. TheInternational Finance Corporation issued ‘Masala Bonds’ in November 2014 that are linked tothe rupee but settled in dollars.A strong derivative market: The exchange traded currencyderivative market has been around since 2008 but it has not grown to a desirable extentthanks to undue restriction on trading in this segment.A knee-jerk reaction to the currencycrisis in 2013, with an increase in trading margins and limiting participation of banks, alsodealt a blow to this segment. The RBI has recently allowed FPIs to trade to a limited extentin this segment. The interest rate derivate futures market too is in its nascent stages andwill take a few years to really grow and meet its desired objective of acting as an instrumentfor hedging risk.Besides these, the black money angle needs to be given considerableattention. CAC will give citizens the freedom to convert their assets to foreign assets at will.This will be a freeway for money launderers.

30. Economic reforms: Looking back & ahead

Unfortunately, the debate on the Land Bill got embroiled in controversy and seems to pitchindustrial growth against agricultural growth. The progress of agriculture and industry canbe complementary to each other.States matterThe effort is to build a development model that is more consensual and cooperative andstrengthens the resolution of the 73rd and 74th Constitutional amendments of 1992.Ingenerally accepting the recommendations of the Fourteenth Finance Commission (FFC), thegovernment clearly followed the policy to strengthen and empower states.The key policyassumption of FFC was that all governments in the country, be it the Union, state or local,have the wisdom to spend optimally.Each tier of the government should be consideredequally accountable and responsible not only by the public but also by the UnionGovernment. Another important and clearly delineated philosophy of the FFC has been thattransfer of fiscal resources to the states from the Union should be on trust rather than onconditions.The first year of the Prime Minister at the helm of policy making in India has truly beenmomentous. The country has witnessed a number of initiatives on the economic front sincehe assumed the august office after more than a decade of experience as a chief minister of afast-developing Gujarat. The reforms, under the PM's stewardship, spanned different aspectsof the economy industry mainly micro, small and medium enterprises; monetary and fiscalpolicy, social security; skill development; and employment generation.On the economicpolicy, an important and historic measure was implementation of Jan Dhan Yojana forextending bank accounts to unbanked. In less than a span of six months, more than 12.5crore accounts were opened, which are nearly one-seventh of the existing number ofaccounts in the banking system.Coverage of householdsThe coverage of households with bank accounts has increased to nearly 98 per cent and ofthese nearly 50 per cent of the accounts are actively operational. Public sector banks haveplayed a significant role in the success of the Jan Dhan Yojana and to further facilitatebanking usage are installing additional 20,000 ATMs. The bank account opening drive,supervised by the PM, established his commitment in obtaining results, when he personallywrote to the banks to ensure success. This is historic because since 1955, after thenationalisation of State Bank of India, political rhetoric emphasised financial inclusion butwithout achieving results.


The vision of the new government, enunciated in the Budget in February 2015, in sharpcontrast to the traditional Garibi Hatao is to provide a house for each family in India, implyingcompletion of 2 crore houses in urban and 4 crore houses in rural areas by 2022. The first fullyear Budget covered issues like social security, employment opportunities for the youngdemographic nation, black money, provisioning of 100 smart cities, and roadmap for goodsand services tax. To encourage youth to create jobs, government conceived establishing atechnofinancial incubation and facilitation programme to support start-up business.Focus on make in IndiaTo encourage Make in India, Micro Units Development Refinance Agency (MUDRA) Bank wasinaugurated, with the objective of providing funding to the unfunded as of nearly 6 croreenterprises, only 4 per cent get institutional financial support in the country. MUDRA Bankwith the corpus of Rs.20,000 crorewill refinance and assist those financial institutions that finance micro units in India.Thebusiness cover under MUDRA Bank includes small manufacturing units, repair shops andartisans with financing requirements of up to Rs 10 lakh.The government also proposed monetising gold stocks through various schemes, includingminting of coins. The minting of gold coins in India, would lead to higher employment andretention of related profits within the country. In view of the fact that about 30 per cent ofgold held by the public is for investment purposes, this at least is expected to be monetisedeasily. The government is making efforts to encourage recycling of gold within the countryand reducing the pressure on imports that finally impacts the current account deficit. In thecontext of social security, the PM announced three schemes with the flagship Atal PensionYojana (APY) aiming to provide old age income security to the working poor in theunorganised sector. The Jeevan Jyothi insurance scheme provides a one year cover,renewable annually, offering life insurance for death. The third scheme, Suraksha insurancescheme, renewable annually, provides insurance to cover death or disability on account ofan accident. These three schemes will ensure financial inclusion, enhanced businessopportunity for banks and higher insurance penetration, thus providing economic security topeople in the unorganised sector. Economic security will also ensure stability inconsumption pattern and ability to weather income shocks, implying a steadier path ofgrowth for the economy.Empowering statesThe PM, during the year, clearly followed a policy to strengthen and empower states. ThePlanning Commission was declared dead on August 15, 2014 and the birth of a new bodycalled National Institution for Transforming India (NITI) was announced. In setting up NITIAayog, the government aims to reap the benefits of creative energy across the country thatemerges from states, regions and local bodies. The effort is to build a development modelthat is more consensual and cooperative and strengthens the resolution of the 73rd and74th Constitutional amendments of 1992. Second, in generally accepting therecommendations of the Fourteenth Finance Commission (FFC), the government clearlyfollowed the policy to strengthen and empower states. The key policy assumption of FFC wasthat all governments in the country, be it the Union, state or local, have the wisdom tospend optimally. This is an important principle of equality amongst fiscal peers that needs tobe upheld in all inter-government deliberations. The above principle implies that each tier ofthe government should be considered equally accountable and responsible not only by thepublic but also by the Union Government. Another important and clearly delineatedphilosophy of the FFC has been that transfer of fiscal resources to the states from the Unionshould be on trust rather than on conditions.The government is successfully pursuing the implementation of goods and services tax,aiming at a uniform rate across the country and thereby integrating the national market.The success of GST would be a landmark decision in the history of taxation and politicaleconomy of India. The Prime Minister has also been extensively interacting with leaders fromvarious important countries to enhance trade, business, and opportunities for growth andemployment in India. The increased economic and regional cooperation that has been notedin the last one year is expected to yield results in the future. The government has also beensuccessful in engaging Russia, USA, China and Japan along with other advanced countries


like Germany and France as well as immediate neighbours to help maintain the powerbalance in the region. This balanced strategy will also benefit the Make-in-India approach,providing an impetus to employment, and growth.The Make-in-India strategy, with focus on micro and small industries will help in the processof urbanisation and generating employment for the young dynamic population. Increase inindustrial output would also ensure higher volume of high quality of exports yielding higherforeign exchange earnings.Unfortunately, the political debate on Land Bill got embroiled in controversy and seems topitch industrial growth against agriculture growth. In fact, progress of agriculture andindustry can be complementary to each other. The agriculture sector provides manpower,food and raw materials to industry, while industry reciprocates with employmentopportunities and manufactured goods which get absorbed in the rural areas. The higherpurchasing power with higher income growth in both rural and urban areas enhanceseconomic welfare in society and is mutually beneficial. Illustratively, higher growth in theindustrial sector has resulted in the price of food grains and agriculture products rising fasterthan industrial output over the last few years, providing larger benefits to the farmers. Themost important development in the last year is the reversal in the investment climate andexpectations in the capability of the economy. The industry which had been suffering frompolicy paralysis suddenly found hope in the new political regime. The hopeful mood helped ingenerating a positive impulse conducive for growth. The year goneby has been packed byeconomic events but the general approach towards economic reforms has beenreconciliatory and continuity in policy which has inspired confidence in the internationalcommunity. However, the government, given its strong mandate could have donesignificantly more on some select challenging issues. One such menace is corruption,impacting India's global image and ease of doing business, as at grass-root level it is stillrampant. In literature of political economy, the most significant justification and cause ofcorruption is election funding. The other challenge is crime against women which haseconomic implications in terms of female workforce participation and tourism. The third isfarmer suicidesdue to financial distress on account of crop failures. The government could considerestablishing stringent zero-tolerance standards in all these cases.Building consensus for reformsThe success of the 1991 reforms was partly attributed to careful crafting, cautiousimplementation, and appropriate sequencing of measures. In addition, and moreimportantly, there was widespread consultations and building of consensus not onlyamongst policy makers but also the general public. This role was ably undertaken byeminent economists, occupying different advisory positions, through wider consultationsand deliberations and by organising and participating in seminars, workshops andconferences. Further, as the government constituted the expenditure managementcommission to review the major areas of central government expenditure, there is alsoneed to examine other economic issues like monetary policy framework, governance issuesin banks, and trade and gold policy. A team of professional economists would not only helpin completing these tasks but in the process get groomed to shoulder internationalassignments when global opportunities arise.Translate hope into growthDid all this hope and conducive environment, that marked Modi’s focus on altering theinvestment climate translate into growth? Yes and no. Yes, while the global growth iswobbling, India's robust growth outlook is positive and upward looking. No, because resultsare not commensurate with heightened hope and expectations. However, it is important tounderstand that transmission of hope takes time to transform into output, as all outputshave gestation lags, especially after such a long spell of policy inertia. Also, there could bean emerging a gap between policy announcement and implementation which is probablyevident in the slower industrial production. In fact, the ecosystem to generate growth needsto be revisited to revive industrial production. Similarly, recent banking results, includingnon-performing assets, are not encouraging.


31.Inflation is bad, but is deflation good?

The decline in the rate of inflation began in November 2013 (which was the month whenboth CPI inflation and WPI inflation had peaked). The decline has been secular, and inNovember 2014, WPI inflation touched zero. The numbers published in March 2015estimated WPI inflation at (-)2.33% and CPI inflation at 5.17%.Happy urban consumerNone is happier than the consumer, especially the urban consumer. The happiest person isthe head of the household because she is the one who buys most goods and servicesneeded by the family. She is still unhappy that prices of some food articles are elevated:the current rate of year-on-year inflation in cereals is 2.32%, milk and milk products is8.35%, vegetables is 11.26%, fruit is 7.41%, and meat, fish and poultry is 5.11%.Behindevery product or service, there is a producer or service provider. While consumers aregenerally happy, producers are in distress.The worst affected are the farmers. Barring a few (who have managed to keep largeholdings despite land ceiling laws), most farmers are small landholders and are poor.According to the Situation Assessment Survey of Agricultural Households (December 2013),published by the National Sample Survey Office, 40% of the households of the country areclassified as agricultural households. The estimated number is 90.2 million and does notinclude agricultural labour (i.e. landless) households. The Survey estimated that 70% ofagricultural households own less than one hectare.The small landowner (less than one hectare) will always remain poor â€” unless he strikesoil or gold in his land. He needs help. He needs to supplement his farm income with non-farm income. He needs help to migrate (or enable his children to migrate) to the non-agricultural sectors. His children need to acquire aneducation and non-farm skills. Given a choice â€” and this is very sad â€” he will give upfarming. But the vast majority of farmers do not have that choice. What will they dotomorrow if they give up farming?Unhappy producer-farmerBesides, the rest of the country needs them to continue to do farming and will be horrified ifthey abandoned farming. Who will produce the 96 million tonnes of wheat, 103 milliontonnes of paddy, 18.4 million tonnes of pulses, 355 million tonnes of sugarcane, and 35million bales of cotton that the country produced in the last agricultural year?The farmsector is in deep trouble because of a fall in prices. Take a look at the table sourced from theCentre for Monitoring of Indian Economy. It contains the monthly average wholesale prices(that is what the producer can expect to get) across various markets in India during March2014 and March 2015.The decline in prices has left the producer-farmer poorer and deeper in debt. Compoundinghis woes are unseasonal rain, drought, thunderstorm (in Bihar on April 22), and the threat ofa deficient monsoon as per early forecasts. The government has added to his woes by apaltry increase in Minimum Support Price (MSP), inefficient procurement, increase in pricesof fertilisers, poor compensation for lost crop etc.This situation did not emerge suddenly. Every government has grappled with theseproblems. The UPA tried to address them in different ways: introduction of MGNREGA in2006 to supplement farm income/wages; farm loan waiver in 2008 to give partial relief frompast debt; and generous increases in MSP between 2004 and 2014. The Food Security Act,2013 was an indirect supplement to income. The Land Acquisition, Rehabilitation andResettlement Act, 2013, was to give the small landholder an opportunity to exit willingly andmigrate to other sectors of the economy. These efforts paid off and agricultural growthduring 2009-2014 recorded a historic high of 4.06%. Yet much remains to be done, andevery successor government is obliged to help the producer-farmers.Deflation and its consequencesThe decline in the rate of inflation could be attributed to many reasons. Presently, it is mainlydue to the steep fall in the world prices of crude oil and commodities. Lack of adequatedemand is another reason. Increase in productivity could lead to increase in supply andcontribute to decline in prices, but there is no evidence of a sudden rise in productivity in the


agricultural or manufacturing sectors. Most commentators agree that there is inadequatedemand: indicators of that are low growth rate of bank credit (12.6% in 2014-15), decline inmerchandise exports($310 billion in 2014-15 as against $314 billion in the previous year), and the widelyacknowledged fact of absence of new investments.Consumers need to change their outlook towards producers. Producers must makereasonable profits; if they make losses, they will stop producing. It is profits which sustainproduction, employment and more investment. Reasonable price increases are the only wayto reward producers, especially farmers, and if that means a reasonable level of inflation,consumers must accept it as a necessary concomitant of development.Deflation is not anunmixed blessing. Sometimes it can be more calamitous than inflation.

32. Make in India - beyond the slogan

Last Friday, the governor of the Reserve Bank of India (RBI), Raghuram Rajan, fired offanother clever but misdirected argument, this time about "Make in India". A few weeks agohe blamed various businesses and bad laws - but not public sector bankers themselves, orthe RBI - for allowing bad loans to balloon. This time he pointed out that Narendra Modi's"Make in India" campaign should be suitably modified to "Make for India". His short pointwas that if the "Make in India" slogan is supposed to mean pursuing export-led growth, thatwill not be easy because of slow global growth. "Indeed in the last decade, even as Chinadeveloped on the back of its exports to industrial countries, other emerging marketsflourished as they exported to China. Emerging markets now have to rely once again ondomestic demand."

While this may be correct in a narrow, immediate sense, it is an irrelevant argument fromthe policy perspective. Manufacturing for exports or for domesticmarkets are merely outcomes of the way the government manages the economy. If theeconomy is mismanaged, specific policies that try to boost either of them will not work.Indian businesses need not be told to "Make for India". They will anyway do that. That'stheir business. Domestic demand is what they service and all domestic players are operatingin the same local cost structure. If costs rise, they will all try to pass on the costs to buyersand carry on as before.Indeed the real issue is neither Make in India nor Make for India. It is the cost of doingbusiness. If that is high, domestic buyers pay too high a price and the market does notexpand, depriving businesses of economies of scale, which can push down costs further. Thesame high cost of doing business makes exports uncompetitive - whether the global marketis conducive to it or not.So we need to shift the debate beyond this slogan or that, and discuss long-termprescriptions for boosting manufacturing - whether for exports or for domestic demand. Theanswer to both is the same: lower costs to doing business.Businesspeople need the freedom to make or service anything easily, anywhere, at areasonable cost in a competitive environment. If this happens, Indian business will boom,jobs will be created and exports will rise. "Reasonable cost at a competitive environment" isalmost entirely influenced by macroeconomic decisions. The question is, has the governmenteven acknowledged this and started to move in this direction? The most charitable answeris, we don't know. Since this government is not exactly reticent, we can even concludenothing much has happened so far.We all know that government dominates our lives in every possible way. The result is thatthe main factors of production are made expensive by the government, making India a high-cost economy. Take a look at these three issues:Human resourcesIndia's education system is a mess. India needs millions of skilled workers, coming out ofthousands of Industrial Training Institute-type of establishments not run by thegovernment. When people come out of college, they are unemployable. They may be


repaying a big education loan, too, which has to be built into the compensation, pushingcosts up again. We also need good quality basic education. All these are directly influencedby the government - often by the state government. There is no game plan to set all thisright - while the government is distracted by many irrelevant issues. Skill development isbeing talked about, but there is little progress.Real estate :While reams have been written about the problems of the land acquisition Act,this is a problem only for expansion and large new businesses. A much bigger contributionto high cost of operations comes from the exorbitant cost of real estate in India, relative toits level of development. Millions of businesses have to buy either a high-cost property orpay high rent, making their products costlier. There is no game plan to bring down realestate prices, which will be the biggest boost for consumers and businesses alike.CapitalForeign companies can bring their capital and large Indian companies have access to lower-cost capital from local and global sources. But everybody else, including consumers, have toborrow at high rates from Indian banks. Here, the government is keeping the cost of capitalhigh in two ways. One, by not insisting that the RBI allow many more banks to come in,which will create competition to supply capital and lower the cost of capital. Two, byremaining the biggest borrower of capital, setting a benchmark of sorts for high interestrates.These are mere pointers. There are many other ways the government is making Indiancompanies uncompetitive. Without the Modi team making a thorough analysis of this andtaking publicly declared corrective steps, "Make in India" or "Make for India" will remainempty slogans.

33.MSME FINANCING

MSME sector constitutes an important segment of our national economy and hasshown continued dynamism in terms of growth in number of enterprises, production,employment generation and its contribution to the country's manufacturing outputand exports. MSME sector provides employment to over 60 million people. 28.50million Micro, Small and Medium enterprises contribute to 45% of the industrialproduction of the country and 40% of the total exports. Looking at the totalemployment generated as well as employment generated per crore of investment inMSME sector, the importance of the growth of MSMEs for overall growth of theeconomy and up liftment of the poor in India is immense.

The contribution of MSME sector to the Indian economy is 9 % of the GDP and the sector isone of the major contributors for creation of value in the economy.

Canara Bank is in the forefront of assisting the MSME sector since last four decades and hascreated a good clientele portfolio in the sector.

The Bank has taken the technology initiative in right perspective for speedy and transparentdisposal of credit through Online process and has put in place a proper organizational setupat various hierarchical levels to hasten the process of credit delivery.

The products and services launched by the Bank during the current financial year hascreated a niche for the Bank in the fraternity of MSME credit delivery Institutions .

The 'Make In India' Programme announced by the Hon'ble Prime Minister is the step in rightdirection in promoting indigenous entrepreneurship especially under manufacturing sector

Since the MSE sector has the supportive role to the major industrial and servicesectors, it has demand for regular credit off take for both manufacturing and servicesector including transport sector. Government of India has launched 'Make in India'campaign in the past year, which would create vast demand for credit off take moreparticularly in MSME sector.The MSMEs are best vehicle for inclusive growth, to create local demand and consumptionand also to increase forex reserves through exports.CANARA BANK initiatives during the Year


In the past one year the Bank has taken following initiatives to increase the flow of credit toMSME sector and also bring about continued awareness about the steps taken.

Increased the specialized outlets for exclusive lending to MSME sector, 162 newspecialized SME branches are functioning throughout India and for faster processingcredit proposals, 48 SME Sulabhs (Specialised SME Processing Centres) are functioningas on date.

To extend financial assistance to micro and small enterprises without offering anycollateral security and with relaxed lending terms, new segment specific schemes havebeen launched such as MSE SMART, Doctors' Choice, MSME CAP, MSME Vahan, MSEVijeta and Canara Contractors' Scheme, Canara CARAVAN, Flavour and MSME Expo.

To increase the Bank's exposure to specific clusters and activities, new area/clusterspecific schemes have been launched/continued such as Rice Shellers' Scheme, Dal Millsscheme, Cashew Processors' Scheme, etc.

MSME CONNECT - Mega Credit camps are conducted during January-February 2015 at allCircles on a single day to create awareness and pool sources for increased flow to MSMEsector. As a prelude to this, every Friday is celebrated as MSE day for focused attention toMSMEs throughout the year.

START UP SUMMIT - Summits have been arranged at Ten centres for Start upEntrepreneurs involving functionaries from different Government departments and localindustrial organizations for necessary inputs and guidance for successfulentrepreneurship.

MSME Consultancy Services Cells established in five major centres for project reportpreparation, appraisal and other consultancy services to MSME entrepreneurs.

MICRO ENTERPRISES BUSINESS CENTRES - are established at Circles for handholdingMicro Enterprises' initial activities and also data monitoring purposes for successfulimplementation of bank's MSME products and schemes

E-mart & E-store - In order to support the marketing efforts of the MSME entrepreneurs,Bank has launched a website CanbankEmart.com and also E-store to display theirproducts

EXCLUSIVE WEBSITE FOR MSME: Bank has launched an exclusive websitewww.canaramsme.com for easy access & better understanding of Bank's initiatives underMSME.

ONLINE TRACKING OF MSME: The online submission of MSME applications and trackingthereof by the customers is facilitated and used extensively by the MSME clientele.

CREDIT SCORING MODEL FOR MSME: Bank has introduced a Credit Scoring Model toevaluate the MSME entrepreneurs who apply loan from the Bank for the first time

ENTREPRENEUR DEVELOPMENT CENTRE: EDC has been set up at the Wing to cater to theneeds of budding entrepreneurs by way of assimilation of information regarding thechallenges and opportunities under MSME, conducting of seminars, training initiatives,interaction with the concerned organizations etc.,

MONITORING AND REHABILITATION CENTRE: An exclusive set up has been established atWing to look into the aspects of monitoring as well as slippage management and moreover handholding in times of stress by way of rehabilitation and restructuring of MSMEunits as per Government guidelines

As a result of all these initiatives, Bank has surpassed the mandatory targets for the year2014-15 registering a growth rate of 26 % under MSE and 21 % under MSME. The clientelebase has increased by 33 % over previous year.

GOALS FOR 2015-16 AND STRATEGIES:

To reach outstanding level of Rs.72000 crores under MSME credit with clientele baseof 8 lakh.

To achieve annual growth rate of 21% under credit to MSE sector.


PRODUCT SPECIFIC MONITORING: In order to have a thorough review of theproducts/schemes introduced in the recent years and the impact it created amongstthe MSME segment and also to fine tune for better acceptance, product specificmonitoring and follow up is envisaged

RESEARCH OFFICER AT WING: An exclusive set up will be created so as to conductextensive research of schemes and products of peers in the market and imbibe thebeneficial points into our own products and schemes.

BUSINESS FACILITATION CENTRES: The Pilot 5 BFCs introduced last year haveevoked good response from the customers through varied initiatives taken by theunits. The same will be extended to other centres during the current financial year.

TO INCREASE THE DELIVERY POINTS for MSME credit, the number of SME Specializedbranches shall be increased to 200.

NEED BASED PRODUCTS AND SCHEMES shall be launched catering to the specificsegments under MSME sector.

34.RETAIL LENDING : FOCUS AREA FOR BUSINESS GROWTH

Drivers of Retail growth:

Growing disposable incomes

Youngest population in the world

Increasing literacy levels

Higher adaptability to technology

Growing consumerism

Fiscal incentives for home loans

Changing mindsets willingness to borrow / lend Desire to improve lifestyles

Retail Lending continues to be one of the major thrust areas of the Bank for the FY2015-16 due to reasons furnished below:

Win-Win for the Bank and the borrowers

Less Corporate Credit demand

Less Risk under major segments, viz., Housing Loans, Car Loans, etc.

Bigger profit pool and stable returns

Huge market potential

Less capital to be set aside by Bank

Availability of tailor made products

Increase in earning population among Gen-Y

Increase in demand for more Housing Loans due to shifting of population from rural /semi-urban areas to urban / metro areas.Advantages

Retail Loan clients are generally loyal

Credit risk is well diversified

Interest spreads are wide


Large data base is available for better marketing

Less volatility in demand and credit cycleFuture of Retail Lending :

The accelerated retail growth has been on a historically low base

Penetration continues to be significantly low compared to global bench marks

Share of retail credit expected to grow from 13% to 20% by 2017

Dramatic changes expected in the credit portfolio of Banks in the next 5 years

Housing will continue to be the biggest growth segment, followed by Auto loans

Banks need to expand and diversify by focussing on non urban segment as well asvaried income and demographic groups

Rural areas offer tremendous potential too which needsto be exploitedChallenges

Sustaining customer loyalty NPA reduction and Fraud prevention Leveraging technology effectively Competition from peer Banks

35. PEOPLE MANAGEMENT / PEOPLE DEVELOPENT

Energizing and Motivating Team

Showing leadership traits

Empathy towards employees

Helping the team achieve expected results.

Helping team mates receive required training for their development.

Managing dissent

Problem solving approach

Facilitation approach

Frequent meetings & feedbacks

Managing failures.

Conflict management

Handling Perceptual errorsBeing a Branch head/leader means energizing and motivating your team to perform at ahigher level. Out of various dimensions of Your Role as Branch Head, one of the most criticalaspects is dealing with human resources. As a branch head and as a leader, it is expectedthat you realize the full potential of your human resources. What is required to realize thefull potential of your human Resources? Work on “RED” theory i.e. Focusing on

a) Role –Identifying talent

b) Environment –Make it vibrant working environmentc) Development of People –Nurturing your talent

A) ROLE- IDENTIFYING TALENT

For identifying talent, you will have to spend some time with each of your employee, atleast in initial period after taking charge as branch head. Once you understand thepotential of an employee, give him/her assignments complimenting their potential. Manytimes on account of manpower shortage, you may not able to do so.However in such ascenario communicate with the employees about the constraints and your action plan for


future. Seek their active willingness for managing the situation. This will ensure Employeeperform well without the risk of getting frustrated of temporary pressure situation arisingout of manpower shortage etc. Provide adequate freedom to do the job well.

FREEDOM AND AUTHORITY

Hardly anybody likes to be micromanaged. Not having the freedom to do their job well is abig source of job dissatisfaction. Marcus Buckingham and Curt Coffman, authors of Fist,Break All the Rules, suggest a simple recipe to achieve the right balance between freedomand oversight: Control the end and not the means. This means spending adequate timewith your team in agreeing upon specific out comes you expect from them, then leavingthem free to achieve them. Of course, you should make yourself available when they needhelp, but clear articulation and agreement on expected outcomes largely removes theneed for micromanagement.

ALIGNMENT WITH PURPOSE AND VALUE

Most people like to play roles that align with their personal purpose and values. Most of uscome to work with a desire to be successful. A role that does not give us an opportunity toachieve ourpersonal purpose and live according to our values is unlikely to meet this need. Whenpersonal purpose and values are in alignment with organizational goals and values, peopleare energized

to the fullest, and this energy translates into superior end results.

For an employee to be highly engaged and energized at work, he/she must strongly agreewith the following six statements regarding his/her role:

Our branch has a compelling vision for its future success.

We have an effective/differentiated strategy to achieve the vision.

I have challenging (stretch) but achievable goals.

I clearly understand how my work fits into the overall vision and strategy.

I have sufficient freedom and authority to do my job well.

My role aligns with my personal purpose and values.

Again, based on personal preferences, some attributes may be more important to anemployee than others.

B) ENVIRONMENT –BUILDING VIBRANT WORKING ENVIRONMENT WHICHGIVES POSITIVE VIBRATIONS

As a branch head, you have to take steps so as to build a vibrant working environmentwhich gives positive vibes to your team. This is about how it feels to be a part of yourteam. Several factors make up a good working environment: open two-waycommunication; involvement in key issues; collaboration; respect; a sense of community;fairness; and a culture of high performance.

COMMUNICATION

The first thing people expect from their Branch Head is that the Branch Head gives themadequate time and understands their needs. This involves creating an environment inwhich open and honest two-way communication takes place. Unless Branch Head


regularly reaches out and talks to their employees, and similarly encourage employees toapproach them when needed, it is impossible to get a sense of what is important toemployees. Without this knowledge, they cannot align personal aspirations withorganizational goals, and therefore cannot release their latent energy. The normalreaction from Branch Head when they hear this is that they don’t have enough timeduring the r day to give each team member as much attention as they need. On thecontrary, those who understand this simple idea know that they don’t have enough timein the day because of the fact that they are not investing enough time in their people.Most Branch Head end up firefighting or doing the work themselves because they aredisappointed by their subordinates’ output. If they have created an environment of opencommunication and ask the question, Why is this subordinate’s output a problem?,chances are they will realize it is less about the subordinates’ abilities and more aboutmismatched expectations caused by poor communication. Let’s get one thing straight:Most employees like to succeed, and don’t want to disappoint their superiors. They expecttheir Branch Head to invest enough time in them so that they fully understand what ittakes to succeed. Great managers understand that to save time, you have to invest timein your subordinates.

INVOLVEMENT AND GUIDED DISCOVERYMost people like to be involved in key issues and want their opinions to be consideredbefore key decisions are taken. As their Branch Head, do you actively seek and value theirinput? This is a simple technique-We call it “guided discovery”-whereby instead of givingsomeone the answer, you ask questions in a way that leads the individual toward theanswer so that they feel it is their solution. Try it, it is not too difficult.

COMMUNITY AND FRIENDSHIPGiven the ever-increasing number of work hours, employees expect an environment ofcommunity and friendship. As lives are getting busier, the number of people who don’tknow their neighbors is increasing world wide. For many, the only avenue to satisfy thehuman need of belonging to a community is the workplace. Studies have shown thatemployees who have good friends at work tend to be more energized than those who donot.

FAIRNESSAnother common expectation is that of fairness. Most people like to work with full integrityand diligence, and generally try to perform to the best of their abilities. In return theyexpect to be evaluated and rewarded fairly. The fairness of compensation and reward isoften more important than their size. The amount of money people make is important, butfairness is even more important.

HIGH PERFORMANCE CULTUREFinally, achievement-oriented employees like an environment that demands highperformance and where mediocrity is not tolerated. Nothing de-motivates a hardworkingemployee more than widespread tolerance for nonperformance. Achievement-orientedpeople like to be challenged, and like to work with other achievement-oriented people.Who do you like to play your favorite sport with- someone slightly better than you orsomeone worse than you? In which of the two cases does the standard of your own gamefall below your normal level?

Summing up, for an employee to be highly engaged and energized at work, he/she muststrongly agree with the following seven statements regarding his/her work environment:

My Branch Head regularly engages with me and has a good sense of what is importantto me.

My opinion on important issues is sought and valued.

Our branch has a culture in which people collaborate rather than compete with one


another.

Everyone in our branch is treated with respect and dignity.

Our branch has an environment of community and friendship.

Our branch has a fair reward and recognition system in place.

Our branch has a culture of high performance where mediocrity is not accepted.

DEVELOPMENT

The third role with regard to human resources is development. This set of expectationsdeals with most employees’ need for growth. With the ever-increasing rate of change inbusiness, lifetime employment has become a thing of the past. New technologies aremaking traditional businesses obsolete at an alarming rate, and as result the averageperson is changing jobs more often than before. Hardly anyone expects lifetimeemployment anymore, but they do expect lifetime employability. While choosing betweenjobs, candidates often opt for the one that offers better prospects in terms of learning anddevelopment. Managers who have a reputation for investing the time in developing theirpeople tend to have an easier time attracting the best talent. If you pause there for amoment and think about the best managers you have ever worked for, you will probablypick someone you learned a lot from.

OPPORTUNITIES TO LEARN AND GROW

In order to continually develop their skills, high-achieving people like to be staffed onchallenging assignments. They do not shy away from high-profile work and are willing totake risks. They also like to receive regular feedback and coaching on their performance,and seek our managers who are willing to do so.

DEVELOPING STRENGTHS FURTHER For them to be highly energized, employees want their managers to help identify anddevelop their strengths further. Contrary to conventional wisdom, most people have moreroom for improvement in an area of natural talent rather than an area of weakness. This ishard to understand at first, but think about this: If you have a shot at being greatsomething, which is it more likely to be-something that you are already good at, orsomething that you have not yet had much success in? Talent is not a mathematicalequation. To go from good to great, you have to possess some natural talent. Mostmanagers do not understand this, and continue to focus their development investment andfeedback on their subordinates’ weaknesses.

When it comes to the development of our children, what do most parents do whenthey see their child showing natural talent at music, a sport, or a particular academicstream? They focus on it and help their child develop it further, they organize privatelessons, and go to great lengths to give the child every opportunity to excel at the thingshe or see seems to have some natural talent in. Most parents prioritize the talent areasover other areas because they fully understand that the return on investment will begreater if they focus on natural talent areas. In fact, if a parent keeps pushing a child inan area where the child does not have natural talent, over time the child loses confidenceand her performance drops even in areas in which she is strong. Yet, as mangers, at workwe often tend to do the reverse. We focus almost exclusively on weaknesses. This is alose-lose strategy because contrary to conventional wisdom, both the employee and theorganization tend to gain more if the focus is on developing strengths rather thanovercoming weaknesses.

The best managers help their subordinates in understanding a bit more about who theyreally are and in putting their strengths to work. If you work in an area of natural strengthand passion, you will be extremely successful and have a lot of fun at the same time. Thebiggest gift a manager can give subordinates is to help them build on their strengths.

You are probably thinking: “But what about critical weaknesses? What if an employeeneeds to perform certain tasks really well in order to succeed on the job? Here’s a simple


rule of thumb: Ifthe employee needs to perform ten tasks really well in order to excel at a job, and if six toeight of them are areas of weakness, then the employee should be removed from thatparticular job. This is a clear sign of a poor job fit. If, on the other hand, the employee isgood at seven to eight out of the ten tasks and is weak on one or two, you need to askyourself how critical those two tasks are to overall success. If they are very critical, thenyou need to help the employee get to a level where they can perform to an acceptablelevel, but accept that this might never be an area of strength. If the tasks are notparticularly critical to success, then you should not worry about it, and focus yourdevelopment efforts on an area of strength. Nobody can be good at everything. It isimpossible. They are of managing and leading people is all about getting the best out ofpeople by leveraging and growing their strengths and neutralizing critical weaknesses.

Entrepreneurship and InnovationAnother way to develop someone is to encourage them to be innovative andentrepreneurial. The best leaders are willing to take some risks and constantly urge theiremployees to think out of the box to come up with innovative ideas to increase commercialimpact. Most corporate settings tend to dismiss creative ideas before they even have achance to be full evaluated. If you really want to continue winning in the marketplace anddevelop your people at the same time, consider requiring all your people to spend 15 to 20percent of their time developing new ideas or working on something other than their dayjob.

Constantly Upgrading CapabilityOne of the most common traps managers fall into is what I call the “routine of problemsolving.” Thanks to the ever-increasing pace of business, managers get so busyresponding to situations in the normal course of business that they stop thinking. They failto step back from time to time and ask themselves questions like:

1. How is my team performing and what can we do to get better?2. How is the market changing around us and what capabilities will we need to succeed in

the future?3. How can we build those capabilities now while we are still fully focused on current

opportunities?For employees to be highly energized, employees must strongly agree with the followingsix statements about development:

I am given challenging assignments that provide me with opportunities to learn anddevelop.

I receive regular coaching and feedback on my performance.

My Branch Manager helps me identify my strengths and develop them further.

Our culture strongly emphasizes entrepreneurship and innovation.

Our branch constantly strives to upgrade its overall capability to deliver outstandingresults.

I am expected to come up with new ideas to improve efficiency and/or profitability.

36.CAPACITY BUILDING & TALENT DEVELOPMENT - HR CHALLENGES

Human Resource Management is important for banks because banking is a service industry.Management of people and management of risk are two key challenges facing banks. Howwe manage the people and how we manage the risks determines our success in the bankingbusiness. Efficient risk management may not be possible without efficient and skilledmanpower. Banking has been and will always be a "People Business".Thoughpricing is important, there maybeother valid reasonswhy people select and stay with us.We must


therefore try to distinguish ourselves by creatingour ownniches or images, especially in transparent situationswith a high level ofcompetitiveness.Our survivalwoulddependoncustomer satisfaction. Wemust articulate andemphasize ourcore values to attract and retain certain customer segments and values suchas "sound", "reliable","trustworthy”, “innovative", "international", "close", "socially responsible", etc. need tobeemphasized throughconcrete actions on the groundand itwould be the bank's human resource thatwould deliver this.HR in Banks can be defined as “planning, organizing, directing and controlling of aprogramme that has a wide range of activities relating to the development of employees interms of enabling them to acquire competencies needed to perform their present and futurejobs with ease and enthusiasm”. It is a conscious and continuous process of development ofemployee competencies, dynamism, motivation and effectiveness in a systematic andplanned manner. It deals with bringing about improvements in inter-personal relationship,attitudes, values, knowledge and skills of the employee required for achieving the CorporateObjectives. If employees are effective, their contribution to the Banks will be effective,consequently they will also be effective in accomplishing their business objectives.We utilize the skills and efforts of a number of widely divergent groups of professionals,semi-professionals and non-professionals. It also differs from other large scale organizationsand there is

extensive division of labor

high interdependence of services

efficiency demanded by the public

complementary expectations among people at work

little control over workload and over its key members

Nature of work involves certain amount of risk.

Reliance on information technology to reduce errors in work.

We are increasingly faced with resource constraints due to the economic trends that areprevalent all over. With large amounts of budgets being spent on the human resources, it isvery important to get good “value for money” through sound HR practices. HR becomesimperative due to the following:

Manpower is the most important factor of production of the services in our bank likeany other services.

Human resource costs are usually a substantial percentage of the total cost to theBank.

There is shortage of quality, knowledgeable and experienced human resources.

Attrition among professionals and paraprofessionals due to various opportunities inprivate sector with huge salary. Therefore, how to retain the talent has been achallenging task for us.

Underutilization and wastage of human resources due to lack of proper planning andplacements.

Effective HR Management can be achieved through 3 main sub activities which should bewell planned and organized for better execution. They are :

1. Training

2. Mentoring

3. Performance Appraisal & Career Development

We have inducted more than 14000 direct recruit Officers and Clerks in the recentpast on account of our large scale expansion plans and large scale retirements. Since


these recruitments have happened after a gap of almost 10 years there is almost whatis called a “generation gap” in knowledge skills that has arisen within the Bank wherewe have employees mostly at 50+ or at 30 minus. So, one of the biggest HRchallenges now being faced by us is to bridge this gap of the retiring experienced,skilled & knowledgeable workforce with the freshers by giving them continuoustraining, both practical as well as classroom and with a heavy dose of “On the jobtraining”.

Simply replenishing the retiring staff with new entrants is not going to be sufficient tosustain the Bank in the coming years but transfer of knowledge, capacity building andexposure of the new recruits to any challenging task is a very important activity thathas to be taken up to maintain our course towards achieving its business plans andtargets. HR, therefore, plays a very important role in training such people.

However, an equal and almost at par responsibility lies with each one of us in sharingour knowledge, skill, experience and the nuances of branch banking, credit appraisal,customer service, balance sheet analysis etc., to ensure that our young workforcedevelop themselves to take on the higher responsibilities which will accost them shortlyon account of the retirements of their senior colleagues.

Thus the second challenge comes up in HR which is mentoring of the young and theinexperienced. Mentoring as a concept is nothing but hand holding; a means ofinstilling confidence and improvising on the skills of a fresher with the ultimate aim ofmoulding him/her to become an asset for the Organization. Though from the HR wehave introduced the concept of mentoring and supporting more than 7000 ProbationaryOfficers through this concept with the help of around 150 Mentors across all Circles, itshould be the endeavour of each one of us to don the role of a Mentor to encourage &guide the new recruits who are under their supervision and tutelage to orient themtowards the organizational culture and mould them as futurist leaders of the Bank.

The third and major sub activity that has a direct relevance is the 'Retention' of these newrecruits who have been trained and given all opportunities within the Bank to develop asfuturist leaders of the Bank. Talent retention is a very major challenge and we could besuccessful in retaining the young blood only if we have a well defined career developmentpath and a robust performance appraisal method which will instill confidence in these youngrecruits that they are being assessed and promoted based on the merits and with anobjective assessment of their performance. We have a very robust and well definedPerformance Appraisal System in the Bank right from Clerks to Scale VII, covering theentire gamut of their work space. It is left for the respective reporting authorities toassess them very scientifically, objectively & pragmatically to ensure that an employee isappraised in a manner in which, at no point of time, he/she feels frustrated or otherwisedisappointed with the system. Any such onerous actions on the part of the assessors willallow a sense of dejection to germinate within them which will make them non or underproductive and ultimately lead them to leave the Bank. If each employee feels confidentand accepts the fact that he shall reap what he sows, that itself would be a majordeterrent to attrition. It will also inculcate a sense of belongingness, oneness and sincerityto the organization which has recognized the talent and performance of the employee andawarded him/her in a manner befitting his performance. Thus, it should be the endeavourof each one of us as ambassadors of HR to ensure capacity building and careerdevelopment by rigorously implementing the HR concepts so as to focus on talentdevelopment, both for the present and for the future.

37.VIGILANCE : A HEALTHY WAY TO BANKING

“Eternal vigilance is the price of eternal development”'Caveat Emptor' a popular legal expression signifying 'Let the Buyer Beware' can beborrowed & modified to suit the realms of Today's Banking. Instead of the 'buyer beware',we can use the expression, 'Banker Be-Aware' which in normal Banking parlance is anotherword for Vigilance.Vigilance which was considered an external arm of functioning has certainly now come to the level of


being imbibed in the day to day functioning itself. Pearl S. Buck, an American writer and novelisthighlighted the importance of vigilance in our daily life by stating that “When good people in any countrycease their vigilance andstruggle, then evil men prevail”. These observations made years back hold true even today, where onehas to be ever vigilant to ensure that no harm befalls him, his family, his organisation or the society atlarge. Hence, the need for awareness about vigilance and the various dimensions to it has become allthe more critical in the modern public space.The dictionary defines Vigilance as being watchful and wary to detect danger; being everawake and alert. While being vigilant is important in all walks of life, the observance ofvigilance becomes more critical in the financial sector and particularly for institutions likebanks, which deal with public money.Banks, which act as an intermediary between depositors and lenders, are duty bound toobserve the highest standards of safeguards to ensure that money accepted from depositorsare not misutilised and are put to gainful use or are available with them to be paid ondemand. In order to ensure this, banks are not only required to do due diligence on theborrowers but are also expected to put in place appropriate safeguards to ensure that thetransactions being undertaken by the staff are as per laid down guidelines. The watchfulnessenforced by the vigilance function is required to ensure that public money, which banks holdin fiduciary capacity is not allowed to be misused by the delinquent elements in any manner.The existence of a credible and responsive vigilance system at every level acts as aneffective deterrent to disorderly conduct.As in all organisations, vigilance activity in Banks is an integral part of the managerialfunction. The vigilance function should not be seen as an impeding factor in the decisionmaking process. The role of the vigilance structure envisaged in the banks is to strike a finebalance between the role of risk taking which is the raison d'être of banks and theresponsibility as trustees of public deposits.There are three aspects to the vigilance function Preventive, Participative (surveillance anddetection) and Punitive.In normal course, preventive vigilance functions should be strengthened by inculcating asense of honesty and integrity among the employees and adhering to system and procedure,which would act as a defence againstmalafide activity. Preventive vigilance function is, perhaps the most crucial and yet, themost challenging of the three aspects of vigilance. It is crucial because it has the potentialto prevent lapses from occurring by stemming the rot at the initial stages itself. However, itis challenging because it needs to be a continuous exercise across all levels of theorganization and demands the focussed and continuous attention of the management atvarious levels.This involves keeping close watch on the activity profile and the life style of the employees.The employees, who maintain a flashy life style without accounted for means to supportsuch life style, who rarely take leave, who do not share the finer points of work with fellowcolleagues, who take extra interest in the work assigned to others, who are ever ready tohelp vendors dealing with the institution, who are under debt etc., need to be closelywatched from a vigilance angle.The concept of whistleblower is another effective tool for preventive vigilance which acts asdeterrent for the employees to keep themselves away from such activities. With regard toconcept of whistleblower, perhaps it will be appropriate to quote Churchill who had said“Courage is what it takes to stand up and speak, Courage is also what it takes to sit downand listen”. The whistleblower is generally an insider who has near full knowledge of thenefarious activities of fellow worker or higher official and can provide clinching evidenceagainst the delinquent employee when required. The culture of whistleblowers in theorganisation should be supported so that this channel of information gathering from theinside sources can be nourished and built into an effective arm of the vigilance function.Preventive vigilance activities should be followed by strengthening participative vigilancefunction which encompasses reviewing the existing systems and control, its implementation,identifying lacunae and putting in place sufficient red flags so that the scope for misconductis minimised and transgressions are detected swiftly. When the precautions and compliance


become part of the culture of any organisation, the same also act to improve thesurveillance and detection vigilance function in the organisation.Punitive vigilance is the most important and most dreaded part of the vigilance function inany organisation. This function can be used to instil a sense of responsibility andaccountability amongst its work force. To make this tool really effective, there is need tocomplete the investigation process promptly without any bias and impose penalty which iscommensurate with the gravity of the offence committed and the loss suffered by theorganisation. However it is of utmost importance to ensure that the decision making abilityis not impacted adversely.We can test our willingness, preparedness and commitment to vigilance awareness andconcept of implementing the philosophy of vigilance for all around, healthy and sustainablegrowth of our beloved Bank by giving a thought to the following:

Know the essence of the vigilance function - What is expected of you? Evaluate decisions against two tests Was it for the good of the organisation? Was it

done at the cost of the public /common good? Have an open and inquisitive mind - Be aware of things that may affect the interests

and good governance in the organizations. While pushing for business and growth are we losing sight on ethics and values? Are we becoming silent spectator or unwilling party to decisions, which are harmful to

our organisation?

38. LEVERAGING SUBSIDIARIES FOR GROWTH OF THE BANK

Our Bank with an intention to grow in multiple areas chose to enter into Housing Finance,Mutual Fund, Stock market operations, and Insurance, Factoring, Venture Capital, andComputer Services verticals by way of floating Subsidiaries / Associates.With major diversification initiatives undertaken over the last three decades, Canara Bank,today, has emerged as a 'Financial Conglomerate' with eight domestic Subsidiaries/Associate.The Bank's Subsidiaries/ Associate have helped to strategize its presence in the financialmarket, offering financial as well as non-financial services to its growing clientele base.Towards enhancing its role as a financial conglomerate, initiatives have been formulated tobuild group synergy amongst the Subsidiaries / Associate and harness long term value.A Glimpse of our Subsidiaries / Associate

Can Fin Homes Limited - Can Fin Homes Ltd is our Associate and a listed Company. Theprimary objective of the company is to provide long term finance to individuals forconstruction / purchase of residential houses/flats. It also finance builders and commercialventures, loans against rent receivables and Mortgage loans against house properties.The company has created a niche in housing finance sector and has a pan India presencewith over 110 branches with loan book size of over T8000 Cr.The present Marketcapitalization of the company is T2153 Cr.Canara Bank Securities Limited - The Company has positioned itself as a corporatebroking entity and financial intermediary offering investment and online trading services inthe capital market. It has membership /certificate from NSE/BSE/SEBI for Stock Broking andalso Member of MCX stock exchange. The Company is offering investment and online tradingfacilities in the capital market-cash segment, futures and options and currency derivativessegments and subscription to public issues and Mutual Fund products.Canbank Venture Capital Fund Limited - As a trustee and manager of Canbank VentureCapital Fund, provides growth capital for Expansion of Industries and also for start-ups. Tilldate company has floated 5 Funds, the latest being Emerging India Growth Fund with acorpus of T500 Cr. Company is setting up of its sixth fund with a corpus of T500 Cr shortly.It is also in the process of getting the allocation of T500 Cr from Ministry of Finance, Govt. ofIndia under Vibrant India MSME Fund. Being one of the important players in the venturefunding industry, Company has been also invited by Department of Pharmaceuticals,Ministry of Defence, Ministry of Electronics and information technology, Govt. of India forsetting up of new funds for their respective sectors.


Canbank Factors Limited - Factoring is a powerful alternative instrument, particularlydesigned to meet the post sales working capital requirement of the industrial/trade andservice sector. Invoice discounting against invoicesbacked by LCs of Banks is provided to enhance the liquidity and there by converting creditsales into cash sales. The company has recently introduced new factoring product/servicesviz., loan against plant & machineries and equipment.Canara Robeco Asset Management Company Limited - The Company was incorporatedin the year 1993 as a wholly owned Subsidiary as Canara Bank Investments ManagementServices (CIMS).In the year 2007 bank took a strategic decision to divest 49% of stake infavor of M/s. Robeco Group NV for managing the assets of Mutual Fund. The company ispresently managing 24 schemes in Debt, Equity, Diversified & Gold ETF with Assets underManagement of over T6420 Cr. Apart from providing Systematic Investment Plans (SIP)company mobilize bulk group business and provides overseas advisory servicesCanbank Computer Services Limited - Company designs and develops software forbanks, financial institutions and government departments with its extensive in-houseinfrastructure and proven technical expertise backed by strong banking domain. All itsproducts and projects are well documented and user- friendly with on-line help, dataencryption and audit features. The company also does cash replenishment for over 1100ATM of our Bank and is into providing end to end ATM management. It also provides BPO, R&T services and also manages call centre of our Bank. Company has plans to venture intoTraining and provide ATM to Co operative Banks under total outsourcing model.Canara HSBC OBC Life Insurance Co. Ltd - With the synergy of the Internationalexpertise of M/s. HSBC Insurance (Asia-Pacific) Holdings Ltd and Oriental Bank ofCommerce, Company was incorporated in the year 2007.The company covers over 5 lakhlives and is ranked 12th in the industry of 24 players. The company was recently awarded as'Promising Company of the year'. Company has total Gross Written Premium of over T1350Cr. In order to realize the full potential of our Subsidiaries & Associate keeping in tune withthe market situation, services of M/s KPMG Advisory Services Private Limited was availed tomake a 'comprehensive assessment and to draw road map of subsidiaries/Associate'. Theconsultant has submitted the final recommendations and the same is being implemented inour Subsidiaries / Associate to ensure further growth and performance.Our Circles/Branches can help in further enhancing the value chain from ourSubsidiary/Associate by the following:

Advise clients to avail factoring facility and guide them to utilize services of CanbankFactors Ltd.

Refer potential customers looking for equity and Venture Capital Support includingStart - Ups to Canbank Venture Capital Fund Ltd.

Assign site preparation of ATMs, avail cash replenishment services for Offsite ATMsand explore possibility and provide software for online fee collection for existing /prospective schools / colleges from our Canbank Computer Services Ltd and alsopropagate Canbank emart.com portal of the company for our MSME clients to selltheir products.

Propagate Online Trading product and facilitate opening of trading accounts forCanara Bank Securities Ltd.

Market Systematic Investment Plans (SIPs) and mobilize liquid funds from Corporatesfor Canara Robeco Asset Management Co. Ltd

Market Life Insurance products of Canara HSBC OBC Life Insurance Co. Ltd to ourclients including NRIs and HNIs.

39. DATA QUALITY FRAMEWORK - MANAGEMENT INFORMATION SYSTEM

With the advent of technology in banking, huge volume of data is produced and storeddigitally. The transformation of banking in the form of anywhere/virtual banking hasalso resulted in increased information availability which necessitates banks toimplement robust information management processes to facilitate effective DecisionSupport system. The ability of organizations to capture, manage, preserve and deliver


the right information at the right time to the required personnel is one of the keysuccess factors of Information Management.Importance of Data Quality:RBI in its survey, revealed that only 33% of the respondents use automation in theirmonthly report generation process and 44% have minimal manual intervention so as toreduce Data Quality issues. Banks tend to collect information across multiple locationsand multiple formats, thus potentially creating non standardized data. 67% of therespondents claimed to have clean and standardized data across systems.The new regulatory waves in Banking have necessitated the system of collecting thebroader and deeper details of data to enhance risk identification and control structures,to upgrade reporting capabilities and to improve transparency. Data Management hasoccupied the prominent place in today’s Banking from the angle of compliance, riskmanagement, operating efficiency, effective customer relationships and also marketing.All the functions rely on the accuracy of data for timely and effective decision making.Importance of Data Quality in Banking Sector:The importance of data quality in Banking Sector has manifested in the following 5perspectives;

i) Regulatory

ii) Product Pricing

iii) Treasury Management

iv) Risk Management

v) Business/CRM/Analytics

Data Quality Framework in our Bank:Moving towards bringing in data quality, the following initiatives have been taken by theBank;

i) Introduction of a MIS Policy for the Bank clearly defining the role of stakeholders

ii) Identifying the gaps in MIS due to migration from legacy systems and guiding thebranches in updating with the correct MIS codes in the source

iii) Identifying the gaps in customer related data viz., minority community, weaker section,women beneficiary etc., and guiding the branches in updating the same

iv) Identifying the gaps/errors in account level MIS viz., sector code, sub-sector code, BSRcode, BASEL code, special beneficiary code, guarantee cover etc

v) Identifying the gaps/errors in Sector specific data viz., Commercial Real Estate,Capital Market, Infrastructure etc

MIS Reports:To facilitate branches, Circles and functional Wings to identify the MIS gaps and to also togenerate various internal and regulatory Reports, the following options have been madeavailable;Business Objects where the reports on various parameters can be generated as and

when required. HO Circular 40/2013 dated 01.02.2013 enumerates the list of MISfields in CBS and HO Cir 122/2010 containing list of BO Reports available. •CBSReports site is available for generating various types of reports as shown below;

Daily Reports Balancing Reports Consistency Check Reports MIS Reports / Statements FCR and FCC Module Reports Balance Sheet Statements and Reports

ADF Menu is made available to functional Wings for generation of regulatory returns ondue dates.Several web based packages have been made available through Single AuthenticationSystem (SAS) for use of Wings for generation of regulatory returns for onward submission to


RBI.In CBS (Flex cube Retail), there is report option 7775 and 7778 where in reports can betaken from CBS database at any point of time.The way forward:Cleansing of MIS and putting in place a robust data management mechanism is a continuousprocess. As can be seen in the following figure, there are three prominent reasons formismatches in data.The above three reasons are to be attended to on priority basis in order to establish arobust data quality framework for our Bank. Cleaning/updating of MIS fields in CBS andensuring the elimination of data entry errors shall be the focus of attention for each andevery Canarite. From the view point of Risk Based Supervision by RBI,

a clean and accurate data quality framework goes a long way in generation ofnumerous data points and in turn the risk rating of our Bank. In this direction,the following line of action is suggested for the branches:

a. Ensuring unique customer id and correct mapping of individual accounts of acustomer under unique id

b. Ensuring Limit Creation for fund based and Non-Fund based limit for the party inFCC module of CBS..

c. Customer type relating to Individual/Private Sector/Public Sector updation

d. Updation of both permanent and temporary address of customers in CIM09for correct generation of NRDCSR and IBS Returns in ADF

e. Customer related MIS fields viz., minority community, weaker section, etc.,to be updated on continuous basis in CIM09 .

f. Updation of Guarantor details in CI142.

g. Updation of Group ID for automatically calculating group exposure(CIM24)

h. To flag the nature of loan - Individual, multiple banking and consortium underLN555.

i. Correct feeding of Moratorium details (LN 521)

j. Updation of sector, industry and activity codes in BAM 83

k. Updation of security details under BAM74/LNM34/FCC module.

l. Updation of collateral details to enable the correct generation of data for CollateralFree Loans Return in ADF

Data MigrationIssues

Reasons forPoor Data

Data EntryErrors

Data collectionIssues / manual

compilation ofreturns


m. Ensuring appropriate and correct updation of security type/security nameand security value for secured advances with status of charge creation anddate of last valuation

n. Updation of correct rate of interest in accounts.(LNM83,CHM07)

o. Incorporating internal and external rating details BAM51,BAM88,BAM89

p. Flagging of project loans, incorporating Date of Commencement ofCommercial Operations (DCCO) for project loans, nature of project,location of project, status of project in LNM35 .

r. Incorporating details relating to receipt of stock statements, document expiry,receipt of financial statements Sensitive Sector details in BA020 Menu updationfor generation of BSR-3 Return in ADF.

s. Correct feeding of Compromise details (BAM 54)

t. Sick Unit details in respect of BAM 43 updation in specialised branches

u. Entering details relating to suit filed accounts and details of accounts underSARFAESI (BAM31)

v. Reckoning guarantees invoked and devolved LC accounts in CBS

Updation of MIS fields in CBS is a continuous activity. While the cleansing of existingaccounts is the need of the hour, entering the correct MIS codes in all new accountsbeing opened on day to day basis is even more important as it ensures no furtheradditions to the incorrect data. All Canarites should take pledge to feed all the MISdetails while opening accounts so that each branch performance under different sectorsare correctly reflected in their branch/Circle report and Bank can show legitimateperformance.

40. GOAL SETTING

Goal setting is much more than simply saying you want something to happen. Unless youclearly define exactly what you want and understand why you want it the first place, yourodds of success are considerably reduced. By following the Five Golden Rules of GoalSetting you can set goals with confidence and enjoy the satisfaction that comes along withknowing you achieved what you set out to do.So, what will you decide to accomplish today?The Golden Rules

1. Complementary design aligned with corporate policy

Whatever goal as per business strategy is designed to achieve, it requires proper alignmentwith corporate objectives.

A branch manager should always keep in mind the corporate concerns before creatinggoals for the branch. Bank, every year comes out with “Business policy guidelines” whichgives a direction for performing in line with corporate policy for business development.

2. Set Goals that Motivate You

When you set goals for yourself, it is important that they motivate you: this means makingsure that they are important to you, and that there is value in achieving them. If you havelittle interest in the outcome, or they are irrelevant given the larger picture, then thechances of you putting in the work to make them happen are slim. Motivation is key toachieving goals.

Set goals that relate to the high priorities in your life. Without this type of focus, you canend up with far too many goals, leaving you too little time to devote to each one. Goal


achievement requires commitment, so to maximize the likelihood of success, you need tofeel a sense of urgency and have an "I must do this" attitude. When you don't have this,you risk putting off what you need to do to make the goal a reality. This in turn leaves youfeeling disappointed and frustrated with yourself, both of which are de-motivating. And youcan end up in a very destructive "I can't do anything or be successful at anything" frame ofmind.

3. Set SMART Goals

You have probably heard of "SMART goals" already. But do you always apply the rule? Thesimple fact is that for goals to be powerful, they should be designed to be SMART. Thereare many variations of what SMART stands for, but the essence is this – goals should be:

Specific.

Measurable.

Attainable.

Relevant.

Time Bound.

Set Specific Goals

Your goal must be clear and well defined. Vague or generalized goals are unhelpfulbecause they don't provide sufficient direction. Remember, you need goals to show youthe way. Make it as easy as you can to get where you want to go by defining preciselywhere you want to end up.

Set Measurable Goals

Include precise amounts, dates, and so on in your goals so you can measure your degreeof success. If your goal is simply defined as "To reduce expenses" how will you know whenyou have been successful? In one month's time if you have a 1 percent reduction or in twoyears' time when you have a 10 percent reduction? Without a way to measure yoursuccess you miss out on the celebration that comes with knowing you have actuallyachieved something.

Set Attainable Goals

Make sure that it's possible to achieve the goals you set. If you set a goal that you haveno hope of achieving, you will only demoralize yourself and erode your confidence.

However, resist the urge to set goals that are too easy. Accomplishing a goal that youdidn't have to work hard for can be anticlimactic at best, and can also make you fearsetting future goals that carry a risk of non-achievement. By setting realistic yetchallenging goals, you hit the balance you need. These are the types of goals that requireyou to "raise the bar" and they bring the greatest personal satisfaction.

Set Relevant Goals

Goals should be relevant to the direction you want your life and career to take. By keepinggoals aligned with this, you'll develop the focus you need to get ahead and do what youwant. Set widely scattered and inconsistent goals, and you'll fritter your time – and yourlife – away.

Set Time-Bound Goals

You goals must have a deadline. Again, this means that you know when you can celebrate


success. When you are working on a deadline, your sense of urgency increases andachievement will come that much quicker.

Set Goals in Writing

The physical act of writing down a goal makes it real and tangible. You have no excuse forforgetting about it. As you write, use the word "will" instead of "would like to" or "might."For example, "I will reduce my operating expenses by 10 percent this year," not "I wouldlike to reduce my operating expenses by 10 percent this year." The first goal statementhas power and you can "see" yourself reducing expenses, the second lacks passion andgives you an excuse if you get sidetracked. Frame your goal statement positively. Postyour goals in visible places to remind yourself every day of what it is you intend to do. Putthem on your walls, desk, computer monitor, bathroom mirror or refrigerator as aconstant reminder

10. Make an Action Plan

This step is often missed in the process of goal setting. You get so focused on the outcomethat you forget to plan all of the steps that are needed along the way. By writing out theindividual steps, and then crossing each one off as you complete it, you'll realize that youare making progress towards your ultimate goal. This is especially important if your goal isbig and demanding, or long-term. Read our article on Action Plans for more on how to dothis.

11. Stick to It!

Remember, goal setting is an ongoing activity not just a means to an end. Build inreminders to keep yourself on track, and make regular time-slots available to review yourgoals. Your end destination may remain quite similar over the long term, but the actionplan you set for yourself along the way can change significantly. Make sure the relevance,value, and necessity remain high.

12. Handling resources

In addition to Managing Human resourcea as mentioned earlier, there are other resourceswhich need to be managed by branch manager viz.,

TechnologyHardware, software, connectivity, machines, are the basic available resources in thebranch to make various transaction , record keeping , communication, data managementetc.

The Branch Manager should be able to manage technology resources to the optimum level.For that he needs to ensure constant & flawless availability for use. Training to the staff onhandling Technology is also the important role of the branch manager. Process knowledge,security, functioning, AMC are the areas for technology level , which a branch managershould work periodically.

CustomersCustomers are the key resource for the branches for business development. It is a veryimportant role of the branch manager to manage customer flow. The customers are basefor the business. A branch manager needs to create robust process for convenient andexcellent customer services. All the initiatives are to be set to serve better to thecustomer. Without them, no business is possible. So for branch managers prospective,the business of the branch is to mind the customer well.


Profitability-

Controlling Expenses ,

prevention of revenue leakages

increasing income by maximizing recovery in NPA/PWO accounts.

Risk Management

Operation Risk

Physical security at branch.

Preventive Vigilance in operations & Advances- studying modus operandi of recentincidences of Frauds.

Credit Monitoring & NPA management

Improving Branch’s FSA score & risk rating

41. BE A FINANCIAL ADVISOR / CONSULTANT

What Is Financial Planning?

Financial planning is the process of meeting your life goals through the propermanagement of your finances. Life goals can include buying a home, saving for your child’seducation or planning for retirement. The financial planning process involves the followingsteps:

Gathering relevant financial information

Setting life goals

Examining your current financial status

Coming up with a financial strategy or plan for how you can meet your goals

Implementing the financial plan

Monitoring the success of the financial plan, adjusting it if necessary

Banks play a major role in advising the clients on money matters. The customers would belooking up to the Bank’s for assistance for their financial planning. One must have thequality and capacity to guide his clients as to what type of investments suit them the most.

These six steps help you to understand what you are expected to do as afinancial planner.

It’s important to make sure that you have taken the time to understand the client’sneeds/goals and preferences before giving any recommendations.

1. Defining the scope of engagement

The planner should explain the process they will follow; find out the client’s needs andmake sure they can be met. You can ask them about their background, financialmilestones, income and expenses in such a way that you get a fair idea about the customer


2. Identifying the Financial Goals

The planner should work with the client to identify his/her short and long term financialgoals – this stage serves as a foundation for developing your plan.

3. Assessing the financial situation

The planner will take a good look at the client’s position – his assets, liabilities, insurancecoverage and investment or tax strategies.

4. Preparing the financial plan

The planner recommends suitable strategies, products and services, and answers anyquestions which the clients have. This part can be called as asset allocation, which isdependent on the need and risk appetite of the customer. Asset allocation is an investmentportfolio technique that aims to balance risk and create diversification by dividing assetsamong major categories such as cash, bonds, stocks, real estate and derivatives. Eachasset class has different levels of return and risk, so each will behave differently over time.

We must emphasize that there is no simple formula that can find the right asset allocationfor every individual. It should be based on the Risk appetite, return expectation,investmenthorizon, life style, income and future earning etc of the individual, which will be varyingfrom person to person. Hence the biggest challenge is to suggest the right kind of assetallocation.

S. Implementing the recommendations

Once the client is ready to go ahead, the financial plan will be put into action. In this step,the planner would assist the client in implementing the recommendations and would workclosely with other professionals to bring the financial plan to completion.

6. Reviewing the Plan

Client’s circumstances, lifestyle and financial goals are likely to change over time. So it’simportant that the financial plan is regularly reviewed, to make sure you keep on track.This not only keeps the client’s confidence level but also gives you an opportunity tosuggest new products as well as to improve the investment returns.

What Are the Benefits of Financial Planning?

Financial planning provides direction and meaning to one’s financial decisions. It allowshim to understand how each financial decision he make affects other areas of his finances.For example, buying a particular investment product might help you pay off yourmortgage faster, or it might delay your retirement significantly.

By viewing each financial decision as part of a whole, one can consider its short and long-term effects on life goals. He can also adapt more easily to life changes and feel moresecure that his goals are on track. As quoted by Certified Financial Planner Board ofStandards "Financial planning is the process of meeting your life goals through the propermanagement of your finances."

42. NON INTEREST INCOME – A WAY TO GET MORE PROFIT

For the FY15, Bank had targeted Rs.5650Cr under Non Interest Income against theperformance of Rs.3933Cr as at FY14 with ambitious growth rate of 43.66%. With thecontinued trend in high Interest Rates for the FY15 also and low or muted growth inlending due to slow economic growth of the country, there was a strain on robust


growth in Non Interest Income. Bank has achieved Rs.4550 Crore Non Interest Incomefor the FY15 with a growth rate of 15.7%.

With the squeeze on NIM and pressure on profits and profitability, augmentation of FeeIncome plays a vital role in improving the profitability of the Bank and thereby profitabilityratios. Non InterestIncome provide the elbowroom for Banks to counter the margin pressure and to shore up theprofitability levels.

Augmentation of Non- Interest Income is the strategic agenda of banks for strengtheningthe bottom line. The main reasons are:

1. Competition amongst financial institutions and persistent pressure on spreads.

2. Earnings from treasury is uncertain due to volatility in the market conditions.3. Increased trend of NPAs due to Economic slowdown and consequentlyhigher provisioning. Focused attention is desired for sustained growth in Non-Interest Income.

Bank has taken initiative and formed separate Fee income Vertical and Circles alsonominated an executive for Fee income. Circles are required to monitor the branchesclosely for improved Non Interest Income. Circles/Branches are required to give morefocus among others on:

1. Identifying new Non Fund based proposals. Proper training of Staff and theirmonitoring.

2. Utilisation of Marketing Officers for increased NFB limits, selling 3rd party productsetc.

3. Focusing on Government Business.

4. Recovering locker rent arrears, hiring out of vacant lockers and installation of new lockerunits and locker plazas in residential areas.

5. Prompt collection of upfront fee/processing fee, minimal concessions in ServiceCharges.

6. Prompt collection of charges for cash handling, godown/stock verification, chequereturns, out of pocket expenses etc.

7. Increasing credit and debit cards clientele base: Installation of ATMs and POSmachines in potential places.

8. Recovery in written offaccounts. Peer Bank Analysis:

An analysis of the performance of our Bank vis-à-vis Peer banks namely, Bank of India,Bank of Baroda, Punjab National Bank and SBI reveals the following position.

Share of Core NII to total Non Interest Income has decreased over previous year(Mar 14) by more than 10% in our Bank.

Share of Non Interest Income to Total Income of the Bank has increased from9.05% to 9.42% over the previous year.

Share of Non Interest Income in total income is a key factor for driving profitgrowth. This parameter has strategic significance from investors as well asanalysts point of view.

Non Interest Income as percentage to total income at 15% and above is reckonedas a benchmark and this parameter figures prominently in the CAMELS ratingawarded by RBI.

With progressive increase in business, it is expected that both interest and NonInterest Income move in parallel to maintain the share of Non Interest Income tototal Income.


The share of Non Interest Income in total Income for our Bank as at March 15increased to 9.42% Major Contribution has come from Profit on Sale of Investments (23%) followed by Profit

on exchange transaction (17%).

Profit on Sale of Investments grew by 107.75%

Profit on Exchange Transactions grew by 16.72%.

LCBG Commission grew by 10.55% over March 2014.

Action Points:

Among others, following action points are suggested to improve the FeeIncome: s More thrust on traditional sources like LCs/BGs, Collection ofinstruments and Service charges.

Plugging the leakage of income, by charging the prescribed amount of Service Charges.Circles/Branches to be referred to HO Circular 93/2015 regarding reiteration ofguidelines.

Cross selling of 3rd party products like Insurance, Mutual Fund etc,.

Improve in Card income by enrolling more PoS, increase in card base, scouting moreGovernment Business turnover and PPF/NPS Accounts. Improving e-stamping business,e-payment of taxes by our Customers.

Conducting Expos in major Centres for sale of Bankassurance and PPF accounts.Popularising Insurance products/Health product, covering Bank assets under Insurancewith United India Insurance Co ltd.

Advising the parties to utilize the unavailed limits and also to identify the new partiesunder Trade Finance.

Recovering the Locker rent arrears, hiring out of vacant lockers and installation of newlocker units and locker plazas in residential areas and reviewing the Safe Deposit Lockerrentals by circles.

Installation of more number of ATMs to increase acquiry income.

Focusing on recovery of Written Off accounts under doubtful-3years and loss accountsand recovering minimum 10% of outstanding amount.

Tie-up with schools and colleges for collection of fees and selling of college applications.

Review the concessional facilities permitted/selective in permitting concessional facilitiesto the parties and to ensure proper pricing of services.

Concerted focus on Customer-Relation Management will ensure a sustained growth in NonInterest Income. s Prompt collection of charges for cash handling, godwown/stockverification, cheque return charges, OPE etc,. Dashboard on Fee Income has been developedby DIT Wing and made available in the link (also in CBS important link)

http://172.16.42.70/rbi/dashboard.aspx to help Branches/Circles and HO to effectivelymonitor and plan augmenting Fee Income.

43.COST CONSCIOUSNESS : CONTROL AND REDUCTION

It is a matter of Great Pride to the Bank that it has since its inception shown Profitsdespite espousing the Social cause of its Founder Sri Ammembal Subbarao Pai andwithout resorting to usurious practices. The Bank has come a long way since thoseheady days and maintained a steady pace inspite of changes in Ownership, EconomicPolicies, constantly changing economic situation and the dynamics of the FinancialMarket.

POLICY CHANGES THAT HAVE AFFECTED THE BANK PROFITABILITY

The 1990s ushered in a dramatic change in reckoning Income fromLoans with the implementation of the Narasimhan Committee recommendations. Until


this period, the Banks' had a fair amount of cushion in that whatever Interest wasdebited to the account was considered as Income irrespective of whether the same waspaid by the Borrower or not. This used to give a Spread of close to 5% depending on theInterest Rates in vogue.

The Narasimhan Committee recommendations ensured that this form of accounting wasabandoned and Income had to be reckoned on actual accrual basis. Thus, the focusshifted to the Banks' having to ensure that the Borrower services his Loan inclusive ofthe Interest levied. This concept resulted in shrinking spreads and Banks' began to feelthe pinch.

Significant changes in Economic policies of the Government with its desire to spreadthe Socialistic Financial Frame-work resulted in several low interest Schemes for thepoorest of the poor and Loan Melas. Interest concessions, Interest subsidy and themalady of Loan waivers brought a new generation of borrowers who resorted todelaying tactics in repaying the loan so as to avail the benefits of waiver as and whenannounced by the Government/s.

THE ECONOMIC PICTURE IN THE LAST FEW YEARSThe Globalization of the Indian Economy ushered in a sea-change in how businesseswere run. Significant inflow of Capital from abroad, Strategic tie-ups, Mergers andAcquisitions, Broad basing of Products and Services became the norm. However, everyminute change in the Global scenario began to affect the Nation, the Economy and theIndustries. Crude Prices, Currency fluctuations, economic outlook of countries withwhich the Nation had significant trade ties had a severe impact on Economic growth.

This impacted our Loan portfolio severely. The economic downturn resulted in significantincrease in our NPAs which included several Large Borrowers. There was also demand forrestructuring of the loans which has impacted our Interest Income.

ESTABLISHMENT EXPENSES

The Bank has very little control over this head of expenses as this is governedby the Bi-partite settlements and is affected by Inflationary pressures. Besides,the Bank's policy on Branch Expansion necessitating large scale recruitment ofpersonnel also impacts these expenses. We furnish in the table below theEstablishment Expenses of the Bank over the last 5 years.OTHER OPERATING EXPENSES

The Expenses being incurred by the Bank for maintaining its branches and offices forms theOther Operating Expenses. The major heads are:

1. Rents for Premises and Quarters

2. Electricity expenses

3. Stationery Expenses

4. Postage, Courier and Telephone

5. Repairs & Maintenance

6. Computer Expenses

7. TA, Conveyance, Subscriptions, BDE and Incentives to Staff

8. Other Expenditure not categorized above

AREAS FOR COST CONTROL

As indicated above, the major heads of Other Operating Expenditure like Rent, Electricity,Stationery, Postage, Telephones, Repairs & Maintenance are the areas to be targeted forreduction in expenses.

COST CONTROL MEASURES : Rent


In respect of Branches to be newly opened Selective opening based on business potential of the place Rental fixation through hard negotiations based on locational advantage, proximity

and potential for generating business. Limiting expenditure of Branch opening functions Use of vertical spaces in Premises In respect of branches already opened Rental fixation during renewal of agreements to be negotiated to the benefit of the

Bank Unused/unutilized areas to be surrendered during such renewals after considering

security aspects Possibility of shifting to low cost Premises with potential for generating higher

business to be explored Use of vertical spaces in Premises GA Wing may conduct Space Audit for Branches & Offices, review minimum floor area

fixed for various categories of branches & offices the area may be fixed on par withthe private banks, so that the floor area requirement may be reduced / optimized inthe long run. Branch automation, introduction of e-lounges and customers acceptanceof technology products are reducing the need for larger floor spaces.

Besides, the following general measures are to be adopted for cost reduction and costcontrol

1. Printing of Booklets for internal distribution to be uploaded in CANNET. Only softcopiesto be provided to minimize the printing and stationery expenses.

2. Trainings / Meetings / Interface etc to be conducted preferably through VideoConferencing wherever possible and in a cost effective manner.

3. Notes and back papers for meetings to be uploaded to the Tablet / Laptops of theexecutives instead of supplying hard copies.

4. Need based training at Overseas may be considered very selectively by the TOPManagement on merits.

5. Trainings and Seminars on All India basis may be held only with the consent ofExecutive Director.

6. Trainings and Internal Programs to be planned well in advance to facilitate Advancebooking of tickets.

7. E-documentation of legacy and current data/documents to be taken up to reducephysical storage space in due course.

8. Disposing off old and unusable furniture & stationery on an on-going basis to reduce thespace requirement.

9. Reviewing the utility of the godowns hired to store old records / old furniture / oldcomputer systems and taking appropriate steps to surrender them or ensure optimalutilization.

10.Surrendering extra telephone lines and FAX facilities provided to branches / offices,after proper study. Usage of scanners and e-mail facility to scan letters and sendingthem by e-mail instead of FAX.

11.Prompt switching off of Lights, Fans and Air Conditioners when not required/ not in use.

12.Creation of in-house Travel Desk to reduce dependence on travel agents and expensesthereof.

13.Renovation and refurnishing works to be taken up only in respect of those brancheshaving the potential to attract and generate greater business.

14.Minimal movement of personnel during transfers to reduce TA/HA expenses as well as


shifting expenses.

44.STRATEGY FOR NPA RECOVERY & MANAGEMENT

A healthy banking system is essential for any economy striving to achieve growth andremain stable in competitive global business environment. With the slowdown of theIndian economy, a number of companies / projects are under stress. As a result, theIndian banking system has seen increase in NPAs and restructured accounts during therecent years. Against this backdrop, NPAs have emerged as one of the major concernsof banks in India.

MULTI-DIMENSIONAL EFFECTS OF NPAs:

NPAs in short are not just a problem for Banks but also for the economy itself. Nonperforming assets impact bank's profitability by reducing the net interest income,employee- productivity and overall profitability. They affect recycling of bank credit, theliquidity position of the Bank, leading to low profits and lower capital adequacy ratiowhich in turn limits further asset creation. High nonperforming assets dent the image ofthe banks in both domestic and international markets.

NPA POSITION IN THE BANKING INDUSTRYGNPAs of Public Sector Banks (PSBs) rose from 2.09 percent in 2008-09 to 3.84 per cent asat March, 2013 and further to 5.64 per cent as at the end of December, 2014, WHICH ISINCRESED TO MORE THAN 10% NOW AS ON MARCH 2016. The average of GNPA Ratio +Restructured Standard Advances Ratio of PSBs stood at 11.34% as at March 2014,increasedfrom 11.02% as at March 2013. It has further increased to 13.03% as on December 2014.WHICH IS INCRESED TO MORE THAN 25% NOW AS ON MARCH 2016.COMMENTS :

Our Bank's GNPA and Net NPA Ratio are relatively lower.

As at 31.3.2014 and also as at 31.03.2015, our Bank's Gross NPA stands at the lowestamong Peer Banks, (Except BoB as at March 15) amount-wise as well as percentage-wise

Our Bank's Net NPA stands the second lowest among Peer Banks, amount-wise as well aspercentage-wise during the above periods.

SNAP SHOT OF OUR BANK’S PERFORMANCE :FOR 2014-15

) Cash Recovery:

Bank has performed extremely well under Cash Recovery by achieving Mile stone figure ofT5993 crore (provisional) (last year T5494 crore) 3 Circles and CBD, HO have crossed thetwin targets, 10 Circles and CBD, HO have reduced their NPA level (Pre-Moc) belowMar’14. 32 circles and CBD, HO have surpassed their Cash Recovery target. OurBengaluru Metro Circle has contributed a total of T950.89 crore towards cash recovery,followed by Chennai Circle (T512.79 crore) & Delhi Circle (T397.90 crore).

While congratulating the Circles / Branches for their splendid contributions towards theabove performance, we are equally concerned about the slippages to the extent of T9008crore (Pre-MoC) (T8444 crore last year) observed during the year.

B) NPA LEVEL :

Despite the positive performances, one area still causing Concern to all is the NPA level ofthe Bank.

Bank's Gross NPA which was T6260 crore (2.57 %) as at March‘13 had increased toT7570 crore (2.49 %) as at March 2014. Where as, it increased to T10614 crore as atMar’15 (Pre-Audit) (3.23 %).

The fresh net slippage during the year is T9008 crore (Pre-MoC) ( T8444 crore last year),C) Goal for the year 2015-16 :


We have set the following challenging goals for the current Financial Year :

Reduction of Gross NPA to T9500 crore (Below 2.5 %)

Reduction of Net NPA to T6500 crore (Below 2 %)

Cash Recovery - T5500 crore.

Recovery in Written Off accounts - T600 crore.

D) Action Programme :

In the present scenario, we are confronted with two major tasks, viz., containment ofSlippages and Recovery and Upgradation of existing NPAs. Both these tasks are to behandled with utmost seriousness and concern so as to ensure that the situation continues tobe under control. Preventive Management :

The origin of NPAs lies in the quality of managing credit assessment, risk management,monitoring and supervision.

Slippage Management is the back bone of NPA Management. The monitoring of the accountsappearing in SMA, should be a daily affair on the part of the Branch Managers and warningsignals portrayed should be given serious thoughts to avoid slippage of fresh accounts toNPA.

Timely Restructuring / Rephasement to be done in all deserving cases. Stalled projectswhich are attracting lot of attention have to be looked into for remedial measures to ensurecompletion.

Tackling of newly slipped accounts:

Initiate recovery steps from the early stage of account slipping to NPA. Transfer of NPA accounts to LPD by marking for recovery within a maximum period of

60 days of slippage, and initiate further steps like suits/SARFAESI etc. Non transfer of accounts to LPD results in appropriation of recovery in NPA accounts

to accrued interest, as a result despite recovering the book liability, the NPA leveldoes not get reduced to the extent of Cash Recovery.

Curative Management :The curative measures are designed to maximize recoveries / upgradation so that the Bank’sfund locked up in NPA are released for recycling and generating profit.

New Passionate Approach to NPA: Our Top Management has given clarion call forReaching out all NPA Borrowers which is the Success Mantra for Recovery :

Our recovery efforts get a boost only when we reach all our borrowers & demand forrecovery. There should not be any case of leaving out any of the borrowers.

Recovery in Written Off accounts: During the year we could recover nearly T1351 crore(18.29% out of the amount outstanding under technically Written off accounts as at31.3.2014) as against the Target of T750 crore which has directly added to our profit.Branches to continue their vigorous efforts in this direction to double last year’s figure.

Reduction in Small value accounts:

97 % of the accounts are having liability less than T10 lacs.

Hence, Circles are instructed to draw an action plan to reduce the number of accounts,further. Even if 30 % of the accounts are targeted we can achieve reduction of about 1 lacaccounts.

ONE TIME SETTLEMENTS:

OTS has become our major tool of recovery,

Our actions like SARFAESI / filing Suit & classifying them as wilful defaulter/ publishingtheir photos etc. will compel them for negotiation culminating into OTS.

Conducting frequent Canadalats at branch level & Mega adalats at Circle level for One


Time Settlements will be continued. During FY 2014-15, Circles/Branches have conductedaround 18900 recovery meets/ Canadalats / Mega Adalats, in which 55000 accounts weresettled involving compromise amount of T1165 crore which has contributed a major sharein our recovery.

. Pursuing OTS permitted accounts for recovery as per schedule

SARFAESI:SARFAESI action to be initiated for all eligible cases with time bound follow up till its logical

conclusion. If procedure is meticulously followed; it takes just 4 months to realize our duesby enforcing the securities.

. In all eligible cases demand notices are to be issued with a time bound programme.

. To get the favourable & early orders from CMM, proper liaisoning by our advocates/seizureagents is essential, which has to be ensured.

Online Auction: As directed by Ministry of Finance, Govt of India our bank isconducting E-Auction under SARFAESI Act with the assistance of service providers, Viz,E Procurement technologies PVT Ltd, C1 India PVT Ltd and M/S Antares systems Ltd.Further we are in the process of empanelling more service provider.

Wherever there are no bidders Bank can consider purchasing the property as NonBanking assets.

Conducting Lok Adalats, follow up of Suit filed cases in various Courts and DRTs, filing EPsand execution of decree needs to be ensured. Performance of Advocates to be monitoredperiodically.

LOKADALATS: Making extensive use of forum of LOKADALAT and conducting LOK ADALATin each district of each Circle in every quarter. In the National Lok Adalat held duringDecember 2014 and February 2015,

OTHER ASPECTS: Recovery in ARM Branches:

ARM Branches: Bank has got 16 ARMBs covering nearly 23.55 % (Dec’14) of bank’s NPA.In some of the circles the share of ARM Branches under Circle’s total NPA is more than40%. A well planned and coordinated efforts to be made to improve the performance ofARM Branches.

Effectiveness in the functioning of ARMBs contribute much to the success of NPAmanagement & recovery in the respective Circles.

Recovery Officers:

Circles should activate the Recovery team at their end and post Recovery Officerscovering cluster of branches to provide required assistance in their efforts of meetingborrowers/conducting Canadalats / Lokadalats & SARFAESI action, follow up of SMAaccounts.

Recovery Agents:

It is more than 3 years now that, bank has come out with a scheme for appointingretired Govt./PSU/ our Bank employees as Recovery agents to supplement therecovery efforts of the branches. The criteria for appointment of Recovery Agents isliberalized and remuneration is increased vide latest Recovery Policy. Still,,

till date only 127 agents have been empanelled. Trivandrum Circle has empanelled 30Recovery Agents followed by Hubli 14 and Ernakulam 9, So far 35 Circles have yet totake initiative in empanelling Recovery Agents.

Website publicity:

The property particulars under auction reported by Circles are being published by us inBank’s website & also in the website of “bankdrt.com” which is getting us good response.As per the government guidelines the sale notices are also published in the website ofGOI : tender.gov.in

E) HO INITIATIVES :


HO has initiated the following measures to support the branches in curtailing NPAs andimproving Recovery:

Employee Incentive Scheme - Recovery Contest with enhanced incentive amount is beingextended for the current year.

Special Scheme for settlement of small NPAs, up to T10 lacs, along with a liberalizedscheme for Education & Tractor Loans was introduced and the extension of the same isunder consideration.

Special Scheme for settlement of MSME NPAs, is in vogue till December 2015.

Delegation of powers to Branch Managers for settlement of small value NPAs underloss assets.

Call Centre: for follow up of overdues in loan accounts is functioning at HO, services ofwhich can be utilised by the Circles by contacting MCRM section of Retail Banking Wing.

Conclusion:

We have a very formidable task before us, particularly in view of continuing slippages.Unless all the staff members are motivated to extend their full co-operation &involvement in recovery efforts, we may not be able to meet the challenges. Circles toensure this aspect.

All our Branches/Offices are required to gear up and join together to arrest slippages, andbestow their best attention to improve the NPA management & Recovery position byinitiating the following steps :

a) Identification of Major accounts for SARFAESI & Close follow up for recovery in eachbranch. To be monitored by an identified executive.

b) All VLBs/ELBs to ensure special attention for big accounts.

c) Pending notices / Possession of Securities / Sale of Securities under SARFAESI in respectof eligible accounts to be listed out and to be cleared immediately.

d) Making use of forum of LOK ADALAT and to conduct LOK ADALAT in each district ofeach Circle in a quarter.

e) Ensuring conducting at least 2 canadalats every month by all branches.Identify & engage Recovery agents at all branches.

45. CREDIT MONETORING TOOLS & RECOVERY MECHANISM

The various loan review & monitoring functions shall be as follows:

1) Review of Credit Sanctions made by Each Authority

Loan sanctions made by each sanctioning authority shall be placed before the NHA forreview as per guideline. Such sanctions include fresh sanctions, renewals and/orenhancements.

2) Mid Term Review (MTR) : Merger of MTR with CMF (302/2014), Periodicity: 6months from the date of sanction/ renewal. If the tenability is fixed beyond one year, MTRwill be done every 6 months thereon.3) Asset Sub-classification Code System (ASCC):

ASCC System is a mechanism to classify borrowers on the basis of compliance to theparameters indicating the quality of assets and to detect early warning signals ofincipient sickness. Applicable in respect of all borrowal accounts subjected to MTR.

4) Based on the conduct of the account, adherence to various financial parameters etc.,the accounts are categorized into 9 grades viz, Standard Assets ASCC S1 to S4;Substandard Assets SS; Doubtful Assets 1st year D1; 2nd year - D2; 3rd year - D3;Loss Assets

Monitoring of Special Watch List Accounts: SWL is an early warning signal to be


used to avoid slippage.

All accounts displaying unsatisfactory dealings/ early warning signals are put underspecial watch list for follow up and time bound actions to prevent slippage to NPA.

The following types of accounts are reported in the Special Watch list:

i) Running accounts – Where any amount which has fallen due for payment andremains unpaid for a period of more than 30 days; Where the regular limits/adhoclimit /Adhoc Over limit or Single transaction limits are not renewed/ reviewed/regularized beyond 1 month from due date stipulated in the sanction; Where thedrawings are allowed in an account based on the Drawing Power calculated fromstock statements older than 1 month from the due date for submission;

ii) Bills both demand and usance remaining overdue for more than 30 days from thedate of purchase/ due date respectively; ii) Devolved NFB facilities outstandingbeyond 30 days from the date of devolvement;

iii) Term loans where interest and/or installment of principal remain overdue for aperiod of more than 30 days.

Accounts classified as NPA as per IRAC norms need not be included in this statement.

The Special Watch list statement is categorized in to 5 Parts namely,Part A - All Borrowers with limit including and upto Rs 1 lac.Part B - All Borrowers with limit of > Rs 1 lac including upto Rs5 lac. Part C - All Borrowers with limit of > Rs 5 lac includingupto Rs 25 lac Part D - All Borrowers with limit of > Rs 25 lacincluding upto Rs100 lac. Part E - All Borrowers with limit of >Rs 100 lac.

Monitoring of SWL accounts: i.Parts A to E shall be primarily reviewed at Branches.

(i) In respect of Part B to E, Branch wise/ account wise review of S W L accountsshall be carried out at Circles.

(ii) Part E (>Rs 100 lac accounts) accounts shall be individually reviewed at CM Wing, HO.

(iii) In respect of accounts requiring rephasement/restructuring, it is to be ensuredthat proposals are taken up well in advance so that the decision is received wellbefore the overdues or irregularities complete 90 days.

Important steps to follow:1. Download SWL report of your branch and save it.

2. Select (+) sign of customer wise consolidation(+) sign before PART-A, B, C, D, E will bedisplayed

3. Click on (+) sign of PART-A and attend each a/c, then select PART B and soon.

4. (You may attend first PART-E then "D” then "C" "B" "A".)

5. You may also take print out of the relevant pages (instead of taking whole report)

6. "Dormancy", "Stock statement", "Arrears" is the reasons in running a/c which indicatesparty isnot transacting. Contact them and convince, look for associated problems and extendhelpinghand.

- Dormancy will be removed by credit entry (any amount) comes- Stock statement feeding to be done correctly and timely.- Opt CHM06 -à note down Security id and its type- Feed in the system under option BAM74- For arrears full overdue amount is to be recovered.- For TOD over line, amount above the limit granted to be recovered.- Where limit is expired, immediate steps to be taken to renew it.

7. Please note, first two pages of this report 'WAR Dtls 1-15' & 'WAR Dtls 16-30'are really WAR list and to be followed on 'war' basis. Already more than 60days are over and a/c will slip to NPA shortly. This will help you in making NIL


slippage.

8. Make maximum use of below reports.

a) Business Object: a) 280119: a/c appearing in SWL for various reasons, b)280105: a/c slipping to NPA between two dates,c) 280080: daily slippage /Upgradation

Numbers of accounts appear in the SWL for the NON FINANCIAL REASONS i.e.Renewal of Limit, Dormancy & Stock Statement Review etc., as per BO REPORT ID280119. These accounts are leading to unnecessary increase in SWL figures whichcould have been easily avoided.

9. As and when SWL report comes, branch should generate ―Report-280119‖ from BOand follow each & every a/c for early regularization. PDF file from CBS report homepage should be generated and followed from ‗customerwise consolidation‘

10.Excel sheet of SWL report can be generated from CBS Report home page ---- otherpackage Special Watch mail merge list. (Similarly NPA borrower list may begenerated for mail merge)Tips: While Updating Stock Statement, plz. follow following steps:

1. Find out the security ID & Security Code from CHM 06 Option.2. Update the above found Security ID in BAM 74 option.

5) Credit Monitoring Format (CMF) [Merger of MTR with CMF (304/2014)]

All borrowal accounts with total credit (FB+NFB) limits of Rs 1 Cr & above shall bemonitoredonce in 2 months at branch level not later than 10 days from due date using SSOpackage.

6) Stock audit reports by external agencies : This audit of inventory stock and bookdebts securities will be got done through our bank panel valuers at the prescribedperiodicity.

7) Quick Mortality Accounts: Slippage in new accounts with aggregate liability of Rs.5 lacs and above and becoming NPA within a period of 12 months from the date offirst disbursement shall be identified and suitable remedial measures shall be initiated byCircle Offices.8) Credit Monitoring Officers at branches :

All borrowal accounts with total credit exposure limits of Rs. 1 crore and above (Fundbased + Non fund based) shall be monitored once in 2 months by an officer in thebranch designated as Credit Monitoring Officer (CMO) for the purpose.

Circles shall review the functions of CMOs by holding CMO meet every quarter.9) Credit Audit : All fresh sanctions, renewals with enhancements/additional exposuresshall be subjected to credit audit enjoying fund based and non-fund based working capitallimits of Rs.1 crore & above within a period of 3-6 months from the date of disbursement.10) Quarterly/Half Yearly Operating System (QOS/HOS) : Applicable in respect ofindustrial borrowers, merchant exporters, traders, borrowers under SME (bothmanufacturing and service sector), etc. enjoying fund based and non-fund based workingcapital limits of Rs. 5 crore and above from the banking system.11) Other credit monitoring tools :

Monthly Stock Statement cum select operational data (MSOD) -Copy of thesame shall be submitted by the branches to the reviewing authority at Circle Officeduly furnishing the computation of the Drawing Power.

Stock Inspection reports (SIR) of Branch officials shall be reviewed by thereviewing authority at branch / Circle office as the case may be.

Project Implementation Progress Reports (PIPR) for term loans.

Lenders' Independent Engineer's Report (LIE) at periodical intervals duringimplementation of the project.

In respect of sanctions made by SME Sections in Circles, SME Sulabhsand Retail Hubs the respective sanctioning authorities shall monitorthe accounts.


INSPECTION OF STOCK – EXTANT GUIDELINES (Cir 303/2011 dtd. 15.10.2011)

1. In respect of fresh OCC accounts, inspections of godown without fail before release oflimits.

2. Branch-in-charge has to ensure equitable distribution of godown inspection amongOfficers that each official conducts stock inspection of a particular account 3 timesconsecutively.

3. At least once in a year, godown shall be inspected by the Manager/ Senior Manager in-charge.

4. Special Watch category/ NPA accounts (non- LPD accounts), Manager / SeniorManager in-charge shall conduct the godown inspection at least once in 6 months.

5. In the case of VLBs/ELBs and PCBs, apart from conducting inspection of stock by theOfficer/Manager at the prescribed intervals of time, Manager/Senior Manager incharge of Advances Department shall conduct stock inspection at the followingperiodicity: Once in a year in the case of regular accounts; At least once in 6 monthsin the case of accounts classified under Special Watch category and non LPD NPAaccounts

6. CM, AGM and DGM heading the branches shall conduct stock inspection at least oncein a year in respect of following accounts: High Risk accounts (wherever theaccounts are subjected to Credit Risk Rating), ASCC S3, S4 and non LPD NPAaccounts, Accounts which are appearing in the Special watch category .

FORMAT REDESIGNED : (CIR 322/2011 Dt. 3.11.2011) -

1) NF 585 – Simplified stock statement is since dispensed with.

2) A redesigned simplified stock statement – NF 1003 is introduced.

3) Stock inspection report is also embedded in NF 1003.

4) NF 1003 from all borrowers (industrial and non-industrial borrowers) who areenjoying SOCC limits upto Rs. 5 lacs and OCC/PC limits upto Rs.10 lacs.

5) Borrowers who are enjoying credit limits (OCC/PC) of above Rs. 10 lacs and who arerequired to submit periodical stock statements shall continue to submit the statement inNF 902 – MSOD cum stock statement.However, there will be no change in the format inrespect of Canara Trade limits.)7) Since Stock Inspection Report is appended to the redesigned stock

statement, there will be no need to prepare NF 814 (Stock InspectionReport) separately for limits upto Rs. 10 lacs.

8 ) Stock s ta tement s a re to be obta ined f rom bor rowers as pe r thepe r iod ic i t y p resc r ibed by the sanc t ion ing autho r i t ie s .

SOME IMPORTANT REPORTS (BUSINESS OBJECT)

1. 280105: A/C Slipping to NPAbetween two dates

2. 280143: Alert report for QuickMortality A/C

3. 280149: List of Out Of Order A/Cs 4. 280119: Reson wise list of SWL A/Cs

5. A00001: A/C Slipped to NPAbetween two dates and continuesin NPA

6. Loans and Advances-280024 –forlimits expiring in the next 2monthsPERIODICITY OF GODOWN INSPECTION AND STOCK STATEMENT

SNSCHEME STOCK STOCK GODOWN1. Artisan Credit Waived Yearly Quarterly2. SOCC Monthly For Industry- Half

yearly For retailMonthly

3. LUCC Waived. Annually Quarterly

4. OCC Upto limit of 10lakh only.

For Industry –Monthly Forothers –

Monthly.

5. CANARATRADE

Limit Upto 50lacks – H.Y Above50 Lacks-quarterly M,J,S,D

Quarterly


6. OD SME Simplified Up to 10lacks H.Y. Beyond10 lacks quarterly

quarterly intervals Upto 10 lakh-H.Yly Beyond 10lakh- Quartly

7. MSE PRAGATI Upto 2 lacks Nil.Above 2 lacks-

Annually at March At Sanctionand half

8. MSE UNNATI quarterly Annually at March. At Sanction andquarterly.

9. MSE SATKAR Inspection of stocks & Unit visit- At thetime of sanction and once in 6 months.

At Sanctionand half

10. Doctors choice Quarterly Annual11. Weavers

CreditWaived Waived Half Yearly

12. CanaraContractor

need not besubmitted

Inspection &PIPR Half

SWL REASONS AND REMEDY :FOCUS ON SWL & SMA1. Reach out to all SWL/SMA borrowers. Collect contact details such as e-mail ids, mobile

numbers and be in touch with the parties.

2. Restructuring to be deep and purposeful. Benefit of restructuring should be extendedto small

borrowers also. Restructuring is not the easy alternative to resolving thebasic issues in the exposures.

3. No exposure shall appear in special watch list or slip to NPA due to non financialparameters.4. Implement the new SMA framework of RBI in right earnest. Educate customers on

the new SMA framework and guide and assist them in avoidance of reporting themunder SMA regime.

i. Ensure Corrective Action Plan(CAP) in respect of all SMA 2 accountswithin 30 days of identification of account as SMA 2.

ii. Monitor Accounts rated ―High Risk‖ closely and avoid slippage.

iii. Avoid incomplete and pending documentation.

5. Maintain NIL Expired Credit Limits on an ongoing basis.

S.N REASONS MEANING STEPS

1. Arrears- CASA TOD in SB/CA & all OD/OCC accounts Recovery of Arrears

2. Arrears- AgricultureLoan

Constitiutes all agriculture a/cs KCC,KOD, Tractor Loan; dairy loan etc

Recovery of Arrears

3. Arrears- Gem Loan Constitiutes all non-agriculture a/csRetail lending, LHV etc

Recovery of Arrears

4. Erosion in security valuof CASA

Security value erodes to less thanliability

Security value to beupdated in BAM74

5. Erosion in Securityvalue- other loans

Security value erodes to less thanliability

Security value to beupdated in LNM34

6. Stock statement review Stock statement not updated Stock value to beupdated in BAM74

7. TOD overline Liability more than limit/Drawing power Recovery and liabilityto bring within limit

8. Dormancy Interest not serviced Recovery/Credit entry

9. Limit Renewals pending Limits not renewed Limit to be renewed/extended

1 0 Arrears FCC accounts Arrears in contracts (Bills, LC, PC, BGetc.)

Recovery


6. Follow up and adjust Expired LC/BGs so as to have NIL position.

i. Ensure completion & closure of Stock Audit programme as per the guidelines.

ii. Ensue closure of Credit Audit Report within the stipulated time frame of 3months.

7. Ensure compliance of Pre disbursement Audit observations.

RECOVERY STRATEGIES

Minimize accretion of fresh NPA:Effective monitoring of the borrowal accounts; Proper Classification under SWL and

close monitoring thereof.Personal contacts/persuasion/ follow up for recovery of installments/interest due.

Recovery of critical amount to avoid slippage.Re-phasement of existing loan / facilities, if the need is genuine.Ensure timely renewal /regularization of credit limits. Ensure prompt submission of

stock statements.Debt restructuring of standard assets under CDR / SME-DR schemes

Upgradation of existing NPAsUpgradation of accounts by recovering the overdue amount.

Restructuring / re-phasing of accounts wherever possible as per extant guidelines. Implementation of rehabilitation / restructuring package permitted by BIFR / CDR

and ensures recovery as permitted

Enforcement of Securities as per the provisions of SARFAESI Act.

Enforcement of Securities as per the terms of Loan Documents (in respect ofsecured assets not covered under SARFAESI Act)

Recovery through non- legal methods –Settlement through compromise ; Invoking claim with ECGC /CGTMSE ;Sale of NPA to

Asset Reconstruction Companies;Sale of NPAs to Bank/FIs/NBFCs

Recovery through Legal methods –Last resort adopted for recovery of dues- Legal Action through court/DRTs etc Initiate disposal of movable securities / exercise right to set off against the deposits

available prior to initiation of legal action.Examine the pros and cons of filing suit and the prospects of recovery and initiate

any of the following measures:Filing suits in appropriate civil courts; Filing cases in DRTs in respect of cases whereclaim is Rs.10.00 lacs and above; Invoking the provisions of revenue recoveryact, wherever applicable; Referring the cases to lokadalat for settlement throughconciliation; Winding up of the company; Invoking provisions of section 138 of NIact where cheques issued towards repayment of debt is dis-honoured for want offunds; Filing insolvency petitions wherever desirable.

Wherever suits are filed for recovery – Seek interim orders from the court /DRT for ABJ / restraint orders, appointment of

court receiver, etc. Obtain decree / RC expeditiously. Obtain Decree/RC expeditiously File appeal/review/ revision petition wherever necessary within the limitation period. Execute decree /RC immediately to bring the securities for sale, attach and sell the

assets owned by the judgment debtors, seek garnishee orders, seek arrest of jdrs,etc. Purchase and sale of non-banking assets acquired in loan recovery proceedings.

Compromise PolicyCOMPROMISE POLICY GUIDELINES ( Cir 189/2015 )

Accounts eligible for compromise settlement: NPA accounts normally marked forrecovery.

Cut off date: Date on which the account was classified as NPA. In exceptional cases,date of sickness or date of closure of unit or first date of incurring cash loss can betaken as cut-off date giving justifiable reasons.


SETTLEMENT FORMULA FOR COMPROMISE

1. NON WILFUL DEFAULTERS:A. Realizable value of security is sufficient to cover the contractual/decretal

dues, Recover the full amount. However, if paying less recover not less than thebook liability plus simple interest @ Base Rate plus 1% as on the date of proposal.

B. Realizable value of securities + net worth (put together) is sufficientrecover not less than the book liability along with simple interest at not less than1% below the Base Rate.

C. Securities and/or net worth of the borrowers/ guarantor/s/ coobligant/ sis not sufficient or negligible to cover the Bank‟s dues, it should be ourendeavor to recover the maximum amount possible, keeping in view the realizablevalue of securities/assets of borrower/s, guarantor/s, coobligant/s and the timetaken for realization of the same.

2. WILFUL DEFAULTERS:A. Realizable value of security is sufficient to cover the contractual dues;

recover the full amount. However, where the parties are paying less recover notless than the book liability as on cut-off date along with simple interest at BaseRate plus 2 % as on the date of proposal

B. Realizable value of securities + net worth (put together) is sufficient,recover not less than book liability as on the cutoff date along with simple interestat Base Rate plus 1 % as on the date of proposal.

C. Where the securities and/or net worth is not sufficient to cover the duesor negligible, recover maximum possible,

SETTLEMENT FORMULA FOR COMPROMISE IN RESPECT OF AGRICULTURAL LOANSWITH LIABILITY BELOW RS.10 LACS CLASSIFIED AS NPA.

Realizable value of security is sufficient; Recover the book liability + simpleinterest at 5%(on reducing balance)

Realizable value of securities + net worth (put together) is sufficientrecover book liability as on the cut-off date + simple interest at 4 %(on reducingbalance).

Realizable value of securities and/or networth is not sufficient ornegligible, recover the maximum amount possible.

CALCULATION OF UNAPPLIED INTEREST FOR INTERNAL PURPOSE:

(i) NPA accounts except decreed accounts, the amount of unapplied interest is :- Sub-standard assets: At Base Rate plus 0.75 % or contractual rate includingpenal rate (whichever is lower) on simple basis- Doubtful assets: At Base Rate -2% or contractual rate including penal rate(whichever is lower) on simple basis

- Loss assets: At Base Rate – 4% or contractual rate including penal rate (whichever islower) on simple basis from the date of stoppage of interest or cessation of interest on theaccount becoming NPA, till the end of the quarter immediately prior to the date ofsubmission of the proposal.(ii) Decreed accounts, the rate as above applied upto the date of filing of suit and at therates awarded by the Court from the date of suit or above rates (as per the classification ofaccount as on date of proposal) on simple basis whichever is less.(iii) Sacrifice under the Policy Guidelines is defined as under: The difference betweenthe dues calculated as defined under (i) / (ii) above (including book liability) and the OTSamount offered constitutes sacrifice for the purpose of settlement.Time Limit for Payment of Compromise amount: 12 to 18 month

SPECIAL SCHEME FOR SETTLEMENT OF NPAS IN MSME WITH TOTAL DUES OFRS.100.00 LACS AND BELOW (Cir 24/2015 ) : The Scheme is valid till 31.12.2015.

Coverage:


Doubtful & Loss Assets in MSME Sector; Sub-Standard (MSE) Sector (categorised as―SICK‖/NON-VIABLE for restructuring or rehabilitation)which are outstanding ason 30.09.2014 with total dues of Rs. 100 lacs and below as on the date ofsettlement.

Eligible accounts includes account where action has been initiated underSARFAESIAct/ Revenue Recovery Act, cases pending before courts/DRTs s.tobtaining decree wherever applicable and also decreed accounts & legalaction waived accounts.

c) Not Eligible: Willful default, fraud and malfeasance; Closed/settled;Accounts eligible and covered under CGMSE

In group accounts, other accounts of party/group have to be settledsimultaneously.

Settlement Formula- Refer annexure to the circular 24/2015

SPECIAL SCHEMES FOR ONE TIME SETTLEMENT OF SMALL VALUE NPAACCOUNTS

( Cir : 219/2015 ) : Scheme extended till 31/03/2016

Small value NPAs OF RS.10.00 lakh and below (as on the date of NPA) fordoubtful & loss assets.

NPAs under education loan with limit upto Rs.4.00 lakh

NPAs under tractor & other farm mechanisation loan/s with original loan amountupto Rs.10.00 lakh

Eligibility of the NPA account/s for settlement under the scheme extended by oneyear

SLIPPAGE MANAGEMENT TO REDUCE SLIPPAGE, WE MUST DOClose follow-up of top 100 SMA I and II/ SWA accounts,At least 15% recovery of written-offaccounts balance as on March 2014 and reduction of small value NPA accounts. Closemonitoring of Special Watch and NPA a/cs & CDR/restructured accounts. Contain High NPAsin segments (focus on SME a/cs - upgradation and Cash Recovery) like Priority Sector -Agriculture - Tractor Loans, KCCsRetail - Housing, Vehicle, Mortgage,Education, Large industries - Mining, Infrastructure, etcMSMEs: SME a/cs no. and amount to be brought down and in each Circle and in the Bankbelow 4% from 9% level of March 2014.Reach out to all the borrowers (standard-Special Watch / SMA I and II accounts and NPAs),pursue credit monitoring vigorously, focus on upgradation through contacts and OTS and on-line tracking of stressed assets.Rapid progress and follow up in suit-filed/decreed cases.Handholding and timely rehabilitation/restructuring/rescheduling, as per guidelines.No account with security is permitted to slip to NPA without personal contact at CO level andone restructuring/ rescheduling to be tried separately with cash flow and viability, if requiredunder all segments- PS, Agriculture, KCCs, MSMEs, Retail, Corporate Credit, etc.STRATEGIES INITIATED TO COMBAT NPAS AND ENSURE MAXIMUMRECOVERY

1. Monitoring newly slipped accounts to ensure better and early recovery.

2. Transferring of all Non-LPD accounts to LPD / Recovery sections immediately if notupgraded / restructured / resolved within the stipulated time upon slipping to NPA,duly recommending for further course of action.

3. Conducting LOK ADALAT in each district of each Circle.

4. Issuing SARFAESI Notice in all eligible cases immediately after the account slips toNPA.

5. Mobilising OTS proposals at acceptable level and follow up of OTS permittedaccounts closely for recovery.

6. Follow up of DRT cases intensively for obtention / enforcement of DRCs.

7. E-auction of all the eligible assets involving more number of Recovery agents toattract maximum potential bidders.


8. Sensitising the Circles / Branches to initiate Recovery steps promptly.Declaring the Borrowers/guarantors as ―Wilful Defaulters" / ―Non Co-operative Borrower" andresorting for filing FIR / Criminal complaints / CBI cases depending upon individual cases.

SPECIAL SCHEME FOR SETTLEMENT OF NPAS IN MSME SECTOR WITH TOTAL DUESOF RS 100 LACS AND BELOW ( Cir 24/2015 ) : Valid till 31.12.2015

Coverage: Substandard (Sick/Non viable for restructuring/rehabilitation);Doubtful andloss assets in MSME sector as on 30.09.2014 with total dues of Rs 100 lacs and belowas on the date of settlement; accounts where action initiated under SERFAESI Act,cases pending before courts/DRTs s.t obtaining consent decree in such cases and alsodecreed account.

46.MANAGING SPECIAL MENTION ACCOUNTS

Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery forLenders: Framework for Revitalizing Distressed Assets in the Economy

With the slowdown of the Indian economy, a number of companies / projects are understress. As a result, the Indian banking system has seen increase in Non-Performing Assets(NPAs) and restructured accounts during the recent years. Not only do financiallydistressed assets produce lessthan economically possible, they also deteriorate quickly in value. Therefore, there is aneed to ensure that the banking system recognizes financial distress early, takes promptsteps to resolve it, and ensures fair recovery for lenders and investors. Accordingly, aFramework for revitalizing distressed assets in the economy was placed on RBI website onDecember 17, 2013 as a Discussion Paper for comments by January 1, 2014. Taking intoaccount the comments received, the Framework has been developed outlining a correctiveaction plan that will incentivize early identification of problem account, timely restructuringof accounts which are considered to be viable, and taking prompt steps by lenders forrecovery or sale of unviable accountsFor early recognition of financial stress, prompt steps for resolution, fair recovery forlenders and revitalising distressed assets.

Main proposals of the Framework

> Centralised reporting and dissemination of information on large credit.

> Early formation of a lenders' committee with timelines to agree to a plan for resolution.

> Incentive for lenders to agree collectively and quickly to a plan better regulatorytreatment of stressed assets if a resolution plan is under way, or accelerated provisioningif no agreement can be reached.

> Improvement in current restructuring process: Independent evaluation of large valuerestructurings mandated, with a focus on viable plans and a fair sharing of losses (andfuture possible upside) between promoters and creditors.

> More expensive future borrowings for borrowers who do no cooperate withlenders in resolution. More liberal regulatory treatment of asset sales> Lenders can spread loss on sale of loan assets over two years provided the loss isfully disclosed. > Takeout financing/refinancing possible over a longer period and willnot be construed as restructuring. > Leveraged buyouts will be allowed forspecialized entities for acquisition of “stressed companies” > Steps to enable betterfunctioning of Asset Reconstruction Companies mooted.

Sector specific Companies/Private Equity (PE) firms encouraged to play active role instressed assets market CLASSIFICATION OF STRESSED ASSETS:

SMA SUB CATEGORIES BASIS FOR CLASSIFICATION

SMA - 0 PRINCIPAL OR INTEREST PAYMENT OVERDUE NOTMORE THAN 30DAYS,

SMA - 1 PRINCIPAL OR INTEREST PAYMENT OVERDUE BETWEEN 31 - 60 DAYS


SMA - 2 PRINCIPAL OR INTEREST PAYMENT OVERDUE BETWEEN 61- 90 DAYS

Central Repository of Information on Large Credits (CRILC)

The Reserve Bank of India has set up CRILC to collect, store, and disseminate creditdata to lenders. The credit information would also include all types of exposures asdefined under RBI circular on Exposure Norms and will therefore inter alia includedata on lenders' investments in bonds/debentures issued by the borrower/obligor.

Banks to furnish credit information to CRILC on all their borrowers having aggregatefund based and non fund based exposure of T5 cr and above. While all scheduledcommercial banks will mandatorily contribute their credit information on theirborrowers/customers as above, systemically important non banking financialcompanies will also be asked to furnish such information. In addition, banks willhave to furnish details of all Current accounts of their customers with outstandingbalance (debit or credit) of T1 cr and above. Banks will be required to report, theSMA status of the borrower to CRILC. RBI has formulated the reporting data byeach bank in the following formats effective from June 2014:RLC (Quarterly Submission): This will comprise of three sections viz:Section A: Exposure to Large Individual Borrowers (global operations)

Section B: Exposure to Large Group Borrowers (Global operations)

Section C: Top Twenty Exposures to Banks (Domestic, Overseas and Global operationsseparately)

CRILC MAIN (Quarterly submission):

This will comprise of four sections:Exposure to Large Borrowers(Global Operations)

1. Reporting of Technically/Prudentially Written off accounts(Global operations)

2. Reporting of Balance in Current Account(Global operations)3. Reporting of Non cooperativeBorrowers(Global Operations) CRILC SMA2 and JLF Formation (Submission on asand when basis)

There will be two sections which are to be submitted on as and when basis.Presently RBI vide their communication dt 21 10 14 has modified to furnishthe data on a weekly basis instead of on the 61st day itself.(on each Fridayof the week) and whenever JLF is formed in respect of SMA 2 classifiedborrower.

The CRILC website is available to be viewed by all Banks through designated Officialof each Bank.

RBI disseminates the information of SMA 2 reported by the Banks to all the other Bankswho are having exposure to the concerned borrower and giving therein the total exposureof the concerned borrower by way of Mail on a daily basis.

Corrective Action Plan (CAP) by JLF

JLF may explore various options to resolve the stress in the account. The intention of thisFramework is not to encourage a particular resolution option, e.g. restructuring orrecovery, but to arrive at an early and feasible resolution to preserve the economic valueof the underlying assets as well as the lenders' loans. The options under Corrective ActionPlan (CAP) by the JLF would generally include:

a) Rectification - Obtaining a specific commitment from the borrower with identifiable cashflows within the required time to regularize the account so that the account comes outof SMA status or does not slip into the NPA category, within a specific time periodacceptable to the JLF without involving any loss or sacrifice on the part of the existing


lenders. If the existing promoters are not in a position to bring in additional money ortake any measures to regularize the account, the possibility of getting some otherequity / strategic investors to the company may be explored by the JLF in consultationwith the borrower. These measures are intended to turn-around the company withoutany change in terms and conditions of the loan. JLF may also consider providing needbased additional finance to the borrower, if considered necessary, as part of therectification process. However, it should be strictly ensured that additional financing isnot provided with a view to ever green the account.

b) Restructuring - Consider the possibility of restructuring the account if it is prima facieviable and the borrower is not a willful defaulter, i.e., there is no diversion of funds,fraud or malfeasance, etc. At this stage, commitment from promoters for extendingtheir personal guarantees along with their net worth statement supported by copies oflegal titles to assets may be obtained along with a declaration that they would notundertake any transaction that would alienate assets without the permission of the JLF.Any deviation from the commitment by the borrowers affecting the security /recoverability of the loans may be treated as a valid factor for initiating recoveryprocess. For this action to be sustainable, the lenders in the JLF may sign an InterCreditor Agreement (ICA) and also require the borrower to sign the Debtor CreditorAgreement (DCA) which would provide the legal basis for any restructuring process.The formats used by the CDR mechanism for ICA and DCA could be considered, ifnecessary with appropriate changes. Further, a 'stand still'1 clause could be stipulatedin the DCA to enable a smooth process of restructuring. The 'stand-still' clause does notmean that the borrower is precluded from making payments to the lenders. The ICAmay also stipulate that both secured and unsecured creditors need to agree to the finalresolution.

c) Recovery - Once the first two options at (a) and (b) above are seen as not feasible, duerecovery process may be resorted to. The JLF may decide the best recovery process tobe followed among the various legal and other recovery options available with a view tooptimizing the efforts and results.

. The decisions agreed upon by a minimum of 75% of creditors by value and 60% ofcreditors by number in the JLF would be considered as the basis for proceeding with therestructuring or recovery action of the account, and will be binding on the lenders underthe terms of the ICA.

The JLF is required to arrive at an agreement on the option to be adopted for CAP within30 days from (i) the

date of an account being reported as SMA-2 by one or more lender, or (ii) receipt ofrequest from the borrower to form a JLF, with substantiated grounds, if it sensesimminent stress. The JLF should sign off the detailed final CAP within the next 30 daysfrom the date of arriving at such an agreement.

! If the JLF decides on options (a) or (b), but the account fails to perform as per theagreed terms under option (a) or (b) , JLF should initiate recovery under option (c).

Penal Measure for non-adherence

In cases where banks / notified NBFC fail to report SMA status of the accounts to RILC orresort to methods with the intent to conceal the actual status of the accounts or evergreenthe account, banks / notified NBFCs will be subjected to accelerated provisioning asappended below for these accounts and / or other supervisory actions as deemedappropriate by RBI. The current provisioning requirement and the revised acceleratedprovisioning in respect of such non performing accounts are as under;

Asset

Classification

Period as NPA Current provisioning (%) Revised Acceleratedprovisioning (%)

Standard Up to 6 months 15 No change


(Secured) 6 months to 1year

15 25

Sub-standard(unsecured ab-initio)

Up to 6 months 25 (other than infrastructureloans)

25

20 (infrastructure loans)

6 months to 1year

25 (other than infrastructureloans)

40

20 (infrastructure loans)

Doubtful I 2nd year 25 (secured portion) 40 (secured portion)

100(unsecured portion) 100 (unsecuredportion)

Doubtful II 3rd & 4th year 40 (secured portion) 100 for both securedand unsecuredportions

100 (unsecured portion)

Doubtful III 5th yearonwards

100 100

Any of the lenders who has agreed to the restructuring decision under the CAP by JLF andis a signatory to the ICA and DCA, but changes their stance later on, or delays / refuses toimplement the package, will also be subjected to accelerated provisioning requirement asindicated at para 6.3.1 above, on their exposure to this borrower i.e., if it is classified asan NPA. If the account is standard in those lenders' books, the provisioning requirementwill be 5%. Further, any such backtracking by a lender might attract negative supervisoryview during Supervisory Review and Evaluation ProcessPresently, asset classification is based on record of recovery at individual banks andprovisioning is based on asset classification status at the level of each bank. However, iflenders fail to convene the JLF or fail to agree upon a common CAP within the stipulatedtime frame, the account will be subjected to accelerated provisioning as indicated at para6.3.1 above, if it is classified as an NPA. If the account is standard in those lenders' books,the provisioning requirement would be 5%.If the escrow maintaining bank under JLF / CDR mechanism does not appropriate proceedsof repayment by the borrower among the lenders as per agreed terms resulting into downgradation of asset classification of the account in books of other lenders, the account withthe escrow maintaining bank will attract the asset classification which is lowest among thelending member banks.

Conclusion: This has enabled the banks to identify the stressed assets immediately so as to call for

JLF and to put in place the CAP. Restructuring process is undertaken without muchdelay.

Since CRILC website is made available to all Banks the data is helpful while makingCredit decisions by various authorities enabling them to assess the total exposure of thecompany to various banks at a given point of time and its SMA status.

Co-ordinated approach by all banks concerned either in restructuring or recoveryprocess ensures that the borrower adheres to the collective decision taken by the JLF.

The introduction of “non cooperative borrower” in addition to the existing list of willfuldefaulters will go a long way in ensuring borrowers cooperation in the concerted effortsof the banks to retain the economic value of the asset.

Monitoring of SMA 0 and SMA 1 accounts will help identify the stress in an account fairlyearly to take the corrective action plan in time.

Status of implementation of SMA Framework in our Bank

RBI’s Framework for revitalizing stressed assets in the economy effective from 01 042014 was adopted by our Bank vide Board orders dt 24 02 2014. (Board Note RMW CPSBN 10/2014 dt 20 02 2014). We have since implemented the SMA- Framework in ourBank with effect from 01.04.2014. Detailed Policy guidelines on SMA Frame work were


issued by Risk Management Wing vide HO CIR 136/2014 dated 08/03/ 2014 anddetailed operational guidelines for making data entries in the web portal in the SingleSign On package were issued by our Wing vide HO Cir 142/2014 dated 10/03/2014.

Capturing the stressed accounts under each category of SMA viz., SMA 0, SMA 1, SMA2:

SMA0A separate web portal has been designed for capturing all Non-financial parameters / Earlywarning signals as identified by SMA framework and the is ported in SAS package. This iscaptured only in respect of identified 17 product codes (running limits) and branches havebeen instructed to punch the required data. Credit Administration and Monitoring wing isfollowing up with the circles to ensure capturing of all the eligible accounts in the Webportal. The following non financial parameters prescribed under SMA 0 are yet to becaptured:

a. Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30days on grounds of non availability of balance/DP in the account or return of 3 or morebills/cheques discounted or sent under collection by the borrower.

b. Increase in frequency of overdrafts in current accounts - ‘frequency’ - number ofoccasion TOD/adhoc can be

c. given is not defined in SMA Framework. RM Wing has taken up the matter with IBA. Inthe meantime we have requested RM wig to define the same internally with suitablepolicy measures.

d. c. Borrowers who are enjoying stand alone Term loans/other loans, non fund basedlimits, export limits etc.,(for whom many of the non financial parameters prescribedunder SMA 0 are not applicable)

e. The above parameters shall be captured in the Web portal on orbefore 31.05.2015. SMA1 & 2

f. The same is generated on a monthly basis by DIT. In addition to this DIT has madeavailable the data in the BO report 280150. Further, list of SMA 1 & 2 accounts withindividual account details of T1crore to 5 crore and T5 crore and above are generatedonly a monthly basis and sent to Circles for their follow-up, besides forwarding same toall the credit sanctioning wings at HO. Accounts identified as causing concern arediscussed in detail during fortnightly slippage management committee meetings withcredit sanctioning wing heads and also during monthly video Conferencing with Circles.

g. REPORTING TO RBI:

h. Reporting on Quarterly basis for furnishing credit information to CRILC (CentralisedRepository of Information on Large Credits) on all borrowers having aggregate fundbased and non fund based exposure of T5 Crore and above including the ExternalCommercial Borrowings (ECB) extended by our Overseas Branches to the Indianborrowers and also Current accounts with outstanding balance (debit or credit) of T1 Crand above has been done up to the Quarter ended 30 09 2014 by Risk ManagementWing .

i. Reporting of SMA 2 accounts on an ongoing basis and ensuring that SMA2 accounts getreported on the 61st day itself on weekly basis to CRILC. In this regard, RBI vide theircommunication dated 21/10/2014 has modified the reporting format. We have furnishedthe weekly data up to 10.04.2015 to CRILC.

j. SMA 2 accounts reported by other Banks:

k. RBI has been informing SMA 2 exposures reported by other Banks to our Bank on anongoing basis (in respect of borrowers who are also having exposures with our Bank).Such accounts are being followed up by the respective Credit Sanctioning Wings forformation of JLF and initiation of corrective action. A list of such accounts are taken withdetails of Bank having highest exposure and names of other banks having exposure to


the concerned borrower and sent to all the Credit Sanctioning Wings for their furtherfollow up with regard to formation of JLF and putting in place of CAP (Corrective ActionPlan)

l. Formation of JLF (Joint Lenders’ Forum):

m. As per RBI’s Frame work, formation of JLF is mandatory in respect of all SMA 2exposures of T100 cr and above from the banking system. In respect of Consortiumaccounts, the same is to be formed by the Leader Bank and in respect of MBA, the Bankwho is having the highest exposure has to form the JLF. Details of formation of JLF,Corrective Action Plans taken in respect of individual accounts are followed up byrespective Credit Sanctioning Wings. List of accounts in which our Bank is the leader /having highest exposure / where JLF has been formed is given in the annexure IV. Wehave since uploaded the same to CRILC. We are also following up with the CreditSanctioning Wings / Cos for updating the information.

RBI SPEECHES

47. Asset Quality Challenges in India: Diagnosis and Prognosis( S S Mundra, DG, RBI sppech on 28.04.16)

Shri Rashesh Shah, Chairman and CEO - Edelweiss Group; members of the finance fraternity; delegatesto the Conclave; ladies and gentlemen! It is indeed a pleasure to be here this morning. In my address, Iprimarily intend to focus on some of the contemporary issues around our banking sector that have come todominate news rooms, court rooms, board rooms and drawing rooms alike. I am hinting at loudvilification of bankers and promoters without distinguishing between the victim and the black sheep. Thisis not an endeavor to bat for either the banks or the promoters but only an attempt to put the things in rightperspective and to encourage an objective assessment of the situation. But before I do that, let me beginwith some good news on the economic front.Amidst the continued global sluggishness, domestic growth outlook remains positive for 2016-17 mainlyon account of various structural reforms undertaken, expectations of a normal monsoon, easing of CPIinflation and rising private consumption. Focus on rural and social infrastructure sector and decline insubsidy outgo have resulted in improvements in the fiscal front, both quantitatively and qualitatively.Over the recent past, steel prices have strengthened both, globally and domestically, especially afterintroduction of the Minimum Import Price. Cement and auto sectors have also shown signs of growth pickup while the demand for oil has also increased by about 11 % in terms of quantity conveying some signsof buoyancy in economic activity in the country.Let me now come to the main issue that I wanted to focus on this morning. What I am going to speak maysound like a medical script but that is how this story can be best described. I begin with talking about thesymptoms of the disease that had shown signs of turning malignant.Symptoms4.The signs of rising stress in the banking system became increasingly evident in the years beginning2012. The stressed assets (GNPA+ Restd. Std. assets +Written OffAccounts) for the banking system as a whole, which stood at 9.8% as at the end of March 2012, moved upsharply to 14.5% as at the end of December 2015. During the same period, the stressed assets for the PSBsspiked from 11.0 % to 17.7%.5. Similarly, the growth in net profits of SCBs was also on a declining trend since 2011 12 and turnednegative in 2013-14. This decline in net profits of SCBs during this period was primarily the result ofhigher provisioning on banks’ delinquent loans during the period 2012-14. This in turn impacted theirreturn on assets (RoA) and return on equity (RoE). The banks’ spread and net interest margin (NIM) alsowitnessed a decline during the period.

Return on assets and return on equity of SCBs: Bank group-wise

(Per cent)

Sr. No. Bank Group/Year Return on Assets Return on Equity

1 2 3 4 5 6 7


2012-13 2013-14 2014-15 2012-13 2013-14 2014-15

1 Public sector banks 0.80 0.50 0.46 13.24 8.48 7.76

2 Private sector banks 1.63 1.65 1.68 16.46 16.22 15.74

3 Foreign banks 1.92 1.54 1.87 11.53 9.03 10.25

All SCBs 1.04 0.81 0.81 13.84 10.69 10.42

Notes: Return on Assets = Net profit/Average total assets. Return on Equity = Net profit/Average totalequity. Source: Annual accounts of respective banks.

Diagnostic or Root Cause Analysis6. As in any medical exercise, the next step is to run a diagnostic check to understand the root cause of theproblems. The asset quality problems can be fundamentally ascribed to one of the following four factors:a) Environmental factorsThe economic downturn that has engulfed the global economy since the onset of the Financial Crisis in2008 can be counted as one of the major cause for the asset quality problems in India. Then, there areother external factors like fall in commodity prices, dumping by China etc. which has led to reducedcompetitiveness and consequently idle capacities and cash flow problems. The situation got aggravateddue to the policy logjam that followed in the country. Several large scale projects in the country haveremained stalled due to lack ofenvironmental clearances, cancellation of coal block allocation, falling through of the fuel supplyarrangements, local protests etc. Now, where do you bracket these promoters or the lending banks? Doyou brand such promoters as wilful defaulters or such lenders as ill-motivated?b) Corporate ImprudenceThe imprudence of the corporates can be attributed as the second most important factor for poor assetquality in the system. Some of the major failings that the corporates exhibited are:Overleverage - All debt, no equity; Veiled corporate structures impeded assessment by banksObsession for higher growth- Excess capacities, Unrelated diversification. The liquidity generated due toultra-accommodative monetary policy stance by Central Banks in advanced economies also createdmisaligned incentives.Chasing profits eg. ignoring risks inherent in unhedged forex exposuresCorporate MisdemeanorsNot all promoters/borrowers have had a clear conscience and some of them were out to dupe the systemby using foul means. They are willful defaulters in banks’ books as they have been unwilling to honourtheir payment obligations even while having a capacity to do so. Some of the promoters have divertedborrowed funds for purposes other than for which the finance was availed. There are also occasions wheresome of the borrowers have siphoned off funds for personal gains and not created any productive asset. Asection of the promoters have also disposed off movable fixed assets or immovable property given for thepurpose of securing a term loan without the knowledge of the lender. The consequent defaults, in suchcases are intentional, deliberate and calculated and hence willful. It is this set of promoters that need to besingled out and quickly brought to justice.Banks’ failingsIt is not corporates alone that caused pain in the system. In several instances, the bankers have also notexercised due caution while conducting due diligence on the projects that they have financed. Some of thecommon shortcomings that the banks exhibited include:

Governance deficit Poor credit appraisal particularly in infra financing such as highways where contracts were

‘gold plated’; Power which suffered from Faulty FSAs, absence of Pass througharrangements, lack of provision for termination payments etc.;

Weak risk management; Chasing quick growth; Pretend and Extend

7. The mistakes committed by the banks and the corporates, whether incidental or intentional, haveresulted in a massive pile up of non-performing assets in the banking system. While the banks needed to


guard against growing credit concentration risks especially in sectors which had witnessed excessivelyhigh growth, the corporates should have had the foresight of analyzing the emerging market dynamics.There was a general reluctance from the banking community to admit the level of stress in their books. Itwas built on the premise that NPAs are taboo and no one would be willing to lend to such accounts.Though, this perception has some real life truth, my question is should we not administer drug to thesick? Sometimes, there are overblown fears of unknown. If we don’t address the stressed accounts, whatare our alternatives? Company position would deteriorate further, hit banks’ books and would still invitefurther scrutinies. Having said that, it is important to quickly decipher whether the disease is curable orterminal and also if curable, medicinal or surgical.

Pre-operative procedures8.As any surgery is preceded by certain medication or other pre-operative procedure, here also, RBI didprescribe them. It started with creation of the CRILC database which enabled compilation of informationon level of indebtedness of various groups to the financial system. This was followed by issuance ofGuidelines on "Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recoveryfor Lenders: Framework for Revitalising Distressed Assets in the Economy by RBI, which were aimed atimproving the system’s ability to deal with corporate and financial institution distress. Detailed Guidelineson formation of Joint Lenders’ Forum (JLF), Corrective Action Plan (CAP), ‘Refinancing of ProjectLoans’, ‘Sale of NPAs by Banks’ and other regulatory measures were also issued to banks for enablingprompt steps for early identification of problem cases, timely restructuring of accounts considered to beviableand recovery or sale of unviable accounts. The 5/25 scheme and the Strategic Debt Restructuring schemewere also introduced with a view to enable reduction in stress levels and early resolution.Surgical procedure

9. After the pre-operative procedures, RBI undertook a surgical procedure in the form of Asset QualityReview at banks. The exercise was aimed at tracing the sources of pain and pressure points so thatremedial procedure could be administered. GOI must be complimented for extending total support byinfusing capital /committing to infuse capital in the weaker PSBs.

10. Whether this surgery is successful? Did it have the desired impact? I would think so. In myinteraction with various players, I sense it has a very positive impact, even in Tier II and Tier III towns.The promoters have realized that the banks are going to come hard after them if they don’t observecredit discipline. Of course, there are skeptics who say whether it was the right time to RBI to undertakethis initiative especially at a stage when the economy is growing slowly. Interestingly, some of these arethe very same people who earlier criticized RBI for letting things drift and banks being allowed toomuch of forbearance. In sum, the larger fallout of the exercise is that there is a “better credit discipline inthe country”.

Unsolicited Advices

11. You must have experienced how many advices come your way if you suffer from an ailment. Everyother person has an opinion and a remedy for the same, including weird alternate therapies. Situationhere is not much different. Even as RBI has launched steps to cleanse the banking system of its ill-health, everyone seems to have become wiser about the issue and have a prescription to offer. Someblame the patient, some blame the doctor and still others are blaming the procedure. So called expertopinions are being voiced about the credit appraisal process of banks, collateral availability, personalguarantee, restructuring, staff accountability and so on. If all these prescriptions are followed, theoutcome would be akin to a successful operation, but a dead patient. In other words, the lending processwould freeze.Post-Operative Care

12. All post-operative cases require rehabilitation and so would the banking system. There is a need forthe system to pause and reflect on what has gone wrong. The form of life style change for the bankswould be to concentrate on credit risks that they understand and which fall well within their riskappetite. Going forward, they have to refrain from binging on what their neighbors are eating. Moresimply put, the Board and the Top Management have to steer the bank in a manner that they have arobust credit appraisal process, effective post-disbursement supervision system, a diversified portfolioand better risk governance. The lifestyle changes for the borrowers on the other hand would entail


adoption of a regimen more attuned to a marathon runner than a sprinter. Running enterprises is not aone-off sprint. Like a marathoner, one has to be conscious of the external environment at all times andrun at a steady pace without exhausting himself.

Remedial Measures

13. Even post AQR, challenges abound. What are the possible solutions? That a vast majority of thecorporates are overleveraged with severely diminished debt servicing ability is common knowledge.There are projects which need fresh capital, new management and new promoters. Banks are wary ofincreasing their commitments to accounts which are in stress, for a variety of reasons. It may beextremely difficult to operate the enterprise profitably without paring down debt levels and hence, a firststep could possibly be to bring down the debt to a manageable level. This might involve writing down apart of the debt by the lenders and/or converting them into equity and bring in a new promoter to run theenterprise. This might, however, be a time consuming process and hence, in the interim the banks mayneed to appoint an O & M agent to run the operations.14. In certain cases, there may be a need for additional funding for some residual investment or forworking capital needs. A major impediment observed in JLF functioning is slow evolution of consensusamong the consortium members and hence, the resultant action plan gets delayed invariably. The delaysomehow defeats the very purpose for which the JLF mechanism is set up. There are some views aboutsetting up an investment fund which might come in as a last mile lender. The investment fund could lendto the truncated enterprise and help it get back to profitability at which level banks could profitablydilute their equity holdings in the firm. Question is who would fund this investment fund? My sense is itwould have to be joint endeavor of multiple players in this arena. Moreover, extending financial supportwould not be sufficient. Such fund would also need to have capability to provide managementbandwidth to the concerned projects.

Conclusion

15. Let me conclude by saying that the global economy has been passing through a difficult phase andvulnerabilities remain. Against this backdrop and that in a globally integrated economy, a generaldecline in the asset quality was not totally unexpected. However, the extent being witnessed could havebeen avoided. It is probably because neither the banks nor the corporates resorted to preventivehealthcare. I am sure that everyone would emerge much wiser after enduring the pain and becircumspect in the approach and get a periodic checkup done so that they can stay healthy and livelonger.

16. For the enterprises under temporary duress, we must stretch every sinew to ensure that a productiveenterprise does not become terminally ill. There are suppliers- sometimes in the form of small ancillaryunits or MSMEs and then, there are workers and their families. Each enterprise supports many lives.There is an entire ecosystem around a factory or company. Closure of any running unit would impact thelives of scores of people and hence, I feel it’s a collective societal responsibility that productiveenterprises don’t run aground.

48. Basel III Implementation- Challenges for Indian banking system

(Inaugural address delivered by N. S. Vishwanathan, Executive Director on the occasion of Nationalconference on BASEL III Implementation: Challenges for Indian banking system organised by TheAssociated Chambers of Commerce & Industry of India with support of National Institute of BankManagement on August 31, 2015)

I am indeed privileged to be sharing the dais with stalwarts and thank ASSOCHAM for giving me thisopportunity to speak on challenges in implementing Basel III in India.

2. Basel III framework was basically the response of the global banking regulators to deal with thefactors, more specifically those relating to the banking system that led to the global economic crisis orthe great recession. In the advanced economies, there was a huge fiscal cost for protecting the financialsystem, which those governments did not want a repeat of. The framework therefore sought to increasethe capital and improve the quality thereof to enhance the loss absorption capacity and resilience of thebanks, brought in a leverage ratio to contain balance sheet expansion in relation to capital, introduced


measures to ensure sound liquidity risk management framework in the form of liquidity coverage ratio(LCR) and net stable funding ratio (NSFR), modified provisioning norms and of course enhanceddisclosure requirements.

3. In India, Basel III capital regulation has been implemented from April 1, 2013 in phases and it will befully implemented as on March 31, 2019. Further, we have also introduced Basel III Liquidity CoverageRatio (LCR) to be implemented by banks in India from January 1, 2015 with full implementation beingeffective from January 1, 2019. We have issued draft guidelines on implementation of Net Stable FundingRatio (NSFR). We are also working on other areas of evolving regulations, especially those which are ofcritical importance from Indian perspective.

4. As this event is on challenges in implementing Basel III let me begin with the assumption that there arechallenges. Any change, big or small, of whatever nature brings with it challenges. The issue one must lookat is whether the challenges are as onerous as one would think them to be and whether the challenges areworth facing up to.5. The first element in this debate was whether we needed Basel III at all for a country like India. On this,Dr. Subba Rao, the then Governor of RBI1 made an interesting point and I quote him:“One view, although not explicitly spelt out in that form, is that India need not adopt Basel III, or shouldadopt only a diluted version of it, so as to balance the benefits against the putative costs. To buttress thisview, it is argued that Basel III is designed as a corrective for advanced economy banks which had goneastray, oftentimes taking advantage of regulatory gaps and regulatory looseness, and that Indian bankswhich remained sound through the crisis should not be burdened with the ’onerous’ obligations of BaselIII.The Reserve Bank does not agree with this view. Our position is that India should transit to Basel IIIbecause of several reasons. By far the most important reason is that as India integrates with the rest of theworld, as increasingly Indian banks go abroad and foreign banks come on to our shores, we cannot affordto have a regulatory deviation from global standards. Any deviation will hurt us both by way of perceptionand also in actual practice.The ‘perception’ of a lower standard regulatory regime will put Indian banks at a disadvantage in globalcompetition, especially because the implementation of Basel III is subject to a “peer group” review whosefindings will be in the public domain. Deviation from Basel III will also hurt us in actual practice. We haveto recognize that Basel III provides for improved risk management systems in banks. It is important thatIndian banks have the cushion afforded by these risk management systems to withstand shocks fromexternal systems, especially as they deepen their links with the global financial system going forward.”6.Once we take this postulate for granted, and in fact it needs to be, let us see what the challenges are:CapitalWhat are the factors that lead to higher capital?

7. The first set of Basel III reforms agreed in later part of 2010 tackled the issue of numerator part ofregulatory capital ratio. While minimum total capital requirements were kept unchanged at 8% of theRWA, the definition of various components of capital and its composition were thoroughly revised toensure that capital performs its intended role of loss absorption. The minimum common equity requirementwas raised from 2% level, before the application of regulatory adjustments, to 4.5% after the application ofstricter adjustments. This meant that common equity requirement was effectively raised from 1% to 4.5%.The Tier 1 capital, which includes common equity and other qualifying financial instruments based onstricter criteria, was increased from 4% to 6%. It has also been agreed that there would be a capitalconservation buffer of 2.5% above the regulatory minimum requirement to be met with common equity.This effectively increases the total capital requirements from present 8% to 10.5%. In our case, the level ofcapital increases from 9% to 11.5%, if capital conservation buffer is taken into account. In this context, itmay be pertinent to note that post-crisis, major banks in advanced economies have raised their capitaladequacy level significantly. In general, globally banks have raised their CET1 ratio by almost 400 bpsduring last four years. And importantly, this is mainly by way of fresh infusion of equity capital. Acomparative capital position of major Indian banks vis-à-vis major global banks as indicated in graph 1below:


(Group 1 Banks: Tier 1 capital more than €3 billion as on Dec 2010, rest Group 2banks) Source: Basel III Monitoring report of the BCBSAs may be appreciated, capital levels of our banking system need to go up significantly if our major bankshave to compete globally. During recent years, the capacity of banks specifically, for the PSBs to generatecapital internally have adversely affected mainly due to sharp deterioration in the asset quality. At the sametime, banks have not made concerted efforts to shore up their capital level outside of the usual budgetarysupport. After the phased-in implementation of Basel III, the RBI apprised the Government of India on theneed to initiate appropriate measures to ensure that PSBs have plans and a well-defined strategy formeeting the capital requirements from a medium-term perspective. In this context, it is heartening to notethat Government has initiated several measures such as allowing PSBs to access market to raise capitalsubject to ensuring minimum shareholding of the Government of 52% and recent unleashing of a plan forrevamping PSBs called ‘Indra dhanush’ These measures show the intent and commitment of Governmentto provide additional budgetary support to these banks to ensure that PSBs remain adequately capitalized tosupport economic growth. The improvement in the equity capital and all other measures taken togethermay also facilitate raising non-equity capital (AT1 and Tier 2), as the markets / investors would be morereceptive to those banks holding a higher level of common equity.8. The second element in the capital framework is the leverage ratio. We have advised banks that theywould be monitored on a leverage ratio of 4.5%. We are watching this closely. Leverage ratio generallydoes not adjust the assets for risk weights and therefore would need the required capital for a given balancesheet. We have seen on the basis of the RW profile of banks that the leverage ratio is not acting as thebinding factor for most banks in India. The graph 2 below shows the interaction between Tier 1 leverageratios (horizontal axis) and Tier 1 risk-based capital ratios (vertical axis) of domestic banks. The diagonalline represents the points where the Tier 1 capital requirements would remain the same for meeting boththe ratios. Therefore, for banks above the diagonal line, the leverage ratio requires more capital than risk-based capital ratio and vice-versa.Graph 2: Tier 1 risk-based capital and leverage ratios


To ensure that the leverage ratio acts as a credible back-stop measure, the Reserve Bank would continue tomonitor the leverage ratio behaviour of Indian banks and also the developments of other related regulatoryframework before finalizing the appropriate level of leverage ratio for Indian banks.9. Another element that could lead to higher capital is the changes in the Risk Weighted Assets, morespecifically, on account of proposed revisions to the standardised approaches for risk measurements. TheBCBS intends to avoid reliance on credit ratings for determining risk weights for credit risk given thelessons learnt from the crisis. Although this is work in progress, under the proposed revised framework,banks would be required to utilise a set of risk drivers like leverage of the entity, NPAs, etc. to determinethe appropriate risk weight. Similarly, for market risk, there would be a requirement to computesensitivities (delta, gamma, etc.) on a deal level for computing RWAs. For measuring counterparty creditrisk (CCR) in the derivatives, both in the OTC and exchange-traded derivatives, the existing currentexposure method (CEM) will be replaced with a revised method called standardised approach for CCR(SA-CCR). Besides, talks are already underway to review the existing treatment of sovereign assets underBasel framework wherein exposure to sovereign requires zero or very little capital charge. These proposalswill alter theway banks compute RWAs. Besides, a new explicit capital charge for interest rate risk for banking bookpositions is also proposed to be introduced. Further, specific to the advanced approaches for riskmeasurement, the Basel Committee is undertaking a strategic framework review with a view to enhancingsimplicity, reducing complexity and at the same time ensuring that the framework remains risk sensitive.The Committee would also examine the potential for interaction amongst various policy prescriptionsamongst themselves as well as with the monetary policy objectives to assess whether there is any potentialroom for material inconsistency which may severely undermine the overall objectives.

10. The fourth element impacting capital requirements is provisioning. IFRS 9 requires provisioningbased on expected loss provisions. The BCBS only recently put out a discussion paper on accounting issuesin estimating expected loss.

11. No doubt the new framework will need additional capital. Specific to the PSBs, Government hasannounced the infusion of Rs 70000 crore over the next four years. But the need of the hour is as much forthe PSBs to improve their internal processes to enhance efficiency, optimise the capital allocation and dealwith the asset quality issue. There are several measures internal to banks and they must look at them thanjust look at the external factors. A lot can be done to improve credit underwriting, manage the credit postdisbursement and recoveries. There is thus scope for improvement of internal accruals as a source ofcapital, and improving efficiency, risk management system and asset quality management are one of themost important parts of that effort so that external capital is not required for cleaning up balancer sheetsunlike what would be happening now

12. When capital requirement increases, there is impact on growth. There are varying estimates of this


impact. The Macroeconomic Assessment Group (MAG) established in February 2010 by FinancialStability Board and Basel Committee on Banking Supervision to coordinate an assessment of themacroeconomic implications of the Basel Committee’s proposed reforms, estimates that bringing theglobal common equity capital ratio to a level that would meet the agreed minimum requirement and thecapital conservation buffer would result in a maximum decline in GDP, relative to baseline forecasts, of0.22%, which would occur after 35 quarters. In terms of growth rates, annual growth would be 0.03percentage points (or 3 basispoints) below its baseline level during this time. This is then followed by a recovery in GDP towards thebaseline. Banks can also respond to the higher capital requirements by reducing costs or becoming moreefficient. In fact a less stable financial system could have more deleterious consequences. The extent towhich the great recession put global economic growth back is proof enough of this.Liquidity

13. The second Challenge comes from Liquidity Framework. The global crisis underscored theimportance of liquidity management by banks. The apparently strong banks ran into difficulties when theinterbank wholesale funding market witnessed a seizure. In fact I have mentioned elsewhere too that for meit is only a matter of time before a liquidity risk degenerates into a solvency risk for a bank and thereforeneeds to be avoided. The crisis proved that and had it not been for central bank support, the crisis toll couldhave gone beyond what we saw. The LCR and the NSFR Frameworks basically address this problem.

14. In the Indian context, any discussion on the LCR issue brings to the fore the fact that it runs parallel toSLR requirement. We have over a period of time reduced SLR and of the current level of 21.5%, a portioni.e.7 % is available for LCR as well. There is always the contention that the parallel need to maintain SLRand LCR poses an additional burden on the banks in India. We are aware of this concern and alreadycommunicated our intention to reduce the SLR requirements in a phased manner. However, there areseveral factors that would have to be addressed before we can move further to address the potentialoverlap.

15. The NSFR framework is draft for consultation. We are looking at the comments received and willcome out with the final guidelines taking into consideration the responses to the extent we canaccommodate them.

Technology

16. The Third challenge is technology. As I mentioned earlier, BCBS is in the process of makingsignificant changes in standardised approach for computing RWAs for all three risk areas. These revisedstandardised approaches them selves will be quite risk sensitive and will be dependent on a number ofcomputational requirements. Further, BCBS has proposed that for those banks which are underadvanced approaches, RWAs based on standardised approaches may work as some kind of floor. BCBS isworking on calibration of these floors. Banks may need to upgrade their systems and processes to be ableto compute capital requirements based on revised standardised approach.Skill Development

17. The fourth challenge is skill development. I see this as a requirement both in the supervised entitiesand within the Reserve Bank. Implementation of the new capital accord requires higher specialised skills inbanks. In fact it requires a paradigm shift in risk management. The governance process should recognisethis need and make sure that the supervised entity gears up to it. Risk awareness has to spread bank-wide,the manner of doing business that measures risk adjusted returns needs to permeate the system. Topmanagement and the Human Resource Development Policy of banks thus need to get tuned to thisrequirement. We in the Reserve Bank also need to hone up our skills in regulating and supervising banksunder the new system. We see this as an ongoing process and are continuously working towards skillimprovement.

Governance

18. One can have the capital, the liquid assets and the infrastructure. But corporate governance will be thedeciding factor in the ability of a bank to meet the challenges. BCBS has added a separate principle on


corporate governance in its core principles for effective banking supervision which were revised in 2012. Itis interesting to note that before 2012, there was no separate principle on corporate governance. I thinkglobal community is recognising the importance of corporate governance and is trying to fix the issues.Thus while strong capital gives financial strength, it cannot assure good performance unless backed bygood corporate governance.

Element of conservatism in minimum standards

19. Several speakers mentioned about the super equivalence issue. Let me add my bit to that discussionbefore I conclude. There is a general feeling that we have put in place a more stringent framework thanwhat Basel Norms require. Of course one would point out to the 9 percent CRAR, the 4.5 leverage ratio,the SLR running parallel with LCR, the higher CCF for OTC derivatives and the like. We need to seethis in a context. I have already dealt with the SLR-LCR issue. On capital, all I can say is that in theultimate analysis, on an aggregate basis, it does not make much difference. We must also appreciate thatrelatively much longer recovery process of defaulted loans, shorter history of ratings assigned by ratingagencies in Indian conditions putting certain constraint on benchmarking them against the internationalstandards, relatively large population of unrated borrowers especially in mid and SME corporate sectors,market risk factors exhibiting more volatilities, etc. add challenges. Besides, Pillar 2 process and relatedadd-on capital requirements is also yet to be fully stabilised. The higher prescription of 9% minimumrequirements in comparison to Basel minimum of 8% may be seen in the above context. Moreover, in aneconomy whose financial system is dominated by banks, one has to build more resilience than if it were notthe case. We have also announced two banks as DSIBs based on the criteria of size, interconnectedness,complexity and substitutability.

20. I must add here that the recent Regulatory Consistency Assessment Programme of the BCBS did findour regulations to be fully compliant on all issues relating to capital. Such an affirmation that the banks areworking in a regulatory environment consistent with global standards is an assurance to the internationalfinancial system that they can do business with Indian banks like with any other. It would be instructive toquote the BCBS Chairman2 here

“I would like to remind you that the Basel framework is a minimum standard and members are free to gobeyond the minimum. We actually encourage that, and most jurisdictions have adopted minimumrequirements that exceed the global standard. Super-equivalences are often found in developing andemerging market economies, where banks have a higher risk profile. The local regulators therefore sethigher minimum requirements”.

Incidentally, it may also be appreciated that we are not the only jurisdiction having prescribed a higherminimum capital standards. Several other jurisdictions, particularly Asian countries, have proposed highercapital adequacy ratios under Basel III as may be seen from Table below:

Sample of Basel Member Jurisdictions withHigher Capital Adequacy Norms

(in percentageJurisdictions Minimum

Common EquityRatio

Minimum Tier 1Capital Ratio

MinimumTotal CapitalRatio

Basel III (BCBS) 4.5 6.0 8.0

India 5.5 7.0 9.0Singapore 6.5 8.0 10.0South Africa 6.0 8.25 11.5China 5.0 6.0 8.5China (D-SIBs) 6.0 7.0 9.0Russia 5.0 6.0 10.0


Brazil 11.5 till 2019Switzerland 4.5-10 6-13 8-1921. Let me conclude now. I began by saying why it is necessary to implement Basel III in India. I lookedat the various challenges that it brings but argued that we cannot see any challenge in isolation. The Baselrules seek to make banks more resilient and risk aware. Such a banking system is always better than anunstable one. We cannot overlook the fact that a crisis is better prevented than faced because theaftermath of the crisis is costlier than the incremental cost that one incurs to prevent it. I suppose thedeliberations in today’s meet would not be oblivious to this reality.

49. Capacity Building in Banks(* Speech delivered by Shri R. Gandhi, Deputy Governor at the Roundtable on Capacity Building in Banks organised by CentreFor Advanced Financial Research and Learning (CAFRAL) on June 18, 2015 at Mumbai.)

I appreciate CAFRAL for taking the initiative of holding this roundtable on capacity building in banks. AsI am given to understand, the objective of this roundtable is to discuss the key aspects of therecommendations of the Committee on Capacity Building in Banks and Non-Bank Institutions (Chairman:Shri G. Goplalakrishna) and to formulate strategy to streamline and implement the recommendations. I alsounderstand that the issues and challenges in implementing these recommendations would be the majorfocus area today. At a time when the Reserve Bank as a regulator is engaged in consultation with thestakeholders on the aspects of implementation of the various recommendations of the Committee, such aninitiative is most welcome. The feedback from the deliberations today would serve as a good input for us,going forward as we formulate the policies for implementation.

Capacity Building

2. Let me start by asking a fundamental question to set the tone for the deliberations to follow. What is‘capacity building’? Capacity building is an ongoing process through which individuals, groups,organisations and societies enhance their ability to identify and meet development challenges. It also aimsat understanding the obstacles that inhibit people and organisations from realising their development goals.3.Capacity Building is much more than training and includes the following:

Human resource development: the process of equipping individuals with the understanding, skillsand access to information, knowledge and training that enables them to perform effectively.

Organisational development: the elaboration of management structures, processes andprocedures, not only within organisations but also the management of relationships between thedifferent organisations and sectors (public, private and community).

Institutional and legal framework development: making legal and regulatory changes to enableorganisations, institutions and agencies at all levels and in all sectors to enhance their capacities.

4. A practical definition can be as follows: Capacity Building is planned and continuous development of(or increase in) knowledge, management, skills, and other capabilities of persons and organisations throughacquisition, guidance, incentives, technology and/or training.

Capacity Building – an obsession with financial market regulators

5. Capacity Building is an obsession with the financial market regulators in general and more specificallywith the Indian financial market regulators. The Reserve Bank of India, being the oldest among the financialmarket regulators has a long history of persisting with this obsession. Its efforts include establishing andoperating or being a catalyst for the formation of very many capacity building organisations, not just foritself, but also for the banking and even the financial sectors. These institutions have catered to training,higher academic research, technology, education and certification, etc needs of the sector. There is really avery long pedigree of institutions established/catalysed by the Reserve Bank right from early 1950s. Theseare the Reserve Bank Staff College, the Bankers Training College (BTC), the College of AgriculturalBanking (CAB), the Indira Gandhi Institute of Development Research (IGIDR), the Institute forDevelopment and Research in Banking Technology (IDRBT), the National Institute of Bank Management(NIBM), the Indian Institute of Banking and Finance (IIBF), Indian Institute of Bank Management (IIBM),Institute for Banking Personnel Selection (IBPS) and now the Centre for Advanced Financial Research andLearning (CAFRAL). And, we have not yet stopped; we are now at work to establish an RBI Academy.


6. The other financial market regulators who came later have also imbibed this spirit and haveestablished institutions to meet the needs of their sectors. For example, the Securities and Exchange Boardof India (SEBI) has established the National Institute of Securities Management (NISM) and the InsuranceRegulatory and Development Authority of India (IRDAI) has established the Institute of Insurance andRisk management (IIRM).

7. We can also observe this trend in the regulators of other countries as well, be it in a developed nationor in a developing nation or region. The Federal Reserve Bank, the Bank of England, the Bundesbank, theBanque de France, the International Monetary Fund, the World Bank and others have all establishedcapacity building institutions and arrangements.Why this obsession

8. Finance is primarily a knowledge oriented activity. The chief capital and inputs required for thissector all relate to ‘information and knowledge’. This ‘information’ and ‘knowledge’ is highly dynamic;new research and new concepts crop up every often. The paradigm changes in the sector has very wideramifications; the sector is highly interconnected; happenings in this sector has high visibility. Thatmeans that the regulators have to be upto date with such cutting edge ‘information’ and ‘knowledge’; beabreast of the developments in the sector; and be hands on. On top of these, these efforts have to becontinuous and over the whole career. That is why the regulators typically have such capacity buildinginstitutions under their direct charge.

Background and overview of key recommendations

9. Another significant feature of Indian financial sector is that the Government is also equally keen onsupporting these efforts. Before the regulators came on the scene, it was the Government which played thecatalyst in establishing several capacity building arrangements for the securities and insurance sectors. TheNational Knowledge Commission, established in 2005 as a high-level advisory body to the Prime Ministerof India, has made several recommendations, with the objective of transforming India into a knowledgesociety. Several of these recommendations are being implemented.

10. Further, the Financial Sector Legislative Reforms Commission (FSLRC), established in 2011, has,while recommending a major transformation of the legal foundations for Indian finance through theenactment of the Indian Financial Code (IFC), made several recommendations which pertain to capacitybuilding in banks and non-banks, streamlining training intervention and other related measures. As you areaware, it is in this context that a Committee on capacity building in banks and non-bank institutions inIndia was constituted by the Reserve Bank and Shri Gopalakrishna headed that Committee.

11. Let me begin by outlining what really the Reserve Bank had in mind when the Committee wasconstituted. The thrust was on the entire gamut of human resource skill set which is required for improvingthe efficiency of the employees of banks and NBFCs, which would in turn help the organisationsindividually and benefit the financial system as a whole. The issue is the level of intervention that wouldideally be required in terms of enhancing their skill building - entry level expertise,training requirements both initially and on an ongoing basis, skill sets and qualifications required forcertain specific and specialised areas, and exploring the need and methodologies for prescribingcertification for required qualifications. In short, the most important deliverable for the Committee thuswas to identify capacity building requirements keeping in view the role of the financial sector and what itshould deliver.Key recommendations of the Committee are in the areas of HR management practices,training methodologies and innovations, system wide institutions and processes, exploring mandatorycertification requirements and amplifying capacity related requirements in Boards of banks. I shall dwellon each of these aspects in some detail.

HR management practices

12. HR management is an important function for banks covering the whole gamut of areas such asrecruitment, role mapping, training, skill set identification, building up of HR data base, and performanceassessment. It is very important for this function to be taken up as a specialised area and given its dueimportance rather than as just a routine operational work to be done. HR is going to be at the forefront ofchange in the years to come and it should be understood that banks having clear HR policies withawareness of employee engagement and development will gain a vital competitive edge in a tough market


environment in the years ahead.

13. The HR function world over has undergone many developments/evolution over the years,particularly from its administrative beginnings to a strategic orientation as is seen today. However, it is afact that in a majority of the banks in India even today, the HR function is at best a supplementaryfunction which is not given its due importance in the banking hierarchy. There is a need for change in themind set to underscore the fact that to drive your efficiency, as well as the topline and bottomline in yourbalance sheets, you need skilled resources. Such skill resource base is not possible if you do not have astructured approach to the entire gamut of HR management.

14. HR is an essential element of corporate strategy and is invariably linked to the performance of banksas well. I am happy to observe that this aspect has been emphasised in the Committee report which talksabout aligning human resource planning with strategic planning to achieve the strategic goals of banks andnon-banks. As you go about your deliberations during course of the day, I am quite sure you will havesome more clarity on these aspects.

Training methodologies and interventions

15. A great deal of emphasis has been given in the Report on the process of skill development, particularlyon training needs and training strategies. As you are aware, training enables employees develop the neededcompetencies to achieve the desirable outcomes. Training ensures learning in a structured manner andreduces randomness. Banks and NBFCs need to encourage a culture of learning on an on-going basis.

16. With a fast changing environment, skills and qualifications acquired could fast become redundant ifthere is no on-going updation. While it needs no emphasis that the initiative should also come from theemployees themselves to keep abreast of the developments, it is also the duty of the organisation toequip their employees by providing a minimum training support at periodical intervals. Apart fromtaking away the monotony of their daily work, and expanding their horizons and knowledge levels, itcan also change employee attitude and behaviour, thereby contributing to the organisationalperformance.

17. Studies have shown that training and effectiveness programs have a positive impact on employeeperformance. In this backdrop, there is an interesting suggestion in the Committee Report to introduce asystem where employees have to pass a certification program compulsorily to progress to the next grade inthe hierarchy. It is in this context that institutes like IIBF, IBPS, NISM and CAFRAL have a very vital roleto play.

19. Another interesting suggestion is for training programmes to be combined with certification whichwill improve training efficiency and will offer quality assurance. This will also ensure that training effortsare taken seriously by the recipients.

System- wide measures

20. The next set relates to the steps needed to be taken on a system-wide basis to drive capacitybuilding. The Committee acknowledges the need to look beyond an individual institution’s perspectiveand consider various measures on a system-wide basis to support and drive capacity building. The successof these measures would hinge on coordination and collaboration of all relevant stakeholders. TheCommittee has outlined the various aspects that need to be reckoned, including creation of accreditationagency, introducing Banking Aptitude test, developing Centre of Excellence for Leadership Developmentfor banking sector, fostering development of data and research on skills in banking sector and improvingacademic-industry interface, etc.

21. A very important suggestion is for an accreditation agency to be set up as an independent qualityassurance body for the banking sector which would be responsible for accrediting learning initiatives withinthe banking industry. As per the report, the main focus of the accrediting agency will be to accredit traininginstitutes in the industry. When it comes to implementing this recommendation, the modalities of suchaccreditation needs to be worked out. I understand that this would be one of the issues which will also bediscussed today.

22. In this respect some other action is also needed. Of utmost importance are discussions withthestakeholders - the banks, the premier training institutions, the bankers’ associations, and in the case of


public sector banks, the Government itself.

Building capacities of Top management and members of Boards of banks

23. Public sector banks have been witnessing increasing number of younger officers at top levels ofhierarchy over the last few years. Some of them have risen rapidly thru senior positions over a short periodof time. While this can bring fresh perspectives on various issues, it is also a fact that given the strategicimportance of leadership at the top, it is important to understand the training requirements of topmanagement and fulfil the same. The Committee has recommended mentoring programmes forCMD/CEOs of banks. I find that CAFRAL has already carved out a niche for itself in this area.

24. We are all aware of the concerns that corporate governance weaknesses in banks world over hadcontributed to the financial crisis. Doubts have been raised on the ability of Boards of banks to adequatelyguide and oversee their institutions. There have been questions on the role of Boards of Directors and thedesired, but frequently missing, skill sets of non-executive directors in light of lessons drawn from thecrisis. Bank boards are in constant scrutiny of the regulator, shareholders, and various stakeholders.Needless to add, directors need to possess adequate skill sets and stay abreast of developments in thefinancial sector to guide banks and steer them in the right direction.In our country, in terms of the Banking Regulation Act, 1949, not less than fifty-one per cent, of the totalnumber of members of the Board of Directors of a banking company are required to have special knowledgeor practical experience in accountancy, agriculture and rural economy, banking, co-operation, economics,finance, law, small-scale industry or any other matter the special knowledge of, and practical experience in,which would, in the opinion of the Reserve Bank, be useful to the banking company. There is thus norequirement for a specific educational qualification for nomination as a Director.

26. What is interesting is that the Committee has deliberated in detail on the issue of compulsorycertification of individuals before their appointment as Directors on boards of banks. While the Committeehas recommended that such certification need not be considered as of now, it has thrown open the debateon the knowledge and skill development at the highest decision making body – the Boards. Formal andsystematic induction process and regular training intervention subsequently for members on bank Boardshave been recommended. These are some of the recommendations, which in my view, can be implementedimmediately.

Certification

27. Having discussed the recommendations in broad details, I would like to spend more time on thespecific issue of certification in more details. Why separate certification is needed? Can’t the academiccredentials, university degrees, diplomas and certificates be sufficient? These questions can naturally beraised. The answer is that several aspects of banking and finance is becoming increasingly a set ofspecialised knowledge. As distinct from an academic perspective, a practitioner’s perspective is morerelevant here. India is poised for growth; along with stable growth, we will have a stable and low interestregime. This will necessitate the capital market to grow much faster and larger. The financial instrumentsand services that will be demanded by the investors and offered by the financial institutions users will bemuch more in number and in complexity. Complex expertise in niche area will be the increasing need ofthe hour. Attrition and Lateral recruitments will further exacerbate this.Knowledge assurance will be an imperative. Customer rights and the financial institutions’ liabilities andproof of burden will be squarely on the shoulders of the financial institutions. Legal and regulatorycompliance will demand another set of special talents and skills. If the banks and the financial institutionswill have to meet all these challenges, they will need the assurance that their operating officials are dulyqualified to undertake the respective responsibilities. And certification will provide that assurance.

28. Implementation of the recommendations

In so far as the implementation of the recommendations of the Committee are concerned, since itinvolves among others, issues such as specialisation, entry point qualification, special recruitments basedon job roles and competency, accreditation agency to be set up as an independent quality assurance body,national online aptitude test at entry level as well as exclusive funding arrangement under thenomenclature of the Financial Sector Development Fund with a large corpus (to be considered by the


Government of India) to support various capacity building initiatives, etc. it will have a significantbearing on the HR policies of public sector banks. In view of this, we are in consultation with theMinistry of Finance, Government of India and the Indian Banks Association on operationalising therecommendations.

29. While the consultation process is underway, there has been some feedback that the proposals of thereport should manifest as broader guidelines for the banks’ which are recommendatory in nature and notmandatory. While several will remain so, requirements like certification and accreditation can bemandatory. If this roundtable could discuss the suggestions and arrive at a valuable implementation roadmap, it would be a welcome feedback for the Reserve Bank as we finalise our policy on implementation ofthe proposals.

Conclusion

30. Banking sector plays a very important role in the economic growth of the country and our bankingstem has to ensure that its capacity to deliver has to continuously evolve and adapt to the developments inthe sector. Banks have to make conscious and structured effects in building such capacity, by putting inpractice the various recommendations in the Report. I am confident that the discussions in this roundtablewill lead to specific road map for action and provide clarity on issues.

50. Consolidation among Public Sector Banks(Speech delivered by Shri R. Gandhi, Deputy Governor at the MINT South Banking Enclave, Bangalore onApril 22, 2016. Assistance provided by Shri Santosh Pandey is gratefully acknowledged.)

1. At present banking system in India is evolving with a mixture of bank types serving different segmentsof the economy. In the last few years, the system has seen entry of new banks and emergence of new banktypes targeted to serve niche segments of the society. However, banking system continues to be dominatedby Public Sector Banks (PSBs) which still have more than 70 per cent market share of the banking systemassets. At present there are 27 PSBs with varying sizes. State Bank of India, the largest bank, has balancesheet size which is roughly 17 times the size of smallest public sector bank. Most PSBs follow roughlysimilar business models and many of them are also competing with each other in most market segmentsthey are active in. Further, PSBs have broadly similar organisational structure and human resource policies.It has been argued that India has too many PSBs with similar characteristics and a consolidation amongPSBs can result in reaping rich benefits of economies of scale and scope.2. The suggestion of consolidation among PSBs has quite old history. Narasimham Committee Report in1991 (NC-I), recommended a three tier banking structure in India through establishment of three largebanks with international presence, eight to ten national banks and a large number of regional and localbanks. Narasimham Committee Report in 1998 (NC-II) also reiterated the recommendations on NC-I.Recently, in the budget speech for 2016-17, Finance Minister mentioned that a roadmap for consolidationof PSBs would be spelt out. The desirability of consolidation in Indian banking sector is widely felt acrossthe spectrum.Current Imperatives

3. There are at present times several congruent factors thatindicate that consolidation in Indian banking scene has its right time. They are as follows:4. The need for consolidation is specially felt now, due to thefact that although India is seventh largest economy in the world in terms of nominal GDP, there is noIndian bank in the list of 70 large banks in terms of asset size. We can easily see that large banks reapcertain advantages in terms of efficiency, risk diversification and capacity to finance large projects. Theefficiency gains resulting from lower cost of services and higher quality of services is too attractive toignore.5. It is also felt that a larger bank may be less risky than asmaller bank as the larger bank will have a more diversified portfolio resulting in less volatility in itsearnings. Consequently, a large bank may command higher credit rating than a smaller bank. In a March2016 report, Fitch rating agency mentioned following: “More stable banking systems tend to be structuredaround a number of large 'pillar' banking groups. These large banks in a consolidated banking system enjoyscale benefits leading to better diversification of risks and stronger overall profitability contributing to


higher credit ratings.”6. Large banks do benefit from economies of scale in terms ofrisk diversification, although this benefit disappears when banks become excessively large beyond acertain threshold size. This threshold size has been subject of much debate in the discipline of finance.However, there is no clear research which may point towards an optimum size for a bank in a particularcountry. Perhaps in future, research will throw light on the optimum size of banks. However, in thecontext of India, it is felt that there is ample room for consolidation in the banking sector, especiallyamong PSBs without creating issues of moral hazard or too big to fail concerns. It does appear that thebanking system in India is too fragmented at present. There is evidence, as measured by Herfindahl-Hirschmann Index (HHI) for Indian banking sector using square of on-balance sheet market share of allbanks in the system which works out to be 518.53. This indicates that our banking system is highlyfragmented and diffused. In fact there is evidence which shows that this index has been falling over theyears in India.

7. There are 48 domestic banks (excluding RRBs and LABs)out of which there are 27 PSBs having a market share of around 70% in terms of asset size. A comparisonof performance of larger PSBs with smaller PSBs does indicate that larger PSBs perform better. Forexample, among all PSBs, larger PSBs like SBI and Bank of Baroda are trading at higher Price to BookValue ratio in comparison to other smaller PSBs. SBI has been able to maintain relatively strong capitalratios and appears to be in a better position to withstand shocks to asset-quality. This indicates that underIndian conditions, there is lot of scope for banks to grow in size to become efficient and diversify theirrisks.

8. The other important aspect which needs to be considered iscredit demand of a growing economy. As Indian companies increase their business and become global innature, their demand for large scale credit will become higher. Banks also have to grow in size to meet thehigher demand of credit. The banking system will be required to enhance its capacity to lend to largercompanies and to larger projects. With increase in credit penetration and as credit to GDP ratio increasesfrom present levels of 50 percent, PSBs with a market share of over 70 per cent need to contributesignificantly in the process. Without strong PSBs which are efficient, competitive and well-capitalised,meeting higher demands of bank credit would be quite challenging in future.

9. Recent proposals on Large Exposure norms which limitbanks’ exposure to a group by 25% of their common equity will further limit their capacity to fund largecredit demands. It is therefore imperative that some consolidation among PSBs do happen to support thegrowth potential of the economy.

10. After the crisis, internationally there has been a significant tightening of regulatory norms. Asmentioned earlier, G-SIBs are required to maintain higher amount of common equity capital than otherbanks. Further, Financial Stability Board has agreed on Total Loss-Absorbing Capacity (TLAC) standardfor G-SIBs. G-SIBs will be required to meet the TLAC requirement alongside the minimum regulatoryrequirements set out in the Basel III framework. Specifically, they will be required to meet a MinimumTLAC of at least 16% of the resolution group’s risk-weighted assets (TLAC RWA Minimum) from 1January 2019 and at least 18% from 1January 2022. These regulatory requirements have compelled many of these internationally active banks toreframe their business strategies into downsizing, quitting some businesses and some jurisdictions. Thisprovides an opportunity for EME banks who have global ambitions, a ready business and market space. Ifwe have good large banks, such banks can tap these opportunities and can become global banks.

11. Thus we can see that right now the time is ripe for consolidation in the public sector bank space.

Consolidation in Indian banking system in the past12. There have been two types of bank consolidation in India. One and most obvious has been

voluntary merger of banks driven by the need for synergy, growth and operational efficiency in operations.Recent merger of ING Vysya Bank with Kotak Mahindra Bank is an example of this kind of consolidation.ING Vysya Bank had a stronger presence in South India while Kotak had an extended franchise in theWest and North India. The merger created a large financial institution with a pan-India presence. This kindof voluntary merger driven by synergy and clear economic logic has been rather common in the privatebanks segment. Other examples of this kind of merger may be acquisition of Bank of Madura in 2001 andSangli Bank in 2007 by ICICI Bank, acquisition of Centurion Bank of Punjab by HDFC Bank in 2008, etc.


The Reserve Bank has been given powers under Section 44A of Banking Regulation Act 1949 to approvesuch voluntary mergers. The Reserve Bank has been quite supportive of voluntary mergers of banks whichhave the prospect of creating value for those banks. However, such examples are not many inpublic sector banks sphere. Recent merger of State Bank of Saurashtra and State Bank of Indore into StateBank of India may be seen as basically merger among group companies. The only example of merger oftwo PSBs is merger of New Bank of India with Punjab National Bank in 1993. However, this was not avoluntary merger.

13. The other type of merger of banks has been from the perspective of resolution of a weak bank.Section 45 of Banking Regulation Act 1949 empowers the Reserve Bank to make a scheme ofamalgamation of a bank with another bank if it is in the depositors’ interest or in the interest of overallbanking system. The operation of the weak bank may be kept under moratorium for a certain period of timeto ensure smooth implementation of the scheme. Many private sector banks have been merged with otherprivate sector banks or the PSBs under this mechanism. The merger of Global Trust Bank with OrientalBank of Commerce in 2004 was an example of this kind of merger. Earlier way back in 1960s, post PalaiCentral Bank’s failure, there were several such mergers guided by the Reserve Bank.

14. Since the onset of reforms, there have been about 32 mergers / amalgamations in the bankingsector. Prior to 1999, most of the mergers were driven by resolution of weak banks under Section 45 ofBanking Regulation Act 1949. However, after 1999, there has been increasing trend of voluntary mergersunder Section 44A of Banking Regulation Act 1949. As noted above, most of these Section 44A mergerswere among private sector banks. PSBs have bypassed this trend despite the fact that theremight have been ample opportunities of creating value through strategic mergers and acquisitions amongtwo PSBs.Some caveats

15. Having said that Consolidation in PSBs is worth considering, I would hasten to add certain caveats.

16. It is not that a large size is always beneficial for the banking system and overall economy. Thebenefit of size is observed up to a threshold level of size. A size beyond this threshold size may havenegative consequences for the economy. Existence of excessively large banks may also create significantmoral hazard costs for the entire system. A failure of a very large bank may have systemic implications andtherefore, there is a perception that large banks may be bailed out during stress periods. This expectation ofgovernment support create the perception of too big to fail, and this may improve their creditworthinessresulting in significant funding advantages. This implicit government subsidy enjoyed by these banksincentivises them to grow even bigger and makes them use higher leverage and engage in risky market-based activities. During the recent financial crisis, it was learnt that problems created by large banks (seenas too big to fail) can only be addressed by specific regulations targeted to these banks only. One of theimportant aspects of the post crisis regulatory reforms has been formulation of specific regulatoryrequirements targeted at larger banks.

17. PSBs as a group have not been performing well during the last few years. There has been a largeincrease in Non-Performing Assets (NPAs). As a part of managing large NPAs, somesuggestions have been made that perhaps a consolidation of PSBs can render them more capable ofmanaging such challenges relatively better. The basic argument is that a large bank will have been wellcapitalised, will have deeper expertise to handle large credits and large NPAs and hence can ride offtroughs with relative ease.

18. It has to be ensured that mergers among two banks should not be seen as a fix to short termproblems as being faced by certain PSBs. Merger may be useful only if it has strategic vision driven bysynergy and creating value for both the banks. Merger of a weak bank with a strong bank may makecombined entity weak if the merger process is not handled properly. The problems of capital shortages andhigher NPAs may get transmitted to stronger bank due to unduly haste or a mechanical merger process.Consolidation should not be seen from the sole perspective of creating larger sized banks. While it isagreed that under present banking structure in India, creating a few large size banks is desirable, it has to bea well calibrated and cautious process.Suggested Consolidation Process

19. Ideally, the process has to be initiated by the boards of individual banks themselves. NC-I had alsomentioned that any move towards restructuring and reducing the number of banks through mergers andacquisitions should evolve on the basis of market driven and profitability considerations and with


understanding and support from bank officers and staff. The committee had emphasized on the voluntarycharacter of the exercise to avoid the type of problems associated with a top down approach.

20. However, as discussed above the examples of two PSBs coming together voluntarily and planningfor merger have not been seen, although such examples have been quite numerous in private bankingsector. So the question is how to ensure consolidation among PSBs when PSBs themselves are not comingforward voluntarily. One way forward may be a nudge from large shareholder of PSBs i.e. Government ofIndia. As the Honourable Finance Minister, in his Budget speech of 2016-17 has mentioned, that a roadmap in this regard will be announced soon. An approach in this direction may be constitution of an expertcommittee which may thoroughly examine the business of each PSB, their forward looking business plansand try to find out opportunities of consolidation based on sound business strategy and synergy in theoperations of concerned banks. The areas of synergies are to be properly identified encompassing, interalia, compatibility of businesses, culture, treasury and IT and locational advantage. The committee mayinteract with the boards of banks on the tentative plans it might be having with respect to individual banksand try to understand their reactions. Further, interests of all stakeholders like depositors, borrowers,supervisor, employees, etc. also need to be balanced. Perhaps, the recently constituted Banks Board Bureau(BBB) can perform such an advisory role.

21. It also needs to be emphasised that PSBs are listed and their shares are held by diversified privateinstitutions and individuals and interests of these minority shareholders need to be protected. Any plan formerger or acquisition has to be a Board led process in which all stakeholders have to be involved frombeginning.

22. Further, mergers among PSBs may reduce competition in certain segments or geographiessubstantially and may alter competition between banks and non-banks. As discussed above HHI of theIndian banking system is about 518 which is very low and therefore there is room for consolidation.However, as the HHI scores approach a level of 1800, the competition authorities are usually alarmedabout competition issues. Hence, the aspects related to competition and consumer protection need to beevaluated diligently in the context of consolidation.

23. There may also be significant implementation challenges in the merger of two entities even if it isbased on sound business logic and synergy. Integration of two different organisation cultures andtechnological platforms may not be a simple process. The treatment of legacy issues, closure of redundantbranches, redeployment of human resources and efficient allocation of capital post-merger are not straightforward decisions. The considerations related to implementation challenges also need to be adequatelyfactored in.Consolidation beyond Mergers

24. Very often, we understand consolidation means mergers and acquisitions. It need not be so. There isanother type of consolidation viz. consolidation of businesses. This is distinctly different fromconsolidation of entities. Under this type of consolidation, a bank consciously decides to be in particulartypes of businesses and sheds or quits certain types of businesses. Why a bank would decide so? One set ofcircumstances, as I have alluded earlier, relates to reaction and readjustment to the new regulatorystructure. The TLAC requirements, the Dodd-Frank Actcompliance, the Vickers Commission reforms, the Likanen Group reforms, etc. have forced banks in USA,UK and EU to rethink and rearrange their businesses. I believe this is also a type of consolidation.

25. Our PSBs can take a leaf out of this type and can examine whether every one of them neednecessarily be a universal bank or can each of them choose to be a differentiated bank in its own area orbusiness of strength. For example, there are a few PSBs whose major presence, strength and expertise is inagriculture and rural segment. There are a couple of PSBs whose assets and reach are predominantly in theSME segment. These PSBs can choose to be Small Finance Banks. This way they can conserve capital, donot dissipate their energy in the highly complex and specialised corporate and project financing business.

26. Similarly, there are a few other PSBs who are effectively Payments Banks, as they primarilyundertake deposit acceptance business and their loan book has been built only to comply with the PrioritySector Lending requirements. They even give an impression that such loan book was built reluctantly.These banks may better be Payments Banks and undertake that activity in full vigour and generate valuefor its stakeholders.


27. Likewise, there may be opportunities for some other PSBs to be wholesale / infrastructure banks,about which the Reserve Bank in the recent Monetary Policy Statement expressed its intention to usher insuch differentiated banks in the coming times.

28. The advantage of being a differentiated bank is that its capital can be conserved and put to its bestuse. It can leverage its core strength, in a focussed manner.Conclusion

29. Let me conclude by saying that there is tremendous scope for consolidation among PSBs.Consolidation will bring efficiency and synergy of operations and will ensure that Indian banking sectoris capable of meeting credit demand of our growing economy. However, the consolidation needs to be awell-calibrated process based on sound economic logic. A hasty top-down approach which does notadequately consider synergies in the business models and compatibility in the business cultures andtechnology platforms of the merging banks may not be sustainable in the long run. And, finally,consolidation does not mean only merger of banks; consolidation also means focussing on chosenbusinesses only.

51. Empowering MSMEs: Issues & Challenges( Inaugural address delivered by Shri S. S. Mundra, Deputy Governor, Reserve Bank of India, at the 2nd

Bankers Borrowers Business Meet 2016 held in New Delhi on April 6, 2016.)

1. Shri Rajkumar Dhoot, Member of Parliament; Shri K.K. Jalan, Secretary, Ministry ofMSME, Govt. of India; Shri Ashwani Kumar Chairman, Indian Banks’ Association & CMD,Dena Bank; Dr. Kshatrapati Shivaji, Chairman & Managing Director, SIDBI; Shri SunilKanoria, President, Assocham; dignitaries on the dais; distinguished colleagues from thebanking fraternity; members of Assocham; representatives of the print and electronicmedia; ladies and gentlemen! Bringing the bankers and the borrowers together on acommon platform to deliberate on issues and challenges that afflict businesses is a verynovel idea and hence, I could not refuse an invite to address this gathering for the secondyear in a row. So, I begin by complimenting ASSOCHAM for conceptualizing this ‘Bankers-Borrowers-Business’ meet and more so, for choosing “Empowering MSMEs” as the theme forthe second edition of the Meet. The theme is extremely significant for a number of reasons:continued moderation in economic growth; rising pile of stressed assets in the corporateloan book of banks; need for employment generation; fulfilling entrepreneurial ambitionsand so on.2. I understand that three fundamental issues pertaining to the MSME sector are getting coveredduring the deliberations here: firstly, enabling better understanding of the sector by the bankingcommunity; secondly, ensuring timely financial support to distressed Micro and Small enterprises;thirdly empowering MSMEs, an objective that is closely linked to the first two.

3. Let me set the ball rolling by briefly speaking on each of these three issues which canthen be deliberated upon in greater detail in the technical sessions that follow. To put thingsin context, I would like to recall that the MSME Sector has emerged as a vibrant anddynamic sector of the Indian economy, contributing 37.5 per cent of India’s GDP, with itsvast network of 48 million enterprises providing employment to 111.4 million persons.2 Itmay not be out of place to mention here that in the face of adverse economic conditionsprevalent in the country today, the MSME sector stands as a beacon of hope. Realizing thepotential that the sector holds, both Government of India and Reserve Bank of India havebeen laying substantial emphasis on means to energize the sector. Among the GOIinitiatives that have a bearing on the sector are provision for Udyog Aadhaar, Start-up India,Make in India and steps for improving “Ease of Doing Business” in the country. Likewise,Reserve Bank of India has also been very conscious of the needs of the MSMEs and hashence, initiated a plethora of steps to support them through their lifecycle. I will delve uponsome of these measures in the course of my address today.Strengthening the Banking System for lending to MSMEs

4. With a view to strengthen the reach and scope of credit delivery mechanism for smallentrepreneurs and businesses, RBI has recently issued in-principle approvals for setting up


of 10 Small Finance Banks (SFBs). The SFBs are mandated to extend 75 per cent of theirAdjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sectorlending (PSL) by RBI. Further, these banks are also mandated to ensure that at least 50 percent of their loan portfolio should constitute of loans and advances of up to Rs.25 lakh. Thisis intended to ensure that these SFBs have a diversified loan book with exposures to smallentrepreneurs. We believe that together with the existing players, these banks would beable to meet the credit needs of small businesses in a holistic and timely manner, which isso central to the financing needs of the MSMEs.5. The recent revision to the priority sector lending guidelines has also sought to facilitateflow of credit to the sector. While on the one hand, the target for banks’ lending to microenterprises has been progressively increased to 7 percent by March 2016 and 7.5 percentby March 2017, medium enterprises have been brought within the ambit of priority sector,whereby all loans to medium enterprises in the manufacturing sector and those up to Rs.10 crore in the service sector now qualify for priority sector classification.

6. An extremely important, but relatively much less appreciated aspect of credit deliverysystem is the availability of trained human capital within the banks. Bankers ought to have asound understanding of the businesses that they finance. In respect of establishedbusinesses with predictable cash flows, conducting a credit appraisal, developing a properunderstanding of the business cycle and analyzing problems is a lot easier when comparedto small businesses, which often do not follow a set business cycle, are too dependent onidiosyncratic events and where promoters are not in a position to bring additional equityquickly. In this decade of retirements for the PSBs, the number of trained personnel hasbeen dwindling very fast while the relatively inexperienced bottom rung does not possessappropriate skill-sets to lend to the MSME sector, which is perceived to be risky and costlierto service.

7. To overcome this human resource deficit in the banking sector, we at the Reserve Bankof India have embarked upon a fairly ambitious national level skill building programme forthe bankers titled National Mission for Capacity Building of Bankers for Financing MSMESector (NAMCABS) in July 2015. A major facet of the NAMCABS initiative is ‘Training thetrainer’, which is intended to serve as a force- multiplier. I am happy to state that close to1800 bankers have undergone an intensive entrepreneurial sensitivity and skill buildingprogramme in the last 8 months. I would like to reemphasize the ‘Entrepreneurial sensitivity’content of the capacity building efforts, as this is the key to responding to the lifecycle needsof the small and medium enterprises.

8. Of course, the banking system needs to walk a fair bit to create an environment wherean aspiring entrepreneur is more worried about embracing technology, improvingproductivity and efficiency at his/her unit rather than worrying about the availability,timeliness and adequacy of finance. This would require more enablers in the nature of amore robust and responsive financial infrastructure. There are several initiatives on the anviltowards this objective. Let me give a peek into some of them:

9. Timely availability of credit from the formal financial sector is a very critical issue whichthe small entrepreneur faces. I receive a fair bit of complaints about the cumbersomeprocesses involved, documentation requirements and concomitant delays that are associatedwith getting finance from the banks. We have issued guidelines on maintaining electronicrecords of the loan applications from MSME borrowers and some of the banks haveimplemented a Credit Proposal and Tracking System. However, that has not been universallyimplemented. Under the circumstances, the potential

borrowers continue to face uncertainty over quantum and timelines after making a loanapplication. To ease the process, bridge information gaps, enable monitoring of processingtime and reducing transaction costs, RBI is in active discussions with GOI, IBA, SIDBI and e-governance experts to set up a universal ‘Udyami’ Portal for access by small entrepreneur.

10. The Committee on Medium Term Path on Financial Inclusion (Chairman: Shri DeepakMohanty) has recommended exploring a system of professional credit advisors for MSMEs,


which could help bridge the information gap between bank and the borrower that is a majorconstraint in the flow of credit to the MSME sector today. As announced by the Governor inyesterday’s Monetary Policy statement, there is a proposal to accord accreditation to fewcredit counsellors who would act as facilitators for the micro and small entrepreneurs foraccessing the formal financial system with greater ease and flexibility. Since MSMEs aretypically enterprises with weak credit histories and inadequate expertise in preparingfinancial statements, credit counsellors can help bridge the information gap and thereby helpbanks make better credit decisions. The Reserve Bank will hold consultations with all thestakeholders and come out with guidelines for this by September 2016.

11. Another financial infrastructure, which could have a multiplier effect on lending to smallbusinesses, is a Movable Asset Registry. Today CERSAI provides a facility for registeringcharge on immovable property. However, most of the small business entrepreneurs do notpossess immovable property to offer as collateral and instead they own machinery, stocks,receivables or livestock, which can be leveraged to obtain finance from banking channels if a‘Movable Asset’ Registry is available. We are working towards this as well.

Tiding Over the Life Cycle Issues- MSME Way12. Predicting the lifecycle of MSMEs, particularly the Micro units, is a difficult proposition. The microentrepreneurs neither have keen business acumen nor sizeable resources. As opposed to largerbusinesses, the inability to respond in time to the vagaries of these business cycles can often provefatal to the Micro enterprise. With timeliness of resource support being such a critical element atdifferent stages during the life cycle of small businesses, let me flag a few initiatives which RBI hastaken to address the issue.

13. RBI has recently issued licenses to three entities for operating the Trade Receivable DiscountingSystem (TReDS), which when operational, would address a major issue faced by the sector, i.e.timely realization of receivables. This is a path-breaking initiative with very few parallels in othercountries. However, the implementation would need wholehearted support from all the majorstakeholders, i.e. the large corporates, the PSUs and eventually, the Government enterprises.

14. RBI has also recently issued guidelines to streamline the credit flow to the MSMEsector. The banks have been advised to review their existing lending policies to the MSEsector and fine-tune these policies by incorporating provisions for sanctioning of StandbyCredit Facility in case of term loans, Additional Working Capital Limits, Mid Term Review ofRegular Working Capital Limits, setting timelines for making credit decisions, etc. I take thisopportunity to urge the banks to be sensitive to the requirements of the smallentrepreneurs and offer a helping hand in times of crisis.

15. Thirdly, it is seen that the life cycle issues of micro entrepreneurs like weavers,artisans, etc. in far flung areas, in agglomerations and unrecognized clusters are much moreacute. More often than not they are compelled to borrow towards their working capital needsfrom local money lenders and informal sources. RBI has carried out a dip stick survey ofagglomerations/clusters recently and observed a huge scope for deepening of bankingservices in such areas. I urge the banks to proactively open their banking outlets in andaround clusters/agglomerations as it makes prudent business sense.

Empowering the entrepreneur16. Having delved into the supply side issues and focusing mainly on institutional infrastructure, letme now talk about the demand side of things. While it is not difficult to find people withentrepreneurial ambitions, there is a need to imbue the budding entrepreneurs with a keen businesssense and awareness about the intricacies of the markets and banking, the demand-supplyconundrum, understanding of technology, etc.

17. Preparing an individual for an entrepreneurial venture is as important to the resource provideras it is to the entrepreneur himself. One of the major initiatives in this direction has been theinstitution of Rural Self Employment Training Institutes (R-SETI) which trains the rural youth to takeup micro entrepreneurial ventures. Close to three lakh youngsters are trained through around 600RSETIs every year. While conceptually, it is an excellent mechanism, I observe that certain infirmitieshave come to grip the institution of R-SETIs over time. In my opinion, such institutions require well-defined objectives, a robust process for selection of trainees, constant up-gradation of training


methodologies, hand-holding, ensuring credit linkage etc. I feel that there is a need for a fundamentalshift in our approach towards operations and management of R-SETIs. It may, perhaps, be ideal topool the R-SETIs into a single National Trust with a separate Governance framework for achievingbetter synergy. This would ensure an arms’ length distance with the banks in terms of theiroperations even while they continue to receive funding support from the banks. We have done someinternal studies and see a clear possibility for achieving this. I would request the banks and the IBA towork together to make this institution truly meaningful.

19. The second issue that I want to highlight in this regard is the recently announcedFramework for Revival and Rehabilitation of MSMEs. GOI, in consultation with RBI and otherstakeholders, has provided an institutionalized framework for rehabilitation of enterpriseswhich are potentially viable, but under temporary duress. From a bank’s perspective, themost critical period in the lifecycle of small enterprises is the little time window between theunit operating smoothly and turning sick. The Framework provides for a structuredmechanism, which could be triggered either by the banker or by the entrepreneur when firstsigns of stress appear. The problem resolution is scaled up to a committee with a timebound schedule. I am sure, if implemented effectively, it would greatly help in savingproductive enterprises rather than letting them slip into morass. I trust, the entrepreneurswould find this mechanism truly empowering. Thirdly, it is time we took a relook at whetherwe need to change our approach towards the sector from a ‘one size fits all’ approach to amore differentiated approach towards the Micro sector. The Micro sector itself consists of adiverse set of enterprises. The banking fraternity needs to look at how they can differentiatein their procedures and products by making them more attuned to the unique needs of theMicro sector.

20. While on the institutional mechanism, just as a reassuring thought, I would like tomention that we at RBI are extremely mindful of the trials and tribulations of smallenterprises and we have put in place institutional mechanism for deliberating and generatingsolutions for issues concerning the MSME sector. First, there is the Standing AdvisoryCommittee at the national level which I chair and in which some of the industry bodiesparticipate. Then there is an Empowered Committee at the Regional Offices of RBI and thenthere are town hall meetings held at periodic intervals to serve as a forum for feedback.Each of these fora have evolved into vibrant platforms for deliberating and sorting out policyand operational issues with specific focus on this sector. I would urge the industry bodies,including ASSOCHAM, to use these platforms extensively to deliberate on critical issues (andnot merely raising rhetoric for reducing interest rates) and put forward suggestions for policyinterventions.

Conclusion

21. Before I conclude, let me reemphasize that an entrepreneur would feel empoweredwhen he/she is able to bridge the asymmetry of knowledge. There is no better way to dothis than peer help. Be it in skilling, assisting or hand holding, the industry bodies have amajor role to play in empowering the MSMEs. International experience, you might know, istowards industry bodies serving as peer counsellors for small businesses. I visualize asignificant role for industry associations like ASSOCHAM in empowering the entrepreneurs. Iam happy that ASSOCHAM has been actively working in this area and the report releasedtoday is a testimony to their efforts.

22. I stated this at the close of my address last year and at the cost of repetition, would liketo re-emphasize the importance of borrower education (especially for small businesses). Thebanks and borrowers share a symbiotic relationship and hence, both

the lenders as well as the borrowers have to understand their basic responsibilities, co-operate with each other and adhere to a general code of conduct and discipline. We have torealize that only if the business survives would both, the borrowers and the bankers flourish.23. As I said at the beginning of my address, the MSMEs are key to a sustainable economicgrowth and hence, it is in our collective interest that these enterprises thrive. To paraphraseMao-Tse-Tung, “Let a billion MSMEs bloom!”


52.. Financial Frauds – Prevention: A Question of Knowing Somebody (Speech

delivered by Shri R. Gandhi, Deputy Governor at “2nd National Conference on Financial Frauds Risks &Preventions” organized by ASSOCHAM on June 26, 2015 at New Delhi. )

Introduction

2. “There are three things in the world that deserve no mercy -hypocrisy, fraud, and tyranny” - Frederick William Robertson

There is no universally accepted definition for the term ‘fraud’. The laws in many countriesdo not define fraud; it actually needs no definition; it is as old as falsehood and as versatileas human ingenuity. Fraud is a generic term embracing all the multifarious means whichhuman ingenuity can devise and are resorted to by one individual to gain an advantageover another by false suggestions or by suppression of the truth.

3. Section 25 of the Indian Penal Code (IPC) states that a“person is said to do a thing fraudulently if he does that thing with intent to defraud butnot otherwise.” IPC also does not specifically define what a fraud is; but we all know thatcertain offences like cheating, concealment, forgery, counterfeiting, mis-appropriation,breach of trust and falsification of accounts involve elements of fraud in theircommission.

4. Can frauds be wished away? Obviously, we can’t wish themaway. We can only be consciously on our vigil to ward off frauds

and initiate exemplary action on the perpetrators of fraud which will serve as deterrents tointending fraudsters.Banks and financial institutions are easy prey to fraudsters.5. As long as banks and financial institutions handle huge sums of money as financialintermediaries they will always be the target of ingenious fraudsters trying to relieve them ofthe money. But our endeavour, as I just mentioned, has to be to prevent it, detect it at theearliest if it happens and minimise its negative fallout. This entails a constant state of vigilagainst frauds and emerging fraud risks in the economy.Type of Frauds6.The bank frauds are primarily deposit related, advancesrelated and services related. Of these, the deposit related frauds which used to be big innumber though not in size, have been on the wane, thanks to the improvements in chequeand payment processing, usage of technology and tightening the provisions of theNegotiable Instruments Act. The advances related frauds continue to be the major concernfor banks, especially because of their size and far reaching implications to their financialsoundness and integrity. A special variety of frauds, which are increasing in number and interms of speed, are the cyber frauds. Yet another special type relates to trade ordocumentary credit related, special because of cross border implications.7. When we discuss about bank frauds, we will not discussabout bank frauds committed by third parties which can suitablybe classified as thefts. These types include cyber frauds committed by tricksters, ortechsters. For our discussions, we will include bank frauds committed by some connectedparties like the depositors, the borrowers, the users of bank services or by their own staff,their outsourced agencies, their vendors, their agents like assayers, valuers, auditors, etc.Root Cause of Financial Frauds

8. Financial frauds, more specifically the advances relatedfrauds, occur because of breach of contract and trust. It could be because of the pledged ormortgaged assets are compromised or divested off; or the documents are forged; or thefunds availed are diverted or siphoned off; or the documentary credits like the letters ofcredit or guarantees are misused, etc.

9. The root cause of financial frauds can be reduced to onesingle phenomenon. It is failure to Know Its Somebody – i.e. failure to Know Its Customer,or failure to Know Its Employee, or failure to Know Its Partner / Vendor.Bankers' Response to Frauds

10. What the fraudsters do not understand is the systemic response of banks when they


have been tricked into facing the consequences of frauds. The bankers' reactions includewithdrawal from lending, being risk averse, losing confidence in documentary credit,excessive collateralisation or documentation, demands on personal guarantees, collapse ofneed based lending systems like MPBF, Tandon and Chore Committee norms, etc.These are in addition to the bankers' efforts to recoup the losses through higher interestrates and charges.The Three KY Principles

11. When banks are faced with frauds, their financials are expected to bear theimmediate impact. Because of this implication, and if uncontrolled it can cause systemic risk,the regulators usually have an extra oversight on banks about frauds. More often than not,the frauds lead to tighter regulations. These aim towards bringing in both corrective andpreventive measures. As I said earlier, if a bank has to prevent fraud, it must follow thethree KY Principles. It must Know its Customer; it must Know its Employee and it mustKnow its Partner i.e. Know Your Customer, Know Your Employee and Know Your Partner, theThree KYs.

The First KY - Know Your Customer (KYC)

12. When one thinks of KYC norms frequently the emphasis is on the different type ofdocuments to be obtained from an account holder which will establish that KYC norms havebeen followed. In a scenario where many frauds are committed by submitting forged andfabricated documents, such an emphasis is too narrow and will result in us missing the woodfor the trees.

13. A bank, apart from obtaining the relevant documents, should make an effort to ‘knowthe customer’ in the real sense - his background, his stated activities / profession, what hissignature style of operation is or digital foot print is, in case of online transactions, etc. Arobust KYC system envisages such an

understanding. This observation of his pattern of transactions will let the bank draw up acustomer profile. Once this is established any exception to the norms can raise a red flagand tracked or confirmed with the customer. Banks should become adept in patternrecognition and do discreet investigations on the suppliers / buyers to check if they are inthe same line of business or are bogus entities. Such timely checks help identify frauds at anearly stage.

14. Banks need to invest in data analytics and also intelligence gathering to make frauddetection as near to real time as possible. Data analytics solutions can crunch huge data andgive us the patterns, that too in a visual, easily understandable format.

15. Another strong trend in the future would be the profiling of the customer across differentchannels or medium – online, offline, corporate loans, personal loans, etc. At least in respect ofcustomers perceived to be of high risk, very large advance accounts, we need to use Big data foranalysing information from disparate sources e.g. data available with the banks, the social networkactivities, identifying relationships that are usually invisible. This way we may be able to analysetransactions and be able to predict the likelihood of a fraud happening.

16. On a bank level, each bank should segment its customers based on their risk profile andtransaction patterns and develop appropriate response systems for exceptional patterns noticed andfortify systemic level controls.

17. But one word of caution though. I don’t think banks can sit back after investing in asoftware or establishing a fraud risk management system. The business landscape isgenerally dynamic and with ingenious fraudsters we are dealing with people who alwayschange their strategies to be one step ahead of bankers and regulators and the police. Assuch, when it comes to fraud risk management, a bank has to be like a referee in a footballgame, always moving with the players and be alive to changes in the game and take action.The Second KY – Know Your Employee (KYE)

18. Several frauds are insider jobs; or at least with the abetment of insiders. Bankers aregenerally people of integrity. The selection process is highly sensitized in this respect. Still,some bad apples do escape or become rotten. Banks have to take extra care to havecontinuous vigil on their staff. Background checking for antecedents, checks and balances,periodic rotations, vigilance assessments, internal audits, etc. techniques will have to beemployed to know the employees better and as preventive measures.


The Third KY – Know Your Partner

19. Modern day banking necessitates that a bank join hands with partners, agents,vendors. Outsourcing peripheral and several operational activities involves deploying andtrusting somebody else’s employees. Varied activities as diverse as cash logistics to ITand data management are being entrusted to third

parties. Banking Correspondents and Banking Facilitators are emerging as another set ofpersons closely associated with a bank. If frauds are to be prevented effectively, banks haveto know their partners.Regulatory response

20. The Reserve Bank has been issuing instructions from time to time on the preventiveand corrective measures that banks should adopt. One set of instructions relate toinformation sharing. The importance that the Reserve Bank had always attached to isinformation sharing among banks, which has been again reinforced and made an integralpart of the monitoring of potential frauds.

21. To facilitate this, banks have been advised to assign Unique Customer Identity Numbers(UCIN). Database on credit information, centralized registry for recording security interests CentralRegistry of Securitisation, Asset Reconstruction and Security Interest (CERSAI), centralized know yourcustomer registry, Central Repository of Information on Large Credits (CRILC), etc have beenestablished or being built to share information among the bankers. A Central Fraud Registry is alsobeing planned.

22. Another initiative in this respect is the List of Wilful Defaulters. Fraudsters are included in thislist. With this List in hand, the banks get not only cautioned about the fraudsters, they can also bringin certain deterrent action against them.

The new framework to deal with Frauds

23. Recently, we had constituted an Internal Working Group that went into the causesfor delays in detecting frauds, suggest ways to compress the time between occurrence offraud and detection and also to remove any other impediments that may prevent deterrentactions taking place. The Group after wide consultations had recommended for a newframework to deal with frauds. The study revealed that there were a lot of delays indetecting a fraud and in quite a few large value frauds, the time taken was more than fiveyears. Further to this initial delay, in case it was a consortium or multiple banking facility,the divergent opinion among the financing bankers on whether an account was a fraud ornot also contributed to further delays. Any delay in detection of fraud entails further delaysin filing of complaints with law enforcement agencies and other consequent actions. Suchdelays, it is needless to add, enable a fraudster to enjoy banking facilities with impunityand ensnare more bankers and other innocent individuals in his net. The money trail getscold and prospects of recovery becomes dim as each day passes. This scenario calls for afocussed response from the regulators, bankers and other stakeholders.

24. The best way to prevent frauds especially, loan frauds is to tone up the appraisalprocess. A good appraisal can weed out many undesirable or flawed proposals that mayeventually turn out to be fraud. A good appraisal does not mean only analysing the financialstatements and projections submitted by the potential borrowers. It requires going beyondthe given and independently gathering intelligence on the potential borrower. This requiresaccessing public databases, news reports on any adverse governmental action like raids, etc.A good appraisal should also take into account problems brewing in the industry, in thepromoters’ group, etc. which may show the direction in which a company’s operations will goand whether there is inherent resilience in the promoters and the project to face roughweather and come out unscathed.

25. While diligent appraisal is a major factor in eliminating dodgy borrowers, subsequentmonitoring also plays a vital role in identifying potential frauds. In many cases we find that thediscovery that stocks have been clandestinely sold, diversion to related parties and siphoning off offunds have taken place and documents provided had been fabricated, is made after the accountshows stress and becomes an NPA. Any action taken at that stage is as useful as locking theproverbial stable doors after the horse has bolted.

26. It is obvious that if anyone wants to identify potential frauds before they happen, it ispossible only by continuous monitoring. We have therefore prescribed stage wise actions in the life


cycle of a loan account and also prescribed actions that a bank may take in each stage to safeguardits interest. A system of identifying Red Flagged Accounts based on Early Warning Signals has beenput in place. A red flagged account is one where a suspicion of fraudulent activity is thrown up by thepresence of one or more

Early Warning signals. The presence of these signals should trigger a detailed investigationinto the RFA.

27. As one of the major problems in fraud risk management was time delays in dealing with afraud, we have prescribed time limits within which certain actions like investigating for fraud shouldbe completed and a decision on whether an account is indeed a fraud or not is made. Similarly thedelays and divergent stands taken by banks in a consortium or multiple banking arrangements havealso been tackled by spelling out time lines for actions like informing other banks of a Red FlaggedAccount, commissioning a forensic audit and arriving at a consensus/majority decisions, etc. Iffrauds have to be minimised it is not enough to tighten the actions incumbent on banks alone. Inpreventing frauds a major part is played by the deterrent actions and punishments that are metedout to the fraudsters. Towards this end henceforth the fraudster borrowers will not be able to availbank finance for five years after full repayment of the dues. This is of course in addition to thecriminal complaints to be filed with police or CBI. This is expected to build in a disincentive for anyborrower to consider committing a fraud on banks.

28. As I mentioned earlier, containing frauds means focussed action by all stakeholders, notleaving any flank uncovered. One of the flanks was the criminal investigations done by lawenforcement agencies and bringing to book fraudsters soon after a fraud is committed. To facilitatethis and smoothen the process of commencing the investigations the Reserve Bank has been

working with the Ministry of Finance and coordinated actions have been initiated.

Fraud Prevention

29. I have dwelt on loan frauds at length as they form a major portion of frauds reportedby banks. However the aspects of continuous monitoring and timely action on the basis ofany early warning signals apply equally well to other types of fraud like deposit frauds, cyberfraud, etc.

30. It is here that I am sure that adhering to the KYC norms and real time transactionmonitoring, transaction analysis, centralized databases, etc. rigours will come in handy for banks.

Fraud risk and governance

31. It is when we think of the dynamic nature of frauds’ landscape that we need to payattention to certain systems and enduring values in a bank. Without a strong system guidingthe anti-fraud initiatives of a bank, the responses to quick changing fraud risks may end upbeing knee jerk reactions than the flexible and appropriate measures that are called for. Thisrequires a look at the corporate governance in banks and board level ownership of the anti-fraud initiatives.

32. The Board of a bank should be proactive in understanding the fraud risks facing the bank andalso put in place a robust antifraud machinery. They should have a deep understanding of theinstitution’s strengths and weaknesses and be able to steer the

institution in the right direction. For this they need to retain their common sense in theface of an information overload. As a famous saying goes, you can find out if a man isclever by his answers, but you can find out if a man is wise by his questions (NaguibMahfouz). As another saying goes, the wise man doesn't give the right answers, he posesthe right questions (Claude Levi-Strauss).

33. The Board needs to ask the right questions. They need to assess the robustness of the internalcontrols, with each new threat detected and be in a position to get the data analysed in a holisticfashion.

34. Our recent initiatives in separation of the post of Chairman and Managing Director in banks isalso aimed at giving the much needed breadth of vision to the Chairman without being harried by theday to day running of a huge organisation.

35. The Board needs to show the way by enunciating the ethical values of the bank and byexemplary actions when frauds and insider collusions are detected. Another way to empower theemployees is to put in place a whistle blower policy and having a standard and impartial procedure todeal with such complaints. That the bank will deal firmly and consistently with any fraud andemployees can without fear escalate their concerns and insights on potential frauds to the TopManagement will send out a strong message and convince each employee to own the anti-fraudinitiative of the bank. It will not be the preserve of the Board, the


chief executive officer or the fraud monitoring department of a bank alone.Conclusion

36. To conclude, let me say that the fraud preventing and corrective measures andprinciples are not confined only to the Boards of banks. As the members of ASSOCHAM canreadily empathise, these are needed in all the enterprises. The ethical values in businessserve as beacons for businesses; though buffeted by economic downturns, and by thepressures to be profitable, the ethical values will dictate the enterprises avoid the periloustemptations of the fraud triangle – that of pressures, opportunities (gaps in systems ) andrationalisation.

53. Financial Reforms - Past and Present.(1C.D. Deshmukh Lecture by Dr. Raghuram Rajan, Governor, Reserve Bank of India at NCAER, New Delhi on 29.01.16).

I thank Shekhar Shah for inviting me to deliver the C.D. Deshmukh lecture at NCAER.Sir Chintaman Dwarakanath Deshmukh, an ICS officer, was truly a giant of modern India. In1943, he was the first Indian, as well as the youngest in its history to date, to be appointedthe Governor of the Reserve Bank of India. He subsequently served as the Finance Ministerin the Union Cabinet. It was during this time that he also became a founding member of theGoverning Body of NCAER. After resignation from the Union Cabinet over a matter ofprinciple, he served at various times as Chairman of the University Grants Commission,Vice-Chancellor of the University of Delhi, President of the Indian Statistical Institute, andfounding member and lifetime President of the India International Center. Among his manycontributions were his insightful interventions at Bretton Woods as part of the Indiandelegation to that historic meet. He was awarded the Padma Vibhushan in recognition of hisservices. Sir C.D. Deshmukh died in 1982.

C.D. Deshmukh was an institution builder. I am currently the caretaker of one he led,the Reserve Bank of India. Let me assure him that the Reserve Bank is in fine fettle. In acountry where time has weighed heavily on the quality of institutions, the integrity,capability, and motivation of my colleagues allows the Reserve Bank to continue to standtall.

The world today, however, is much less comforting. Industrial countries are stillstruggling, with a few exceptions, to grow. Our fellow BRICS all have deep problems, withconfidence about China waxing and waning. Indeed, India appears to be an island of relativecalm in an ocean of turmoil. What is different here and how can we be assured that it willcontinue?

A lesson from Brazil?

Perhaps Brazil offers a salutary lesson. Only a few years ago, the world wasapplauding the country’s thriving democracy, its robust economic growth, and the enormousstrides it was making in reducing inequality. It grew at 7.6 percent in 2010, and haddiscovered huge oil reserves which the then President Lula likened to “winning a lotteryticket”. Yet the country shrank by 3.8% last year, and its debt got downgraded to junk.Growth will be no better this year. What went wrong?

Paradoxical as it may seem, Brazil tried to grow too fast. The 7.6 percent growthcame on the back of substantial stimulus after the global financial crisis. In an attempt tokeep growth high, the New York Times says the central bank was pressed to reduce interestrates, fueling a credit spree that overburdened customers are now struggling to repay.2

Further, Brazil’s government-funded development bank hugely increased subsidized loans tocorporations. Certain industries were favored with tax breaks while price controls wereimposed on gasoline and electricity, causing huge losses in public sector firms. Petrobras,the national oil company, which was supposed to make enormous investments in oil drilling,instead became embroiled in a corruption scandal. Even as government pensions burned anever larger hole, budget deficits expanded, and the political consensus to narrow them hasbecome elusive. Inflation touched double digits in the 4th quarter of 2015.

While the Brazilian authorities are working hard to rectify the situation, let us not


ignore the lessons their experience suggests. It is possible to grow too fast with

substantial stimulus, as we did in 2010 and 2011, only to pay the price in higher inflation,higher deficits, and lower growth in 2013 and 2014. Of course, India is not in the samesituation today. Given the inhospitable world economy and two successive droughts, eitherof which would have thrown the economy into a tail spin in the past, it is to the immensecredit of the government that we have over 7 percent growth, low inflation, and a lowcurrent account deficit. But it is at such times that we should not be overambitious.

Macroeconomic stability

As Brazil’s experience suggests, the enormous costs of becoming an unstable countryfar outweigh any small growth benefits that can be obtained through aggressive policies. Weshould be very careful about jeopardizing our single most important strength during thisperiod of global turmoil, macroeconomic stability.

There is a public discussion of whether India should postpone, yet again, the fiscalconsolidation path it has embarked on. Clearly, the Government will balance variouscompulsions in taking its decision. But a number of facts are worth pointing out:

The consolidated fiscal deficit of the state and centre in India is by far the largestamong countries we like to compare ourselves with; presently only Brazil, a country indifficulty, rivals us on this measure. According to IMF estimates (which is what the globalinvestor sees), our consolidated fiscal deficit went up from 7 percent in 2014 to 7.2 percentin 2015. So we actually expanded the aggregate deficit in the last calendar year. With UDAY,the scheme to revive state power distribution companies, coming into operation in the nextfiscal, it is unlikely that states will be shrinking their deficits, which puts pressure on thecentre to adjust more.

Some say that fiscal expansion is necessary to generate the growth needed to put ourdebt to GDP ratio back on a sustainable path. This is a novel argument. Ordinarily one wouldthink that a government should borrow less, that is, run lower fiscal deficits, in order toreduce its debt. But there is indeed a theoretical possibility that the growth generated by thefiscal expansion is so great as to outweigh the additional debt that is taken on.Unfortunately, the growth multipliers on government spending at this juncture are likely tobe much smaller, so more spending will probably hurt debt dynamics. Put differently, it isworth asking if there really are very high return investments that we are foregoing bystaying on the consolidation path?

Of course, the common man does not really care whether we stay on theconsolidation path or not. But the bond markets, where we have to finance over T10 lakhcrore of deficits plus UDAY state bonds, do care. Deviating from the fiscal consolidationpath could push up government bond yields, both because of the greater volume of bondsto be financed and because of the potential loss of government credibility on futureconsolidation. It was James Carville who said “I used to think if there was reincarnation, Iwanted to come back as the President or the Pope or a .400 baseball hitter. But now Iwant to come back as the bond market. You can intimidate everybody.” The Governmentunderstands the importance of bond market confidence, but I wonder if the economistsdebating in public put adequate weight on it.

The fall in inflation has been a major contributor to lower bond yields, and is the jointwork of the Government and the RBI, aided to some extent by the fall in internationalcommodity prices. This is no mean achievement given two successive droughts that wouldhave, in the past, pushed inflation into double digits. Despite this success, we hear voicessuggesting weakening the fight against inflation. Let me reiterate that macroeconomicstability relies immensely on policy credibility, which is the public belief that policy willdepart from the charted course only under extreme necessity, and not because ofconvenience. If every time there is any minor difficulty, we change the goal posts, we signalto the markets that we have no staying power. Let me therefore reiterate that we haveabsolutely no intent of departing from the inflation framework that has been agreed with the


Government. We look forward to the Government amending the RBI Act to usher in themonetary policy committee, further strengthening the framework.

Macroeconomic stability will be the platform on which we will build the growth that willsustain our country for many years to come, no matter what the world does. Indeed, I amreminded today of the period 1997-2002 when India labored and reformed with onlymoderate growth, only to see a decade of high growth after that.

Before I turn to the main body of this talk, a word on interest rates. Industrialistsgrumble about high rates while retirees complain about the low rates they get today ondeposits. Both overstate their case, though as I have said repeatedly, the way to resolvetheir differences is to bring CPI inflation steadily down.

Let me explain, starting with the retiree. The typical letter I get goes, “I used to get10% earlier on a 1 year fixed deposit, now I barely get 8%”, please tell banks to pay memore else I won’t be able to make ends meet”. The truth is that the retiree is getting moretoday but he does not realize it, because he is focusing only on the nominal interest he getsand not on the underlying inflation which has come down even more sharply, from about10% to 5.5%.

To see this, let us indulge in Dosa economics. Say the pensioner wants to buy dosasand at the beginning of the period, they cost T50 per dosa. Let us say he has savings ofT1,00,000. He could buy 2,000 dosas with the money today, but he wants more byinvesting.

At 10% interest, he gets T10,000 after one year plus his principal. With dosas havinggone up by 10% to T55, he can buy 182 dosas approximately with the T10,000 interest.

At 8% interest, he gets T8,000. With dosas having gone up by 5.5%, each dosa costsT52.75, so he can now buy only 152 dosas approximately. So the pensioner seemsvindicated: with lower interest payments, he can now buy less.

But wait a minute. Remember, he gets his principal back also and that too has to beadjusted for inflation. In the high inflation period, it was worth 1,818 dosas, in the lowinflation period, it is worth 1,896 dosas. So in the high inflation period, principal plusinterest are worth 2,000 dosas together, while in the low inflation period it is worth 2,048dosas. He is about 2.5% better off in the low inflation period in terms of dosas.

This is a long winded way of saying that inflation is the silent killer because it eatsinto pensioners’ principal, even while they are deluded by high nominal interest rates intothinking they are getting an adequate return. Indeed, with 10% return and 10% inflation,the deposit is not giving you any real return net of inflation, which is why you can buy only2,000 dosas after a year of investing, the same as you could buy before you invested. Incontrast, when inflation is 5.5% but the interest rate you are getting is 8%, you areearning a real rate of 2.5%, which means 2.5% more dosas. So while I sympathize withpensioners, they certainly are better off today than in the past.

Let us turn to the industrialist. At a recent conference, I met a businessman whocomplained that his business was getting torn to shreds by imports. He was lobbying forsafeguard duties. When asked for evidence of unfair competition, he said his revenues hadnot grown at all, with his volume growth barely offsetting the price decline for his product.While commiserating with him, I said lower input costs must be a boon, because commodityprices have fallen even more sharply than output prices. He grudgingly agreed they hadhelped. When asked about his profits, he eventually admitted they were at an all-time high.But nevertheless, he said, we need safeguard duties because foreigners are dumping belowcost! Put differently, businesspeople complain about low output price inflation, but theinflation that matters to them is the inflation in their profits, which is higher. For instance,analyzing 2nd quarter results for non-financial non-government corporations, we find thatwhile revenues have fallen by 8.8% year on year, input costs have fallen by an even higher12.4%, so that gross value added has gone up by 10.8%.

Clearly, there are industries in trouble. We should, however, be particularly careful


about raising tariffs at a time when costs are falling everywhere – aside from the inflationaryimpact, for every happy domestic businessman whose prices are raised by the imposition oftariffs on imports, we have an unhappy domestic businessman whose costs are raised by thevery same tariffs, as well as unhappy consumers.

Cleaning Up the Banks

One very important contributor to macroeconomic stability is healthy banks. Banks inIndia have a number of stressed loans on their balance sheet. In some cases, the reality isthat existing loans will have to be written down significantly because of the changedcircumstances since they were sanctioned (which includes extensive project delays, costoverruns, global overcapacity, and overoptimistic demand projections). If loans are writtendown, the promoter brings in more equity, and other stakeholders like the tariff authoritiesor the local government chip in, the project may have a strong chance of revival, and thepromoter will be incentivized to try his utmost to put it back on track. But to do all this deepsurgery, the bank has to classify the asset as a Non Performing Asset (NPA), a label banksare eager to avoid. Alternatively, instead of deep surgery, the banks could apply band aids,they could “extend and pretend”, lending the promoter the money he needs to make loanpayments. The project’s debt obligations grow, the promoter loses further interest, and theproject goes into further losses.

A number of good banks in our system have taken the necessary action to recognizeand resolve stressed loans in a timely fashion. But some others need to take more proactiveaction. Over the last few quarters, the Reserve Bank has expanded the tools banks have torecognize and deal with stressed loans. It is now working with the Government and banks toensure that the stressed assets are dealt with on a proactive basis, and that bank balancesheets both reflect a true and fair picture, and are adequately provisioned. The FinanceMinister has indicated he will support the public sector banks with capital infusions asneeded. Our estimate is that the support that has been indicated will suffice, especially whencoupled with other capital sources that are usually available to banks. Our various scenariosalso show private sector banks will not want for regulatory capital as a result of thisexercise. Finally, the RBI is also working on identifying currently non-recognizable capitalthat is already on bank balance sheets, such as undervalued assets. The RBI could allow

some of these to count as capital as per Basel norms, provided a bank meets minimumcommon equity standards.

In sum, we believe enough capital is available. While the profitability of some banksmay be impaired in the short run, the system, once cleaned, will be able to supporteconomic growth in a sustainable and profitable way. To be less proactive, as our past andthe history of banking across the world suggests, will only see the problem get bigger andless manageable.

Let me now turn to the structural reforms that we intend to implement in the financialsector, which will build on the platform of macroeconomic stability to generate growth. Wewill increase efficiency through greater entry and competition. We need more participation inour financial markets to increase their size, depth, and liquidity. Participation is bestenhanced not through subventions and subsidies but by creating supporting frameworks thatimprove transparency, contract enforcement, and protections for market participants againstabusive practices. Technology can be very helpful in reducing the costs of the supportiveframeworks, and can bring hitherto excluded populations into the financial fold. It is theseideas that guide our medium-term reform strategy. Let me be more specific.

Fostering Competition

In order to get sustained growth, we need more competition, especially from newentrants who are in a better position to reach hitherto excluded parts of our economy. Afterover a decade of no new entry, we have seen two new private banks enter last year, and anumber of payment banks and small finance banks will enter this year. We will put licensing


for universal banks on tap soon.

Incumbents have expressed fears about unfair competition. Competition is only unfairif it is not on the same playing field. In fact, new entrants have no privileges thatincumbents do not already enjoy. We hope, though, that the new entrants will findinnovative ways of giving customers better services at lower prices, thus shaking up andchanging the banking sector for the better. Payment bank kiosks, post offices, or businesscorrespondents could be the means by which the remote villager traverses the last mile tothe formal financial system. Small finance banks could be the low cost assessment andmonitoring mechanism to lower lending costs to small urban and rural firms.

Clearly, public sector banks (PSBs), with their large branch network, will have toadapt because some of these new entrants will go after their customers. This is no bad thingbecause, hitherto, those customers have had limited choice. Public sector banks will need toautomate more so as to reduce transactions costs, cut administrative overheads andimprove response times, even while improving their risk assessment and monitoringsystems so that they can use the wealth of information they have gathered over the years tomake sound lending decisions. Almost surely, this transformation will require more lateralhires at market wages, including skilled loan officers, risk managers, forensic accountants,IT professionals, lawyers, and human resource professionals. While PSBs can undertakecontractual hiring at market wages, it remains to be seen whether they can attractprofessionals without promising them the means for career advancement within the bank.

Public sector banks will also require more professional boards that can chart adifferentiated strategy for them. The Bank Board Bureau, which will select board members,will come into operation soon. We have to pay board members of PSBs a marketcompensation if we are to attract decent talent – otherwise we risk attracting

an unwieldy mix of the truly patriotic and the truly unscrupulous, with the latter intending toprofit by their board position. When thousands of crores can be diverted by a bad boarddecision, should we not ensure we have adequate integrity and talent on bank boards?

More decisions need to be decentralized from the Government to the PSB boards,once they have been fully professionalized. For instance, should boards not determinestrategy as well as the appointment or renewal of their chief executive? What about theirexecutive directors? Can bank boards have more freedom in choosing these? Can boards begiven the freedom to set compensation structures and performance measures for theirsenior executives, including long term stock options? If we want to address the concern thatmany public sector banks have identical strategies and are competing for the same pie, wehave to allow the boards more freedom to differentiate their banks.

Finally, as bank health recovers, the issue of PSB mergers can be addressed. Almostsurely, some banks will have to merge to optimize their use of resources. But talking ofbank mergers, which take a lot of management attention, especially when each bankmanagement is preoccupied with dealing with stressed assets, is probably premature. Atthe same time, some banks could benefit from governance help to deal with their currentproblems. Is it an opportune time to induct skilled financial firms as strategic investors intopublic sector bank boards, perhaps with a 10 or 15% stake? Certainly, the experience ofcountries like China who inducted such investors is worth studying.

Technology and Innovation

Regulators are naturally a conservative lot. It is good we are that way else therewould be no speed breakers in the economy to slow its propensity to get into trouble. Butwe also should not stand in the way of innovation. There is a Chinese saying: “Cross theriver by feeling the stones”. The RBI has tried to follow that path of experimentation andincremental liberalization. So, for example, as increasingly innovative new services wanttheir customers to have the ability to make payments quickly, we have allowed small valuecard payments without two-factor authentication. As we and financial institutions gainexperience, and as new technologies ensuring security emerge, we can liberalize further.More generally, our philosophy is to allow innovation in institutions, instruments and


practices so long as they do not present a clear and present danger. Once we understandthem better, and they grow to a material size, we can do a deeper analysis on how theyshould be regulated.

A number of innovative structures are likely to be implemented soon. NPCI will go livesoon with the Unified Payment Interface, which when fully rolled out will allow anyone tomake a payment to anyone else with a bank account simply via a mobile and a uniqueemail-like address. The Trade Receivables Exchanges will be a boon to small businesses.Essentially, any business that has a receivable against a large firm can sell it as a bill on theexchange, after the large firm acknowledges it has been supplied the goods. Not only willthe small firm get paid quickly, buyers will discount the bill at the rate associated with thelarge firm, and thus pay the small firm more. Importantly, the three Trade ReceivablesExchanges that have been licensed will get a fillip if public sector firms and governmentdepartments are required to allow their receivables to be traded. This will also disciplinethese entities to pay on time, a huge boon to the system.

Yet another technological development to watch is the alliance between internetmarketplaces and financial firms. The information obtained from monitoring sales and cashflows of the online merchant can be the basis for making him a loan and recoveringpayment. I am especially excited by the possibilities afforded the carpet seller fromSrinagar, who can display her wares across the globe, with the marketplace arrangingmarketing, logistics, and finance for her.

Financial Inclusion

The Prime Minister’s Jan Dhan Yojana has created accounts for much of the excludedpopulation. Government has taken the next step of attaching a variety of financial servicessuch as accident and life insurance to these accounts, and sending Direct Benefits such asscholarships, pensions, and subsidies to these accounts. We also have to ease access tobank accounts through Business Correspondents, payment banks, and point-of-salesmachines so that they are used frequently. Easy payments, access to cash-in and cash-outfacilities, and widespread availability of safe savings instruments have to be our nextobjectives in the financial inclusion of households.

When credit leads the process of financial inclusion, we risk lending to people whohave little ability to manage money and overburdening them. By drawing them into theformal system through savings and payments first, then insurance, we get them accustomedto managing money before tempting them with credit. This is the successful method wehave followed with Self Help groups, and is what we should do more widely. Importantly, weneed a variety of firms and NGOs to help small businesses with management advice so thatthey can flourish.

Technology will also help reduce transaction costs, facilitating inclusion. We now havean internet portal (Vidyalakshmi) where students can apply to a variety of banks foreducation loans. We are exploring a similar portal for MSMEs, where MSMEs can apply easilyto banks and where we can monitor timely responses to the loan applications.

In all such lending, we need to address the issue of collateral. Credit flows easily onlywhen the lender is persuaded that he will get his money back, so easier access to creditnecessitates harsher consequences of default, including the loss of collateral. Aadhaar hasgiven individual borrowers the possibility of using their future access to credit as collateral. Ido hope the Supreme Court clears up the cloud over its use quickly. But there are alsosituations where borrowers have physical collateral they can use to lower their cost of creditand improve access. We really need to reexamine mandates that banks should lend withoutcollateral to certain segments. While the intent is laudable, the consequence may simply bethat banks fear taking collateral even when available, and thinking the borrower is too risky,do not lend.

More generally, the best way to facilitate lending to the excluded is to reducetransactions costs, improve borrower information and frameworks for recovery, and createinstitutions that have lower costs and easier access to the borrower than existing ones. For


this, we need to improve the structure and working of credit information bureaus, collateralregistries, and debt recovery tribunals. Perhaps the most important source of collateral valueis land. We need better digital mapping and clean records of land ownership across thecountry so that land can be used more effectively as collateral. Andhra Pradesh’s pattas fortenant farmers is also an innovation that will help tenants get access to credit.

Consumer Protection and Literacy

Finally, newcomers and outsiders need protection against unfair practices. As oneexample of what we are doing, RBI has developed a Charter of Consumer Rights afterpublic consultation. Bank boards have been asked to put in place frameworks that ensurethose rights are protected, including creating an internal office of ombudsman. Soon, thoseframeworks will have been in operation for about a year. After studying practices, RBI willtake a view on best practices and even regulation, if any is needed. In the meantime,incognito field visits by RBI, to check mis-selling as well as the proper functioning of bankinfrastructure such as branches and ATMs, will be expanded. We are also working withstate law enforcement authorities through State Level Coordination Committees to try andnab fly-by-night operators before they do real damage.

As access to finance improves, we need customers to protect themselves. Highereducation is not sufficient protection. Many of you must have received an email from mesaying that the RBI had concluded a pact with the IMF or the British Government to takeover the gold found on pirate ships in the sixteenth century, sell it, and give the proceedsto deserving citizens like you. In return for a small transaction fee of T20,000, the emailgoes on, I would be happy to transfer the sum of 50 lakh rupees into your bank account.Without pausing to think why I need T20,000 when I supposedly have T50 lakhs of yourmoney with me, some of you send T20,000 as requested into an untraceable account. Myoffice then gets repeated phone calls from you asking what happened when the T50 lakhsdoes not show up. The truth is that we are all gullible – no amount of warnings that theReserve Bank does not ask you for your money helps. The central theorem of financialliteracy is “There is no such thing as a free lunch”. In the context of financial investments,it can be restated as “There is no return without risk”. We need to imprint these twostatements in everyone’s head and we intend to roll out campaigns to do so.

Conclusion

I have described some of the ways we will position the financial system towardssustainable growth on a base of macroeconomic stability. Of course, finance can onlyfacilitate growth, the true engine of growth is the real economy, where the government’sstructural reforms are facilitating the way.

Throughout its 81 year history, the RBI’s staff has always risen to the challengesposed by a dynamic, growing economy. We have never hesitated to say no when thestability of the system is at stake. At the same time, we have liberalized when it is needed.Following the traditions set by our past leaders like Shri C. D. Deshmukh, we will help takeIndia forward. Thank you very much again for inviting me to give this talk.

54. Strategy adopted for Financial Inclusion

One of the major challenges for next decade or more to banks in the country is to capture the banking

business of over 50% population of this country of over 1.2 billion people. Poor people need to be

provided with access to financial products at low transaction cost. They need to be provided assistance

on the demand side (in terms of financial awareness and literacy) as well as on the supply side (in the

form of availability of customized financial products). Taking into account their seasonal inflow of income

from agricultural operations, migration from one place to another seasonal and irregular work availability

and income, the existing financial system needs to be designed to suit their requirements and to be more

responsive to their needs. No doubt banks and regulators play a major role in this, but we also need to

think beyond traditional ways and delivery channels to speed up the efforts.


Dr. Raghuram Rajan, Hon'ble Governor, RBI has powerfully enunciated the need for broad based

diversified growth leading to rapid reduction in poverty. Governor has also laid down RBI's

developmental measures for the near future on five pillars and one of the most important pillar amongst

them is Financial Inclusion where the objective is to expand access of finance to small and medium

enterprises, the unorganized sector, the poor, and remote and underserved areas of the country.

The approach adopted for achieving the objectives under Financial Inclusion

RBI’s perspective on Financial Inclusion aims at giving a specific direction to the collaborated efforts

to gain synergic benefits. Therefore, we have defined Financial Inclusion as “the process of ensuring

access to appropriate financial products and services needed by all sections of the society in general

and vulnerable groups such as weaker sections and low income groups in particular at an affordable

cost in a fair and transparent manner by mainstream institutional players.”

Reserve Bank of India has made sustained efforts to increase the penetration of formal financial services

in unbanked areas, while continuing with its policy of ensuring adequate but viable flow of credit to

priority sectors of the economy. We have adopted a structured, planned and integrated approach

towards FI which is focusing on improving access to financial services and also encouraging demand for

financial services through financial literacy initiatives. Some of the defining features of our approach to FI

are:

Institutional Mechanism

Under the institutional mechanism put in place for financial inclusion, we have the Financial Stability

and Development Council (FSDC), which has an exclusive mandate for financial inclusion and financial

literacy. A separate Technical Group on financial inclusion and financial literacy, under the

Chairmanship of a Deputy Governor, has been set up under the aegis of FSDC. The Group has

representations from all the financial sector regulators. In order to spearhead efforts towards greater

financial inclusion, RBI has constituted a Financial Inclusion Advisory Committee (FIAC) under the

Chairmanship of Deputy Governor. The FIAC has few Directors from the Central Board of RBI and

experts drawn from NGO sector/other civil society representatives, etc. as members. At the State level,

there are State Level Bankers Committee (SLBC) further supported by Lead District Managers (671

Districts) at the district level.

Bank led Model

In India, we have adopted a bank- led model for financial inclusion, which seeks to leverage on

technology. The FI initiatives would have to be ICT based and would ride on new delivery models that

would need to be developed by the market participants to best suit their requirements.

Our experience has shown that the goal of financial inclusion is better served through mainstream

banking institutions as only they have the ability to offer the suite of products required to bring in

effective/meaningful financial inclusion. Other players such as mobile companies have been allowed to

partner with banks in offering services collaboratively.

Integrated approach – Financial Inclusion & Financial Literacy

Considering that financial Literacy is an important adjunct for promoting financial inclusion, consumer

protection and ultimately financial stability, RBI has adopted an integrated approach wherein efforts

towards Financial Inclusion and Financial Literacy would go hand in hand.

Bouquet of Financial products

In the absence of banks a large number of informal intermediaries had mushroomed, mostly in the rural

areas, which were acting as proxy to the banks. Such unregulated entities were in the business of

extending only credit products that too at exorbitant rates of interest mostly to the illiterate section of the

population. This had resulted in huge indebtedness amongst the poor people. With our renewed efforts

under financial inclusion we have now advised banks to ensure that all the financial needs of the

customers are met by offering, at the minimum, four basic products to customers, viz.


The idea is to ensure that customers who are linked to the banking system is provided with all the basic

financial products that are required to enhance their income generation capacity thus helping them to

come out of poverty. Such an initiative is expected to be a win-win situation for both banks as also the

large section of poor people residing in the rural areas.

Combination of Branch and BC Structure

We are advocating a combination of Brick and Mortar structure with Click and Mouse technology for

extending financial inclusion, especially in geographically dispersed areas. Banks have to make effective

use of technology to provide banking services in remote areas. In addition to creating a large network of

small branches in rural areas, the Reserve Bank has permitted banks to utilise the services of

intermediaries in providing banking services through the use of business correspondents. The BC

model allows banks to do ‘cash in - cash out’ transactions at a location much closer to the rural

population, thus addressing the last mile problem.

Leveraging on Technology

Penetrating banking services through the traditional brick and mortar model was expensive for banks.

We realized that the task of Financial Inclusion was gigantic and would not be possible without actively

leveraging on technology. We have therefore encouraged banks to leverage on technology to attain

greater reach and penetration for minimizing the cost of providing financial services in far flung areas of

the country. With adoption of technology it has been possible for banks to deliver banking products and

services to the doorsteps of villages.

Engaging Business Correspondents: The Reserve Bank has permitted banks to engage Business

Facilitators (BFs) and Business Correspondents (BCs) as intermediaries for providing financial and

banking services. The BC Model allows banks to provide door step delivery of services especially to do

‘cash in - cash out’ transactions, thus addressing the ‘last mile’ problem. The list of eligible

individuals/entities who can be engaged as BCs are being widened from time to time and we have

adopted a test and learn approach to this process. Now, even for profit organisations excluding NBFCs

and

Tel

cos

hav

e

bee

n

per

mitt

ed

to

ope

rat

e

as

BC

s of

banks.

Relaxation of KYC norms: The strict KYC norms inhibited linkage of common people with the

Banking System. Know Your Customer (KYC) requirements for opening bank accounts have been

relaxed for small accounts. Further, in order to leverage on the initiative of UIDAI, we have allowed

‘Aadhaar’ as one of the eligible document for meeting KYC requirements and very recently have

also allowed banks to provide e-KYC services provided through the Aadhaar platform.

Simplified branch authorisation: To address the issue of uneven spread of bank branches, branch

licensing norms have been relaxed considerably and banks are now free to open branches in centres

Entrepreneurialcredit products like

a GCC or KCC

A remittance productto facilitate EBT andother remittances

A savings cumoverdraft account

Bouquet ofFinancialServices

A pure savingsaccount, ideally a

recurring orvariable recurring

deposit


with population less than 1 lakh under general permission, subject to reporting.

Opening of branches in unbanked rural centres: To further step up the opening of branches in rural

areas, banks have been mandated to open at least 25 per cent of the branches in unbanked rural

centres. To help facilitate achieving this mandate, banks have been advised to open to open small

intermediary brick and mortar structures between the base branch and the unbanked villages. The idea

is to create an eco-system for ensuring efficient delivery of services, efficiency in cash management,

redressal of customer grievances and closer supervision of BC operations. This is expected to facilitate

quicker branch expansion in unbanked rural centres.

Financial Inclusion Plan of banks

We have encouraged banks to adopt a structured and planned approach to financial inclusion with

commitment at the highest levels, through preparation of Board approved Financial Inclusion Plans

(FIPs). The first phase of FIPs was implemented over the period 2010-2013. The Reserve Bank has

used the FIPs to gauge the performance of banks under their FI initiatives. In this direction we have put

in place a structured and comprehensive monitoring mechanism for

evaluating banks’ performance vis-à-vis their targets. To ensure support of the Top Management of

the Bank to the Financial Inclusion process and to ensure accountability of the senior functionaries of

the bank, one on one annual review meetings are held with CMDs/CEOs of banks.

A snapshot of the progress made by banks under the Financial Inclusion Plan during the period from

April 2010 to March 2013 are as follows:-

Banking outlets in villages have increased to nearly 2,68,000 from 67,694 outlets in March 2010.

About 7,400 rural branches have been opened during this 3-year period compared with a reduction of

about 1300 rural branches during the last two decades.

Nearly 109 million Basic Savings Bank Deposit Accounts (BSBDAs) have been added, taking the total

number of BSBDA to 182 million. The share of ICT-based accounts has increased substantially. The

percentage of ICT accounts to total BSBDAs increased from 25 per cent in March 2010 to 45 per cent

in March 2013.

With the addition of nearly 9.48 million farm sector households during this period, 33.8 million

households have been provided with small entrepreneurial credit as at the end of March 2013.

With the addition of nearly 2.24 million nonfarm sector households during this period, 3.6 million

households have been provided with small entrepreneurial credit as at the end of March 2013.

About 490 million transactions have been carried out in ICT-based accounts through BCs during the

No.

ofO

utle

ts

Banking Outlets in Villages - Other Modes Banking Outlets in Villages - BCs

Banking Outlets in Villages - Branches

Period

300000

250000

200000

150000

100000

50000

0

142

Mar 10 Mar 11 Mar 12 Mar 13

34174

33378

Banking Outlets-Villages-Mode wise

595

80802

34811

3146

141136

37471

6276

221341

40837


three-year period.

Noof

ICTbase

dTransactions(No.in

Lakh)

We

hav

e

now

crea

ted

a

larg

e

ban

king

net

wor

k

and

have also managed to open a large number of small accounts. The focus under the FI plan has now

shifted towards leveraging the banking network created for extending other products viz. credit, etc.

which will help make the business more viable for banks. This would also ensure that the large number

of accounts opened see large volume of transactions taking place and people reap the benefits of getting

linked to the formal financial institutions.

Roadmap for providing Banking Services in unbanked villages: With financial inclusion gaining

increasing recognition as a business opportunity and with all banks geared to increase presence, we

adopted a phase-wise approach to provide banking services in all unbanked villages in the country. On

completion of the first phase where nearly 74000 villages with population more than 2000 were

provided with a banking outlet, we are now in the second phase where the remaining unbanked

villages, numbering close to 4,90,000, have been identified in villages less than 2000 population and

allocated to banks, for opening of banking outlets by Match 2016. Under the roadmap for provision of

banking facilities in villages with less than 2000 population, SLBC, Madhya Pradesh has identified and

allotted 47660 unbanked villages among various, out of which 18986 unbanked villages are required to

be covered by March 2014.

Period Mar 10 Mar 11 Mar 12 Mar 13Period M a r 1 0 M ar 1 1 Ma r 1 2 M a r 1 3

KCC-No. in Lakh400

350

302.3

5

337.8

9

243.0

7

271.1

2

300

250

200

150

100

5 0

0

No

.ofA

ccou

nts

GCC-No. in Lakh4 0

13.87 16.9921.08

35

3 0

25

2 0

15

10

5

0

36.34

No.

ofA

ccou

nts

2000

1800

1600

812.681400

1200573.01

1000316.30

800132.65600

1007.95400 812.03731.29601.88200

0

Period

No.

ofA

ccou

nts

Basic Savings Bank Deposit A/c through BCs (No. in Lakhs)Basic Savings Bank Deposit A/c through branches (No. in Lakhs)

Mar 10 Mar 11 Mar 12 Mar 13

BSBDA- No. in lakh


Direct Benefit Transfer – The GoI has plans to route the social security payments through the banking

network by leveraging on the Aadhaar Enabled Payment System based platform. In order to ensure

smooth roll out of the Government’s Direct Benefit Transfer (DBT) initiative, banks have been advised to

open accounts of all eligible individuals and to seed the existing and new accounts with Aadhaar

numbers.

Financial Literacy – We have realized that Financial Literacy is an important adjunct for promoting

financial inclusion. We have adopted an integrated approach, wherein our efforts towards Financial

Inclusion and Financial Literacy go hand in hand. Through Financial literacy and education, we

disseminate information on the general banking concepts to diverse target groups, including school and

college students, women, rural and urban poor, pensioners and senior citizens to enable them to make

informed financial decisions. To support this we have nearly 800 financial literacy centres set up by

banks. We have designed a mass scale Financial Literacy Program with an objective to integrate the

financially excluded population with low level of income and low literacy level with the formal financial

system. Financial Literacy Centres organize Outdoor Literacy camps which are spread over a period of

three months and delivered in three phases wherein along with creating awareness, accounts are also

opened in the Literacy camps.

Way forward - Issues and Challenges

Structure

With adoption of new branchless delivery channels by banks, there is a need for banks to revamp the

structure for carrying out banking operations. There cannot be a fixed structured defined which can be

adopted by all the banks. Each bank has to based on its current architecture develop a structure that can

enhance its financial inclusion efforts. This would entail the following:-

Review of the HR policies with respect to recruitment of staff in view of the FI requirements. Separate

cadre of staff can be thought off for catering to the needs of providing banking services in far flung

rural areas.

Banks have to think and act differently and make themselves more flexible so as to meet even the

smallest requirements of the rural population.

BC Model

There are many challenges being faced while implementing BC model. Sustainability and scalability of

the BC model is essential. More and more innovative products will have to be introduced which would

benefit both banks as well as the rural people and at the same time make the BC model more viable.

Review of the cash management practices for delivery of banking services through the branchless

modes need to be done for ensuring scaling up of the various models.

Transactions

During the first phase of our FI initiative, we have had success as regards opening of banking outlets by

banks and also in opening bank accounts for large number of individuals. Going forward our idea is to

enable more transactions in these accounts by providing more credit products, which will not only help

rural people to avail of credit at comparatively lower rates of interest but at the same time also make the

BC model viable for banks. Banks have been advised to leverage upon the Direct Benefit Transfer

initiative of the Government of India for linking all the individuals to the banking system and for utilizing

the large amounts likely to be credited in these accounts for encouraging issue of deposit and credit

products.

Collaboration

Finally, financial inclusion cannot be achieved without the active involvement of all stakeholders like RBI,

other financial regulators, banks, governments, NGOs, civil societies, etc. The current policy objective of

inclusive growth with financial stability cannot be achieved without ensuring universal financial inclusion.

Banks alone will not be able to achieve this unless an entire support system would be partnering with

them in this mission. All the stakeholders need to join hands and make it possible.


55. Financial Education: Basics and Beyond

Shri P. K. Panda, Principal, CAB; Shri Sandip Ghose, Director, NiSM; delegates toConference; my colleagues at RBI and friends from the banking fraternity! It is a pleasure tobe here this morning to deliver the keynote address at this Conference on Financial Literacy.I understand that it is quite a heterogeneous group with representation of various stakeholders in the field of financial inclusion, literacy and consumer protection and hence, Ibelieve you would have plenty of interesting things to discuss over the course of two days.

2. I understand that this National Level Conference was preceded by three RegionalConferences at Hyderabad, Kolkata and Chandigarh and this is the culmination of theprocess of extensive consultations amongst the stakeholders which would lead tocrystallization of action points. I think such conferences should serve a far greater purposethan only discussing issues. They should lead identifying the challenges, working out somekey action points and generation of ideas which could be discussed in other formal andinformal interactions amongst the delegates. Let me now turn to the subject for themorning.3. As Central Bankers, very often, we talk about the impossible trinity, while discussing thelarger monetary policy framework. Some of you would know the concept. But for the benefitof others, Impossible Trinity is a concept in macroeconomics which states that it is impossibleto simultaneously pursue three goals that of a stable foreign exchange rate, free capitalmovement and an independent monetary policy. You must be wondering what this has to dowith theme of the Conference. I am drawing reference to the ‘impossible trinity’ just to begintalking about an essentially possible and feasible trinity and this ‘possible trinity’ is that offinancial inclusion, financial literacy and the consumer protection. Together the three, form atriad that has a vital bearing on the stability of the financial system. That I think should bethe overall theme of what we discuss today. On a broader level I would also like to mentionthat this entire subject has a much wider ramification. I would like to recall a declarationmade seven decades ago. This was a very important declaration by the International LaborOrganization in their convention held at Philadelphia in the year 1944, which had a verysignificant and remarkablesentence. It stated, “Poverty anywhere is a threat to prosperity everywhere”. Toeliminate or to address the issue of poverty, financial inclusion is a very important means.Until and unless you have an inclusive society you cannot dream to address the challenge ofpoverty. Likewise, if universal financial inclusion has to become a reality, efforts to spreadfinancial literacy have to be an essential pre-requisite. So that is what we are talking abouthere. Financial literacy to financial inclusion to poverty elimination, this is something veryvery important for the global stability.

4. When I looked at the theme of this conference and as I pondered over what tospeak, I actually started wondering about the nature of financial illiterates in thesystem. My own sense is that the “financially illiterate” can be broadly divided into fivecategories. Let me explain:

5. The first form of financial illiteracy, I call ‘Wise Illiteracy’ and people as ‘WiseIlliterates’. Now you must be wondering that how a person can be called wise andilliterate in the same breath. When I say “wise illiterates”, I am referring to the victimsof Madoffs of the world or the people who happily submit to the financial scams -exchange scams, penny stock scams or exotic derivative products. This class does notonly include individuals, but also corporates. They have all the resources at theircommand; they understand risks in all its dimensions and pros and cons of theiractions but despite that with an unnerving regularity, keep falling into the trap ofmega level of scams. This happens in India as well as elsewhere across the globe. So,these are the ‘wise illiterates’ in my definition.

6. The second category of financially illiterates I call them ‘Greed-driven Illiterates’. Theseare people who are well educated and well understand the risks involved in various financialdecisions that they make. But in their case, greed overpowers sanity. Believe me in Reserve


Bank of India, every day we keep receiving strange complaints or the grievances frompeople, who were offered a big sum of money from the British Government or a largecorporate firm or someone has left them a big endowment. They are promised huge sums ofmoney 5 million pounds or 10 million pounds, if they pay just a small fee. People end uppaying once and then they fall into a trap. One payment call leads to another –for taxpurpose or for clearance. These days, Reserve Bank’s name is also very liberally used.Payments are stated to have been assured by Reserve Bank’s Governor or sometimes even inmy name. An email is sent out stating that some fund has been deposited on your behalf andthe money is sitting in Reserve Bank of India which you can claim. Very recently, Icameacross a unique incident. An Indian lady came across a gentleman, claimed to be settled inUAE, through the portal of a marriage bureau. Their association grew and they decided tomarry on an appointed date when the gentleman would arrive in India. On the appointeddate, that lady received a phone call stating that the gentleman had arrived but since hehad a huge amount of foreign currency and for which, there would be need to pay someduty, some registration charges etc. She paid Rs. 55000. Next day, a call said that theperson had been taken to Delhi where another clearance, a certificate from Reserve Bank ofIndia was needed which could establish that it was not dirty money and so on. In each suchinstances that I am mentioning people have ended up paying at least five to seven lakh ofrupees. Most of these are well educated people, many of them are professionals, doctors,doctorate by education, post graduates, lawyers. It is only after paying up a sizeableamount they smell the rat and come forward for grievance redressal. It is this category ofpeople that I call the ‘greed driven illiterates’. There are several of them who have put theirmoney in plantation schemes, emu farming, multi-level marketing schemes and have burnttheir fingers.

7. Let me now come to the third category- whom I have named ‘Information-deprived Illiterates’. There is rapidly growing middle class in the country. Inaddition, there is rapid urbanization and a large number of people migrate from therural to urban areas. As the middle class grows, urbanization increases; so do thefinancial needs of the people - these are lifestyle needs for savings/credit/investments/retirement planning etc. The need may be for consumer goods, vehicles, house,investment requirement, mutual fund, insurance etc. The providers of these products/services are becoming increasingly sophisticated by the day as they are in possessionof more and more information and have the capability to apply more analytics.

8. On the contrary, the consumers, the recipients of these services, are not reallybecoming financial literate in that sense, at the same pace. They do not have access tothe level of information that the service providers have which has led to a wide gap, anasymmetry in information and knowledge between the service provider and servicereceiver. That is why I call this section of people illiterate, ‘information deprivedilliterates’, not in the sense of education, albeit in respect of the financial informationthey possess.

9. The fourth category- I have named ‘Illiterate Illiterates’. These are the peoplewho have just entered the formal financial system or formal banking system.Under the PMJDY, in the last one year almost fifteen crore new accounts havebeen opened. In three years before that under RBI’s financial inclusion push,another fifteen crore accounts had been opened. Initially villages up to apopulation of 5000, then 2000, then below 2000, were covered in a phasedmanner. The sum and substance is that in the last four- five years around thirtycrore new people have entered into formal financial/banking system for the firsttime. We keep on hearing that there are not enough transactions in a largenumber of these ‘zero-balance’ accounts. These people are the “illiterateilliterates”, - illiterate both in the sense of normal education and more so inrespect of financial education.

10.I am in a dilemma over where I should categorize a very important segment ofthe population that is ‘housewives’. Irrespective of whether they are clubbedunder the category of ‘Information- deprived illiterates’ or the ‘Illiterate


illiterates’, they constitute an extremely important target group for theviewpoint of success of financial literacy endeavor. I say this because apart frombeing recipient of financial education and improving their financial decisionmaking capabilities; they have the potential to educate and influence othermembers in the household, especially their children.

11.The fifth category of illiterates, I have named as “Kindergarten Illiterates”.These are the young students and justifiably many of them are financiallyilliterate. These are school children and it would be sometime before they enterthe formal world of finance. But they are another very important target group,which is needed to be brought under the financial literacy drive.

12.In my address, I would focus only on the last three groups. I do not intend to talkabout the ‘wise illiterate’ or the ‘greed driven illiterate’ because what these peoplereally need is some kind of goading from time to time, to curb their instinct andimpulse for making quick money.

Let us now delve into the kind of financial literacy drive that would be useful for these three groups ofpeople. First of the three is the ‘information deprived illiteracy’. For this group - what is needed iseducation, to bridge the information gap between the service provider and the service receiver.Generally, whenever we meet in this kind of conferences, our attention is squarely focused on thenew customers who have joined under the financial inclusion drive and we think that entire financialliteracy drive should be focused only on this segment. 13.Undoubtedly, this segment is important butwe have this existing population group and growing every day that is increasingly using a number ofbanking and other financial services. In my opinion, our efforts should be equally focused on them.They should know their rights and responsibilities and be able to make informed financial choices.This kind of education can only be imparted through coordinated efforts from various agencies- thegovernment, the financial institutions themselves will have to pitch in, the industry, the consumerassociations have to play a role and the mass media- whether it is the internet, mobile, paperpublication, specific publication, classroom training. All these tools would require to be employed.The level of awareness about simple things like need for timely payment of the bills, credit card duesetc. is absolutely low. People aren’t really aware about the penalties that they might end up payingfor their failures to make timely payment of bills/ credit card dues. Not only the penalty could besevere, even more importantly, the bad credit behavior can feed into their credit history with creditbureaus which can serve as an impediment for their future credit requirement. These are the areason which the literacy efforts for this group should focus on.

14. Coming to the next category i.e. the ‘illiterate illiterate’. They would need to beeducated on basic savings account, basic investment, insurance and pension needs. Theyhave to be made aware about the lifecycle needs and the importance of financial savings tomeet these needs. These lifecycle needs are education of children, health requirement,marriage of children, building first house, preparing for the old age through pensioncontribution etc. On a very practical level, for people entering into the formal financialsystem at a late stage in their lives, it may not be a big motivation to save or invest sincethey might feel that these are not going to help them greatly in their own lives. There is astrong possibility that this kind of reaction may come. So, it would be very important thatwhen we do a literacy drive to this segment of people, we should send a strong messagethat whatever they start doing today would have a very significant impact on their nextgeneration, on their children. By all these efforts their children can get better education,can lead a healthy life, can have a shelter over their head - this could be a propermotivation for them. On a larger scale; when these things are aggregated, the potential payout for the economy can be really very, very big. That is where we need to concentrate ourefforts for this segment.

15. Another important thing about this segment is while we educate them, we give themall kinds of learning about the formal financial sector, they should also be made awareabout the harmful side of financial inclusion efforts. What is the harmful side? Overzealousefforts by financial inclusion crusaders can result into over-indebtedness for this targetgroup. Soon after entering into a formal financial system they could become a victim ofpredatory lending, high interest rates, higher service charges etc. These people would needto be protected from such possibilities because, we must realize that this group has enteredthe formal system after lot of efforts and cajoling, and if for any reason if they walk out


feeling hurt, then it would be virtually impossible to bring them back. So this sensitivity hasto be there.

16. As far as the kindergarten illiterate I have already spoken enough before awarding thewinners of the NCFLAT. But broadly under the FSDC and its Sub-Committee, a TechnicalGroup is working on the Financial Inclusion and Financial Literacy areas. This TechnicalGroup has formulated the NSFE and efforts are on to introduce financial education as a partof formal curriculum under the various state boards, and the Central Board. While there hasbeen some success but I think still lot of work is required to be done. Unfortunately I don’tsee the same sense of urgency on part of various authorities in the education system tounderstand the importance of this drive or the requirement of this and move fast enough.But the efforts would need to continue. Quickly, I would like to cover at this point when weare talking about financial education and financial literacy a lot of efforts have already goneinto addressing the supply side and the consumer protection issues. You all may be awarethat recently Reserve Bank of India has come out with a charter of customer rights, wherefive basic rights of customers have been enshrined. We have granted twelve to eighteenmonths to the banks to voluntarily adopt this charter. We have simultaneously requestedIBA and BCSBI to prepare a Model Code which can be adopted by individual banks. Thebanks can customize it for their individual requirements and we will observe for the nexttwelve to eighteen months that how this is shaping up. If we are not satisfied with theprogress and find any need to intervene, we would do so. Similarly I have alreadymentioned about the FSDC Sub-Group and the Technical Group in which representatives ofall financial sector regulators participate. In addition to Reserve Bank of India, SEBI is there,IRDA is there, PFRDA is there, so it’s a combined effort of various regulators, in the area offinancial literacy. Then there is BCSBI, which is a voluntary body. All the banks havecommitted to abide by the codes prepared by BCSBI including one for MSME clients. I seethat one of the panel discussions is focused on MSME, so I would not go into the details.Then there is RBI’s Banking Ombudsman Scheme where customers can seek grievanceredressal. Very recently we have also issued guidelines for each bank to appoint their owninternal Ombudsman or basically what is called as the Customer Service or CustomerComplaint Resolution Officer. Banks have practically in every district set up Financial Literacyand Credit Counseling Centres which is another initiative to address the supply side. RBIwebsite has material on financial literacy which is available in thirteen languages. In additionReserve Bank has prepared some short films, cartoon literature, sixteen posters, which areaimed towards spreading financial literacy to the target group. And finally very soon moreplayers would be coming in the banking sector. There would be new entities in the form ofsmall finance banks and payment banks. Also on the payment system side some playershave been allowed to issue the pre-paid cards up to a certain extent. So these all arecreating more enablers in the supply side.

What are the challenges?

17. Challenges exist on the demand side. There are certain barriers to demand side and theyare important. Important because the customers who are financially literate would demandinformation and thereby play an important role in ensuring transparency among the financialinstitutions. The transparency in the market encourages institutions to compete on the basisof better products and services and at lower cost. That is what the informed customers bringinto the market and ultimately it is beneficial because it expands the market and bringsmore and more new customers.

Demand side barriers

What are these demand side barriers? The first demand side barrier is more onpersonal level. A large number of people who have come into the financial systemnow have low or uncertain incomes. For them, any high fee or a stipulation likemaintaining a minimum balance in the account it can become a barrier. This is what Icall a personal barrier.

The second is, of course, the low level of financial literacy. If they don’t have thatlevel of literacy, then they would not know about the availability, neither can theyjudge the products’ suitability nor can they compare various products. When that does


not happen for the new entrants to the financial system, it creates a trust deficiency.It does not break that hesitation to use the banking services. That is the secondbarrier.

The third barrier is low social and technological inclusion. What is social inclusion? Idid mention in the early part of my address about the rapid migration of people fromrural to urban area. The migratory population coming into the towns or cities findthemselves displaced from their roots. They don’t have their ecosystem in place,whereby something like obtaining an address proof or a simple introduction becomesa challenge. So, these are the social inclusion challenges.

Similarly on technological side, the hesitation to use ATMs, mobile banking, netbanking etc. These are the kind of things which act as a technological barrier. I haveseen in the programme schedule there is a session on this also. This should becomean important part of the financial literacy drive that we are talking about.

And finally the fourth barrier - the linguistic barrier. India is a diverse country. Thereare so many dialects, so many languages and until and unless players deal with theconsumers in respective area in the local language; unless the literature, the materialis made available in the local language, the efforts towards connecting theseconsumers would never succeed.

18. Effectively, we have so much of supply side infrastructure available and at the same time we dohave these demand side barriers. So the challenge before us is how to break the barriers on thedemand side and make effective utilization of infrastructure which is created. I think that conferencesand seminars like this would serve a great purpose if these specific areas can be focused upon and adefinitive strategy and specific action points be worked out for each area, each kind of illiteracy andeach target group. The problem universally is that there is no dearth of policy. We have the bestliterature available which tell you what to do. You have consultants available who would also tell youwhat to do; you will also derive many conclusions from the conference and maybe list out dozens ofwhat to do. The challenge is how to do it. So along with each what to do, if we can also outline how todo it, then only the purpose of such conferences would be served.19. This becomes important win-win for both - for the consumer as well as the providers. If theconsumers get service suitably, they develop the confidence and subsequently the requirement andthe demand for this kind of product enhances. Consumers prosper and if they prosper they providemore business to the providers- it becomes a virtuous cycle. And then the industry and the serviceproviders can reasonably expect to enhance their profitability and earnings by fair and transparentmeasures, rather than chasing profitability through all kinds of dubious means. Globally we have seenimprudent institutions getting into the mess and then requiring government bail outs. The regulatorsare forced to work hard to clear the left debris, when these unscrupulous players exit the scene.

20. Before I conclude I would like to mention that just the other day I came across a papertitled “National Strategy for Financial Literacy-Count me in, Canada.” I found it to be quite afocused paper. The paper sets out goals and priorities to help Canadians better manage theirfinances and make appropriate decisions as their needs and circumstances change. It alsocalls on organizations to join efforts to help Canadians take action and make financialliteracy a life-long journey. The strategy has clearly articulated three goals for the citizens:

manage money and debt wisely

plan and save for the future

prevent and protect against fraud and financial abuse

21. The paper also details three priorities for achieving concrete actions and effectiveimplementation of the strategy for achievement of the above policy goals:

collaborating and sharing between governments, educators, financial serviceproviders, employers and non-profit organizations, as well as individuals and families.

tailoring programs and applying plain language principles

reaching and engaging each and every Canadian

22. Applying Plain language principle is absolutely important. I was also hinting at thisearlier when I mentioned that our communication should be in a language and through amedia which is understood by the receiver, otherwise it will not serve the purpose.

23. So, the Canadian National Strategy for Financial Literacy lists out three goals, sets out


three priorities for achieving concrete action and also makes a pitch for measuring thesuccess periodically through a range of evaluation tools supported by research. Overall, thedocument is very focused and I wish if we could come out with a blue print of this kind afterthe deliberations at this conference, which can serve as a national reference paper, thatwould be quite an achievement. I understand this cannot be the final word as severalinitiatives are being taken in this direction simultaneously. But this paper can certainly helpin raising a healthy debate and ultimately help in further fine-tuning the approach forpromoting financial literacy in the country.

56.Strong Financial Services Sector: Imperative for Sustainable Growth

( Keynote address by Shri S.S. Mundra Deputy Governor, RBI at the ICAI International Conference“Accountancy Profession: Spearheading Excellence” on August 9, 2015 at Indore )

I am pleased to be here this morning to speak to the delegates of this International Conferenceand I thank ICAI for providing me this opportunity. As you all know, the theme of this morning’ssession is “Financial Services Sector- Agenda for Sustainable Growth” and as somebody whohas spent his entire professional life in the banking sector - first as a commercial banker and nowas a Central banker, I would speak with a particular emphasis on banking sector.

Introduction2. Let me begin by taking you back to South Korea of the year 1997. The ‘grey-haired’ amongstyou would recall that in the period leading up to 1997, the Korean economy as also the other‘tiger’ economies in the South East Asian Region had expanded by 6% to 10% on an annualbasis. Buoyed by expectations of rapid growth and expansion, the chaebols (family-ownedbusiness conglomerates) in Korea had raised significant amounts of foreign funds for investmentin building industrial capacity. However, as the economic growth slowed down, the debt problemstarted to accentuate and one of the chaebols, Hanbo collapsed under a $6 billion debt load. Thecompany had decided in 1993 to build the world's fifth largest steel plant and there was costescalation of the project from Won 2,700 bn to Won 5,700 bn while the steel demand had turnedsluggish. The situation deteriorated further in July 1997 when Kia, Korea’s third largest carcompany asked for an emergency bank loan to avoid bankruptcy. These events promptedinternational credit agencies to downgrade the ratings of Korean banks with heavy exposure tothe chaebols and thus, began the financial meltdown in Korea.3. Of course what is widely known as the “Asian Financial Crisis” had begun earlier on February5th, 1997 in Thailand when a Thai property developer failed to make a scheduled interest paymenton its eurobond loan. The business model of financial institutions in Thailand was built aroundissuing eurobonds denominated in US dollars tobenefit from the interest rate differential between dollar denominated debt and Thai debt andusing the proceeds to fund property development. By January 1998, the stock markets in many ofthese economies had lost over 70% of their value, currencies also depreciated by a similar extentand many had to seek IMF assistance.

4. My purpose in beginning the address by narrating these events is to highlighttypically how problems unfold in a crisis. The problem often begins with banks takingexcessive exposure (concentration) to a particular sector or sectors, the corporateincreasing their leverage manifold and investing in creating excess capacities. Unraveling ofthe risks could perhaps still be managed if the banks’ capital positions were strong, but ifthat is not the case, risk manifests itself in all its dimensions. Leveraged positions createdout of borrowed money from abroad for funding growth in domestic markets add anothertwist to the tale. Once home currency depreciates, debt servicing becomes a challenge forcorporates holding large unhedged positions. If there are large scale borrowings by variouscorporates, this debt crisis could easily degenerate into a full-blown currency crisis.

5. The Financial Crises typically take the form of currency, debt or banking crisis andhave severe consequences for the economy. A question that begs an answer at this stageis why financial crises happen? There are, of course, many reasons - some economic,some social and some political. While we would leave a detailed discussion on this issue


for another day, suffice to say at this stage that the origin of all crises can be traced to aweakness in the underlying structure and an all-round failure to exercise self-restraint andlack of adherence to the established framework. In fact, the ground for the 2008 FinancialCrisis was created by a prolonged period of easy monetary policy, consequent mispricingof risks, a search for yield by the market intermediaries and an inadequate supervision overmarket behavior.

India Today6. Looking at the Indian scenario today, one can’t avoid some comparison with the events in theSouth East Asian economies of 1997-98, though the degree of severity differs widely. Let metake the example of the steel sector. Bank loan to the steel sector in India has witnessed a 21%CAGR over the past five years and broadly rangesbetween 4 to 9 % of individual bank’s loan book. Banks’ total exposure to the steel sector standsat Rs. 3 lakh crore while the net sales for the companies within the sector also stands at aroundRs. 3 lakh crore with an EBIDTA of Rs. 37000 crore. The level of stressed assets in the sectorexceeds 27%. Large capacities are lying idle as global/domestic demand conditions haveweakened. Further the capacity expansion has been done using excessive leverage. Thesepointers definitely raise concerns.

7. Excessive leverage by the borrowing corporates is not limited to the steel sector alone. TheGlobal Financial Stability Report released by IMF recently has noted that 36.9 per cent ofIndia's total debt is at risk, which is among the highest in the emerging economies, whileIndia’s banks have only 7.9 per cent loss absorbing buffer, which is among the lowest. Ananalysis of a sample of 3,700 companies by Credit Suisse has highlighted that 37% of thedebt held by these companies is with companies having Interest Coverage less than1.There may be valid questions around the assumptions made in deriving theseconclusions, but the underlying direction cannot be ignored.

What are the consequences of a weak financial sector?

8. Let me answer it differently. Financial sector facilitates risk-sharing by reducinginformation and transactions costs.A strong financial sectoris characterized by strongfinancial intermediaries and wider and deeper financial markets. In a strong financialsector, the liquidity and maturity transformation amongst the borrowers and savershappens in the most efficient manner. In such a market, savers are confident in handingover their surplus funds to the financial intermediaries which can then be borrowed andinvested for creation of productive assets at the least cost. This can create multipliereffect and generate wealth and prosperity for both savers and borrowers and for theeconomy as a whole. Particularly in case of EMEs, where credit market is typically bank-led, an efficient resource allocation framework is central to Governments’ efforts towardsemployment generation and poverty eradication. On the contrary, a weak financial sectorconsisting of weaker intermediaries and shallow financial markets would invariably beprone to crisis resulting from inefficient resource

allocation and disproportionate risk-taking behavior.So, typically, a weak financialsector would have highly leveraged corporates and/or over indebted individuals.Absence of a strong financial sector also drives individuals towards dissaving or moving intophysical assets which retards investment and consequently growth besides building up assetprice bubbles.

9. A weak financial system can have deleterious consequences for the economy and thecountry. Dallas Federal Reserve researchers Tyler Atkinson, David Luttrell and HarveyRosenblum in their paper "How Bad Was It? The Costs and Consequences of the2007–09 Financial Crisis” observe that the crisis was associated with a huge loss ofeconomic output and financial wealth, psychological consequences and skill atrophyfrom extended unemployment, an increase in government intervention, and othersignificant costs. Their estimate of total loss for the US economy alone is nearly $ 14trillion, which is nearly 7 times India’s GDP.


10.The quarterly report of March 2012 of the Special Inspector General for TroubledAssets Relief Program (TARP) in the US puts the cost of Gross US GovernmentBailout Outlays from the 2008 Financial Crisis at $4.6 trillion, while the guaranteesfrom US Treasury, Federal Reserve and other US government agencies totalled $16.9trillion. Likewise figures released by the National Audit Office in the UK, put the cost ofbailouts for the UK taxpayer due to the 2008 Financial Crisis alone at a peak of£955bn.

11.The above numbers, thus, give a sense of the economic loss arising out of financialcrisis. These numbers are staggering and hence, scary. As the old adage goes,“prevention is better than cure” and hence, it is the endeavor of the regulatory reformprocess to strengthen the financial system and prepare it to withstand the force of anyimpending crisis.

12.So, what all is being done to make the financial sector and the banking sector healthy?Before I get into the steps taken to strengthen the banking sector post crisis, I musthighlight the monetary stimulus infused by various Governments/ Central banksacross the developed world. The monetary policy makers in the US, Europe, UK andJapan have all followed an expansionary monetary policy to wriggle their way out ofrecession. But the efforts have not quite borne fruit as many of these countries havenot yet reached anywhere close to pre-crisis growth rate. Japan has, in fact, enteredits

third ‘lost decade’ and is still stuttering to find growth. Moreover, as is being proven now, loosemonetary policy is like “Chakravyuha”, the famous battle formation in the epic “Mahabharata”where it was easy to enter, but difficult to exit.

13.Let me now turn to the reforms aimed at the banking sector.Global reforms

14.The banks in Europe and the USA entered the financial crisis with highly –leveraged balancesheets. They were too thin on equity and the balance sheet was too precariously placed towithstand write-down on their investments in complex derivate instruments. The situation wassomewhat better in the developing world, but even the banks in these markets got impacted asthe pains of the real economy slowly started to inflict the financial economy. It was in thisbackground that the regulatory reform process was set in motion by the multilateral StandardSetting Bodies to undo the excesses of the pre-crisis era. The major elements of the reformprocess that have been implemented/ currently under negotiation are as under:

Basel-III capital prescriptions including capital conservation and countercyclical buffers

Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)

Leverage Ratio Total Loss Absorbing Capacity (TLAC), a work-in-progress, which aims at a higherloss

absorbency requirements and resolution framework for G-SIBs/GSIIIs/G-NBNIs

Regulation of the shadow banking sector

Reforms of the OTC derivatives market and resolution of CCPs A standardized, non-modeled approach for calculating regulatory capital to resolve the

problem of excessive variability in banks’ regulatory capital ratios (A thought)

Compensation– Alignment with prudent risk taking, Claw back provisions

Transparency in benchmark setting

15. The underlying objective of these reform measures is to avoid the dependence ontaxpayers’ money to bailout financial institutions in the event of stress.

Indian Position

16. Being a bank dominated economy, a healthy banking sector is imperative for India’s


economic growth. RBI has been proactively working towards development of a strongand efficient banking system through its regulations. As member of the international StandardSetting Bodies, we are not only implementing the globally agreed regulatory reforms now, buthave also been proactive in introducing macro-prudential measures like higher risk weights forreal estate exposures of banks, measures for dealing with risks emanating from derivatives andsecuritization transactions and spiraling unhedged forex exposure of corporates, much before theglobal attention was drawn to such risks. At RBI, we have always been conscious of the need forthe regulation to evolve quickly for addressing incipient risks and it is in this spirit that many of therecent reform measures have been set in motion.Recent measures taken by RBI

17. An important pre-condition for banks to be able to meet their lending obligations to currentand prospective borrowers is that they remain profitable and solvent. It is in this context thatfollowing regulatory actions have been launched in recent past which are a fair mix of both,prudent regulation and right incentives to support growth with proper risk management:

Guidelines on "Early Recognition of Financial Distress, Prompt Steps for Resolution andFair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economycovering formation of Joint Lenders’ Forum (JLF), Corrective Action Plan (CAP),‘Refinancing of Project Loans’, ‘Sale of NPAs by Banks’ to facilitate earlyrecognition/resolution of financial distress

Banks permitted to grant an extended debt repayment period to their borrowers in long-gestation projects (‘5/25’ scheme)

Enabled banks to take steps for Strategic Debt Conversion (SDR) giving them right toconvert their outstanding loans into a majority equity stake if the borrower fails to meetconditions stipulated under the restructuring package

Enhanced fraud monitoring framework Issuance of long term infrastructure bonds to facilitate financing of long term infra projects

Revoking forbearance on restructuring

Certain other regulatory measures like revision of the single/group borrower exposure limits andidentification of D-SIBs, etc. have also been initiated.

Role of the Auditor community in promoting sustainable growth

18. Let me now turn to some messages that I would like to give the auditor community presenthere. First of all let me compliment you for the very critical role that you play in keeping thebanking sector healthy by auditing the balance sheets of banks and that of the borrowers towhom the banks lend. I would, however, begin on a light-hearted note. I quote former AIG ViceChairman Jacob Frenkel, who, in the aftermath of the Financial Crisis,once quipped, "The leftside of the balance sheet has nothing right and the right side of the balance sheet hasnothing left. But they are equal to each other. So accounting-wise, we are fine." I am surewe don’t want our accounting system to be fine like this.

19. External auditors play a vital role in maintaining market confidence in audited financialstatements. In the case of the banking industry, this role is particularly relevant to financialstability given banks’ financial intermediation function within the economy as a whole. CorePrinciple 27 of the Basel Committee’s Core Principles for Effective Banking Supervision(September 2012) states that “the supervisor determines that banks and banking groupsmaintain adequate and reliable records, prepare financial statements in accordance withaccounting policies and practices that are widely accepted internationally and annually publishinformation that fairly reflects their financial condition and performance and bears anindependent external auditor’s opinion”.21. Over the years, we have observed several accounting scandals unfold, latest in line beingthe one at Toshiba. It is understood that Toshiba would have to revise its pre-tax profit figures by¥152bn ($1.2bn) over a seven-year period dating back to 2008. The amount involved accounts


for nearly 30 per cent of the total pre-tax profit during the period. The initial findings have showedtop executives’ involvement in accounting malpractices where the inflated figures were madepossible by delaying the reporting of losses and underestimating project costs. A sustainedfailure of this kind most definitely points to gaps in the audit process.Another piece of accountingmanipulation was observed in case of Rosneft, the Russian state controlled energy group, which,in a bid to mitigate the effects of the rouble’s fall on its results, changed the way it accounted forforeign currency swings. The company shifted to recording the impact of such fluctuations whenthey materialized, rather than calculating the temporary effect every quarter. I am not sure howthe audit community views this but analysts would definitely find it intriguing and not presenting atrue and fair picture of the company’s financials.

22. Auditors are expected to maintain highest standards of professional ethics and ensure thatthe financial statements of the enterprises they audit, present a true and fair picture of theprevailing state of affairs on an ongoing basis. As professionals, you must remain rather vigilantwhen auditing areas that: (a) involve significant management estimates and judgments,especially those measurements involving a wide range of measurement uncertainty; (b) involvesignificant non-recurring or unusual transactions; or (c) are more susceptible to fraud and errorsbeing perpetuated due to weak internal controls2.

23. As I said earlier, the lending business and the loan appraisals depend almost entirely on thebalance sheets submitted by the borrowers and hence, fabricated account statements can lead toerroneous conclusions and unwarranted financing of enterprises. Banks increasingly lean on theauditors for undertaking stock and asset audit, concurrent audit and forensic audit. While lookingat corporate balance sheet and to understand the level of leverage, it is important to look throughthe corporate structure and gearing of capital in downstream subsidiaries.If these tasks areaccomplished proficiently, that would not only strengthen the banks’ financials but also helpcreate a stronger financial sector.

24. Many contend that accounting rules fueled the recent global financial crisis. While there isbroad consensus that accounting rules are an important determinant of bank behavior, it wouldbe imprudent to blame a single factor for the crisis as the specific mechanisms and theirinteraction with regulatory requirements are less well understood. The implications of the use offair value accounting and the incurred loss approach of

loss provisioning under International Financial Reporting Standards (IFRS) are cases in point.Both have been criticized as contributing to a pro-cyclical behavior in banks’ decision making, i.e.adding exuberance and fueling investments in the up-turn and triggering downward spirals andthrottling investments in the down-turn of the credit cycle3. Regulation, on the contrary, areframed to last “through the cycle.” I am, however, not going to delve deeper into this debate andwould only focus on some of the imponderables which implementation of IFRS would throw up,especially in the Indian context.IFRS Implementation and the imponderables

25. What IFRS implementation would entail for the banking system? The question is howprudential regulation would exist alongside IFRS? Proposed impairment calculations under IFRS,accounting for interest income on Effective Interest Rate basis and presence of multiple systemsfor operation and accounting of different portfolios would mean that IT systems would have to beupgraded/realigned for IFRS migration. Banks would also need to overcome challenges aroundconverging policies for financial accounting and tax accounting for preparation of financialstatements.

26. As the IFRS implementation date draws near, there are several pressing questions for whichanswers would need to be found.

i) How would the consolidation of accounts happen in situations where the parententity is covered under Ind AS but the downstream subsidiaries are not?

ii) What would be the position when an account of one of the subsidiaries has to be drawnup under Ind AS but that is not the case for the parent entity (say an NBFC holding


company)?

iii) How do you deal with equity with a ‘put’ option?

iv) How the firms’ account can be made comparable across periods?27. It is quite possible that initially adoption of fair value accounting may lead to negativeimplications for the revenue of firms and consequently, could impact the balance sheet of both -firms as well as that of the banks.Conclusion28. I am reminded of a quote by Jim Peterson, a former lawyer for Arthur Andersen, the now-defunct accounting firm that audited Enron. He said “An auditor’s opinion really says, ‘Thisfinancial information is more or less OK, in general, so far as we can tell, most of thetime’,” I trust the accounting community present here does a much more meaningful andmethodical job than what Mr. Peterson suggests.

29. Let me conclude by reiterating that a strong financial sector is a sine qua non for sustainablegrowth. Financial Sector and in specific, the banking sector, derives its strength from a healthycredit portfolio, both corporate and retail as well as a healthy investment portfolio. Accountingstandards and the auditors have a pivotal role in enabling the banks to develop such portfolios.There are, of course, complex but essential interplay between regulations, accounting standardsand credit ratings.

57. Emerging Issues in Cyber Security in the Financial Sector

(Address by Shri G Padmanabhan, Executive Director at the Sri Chithira Thirunal Memorial LectureSeries organised by the State Bank of Travancore, Thiruvananthapuram on Feb 28, 2015.)

It is not often that one gets an opportunity to deliver the very first lecture of a series organisedin memory of a person whom you have known and respected from the childhood. One mayhave many things to say and eulogise about the Late Highness Sri Chithira Thirunal, but I canclaim to represent a family which knew him personally and many of his family members.Therefore, I am thankful to Mr Jeevandas Narayan, Managing Director of State Bank ofTravancore for starting this lecture series and giving me the unique opportunity of deliveringthe first lecture. It is also appropriate that the bank has started this lecture series consideringthe association of the Royal family with the setting up of this bank which has been welldocumented by Prof A Sreedhara Menon in his book, "Triumph and Tragedy in Travancore".The predecessor of today's State Bank of Travancore, Travancore Bank Ltd, startedoperations with a public issue of shares worth Rs 1 crore on October 8, 1945 which wasoversubscribed by two and a half times the same day. The entire process was orchestrated bythe government under Sri Chithira Thirunal and the inimitable C P Ramaswamy Iyer. Dr.Ludwik Aronson, a Polish Jew, whose expertise was reportedly utilised by the Reserve Bank ofIndia for their Foreign Exchange transactions during 1943-45, was appointed as the firstGeneral Manager of the bank. The rest as they say is history and even today the bankcontinues to be the biggest influence in Kerala with the largest market share among banks andthe mind-space among Keralites.

2. I chose the topic of cyber security, esoteric to many, as to my mind this area requires far moreattention by the financial sector in India. Technology is quickly altering all elements related toend-to-end financial transactions. Infrastructures that support this transformation are increasinglybecoming ubiquitous as they ought to be, more sophisticated and mobile. More importantly,financial transactions are increasingly getting processed in real time with lesser humanintervention. End users are becoming more demanding for faster, more efficient, easier andmore secure means of carrying out their transactions. At the same time, the financial sector isfacing ever-escalating threats from cyber criminals. In an interconnected world, although allorganisations are targets for cyber attacks, financial institutions are more vulnerable than mostothers. The vulnerability arises out of two reasons. One is the nature of banking. Banks deal withmoney. Money is today stored and transferred in digital form. An attack on banks can help theperpetrator to gain funds, which makes them the prime target. As banks have to keep their


systems open to the customers unlike other vulnerable systems like defence, they are in generaleasier targets. So security in banks is not just important. It is essential. More importantly, thefinancial sector is based on trust. A customer would be willing to park his money with a bank ifhe believes that it is safe. In the digital world, the customer trust depends on the strength ofsecurity, or more precisely, perceived strength of security. This perception gets built on theexperience of the customers. As more and more customers experience fraud--free transactionsthrough digital channels, their trust in that bank is likely to be higher. Today, when the Indianfinancial sector is at a tipping point in technology adoption, when banks are going in for arevamp of CBS from being a mere transaction enabled system to a more modern informationprocessing and decision support system, the sector can ill afford to ignore the cyber threats thatare getting increasingly sophisticated, systematic, and as some say even state sponsored.

IT Security

3. Before getting into specifics of cyber security issues, let me talk about IT security in general.IT security implies that the IT systems including data are held in a secure manner and madeavailable only to the legitimate users of the system. It implies protecting the IT systems,networks, programs and data bases, from damage, attack, or unauthorised access, so thatresources are available for business transactions whenever required.

4. The security issues or failures can be broadly discussed under two segments-unintendedand intended. The unintended failures largely occur due to IT systems hardware failure,application systems crashes, non-availability of infra resources such as power, bandwidthetc. All these factors could completely halt the business process with all-round negativefallouts. To address the unintended failures, an institution is expected to take several stepssuch as adoption of Board-approved IT governance policies, establishing data centres, thirdparty contracts, robust service level agreements, IS audit etc. As far as the risk ofunintended failure is concerned, the IT management policy framework that has evolvedover a period of time along with corporate governance has addressed the risk factors to alarge extent. All these have come at a huge cost, but a definite resilience has beenachieved. However the intended intrusions to disrupt business, misuse the informationavailable at the institutional level and to perpetrate fraud at the customer level continue tobe orchestrated largely by a sophisticated group of cyber criminals.

Tackling Cyber threats

5. While vulnerabilities in software and network continue to be the target of cyber attackersand defending these resources remain the focus of every organisation, the weakest linkcontinues to be the user. Data breach arising from phishing attacks and social engineeringcontinues to be on the rise. No doubt banks have made significant efforts to educate theuser on safe banking, but it is often found to be inadequate in the face of a targeted attack.Social media provides the platform required for an attacker to mine information on anindividual. This information is then used to make the user believe that he is communicatingwith a legitimate source. With easier access to social media and the tendency to sharepersonal information, the number of users that are exposed to such attacks will continue toincrease. Internet of things is no longer just a catch phrase. Today, a typical Indian homehas mobile phones, tablets, laptops, smart TVs and gaming devices all connected to theInternet and with each other. It is estimated that by 2020 there would be 30 billion wirelessdevices connected to the Internet of things. Most of these devices have not been principallydesigned with security in mind. The issue that I am trying to flag is that as we acquire moreand more modern electronic gadgets, there will be a large number of insecure devices thatco-exist on the same network with more secure ones. Since in an inter-connected world,security is as good as the weakest link, the criminals will attempt to exploit a less securebut trusted device to attack the critical and well protected resources.

6. Mobile devices have been getting more powerful every year. Smart phones available todayare capable of carrying out all the functionalities generally done on a PC. While there are


efforts made to ensure that a PC is kept secure, a smart phone that does the samefunctionality does not receive similar attention. Mobile Banking has gained popularity in thelast few years. In the coming years mobile devices are going to be increasingly used fortransferring funds and for making payments. Mobile devices, if regular updating of securityis given a go by, could well become an attractive and easy target for cyber criminals.

7. Large banks, retail establishments and restaurants are often the main targets of cyberattacks. In 2014, J.P. Morgan Chase & Co, the largest U.S. bank by assets conceded thatunknown attackers stole about 76 million customers’ contact information—including names,email addresses, phone numbers and addresses. It also affected about seven million of J.P.Morgan’s small-business customers. Mercifully, the hackers were reportedly unable to gatherdetailed information on accounts, such as account numbers, passwords, social securitynumbers or dates of birth. That these breaches happened even to banks like JPMorganChase that spend billions of dollars to fund IT budgets and employ large teams of securityanalysts points to sophistication of cyber attacks.

7. A survey conducted in the United States revealed that the cost of cyber crimes for the retail

stores doubled between the years 2013 and 2014. Information of tens of millions of

customers were stolen from retail stores Target, insurance company Anthem, formerly known

as WellPoint, Anthem (ANTM) is the second-largest health insurer in the United States. In

this context, FBI Director James Comey was quoted as stating “There are two kinds of big

companies in the United States. There are those who’ve been hacked...and those who don’t

know they’ve been hacked.”

8. The latest Kaspersky Labs Report-Financial Cyberthreats in 2014- highlights certain new,disturbing trends:

Cybercriminals are becoming less interested in “mass” malicious attacks on users, preferring

fewer, more “targeted” attacks.

A shift in the cybercriminals’ focus — instead of attacking end-users, they started to pursueorganisations that work with financial information and payment tools.

The recent uncovering of estimated $1 billion heist against several banks is a pointer to theabove. As per the report, $ 1 billion has been stolen in the attacks, which started in 2013 and arestill ongoing. The gang, dubbed as Carbanak, used computer viruses to infect company networkswith malware including video surveillance, enabling it to see and record everything that happenedon staff's screens. In some cases it was then able to transfer money from the banks' accounts totheir own, or even able to tell cash machines to dispense cash at a pre-determined time of theday.

10. Another concern is the increasing tendency of the insiders using the informationthey have about their organisation, against itself. Companies have no option but to trusttheir employees and provide them privileged access to systems. The Snowden incident inthe US has clearly shown the amount of damage an insider can cause to an institution. Itis easier for an insider to carry out a cyber-attack as he is already aware of all the securitydevices and procedures in place. An attack by an insider is often more difficult to identify

and recover from. Attacks by nation states — cyber war — wars among nations are

increasingly being fought in cyber space than on the battle field. Acts of cyber espionage areincreasingly being reported and many nation states are suspected of being covertly involved.Cyber attackers that have the backing of the state have powerful systems and monetaryresources at their disposal.

Need for robust policies and practices


11. As we have seen, any electronic system connected to a network can be potentiallycompromised. The best preventive solutions have been found inadequate to thwart a

sophisticated, targeted attack by a motivated attacker. This is not to say that preventive solutionsdo not serve any purpose. Traditional prevention solutions like firewalls and Intrusion preventionsystems help prevent a large number of known attacks and should be a part of any network,however, they are becoming quite inadequate as attacks become more sophisticated. Forinstance, a new but disturbing feature is the advent of malafide attacks on computer systems,which are difficult for even experts to identify. Some of the examples include malware which getattached to songs (which are commonly downloaded from recognised sites), or as links on e-mailmessages. The malware gets itself installed in the computer of the user and starts watching theactions of the user. Some of the malware have the capability to read, recognise and record thecommands and actions keyed in by accessing the kernel (which is at the heart) of the computerand gather information such as user id and password of internet banking transactions. Oncethese are obtained, the

information is transmitted to the hacker who could simply log on to the bank’s site using safe(but compromised) credentials and siphon off money from an unsuspecting bank customer. Bythe time the customer realises this, the fraud is complete and most of the money is lost. Thereare reports that some versions of the malware ‘wear’ disguises and have the capability ofcapturing the key strokes entered in the key board using the user’s own camera on the computer!One approach towards ensuring that such attacks do not occur is to create a culture of selectingonly those sites / addresses which we are very sure about as being safe and secure, which iscommonly referred to as ‘white listing’ of sites for granting access.

12.Today, tools like Security Incident and Event Management (SIEM), Network BehaviourAnomaly Detection (NBAD), Data Leakage Prevention (DLP), etc are available which providesdeep visibility into operations and quickly detect a security breach. Besides, one

approach being increasingly adopted by banks – apart from procuring tools and having rules – is

following the age-old and time tested method of using analytics. We have all read

about the advantages of Big Data and Big Data Analytics. While this is more often used forbusiness development and customer behaviour analysis and customer preferences, there isscope of using this for mapping general customer behaviour patterns and whenever there is anexception or an outlier, the computer system could trigger a warning. For example, if a credit cardholder has always been doing transactions in India, an SMS alert for confirmation could be sentwhen use of the card is noticed at let’s say Malaysia. Or, if a computer user always browses dataand speeches on the internet, when an attempt to download is performed, an alert seekingconfirmation could be automatically generated. Thus, analysis of customer behaviour could resultin pattern formation based on which exceptions could be highlighted by the computer itself, withlittle or no human intervention. This may of course necessitate some investment in the form ofenhanced human resources with specialised skills. There are financial organisations in the worldwhich have implemented these approaches with remarkable success.

13.What lessons do we draw from the foregoing? In this scenario, it is important to ensure thatat the organisation level, the policy on cyber security clearly identifies different types of systemsand data based on sensitiveness and criticality. It should set out the type of preventivemeasures required for each category, with critical systems having more stringent security.Cyber-attack is generally met with panic. A policy that clearly states the roles andresponsibilities of each stake holder and the response that is required for each scenario willensure that panic is replaced with decisive action.

International efforts

14. The biggest challenge in making the financial sector cyber resilient is to first acknowledge thecomplexities and interdependencies and then to proactively address failures, adopt effectiveresilience techniques, and resolve problems through cooperation. In order to cope with theidiosyncrasies of cyber attacks and enabling services to resume, the financial sector has to follow


an integrated approach based on the adoption of a cyber

resilience framework developed internally or adapted from a more generic framework – examples

being: the NIST framework2 (February 2014); the World Economic Forum’s

cyber resilience approach, (January 2014)3; and the MITRE framework (2013)4. However, it isequally important to recognise that any framework would not provide a one-size-fits-all approachto managing cyber security risk for the financial institutions.

Generally, cyber resilience frameworks aim to address three broad scenarios: Confidentiality breach, which involves confidential information being stolen.

Availability breach, where the services provided are inaccessible or unusable upondemand by customers but where the systems per se are still intact.

Integrity breach, which is the corruption of data or systems affecting the accuracy orcompleteness of the information and processing methods (and which could also impactthe availability of services). The focus of the majority of cyber attacks continues to be oncompromising confidentiality (eg stealing sensitive data) and degrading systemavailability (eg DDoS* attacks). An integrated approach has to address cyber threatholistically.

15. Let me highlight a few international initiatives in this regard that could be instructive. Bank forInternational Settlements through its Committee on Payments and Market Infrastructures hassetup working groups and task forces to examine the issue of Cyber threats and have publishedreports on the subject to guide the industry in preparing polices to protect cyber resources. Basedon these reports, I would like to flag a few key points that would need to be kept in mind whileformulating a cyber security policy: Having multiple sites providing for effective recovery against traditional forms of risks

however is mostly ineffective in recovering from a cyber attack. “Unintended

consequence of resiliency” (for example corruption at the primary site gets replicated to the

DR sites) makes them ineffective in case of a cyber attack.

Systems at primary and DR sites are generally similar in architecture and equipment. Thisconstitutes a major risk as the vulnerability that exists at one site is there at all. On the otherhand heterogenic systems would be very difficult to manage.

Periodic Real time, scenario based simulations is necessary to rehearse the managementof a cyber security incident. The scenarios should focus on cyber attacks that coulddisrupt the normal day-to-day business functions, and the processes and procedures theincident response team utilise to address a cyber security incident.

Business staff often spots a problem first, not the IT staff. Business staff is potentially bestplaced to see parameters changing dramatically and/or bottlenecks occurring

2 http://www.nist.gov/cyberframework/upload/cybersecurity-framework-021214-final.pdf3 http://reports.weforum.org/hyperconnected-world-2014/4 http://www.mitre.org/sites/default/files/publications/supply-chain-attack-framework-14-0228.pdf

where they shouldn’t. A process for business staff to quickly escalate such anomalies to IT

staff will help in quick detection.

Services of personnel with expertise in cyber forensics should be utilised to understandwhich systems have been compromised and to isolate them.

‘Buddy Banking’ helps where operational management capability as well as the service itself

is lost. ‘Buddy Banking’ is where a second system or organisation is

capable of taking over the functionalities of the affected organisation so that the service


offered by the affected organisation continues to be available to its users. The usage ofRTGS and NEFT as a backup to each other is an example in the Indian context.

In case of a disaster, communication is the key. Robust communication channels with allstake holders should be available.

16. I would also like to draw your attention to two important initiatives undertaken by Bank ofEngland towards ensuring cyber resiliency. The first relates to prevention and the second,recovery.

CBEST testing framework

17. Penetration testing services as they are currently conducted do not provide assurance againstsophisticated attacks on critical assets. This is because testing is not done on critical assetsbecause of the perceived associated risk and the testing is not done based on current andspecific threats. Identifying this lacuna, Bank of England introduced CBEST. CBEST is aframework that brings together Cyber intelligence service providers, penetration testingcompanies and financial Institutions to deliver customised, intelligence-led cyber security tests ina controlled environment. The tests conducted by identified penetration testing companiesreplicate real world scenarios taking into account intelligence on cyber risks provided by theCyber intelligence service providers. Further the tests are conducted on critical systems andessential services. This ensures that the critical infrastructures of financial institutions are testedwith scenarios that are most relevant and which they are most likely to face in case of a realattack.

Use of SWIFT-MIRS as a Disaster Recovery system for RTGS

18. Unlike many other countries including India which maintain more than two sites for their RTGSsystem, the RTGS system in UK has two sites. BoE decided against investing in a fullyoperational third site as it was felt that the risk of losing both sites at once, though of criticalimpact, is very low probability. Further, in their perception, having a third site which replicatesthe technology platform of the first and second sites does not fully address all risks. A successfulbreach of one site would almost certainly lead to a breach of the second or third sites if theywere exact duplicates. As an alternative, BoE considered the SWIFT MIRS initiative. TheSWIFT Market Infrastructure Resilience Service (MIRS) is a generic RTGS platform developedand hosted by SWIFT. The generic RTGS system could be used by Bank of England (or anycentral bank) in the event that all their sites are lost. The Bank would continue to run thebusiness operation, while SWIFT technically operates MIRS. Apart from offering an additionalcontingency option, MIRS increases operational resilience in two key ways. First, it will betechnically operated from outside the United Kingdom, so bringing greater geographic diversityto the sites hosting the infrastructure. And second, MIRS achieves technical diversity as it will bebased on a different technology platform. This addresses a problem common in contingency

arrangements that sites share software and hardware configurations and so are susceptible tothe same risks.

The way forward

19. The uncomfortable truth all of us need to come to terms with is that cyber crime is here tostay. Crime and money are often linked. Hence the financial sector remains most vulnerable inan inter-connected world. While what has been discussed thus far will be instructive toincrease the defences and agility to deal with cyber criminals and attacks, I have a fewsuggestions as we look ahead.

Customer Protection and Legal Framework

20. Today, a customer can use, apart from paper based instruments, debit cards, creditcards, automated teller machines, mobile phones, points of sale terminals or Internet forundertaking financial transactions. Cyber fraud can be perpetrated through any of the above


medium/device. The Reserve Bank and the Government of India have been consistentlymaking efforts over several years to encourage electronic banking and electronic financialtransactions to bring the economy out of cash based system. If the efforts have to bring insustained and substantial benefits, then the system has to be made robust enough forcustomers to have confidence in the system. For this to happen, the common person has tobe safeguarded against any loss, as long as he has not been negligent, the onus of provingnegligence being on the service provider.

21. In this regard, it is my considered view that India needs a statute protecting a commoncitizen against cyber fraud or cyber crime. A strong law, which protects a diligent customerfrom cyber frauds would infuse institutional safeguard to a common person and increase hisconfidence to use technology in financial transactions.

22. Let me quote two well known US based cases to support my suggestion. Take for

instance, the widely referred case of Patco Construction Co., Inc. v. People’s United Bank, 684

F.3d 197, (1st. Cir. July 3, 2012). The First Circuit Court of Appeals held the bank potentially

liable for its corporate customer’s losses after hackers intruded into the

computer systems, stole the customer’s bank account access security information, and

used that information for effecting unauthorised funds transfers from the customer’s account. In

seven days, nearly $600,000 of fraudulent wire transfers were made from Patco’s account by the

time the fraud came to light. The Court found the bank’s security

procedures were not “commercially reasonable” under Article 4A of Uniform Commercial

Code. Second, The Electronic Funds Transfers Act of the U.S. Federal Government and theRegulation E of the Electronic Funds Transfers adopted by the Board of the Federal Reserveserve well to protect the interest of the customer. The loss or liability for the customer is cappedin case of card or the electronic transfers, if reported within a specific

number of days and the limit varies depending upon the customer’s compliance on the incidence

reporting. This gives Federal protection against cyber crime.

23. One might argue that we already have RBI issued directives currently in place today to

protect the customers’ interest. Besides, institutions such as BCSBI, set up by the Reserve

Bank has also been very active in setting up codes for protecting the customer interest. Theseare largely in the regulatory domain and the common person is not well aware of these nor arethese seen as basic rights of the customers. The point that I am trying to flag is that a customermust be legally protected from suffering losses when he becomes avictim of the cyber crime as a matter of right rather than having to run from pillar to post to provethat he was not negligent. Today, for instance, if a debit card is fraudulently used causing loss tothe customer, how long it takes for the customer to get the balance restored? I have come acrossinstances -where even after fraud is proved- of banks waiting for insurance claim to be settledbefore the amount is restored to the customer. Is this fair? How is a customer concerned aboutthe insurance arrangement that the bank has? This is where statutory protection helps. Can thisprotection also cover issues relating to cloud computing which could give a push for this costeffective technology being adopted more by the financial sector?

Customer Protection and Insurance

24. To implement the kind of customer protection as discussed above, it is important that theinsurance sector also responds. Even in the US, the companies lament that the insurancecover does not give adequate financial indemnity to losses arising out of cyber attacks. Whatis the Indian position? The traditional insurance products cover risks against losses arisingfrom natural calamity, theft, crime etc but typically do not cover losses arising on account ofcyber crimes or cyber failures. An insurance cover against cyber crime or cyber failure would


mitigate the risk to a large extent. There can be First Party as well as Third Party InsuranceCover against the cyber crime or failure. The First Party Insurance can cover losses faceddirectly by the insurance holder including personal information asset damage, includingdamage to the data, software, and a system failure due to cyber attack and post cyber attackcrisis management expenses. The Third Party insurance can protect against claims for lossesfrom another organisation or individuals affected by a cyber breach, including losses arisingdue to malware, virus etc. This can include network security liability, losses due to the theftand misuse of data, protecting against DOS attacks, liability costs due to internet publishing,including websites, e-mail, instant messaging, and chat rooms, crisis management expensesetc.

25. Insurance cover is certainly an option worth looking at as part of risk management, but thisposes several challenges to both the regulator and the insurance companies. There areseveral issues in arriving at an acceptable formula for insurance premium due to paucity ofhistorical data. We need to have systematic data on the losses suffered in the past due tocyber attacks covering incident occurrences and incidence reporting, impact analysis, thirdparty damages suffered etc. This is certainly challenging but not insurmountable. I amconfident that if we can find a way in arriving at a practical risk mitigating insurance solution, itwould certainly add to the push of digital economy.

Cyber Information Analytics Centre

26. Different institutions, different customers, individually or collectively undergo the pains ofcyber crime. To my mind, we need to collect all the data, collate the attacks, failures,measures to mitigate the security gaps, the losses suffered, the turnaround time for fixing thesecurity gap and analyse them in order to guide the industry participants as well ascustomers. This would also over a period of time, reflect the number of attacks, volume andvalue of loss, cost of correction and offer a wealth of information, apart from sharing thesolutions for preventing known attacks. In particular, this effort would reduce the turnaroundtime for the sector as whole in bridging the security gap. IDRBT has started this effort lastyear. But a lot more needs to be shared to serve the full purpose of this important initiative.May I point out in this connection that when CIBIL was instituted to share credit and defaultstatus of the account holders, there was lack of enthusiasm from the banks in sharinginformation. But then, the regulator gave a push and today it has become a SOP (standardoperating procedure) to check on CIBIL site. I would urge all the banks to proactively shareinformation to IDRBT, which would help us to build a better response support system. We willnot hesitate to walk the extra mile to make this happen.

Challenge is expertise

27. As we have seen, security is a function of four parameters – governance, policies,

systems and awareness. Of these, the real challenge for the Indian financial system is theawareness. There are two kinds of awareness. One is the awareness among customers aboutthe dos and donts in digital transactions. It may be required for banks to take upon continuousawareness campaign among all customers on the importance of information security and theabundant caution to be exercised by them. Internal awareness is the awareness amongemployees of the bank about security. While it is necessary to increase the overall awarenessamong all employees, it is imperative that a small section of employees are groomed to handlehigher end security concerns, including digital forensics. Unless banks are able to have stronginternal security teams, their position would be weak. Unlike other technology related activities,no organisation can afford to outsource its entire security. Banks have to take up measures torecruit and retain the right talent. More importantly, they should keep the security skills setsalways alert and up to date in a world of constant threats by a more motivated group of skilledattackers. The challenge is that there is no readymade skill set in the market too. Banks have tobuild an entire banking security eco system themselves.

Conclusion


28. Let me summarise what I have been trying to communicate:

i) Cyber threat is real and is constantly evolving. No organisation is immune or can claimto be fully secure against a cyber attack.

ii) Preventive measures are a must in this scenario.

iii) Where prevention fails, make up with quick detection and decisive response.

iv) Every organisation should have an IT Governance Policy as a subset of cyber securitypolicy. The policy should identify key assets, the risks they are exposed to, prescribemitigation measures, roles and responsibilities in case of a cyber incident and state theresponse required.

v) Identify worst case scenarios and plan and practice the response in each case. This ischallenging as one is facing a fast moving target.

vi) The aim should be to recover from a worst case scenario as set forth in the cybersecurity policy.

vii) Be an active participant in sharing information on cyber threats faced.

viii) Adopt ISO 27001 which is internationally recognised best-practice standard forinformation security management.

30. In conclusion, as Governor Raghuram Rajan warned in an internal communication, in today'sinterconnected world, eternal vigilance is the price we have to pay not merely for the benefits ofdemocracy as the old saying goes, but also to enjoy the benefits of a safe and secure financialsystem.

58. Indian Banking Sector: Emerging Challenges and Way Forward

(Lecture delivered by Shri S.S.Mundra, Deputy Governor, Reserve Bank of India at Bangalore on April 29, 2015 aspart of the Memorial Lecture series launched by State Bank of Mysore in the memory of His Highness Sri Nalwadi

Krishnaraja Wadiyar.)

Shri Sharad Sharma, Managing Director, State Bank of Mysore; Shri Karthak, Regional Directorfor Karnataka, RBI; senior colleagues from the banking fraternity; ladies and gentlemen! It is aprivilege for me to deliver the inaugural memorial lecture in the honour of His Highness SriNalwadi Krishnaraja Wadiyar, former Maharaja of Mysore. It is quite apt that a memorial lecturehas been instituted by State Bank of Mysore in the honour of Sri Krishnaraja Wadiyar. Theprophetic Maharaja of Mysore, during his lifetime, had earned sobriquets of being a philosopher-king and a ‘Rajarshi’ or a "saintly king" from no less a person than the Father of the Nation. It isa glowing testimony of his popularity and prowess that Mysore in his times was regarded as "thebest administered state in the world". As Lord Sankey noted “princes from other sections of Indiawere sent to Mysore for administrative training” and hence, holding this memorial lecture at thisnewly opened learning Centre holds an added significance. During his reign, Maharaja Wadiyarworked towards social causes like poverty alleviation and economic regeneration by improvingrural reconstruction, public health, industry and education; some of the goals that the policymakers are presently pursuing with support from the banking sector.2. The banks are the lifelines of the economy and play a catalytic role in activating and sustainingeconomic growth, especially, in developing countries and India is no exception. Our bankingsystem, at the present juncture is, however, facing significant challenges from several quarters.These challenges, if not addressed quickly and adequately, may result in loss of opportunities asand when the economic growth starts picking up momentum. In a sense, it has implications forboth- the banks as well as for the economy as a whole, because as I mentioned earlier, a strongbanking system is one of the essential pre-requisites in the quest for growth. In my lecture today,I intend to focus on the economic landscape and the emerging challenges for the banking system


at the current juncture.Macroeconomic Landscape

3. Since the onset of the Financial Crisis in 2008, the global economy has continued to facerough weather and the Indian economy and our banking system have not remainedimmune. Recovery has been moderate and sometimes uneven. Different jurisdictionscontinue to be tormented by financial fragilities and macroeconomic imbalances.Geopolitical risks surrounding oil prices and the uneven effects of currency and commodityprice movements also pose significant threat to economic stability. Sustenance of highlyaccommodative monetary policy in the Advanced Economies has also created monetarypolicy challenges in emerging markets like India.

Challenges for the Banking System

4. It is against this challenging backdrop that the banking system in India has been operatingfor a relatively long period of time which has resulted in an adverse impact on the assetquality, capital adequacy and profitability of our banks. But the tough situation in which thebanking system finds itself is also attributable in a large measure to the bankers’inexperience and aggression. Let me delve upon these challenges and the way forward in abit of detail.

i) Asset Quality

Though on the whole, the banking system has remained resilient, asset quality has seensustained pressure due to continued economic slowdown. The levels of gross non-performingadvances (GNPAs) and net NPAs (NNPAs) for the system have been elevated. As perpreliminary data received at RBI for March 15, while the GNPAs have increased to 4.45% for thesystem as a whole, the NNPAs have also climbed up to 2.36%. When seen in isolation, the NPAratios do not appear very distressing; however, if we add the portfolio of restructured assets tothe GNPA numbers, this rises alarmingly. Stressed Assets Ratio (Gross NPA+ RestructuredStandard Advances to Gross Advances) for the system as a whole stood at 10.9% as at the endof March 2015. The level of distress is not uniform across the bank groups and is morepronounced in respect of public sector banks. The Gross NPAs for PSBs as on March 2015stood at 5.17% while the stressed assets ratio stood at 13.2%, which is nearly 230 bps more thanthat for the system.It is pertinent here to also note the observations made in the Global FinancialStability Report released by IMF recently. Referring to the high levels of corporate leverage, thereport highlights that 36.9 per cent of India's total debt is at risk, which is among the highest in theemerging economies while India’s banks have only 7.9 per cent loss absorbing buffer, which isamong the lowest. While these numbers might need an independent validation, regardless ofthat, it underscores the relative riskiness of the asset portfolio of the Indian banks.As you allknow, RBI has taken various steps to improve the system’s ability to deal with corporate andfinancial institution distress. This includes issuance of guidelines on "Early Recognition ofFinancial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework forRevitalising Distressed Assets in the Economy, detailed guidelines on formation of Joint Lenders’Forum (JLF), Corrective Action Plan (CAP), ‘Refinancing of Project Loans’, ‘Sale of NPAs byBanks’ and other regulatory measures, which emphasized the need for early recognition offinancial distress and for taking prompt steps for rectification, restructuring or recovery, therebyensuring that interests of lenders and investors are protected.

Various reports that I get suggest that the implementation of JLF framework needs furtherimprovement on the ground level. We have received representations from bigger lenders aboutnon-cooperation from a few lenders. On the other hand, smaller lenders have voiced theirconcerns about being arm twisted by bigger lenders. Unless, there is proper co-ordinationbetween the interested parties, all the revival efforts are likely to fall flat.RBI had given a roadmap for ending the regulatory forbearance on asset classification of restructured accounts longback and accordingly, the forbearance has come to an end on March 31, 2015. There has been alot of clamor from all quarters for extending this forbearance. Our stand on this issue has been


absolutely clear. I wish to highlight that ‘Restructuring’ per se is not necessarily a forbidden word.It is a legitimate financial activity practiced the world over to help the borrowers tide over shortterm problems and to preserve economic value in the system. I don’t know why restructuring aloan which is under short term stress should not be done. What we are saying is that, the banksmust acknowledge the problem, admit that the account is facing stress as of now, but is expectedto recover in future. Hence, make a small provision and reverse it when the account becomessatisfactory and starts paying. Staying in denial mode does not help anyone especially in aninterconnected world where regulation making has become global and so has the public scrutiny.Any forbearance extended by the regulator will be discounted by the investor/ analyst communitywhile assessing the bank’s financials.

ii) Capital Adequacy of BanksConcerns have been raised about the ability of our banks to raise additional capital to supporttheir business and I would admit that these concerns are not entirely misplaced, especially for thepublic sector banks. Higher level of capital adequacy is needed due to higher provisioningrequirements resulting from deterioration in asset quality, kicking in of the Basel III Capital norms,capital required to cover additional risk areas under the risk based supervision framework as alsoto sustain and meet the impending growth in credit demand, going forward.

Though at present, the banking system is adequately capitalized, challenges are on the horizonfor some of the banks. For the system as a whole, the CRAR has been steadily declining and asat the end of March 2015, it stood at 12.70% as against 13.01% as at the end of March 2014.Our concerns are larger in respect of the PSBs where the CRAR has declined further to 11.24%from 11.40% over the last year.

The poor valuations of bank stocks, especially the PSBs, are not helping matters either, asraising equity has become difficult. When even the best performing PSBs have been hesitant totap the markets for augmenting their capital levels, it would be difficult for the weaker PSBs toraise resources from the market. There is a constraint on the owners insofar as meeting thecapital needs of the PSBs and hence, the underperforming banks are faced with the challenge oflooking at newer ways of meeting their capital needs. A singular emphasis on profitability ratios(based on RoA and RoE) perhaps failsto capture other aspects of performance of banks and could perhaps encourage a short termprofitability-oriented view by bank management. However, without getting into the merits of thisapproach, from a regulatory stand point, we feel that some of these poorly managed banks couldslide below the minimum regulatory threshold of capital if they don’t get their acts together soonenough. Of course, the pressure may lessen somewhat if, going forward, the asset qualityimproves on account of higher growth, resulting in higher retained earnings for banks. The needof the hour for all banks, and more specifically, in respect of the PSBs, is that capital must beconserved and utilized as efficiently as possible.

iii) LCR FrameworkAs you are aware, the Liquidity Coverage Ratio (LCR) regime has kicked in for the banks fromJanuary 1, 2015 with a minimum requirement of 60% to be gradually increased to 100% byJanuary 1, 2019 in a phased manner. The LCR is a ratio of High Quality Liquid Assets (HQLA) tothe Total Net Cash Outflows prescribed to address the short term liquidity risk of banks and thebanks would be required to maintain a stock of HQLAs on an ongoing basis equal to the TotalNet Cash Outflows.Banks have been asking for reduction in SLR citing the implementation of theLCR framework. To a certain extent their request has merit. SLR essentially serves the samepurpose as the LCR. However, SLR does not assume certain outflow rates for liabilities whileoutflow and inflow rates under the LCR framework are based on certain assumptions of stress.Presently, apart from maintaining LCR at 60%, the banks have to maintain SLR of 21.5% of theNDTL. Going forward, as the LCR requirements gradually increase, it may be desirable to reducethe SLR progressively. Presently, there is a special dispensation wherein RBI has permittedbanks to reckon up to 7% of the SLR towards LCR (2% of MSF and 5% under FALLCR[1]). Our


regulatory department is seized of the issue and would take appropriate measures to addressthis issue going forward.

iv) Unhedged Forex ExposuresThe wild gyrations in the forex market have the potential to inflict significant stress in the books ofIndian companies who have heavily borrowed abroad. This stress, besides impacting repaymentof forex liabilities, eventually hampers their debt repayment capability to the domestic lenders aswell. It is precisely with this consideration that RBI has been advocating a curb on the increasingtendency of the corporates to dollarize their debts without adequate risk mitigation.Oursupervision of banks’ books has highlighted the need for the banks to have more robust policiesfor risk mitigation on account of unhedged foreign currency exposure of their corporateborrowers. Inadequacies of data further complicate the impact assessment of such exposuresacross the banking system. The banks have been advised to factor in this risk into their policies/pricing decision and also devise means for sharing of information on such exposures amongstthemselves. Regulatory guidelines have also since been issued outlining the capital andprovisioning requirements for exposure to entities with significant unhedged forex exposures.

v) Human Resource IssuesI do not need to emphasize the HR issues in banks. This is a decade of retirement for the PSBsand I am sure those working there are already feeling the pinch of the loss of experienced handsin their day to day operations. While the recruitments would be happening at the junior levels,there would be a virtual vacuum at the middle and senior level for some time to come. Theabsence of middle management could lead to adverse impact on banks’ decision makingprocess as this segment of officers played a critical role in translating the top management’sstrategy into workable action plans. Some of the major banks are also suffering on account ofprolonged leadership vacuums at the top. All banks, including those in the private sector, arewitnessing high attrition rates, giving rise to resource gaps. The problem is set to getaccentuated further once the banks that have been newly licensed/ likely to be licensed, starthiring.Therefore, bridging resource gaps and managing employee turnover are major challenges thatbanks need to be prepared to address.The banks need to continuously enhance the skill levels oftheir employees so as to remain viable and competitive and to take advantage of newopportunities. The banking personnel, across the cadres need to be suitably trained to acquirenecessary skill sets to perform their jobs more efficiently. The biggest challenge is to buildcapacity at a rate which matches the loss of existing talent and skills to retirement, poaching andresignations. The training initiatives must ensure that the available talent pool in the banks is ableto always keep pace with the fast changing ways in which banking is conducted. Of course, inthese challenges also lie an inherent opportunity for banks to redraw their organizational profileand to create HR systems and processes best suited to the needs of the future.

vi) Revision to the Priority Sector Lending GuidelinesThe revised priority sector lending guidelines have been released last week. Lending to a fewnew sub-sectors like renewable energy, social infrastructure and to the medium enterpriseswould now be treated as priority sector lending. Concept of a tradable Priority Sector Lending

Certificate (PSLC) has also been introduced, which would enable the ‘deficit’ banks to buy

these certificates from ‘surplus’ banks to meet their targets.There is also readjustment in some sub-targets, whereby the banks are now required toprogressively achieve 8% of lending to Small and Marginal Farmers and 7.5% to the microenterprises among the MSEs in a phased manner. This has been brought about with anunderlying objective of making available finance to the most needy and the most alienated of theborrowers. This may probably pose a bit of a challenge initially but I believe with proper planning,these targets could be achieved sooner rather than later.

vii) PMJDY and beyondI must compliment the banking sector for wholeheartedly working for the success of the PMJDY


scheme. The numbers speak for themselves. More than 14.5 crore accounts opened. That leadsto the question- what next? Flow of individual savings, albeit howsoever small combined withflows from direct benefit transfer would be crucial togive an initial push to keep these accounts active while extending productive/needbased creditwould be the second crucial step. The onus is upon all of us to ensure that the window ofopportunity that has been presented by the opening of such a large number of accounts, is notput to waste by allowing the accounts to turn inactive.The credit absorption capacity of thefarmers can be enhanced through consolidation of fragmented landholdings by ushering in landreforms or through pooling of land holdings in a SHG format. Similarly, customers may also betrained to undertake non-farm activities. Efforts to enhance the credit absorption capacity mustalso be supplemented through financial literacy and vocational training initiatives. Improvedfinancial literacy would aid the inculcation of a savings culture and investment habit amongst thecustomers, which can be leveraged by the banks by offering suitable small savings, investmentand pension products.A major challenge for the banks would be to manage their banking correspondent modeleffectively. The problems relating to their viability, governance, cash management, linkage andoversight from a base branch need to be quickly addressed. The entire financial inclusionecosystem must progressively develop, if the momentum gathered under the PMJDY exercisehas to be sustained for all-round benefit of all stakeholders.

viii) Globalization of Regulation- making processAs I alluded to a little earlier, banking regulations are getting increasingly globalized, subject ofcourse to certain national discretions. As members of the standard setting bodies like BCBS andFSB, we are committed to implement these regulations in our jurisdictions. There is a process forpeer review of regulatory guidelines issued by various jurisdictions to ascertain compliance withthe global standards, failure to adhere to which would render the jurisdiction non-compliant to thestandards. While we do participate in the regulation making process and suggest modifications toprotect the rightful interests of the domestic economy, very often, we have to abide by the largerframework. I will give just one example viz. the large exposures regime, for which a consultationpaper on new SBL/GBL norms has already been released by RBI.Technology and its impactLet me briefly touch upon an issue which is relatively much more pertinent for the PSBs, i.e. useof technology in banking. All PSBs are now on CBS platform and have developed capabilities tooffer anywhere banking. Few have also started offering basic banking transactions on mobile fortheir customers. But this is just scrapping the surface as the technology can be leveraged for afar greater effect. PSBs must be able to leverage technology for building data warehouses andthen be able to do data mining and analytics. The goal should be to use data for effectivedecision making at various levels, including product customization, developing business modelsand delivery channels, etc.PSBs must be able to pitch suitable products for their customersthrough internet and mobile banking channels. Traditional businesses are slowly moving on-lineand e-commerce is the preferred choice of the gen-next customer. The challenge before thePSBs is to upscale their capabilities, train their employees on the new technologies to benefitfrom the possibilities that adoption of technology can open up. A good thing going for the banksis the current recruitment of youngsters in the work force. This new-generation staff is tech-savvyand can quickly connect with technology. The enterprising among them must be accordedfreedom to experiment and suggest ways in which the bank could reengineer its processes for itsown benefit and that of its customers. This would require a change in mind-set of the senior / TopManagement and this must happen if the PSBs have to compete efficiently and effectively withthe private sector counterparts in future.

x) Treating Customers Fairly

Protection of bank customers has been one of the thrust areas for RBI in recent times. As youmay be aware, RBI has issued a Charter of Customer Rights based on the global best practices.The Charter comprises of following five rights:


Right to Fair Treatment Right to Transparency, Fair and Honest Dealing Right to Suitability Right to Privacy Right to Grievances Redress and Compensation

A model customer rights policy jointly prepared by IBA and BCSBI incorporating these rights hasbeen circulated to all banks by IBA. The banks have been advised to prepare a Board ApprovedPolicy based on the model policy before July 31, 2015. RBI may review the policies framed bythe banks and their implementation as part of our supervisory assessment over the next 12-18months.

xi)KYC/AML Compliance

Let me now turn to another very important issue which is equally challenging for the privatesector banks as well and that is, compliance with the KYC/ AML norms. A majority of theenforcement action by the banking sector regulator in the recent past has been on account ofthese violations.

The instances of fake e-mails soliciting unsuspecting customers to make payments to certainbank accounts as a precursor to receiving prize or lottery winnings from abroad, have becomequite rampant. It is surprising that even well-educated individuals are falling prey to suchincredulous offers. While spreading financial literacy remains a huge challenge, the banks cannotbe absolved of their responsibilities in the sequence of events. Most of this money is beingtransferred through banking channels and obviously, there is a deficiency in KYC compliance.Money muling is another common occurrence which highlights deficiencies in risk categorizationof customers and monitoring of transactions.

I am emphasizing on this issue because banks need to be sensitive to the possibility of regulatorystrictures / penalties for non-compliance. Consistent monitoring of transactions is necessary toprevent money muling. A few banks in the past have already been fined for deficiencies inadherence to KYC/AML norms and with our commitment to comply with the FATF norms; I canonly forewarn you that the frequency and severity of such penalties would rise in future.

xii) Balance Sheet Management

Over the past few years we have witnessed an increasing propensity to defer or delay provisionsin an apparent attempt to post higher net profits. Probably, this short termvision is also in part attributable to short term tenure which the CEOs/ CMDs get. It must beappreciated that CEOs/ CMDs would come and go but the institutions are perpetual entities. Theonly thing which can perpetuate their existence is a stronger and healthier balance sheet. It mustbe realized that the first step towards resolving a problem is to acknowledge its existence. Theproblems which are swept under the carpet for a quarter or two would need to be encounteredthereafter, with the issue getting further complicated in the interim.

Making higher provisions would not only add strength to the balance sheet, but also lead tobetter control over tax out-go and the dividend pay-out, besides adding credibility to the bank’sfinancial statements. While a lower net profit would make headlines for a day or two, believe methe savvy long-term investors / analysts do not read too much into the short term blips. If theyunderstand that the Management is sincere about repairing the balance sheet, they would driveup the valuation of your stocks, which would help you in the long-term. With most banks in direneed of capital, the retained earnings need to increase progressively.

As a part of balance sheet management exercise, the Board/Top Management would have toproactively take a call on the likely components of their balance sheets and what shape theywould like the balance sheet to take in future. The objective of optimal utilization of capital wouldhave to be necessarily kept in mind while evolving balance sheet management strategies.


xiii) Risk Management

Risk is inevitable in the banking business and hence, a sound risk management framework is thetouchstone of an efficient bank. The risk management effectively aims at balancing the Risk-Return Trade-off which is “maximizing return for a given risk” and “minimizing risk for a givenreturn”. The responsibility of setting a risk appetite for the bank as a whole is that of the Boardand the Top Management. In practice, however, we seldom see the articulation of an objectiverisk appetite statement by the PSBs. If you haven’t set out a risk limit for each type of risk that thebank runs and an aggregate risk appetite for the bank as a whole, how do you measure andmonitor risk? We mustunderstand that risk management is integral to the success of the bank and hence, the TopManagement should strive to put in place an efficient risk management framework keeping inview the changing market dynamics and the regulatory prescriptions. Conclusion

5. In conclusion, I would once again like to invoke Krishnaraja Wadiyar in whose memorythis lecture has been instituted. Maharaja was known to be a man of action, a man ofdeeds and a person of compassion and empathy for his subjects. The bankers presenthere would do a great service to the memory of the Maharaja if they could imbibe thesequalities in their day to day operations, particularly while dealing with their customers.

6. As we have noted, these are challenging times for the banking sector but as the clichédproverb goes “Every cloud has a silver lining”. The future leaders in the banking industrywould be those who identify this silver lining early and initiate necessary steps to leveragethe opportunity. The impending competition from new banks and the large number of newaccounts opened under the PMJDY Scheme are two instances that readily come to mindof the challenges that could be turned into opportunities. Besides this, banks as the keyplayers in the country’s financial system also carry the responsibility of supportingeconomic growth, once the economic cycle turns favourable. Banks have to preparethemselves for meeting this responsibility by nurturing a healthier balance sheet.

60. Make in India, Largely for India

(Talk delivered by Dr. Raghuram Rajan, Governor Reserve Bank of India at the Bharat Ram Memorial Lecture on December 12,2014 in New Delhi)

The global economy is still weak, despite a strengthening recovery in the United States. The Euroarea is veering close to recession, Japan has already experienced two quarters of negativegrowth after a tax hike, and many emerging markets are rethinking their export-led growthmodels as the industrial world stagnates. In the last couple of years, the IMF has repeatedlyreduced its growth forecasts. After 6 years of a tepid post-crisis recovery, the IMF titled its mostrecent World Economic Outlook “Legacies, Clouds, Uncertainties”.The conventional diagnosis and remedy

Why is the world finding it so hard to resume pre-Great Recession growth rates, let alonerestore the levels of GDP that would have been attained if the Great Recession had nothappened? The obvious answer is that the legacy of the financial boom that preceded theGreat Recession is debt, and the overhang of debt, whether on governments, households, orbanks, is holding back growth. In the colourful words of the IMF’s Managing Director, we areexperiencing “the New Mediocre”. The implication is that growth is unacceptably low relative topotential, and more can be done to lift it, especially given that a number of economies areflirting with deflation. Hence the conventional policy advice urges yet more innovative monetaryinterventions with an ever expanding set of acronyms, even while governments are urged tospend on “obvious” needs such as infrastructure. While the need for structural reforms isacknowledged, they are typically deemed painful, and possibly growth-reducing in the short run.Hence the accent is on monetary and fiscal stimulus, and as much of it as possible given thedeadening effects of debt overhang.The efficacy of such policy advice remains to be seen. But the Japanese checked each of theseboxes over the last two decades, including interest rates held low for long, quantitative easing,and massive debt-financed spending on infrastructure. Few would argue that Japan has shed its


seeming malaiseA different diagnosis

A different narrative of the pre-crisis period is now emerging that may explain why theefforts at stimulating economies back to the pre-crisis growth paths have not been successful,even six years after the crisis.2 The term “secular stagnation” used by Larry Summers to describethe current persistent economic malaise, echoing Alvin Hansen’s speech in 1938 in the midst ofthe Great Depression, has caught on.3 But different economists focus on different aspects andcauses of the stagnation. Summers emphasizes the inadequacy of aggregate demand, and thefact that the zero lower bound as well as the potential for financial instability prevents monetarypolicy from being more active. The reasons for weak aggregate demand include ageingpopulations that want to consume less and the increasing income share of the very rich, whosemarginal propensity to consume is small.

Tyler Cowen and Robert Gordon on the other hand, emphasize a weak supply potential.4

They argue that the post-World War II years were an aberration because growth was helped inindustrial countries by reconstruction, the spread of technologies such as electricity, telephones,and automobiles, rising educational attainment, higher labour participation rates as womenentered the work force, a restoration of global trade, and increasing investments of capital.However, post-war total factor productivity growth – the part of growth stemming from new ideasand methods of production -- fell from its 1920-50 high. More recently, not only has productivitygrowth fallen further, but growth has been held back by the headwinds of plateauing educationlevels and labour participation rates, as well as a shrinking labour force in some countriesbecause of population ageing.It is obvious from these lists of factors that it is hard to disentangle the effects of weak aggregatedemand from slow growth in potential supply. Population ageing contributes to both. Indeed, onemay cause the other. For example, anticipating a slowdown in growth potential, households,worried about impending retirement in the face of promised social security entitlements that areunlikely to be delivered upon, may try and build savings. This will depress demand further.Conversely, anticipatedweak demand may reduce incentives for corporations to invest, causing supply potential to growmore slowly.

Whatever the reasons for slow underlying growth starting in the 1970s, the traditionaladverse consequences such as the growing unemployment of the system’s outsiders such asimmigrants and the youth was compounded by the growing realization that economies could alsonot deliver on social security promises without growth. These promises, as sociologist WolfgangStreeck writes, were made to the wider public during the growth years of the 1960s when visionsof a “Great Society” seemed attainable.5 Promises have been augmented since then byincreases in pension and old age healthcare commitments to public sector workers. These havebeen made to avert budget-breaking wage increases, but they have created huge liabilities forthe future, which is approaching fast.

Growth therefore became an imperative, and with underlying growth slow from the1970s on, governments began to spend more to stimulate the economy. With supply potentialalso stagnant, the spending translated into inflation, which spiralled upwards. Streeck arguesthat industrial country successes in curbing inflation in the 1980s meant something else had totake the place of the inflation tax in financing spending. And that was debt, first public debt,then as governments narrowed fiscal deficits, an encouragement to the private sector to takeon debt. Growing leverage of all kinds, whether on banks, corporates, households, orgovernments, led to the financial crisis of 2008-11. Some of the private debt has morphed intogovernment liabilities, but the overall level of debt in industrial countries as a fraction of GDP isstill growing.

Governments that are not forced by market pressures to undertake productivity-enhancingreforms prefer to delay them. As a result, overall debt is still growing because the policies of“reaching for growth” through monetary and fiscal stimulus have not abated. Further complicatingall this is a growing sense amongst the middle class that they need quality higher education andtraining to not slip back into the ranks of the poor, but the poor quality early education they have


received, as well as the prohibitive cost of quality higher education, puts better livelihoods out ofreach. Populist middle class movements, as epitomized by the Tea Party in the

United States or UKIP in the United Kingdom, reflect these worries. The possibility of a backlashagainst technology, global finance, and foreign immigration and trade, which the middle class isled to believe are responsible for its plight, is very real.

The mediocre economic outlook might change. Strong US growth could pull the world outits funk, while low oil prices could also give a substantial boost to aggregate demand. Theindustrial world may well muddle through for a while before it figures how to harness andmonetize (as well as measure) new technologies. New well-paying middle class jobs that wecannot imagine today may emerge once again, as they always have. But overall, there is apalpable sense of gloom in the industrial world, a belief that growth is unlikely to be strongenough to satisfy for the foreseeable future.

If secular stagnation persists, industrial countries will have to figure out how to restructuretheir promises, whether debt, social security, or low taxes, and how to distribute the burden. Afterfiling for bankruptcy, the city of Detroit in the United States has already had to make toughchoices, between servicing its pensioners or its debt, keeping its museums open or its policeforce intact. More such difficult decisions will have to be made.What about emerging markets?

Slow industrial country growth has made more difficult a traditional development path foremerging markets – export-led growth. Indeed, in the last decade, even as China developed onthe back of its exports to industrial countries, other emerging markets flourished as they exportedto China. Emerging markets now have to rely once again on domestic demand, always a difficulttask because of the temptation to overstimulate. That task has become more difficult because ofthe abundance of liquidity sloshing around the world as a result of ultra-accommodative monetarypolicies in industrial countries. Any signs of growth can attract foreign capital, and if not properlymanaged, these flows can precipitate a credit and asset price boom and exchange rateovervaluation. When industrial country monetary policies are eventually tightened, some of thecapital is likely to depart emerging market shores. Emerging markets have to take extreme careto ensure they are not vulnerable at that point.

What implications should an emerging economy like India, which has weathered the initialsqualls of the “taper tantrums” of the summer of 2013, takeaway for its policies over the medium term? I would focus on four: 1) Make in India; 2) Make forIndia; 3) Ensure transparency and stability of the economy; and 4) Work towards a more openand fair global system.

Lessons for India

1) Make in IndiaThe government has the commendable aim of making more in India. This means improving

the efficiency of producing in India, whether of agricultural commodities, mining, manufacturing,or services.

To achieve this goal, it has to implement its ambitious plans on building out infrastructure. Thisincludes

· Physically linking every corner of the country to domestic and international markets throughroads, railways, ports and airports. The kind of economic activity that is generated when apukka all-weather road is built into a village – the explosion of horticulture, poultry, and dairyfarming, the opening of clothing and assorted goods shops, the increasing use of poweredvehicles -- is extraordinary, as is the kind of activity that emerges around national highways.

· Ensuring the availability of inputs such as power, minerals, and water at competitive prices.· Linking everyone electronically and financially to the broader system through mobiles,

broadband, and intermediaries such as business correspondents.· Encouraging the development of public institutions such as markets, warehouses,

regulators, information aggregators and disseminators, etc.

· Making possible affordable and safe homes and workplaces.


A second necessity for increasing productivity in India is to improve human capital. This requiresenhancing the quality and spread of health care, nutrition, and sanitation to start with so thatpeople are healthy and able. People also need better and more appropriate education, skills thatare valued in the labour markets, and jobs where firms have the incentive to invest more in theirlearning.

The government is examining the cost of doing business in India with a view to bring it down.The woes of the small entrepreneur, as she confronts the myriad mysterious regulations thatgovern her, and the numerous inspectors who have thepower of closing her down, are well known. The petty bureaucrat, empowered by theseregulations, can become a tyrant. It is appropriate that the government intends to make him helpbusiness rather than hinder it. As regulators, we too have to continuously examine the costs andbenefits of the regulations we impose.

Finally, we need make access to finance easier. I have spoken about that in other contexts,and will not dwell on it here. Before I move on, let me add some caveats.

There is a danger when we discuss “Make in India” of assuming it means a focus onmanufacturing, an attempt to follow the export-led growth path that China followed. I don’t thinksuch a specific focus is intended.

First, as I have just argued, slow growing industrial countries will be much less likely to be ableto absorb a substantial additional amount of imports in the foreseeable future. Other emergingmarkets certainly could absorb more, and a regional focus for exports will pay off. But the worldas a whole is unlikely to be able to accommodate another export-led China.

Second, industrial countries themselves have been improving capital-intensive flexiblemanufacturing, so much so that some manufacturing activity is being “re-shored”. Any emergingmarket wanting to export manufacturing goods will have to contend with this new phenomenon.Third, when India pushes into manufacturing exports, it will have China, which still has somesurplus agricultural labour to draw on, to contend with. Export-led growth will not be as easy as itwas for the Asian economies who took that path before us.

I am not advocating export pessimism here – India has been extremely successful at carvingout its own areas of comparative advantage, and will continue to do so. Instead, I am counsellingagainst an export led strategy that involves subsidizing exporters with cheap inputs as well as anundervalued exchange rate, simply because it is unlikely to be as effective at this juncture. I amalso cautioning against picking a particular sector such as manufacturing for encouragement,simply because it has worked well for China. India is different, and developing at a different time,and we should be agnostic about what will work.

More broadly, such agnosticism means creating an environment where all sorts of enterprisecan flourish, and then leaving entrepreneurs, of whom we have plenty, to choose what they wantto do. Instead of subsidizing inputs to specific industries because they are deemed important orlabour intensive, a strategy that has not really paid off for us over the years, let us figure out thepublic goods each sector needs,and strive to provide them. For instance, SMEs might benefitmuch more from an agency that can certify product quality, or a platform to help them sellreceivables, or a state portal that will create marketing web sites for them, than from subsidizedcredit. The tourist industry will probably benefit more from visa on arrival and a strongtransportation network than from the tax sops they usually demand.A second possiblemisunderstanding is to see “Make in India” as a strategy of import substitution through tariffbarriers. This strategy has been tried and it has not worked because it ended up reducingdomestic competition, making producers inefficient, and increasing costs to consumers. Instead,“Make in India” will typically mean more openness, as we create an environment that makes ourfirms able to compete with the rest of the world, and encourages foreign producers to come takeadvantage of our environment to create jobs in India.

2) Make for IndiaIf external demand growth is likely to be muted, we have to produce for the internal market.

This means we have to work on creating the strongest sustainable unified market we can, whichrequires a reduction in the transactions costs of buying and selling throughout the country.Improvements in the physical transportation network I discussed earlier will help, but so will


fewer, but more efficient and competitive intermediaries in the supply chain from producer to theconsumer. A well designed GST bill, by reducing state border taxes, will have the importantconsequence of creating a truly national market for goods and services, which will be critical forour growth in years to come.

Domestic demand has to be financed responsibly, as far as possible through domesticsavings. Our banking system is undergoing some stress. Our banks have to learn from pastmistakes in project evaluation and structuring as they finance the immense needs of theeconomy. They will also have to improve their efficiency as they compete with new players suchas the recently licensed universal banks as well as the soon-to-be licensed payment banks andsmall finance banks. At the same time, we should not make their task harder by creatingimpediments in the process of turning around, or recovering, stressed assets. The RBI, thegovernment, as well as the courts have considerable work to do here.

We also have to work on spreading financial services to the excluded, for once they learn howto manage finances and save they can be relied on to borrowresponsibly. New institutions and new products to seek out financial savings in every corner ofthe country will also help halt the erosion in household savings rates, as will a low and stableinflation rate. The income tax benefits for an individual to save have been largely fixed innominal terms till the recent budget, which means the real value of the benefits have eroded.Some budgetary incentives for household savings could help ensure that the country’sinvestment is largely financed from domestic savings.

3) Ensure transparency and stability of the economyAs I argued earlier in the speech, even developed countries like Portugal and Spain have

been singularly unable to manage domestic demand. Countries tend to overstimulate, with largefiscal deficits, large current account deficits, high credit and asset price growth, only to seegrowth collapse as money gets tight. The few countries that have avoided such booms and buststypically have done so with sound policy frameworks.

As a country that does not belong to any power blocks, we do not ever want to be in aposition where we need multilateral support. It will be all the more important to get our policyframeworks right.

Clearly, a sound fiscal framework around a clear fiscal consolidation path is critical. The Dr.Bimal Jalan Committee’s report will provide a game plan for the former, while the governmenthas clearly indicated its intent to stick to the fiscal consolidation path that has been laid out.Whether we need more institutions to ensure deficits stay within control and the quality ofbudgets is high, is something worth debating. A number of countries have independent budgetoffices/committees that opine on budgets. These offices are especially important in scoringbudgetary estimates, including unfunded long term liabilities that the industrial countries haveshown are so easy to contract in times of growth and so hard to actually deliver.

On the monetary side, a central bank focused primarily on keeping inflation low and stable willensure the best conditions for growth. In reacting to developments, however, the central bankhas to recognize that emerging markets are not as resilient as industrial economies. So the pathof disinflation cannot be as steep as in an industrial economy because an emerging market ismore fragile, and people’s buffers and safety nets are thinner. A “Volker” like disinflation wasnever on the cards in India, but an Urjit Patel glide path fits us very well, ensuring moderategrowth evenwhile we disinflate. Going forward, we will discuss an appropriate timeline with the government inwhich the economy should move to the centre of the medium term inflation band of 2-6%.

In addition to inflation, however, a central bank has to pay attention to financial stability. Thisis a secondary objective, but it may become central if the economy enters a low-inflation creditand asset price boom. Financial stability sometimes means regulators, including the central bank,have to go against popular sentiment. The role of regulators is not to boost the Sensex but toensure that the underlying fundamentals of the economy and its financial system are soundenough for sustainable growth. Any positive consequences to the Sensex are welcome but areonly a collateral benefit, not the objective.

Finally, India will, for the foreseeable future, run a current account deficit, which means we will


need net foreign financing. The best form of financing is long term equity, that is, Foreign DirectInvestment (FDI), which has the additional benefit of bringing in new technologies and methods.While we should not be railroaded into compromising India’s interest to attract FDI – for example,the requirements to patent a medicine in India are perfectly reasonable, no matter what theinternational drug companies say – we should ensure policies are transparent and redress quick.If we make it easier for young Indian companies to do business, we will also make it easier forforeign companies to invest, for after all both are outsiders to the system. This means atransparent and quick legal process to deal with contractual disputes, and a proper system ofbankruptcy to deal with distress. Both are issues the government has taken on.Let me turn finally to the international framework.4) Work towards a more open and fair global system

As a country that does not belong to any power block, and that does not export vital naturalresources but is dependent on substantial commodity imports, India needs an open, competitiveand vibrant system of international trade and finance. Our energy security, for example, lies not inowning oil assets in remote fragile countries but in ensuring the global oil market works well andis not disrupted. We need strong independent multilateral institutions that can play the role ofimpartial arbiter in facilitating international economic transactions.

Unfortunately, the international monetary system is still dominated by the frameworks put inplace in the past by industrial countries, and its governance is still dominated by their citizens. Tobe fair, it is changing, albeit slowly. But there is a more immediate reason for faster change. Withslow growth, as well as the need to finance large debt loads, the interest of industrial countries inan open global system cannot be taken for granted. For instance, regulations that have theappearance of shoring up safety and soundness of the industrial country financial system mayhave the collateral effect of discouraging investment in emerging market assets. We have torecognize that slow growth may direct industrial economy policymakers’ attention inwards, evenwhile politics turns protectionist. The multilateral governance system, still dominated by industrialcountries, may not provide a sufficient defence of openness.

Emerging markets may therefore have the responsibility of keeping the global economy open.For this, not only do emerging markets have to work on quota and management reforms in themultilateral institutions, but they also have to work on injecting new agendas, new ideas, and newthinking into the global arena. No longer will it suffice for India to simply object to industrialcountry proposals, it will have to put some of its own on the table. And this means that ourresearch departments, universities, and think tanks have to develop ideas that they can feed toIndia’s representatives in international meetings.Conclusion

Let me conclude. We are more dependent on the global economy than we think. That it isgrowing more slowly, and is more inward looking, than in the past means that we have to look toregional and domestic demand for our growth – to make in India primarily for India. Domestic-demand-led growth is notoriously difficult to manage, and typically leads to excess. This is whywe need to strengthen domestic macroeconomic institutions, so that we can foster sustainableand stable growth. At the same time, we cannot let foreign markets shrink further, and we have totake up the fight for an open global system. Rather than being reactive, we have to be active insetting the agenda. That requires investment in our idea-producing institutions – researchdepartments of official bodies, think tanks, as well as universities. In sum, the diminishedexpectations in the world at large should not be a reason for us to lower our sights.

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