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special feature - Indian Institute of Banking & Finance

Committed toprofessional excellenceRs. 40/-The Journal of Indian Institute of Banking & Finance Keb[. / Vol. 82 DebkeÀ. / No. 1 pevekejer - cee®e& 2011 / January - March 2011


C O N T E N T SFrom the EditorSpecial FeaturescontentsCEOSpeak .........................................................................................................................................9 - 63Bank QuestVol. : 82 No. : 1January - March 2011(ISSN 0019 4921)HONORARY EDITORIALADVISORY BOARDV. K. KhannaSharad KumarRupa Rege NitsureMohan N. ShenoiHONORARY EDITORR. BhaskaranThe views expressed in the articles andother features are the personal opinions ofthe authors. The Institute does not acceptany responsibility for them.uesKeeW leLee Dev³e j®eveeDeeW ceW J³ekeÌle efkeÀS ieS efJe®eejuesKekeÀeW kesÀ efvepeer efJe®eej nQ ~ uesKekeÀeW Üeje J³ekeÌle efkeÀSieS efJe®eejeW kesÀ efueS mebmLeeve efkeÀmeer ÒekeÀej mes GÊejoe³eerveneR nesiee ~The Journal of Indian Institute of Banking & Finance October January - December - March 2010 20111


special featureINDIAN INSTITUTE OF BANKING & FINANCEnd‘The Arcade’, World Trade Centre, 2 Floor, East Wing, Cuffe Parade, Mumbai - 400 005.Tel. : 2218 7003 / 04 / 05 Fax : 91-22-2218 5147 / 2215 5093Telegram : INSTIEXAM E-mail : iibgen@bom5.vsnl.net.inWebsite : www.iibf.org.inGOVERNING COUNCIL MEMBERSPRESIDENT - O. P. BhattVICE PRESIDENTS - M. V. Nair- M. D. MallyaMEMBERSAnantha KrishnaS. K. BanerjiY. K. BhushanGunit ChadhaK. R. KamathS. RamanRana KapoorC. KrishnanY. H. MalegamA. K. MisraK. RamakrishnanT. C. A. RanganathanArun KaulAsish SahaS. SridharR. BhaskaranRamnath PradipDilip MavinkurveJ. P. DuaMANAGEMENTR. Bhaskaran, Chief Executive OfficerP. Balachandran, Dy. Chief Executive OfficerA. R. Barve, Director of ExaminationsD. R. Wazkar, Director of AdministrationMISSIONThe mission of the Institute is to developprofessionally qualified and competent bankersand finance professionals primarily through aprocess of education, training, examination,consultancy / counselling and continuingprofessional development programs.O³es³emebmLeeve keÀe O³es³e cetueleë efMe#eCe, ÒeefMe#eCe, Hejer#ee,HejeceefMe&lee Deewj efvejblej efJeMes


editorialDr. R. BhaskaranChief Executive Officer,IIBF, MumbaiThe CEO Speak special issues of Bank Quest April-June, 2006 and October-December, 2008 had carried the perspectives of CMDs on various issues concerningthe banking industry at those points of time. While the first CEO Speak containedthe views of 13 bank CEOs, the second issue contained the views of 14 CEOs. Both these issues ofBank Quest had received overwhelming appreciation from the readers.This has encouraged us to bring out CEO speak once in a while. Post global financial crisis thebanking landscape is changing and we thought that it is good time, now to get the perspectiveson the current issues engaging the banking industry and hence, this Special Issue 'CEO Speak'.For this issue we have asked for the CEOs responses on several areas such as regulatory capital,risk measurement, base rate system, real interest rates, export credit, optimal utilization of CBSsystem, customer service, cost of compliance, banking utility, agricultural finance, role of ratingagencies, IFRS and disclosure systems. This issue contains the responses / views of CEOs fromboth public and private sector banks on the issues raised. Though CEOs appear to have expressedsomewhat similar opinions on most of the core issues, every one of them has given differentdimensions on those issues, making the responses more diverse and interesting. There are certainissues where the messages are subtle yet powerful. IIBF could not have asked for anything moreinformative than this. It is indeed a rewarding experience to read the responses. Let me say a big'thank you' to the CEOs before taking up brief overview of each question.The concept of regulatory capital on a standardized, now known as BASEL-I was implementedin India in 1992.The implementation of BASEL-II, wherein the capital charge was somewhatmore sophisticated started in 2005. It was here that the concept of regulatory capital wasintroduced. Drawing from the experience of recent financial crises, BIS has already proposed aframework (BASEL-III) that calls for more regulatory capital in due course of time. Measuressuggested under Basel-III, among others, include revisions to the definition of regulatory capital,capital conservation buffer, counter - cyclical buffer, the treatment of counterparty credit risk, theleverage ratio and the global liquidity standards. The phased implementation of the proposednew capital rules (BASEL-III) would start from January 1, 2013. On the question of possibleThe Journal of Indian Institute of Banking & Finance January - March 2011 3


editorialimpact of regulatory capital and if it would limit the expansion of business of banks, the CEOshave indicated that the regulatory capital is essential to manage the risks for overall stability ofthe financial system even though it may limit the business. While some banks are confident ofmeeting the requirements, others particularly capital short public sector banks are hopeful ofcapital infusion from the GOI. Going forward, the fact that the Government holding in PSUbanks has to be 51% could be a constraint. Private banks are able to access equity markets foraugmenting capital. Banks are also confident of managing challenges such as matching creditgrowth with the pace of the economy, competitive pressures on banks' margins, additionalcapital requirements to support overseas expansions, mergers & acquisitions, joint ventures andsubsidiaries, etc.Risk measurement is an important facet of risk management. To measure the risk, accurately,banks are adopting sophisticated tools and seeking the support of technology. In this background,on the goal of advanced measurement approach, CEOs agree that this approach would result incapital efficiency. At the same time they have identified certain constraints / challenges such ascollection, collation and processing of data from widely spread branches, lack of historic data onloss events, lack of trained and skilled manpower to analyze and interpret such data. The needfor appropriate reporting systems and IT infrastructure up gradation has also been pointed out.Banks have indicated that business decisions have to be often driven by market conditions ratherthan the efficient deployment of capital. Adoption of advanced approaches will help banks ingetting better equipped to handle the risk return trade off. Sensitizing the bank staff with regardto the nuances involved in advanced approach is one of the important issues in this regard. Bankshave indicated that they are taking effective steps to meet these challenges.The answer for the question on effective response of base rate system to changes in policy rates andits influence on risk focused lending is an ovewhelming 'Yes'. The base rate will be useful intransmitting the monetary policy measures. It is however evident that the response will be with atime lag. The time lag will be less than what it was in the BPLR regime. It is revealed that thebase rate is also expected to help capture the risks associated with the type of customer, businessline as well as the tenor of the loan. CEOs have opined that the base rate system will make creditpricing more efficient and that it has the potential to capture the risk associated with the type ofcustomer, business line as well as the tenor of the loan.We had argued that the real rate of interest on deposits is negative and could impactthe flow of deposits. While the CEOs have agreed with the statement that the real rate of4 January - March 2011The Journal of Indian Institute of Banking & Finance


editorialinterest on the deposits has been negative they are not overtly concerned with the possibilityof reduction in the volume of deposits. It has been pointed out that the pricing of depositshas not factored the inflation rates. However, the deposits rates were increased only inthe beginning of this quarter. Some of the reasons put forward for non-introduction offloating rates of interests on deposits are lukewarm response from the public to the floatingrate deposit schemes of some banks in the past, the fact that economic conditions in thepast two years have been very different to normal, fixed rate protects depositors from thepossible future fall in interest rates, difficulty in identifying appropriate benchmark forfloating rate products, lack of suitable systems and procedure, customer's sentiments duringfalling interest rate period, small saver's risk aversion and preference to safety of deposits,lack of awareness among depositors about floating rate products etc. A suggestion has beenmade to consider the introduction of floating rate of interest on bulk deposits from institutionalsources for short periods. CEOs have, however expressed an opinion on the possible erosionof value of the depositors' money and if the negative return continues for long, the depositorsmay be attracted towards other options like mutual fund and equity markets, and ultimatelythere is a possibility of affecting the deposit growth in banks in future. Some of the bankshad experimented with the concept of floating rate deposits but did not meet with anyworthwhile success. That the negative real rate of interest does not affect the volume ofdeposits, banks have argued, can be inferred from the healthy growth of CASA deposits inthe recent years.The issues that have been identified in achieving export credit targets are competitivenessin cost and quality, compliance with international best practices, prevalence of childlabour in certain sectors, quality concerns (like rejection of the consignments), volatility ofrupee and global developments, higher interest as well as transaction costs of banks, exportcredit in foreign currency, specialized manpower & training requirements and inadequateinfrastructure etc. Obviously most banks have not achieved the target (12%) set for lending toexport sector. Some of the measures initiated to help increase exports and augment credit flow areincreasing number of designated branches, treating export credit as one of the key performanceparameters, incentive schemes, facilitating increased access of foreign currency loans to exporters,offering foreign currency denominated export credit at very low spread over LIBOR, integratingdomestic as well as forex business under one roof, creation of customer segmentation and midcorporatedesk to focus on to the requirements of mid-corporates, organizing exporters' meets atvarious centers, identification of potential centers to explore the business opportunities andThe Journal of Indian Institute of Banking & Finance January - March 2011 5


editorialdiversifying the product basket as well as the trade destinations. Banks are also attemptingto offer technology driven products to enhance product utility. These measures together withtax concession, interest rate subvention are expected to boost the export credit.Though most of the banks are reporting 100% CBS, certain components of assets side areyet to be covered under CBS. Further the extent of leveraging technology beyond CBSdiffers from bank to bank. The CBS is predominantly transaction processing softwareand appropriate parameterization has to be done to undertake analytical tasks. Theimplementation of CBS is not even across the banking system and there are a number ofissues such as NPA treatment, IRAC norms, provisioning etc., which fall outside CBS.The CEOs in their response elaborate the extent of coverage of CBS in their bank alongwith their journey for the benefit of readers. It has also been pointed out that assets callfor focused application and CBS may not be exhaustive. Evidently there is scope to improvethe usage of CBS and banks are moving forward in this direction.Banking sector, being a service industry dealing with human beings is acutely aware ofthe need for personal interaction with their customers. The customer expectation on thebanks is rather high. Since inception, banks in India have recognized 'individual identity'and knowing customers by face. What do the CEOs feel about the impact of use of technologyon customer service? The common refrain is that technology has helped in providing moreconvenience and options to the customers. Technology has made customer service morefocused and specific. As a result the human interaction may be different than from thepast and will be more driven by the choice of individual customer. Banks are meetingneeds of different customer segment through the option of multiple channels and services.Banks are using customer segmentation and CRM to offer specific services to customers.It can be inferred that the personal touch is not needed in all the cases and what ismore important is that the service needs are fulfilled more efficiently. As one CEO hasindicated if there is decline in the personal touch it is more by choice than by design.Technology has definitely changed the way the bank interacts with the customer. With theincreased use of internet and burgeoning social networks, banks are keen to get closer tothe customer in the virtual space.The cost of compliance, more particularly in the case of overseas branches of Indian banks hasgone up in recent times. There are a number of statutory and other compliances that Indianbanks are faced with. The higher cost of compliance in the case of overseas branches has to be6 January - March 2011The Journal of Indian Institute of Banking & Finance


editorialoffset by higher volumes of business. The risks and costs have to be appropriately balanced in thelong run. Besides mentioning the rationale, list of compliances CEOs have shared their thoughtson the effective ways to address cost of compliance.One of the issues that IIBF had posed in the International Banking Summer School that it hadorganized towards the end of 2009 was on Banking Utility. Payment and Settlement System,Savings Accounts and Priority Sector Lending, we feel, fall under utility banking. Today's bankshowever are not merely commercial banks. Also we do not have many banks in India who can betermed as private sector banks in the real sense i.e. banks which are involved more in investmentand HNI business. Thus be it PSU or Private sector banks the business mix is somewhat similarand most banks in India are extending services beyond mere commercial banking- namelylending or deposit taking or ancillary services. These banks provide utility services likeremittances, bills payments, sale of gold coins, tax collection, e-stamping etc. Banks also offerloans at concessional rates which are development oriented. The reactions of CEOs on the needfor segregating utility and commercial banking are varied. CEOs who believe in providing allservices in one roof akin to a financial supermarket feel that combining utility banking andcommercial banking adds value to the bank. Other group of CEOs feels that segregation wouldhelp in serving the customer better by opening specialized branches like personnel bankingbranches or through the alternative delivery channels. It has been pointed out that utilitybanking would be facing stress on margins. Given that the private banking in the sense that it ispracticed abroad is not practiced here and that banks are adopting technology to reach allcustomers the need for segregating utility banking may not arise. Instead it has been indicatedthat customer segmentation, specialized branches etc., could be adopted.It is well known that the financial, more importantly credit exclusion among farmers isvery high. The question on what steps that banks are taking for augmenting agriculturecredit has received a very detailed response from most banks. Banks have indicated thatagricultural lending is a viable business proposition. CEOs have shared their experience inenhancing the flow of credit to agriculture more particularly the disadvantaged sections suchas small and marginal farmers, tenant farmers, oral lessees and landless laborers. Productinnovations, specialized branches, special drives, capacity building etc., are some of the effortstaken by banks to reach the unreached. In order to bring excluded into the banking fold, bankswill be opening branches in rural and semi-urban areas, take up financing of PACS, take upICT driven Business Correspondents model, Debt Swap scheme, and financing JLGs (jointliability groups).The Journal of Indian Institute of Banking & Finance January - March 2011 7


editorialRating agencies should be made responsible for the rating as much as a professional isresponsible in his / her profession seems to be the general response to the question on rating.It has been opined that as banks will have to rely more on rating agencies in the riskmanagement area they need to consider moving from issue rating to issuer rating. CEOshave suggested that rating agencies should study the rating performance and do periodicalstudies on rating trends and default trends. It has been suggested that there should be, as inthe case of audit firms, a regulatory body for rating agencies. Since the RBI has made fourCredit Rating Agencies as accredited rating agencies it is hoped that a better rating climatewill prevail. On the question about roles and responsibilities of credit rating agencies differentviews have emerged. Fine tuning rating matrix by rating agencies, rating on long-term expectedquality, issue rating v/s issuer rating, roles, responsibility and accountability are some of theissues about which CEOs elaborate their views.Finally, CEOs spoke on the benefits of International Financial Reporting Standards (IFRS)to the bank / customers / stakeholders. Indian markets are getting more integrated withthe global markets. Our banks are also getting ready to compete globally. Though Indianaccounting and disclosure systems are one of the best standards, moving towards the (IFRS)is inevitable. The IFRS will provide more realistic position with the replacement of historicalcost method by fair value method of valuation. The convergence to IFRS, will equip ourbanks to access global markets, to compare and compete with the global peers, to eliminatethe need for multiple reporting etc.Is it only a matter of 12 questions and responses from 14 CEOs? No, it is much more thanthat. This is because the responses are rich and varied. Barring Yes bank most responsesare from PSU banks and apparently the responses look similar. Yet there are certainexclusive viewpoints, subtle statements, and specific data about the banks performance,added by each one. On some of the issues, different experiences have been shared by the CEOs.On some issues there is more eloquence and on some brevity is seen. We must underlinethat each viewpoint is important in understanding the overall scene of the everyday changingbanking. We have grouped the responses of all CEOs to each question. You will, as youread, feel as if you are doing the interviewing. We hope you will enjoy reading this specialissue of Bank Quest.(R. Bhaskaran)8 January - March 2011The Journal of Indian Institute of Banking & Finance


Our previous issues of CEO Speak (April-June, 2006) and (October-December, 2008) received goodresponse from our readers as these issues provided the readers varied perspectives of the then CEOs ofbanks on different issues facing the banking sector then. Encouraged by the response we have decided tordbring out the 3 Special Issue of CEO Speak. There are several new faces with thoughts on new areasand perspectives from both public and private sector bank CEOs.CEOspeakShri. J. P. Dua (JPD)- CMD, Allahabad BankShri. Nagesh Pydah (NP)- CMD, Oriental Bank of CommerceShri. M. D. Mallya (MDM)- CMD, Bank of BarodaShri. K. R. Kamath (KRK)- CMD, Punjab National BankShri. Anup Sankar Bhattacharya (ASB)- CMD, Bank of MaharashtraShri. Arun Kaul (AK)- CMD, UCO BankShri. S. Raman (SR)- CMD, Canara BankShri. M. V. Nair (MVN)- CMD, Union Bank of IndiaShri. Ramnath Pradeep (RP)- CMD, Corporation BankShri. Bhaskar Sen (BS)- CMD, United Bank of IndiaShri T. M. Bhasin, (TMB)- CMD, Indian BankShri. Albert Tauro (AT)- CMD,Vijaya BankShri. M. Narendra (MN)- CMD, Indian Overseas BankShri. Rana Kapoor (RK)- MD & CEO, Yes BankThe Journal of Indian Institute of Banking & Finance January - March 2011 9


special featureQUESTIONNAIRE1. Moving forward, regulatory capital could often be a limiting factor for increasing the business of banks.What are the challenges that the banks may face in this regard/raising capital. How your bank is gearedup to handle this?2. Do you think in the Indian context, advanced measurement approach of risk as a goal can be pursued, toachieve capital efficiency? What are the constraints?3. The base rate system has been introduced. Will this enable banks to respond to changes in policy rates moreeffectively? Will this result in more risk-focused lending rates?4. The real rate of interest on the deposits has been negative over the last two years. Banks are offering lowinterest rate on deposits unmindful of the fact that deposits constitute the largest chunk of resources. Will notsuch sustained negative returns affect the deposit base in future? Is it not time to offer floating rates which willgive positive returns?5. Indian exports are not substantial in terms of its share in the volume of international trade. Is there a specialstrategy / focus to achieve statutory enhanced credit flows to export sector in your bank, given the fact mostof the banks did not even achieve the statutory export credit limits and what are the challenges?6. Most of the banks are having 100% CBS. It is however seen that whereas the full range of liability side iscovered, only a small portion of asset side is under CBS. What are the plans of the bank to fully utilizethe existing infrastructure and IT platforms to usher in a totally tech-driven era in banking?7. With the increasing use of technology in day to day life human interaction in the branch premises has takenback seat. The increased use of technology meant the 'death of individual identity'. In the past the bankersknew their customers by face. Now, they are dealing more with customer IDs than with the customersthemselves - your views? How do you bring back the personal touch? Do you see a greater role for customersegmentation on account of IT?8. Compliance risk and compliance costs have gone up for overseas branches of Indian banks in recent times.What is the emerging picture in the light of tightening of regulatory responses to various crises?9. Is there a case for segregating 'banking utility' and 'commercial banking'?10. Commercial banks commitment to agriculture in terms of total assets is less than 6%.Informal lending is accessed by marginal farmers and landless agricultural laborers.Exclusion among the farming gentry is therefore very high. In the area of agriculturalfinance, what is your experience in enhancing the flow of credit to the disadvantagedsections such as small and marginal farmers, tenant farmers, oral lessees and landlesslaborers?11. Even as Rating agencies are improving the rating tools on account of thelessons learnt in the recent crisis, it emerges that inability to effectivelycapture / simulate the business cycle changes will be a major challengefor rating of long term investments and credit exposures. What role doyou see for credit rating agencies in improving the quality of banks' assetbooks? Do you think that rating agencies must be made responsible?12. The accounting and disclosure systems in Indian banking are well laid out.The size and depth of financial reporting as on date is possibly too large. Inthis back ground, what will be the benefits of IFRS to the bank / customers /stakeholders?10January - March 2011The Journal of Indian Institute of Banking & Finance


special feature1. Moving forward, regulatory capital could often be a limiting factor for increasing the business of banks.What are the challenges that the banks may face in this regard / raising capital. How your bank is gearedup to handle this?JPD (Allahabad Bank) : Let me answer in three parts.a) Moving forward regulatory capital could often be alimiting factor for increasing the business of banks :Regulatory capital is to be seen as a tool for managingthe risk for over all stability of financial system andshould not be construed as a limiting factor. No doubt,the cost of raising capital is bound to increase the costof doing business. Capital cost is akin to input cost andmay not be an impediment in enhancing the business.Going forward, it may throw opportunities in structuringcontingent capital instruments, pricing strategies andcost efficiency measures. In fact, it will reduce theprobability and severity of future financial crises and thuspromote higher growth over the long term.b) What are the challenges that the banks mayface in this regard / raising capital : Challenges are1) to develop a capital plan for different time horizonsconsidering the changes in business model and pricingstrategies 2) to absorb the increased cost or to pass iton to customers for sustainable growth of business3) to explain the investors on the impact on ROE4) to limit the illiquid assets.c) How your bank is geared up to handle this? The bank iswell capitalized as on date. The Capital Adequacy Ratio(CAR) of the Bank is 13.49% as on 30-09-2010 (of whichTier-I is 8.41%). Further we are having head room of`600 crore for raising Tier-I capital and `2,000 crorefor raising Tier-II capital. Though we have comfortablecapital as per Basel-II guidelines, impending Basel-IIImay have impact on capital level, liquidity position andon other financial parameters. I am confident that IndianBanks also evolve with time in meeting the requirements.MDM (Bank of Baroda) : With the prudential normsgetting more stringent, maintenance of capital adequacyratio is always challenging, more so for banks growingat a pace higher than the industry level. With the rise inthe asset size, accessing correspondingly higher capitalneeds foresight, vision and meticulous planning.Drawing from the experience of recent financial crises,BIS has already proposed a framework of BASEL-III thatcalls for more regulatory capital in due course of time.While the general scenario is so, as far as Bank ofBaroda is concerned, we have been able to maintain acomfortable capital adequacy ratio much beyond theminimum prescribed levels. The CAR of our Bank forSeptember 2010 was 13.22 per cent under BASEL-IIagainst 9 percent. The general challenges are liquidityconditions, balancing Tier-I and Tier-II capital, costof raising capital, selection of debt equity and hybridcapital instruments, changing prudential norms, higherrisk weights etc. Since the volume of assets keep rising,banks need to access capital from time to time to avoidany interruption in the growth.ASB (Bank of Maharashtra) : Adequacy of capitalplays a very important role in business expansionfor a bank. Banks will have to ensure that the growth inbusiness is not only quantitative but also qualitative.Loan book, with higher credit ratings, attracts lower riskweights leading to better capital to risk weighted assetsratio for the bank. Lesser delinquencies result in lowerprovisioning which increases the internal accruals. It is awell known fact that retained earnings are more costeffective than raising capital from the capital markets. Tomake the internal accruals as the cornerstone for capitaladequacy, the bank has already taken various stepssuch as ramping up of risk management processes andfurther strengthening of the credit monitoring processby opening of Asset Recovery Branches, Regional RetailLoan Processing Centres (Retail Hubs) and deploymentof specialist officers.GoI, in its Union Budget of 2010, had announceda package of over `15,000 crore for capitalization ofpublic sector banks. Under the same scheme, our bankis expected to receive further `1,200 crore by the yearend. This will add on to a CRAR of 13.82 for Septemberquarter. The Government holding is 76.77% as of Sept,2010 and bank has enough headroom available forraising further capital from the market if the need arises.So, the bank is well poised to ensure sufficient capitaladequacy to meet the business plan of `1,20,000 croreby March 2011.The Journal of Indian Institute of Banking & Finance January - March 2011 11


special featureSR (Canara Bank) : Regulatory capital could be alimiting factor for increasing the business of most of thebanks. However, as long as the banks manage the riskprofile of its assets prudently and are able to sustain theprofitability by adequately pricing and controlling all therisks, this may not be a limiting factor.We are attempting to study the impact of changes inregulatory capital requirement vis-à-vis business plans.We are sure that the enhancement in regulatory capitalrequirement will be in phases.RP (Corporation Bank) : As per the Basel-II Guidelines,Banks are required to maintain capital for the riskarising out of the Credit, Market and Operationalrisks. At present, banks are adopting Basic approachesfor computing capital requirements. Going forward,they will be moving over to advanced approaches forcomputing the capital requirement which will be moreclosely on the risk profile of the underlying assets.Apart from the above, as per the Basel-III accord,banks need to maintain common equity as capitalto the extent of 4.5% and capital conservation bufferof 2.5%, i.e., 7%. The total CRAR will be increasedto 10.5% by the year 2019. In order to comply with thisregulation, it is more important for the Banks to raiseadditional capital in the form of equity and to retain theprofits generated in the Business. In order to raise equityfrom the capital markets it is necessary to maintain highyielding and good quality assets in the Balance Sheet,coupled with robust risk management systems.Our Bank, as part of its Long Range Plan & ICAAP, hasestimated its capital requirement till March 2015. Basedon the Macroeconomic conditions, the Bank will raiseadditional capital at the appropriate time.TMB (Indian Bank) : As given in Financial StabilityReport of Reserve Bank of India dated December2010, the Capital Adequacy position of Public SectorBanks (PSBs) in India is well above 14 per cent withCore Capital above 10 per cent. But individual Bankshave assessed their additional capital requirementbased upon the projected business growth.The oversight body of Basel Committee, at its meetingdated September 12, 2010 announced substantialstrengthening of existing capital requirements. Therecommendations, under Basel-III focus more on corecapital which can be improved only by Tier-I Capital.For Public Sector Banks where the Government holdinghas come down to the minimum requirement of 51%,raising the core capital can be a challenge. The CentralGovernment, majority stakeholder has taken congnisanceof this and has been infusing capital whenever the corecapital level falls below a certain level.Indian Bank's core capital, at present, is adequatelysufficient to meet the Basel-III requirements. The Bankhas sufficient elbow room for raising the core capital (asthe Government holding is presently 80%). Further, theBank is in the process of coming to the market with anFPO early next year. Regulatory Capital will not be alimiting factor, to the Bank for increasing the Business.MN (Indian Overseas Bank) : Accelerating credit growthof the public sector banks is crucial for the economy. Atthe same time the Basel norms that we have adoptedrequires the banks to be sufficiently capitalized. Thoughthe minimum regulatory requirement of Capital to RiskWeighted Assets (CRAR) for the banks is 9%, theGovernment has mandated a total CRAR of 12% with 8%Tier-I Capital. The banks use a combination of methods toraise the necessary capital. Of course, equity option isideal but depends on the market conditions and theheadroom available as the promoter's stake cannotgo below 51%. The banks have, therefore, been raisingcapital through various bonds and debts instruments. Thegovernment also periodically infuses fresh capital intothe public sector banks whenever needed. Recently, thegovernment agreed to provide an additional amount of`6,000 crore, in addition to the `15,000 crore alreadyprovided in the Budget 2010-11, to ensure Tier-I CRAR(Capital to Risk Weighted Assets) of all Public SectorBanks (PSBs) at 7% and also to raise Government ofIndia holding in all PSBs to 58%.Our bank is sufficiently capitalized with CRAR of 13%plus. We have a substantial cushion in promoter's capitalalso. However, to support our growth plans, we proposeto raise `3,000 crore through a domestic bond issueeither in the form of perpetual debt or lower Tier-II bonds.We have also requested `1,400 crore additional capitalfrom the government.NP (Oriental Bank of Commerce) : The statementseems correct looking at the past global financialmeltdown. However, with increase in confidence ofinvestors in Banking industry and redefining the12January - March 2011The Journal of Indian Institute of Banking & Finance


character of capital in Basel-III, it will definitely addressthe concern of first part of the question. Right businessmix, trade-off of asset quality and yield, improving lowcost deposit share, improve in non-interest income willadd to bottom line in proportion to asset growth. Furtherimprovement in bottom line will provide headroom forBanks to tap capital market at an appropriate timefactoring the need for capital and cost of capital.The present capital adequacy position of our Bank iscomfortable, which is above the regulatory requirement.Further the steps initiated by the Bank to reduce cost andimprove yield have started reflecting in its bottom linewhich will support the business growth of the Bank innear term. Moreover the Bank has enough headroomavailable to raise Tier-1 and Tier-2 capital to support thebusiness growth as per its plan.KRK (Punjab National Bank) : Banks need to shore uptheir capital base to support higher credit growth andprovide adequate resources needed by a growingeconomy. Going forward, banks also need to increasetheir capital base, in view of the enhanced Basel-IIregime as there may be some negative impact arisingfrom shifting deductions from Tier-1 and Tier-2 capital tocommon equity. Impending implementation of Basel-IIIand IFRS puts further pressure on the Banks' capital.While banks have been raising capital from the market,the Government has also been supporting them throughtimely capital infusion.PNB's Capital Adequacy Ratio in terms of prescriptionsof BASEL-II stood at 14.16% (Tier-I - 9.11% and Tier-II -5.05%) in March 2010 that not only exceeds therequirements of the regulators worldwide but is alsocomparable with the best Banks globally. At present, thePaid up Equity Capital of the Bank is adequate. Further,the Bank has a headroom of 6.8% (with Govt. of India'sshareholding @57.8%) at present to dilute Govt's staketo 51% minimum required and can raise the same in caseof need subject to necessary approvals. We may raisearound `3,000 crore as Tier-II capital bonds. (subject tofavourable market conditions), of which `500 crore hasalready been raised. Government of India has decidedto increase its stake to 58% by infusing around `184crore in our equity on preferential basis. Further duringthe current budget, the amount provided for capitalinfusion has been taken as a Plan expenditure whichspecial featurewill facilitate Government of India to participate in rightsissue of Public Sector Banks in future without muchdifficulty. Further, we plough back substantial amountsevery year out of our earnings. Put all this togetherPNB will not find it very difficult to meet its capitalrequirements.AK (UCO Bank) : The banking industry is central to anyeconomy which makes regulation of this industry so veryessential. And it has been established, capital is a keyshield that banks can have in place both during goodtimes as well as bad. Towards this end, Basel Committeeon Banking Supervision (BCBS) in Sep'2010 sealed adeal (Basel-III) aimed at a fundamental strengthening ofglobal capital standards.Under the Basel-III guidelines, Tier-I capital, whichincludes common equity and other financial instruments,will have to be increased to six per cent from four percent. Within this, the minimum common equity capitalrequirement has been raised from two per cent to 4.5per cent by January 1, 2015. In addition, banks will haveto carry a further "counter-cyclical" capital conservationbuffer of 2.5%, effectively raising the floor of totalcommon equity requirements to 7%. The new commonequity norms will make banks (a) more risk sensitive, and(b) realign exposure for better use of capital.The Government of India plans to strengthen capital of thePublic Sector Banks so that the Banks would be able toattain a minimum of 8% Tier-I CRAR. Accordingly, it hasbeen decided to infuse `940 crore in UCO Bank by wayof preferential allotment of equity in favour of Governmentof India. The transaction would be carried out in theform of equity plus premium as per the Securities andExchange Board of India (SEBI) guidelines. This wouldalso allow the Bank to raise more Tier-II capital andfacilitate a follow-on public issue in future. After theproposed allotment, the percentage of shareholding ofthe government of India will increase from 63.59% to68.13%, the Tier-I capital of the Bank will improve from7.47% to 8.14% and overall CRAR will be around 13%.MVN (Union Bank of India) : Today, core equity ofIndian banks is quite high. Indian banks already metproposed core tier-I equity standards of Basel-III that willkick in after a couple of years. With CRAR at 14.5 percent including 10.1 per cent of Tier-I capital as on end-March, 2010, the enhanced capital norms are lowerThe Journal of Indian Institute of Banking & Finance January - March 2011 13


special featurethan this level. However, near double-digit growth ofthe economy would require an average growth of about25 per cent in banking sector's assets. Thus, high growthrate coupled with higher capital needs would be achallenge for the banks in medium to long-term.Besides moving to impending BASEL-III norms, thecompetitive pressure on banks' margins wouldnegatively impact plough back of profits. The regulatoryrequirement for maintaining 70 per cent provisioncoverage ratio may also pose difficulty in maintainingprofitability. Banks would also need to have adequatecapital to support overseas expansions, mergers &acquisitions, joint ventures and subsidiaries. Thebusinesses like insurance, mutual funds, assetmanagement, venture capital, credit cards etc. have longgestation periods and there may not be significantreturns in initial period, thus blocking the capital. Thebuffer capital towards possible deterioration in assetquality would add to total capital requirement of banks.There may also be some negative impact arising fromshifting some deductions from Tier-I and Tier-II capitalto common equity. The changes relating to the counterparty credit risk framework are also likely to have capitaladequacy implications for some banks with large OTCbilateral derivatives position. In case of public sectorbanks, another capital constraint may be the inability todilute the government holding below 51 per cent.As regards our Bank, the Tier-I CRAR is below 8 per centand if one excludes the perpetual bonds, the ratio willbe affected adversely. The bank has almost reached theceiling for raising perpetual debt instruments. However,there is enough headroom available for Upper Tier-II andLower Tier-II capital instruments to shore up overallCRAR. The Bank has requested the Government ofIndia to participate in preferential shares issue whichwould increase the government holding as also give anopportunity in the future for dilution and / or for rightsissue. We are also looking at a consistently high returnon assets of 1.25 per cent or more in medium term thatwould help in sizeable plough back of profits.BS (United Bank of India) : In the long-run the proposedregulatory capital would certainly be a limiting factor forincreasing the business of the banks. On the other hand,raising capital would not be an easy task considering thefact that Government's holding must not go below 51%.In India minimum capital adequacy has been fixedat 9% higher than international minimum ratio of8%. Government is proactively encouraging and takingsteps to recapitalise the Public Sector Banks (PSBs)to maintain a higher ratio of over 12% capital to riskweightedassets.With the introduction of Basel-III, pressures on capitalwill further increase. According to rating agency ICRA,capital requirement suggested by the proposed Basel-IIIguidelines would necessitate Indian banks to raise`6 lakh crore in external capital over next nine years,besides lowering their leveraging capacity. It is the publicsector banks that would require most of this capital, giventhat they dominate the Indian banking sector.As for our bank, the Capital Adequacy Ratio (CAR) as onth30 September 2010 stands at 12.74%. We don't foreseeany capital crunch in the current fiscal. The Bank is in agrowth trajectory at present and we have an ambitiousplan to increase our business significantly in next threeyears which necessitates more capital. We are aimingat augmenting our capital through increased internalgeneration by improving our profitability by proper pricingof our various products, strict monitoring and arrestingslippages, recovery of NPAs, more non-interest incomeetc. Considering our planned expansion in the comingyears, the Bank's Board has approved raising `350crore Tier-I capital through IPDI route and Tier-II capitalof `250 crore. Depending on the market conditions wewould go to the market at appropriate times. Further, wemay also consider going for FPO in future. However, IPDImarket at present is not very deep; hence we may haveto approach the Government of India for further capitalsupport in coming years to sustain our growth plan.AT (Vijaya Bank) : I don't think regulatory capital hasin any way been a limiting factor in banks' assetgrowth so far. As of March 2010, combined CRARof all SCBs stood at 14.58% against regulatory normof 9%. Thus, most of the Indian banks are wellcapitalized and I don't foresee regulatory capital tobe a limiting factor at least in the medium term. However,in a futuristic perspective, regulatory capital alonemay not be adequate to support asset growth, goingby the guidance on future loan growth, especially insegments like infrastructure and introduction of newregulatory benchmarks like Basel-III.14January - March 2011The Journal of Indian Institute of Banking & Finance


As far as Vijaya Bank is concerned, a CAR of 14.25% isconsidered quite reasonable. Further, we understandthat the Govt. of India is also contemplating increasingthe capital base of the banks where the Govt. of Indiashare is moderately above 51%. In case of our Bank,Government's stake is at 53.87% and that probablywould facilitate further capital infusion to supportbusiness growth. Our major focus, however, will continueto be on ways to improve retained earnings.RK (Yes Bank) : The Indian Banking System is currentlywell capitalized with a Capital adequacy ratio of 14.5%as of March 31, 2010 and a Tier-I ratio of 10.1%, whichis well above the regulatory limit of 6%. As the normschange with the transition to Basel-III, Indian Bankswould be less affected as they already consider most ofthe deductions (like deferred tax assets, intangibles andinvestment in subsidiaries) mentioned under Basel-IIIfor computing Tier-I capital. According to a Citi ResearchReport released in May 2010, the average reductionin Core Tier-I ratio in US / Europe would be 3.2% onaverage, and for India it would be close to 1%.Challenges in regards to raising capital linked toconditions in global and local market conditions.special featureHigher Tier-I ratios of Indian Banks allow them enoughtime to be able to plan a capital raising depending on therequirements for growth and capital market conditions.Most banks, especially in the private sector have managedto raise capital consistently with a prudent mix of domestic& international investors on a timely basis and at attractivegrowth multiples / valuations.YES BANK has a capital adequacy ratio of 18.2% with a10.4% Tier-I ratio as of December 31, 2010. YES BANKhas established a Financial and Investor Strategy teamdedicated to consummating the financial strategy of theBank and planning well in advance for future capitalraisings and executing the same during favorable times.YES BANK has demonstrated its ability to raise all formsof capital through both benign and challenging marketconditions (including raising perpetual Hybrid Capitalin Feb-March 2009) and augmenting it regularly withhigh level of retention. YES BANK recently concludedits maiden QIP in January 2010 of `1,034 crores (US$225 million) which was placed very successfully and iswell-capitalized to meet the current growth demands.Expanding the Scope of Financial RegulationThe Joint Forum, composed of the BCBS, IMS and IOSCO, is analysing regulatory gaps in order to help ensure that the scope and thenature of financial regulation are appropriate. In January 2010, the Joint Forum, composed of the BCBS, IAIS and IOSCO, published itsreport on the Differentiated Nature and Scope of Financial Regulation. While the report covers a broad waterfront, the recommendationsare focused on five key areas: (i) Key regulatory differences across the banking, insurance and securities sectors; (ii) Strengtheningsupervision and regulation of financial groups; (iii) Promoting consistent and effective underwriting standards for mortgage origination;(iv) Broadening the scope of regulation to hedge fund activities; and (v) Strengthening regulatory oversight of credit transfer products.For the insurance sector, the International Association of Insurance Supervisors (IAIS) published on April 12, 2010, a guidance paper ontreatment of non-regulated entities in group-wide supervision sector. The IAIS is also researching the design and practicality of acommon assessment framework for insurance group supervision. Finally, the IAIS is currently preparing a new Roadmap for standardsetting within the framework for insurance supervision which aims at setting out the policy direction and priorities for all IAIS standardsettingactivities within the Framework for Insurance Supervision over the two-year period commencing January 1,2010. The IAIS haslaunched a consultation process among its members in order to raise the issue of what standard-setting initiatives should be undertakenin respect of supervisory review, reporting and assessment within the timeframe of this Roadmap.IOSCO, which is a member body of the FSB, published in June 2009 a set of high-level principles for hedge fund regulation. The sixprinciples include requirements on mandatory registration, regulation and provision of information for systemic risk assessmentpurposes. They also state that regulators should co-operate and share information to facilitate efficient and effective oversight of globallyactive hedge fund managers / hedge funds. IOSCO will continue its work in this area. National and regional initiatives are also underwayin key jurisdictions.A number of initiatives are also underway at the national level to review the adequacy of domestic regulation and fill identified regulatorygaps, including as part of broader financial sector reform proposals.Source : RBI, Report on Currency and Finance, 2008-09.The Journal of Indian Institute of Banking & Finance January - March 2011 15


special feature2. Do you think in the Indian context, advanced measurement approach of risk as a goal can be pursued, toachieve capital efficiency? What are the constraints?JPD (Allahabad Bank) : Ultimate benefit of advancedmeasurement approach will be translated in terms ofenhancing the capital efficiency. RBI has come out withtimelines for implementation of approaches and as agoal, we have to pursue and implement to reap thebenefits. Constraints rather challenges will be in the areaof IT infrastructure up gradation, reporting systems andmaking the data availability.MDM (Bank of Baroda) : Yes, banks are already on wayto adopt advanced credit risk management modules toensure that capital needs are assessed on more scientificmethods. The advanced approaches also enable banksto fine tune the capital needs and be able to maintaina CAR close to the regulatory requirements. Optimummanagement of CAR can facilitate maintenance ofcapital on just in time model. Since accessing capitalinvolves costs, it is desired that banks adopt higherrisk measurement modules to keep cost of capitallow. Collection, collation and processing of accuratedata from the branches to the central servers are ahighly challenging task. More so, for large public sectorbanks having multiple branch network. Moving overto CBS systems has however brought about somestandardization in pooling the MIS without much humanintervention. But looking to the complexity and size ofoperations banks have long way to go to rationalize datacollection. The banks will be able to move to advancedmeasurement approaches once the data warehousingand data processing are organized to align with the needs.ASB (Bank of Maharashtra) : Marching towardsadvanced measurement approach aims at developingthe abilities of the banks towards near accurateperception of risks in various activities undertaken bythem based on the analysis of loss incurred over asignificant time horizon. Such a Capital charge arrivedat is expected to be significantly lower than regulatoryprescriptions stipulated at present.However, near accurate perception of risk will be possibleonly if granular data for previous years is captured andmeaningful analysis thereof is done. Technological upgradation & designing suitable software are necessary forsuch purpose. Trained and skilled manpower to analyzeand interpret such data for developing suitable predictiverisk models would be a challenge in this direction.SR (Canara Bank): The advanced approaches of riskas a goal can be pursued to achieve capital efficiency.The constraining factors, if any, associated with thisare availability of robust MIS and quality staff withrequired expertise in risk management. In this regard,the Bank has already achieved 100% CBS. Withidentification and employing of suitable risk managementsoftware solution, building up of historical data basesand planned recruitment of risk management specialists,the constraints stated above can be overcome.RP (Corporation Bank) : After introduction of Basel-IIregulation, banks in India are in the process ofestablishing most efficient use of capital to supporttheir business i.e., a changeover from capital adequacyto capital efficiency. In this process, return-on-equitywill be determined by how effectively the capital is used.This will influence banks' business plans and helps themto grow in a systematic manner. One of the constraints inachieving capital efficiency is that the business decisionshave often to be driven by market conditions rather thanthe efficient deployment of capital.TMB (Indian Bank) : Yes, the advanced measurementapproach of risk will result in capital efficiency.In Credit Risk, computation of capital under the advancedapproach will be a more scientific reflection of the quality ofassets and with Indian Banks having larger percentage ofhigh rated accounts in their portfolio will stand to achievebetter capital efficiency under advanced approaches.In Operational Risk, under the advanced approachcapital provision will be the true reflection of the perceivedoperational loss and definitely will be much lower thanthe present level computed under basic indicator oreven standardized approach worked out based on fixedpercentages on gross income.The constraints will mainly arise out of the quality of datainputs, especially in case of Operational Risk on externalloss data. However, Banks are gearing up for moving16January - March 2011The Journal of Indian Institute of Banking & Finance


over to the advanced approaches and Indian Bank hasmade considerable progress in this regard.MN (Indian Overseas Bank) : The advancedmeasurement approach (AMA) is a set of operationalrisk techniques proposed under Basel-II capitaladequacy rules. Under this approach the banks areallowed to develop their own empirical model toquantify required capital for operational risk. The RBIhas also given a road map for Indian banks whichare confident of migrating to this methodology. Ofcourse, there may be risks associated with thistechnique. Basel-III is advocating a leverage ratio whichbasically seeks to achieve capital efficiency throughquality asset build up and better risk managementpractices. For this, qualitative requirements such asgovernance, up skilling personnel for risk managementand internal audit function (independent of eachother), validation of models etc. are the areas wherebanks will need to put in place best practices foroverall improvement in the Risk Management of banks.NP (Oriental Bank of Commerce) : Implementation ofadvanced measurement approach is not a one-timemeasure; it is an on-going process. The method to adoptthe advanced approaches should be a consultative andparticipative one. Banks in India are already in theprocess of implementation of advanced measurementapproach and with the increased level of understandingand the development of technology, shall be successfulin achieving the desired goal of Basel-II requirement.The understanding (and not just the implementation)of the advanced measurement approach shall bringthe essential changes in the way banks identify, assessand manage diverse risks across their strategicbusiness units and incentivizes them with better riskawareness and higher risk-adjusted returns andhence assist them to achieve the capital efficiency.This approach not only emphasizes on sophisticatedrisk model for quantification of risk but also factorsthe effectiveness of internal control mechanism. Therequired capital under Advanced MeasurementApproach will either increase or decrease dependingon the effectiveness of internal control mechanism ascompared to capital charge computed under presentBasic Indicator Approach. However, the advancedmeasurement approach requires the sophisticated riskspecial featuremanagement systems, huge quality data and humanresources with appropriate skill sets and proper training.KRK (Punjab National Bank) : The fundamentalobjective of the Basel II is to develop a frameworkthat would further strengthen the soundness and stabilityof the banking system. The revised framework intendsto promote the adoption of stronger risk managementpractices by the banking industry. The new accordseeks to arrive at significantly more risk-sensitive capitalrequirements (instead of broad brush approach of Basel-I)that are conceptually sound and at the same time pay dueregard to particular features of the present supervisoryand accounting systems in individual member countries.A significant innovation of this Framework is the greateruse of assessments of risk by banks' internal systems asinputs to capital calculations.Advanced approaches permit banks to estimate theirown risk parameters necessary for capital computation.These approaches are more granular and incorporaterisk culture of the organization among other quantitativeparameters. The banks having better control, robust riskmanagement framework and embedded risk cultureacross the organization are set to be in advantageousposition as far as capital requirement is concerned. InIndia, regulatory control is far more efficient and effective.This is one of the major reasons that India came outunscathed from recent financial turmoil. Further, Banks inIndia are subject to various audits at central as well as unitlevel. Granularity of the advanced approaches and bettercontrol environment in Indian context will help banks inattaining capital efficiency. Banking is an art of “strikinga balance” between “Risk and Return”. Adoption of theseapproaches will help banks in getting better equippedin handling this risk return trade off. It will facilitatebanks in directing their operations towards optimizationof business growth and profit.Some of the challenges in adoption of these approachesrelate to creation of data base for estimation of riskparameters, embedding good risk management practicesinto the day to day business processes and need forhuman resources with appropriate skill sets and propertraining for adopting sophisticated risk managementtechniques, particularly under the advanced approaches.With average age of Public Sector Banks' officers beingabove 50 years, the task becomes challenging. Short dataThe Journal of Indian Institute of Banking & Finance January - March 2011 17


special featurehistory, and lesser number of data points in LGD (LossGiven Default), EAD (Exposure at default) and high impactlow frequency events in operational risk may give distortedresults. Efforts for creation of pooled data are required tobe made requiring collaborative efforts amongst banksand supervisor.AK (UCO Bank) : The advanced measurement approach(AMA) (proposed under Basel-II capital adequacy rules)allows banks to develop their own empirical model toquantify required capital for operational risk. Banks canuse this approach subject to approval from their localregulators.AMA not only brings about improvements in riskmanagement but also promotes an enterprise-widerisk capture and assessment culture across allbusiness units of an organization. It makes use of theprevalent best practices of banks to develop techniquesfor identifying, measuring, and attributing capital foroperational risk.Today, development of internal models and theimplementation of the AMA is a significant challengefacing the Indian banking industry. The major constraintsare lack of a) relevant external loss data, and b) skilllevels in the banks to put in place the AMA model. Itwill take some time to develop necessary human skillsfor : (i) putting in place statistical models for measuringthe capital charge, and (ii) designing and incorporatinginputs in the models.MVN (Union Bank of India) : The Indian Banks havealready shown their commitment to adopt the internationalbest practices in all the spheres of the banking. The banksare taking effective steps to move towards advancedmeasurement approach of risk. I believe that banks willalso achieve capital efficiency as they are cost conscious.There are constraints though. Firstly, the implementationof advance approaches will require intensive skills andtechnology. Then there are issues with quantification ofrisk and the right model for this. There will be need toadopt appropriate risk modeling and other computationaltechniques of risk measurement. There will also be aneed to integrate risk management process with capitalplanning strategies. The quality of data is yet anotherissue. The positive thing is that the banks are alreadyworking on it and should be able to address theseconstraints effectively.BS (United Bank of India) : The advancedmeasurement approach (AMA) is a set of operationalrisk management techniques proposed underBasel-II. The AMA is an objective methodology,more sophisticated than the basic Indicator / or theStandardised approach. For implementation of thismethodology there are some constraints too.Under advanced measurement approach which is themost sophisticated of the three, banks can developtheir own model for measuring operational risk andquantifying the capital requirement. However, for usingthe AMA approach the banks need to create requisitetechnology and the risk management infrastructureincluding required database, MIS and skill upgradation.The major constraint is the lack of historic data on lossevents. Another constraint is the lack of proper skilledpersons in risk management area. Banks will have toselect specialized skilled persons for recruitment andthey should be given training to avoid such deficiency.AT (Vijaya Bank) : I feel, banks will definitely achievecapital efficiency by moving forward towardsadvanced measurement approach of risk management.However, for this, banks need to put in more efforts,especially to overcome constraints like inadequacyand cleanliness of data, lack of trained manpower,cost involved in IT infrastructure, need for sensitizingthe branch personnel with regard to the nuancesinvolved in advanced approach. These efforts willbenefit the banks not only by saving additional capitalrequirement but in reducing the credit, market andoperational risks in the organization.RK (Yes Bank) : The constraints faced by IndianBank for migration to Credit Risk and OperationalRisk Advanced approaches is mainly from theperspective of insufficient historical data for computationof PD (Probability of Default) & LGD (Loss GivenDefault) and Operational Loss. There will also beissues pertaining to Integration of data from varioussource systems for migration to advanced approaches.Additionally, for Public Sector Banks (as for otherbanks), there will be a need to up-skill the humanresources for these specific functions.18January - March 2011The Journal of Indian Institute of Banking & Finance


special feature3. The base rate system has been introduced. Will this enable banks to respond to changes in policy ratesmore effectively? Will this result in more risk-focused lending rates?JPD (Allahabad Bank) : Policy rates, as hitherto,were transmitted albeit with a time lag. The Base Ratemechanism which is a continuous process with provisionfor review at greater frequency will enable banks torespond to changes in Policy Rates more effectivelyand transmit the same immediately. The mechanismcaptures market volatility in interest rate which willdefinitely translate into more risk-focused lendingrates.MDM (Bank of Baroda) : The base rate system hasbeen introduced to ensure faster transmission ofmonetary policy measures, more particularly interestrate signals. The transparency and disclosure ofcomputation of base rate provides more confidenceto the market about the reasonability of pricing. Sincemarkups beyond the base rate are meant to cover theperceived risk in lending, it clearly transpires the methodof measuring and pricing of risk. As a result base rateprovides more clarity in linkage of lending rates with risk.Hence the concept of base rate is more risk focused indetermining lending rates.ASB (Bank of Maharashtra) : The base rate systemwas introduced for the purpose of correlating policyrates to the lending rates. The major component in baserate computation is the cost of funds which normallyis derived from the policy rates, though with a lag.So, the base rate will enable banks to respond tochanges in policy rates. Risks are always factoredin loan pricing, irrespective of the process whetherBPLR or Base Rate. Lending rates based on Base Ratemechanism have an added component of Credit RiskPremium, Tenor Premium & Product Specific Cost. Toensure risk return tradeoff, ultimate lending rates canbe prescribed based on the risk appetite of the bankand the profitability projections.SR (Canara Bank) : Under BPLR regime, the pricingof a significant proportion of loans stayed far out ofalignment with BPLR, thus undermining its role as areference rate. This perception was reinforced by widedispersion persisted in actual lending rates owing tosubstantial sub-BPLR lending.The Base Rate system has been able to achievetransparency in the process of pricing of credit. The keyfactors which go into fixation of base rate are aligned topolicy rates. Hence it is expected that ultimate lendingrate will stay in tune with the policy rates as well asestimation of risk. The Base Rate system has led to riskbased approach in pricing the credit and curbed crosssubsidizationto a very large extent.RP (Corporation Bank) : While the Base Rate maybe more sensitive to the policy rates than the BPLR,ultimately it is still based on the internal costs for thebank in the form of cost of deposits / funds. To theextent that T-Bill rates are factored into the equation,the Base Rate does become sensitive to marketconditions, but the over-riding factor is the internal,historical costs which would take at least a quarter,till the next Base Rate change, to get factored in. Tothat extent, the Base Rate would respond with a lagof at least a quarter.TMB (Indian Bank) : Base rates were aimed at bringingmore transparency in the lending market and bankscannot lend below the base rate.Under the base rate system, the lending rate adds up riskpremium to the base rate and naturally this will result inmore risk focused lending rate. But this may take somemore time to settle down fully.Reserve Bank of India has allowed banks to follow anyspecific methodology for calculation of the base rate andhad given them time up to December 2010 which hasbeen further extended to June 30, 2011 for any changein methodology of calculation, after which banks wouldhave to stick to the same methodology.The Base rate of a bank is calculated on the basis ofthe cost of its deposits, which is a major component ofthe base rate formula. Policy rate hikes of Reserve Bankhave a direct bearing on the liquidity and cost of fundsfor the Banks. Definitely, banks would be able to respondmore effectively to changes in the policy rate by RBI. Butthe only rider is that banks can change their base ratesonly once in a quarter, which means that during theThe Journal of Indian Institute of Banking & Finance January - March 2011 19


policy special rates, either upward featureor downward.interregnum, the banks would absorb any change in theMN (Indian Overseas Bank) : Broadly, the banks aredeciding the Base Rate based on the benchmark of costof deposit or offered deposit rate in specified time band.The lending rates are fixed based on the targeted NIM.As such the changes in deposit rates and lending ratescomplement each other.The deposit rates offered by banks are market drivendepending on the asset-liability position of the specificbanks. Policy rates are the indicator and driver for bank'sinterest rate movements. However, there is a time lagbetween the movement in policy rates and the movementin the benchmark for the Base rate depending upon thechange in composition of deposit portfolio and re-pricingof deposits thereof.It is easier to add a risk premium to the base rate basedon the principle that higher the extent of expected default,higher will be the risk premium; which is in line with Baselprinciples that provision for expected loss should comefrom the borrower while that for unexpected loss shouldcome from capital (owners).NP (Oriental Bank of Commerce) : Yes, the BaseRate system has resulted in increasing transparencyin lending rates and improves monetary policytransmission as it is computed scientifically and linkedto market variables i.e. T-Bill yield, CRR, SLR, hence,more responsive to the monetary measures than theearlier BPLR system. It is also expected that the base ratesystem will make credit pricing more efficient and bringdiscipline in financial sector while pricing a borrower.Pricing factors by banks are becoming more andmore risk-focused. Though absolute quantification ofall material risks associated with counterparty is difficult,the technological sophistication in banking industry willmake it easy to translate most of such risks into riskpremium. The efficiency with which risks are assessedby the banks will impact financing of various activitiesand also benefit the borrowers.KRK (Punjab National Bank) : Base Rate systemadoption is aimed at improving transparency and pricingof credit, resulting in risk based pricing as it factorsin credit risk premium as well, among other factors.It gives freedom to Banks in their loan pricing decisionswhile ensuring transparency and improving disclosuresystem.However, given the fact that base rate is to be reviewedquarterly while monetary policy is reviewed twice in aquarter, monetary policy rates get transmitted effectivelyinto lending rates with a lag. Moreover, lending rates alsodepend upon liquidity conditions and competition. IndianBanks are yet to perfect risk based pricing.AK (UCO Bank) : The Reserve Bank of India (RBI) hasallowed banks to formulate their own benchmarks forsetting their base rates. All that RBI wants is that banksshould have a sound methodology which is to be appliedconsistently and in a transparent manner. Obviously, thebase rate is arrived at taking into account, among others,the cost of funds. Before finalizing the rate, each banktakes into account the prevailing rates in the market, pricein its expectations over the next few months and figuresout what they can offer their best borrower. Subsequently,if the factors / circumstances that go into arriving at thebase rate change, then the rate will change accordinglyand so will the ultimate rate to the borrower. Thus, the newsystem is expected to help banks align lending rates withpolicy rate changes introduced by the RBI periodically.As far as factoring in risks are concerned, banks price theirloans based on internal grading to companies in a way thatlowest rating receives the highest risk premium. Thus, thebest-rated corporate can get loan at base rate whereas forothers the rate can go up, say, by 25 bps for every rungof the risk ladder. With emphasis on Basel-II norms, riskbasedpricing and the tenure of loans would play crucialrole in determining effective rate charged to customer.MVN (Union Bank of India) : The interest channelof monetary policy transmission in India has beenweak. Commercial banks are the entities through whichpolicy rate signals get transmitted to the credit markets.Traditional benchmark prime lending rate (BPLR) systemhas extended lags in reflecting the policy changes. In thisbackdrop, base rate system was introduced effectiveJuly2010. It is too early to pass a judgment on its efficacy;however, the experience so far suggests that the newsystem is proving to be more effective. There are reasonswhy I believe so. Firstly, the calculation of base rateis quite transparent and parameter based. After initialcooling period allowed to banks for setting their base rateformula, banks will have pre-defined parameters, changes20January - March 2011The Journal of Indian Institute of Banking & Finance


in which will impact base rate. Secondly, barring a few, allloans are referred to base rate and sub-base rate lendingis prohibited. So, unlike BPLR changes, a change in baserate would cause parallel shift in loan yield curve of thebanks across the loan segments. Hence, changes in baserate are transparent and non-discriminatory.While base rate is the floor, additives for actual lendingrate to the borrower are customer specific charges,product specific costs, credit risk premium and tenorpremium. Obviously, banks have to cover specific risksby loading risk premium. I would not say that base rateis more risk-focused; rather it rightly captures the riskassociated with type of customer, his business line aswell as the tenor of the loan.BS (United Bank of India) : The base rate system hasstbeen introduced by the RBI since 1 July, 2010. In thewords of RBI “The base rate system is aimed at enhancingtransparency in lending rates of banks and enabling betterassessment of transmission of monetary policy.”The BPLR system, introduced in 2003, fell short of itsoriginal objective of bringing transparency to lendingrates. This was mainly because under the BPLR system,banks could lend below BPLR. For the same reason, itwas also difficult to assess the transmission of policyrates of the RBI to lending rates of the banks. The BaseRate system is aimed at enhancing transparency inlending rates of the banks and ensuring faster responseto the policy changes.Banks determine their actual lending rates on loansand advances with reference to the Base Rate and byincluding other customer specific charges which includerisk premium as well. The components of the base rateare the key factors. With the changes in policy rates thecomponents respond to the changes and the effect onbase rate depends on the accuracy and sensitivity of thecomponents. The components of base rate system aremade more transparent than the BPLR system to enableto respond in a more accurate and sensitive manner.It is expected that this will enable the banks to respondto changes in the policy rates more effectively.Regarding risk focused lending rates, the banks havebeen incorporating the risk premium in their lendingrates in some form or other for a long time especially afterintroduction of prudential norms of income recognitionspecial featureand asset classification. Under the new regime ofBase Rate, as stated earlier, now the banks haveto be more precise and transparent in measuring therisk for a particular borrower / activity so that the riskpremium and other borrower specific charges can beloaded to the base rate to arrive at a more scientificpricing of the loan. Further, the system of pricing shouldbe made available for supervisory review / scrutiny,as and when required. Therefore, from this angle itappears that the base rate system would result inmore risk focused lending rates.AT (Vijaya Bank) : Base rate system has broughtin a dynamic element into the loan pricing mechanism.It has also helped to ensure better monetary policytransmission as banks are given leeway to aligntheir Base Rates once in a quarter, in sync withchanges in key policy rates and their liability structure.I must say, Base Rate has largely done away withelement of arbitrariness in loan pricing. It also reckonsand factors in risk perceived into pricing of loansas it mandates no loan to be extended at ratesbelow Base Rate. In a way, it has addressed themalaise of huge loan portfolios at sub-BPLR ratesafeature typifying many banks until recently.RK (Yes Bank) : The base rate regime has introducedtransparency in domestic bank lending rates as thelending rates are now benchmarked against internalcost of funds for each bank. The recent migrationto the base rate would place the new regime underregulatory auditable process, which is beneficial for allthe stakeholders in the industry. While this enhancestransparency in the lending architecture of the bankingsystem in India, it also has the advantage of capturingmonetary policy signals from the central bank in anefficient manner with timely transmission to externalstakeholders.The Journal of Indian Institute of Banking & Finance January - March 2011 21


special feature4. The real rate of interest on the deposits has been negative over the last two years. Banks are offering lowinterest rate on deposits unmindful of the fact that deposits constitute the largest chunk of resources. Will notsuch sustained negative returns affect the deposit base in future? Is it not time to offer floating rates whichwill give positive returns?JPD (Allahabad Bank) : Inflation is the sole factor inturning the real ROI into negative. Though, taming theinflation is not in the domain of Bankers but its effecton deposit base is a cause of worry. As of now, makingavailability of credit at market absorption rates for growthis on our priority. Offering floating rates on deposits maybecome a future reality.MDM (Bank of Baroda) : The interest rates on depositsare subject to market conditions. The contention that theinterest rates are negative in real terms is not correct. Thepricing of deposits are not factored to inflation rates. Therates of interest on deposits are dependent on demandand supply of funds at any given point of time. The interestrates are now on a rising curve which is cyclical in nature.Fluctuations in interest rates are to be accepted as amarket reality. Banks offer liability products as a repositoryof faith and interest rates on them are susceptible tovolatility. Depositors learn to accept the phenomenon offluctuations in deposit rates as a mark of market maturity.I do not think that matured markets can impact the flowof resources into the banking system.ASB (Bank of Maharashtra) : Economic conditionsin the past two years have been very different fromnormal. In the wake of unprecedented scale and natureof financial turmoil in the international financial marketIndian economy, like other developing economies,witnessed dry down of inflow of foreign capital andsharp fall in exports to developed countries. As a resulteconomic growth in India slowed down. Annual economicgrowth decelerated from the level of 9.7% in Q3 ofFY08 to 5.8% in Q4 of FY09. For reversal in the fallingtrend of economic growth rate the Government of Indiaannounced a slew of fiscal measures including reductionin tax rates, increase in government expenditure, hike inwages and salaries of government employees, increasedexpenditure in employment generation schemes, in orderto spur aggregate demand. Government expenditureinduced increase in domestic demand coupled withsupply side rigidities resulted in high rate of inflation.During this period, commercial banks contributed to theprocess of returning to accelerated economic growthpath by way of providing adequate funds for investmentat reasonably low rate of interest. In order to keep lendingrate reasonable, deposit rates could not be raised in syncwith high rate of inflation.However, with the Indian economy returning to highgrowth path and demand for credit picking up banks are ina position to increase lending rates. This also allows banksto offer higher rate of interest on deposits. In this fiscal sofar, deposit rates have gone up by about 150 - 200 basispoints, while WPI based inflation has eased to about 8 percent from about 11 per cent. As a result, real rate of interesthas turned positive and in coming months with furthereasing of inflation pressure that will improve. In the longrun with compounding interest benefits, depositors wouldget reasonably good real returns on their bank deposits.Bank deposits provide fixed rate returns wherein thedepositors are protected from the possible future fall ininterest rate. Although floating rate interest may assure amore or less stable real rate of return, finding a suitablebenchmark is difficult. Due to structural and frictionalrigidities interest rates in the market do not move in perfecttandem with inflation rate. Therefore, benchmarking anymarket rate of interest would expose retail depositors tolarge scale uncertainties.SR (Canara Bank) : In view of the persistent highinflation rate, the Reserve Bank of India has been makingcalibrated increase in the key policy rates. Taking cuefrom the same and also taking into consideration themarket situation, the banks have substantially increasedthe deposit interest rates over the last three-four months.Incidentally, Canara Bank also has a floating rate depositScheme, with interest rate linked to average monthly 91days T-Bill rate. However, Indian customers are attunedto fixed rate deposit schemes and the floating rateschemes are yet to pick up in the Indian context.RP (Corporation Bank) : The economy had experiencedhigh rate of inflation from in year 2008 from Apr-May'08,which continued up to Dec'08. Year 2009 had witnesseda fall in the inflation rate to even negative levels. Theinflation started again picking up in Dec'09 and is stillabove the comfort levels of the regulator. The real rate of22January - March 2011The Journal of Indian Institute of Banking & Finance


interest was positive for most parts of the year 2009,however, the current levels of high inflation has renderedthe real rate negative. This might be the reason that thedeposit growth for most part of the current financial yearhas remained muted and much below the expected 18%level mentioned by the RBI in its annual policy document.As a result of tightening liquidity in the market andcredit growth picking up, banks have been forced to raisetheir deposit rates in recent months, to attract depositors.However, it may take some more time for the depositors toshift their resources back to the banks from the otheravenues where they may have been parking their funds.They may also start switching funds parked in savingsdeposits to term deposits, thereby keeping overall depositrate at same level while increasing cost of funds for thebanks and lowering their CASA ratios. How much thebanks will be able to pass on this higher cost to the loaneesremains to be seen in a competitive market. There arechances that NIM may decline in such a scenario.As regards floating rate deposits, such schemes havebeen floated by a couple of banks but as far as weunderstand they have received lukewarm support fromthe market, principally because banks would be wary ofpromoting such schemes in a rising interest rate scenario,which can raise costs. The situation can appreciablyworsen when the interest rates start coming down andcustomers rush to demand prepayment of such deposits.In a falling interest rate situation depositors would not liketo park their money in such deposits.In the current market situation, it is difficult to decide on asuitable benchmark to which floating rate deposits canbe linked. Also, while deciding on the floating rate, careneeds to be taken that the earnings are able to match theincrease in the rates, if any in the near future.TMB (Indian Bank) : I agree that inflation in India is highwhen compared to other developed countries. But Bankshave been raising their deposits rates in tune with themarket conditions. However, I do not agree that banksare offering low interest rates on deposits.Deposits constitute the largest chunk of Banks resourcesand any increase in interest rates will result in passing onthe same to borrower customers.Banks are progressively reducing their operatingexpenses and will allocate the interest rate benefit toboth their depositors and borrowers.special featureIn India, most banks are offering fixed rates, thoughReserve Bank in India in its monetary and credit policyfor 2002-03 had advised banks to put in place a flexibleinterest rate system for deposits along with the fixed rateoption. The idea of mobilizing floating rate deposits didnot gain currency mainly because suitable systems andprocedures were not in place. The absence of suitablebench marks has been an inhibiting factor; the benchmarkdeveloped was 5 year and 10 year G Secs. There is aneed for a suitable benchmark where the volatility isminimum and which mirrors the movement in the overallinterest rate.Besides, customer behavior and pattern, especially inIndia play a pivotal role with regard to floating rate deposits.In India, customers basically like to be assured of fixedreturns which they contract at the time of opening deposits.In circumstances, where the interest rates become volatileand goes down, it might affect the customer's sentiments.Under floating rate mechanism, interest rates would bedynamic, changing with the benchmark and the marketconditions. Proper information dissemination would be apriority for the banks to enable customer awareness withregard to the prevailing interest rates.MN (Indian Overseas Bank) : Interest rates are a complexsubject. One has to see the interests of the savers as wellas the borrowers. Both are intertwined. The policy makershave been mindful of the inflationary trend in the past yearand have been adjusting up the rates periodically so as tokeep the real interest rates positive. There is a possibilitythat the SB interest rate may also be freed. Inflationindexed bonds are also being talked about. All these will tosome extent protect the savers against inflation.NP (Oriental Bank of Commerce) : Indian savingsmarket is peculiar where many other factors like safety ofdeposits; small savings etc influence the investor'sdecision along with the level of interest rates. Majority ofsmall investors here are still risk averse and have notevolved as rational investors. Unlike developed marketviz., US that is more consumption oriented, the middleclass dominated Indian market is more inclined to savingand that too long term. Hence in long term, the depositbase may not be impacted and shall remain with thebanking industries. Nevertheless, the growth in SavingsDeposits of Banks has been encouraging and put theeconomy in confidence apart from several ups and down.The Journal of Indian Institute of Banking & Finance January - March 2011 23


given special below. featureThe growth data (YoY%) on savings deposits of SCBs isMar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-1016.7 16.4 22.7 26.5 26.2 28.8 26.3The Indian market is growing at a great pace withthe average rate of growth of around 8%. The globalmarket crisis also had little impact on the economicgrowth. Though, it is true that the last two years haswitnessed very high interest rates, but that is majorlydue to global factors like rise in food prices, crude oil,global melt down etc. The present high credit growth inIndia is a cause of concern because it builds inflationarypressure. However, the outlook of Indian economy ispositive and the long term economic indicators are inthe comfortable zone. Hence, in long term the realrate of interest of Indian investors who are more inclinedtowards long term investment in deposits is likely toremain positive.KRK (Punjab National Bank) : Inflation rate hadbeen negative over June - August 2009, up to October2009 when it was close to 1%. During that period,deposit interest rate ranged around 6%. Hence, therewere no negative returns to the depositors. The inflationrate has been on the higher side since January 2010.The deposit rates did not witness an increase aroundthat time because of sufficient liquidity in the systemto support credit demand which was moving at a slowpace around that time. However, as liquidity pressuresbuilt up due to a pickup in credit and the hike in ratesby the regulator to indicate a tightening stance to curbinflation, the banks have also responded by effectingincreases in deposit rates. This has been coupled withintroduction of many attractive deposit schemes byvarious banks to attract depositors. Moreover, bankdeposits offer assured return to the savers as againstother market linked schemes which do not guaranteereturns. Floating rate deposit schemes were launchedby Banks. But it did not find customer acceptance. Thisis mainly because customers can opt for prematurerenewal of deposits in risky interest rate scenario,where they stay insulated in falling interest ratescenario under formal deposit schemes. Thus thecustomers can have best of both worlds under thepreset type of deposits.AK (UCO Bank) : Interest rates on deposits as well asloans are determined by a broad range of factors such asliquidity, deposit growth and policy rates.It is because of high inflation, the real return to depositorswas negative. Inflation affects everybody including thebanks, as inter alia their administrative overheads go up.In fact, the banks have been quick in increasing the ratesof interest on deposits in line with the RBI signals / marketrequirements. (Deposit growth of commercial banks was17 per cent for the year till February 11). Consequently,banks have to hike their lending rates to maintain theirmargins. But banks have to maintain a fine balancebetween the cost of funds and the pricing of loans so asnot to affect the economic growth of the country.RBI data show that for 2009-10, public sector banksexperienced a shift in their deposit liabilities towardsthe short-term end of the maturity. With 60-65% ofthe deposits having maturity period of one year or less,effectiveness of floating rates remains to be seen.MVN (Union Bank of India) : Banks are aware of thesituation. The past 6 to 12 months have been highlyuncertain on inflation front as the causative factorschanged intermittently. Secondly, credit pick-up wassubdued during this period. In this set up, banks did nothave any inducement to mobilize deposits at higherrates. Thus a combined effect of high inflation andsubdued loan growth resulted in prevalence of negativereal interest rate conditions. Definitely, this has adverselyimpacted the deposit growth of banking system. Asthe signs of busy season pick-up in loan demand areincreasingly visible, banks have started responding.In fact, almost every bank has raised interest rate ondeposits over the last six months. At my bank itself,deposit rates have been raised five times during currentfinancial year. Deposits rate hikes coupled with gradualdecline in inflation has now reduced the extent ofnegative real interest rate. With inflation projected to bearound 6.0 per cent by December 2010, one can seeemergence of a positive real interest rate scenario. Thiswould be essential to give a push to deposit mobilizationfor meeting the increasing demand for loans.Of course, floating rate deposit is a good alternative fordepositors as a hedge against interest rate movements.However, such product has not been popular amongstdepositors in our country in the past. The traditional24January - March 2011The Journal of Indian Institute of Banking & Finance


household savings that come to the banking system viadeposits seeks safe and sound return. The awarenessamongst the masses about floating rate products islacking and thus, the response to such products is notencouraging. Even for those who understand floatingrate deposits, the downward movement of deposit ratesbecomes a worry and pre-closure & conversion to fixedrate is normally seen. Such behavior of depositors mayalso be a concern from bank's asset-liability managementpoint of view. Hence, I do not think we are game for afloating rate deposit products in India as of now.BS (United Bank of India) : There is decelerationof deposit growth in banks due to eroding valueof depositors money that earns interest lower thanprevailing inflation. RBI in its Mid Quarter MonetarythPolicy Review on 27 September observed the 'needto end the prevalence of negative real interest rates.'This has prompted the banks to hike deposit rates. Butthe fact remains that there is erosion of value of thedepositors' money and if the negative return continuesfor long, there is possibility that the deposit growth inbanks in future would be affected. Previously banks /post-offices were the option for the general public for thepurpose of savings. Now the market has expanded andmutual fund and equity market , where the rate of returnsare more than the bank deposits, are taking away a largechunk of funds from general public which would havenormally come to banking channels. People are nowmore aware of various options before them especially interms of risk and returns. The alternative avenues to thedepositors would pose a challenge to the banks. Hence,unless interest rates on deposits are tuned with themarket rate of return, there remains a possibility of furtherslowing down of deposit growth.Floating rate on deposits may be a possible alternativeto attract more bank deposits. We feel that floatingrate of interest on deposits, though would capturethe market trend in interest rate movement, wouldattract the depositors so long as the interest is rising.However, in a falling interest rate regime it is likely tohave psychological effect on the general customers.Floating rate would introduce more volatility in depositinterest rates which the general customers are notused to handle so long. The banks may considerintroduction of floating rate of interest on bulk depositsspecial featurewhich are generally mobilized from institutions andmostly for the short term.AT (Vijaya Bank) : The issue of negative Real Rateof Interest on deposits, it goes without saying, isdue to high inflation levels - an area of unprecedentedpolicy focus. Several Policy initiatives have resulted inmoderation of inflation, which is still above the comfortzone. I believe, with hardening trend in interest ratesand further moderation in inflation level by the yearend,the real interest rates could get closer to positivezone. As regards floating rate deposits, a major issueis about finding a proper benchmark. I don't think,given the extent of integration among various marketsegments, we have graduated to the era of a foolprooffloating rate system. I am aware few PSBs had inthe past attempted floating rate linked products butdidn't meet the desired outcome.RK (Yes Bank) : The high inflationary environmenthas resulted in real deposit interest rates turningnegative. However, with the onset of monetary policytightening by the Reserve Bank in India alongsidescarce domestic liquidity conditions, banks haveresponded quite actively over the last 3-4 months. Asa result deposit rates in general have moved up byover 200 bps, which has recently reflected in a pickupin deposit mobilization.The elasticity of deposit mobilization with respectto real rates is low for the system as a whole due tolack of availability of short term alternative investmentopportunities on comparable risk parameters. However,if real rates persistently stay negative for a sustainedperiod of time, then there could be some minorreallocation towards small savings, PF, etc.In India, the market for floating rate deposits isunderdeveloped due to lack of a robust underlyingbenchmark. Most of the floating rate deposits havebeen benchmarked on the overnight MIBOR, whichper se, is not a reliable benchmark from theperspective of inflation adjusted returns. The absenceof any nationwide inflation index which covers theentire economy makes benchmarking complicated.The Journal of Indian Institute of Banking & Finance January - March 2011 25


special feature5. Indian exports are not substantial in terms of its share in the volume of international trade. Is there a specialstrategy / focus to achieve statutory enhanced credit flows to export sector in your bank, given the fact mostof the banks did not even achieve the statutory export credit limits and what are the challenges?JPD (Allahabad Bank) : Though we are not able toachieve export credit of 12%, but have taken proactivesteps like holding Exporters Meet etc. The YoY growth inthe export credit is around 15%.In view of greater demand for foreign currency loans,Bank is gearing up its Hong Kong Branch and Treasury atMumbai to streamline procedures so as to make foreigncurrency loans accessible to exporters.MDM (Bank of Baroda) : As a net importing country,Indian economy has to always operate with a tradedeficit.Moreover the financial crisis had further doused theexport sentiments in the last couple of years. Indianexports are now fast picking up to reach US$ 200 billionin 2010-11. The bank finance to export sector is alsoon the rise. But the recent slowdown in exports led tolower export credit as a consequence. Therefore manybanks could not reach the 12 percent mark of exportfinance. Banks are now refocusing on export finance asa means to step up its ancillary services too. The majorchallenges in export finance relate to volatility of rupee andglobal developments. Since there is interdependence withdomestic financing opportunities, banks look for exportfinance as a marketing tool. With the opportunities ofdomestic foreign business on rise, export finance activitiestoo will also scale up.ASB (Bank of Maharashtra) : Exports from India haveshown sizeable growth in the current FY with 26% growthin Dollar terms and 20% growth in Rupee terms in April-November 2010 over the corresponding period last year.Government of India has taken several initiatives toexpand exports to untapped markets through its FocusMarket Scheme which provides incentives upto 2% forexports to select countries.Exporters face certain challenges in terms cost andquality competitiveness as well compliance withinternational best practices, employment of childlabour in certain sectors, quality concerns like rejectionof the consignments of grapes exported from India,and infrastructure. However, our exporter communityhas taken number of steps to improve their corporatepractices to conform to the international standards.Coming to banking support for this sector, bankshave adopted latest technology to provide speedyremittance and transmission facilities, on par withinternational standards. As regards costs, however,exporters have voiced their concern about higherinterest as well as transaction costs of Banks. OurBank is taking review of these areas. Exporters needforeign currency denominated Export Credit at verylow spread over LIBOR. We feel that RBI shouldconsider providing foreign currency funds to PSBswho are not having branches abroad at competitive ratesprevailing in the International markets.Our Bank has taken the following steps to increase ourlending to the sector.For benefit of our clients, we have strengthened ourinfrastructure and processes. We have integrateddomestic as well as forex business at our CorporateFinance branches in Mumbai and Pune so as toprovide all facilities to our corporate clients under oneroof. We have taken steps to expand the network of 'B'category branches of our Bank and have alreadyopened new Forex Centres at Vashi & Gurgaon. MoreForex centres are planned at Chandigarh, Raipur,Firozabad and other places.●Export sector mainly comprises small and mid-sizedcorporates. With a view to have focus on catering tothe requirements of mid-corporates, we have set up aMid-Corporate Desk at our Head Office.●Challenges are in the field of specialized manpowerrequirements. We are planning specialised trainingprogrammes for our forex personnel.●Meeting the requirements of the Exporters for exportcredit in foreign currency is another area of concern.We are raising resources through line of credit with ourcorrespondent banks so that we can provide low costfunds to our exporter clients. We are also revisiting theROI structure on our Export Credit finance so as tomake it competitive for our exporter clients.●26January - March 2011The Journal of Indian Institute of Banking & Finance


SR (Canara Bank) : In view of the renewed importance oftrade flow during the economic recovery phase, the Bank isplaying an active role in finance of exporters and importers.The Bank has over 120 designated branches that providecredit to exporters and importers. The outstanding exportcredit of the Bank is about `9,000 crore.RP (Corporation Bank) : The global recession hasaffected our export front too. However, the Govt. initiatives,including stimulus package, have certainly helped tocurtail the impact of global recession on our economyand our export have bounced back. There has been agood growth in export in almost all segments. The Bank'sperformance under Export Credit front has also improvedduring the current fiscal. The Export credit portfolio whichhad shown negative growth, to the tune of `95 croreduring the FY 2009-10, has now reached a level of `2,955crore as at 31.12.2010, showing a growth of `303 croreover March-2010, registering annualized growth of around15%. We foresee further growth in export sector in theremaining months of the current fiscal & future years.Bank has taken several initiatives to improve the creditdeployment to Export Sector and the major initiatives areas under :No. of Designated Branches [ADs] have beenincreased from 43 to 52 and all these brancheshave been connected to Forex Division [IIBD-Mumbai] The bank has implemented STP [StraightThrough Process] between all the ADs and IIBD,which facilitates the automatic updation of everytransaction done by the AD at our IIBD. This allowsimproved service to the customers.●With a view to encourage branches to improve theperformance, export credit is included as one of theperformance parameters in the planning exercise.Export / Import customer meets are held periodicallyat potential centres in order to get feedback on theproducts / services offered by the Bank. Further,focused attention is given to meet the needs of existingexporters.●The Designated branches have been advised topopularise the Gold Card Scheme for exporters inorder to encourage exporters with satisfactory trackrecord. The scheme provides various incentivessuch as lower rate of interest, concession in servicecharges, expeditious sanction, relaxation in security●norms etc. We are also in the process of openingnew branches in export potential centres in order toimprove the export credit.For the Credit Plan for fiscal 2010-11, export credit hasbeen projected at a level of `3,500 crore, with anaggregate growth of `817 crore or 30.5%.●special featureTMB (Indian Bank) : India's trade has grown fast,and currently accounts for 1.5% of world trade (2009),according to the WTO. India's economy is mostlydependent on its large internal market with externaltrade accounting for just 20% of the country's GDPin 2009-10.Indian Bank has taken serious efforts to improve upon itsexport credit limits and credit marketing is done in thisarea and we have also organized exporters' meet atvarious centres. The Bank has also expanded its lendingunder FCPCs and has strong presence in lending tocashew exporters in Quilon and tobacco exporters atGuntur.MN (Indian Overseas Bank) : India's foreign trade hasbeen growing the fastest in the past years. Indian exportshave doubled its share in the country's GDP since 1998.India's share in the global trade has also increased to 2%from less than 1% for many years. Still exports have along way to go to be a major player in world trade. ExportSector is a thrust area for the banks.We have set clear targets for exports in our loan portfolio.Exports given priority while forging partnership withvarious commodity boards. Need based line of creditfor 3 years is extended to exporters which is enhancedif required. IOB Expo Gold card offers exporters interestconcession and other concessions. Finer rates for allcategories of exporters are given. Sales Desks havebeen set up to guide exporters. Presently, the majorchallenge faced by the exporters is the volatile movementof foreign currencies against Indian Rupee.NP (Oriental Bank of Commerce) : The share ofIndian export in world economy though not substantial iscritical as it decides the movement of economy in terms ofcurrency value and trade balancing. Also, the employmentgeneration is important factor in export industry.India's exports have shown remarkable resilience inrecent years with a growth rate above 20% in dollar termssince 2002. But in recent time, the global recession joltedThe Journal of Indian Institute of Banking & Finance January - March 2011 27


special featurethis continued upward growth even then export growth in2008-09 stands at a respectable 13.6%, indicating thatIndia had weathered the crisis better than other countries.This has resulted in slackness in trade credit.The difficult financing conditions prevailing in theinternational credit markets and increased risk aversion bythe counterparties exulted declining trend in Export Creditas a percentage of Net Bank Credit (NBC). The total exportthcredit outstanding as on 24 March 2000 was `39,118crore contributing 9.8% of NBC, which increased toth`1,24,360 crore as on 15 January 2010 but share in NBCdeclined to 4.1% in ten years span of time. This is alarmingsituation and the matter is of introspection both from themacroeconomic point of view and banking side. Thoughthe government and RBI took number of stimulusmeasures, decline in external demand resulted in negativegrowth in India's trade over the previous year.OBC's strategies :Potential centers have been identified to explore thebusiness opportunities. The consortium and multiplebanking accounts at branch are put in place such asconstituents belonging to MSME Sector with forexfacilities requirement.●We have been arranging Exporters Meet at majorcenters for creating an awareness of the latestproducts.●Leveraging on Customer Relationship Managers(CRMs) for Non Fund Based business.●Special emphasis on Skill development. Apart fromextensive training of the newly recruited staff,workshops at various locations to sharpen the skillsand knowledge levels of existing staff.●The minimum statutory level (12% of NBC) applies toForeign Banks only being kept in priority sector lending.But Public Sector Banks are also a major contributor dueto their vast presence and customer relations. The loyalcustomers of PSBs do not want to go out normally. Yes,there are challenges like high delinquency level in exportcredit and increased competition for low interest rates. Inrecent period the slackness in export from India coupledwith high rate interest regime contributed to less utilizationof export credits.KRK (Punjab National Bank) : The exports segmentwas the most impacted one by the global economiccrisis which led to a decline for twelve consecutivemonths since October 2008. However, things startedlooking up since October 2009. Post crisis, exportdemand has been increasingly picking up due todemand from newer destinations like Africa, LatinAmerica, etc as well as on account of diversificationfrom the traditional sectors to nontraditional sectors.Towards facilitating faster export credit growth,PNB regularly organizes Exporters' Meets to beused as an interactive forum for improved delivery.The Bank has introduced a basket of new servicesin foreign exchange area. The Bank introducedRETAD (Reuter Electronic Trading), an automaticdealing system for foreign exchange operations.The Bank has also launched a prepaid card forforeign travelers, 'PNB World Travel Card', that canbe used outside, in three popular currencies, theUS dollar, Euro and the British pound. “PNB NRI REMIT -INDIA”, a service aimed at facilitating remittancesby individuals in US to India. Challenges will alwaysremain, but our Bank has a tradition of meeting theminnovatively to ensure continued support required forexports' growth.AK (UCO Bank) : UCO Bank kept its focused attentionto serve the exporter community as we are committedto the national cause. Consequently, the Bank has beenable to maintain steady growth of export credit over theyears. The outstanding export credit as on 31.12.2010stood at `5,232.54 crores as against `3,847.78 croresas on 31.12.2009. The Bank have exporter clients fromall exporting segments viz., cotton and textile yarns,garments, jute and jute textiles, leather products, tea,cashew, tobacco, sea-food, gems and jewellery andvarious engineering goods.UCO Bank is extending export credit for both preshipmentand post-shipment purposes not only in IndianRupee but also in foreign currency at very competitiveinterest rates. Besides, the Bank is booking forwardcontracts at very competitive exchange rates in anyconvertible currency with the help of a centralized andstate-of-the-art dealing room situated at Mumbai andlinked to about 64 branches all over the country handlingforex business through CBS.If needed, the Bank also undertake the task ofeducating exporters by our forex specialist officers28January - March 2011The Journal of Indian Institute of Banking & Finance


posted at various flagship and mid-corporate branchesthat are authorized to handle forex business.To enhance the export credit business, the followingstrategies have been put in place :Clearance from resource angle is given immediately toexporters seeking export credit in foreign currenciesunder PCFC / EBRD and FCNR (B) loan facilities.●Zonal Mangers are organizing exporters meet atdifferent places for the latter's feedback and solvingtheir grievances, if any.●Bank staff are being deputed to upgrade their skillsin forex related matters for offering better service inforeign exchange business.●MVN (Union Bank of India) : India's share inglobal trade is around 1.6 per cent, which is almostdouble of 0.83 per cent in 2003. This is quite lowwhen compared to India's share in world GDP thatis close to 2.2 per cent. Added to this, the mostsevere global crisis of our living memory led to declinein world trade volume. Things are improving now;however, it is not yet broad-based recovery for worldtrade. Our country's trade is witnessing a healthy growthover the past 12 months, though on a low base. India'sForeign Trade Policy aims at doubling exports of goodsand services by 2014 and doubling the share in worldtrade by 2020. This requires a mix of measures includingthose aimed at diversifying the product basket as well asthe trade destinations.In my bank, a team of marketing officers in largecorporate and business banking branches are engagedin identifying the clients in import-export business andoffer them tailor-made products. We also approach themthrough organizing exporters' meet in Tier-I & Tier-IIcities while cluster based approach is also in vogue. Inmy bank, I see an upside for export credit hereafter. Interms of export credit as per cent of net bank credit, weare witnessing an inflection point since June this year asthis ratio is on rise.BS (United Bank of India) : The volume of Indianexports as a percentage of GDP is traditionally low.However, at present, growth is noticed in some sectors.In order to give support to the exporters throughavailability of cheap credit the following measures havebeen adopted by our Bank.Our interest rate is among the lowest in the industry.We extend export credit at 8.5% p.a.●In case of pre-shipment credit for obtaining cover ofECGC, 50% of the cost of premium is borne by us.●The export credit proposals are disposed of within avery short time. The time limit set for the same is 15days for loan up to `10 lacs and maximum 45 daysfor loans above `10 crore.●The interest subvention scheme for exporterspromoted by Government of India is implemented inits true spirit. All eligible exporters in specified sectorsdealing with us are offered the concession and in theircases effective interest rate comes down to 6.5%.●special featureThese steps are expected to give a boost to our exportcredit portfolio.AT (Vijaya Bank) : There is no gainsaying the act that ourshare in world trade is very low which, f course, has beenshowing signs of improvement f late. Over the last fiveyears, India's share in international trade in goods andservices has increased from 1.1% to 1.5%. I feel, there isstill lot f upside left for our share to improve significantly.I am also aware that export credit extended by banks hasnot kept pace with the sector's requirements. It is also wellknown that a large chunk of the incremental credit in recentyears has gone to the infrastructure and large capsegments while that to the export sector has come down.I can think of few reasons that have led to this trend. Firstly,I feel slow pace of export growth in the face of globaldemand contraction is a major reason. Further, in valueterms also export credit has been showing slackness asworldwide commodity prices have been moving downwardfor the last two years. Appreciation in the value of Rupeevis-a-vis major currencies in the West and European Bloccould be another reason for slackened growth in exportcredit. Probably, one of the ways out could be to furtherincentivize export credit with sops in tax treatment, interestrate subvention and similar such measures.RK (Yes Bank) : Unlike MNC banks, domestic banks likeours do not have a statutory / mandatory priority sectorlending requirement towards the export sector. However,we see the export sector and the relative scarcity ofsupply of export credit as a business opportunity. In orderto maximize gains from this, we have taken the followingsteps :The Journal of Indian Institute of Banking & Finance January - March 2011 29


special feature●As part of the Knowledge Banking approach, we areworking on a Trade Corridor Strategy which involvesidentifying top commodities for export and engagingwith relevant customers for export financing. Thisis in addition to the Bank's focus on export orientedindustries like IT, Gems & Jewellery, Textiles and AgroExports.●In order to enhance the Export Credit Book, wehave further sanctioned export financing facilities,which is evidenced by an increase of 275% inexport credit limits sanctioned from March 2008 toMarch 2010.Recent Developments in Basel Committee on Banking Supervision - Liquidity RiskA key characteristic of the financial crisis was the inadequate / ineffective management of liquidity risk. In recognition of the need forbanks to improve their liquidity risk management and control their liquidity risk exposures. The Basel Committee has developed twointernationally consistent regulatory standards for liquidity risk supervision as a corner stone of a global framework to strengthen liquidityrisk management and supervision. The work of the Basel Committee on these two standards is contained in the Consultative Paperissued by the Committee in December 2009 on "International framework for liquidity risk measurement, standards and monitoring".These two standards are explained briefly below :Liquidity Coverage Ratio (LCR)The ratio alms to ensure that a bank maintains an adequate level of unencumbered, high quality assets that can be converted into cash tomeet its liquidity needs for a 30-day time horizon under an acute liquidity stress scenario specified by supervisors. At a minimum, thestock of liquid assets should enable the bank to survive until day 30 of the proposed stress scenario, by which time it is assumed thatappropriate actions can be taken by the management and / or supervisors.Stock of high quality liquid assetsLiquidity Coverage Ratio = -------------------------------------------------------Net cash outflow over a 30 day periodThe specified scenario entails both institution-specific and systemic shocks built upon actual circumstances experienced in the globalfinancial crisis. The scenario entails : (i) a significant downgrade of the institution's public credit rating; (ii) a partial loss of deposits;(iii) a loss of unsecured wholesale funding; (iv) a significant increase in secured funding haircuts; and (v) increases in derivative collateralcalls and substantial calls on contractual and non-contractual off-balance sheet exposures, including committed credit and liquidityfacilities.Net Stable Funding Ratio (NSFR)To promote more medium and long-term funding of the assets and activities of banks, the Net Stable Funding Ratio (NSFR) has beendeveloped. This ratio establishes a minimum acceptable amount of stable funding based on the liquidity characteristics of an institution'sassets and activities over a one year time horizon. This standard is designed to act as a minimum enforcement mechanism tocomplement the liquidity coverage ratio standard and reinforce other supervisory efforts by incenting structural changes in the liquidityrisk profiles of institutions away from short-term funding mismatches and toward more stable, longer-term funding of assets and businessactivities.Available Stable Funding (ASF)Net Stable Funding Ratio = ----------------------------------------------Required Stable Funding (RSF)Available Stable Funding (ASF) is defined as the total amount of an institution's: (i) capital; (ii) preferred stock with maturity of equal to orgreater than one year; (iii) liabilities with effective maturities of one year or greater; and (iv) that portion of "stable" non-maturity depositsand / or term deposits with maturities of less than one year that would be expected to stay with the institution for an extended period in anidiosyncratic stress event.The required amount of stable funding is calculated as the sum of the value of the assets held and funded by the institution, multiplied by aspecific required stable funding (RSF) factor assigned to each particular asset type, added to the amount of OBS (off-balance sheet)activity (or potential liquidity exposure) multiplied by its associated RSF factor. The RSF factor applied to the reported values of eachasset or OBS exposure is the amount of that item that supervisors believe should be supported with stable funding.The finer details relating to these two standards, viz., the definition of liquid assets, the run-off and roll-over factors, etc. to arrive at netcash outflows under LCR and the ASF and RSF factors under NSFR are being calibrated.Source : RBI, Report on Trend & Progress of Banking in India, 2009-10.30January - March 2011The Journal of Indian Institute of Banking & Finance


special feature6. Most of the banks are having 100% CBS. It is however seen that whereas the full range of liability side iscovered, only a small portion of asset side is under CBS. What are the plans of the bank to fully utilize theexisting infrastructure and IT platforms to usher in a totally tech-driven era in banking?JPD (Allahabad Bank) : Certain components ofassets side are still handled manually for operationalconvenience and are not fully parameter-driven. Bank isin the process of automating the remaining portfolios.To usher tech driven era in banking, all the stakeholdershave to play their roles to perfection. All the products areto be marketed within the bank and outside the bank.Customers are to be educated and encouraged to adoptto tech- banking.MDM (Bank of Baroda) : Banks strengthenedtechnology platform gradually modulating implementationin phases. Most banks have migrated to CBS. Attemptsare on to automate flow of MIS from operating level(branches) to centralized server to facilitate generation ofperiodical returns / information. The loan products in mostbanks are also on CBS. Eventually banks will be ableto integrate asset products with CBS architecture. Thetransactions in such banks are online and flow of datato various controlling offices will be through electronicsystems without human intervention. This ensures amove towards harnessing CBS capabilities.ASB (Bank of Maharashtra) : Core Banking Solution(CBS) implementation at all our branches has been oneof the major technology initiatives the bank hasembarked upon during 2009-10. The CBS Software istransaction software that encompasses depositsadvances, remittances Government Business, GeneralLedger etc. It is integrated with other modules likeTreasury, Trade Finances, Credit Processing, HRMSand delivery channels like Net Banking, ATMs, MobileBanking, etc covering by and large the entire gamut ofBank's business operations.Though we have covered almost all the liabilities sideunder CBS, in respect of asset side, compliance of IRACnorms, NPA collation and identification, provisioning,etc., are the major areas which are yet to be coveredunder CBS.The CBS is predominantly transaction processingsoftware and appropriate parameterization has to bedone to undertake analytical tasks. This is likely tocreate overload on the transaction processing systemand thereby affecting customer service.Banks have initiated discussions with the CBS vendor,to take steps to leverage the CBS platform to identifyand collate NPA, thus switching over to system basedidentification. Presently, the data from CBS system istaken in the form of an interface file on monthly basisand uploaded in external software. Validation checksare built in, through which the data is processed for assetclassification and provisioning as per IRAC guidelines.In order to facilitate successful implementation of systembased identification and collation of NPA, banks need toundertake data cleaning exercise. Our Bank has alreadyinitiated steps in this direction to move for a systembased identification of NPA by March 2011.SR (Canara Bank) : The Bank is 100% CBS compliant.Both assets & liability sides of branch banking are fullycovered under CBS platform.CBS, ATMs, internet banking, anywhere banking, RealTime Gross Settlement (RTGS), Electronic Funds Transferat Point of Sale (EFTPOS), cheque truncation, CustomerRelationship Management (CRM), etc. have significantlyimproved customer service and experience. DecisionSupport Systems (DSS) have also been introduced forcredit risk appraisal, forecasting loan delinquencies,investment decisions, etc. for optimized organizationaldesign and company-wide process excellence. Ourtechnology products are now second to none.RP (Corporation Bank) : The Bank has ensuredcoverage of the asset side also in an integratedmanner for both domestic and foreign currency. Thesystem facilitates not only opening of accounts andtransactions in the loan accounts but also facilitatesposting of interest to the loan accounts from a centrallocation, generation of periodical MIS pertaining toassets also from an off-site location, maintenance ofhistory of changes in interest rates and centralisedupdation of interest rates for schematic lending.A 21 digit code is assigned to the individual loanaccounts facilitate tracking of loans to minorities,The Journal of Indian Institute of Banking & Finance January - March 2011 31


special featureweaker sections, women beneficiaries and deploymentof funds to government-sponsored schemes withoutseeking additional information from the branches /offices. Further, the system also facilitates automaticclassification of loans into various asset codesdepending on the repayment schedule, recoveriesmade, repayment holiday or moratorium etc. Thiswould ensure more accurate classification of loans,reduce the workload at branches and ensure betterfollow-up for recovery.TMB (Indian Bank) : The bank has 100% businesscoverage under CBS. All loans and advances head areunder CBS. As such, the bank has fully utilized the ITinfrastructure and can proudly claim to have ushered intech-driven initiatives for its customers.Bank has introduced various technological products tosuit the customer requirements and awareness alsocreated among the customers. The Bank will be shortlyopening an E-banking branch and extending it to othercentres. The E-banking branch will enable a customer tohave all his normal branch banking needs attended towithout human intervention.MN (Indian Overseas Bank) : Our Bank runs on HomegrownCBS software. We have almost all of the AssetSide of the Balance sheet relating to Branch Banking inthe Core. In addition, there are other In-house packagesfor the areas like Treasury, Accounts, HRMS and Balancesheet etc. Apart from this, we have also procured certainmodules like Anti Money Laundering (AML), BusinessIntelligence, SAP - ERP and have integrated. We are alsoin the process of customizing and integrating CRM -Customer Relationship Management, Loan originationand processing software etc.We are working on Management Information Systems(MIS) and Decision Support Services (DSS). With this fullcomplement of infrastructure and IT platforms in place,we are better placed to usher in a totally tech-driven era.NP (Oriental Bank of Commerce) : Banks had an extraedge on developments in the field of InformationTechnology (IT) which strongly support the fast servicedelivery by implementing CBS (Core Banking Solutions).This helped in bringing all services under one supportumbrella which not only enhanced the competitiveefficiency of the banking sector by strengthening backendadministrative processes, but also improved thefront-end operations and helped in bringing down thetransaction costs for the customers.As per RBI latest data available the total computerizationin PSBs done till March 2010 was 97.8% and CBSimplementation at 90%. Our Bank has implementedCBS in all its branches in November 2007 coveringall liabilities and assets of the Bank. Bank has devisedvarious products and services interwoven with the CBSPlatform. These products are extended to the customersutilizing IT infrastructure of the Bank.But the power of CBS is yet to be explored fully. It maybe in ideal situation where each and every transactionswhether of credit or debit or be deposits or advancesmay be performed by system only. The efficiency is atthe optimum level under this situation. The Power ofCBS remains there in terms of utilizing it for productwise FTM, the loan loss provisioning and other creditstructured products.KRK (Punjab National Bank) : All the productsand services offered by the Bank are through CBSplatform - both on assets as well as liabilities side.PNB has been a trendsetter in IT implementation andhas taken many innovative initiatives in this field. It isthe first Public Sector Bank of its size to complete thecoverage of its 100% branches under Core Bankingsolution; establish Security Operation Centre, EnterpriseWide Data warehouse and migrating all its sponsored 6RRBs to CBS. In fact, technology advantage has been akey element enabling our growth which has set us apartfrom other Banks and facilitated consistent improvementin business parameters.The strategy of the Bank is to consolidate the gainsarising out of technology and to aim for still strongerfundamentals. PNB leverages its IT initiatives to cash inon rising opportunities especially from the unbankedpopulation through financial inclusion, the young risingmiddle class, globalizing corporates, upcoming SMEsegment, etc, by offering state of the art customizedsolutions. Focus is also on changing the processes in linewith the new technology so as to achieve one or more ofthe following objectives of IT investment :a) Better customer delivery - both in terms of productsand services.32January - March 2011The Journal of Indian Institute of Banking & Finance


) Ease of operations for staffspecial featurec) Reduction in transaction costs.d) Better tools for informal decision making.AK (UCO Bank) : The technology deployment in UCOBank is one of the best in the industry. The Bank became100% CBS compliant in Feb'2010 at a pace of roll outwhich was one of the quickest in the industry and hasmigrated all its liabilities as well as asset side accountsinto CBS. To further leverage our IT infrastructure, theentire MIS function is also being carried out with the helpof CBS such that barring few statements, all other reportsare being generated from CBS. Besides, we are makingextensive use of technology in our control functions aswell as in our products and services like :NPA identification and provisioning (from CBS)●Providing 24x7 banking services through alternatedelivery channels like ATMs, Internet Banking, MobileBanking●Financial Inclusion initiatives including deployment ofbranch-on-wheels employing cutting-edge technology●Straight through processing of NEFT / RTGStransactions (including positive confirmation to remitter)●e-Tax Payments for both CBDT & CBEC●Utility Bill payments●e-ASBA.●Here it may not be out of place to mention that UCO Bankhas been awarded the runner up prize for outstandingachievement in the “Best Financial Inclusion Initiative”category of IBA Banking Technology Awards 2010.Our future plans include :Offering e-banking services to both Retail and Corporateclientele (Services to include a/c statements, self & thirdparty fund transfers, beneficiary registration, Two FactorAuthentication, On-Line Share Trading)●Starting Self-Service Customer Lobby with CashDispenser, Transaction Kiosk and Self-servicePassbook Printers at strategic locations●Deploying Bunch Cash Depositors and Assisted TellerService machines●Introduction of Human Resource ManagementSystem (HRMS) and Integrated Risk ManagementSystem.●MVN (Union Bank of India) : The first step for banks wasto take all the operations on the technology platform. Thishas already happened as more than 90 per cent of bankbranches in India are on core banking solution (CBS).This has enabled banks to offer multitude of services toboth retail and corporate banking customers. Of course,the extent of leveraging technology beyond CBS differsfrom bank to bank. As the liability is mostly transactionbased, covering these under CBS is easier than theasset side which involves appraisal and monitoring.Many banks are also integrating these aspects intechnology framework.In case of my bank, technology leverage is comparativelyhigher. Our latest foray on this front is migration tosystem-generated data on non-performing loans (NPLs).We are amongst the few select banks having doneso. By March 2011, Union Bank will move completely tosystem-based recognition of NPLs. Prior to this, on assetside, Bank introduced Lending Automation Solution (LAS)that facilitates end-to-end loan processing along withmonitoring, risk rating & MIS. Similarly, on retail asset side,Lead Management System (LMS) is helpful in cross selling.Union Bank has always been innovative in usage oftechnology. We have continuously added tech-savvyfeatures to our product and services. We have presentlyfour projects being developed on technology platform.To move completely to a paperless banking, DocumentManagement System involves digitizing all documents inthe areas of loan processing, account opening, issuanceof circulars etc. Then, the issue of leveraging technologyfor speedy data transfer. Unified Communication Systemwill facilitate voice, data and image transmission usingthe Wide Area Network. Our third project, Digital MediaSignage will be used for displaying various products andcorporate messages digitally through centrally controlledsystem and can be used for educating staff onsite. Fourth,Enterprise Data Warehouse project will make the dataa powerful tool in customer relationship management,planning, risk management and many other areas.BS (United Bank of India) : Almost all the banksare having 100% CBS. As for United Bank of India 100%CBS was achieved in September 2009. Steps have beentaken to cover all the items of assets and liabilities underCBS. Now we can also do credit monitoring and NPAmanagement in a better way through the system.34January - March 2011The Journal of Indian Institute of Banking & Finance


special featureOur vision is to emerge as a dynamic, technosavvycustomer-centric, progressive and financiallysound premier bank of the country. In the changingenvironment, appropriate capacity building measuresare undertaken to equip the employees with skillsand knowledge. For being techno-savvy, the besttechnology is acquired, absorbed and leveraged.As a customer-centric organization, expansion ofclientele base is an important strategy. Innovationof new products, updating of existing products andpublicity and public relations activities to reach tothe masses with these products, are undertaken.As a progressive organization, we move with thechanging times from a traditional banking organizationto a market oriented financial organization, enforcingprofessionalism, trust and transparency in the workingenvironment, rewarding excellent performers to improvework culture. We have moved ahead with changingtimes and competitive environment to be a pan Indiaorganization.United Bank of India is now offering bundle of innovativeproducts through seamless delivery channels in order toenhance customer retention and customer value as wellas attract gen-next customers. Major initiatives of thebank are as under :Continuous value addition / product innovation.●Boosting Internet banking, Tele banking, Demat,ATM, SMS banking, Mobile banking, etc.●Cross selling of bank's products like Bancassurance,Mutual Funds, etc.●Technology based auto-processing of credit proposals.●Introduction of CRM in CBS platform.●Bio-metric smart card based financial inclusion.●Integrated Cash Management Services (CMS).●AT (Vijaya Bank) : It's not correct to say that CBScovers full range of liability and not as much on theassets side. As far as Vijaya Bank is concerned,CBS is well customized to cover disaggregatedsegments of both liabilities and assets. I believe it'strue for other 100% CBS Banks also. Besides, wehave also taken recourse to standalone softwaremodules that can sit on the CBS platform and extractadvances data segment-wise, as per rate of interest,limit-wise and so on. In our case, CBS offers a hostof permutations and combination of data extractionthat helps us to tone up customer service ensureeffective supervisory control and adhere to variouscompliance functions.RK (Yes Bank) : CBS is supposed to provide thecore functionality for the bank - like GL, CIF etc.It is incidental that most CBSs also have built inLiabilities module especially given the context thatCA / SA is your 'first' point of relationship in contextof 'traditional' banking and almost a must to have for anycustomer.Assets (loans / credit) is not a 'must' product and hasits own nuances, workflows, and increasingly complexdifferentiators - from process to risk management.And it is best addressed by 'focused' point applicationswhich cater to the functional needs. So to that extent,it needs to be looked at differently and it will staythat way. Most, if not all banks are highly automatedviz., their assets business and underlying technologies -and these are very well integrated with core bankingfor straight through processing.Unlike ERP systems for manufacturing & servicessectors - there are no 'one box' solutions in banking.For eg. even for retail assets - you may need a separatesystem for each retail product (FAS / FAP / HomeLoans / Mortgages / Automobiles / Education Loans) -corporate assets / trade finance being drasticallydifferent. At YES Bank, we use FINNONE to addressour asset loan needs for retail.36January - March 2011The Journal of Indian Institute of Banking & Finance


special feature7. With the increasing use of technology in day to day life human interaction in the branch premises has taken back seat.The increased use of technology meant the 'death of individual identity'. In the past the bankers knew their customersby face. Now, they are dealing more with customer IDs than with the customers themselves - your views? How do youbring back the personal touch? Do you see a greater role for customer segmentation on account of IT?JPD (Allahabad Bank) : Changing demographic profileof the country, the needs, expectations and lack of timewith the customers are pushing the human interaction toa minimum and it is not true to say that with the adoptionof technology, the human interaction has taken backseat,because after technology adoption 60% of bankstaff are involved in front-office jobs and knowing thecustomer's needs and deliver the suitable services to theirsatisfaction. With the 3G / 4G technology, time is not faraway to have “Virtual Human touch” when bankers handlecustomer calls or instruments with embedded chips.With the CRM in center stage, customer segmentationhas greater use in today's world of cut-throat competition.Retention of existing customer is as important asacquisition of new customer. CRM solution has to beimplemented to access the entire customer details andprovide a 360° degree view across all delivery channels aswell as products and enhance service quality.MDM (Bank of Baroda) : Increased application oftechnology may lead to more off site transactionstaking place in the banking industry. It is a naturalprocess of transformation taking banking servicesclose to customers and making them available roundthe clock. As the number of customers increase withbetter connectivity to people, it is also essential toput the services on auto mode. Even in such virtualenvironment, personalized services will be the hallmarkof success of banks. The automation will provide moreconvenience to the customers but their connection withthe banks will remain active. Rather the significance ofpersonal service is increasing though customer IDs andaccount numbers facilitate automation of transactions,the relationship with the customers continue to buildon personal rapport. The customer segmentation isalso evolving with Customer Relationship Management(CRM) data getting collated centrally in banks. Hencetwo distinct features in the technology driven bankingenvironment could be foreseen :1. More qualitative data of customers will get capturedfacilitating segregation of customers on the basis ofvalue that it can generate to the bank.2. The personalized services and customer touch pointswith bank employees will assume more significance inincreasing the share of wallet.Therefore, technology cannot distance the customerswith the bank. It will better integrate bank and customersby delivering convenience and better value. Leveragingtechnology will therefore remain the most challengingaspiration of banks.ASB (Bank of Maharashtra) : With the advent of and theextensive use of information and communicationstechnology, distribution of banking and financial servicesis enabled through multiple delivery channels. ATM,Point of Sale terminals, Internet Banking, Mobile Bankingand Phone Banking are some of the alternate deliverychannels available to the customers. Distribution ofbanking services through these delivery channels is animportant part of this transformation. This has helped thebanks to improve operational efficiency besides enablingthe branch staff to improve the across-the-counterservices and build relationships.The number of online services offered to customers bybanks and financial institutions is ever increasing. Thetechnology keeps getting more sophisticated. Facilitiesfor online remittances, online tax payments, online sharetrading, on line enquiry options, e-commerce, etc., offersgreater comfort and convenience to the customers.It's a big change for people to move away from thebrick and mortar approach and availing of thebanking services from a typical branch of a local bankround the corner. This is more so in the case of publicsector banks, which have a distinct age profile for bothcustomers and employees. This requires a mindsetchange. There used to be the tendency to shy awayfrom such changes and the idea of change seemsdifficult to accept and implement for many. However,both have started realizing that these new optionsand channels will perform and work as a safe option.More and more customers have started acceptingthe convenience and enhanced efficiency which theseIT initiatives have enabled, both for the banks and theThe Journal of Indian Institute of Banking & Finance January - March 2011 37


special featurecustomers. Customers can easily and quickly handletheir banking business at an ATM or over internet ormobile phone.In addition to the multiple delivery channels, more andmore operations are getting centralized in the banks suchas clearing, opening of account, issuances of chequebooks, retail credit processing, generation of MIS, etc.With these developments brought about by the variousIT initiatives, Banks should embark upon diversificationto offer advisory services, business marketing andselling of new products and services such as insuranceproducts. A face-to-face conversation ability is a hugeselling point for branches. The personal touch is the thingone shall utilize for these activities.Last but not the least, technology options are fraught withrisks of threats and vulnerabilities. Here comes our roleto communicate with the customers and educate themsufficiently for safeguarding from threats of hacking,phishing, etc. Therefore, the branch staff should be madefree to interact more with the customers. Implementationof modules such as CRM will also enable the banks tocommunicate effectively and more with the customers.SR (Canara Bank) : Technology & Centralised BankingSolution (CBS) have totally transformed the presentbanking scenario. 'Branch Banking' has given way to'Bank Banking' and there cannot be a going back. Acustomer, by click of a button can transfer funds from onecorner to another corner of the country. This has helpedto generate more benefits both to the customers and tothe banks in the 24x7 banking era.The present day customers are more sensitive to time andhence banks are giving service at their door steps. Withthe increase of alternative delivery channels, the numberof customers visiting bank branches has come down. Withenhanced technology and less customers across thecounters, banks are able to provide better service byattending to their individual and intricate needs. Majorportion of the customer transactions are done throughe-modes like Internet Banking, SMS Banking & ATMs.Better customer service is the need of the hour andmore customer interactions, marketing of technologyproducts through personalized services, particularlyto the High Networth Individuals (HNIs) have becomethe order of the day.In the present tech-driven environment, humaninteraction with the customers might have reduced buthuman interaction in the banking system still remainsof a high order. Infact, technology can be-and indeed isleveragedto enhance human interaction. For example,technology makes it possible for the banker to wish thecustomer on his birthday, anniversary, etc. via sms / textmessages. Banks have adopted several innovative and'out-of-box' strategies to gain / enhance personal touchand human interactions. Some banks, including CanaraBank have established call centres to answer the queriesraised by customers over phone / e-mail. Banks haveput in place floor walkers, help-desk counter and RadioFrequency Identification (to identify important customersand to signal the branch personnel) to gain / enhancepersonal touch and human interaction in the branchpremises. The personal touch can also be gained bysending greetings on special occasions / anniversarydays of the customer through SMS, over phone / mobileand by e-mail as new generation customers havepassion for e-banking rather than Banking in Person.RP (Corporation Bank) : The Bank has gone in for amix of brick and mortar branches and various deliverychannels like ATMs, Internet Banking, Mobile Bankingetc. These channels facilitate the customers to accesstheir funds or information pertaining to their accounts atany time of the day or anywhere. The new generationcustomers find it more convenient to visit the banks'websites and ATMs rather than their branches,especially when the variety of delivery channels facilitatethem to carry out their banking needs from the comfort oftheir homes / offices. However, banks have to maintaincontact with their customers to develop their ownbusiness, so it is not correct to say that individual identityis lost. There is a marketing person / team who meetsthe customers initially for getting their accounts openedand the servicing team at the branch who services thecustomers when they visit the branch premises.While customer segmentation can be augmented withthe help of IT, it can also enable the banks to developspecialized customer interaction systems suited to servingthe varied need of different customers. For example, theIT-savvy can use internet banking; those who are on themove and require cash can partake of ATMs; similarly,those comfortable with mobiles, can conduct their banking38January - March 2011The Journal of Indian Institute of Banking & Finance


using their mobile phone; the financially excluded canbe brought into the mainstream using smart card andbiometric enabled machines linked to BusinessCorrespondents who can provide service at their doorsteps.Ultimately, it is only people who can talk to peopleand not the computers - to get business the bank staff haveto interact with their customers - but they can certainlydo it more efficiently and productively with the help of IT.In order to provide personalised service to High NetworthIndividuals (HNIs) who would like to visit branchpremises, our Bank has started Priority Banking in a fewbranches where these customers would be serviced byspecific relationship managers. This would enhance thecustomer satisfaction and assist in relationship buildingand bonding between the Bank and the customers.TMB (Indian Bank) : Technology is primarily being usedas an enabler to offer improved customer service and wefirmly believe that our relationship with the customers isof prime importance for our business growth. PSBs stillcontinue with the slogan 'customer is always right andmany avenues have been thrown open for redressal ofdeficiency in services'. Moreover customer contacts forbusiness are now aggressive (CASA campaign, tradersfortnight / Senior Citizens Forum / Home Loan / PersonalBanking mela etc.) and each PSB is vying with eachother to win over customers. IT is only the businessstrategy that aims to understand, anticipate and managethe needs of the current as well as potential customer ofthe organization.The technology has essentially improved the efficiencyof the back up operations of the banking more than thefront end. In practice, Bankers can ill afford to avoidmeeting customers in person.We, in Indian Bank, arrange customers meet at frequentintervals at Zonal levels, wherein the Chairman levelpresence is also ensured. Customer meets are arrangedat branch level also, where again senior executivesparticipate to bring in personal touch.There could be customer segmentation on account of ITand younger generation preferring 'virtual banking' andsenior citizens opting for brick and mortar type.MN (Indian Overseas Bank) : It is true that with theadvent of Alternative Delivery Channels - ATMs, Kiosks,Internet Banking, Payment Gateways, Mobile Banking,special featuree-commerce and m-commerce - the personal touch issomewhat declining. But it may be more by choice thanby chance. Customers often find it more convenient inthe interest of time and reach. Then there is also theaspect of cost from the banker's side. We have done acosting in our Bank. The cost works upwards of `50per manual transaction; `16.25 for ATM transaction,`7 for BC model, `5 or less for internet banking andmobile banking transactions.The down side is that it prevents up-selling, cross-selling.We try to solve this through customer relationshipmanagement, customer profiling etc which will help us incustomer segmentation with its attendant benefits.We must keep in mind that about 350 million customerswill be added by Generation Next. About half of them maynot be affluent. But on the whole the average customerfrom Generation Next is more likely to be a DigitalConsumer. How are banks going to serve them? At least,half of them have to be served by alternative channels.There is bound to be some segmentation.NP (Oriental Bank of Commerce) : 100% CBSimplementation has provided opportunity to the Banksfor streamlining the time-bound processes by takingaway these activities from manual updating. This hasprovided opportunity for diverting human interventionfrom monotonous transactional banking to customerinteractions and marketing of the products.As such we do not agree to the point that use of increasedtechnology meant 'death of individual identity'. CustomerRelationship Management has assumed prime importancesegregating the customers, their needs and providing theproducts / service of a level required by them.KRK (Punjab National Bank) : The technologicaladvent has changed the way a bank interacts with itscustomer. Today a banker interacts more on telephoneor through the net while undertaking internet bankingand mobile banking transactions. Such interactionsare made warmer to leave a personal touch in such nonpersonalinteractions. Besides, majority of the customersstill prefer visiting the branch and are welcomed.Moreover, at PNB, we have institutionalized a systemof inviting our customers once a month and interactingwith them so that we are able to meet their requirementsand redress their grievances, if any. We believe thatThe Journal of Indian Institute of Banking & Finance January - March 2011 39


special featuretechnology has brought our customers closer to usas they can get in touch with us any time of the day asper their convenience rather than waiting for the branch toopen. We have set up a 24X7 call centre having CustomerService Agents trained in soft skills and bank's products /services to address any query from the customer. With theadvent of technology, customer preferences have alsochanged. Definitely there is a greater role for customersegmentation today as we have customers of differentexpectations simultaneously dealing with the bank.AK (UCO Bank) : India is seeing its demographic shiftincreasingly towards the young and working populationin the 25-40 age groups who are tech-savvy with highdisposable income. The 20-40 age group is expected tohave 450 million people in India by 2030, potentiallycreating a huge population for the delivery of bankingservices through alternate channels. Mobile banking willbe the next revolution in the way financial services aremarketed, bought and delivered in the coming years bythis young population.According to a recent survey of Indian Bankingcustomers by a world renowned firm :Working hours and accessibility are important to theyounger generation●Women have a greater preference for the Branch channel●The use of Internet and Phone Banking increaseswith educational level - over 35% graduate and highereducated sample had a preference for Internet andMobile versus 9% in the less educated segment.●Therefore, banks have to appropriately design theirproducts and services to suit the specific needs andbanking patterns of the young versus aging population,urban versus rural etc.In UCO Bank, with the onset of technology, brancheswill be gradually free from all mundane work (a/copening, cheque book issuance, processing retail loans)and can devote quality time for Customer RelationshipManagement (CRM). They would become more customercentric, offering enhanced quality of service. In the daysahead we shall be opening more branches across thecountry to bring in many more customers into our fold. Thebrick and mortar branches would be supplemented byalternate delivery channels to address the needs of modernday customers as also improve our visibility and outreach.MVN (Union Bank of India) : The key differentiatorbetween new age banking and traditional banking isto bring greater emphasis on relationship managementas against managing transactions in the conventionalbanking model. Technology has provided ease for theconduct of transactions and thus branches can focus onbuilding relationship with customers and offer value. Theemphasis adopted by banks to introduce technologyhas given wrong signals that customers are not wantedin the branch. It is not so. Banks need to make customersfeel that transacting their day to day requirementsthrough offsite mode is far more convenient and takesplace in real time. In fact, technology has enabled banksto devote manpower on relationship banking that offerspersonalized services to various segments.IT-enabled customer segmentation is definitely aboon for banks. 'One size fits all' has been themantra of commercial banking earlier. Now IT systemsand MIS of banks can be used to segregate customersas per their profile and products needs. Banks maydesign the right set of products for a particular classof customers. Their design, launch and marketing,all may be tweaked to the needs of each segmentof customers. However, public sector banks are yetto make benefit of segmentation as MIS and datawarehousing are still in transition stages.BS (United Bank of India) : Banking service is nowunder transformation. Technology is shaping up thebanking landscape at present. Over the past few yearsshift in demographic trends in India along with stronggrowth in the Indian economy post liberalization has led tothe emergence of a new class of customers - the YoungUrban Liberalised Indian Consumers (YULICs). Thesecustomers are demanding, open to ideas and flexible inchoice. They always expect high standard of service anddo not remain satisfied with existing convenient andcheaper banking channels of transactions.Use of ATM, mobile banking, internet banking, smartcardtechnology, etc. are gradually increasing. Newgeneration customers are now very tech-savvy and rarelycome to the bank. It is true that face to face interactionwith customers is no doubt waning.To bring back the personal touch, banks have to rebuildthe client trust. Product marketing is an important channelthrough which customer's relationship can be built up.40January - March 2011The Journal of Indian Institute of Banking & Finance


With deeper penetration banks are now at the door ofthe customers.Most of our customers are traditionally from the middleclass,lower middle-class and poorer segment of thesociety. Their attachment with the bank gives us anopportunity to meet them and to keep contact with themon a regular basis. Relationship matters.Moreover, in India banks are expanding in largescaleand penetrating in rural areas. Illiteracy andunder-development would compel the banks to developfinancial literacy. Culturally, Indian society is not averseto interaction. Hence, in spite of a segment of societyremaining mechanically attached to banks, human touchwould not disappear altogether. That is the silver line.As the banks are now technologically very advanced,they can utilize this to their advantage to keep personalcontact with the customers. Customer segmentationplays an important role toward this. On various eventsof life such as birthday, marriage anniversary etc.,banks can easily come in contact with the customersby merely sending warm greetings. Technology basedservices such as marketing and selling of products to thedifferent segments of customers can now be renderedwith personal touch.Lastly it may be said that today walk-in customer conceptis missing and the Bank has to bring the customers.AT (Vijaya Bank) : The notion that technology leadsto 'death of individual identity' is probably misplaced,especially from a PSB perspective. We don't have anybar on customers visiting branches and we do consider'human touch' as an essential adjunct of quality customerservice. Having said that, we also aggressively propagateIT-enabled Alternative Delivery Channels (ADCs) atleast for the tech-savvy clients who prefer remote orvirtual banking. ADCs do contribute a lot in providingreal- time service and facilitating client convenience ofa high order. About customer segmentation, yes, IT doesplay a decisive role, especially with regard to the IT-savvyurban and GenNext as well as HNI clients.RK (Yes Bank) : There are two points of considerationhere - One part is the changed reality - a“globalizedworld”. In this millennium - the closest friends /colleagues - are interacting far more in the virtual /web world even when they actually might be at astone's throw away. Social media / Instant messagingis their choice of communication method. The secondpart is that centralization of 'transactional' and 'nonvalue'add functions into NOCs / offshore captivesetc, clubbed with the fact that customer choosesmultiple channels to transact have taken the 'social'interaction piece out of transaction processing. AtYES BANK, we have taken the following strategicaction towards the same :We have created a platform called 'Insights 2Engage' which brings together information fromall product processors, CRM, Customer ServiceSystems etc. It contains information on demographics& psychographics of the customer, data from BusinessIntelligence - and this system is being positioned tocapture 'all financial and non-financial transactions andinteractions with the customer' - and will be underlyingbasis for all channels. So irrespective of the customergoing to branch or calling up the contact centre - theservice agent at both locations will be viewing the sameinformation - which has 'continuity' built into it to makesure that the customer is provided 'seamless' service.Over time, internet as well as mobile and IVR willpiggyback on this platform.●As we go along, we will enrich the information withsocial networks status updates of customers subjectto obtaining far more contextual information on thecustomer to engage deeper - at transaction level asalso at an emotional connect level. To give an example- when I pull up a screen for customer - If his lastupdate on facebook suggests that he / she just had ababy - and this information has flown into my screen -needless to say a small congratulatory messagewith possibly a token bouquet to the customer and youhave the customer on your side. In other cases - if hisupdate says 'excited about going on a vacation to xyzplace, here is an opportunity to cross sell forex / travelinsurance etc'.●special featureOverall we need to bring in the best of 'old world'charm and emotional connect that existed with branchnetworks along with the changing demographics of the'new' millenials - and make a service value propositionthat is not easily replicable.The Journal of Indian Institute of Banking & Finance January - March 2011 41


special feature8. Compliance risk and compliance costs have gone up for overseas branches of Indian banks in recent times.What is the emerging picture in the light of tightening of regulatory responses to various crises?JPD (Allahabad Bank) : In the light of tightening ofregulatory response to various crises and to meet thesupervisory expectations, Banks are adopting structuredapproach to Governance, Risk & Compliance (GRC).The aim is to effectively define, manage and monitor theexternal and internal business environment. Technologyis assuming a key and enabling role in deliveringsustainability, consistency, efficiency and transparencyacross the GRC process in the organization. Costsinvolved in these areas are high but in the interest offinancial stability it is a necessity. Regarding emergingpicture, we can say that recovery process is just startedand challenge is to manage recovery smoothly.MDM (Bank of Baroda) : The evolving regulatorymeasures are always dynamic posing a challenge tothe banks to strike the right balance between compliancerisk and its costs. Due to financial crisis, many centralbanks have begun to review their various regulatorymeasures and are trying to identify the reasons thatallowed the crisis to precipitate. The compliance risk andcosts in the long run need to be balanced. The benefitsarising out of enhanced regulatory measures shouldbe able to not only meet the cost of risk but should beable to contribute to substantially improve the qualityof systemic controls. Though the cost of compliance ishigher in certain overseas centres, the higher volumesarising out of business should be able to mitigatethe risks. In developed markets & matured markets, thearbitrage opportunities are thin and hence overseasbranches should be able to operate on thinner marginswith low transaction cost. The level of margins that wesee in India is not sustainable globally. The profitability ofoverseas centres flows more on volumes and economiesof scale. If we refer to the recent views of Governor,Reserve Bank of India, he has touched upon the needto develop capability to work on lower margins. Hencethe regulatory measures will be able to offset businessrisks providing more comfort to the banks in terms ofRisk Adjusted Returns. Hence we welcome upgradationof regulatory measures in the long term interest of thebanking system.ASB (Bank of Maharashtra) : We do not have anyoverseas outlets.SR (Canara Bank) : The overseas branches of the Bankhave to comply with guidelines of RBI and respectivehost country regulators like FSA (Financial ServicesAuthority) in UK, HKMA (Hong Kong Monetary Authority)in Hong Kong and CBRC (Chinese Banking RegulatoryCommission) in China.After the global financial crisis, the host countryregulators have issued several guidelines to the overseasbranches, particularly on liquidity management, AML /KYC compliance etc. to comply with those guidelines,overseas branches of the Bank had to upgrade theiraccounting / reposting systems and or procure newsoftware. The overseas branches of the Bank have tocomply with such overseas regulatory requirements.RP (Corporation Bank) : The Bank, presently,does not have an overseas branch. Rather, it hastwo representative offices in Honk Kong and Dubai.Since the role of Representative Office is limitedto collection of information, promotion of exports /imports, facilitating technical / financial collaborationsand developing referrals, with no direct commercialactivity, the compliance role is mainly limited toobservance of KYC and AML rules, in case of theremittances which flow with the help of such offices.Once the offices are converted to full-fledgedbranches in future, they would be subjected to audit,inspection and other regulatory requirements applicableto branches. As far as tightening of regulatory responsesare concerned, we would be affected to the extentthat our regulator, the RBI, tightens rules for us andsuch regulations have generally been found to bebeneficial for the Indian banks, especially during andafter the sub-prime crisis.TMB (Indian Bank) : Compliance Risk and costshave gone up on account of changes in regulatoryrequirements prescribed by different countries,especially in the aftermath of global economic crisis.Further, in some countries, the minimum capital42January - March 2011The Journal of Indian Institute of Banking & Finance


equirement has also been revised upwards, whichhas added to the cost. Indian Bank has branches inSingapore and Srilanka.For instance, in Singapore, there is a prescriptioncalled Assets Maintenance Ratio (AMR) for thecustomer deposits held, which requires maintenanceof a ratio of specified assets with haircuts in addition tothe statutory liquidity requirement, impacting the return.This has been revised upwards after the economiccrisis. In Sri Lanka too, the capital requirement hasbeen revised upwards, to be achieved in stages.In the light of continued global economic woes in variouscountries and the proposed BASEL-III requirements, therecan be further revisions in the regulatory requirementsin various countries, which will have an impact on theprofit margin.MN (Indian Overseas Bank) : We have six overseasbranches, one at Singapore, two in Hong Kong, oneeach at Bangkok, Seoul and Colombo. There hasbeen an increase in compliance cost in each of thecenters as a result of directives of the regulator ineach of the centers. We have to nominate an exclusivecompliance officer. Concurrent audit functions haveto be entrusted to an audit firm instead of an officerof the branch as in the past. Training has been madecompulsory for dealers who are required to clear localexams in some centers. E-payment services have tobe audited by external auditors. Deposit insurance isinsisted. Investment in low yielding approved securitieshas to meet statutory requirements.Extra liquidity has to be maintained for agriculturelending. In some centres it is stipulated that advancesto the extent of 70% of deposits be lent to domesticsector and only 30% can be extended in the form ofimport financing, buyer's credit, overseas credit. Foreignbank branches are required to maintain eligible assetsin local currency in proportion to their liabilities. In theevent of a bank having shortfall of eligible assets asstipulated by the regulator, the bank would be forced toinvest in low yielding treasury bills. All these tighteningmeasures add to cost, restrict asset growth and strainsprofitability. But these are the constraints banks have tolearn to live with.NP (Oriental Bank of Commerce) : Not relevant toour bank.KRK (Punjab National Bank) : It is a universal rulethat any crisis is followed by a tightening of regulationto prevent a repeat. The same holds true in case offinancial crisis as well. While enhanced regulationis sometimes required to ensure financial stabilitywhich has strong contagion impact and spreads likewild fire across the globe. At the same time care needsto be taken that over-regulation should not resultin stifling financial innovations. Another fall-out of astricter regime is that it becomes more expensive anddifficult to raise capital since one has to encouragedynamic provisioning or capital buffers, introducestricter rules for off-balance sheet items, implementtighter liquidity management norms, and strengthenrules for banks' internal control and risk management,notably by reinforcing the “fit and proper” criteria formanagement and board members. These are someof the measures that regulators are taking in thepost-crisis era. Ensuring compliance to these measureswill be a mammoth task in itself. This would requirecreation of compliance infrastructure and factoringin compliance risk for the Banks. Thus costs wouldnaturally rise along with need for additional capitalbut it is necessary to ensure systemic stability.AK (UCO Bank) : After the global financial crisis of2008, the Regulators across the globe have tightenedsupervision and monitoring. Accordingly, compliance ofprudential norms and regulatory guidelines has becomeone of the key functions for the overseas branches. Thusensuring compliance of regulatory norms will be one ofthe major challenges for the foreign branches of IndianBanks and will have major cost implications.As the complexity, coverage and volume of compliancerequirement have substantially increased over thepast few years, cost of compliance is increasingon account of higher allocation of resources interms of :1. More Skilled Staff,2. On-going Training to all the Staff,3. Enhanced IT Support andspecial feature4. Additional Senior Management Time.UCO Bank has overseas branches at Singapore andHong Kong. The required information with respect to ouroverseas operations at these two centres is as under :The Journal of Indian Institute of Banking & Finance January - March 2011 43


Singaporespecial featureCompliance requirements in Singapore broadly coverthe following :1. Regulatory Compliance which includes Anti-MoneyLaundering / Countering Financing of Terrorism(including Trade Surveillance)2. Tax Compliance (Includes Corporate Tax, GST etc.)3. Strict Adherence to Key Regulatory Requirementslike Asset Maintenance Requirement (AMR - DBU& ACU), Liquidity Ratio (Minimum Liquid Ratio),Minimum Cash Balance, Group and SubstantialExposure - Many changes related to StipulatedRatios, its Computation & Reporting Frequency /Format during the past few years ,4. Compliance to Rules / Regulation of various StatutoryBodies in Singapore5. H.O. / Branch Policy ComplianceApart from the off-site ongoing supervision, under theCommon Risk Assessment Framework and Techniques(CRAFT) issued in April 2007, the bank has to provideexhaustive details of its operations and the risk controlmeasures adopted. Moreover, the annual statutory auditin Singapore has become an elaborate exercise whereininter alia Compliance function of the bank is also auditedto ascertain deviations, if any, from Regulatory / Statutory /H.O and Branch Policy and Procedures.Non-Compliance to Regulatory / Statutory Requirementsmay attract financial penalty to the organisation or theindividual or both. Besides, the Regulators may come outwith new imposition for the banks, which at times are verystringent.Hong KongCompliance risk and compliance costs for our Bank inHong Kong Centre cover / involve :1) Deposit protection for customer deposits (increasedfrom HK $100,000/- to HK $500,000/- w.e.f. 1/1/2011)2) Asset Maintenance Rule (AMR) under which banksin Hong Kong are required to maintain liquid assets(cash / Govt securities and placement with banks)equal to 25% of the free deposits.3) Liquidity requirement that mandates banks to maintain25% liquidity ratio (under review) in their books. Inthe case of our Bank, we have in our local LiquidityManagement Policy, kept the level of liquidity ratio at30%, thereby giving us a cushion for any exigencies.MVN (Union Bank of India) : The global financialcrisis has tightened the noose on overseas operationsof Indian banks. There is increased surveillance,both from foreign country's regulator as well asReserve Bank of India. Banks are subject to morerigors in terms of policy formulations and monitoringtools to ensure complete adherence and transparency.Similarly, banks world over have become moreconscious of the increasing money launderingactivities. This requires state-of-the-art KYC andAML procedures in place. Despite measures takenby banks, such activities are still continuing. Thiscalls for putting in place system checks to ward offsuch illegal activities and to identify names ofIndividuals / Organizations, thereby increasing thecost of new software, right manpower, MIS etc.Besides, banks abroad need to be compliant withlocal regulations in the form of quantitative restrictionsand qualitative impositions. On account of IT initiatives,Banks are resorting to E-payments and settlementwhich calls for placing appropriate system checks.While these are highly beneficial for a healthy financialsystem, costs of compliance are set to increase.The effective way to economize on cost of complianceis to have in place integrated approach towardsGovernance, Risks and Compliance (GRC). GRC refersto overall governance structures, policies, technology,and infrastructure and assurance mechanism thatan organization has in place to manage its risk andcompliance obligations. There should be the rightbalance between Risk Management, Governanceand Compliance - within a performance based culture.Rather than treat each GRC initiative in isolation,organization should connect business strategy withGovernance and Risk Management, with a renewedfocus on performance and efficiency out of whichcompliance should fall naturally.BS (United Bank of India) : Banks and financial servicesorganizations of all sizes are now more concernedthan ever about risk and compliance management. Newbanking products, increased government scrutiny andintense focus on operating efficiencies bring forth greaterrisks and a larger set of rules and regulations.44January - March 2011The Journal of Indian Institute of Banking & Finance


At a global level, different countries have their own setof rules, regulations and reform. This adds to thechallenge for global banks and financial institutions.A banking survey by the Economist Intelligence Unitshows that a global bank could face more than 350regulatory exams a year. These results indicate thatcompliance becomes very cumbersome and expensivefor a large or mid-size bank.These banks are required to comply with globalregulatory requirements like Sarbanes-Oxley Act (SOx),Basel-II, OMB A-123, Data Privacy, Consumer Privacy,Check 21, SAS 70, Anti-Money Laundering (AML), BSA,PATRIOT Act, MiFID and Reg NMS to name a few.Further, I firmly believe that the cost of compliance inbanking industry is not always fines and legal fees due tofailures in regulatory and statutory compliance, but alsocosts arising out of “do and test approach” of financialinnovation and regulation.Looking at the tightening regulatory responses tovarious crises across the globe, the banks arerequired to deploy an integrated solution for riskand compliance management which would be lower incosts compared to building and supporting separatecustom applications.A holistic approach to integrated risk and compliancemanagement would offer a highly configurable anddynamic solution that can easily scale up as theregulatory requirements change. Banks and financialNew Cheque Standard "CTS 2010"special featureservices organizations would benefit from systemslike these as they adopt the current and future releaseswithout incurring additional costs.A risk and compliance management solution will beineffective if it does not provide advanced security andaccess controls. The integrated solution needs to have arobust security infrastructure by supporting the currentstandard and best practices including authentication andauthorization.AT (Vijaya Bank) : Compliance risk mitigation issomething that is completely indispensable going bythe dimension of the global crises from which mostof the affected economies are yet to recover fully.The devastating impact of triggers that takes the shapeof a contagion is too well known to give room for anycomplacency. I must say that the Indian regulatory systemdid prove a point or two in making our banks adequatelyresilient to the crises elsewhere and I feel, complianceculture has still a lot of room for improvement.RK (Yes Bank) : While currently not applicable toYES BANK, as we do not have any foreign branch /office, this is a highly material cost and developmentwhich will increase capital costs as well as underlyingcompliance, operational and regulatory risk. IndianBanks will have to be highly cautious in conceivingtheir internal growth strategies supported by strongrisk management systems & controls.The developments in cheque clearing, such as growing use of multi-city and payable-at-par cheques, introduction of Cheque Truncation System(CTS) for image-based cheque processing, and increasing popularity of Speed Clearing for local processing of outstation cheques haveincreased complexity in cheque processing which calls for process re-engineering and automation. Such developments along with the diversityin patterns, designs and security features of cheque forms introduced over a period of time have necessitated prescription of certain minimumsecurity features in cheques printed, issued and handled by banks for uniform application across the banking industry. Against this backdrop, aWorking Group comprising various stakeholders viz., commercial banks, paper manufacturers and security printers apart from Reserve Bankwas set-up by the Bank for examining the need for further standardisation of cheque forms and enhancement of security features therein.Based on the recommendations of the Working Group and the feedback received from banks, Indian Banks Association (IBA) and NationalPayments Corporation of India (NPCI) among others, certain benchmarks towards standardisation of cheques have been issued. Thebenchmarks styled "CTS-20l0 standard" contains mandatory and optional security features on cheque forms. The mandatory security featuresinclude quality of security paper, "CTS-INDIA" watermark, bank's logo in invisible ink (UV ink) and void pantograph (an anti-copying feature).Additionally, certain desirable features have also been suggested, which could be implemented by banks based on their needs and their ownrisk perception. The new cheque standard mandates placement of significant fields on the cheque forms. It also recommends use of light /pastel colours and clutter free background in cheque forms for improving quality and content of cheque images in CTS scenario. Thebenchmarks, inter alia, include prohibition of alterations / corrections on cheque forms other than for date validation. Use of UV image view inCTS has been kept on hold for the present considering the implementation challenges and will be reviewed in future.This set of minimum security features would not only ensure uniformity across all cheque forms issued by banks in the country, but alsoaid presenting / collecting banks while scrutinising / recognising cheques of drawee banks in an image-based processing scenario. Thehomogeneity in security features is expected to act as a deterrent against cheque frauds, while the standardisation of field placements oncheque forms would enable straight-through-processing by use of optical / image character recognition technology. The "CTS-2010 standard"is proposed to be implemented by banks before the roll-out of CTS at Chennai. IBA and NPCI have been vested with the responsibility toco-ordinate and advise banks on introduction of additional security features on cheques as also other aspects relating to implementation of thenew standard across the country.Source : RBI, Reserve Bank of India, Annual Report 2009-10.The Journal of Indian Institute of Banking & Finance January - March 2011 45


special feature9. Is there a case for segregating 'banking utility' and 'commercial banking'?JPD (Allahabad Bank) : Rendering utility servicesenables banks to have access to huge clientele base andsizeable float at cheaper rate which makes the commercialactivity of Banks more viable. These utilities do not providereturns by themselves but they are so fundamental tobanking business of date that it is no longer an option tooperate without them. The utility Banking, being a conduitto huge resource base could in fact provide the muchneeded competitive edge to out-maneuver other players.MDM (Bank of Baroda) : The segregation of consumersin the banking system gets evolved over a period of timewith the diversification and development of products /services. We have seen that retail banking has changedthe banking landscape and specialization of services toselect group of customers led to opening of specializedbranches. Personal banking branches and corporatefinancial services branches are manifestation of suchcustomer segmentation. Since different customers havedifferent aspirations and needs, it is a good idea tocustomize branches to better service them. The conceptof 'One size fits all' may not work in a highly competitiveenvironment. The customer segmentation takes placeon its own as a logical strategy to compete and stayahead in the market. It is an evolution that happens withthe developments and maturity of markets.ASB (Bank of Maharashtra) : Customers, now-a-days,prefer to have the choice of various financial productsunder one roof. This has led to the present “UniversalBanking” model in India. With passage of time Indianbanks have adapted to the condition and havedeveloped their processes and infrastructure that wouldhelp in offering universal banking services. In this context,I do not find a case for segregating 'banking utility' and'commercial banking'. For providing mass banking, bankscan use technology and innovative business models alongwith the existing commercial banking practices.SR (Canara Bank) : The concept of utility bankingis gaining momentum as the financing system isa crucial resource and healthy financial flows facilitateour everyday economic exchanges and livelihoods.For example, when liquidity dries up as starkly revealedin the aftermath of the global financial crisis of October2008, it can create a difficult situation.RP (Corporation Bank) : Banking has undergonetremendous transformation over the last decade. Fromundertaking purely commercial banking, banks haveturned into financial supermarkets and have startedselling a host of financial services from their outlets.They have started selling Mutual Funds, Bancassurance,Credit Cards, Trading facilities, Gold Coins, collectingUtility Bills, Tax Collection, e-stamping, cash management,wealth management, consulting, merchant banking etc.,Competition has created a need for meeting every kind offinancial need of the customers. The commercial banks, asof today, have entered almost every financial segment andso there is little differentiation in the products / offeringsmade by various banks. The real differentiating factor ismainly the customer service experience and the brandvalue which the customer perceives rather than bankingutility vs commercial banking.TMB (Indian Bank) : Banks no more engage themselvesonly in commercial banking - plain lending or deposittaking or ancillary services. Banks have moved touniversal banking in India. They are offering all kindsof banking services and banking related services underone roof, they are a super store that provides variedfinancial products. Considering their large coveragegeographically, they have started giving utility serviceslike bills payments, sale of gold coins and a host of otherservices like wealth management services. Customershave also welcomed these services, as they are able tocomplete all their financial needs in one place. Internetbanking and mobile banking have truly revolutionized theway banking is being done today. I think there is no casefor segregating banking utility and commercial banking intoday's age. The Bank branch has to ultimately convertitself into a financial super market.MN (Indian Overseas Bank) : There appears to be acase for segregating “Banking Utility” and CommercialBanking. Bankers are attempting to segregate thesetasks, by opening specialized branches, centralizingspecialized functions etc. and effectively placing the46January - March 2011The Journal of Indian Institute of Banking & Finance


utility to the customer-touch-points and to the alternativedelivery channels. In addition, these tasks can be betterserved by the alternative delivery channels because ofthe routine nature of the services, flexibility of place andtime and availability of a number of channels, thanks tothe technology and Reserve Bank of India.We have the following offerings : More than 900 ATMs,which we may increase to at least 2000 very soon;Contemporary Internet Banking suite and mobilebanking suite; Payment gateway, for both issuer andacquirer transactions; Self-service Internet Kiosk;Agreements with Bill desk, CC-Avenue, Tech-processetc., for utility payments; Point of Sale Terminals; TechenabledFinancial Services, under BC model; On-lineTax Payments and viewing tax paid details. We try tomeet all the Utility Requirements of our customers, withthis complement of offerings.NP (Oriental Bank of Commerce) : Though 'bankingutility' and 'commercial banking' is under one roof, thebanks have made efforts in segregating the productsand services by setting up verticals within the bank foreffective and efficient management.KRK (Punjab National Bank) : The increasingcompetition in the financial market has led to emergenceof non financial entities entering the banking arena.This has led to birth of financial supermarkets thatoffer pure banking products along with para bankingproducts like insurance, mutual funds, etc and utilityservices like online ticket booking, bill paymentfacilities. All these offerings form an integrated partof a universal bank and go hand in hand. We do notsee any need for segregating them as the customershave a choice to select their requirements from anexhaustive menu card.AK (UCO Bank) : Technology will change / ischanging the face of banking. But, besides hugecost involvement, technology applications also havea high degree of obsolescence. Banks will need tostrategize for cost optimization in the technology front.In doing so, they may have to cede certain functions towhat is known as "industry utilities." This may ultimatelylead to the back offices of banks getting connected like incase of real-time information transfer through a commonnetwork of Society for Worldwide Interbank FinancialTelecommunication (SWIFT).special featureThe emerging scenario points toward banks competingin the front end for increasing market share whilecollaborating in the back end for sharing utilities /facilities like in the case of sharing of ATMs. This typeof competition-cum-collaboration will become the orderof the day as banks on one hand seek to enlarge theircustomer base while on the other try to realize costreduction and greater efficiency.MVN (Union Bank of India) : In this competitiveenvironment, diversification is mantra. Today banksare investing heavily in IT infrastructure, which helpsin delivering services at low prices. Providing utilityservices help banks in optimizing huge investmentsmade in its infrastructure. It also helps in consolidatingfinancials as banks earn fee income. As long as we canserve customers to their utmost satisfaction we do notsee any reason for segregation of 'banking utility' and'commercial banking'. In fact, customers are more thanhappy with the choice of one stop banking. The bank inturn also gets loyal and valued customers.Moreover, the Indian Banks are well regulated.Advances contribute approximately 60 per cent oftotal assets. Banks continue to lend to real sectorsof the economy, particularly agriculture and the smalland medium industries that have limited ability to tapthe capital markets. The banks are prudent and wellregulated to provide a balance growth and ensure thestability of the system.BS (United Bank of India) : In commercial bankingsystem depositor's money is the capital of a bank.Banks mobilize deposits and deploy the funds prudentlykeeping in view the safety and security of the depositors'funds. Commercial banks function in a regulatory systemthat does not encourage risky fabulous and speculativereturns. To augment income banks also extend theirservices in selling of third party product like insurance,mutual fund etc. where banks' own funds are not directlyinvolved and which are virtually riskless. These servicesare being imparted within the framework of regularbanking services. Banks are cross selling these productsto their own customers along with other commercialbanking products. These services are rendered alongwith the regular services of the banks to their owncustomers which augments the earnings of the banks.However, if a bank prefers to launch its own productsThe Journal of Indian Institute of Banking & Finance January - March 2011 47


special featurelike insurance, mutual funds, investment banking it ispreferable to segregate those from the regular commercialbanking so that the depositors' money remain insulatedfrom the risks involved in these type of products. Hence,so long banks do not launch their own products it is notnecessary to segregate the services and deviate from theavowed goal of the commercial banks.AT (Vijaya Bank) : Banking concept has undergone a seachange during the last decade. As I understand, bankingutility broadly refers to risk-free banking entailing serviceslike deposit taking. Advances and non-fund basedservices are now an integral part of commercial banking.Banking utility concept is, thus, no more relevant totoday's banking practice as Universal banking isbecoming the order. We don't see stand alone productsany more as most of the banking products these dayshave augmented or value added features. This is purelyfrom the perspective of what a rational customer demandsand what a competitive market dictates. Therefore, Idon't see any case for segregating banking utility fromcommercial banking practice in vogue at present.The Capital and Liquidity Reform Package, July 2010 - Major FeaturesRK (Yes Bank) : Banking utility services such as Cashmanagement services, bill payments, mobile banking etc.,is a critical service provided by banks and highly soughtafter by both retail and corporate clients as it improvestheir financial supply chain efficiencies. These serviceshave always been offered by Commercial banks. Tillrecently, the banking utility services were largely inthe “physical form” - cash handling, cheques etc. While inIndia, the physical form continues to remain predominantinstrument, the “electronic” platform is gaining significantmomentum. From a commercial bank's perspective,providing banking utility services ensures “customerengagement” while Transactional Banking products arerisky and very important for generating CA balances.(1) Definition of Capital(i)(ii)(iii)Prudent recognition of the minority interestElimination of counterparty credit restriction on hedging of financial institutions investments.Limited recognition of investments in the common shares, mortgage servicing rights, and deferred tax assets for calculatingcommon equity component of Tier I capital.(2) Counterparty Credit Risk(i)(ii)(iii)Modification of bond equivalent approach to address hedging.Elimination of excessive calibration of credit valuation adjustment.To subject banks' mark to market and collateral exposures to central counterparties (CCPs) to modest risk weights in the rangeof 1-3 per cent.(3) Leverage Ratio(i)(ii)(iii)Uniform credit conversion factors (CCF) for off-balance sheet exposures.Basel-II netting plus a simple measure of potential future exposure based on the standardised factors of the current exposuremethod.Testing the proposal of minimum Tier-I leverage ratio of 3 per cent during the parallel run.(4) Regulatory Buffers, Cyclicality of the Minimum and Provisioning(i) Capital conservation and countercyclical buffers to be finalised by end 2010.(ii)(iii)Findings on cyclicality of the minimum requirement to be dovetailed with those from quantitative impact study to develop a set ofsupervisory tools to assess the adequacy of banks' capital buffers.Dialogue with International Accounting Standards Board (IASB) to develop expected loss approach to provisioning.(5) Global Liquidity Standard(i)(ii)(iii)Revision of definition of liquid assets so that they remain liquid in periods of stress.Introduction of 25.0 per cent outflow bucket for custody of clearing and settlement activities, as well as selected cash managementactivities.Treatment of all sovereigns, central banks and PSEs on par with corporates with 100 per cent roll-off rate for unsecured funding.Source : RBI, Report on Trend & Progress of Banking in India, 2009-10.48January - March 2011The Journal of Indian Institute of Banking & Finance


special feature10. Commercial banks commitment to agriculture in terms of total assets is less than 6%. Informal lending is accessedby marginal farmers and landless agricultural laborers. Exclusion among the farming gentry is therefore very high.In the area of agricultural finance, what is your experience in enhancing the flow of credit to the disadvantagedsections such as small and marginal farmers, tenant farmers, oral lessees and landless laborers?JPD (Allahabad Bank) : Our Bank is fully committedfor development of Agriculture and Farming Communityin the country. Never, we defaulted in reaching theregulatory targets as we have 60% of network in Rural& Semi-urban areas, we never had any insurmountableproblems in serving disadvantaged sections of thesociety. Bank is having farmer's friendly schemes likeKisan Credit Card, Kisan Shakti Yojana, Tenant FarmersFinancing Scheme, Debt Swap Scheme, Scheme forfinancing to Self Help Groups etc.For covering disadvantaged sections of the society bankis taking several measures like :Simplification of existing procedure and formalities inproviding Banking services●Capacity Building through awareness (opening RSETIs)●Regular Publicity and improved financial literacy(opening FLCCs)●Opening of No Frills accounts●Implementation of FI Plan (opening branches, BusinessCorrespondents, Mobile Vans etc)●Issuing of Smart cards with inbuilt OD facility●Issuing of KCC and GCC cards.●MDM (Bank of Baroda) : Lending to agriculture hasalways been a value proposition for banks from the pointof Risk Adjusted Return and compliance with the prioritysector requirements. It is a fact that the reach of the bankshas not been deep enough to serve the large communityof farmers in the hinterland. Dependence on indigenousborrowing from the money lenders has been in voguewhich needs to be reduced. Unless the banking systemis able to expand substantially such substitution will bea long drawn aspiration. Nevertheless banks have beenfocusing on financial inclusion in a big way that will giveenough opportunities to extend the reach. Many bankshave been active in linking Self Help Groups (SHGs) withthe banking services. Moreover, the scope of financialinclusion is getting expanded to include both liability andasset products. The urban bias in branch expansion isalso waning fast. Many banks are now expanding theiroperations to Tier-II and Tier-III cities. The services ofbank correspondents, IT delivery modules such as ATMs /Point of Sale terminals / Mobiles / hand held devices etc.are expected to provide the much needed reach. A richpotentiality for increasing agriculture assets in due courseof time is therefore evident.ASB (Bank of Maharashtra) : It is true that in spiteof various measures taken by banks to provide creditto the farmers, the target of 18% of ANBC to Agriculturesector would not be achieved. Since 1969, i.e. afternationalization of major banks, banks have openedbranches in rural and semi urban areas and providingcredit to farmers in general and disadvantaged sectionssuch as small / marginal farmers, tenant farmers, orallessees and agricultural labourers in particular. However,banks could not reach all of them hence farmers wereforced to avail finance from informal sources at exorbitantrate of interest even though agricultural lending is acommercially viable proposition and banks in India cannottake their hands off from agricultural lending.Banks have taken following steps in this regard.Branches have been opened in rural and semi urbanareas to provide banking facilities.●Efforts are being made to provide hassle free financefor which simplified procedures and documentation isfollowed.●Extension education is being provided throughAgriculture Field Officers.●Self Help Groups (SHGs) and Joint Liability Groupmodels are being promoted to provide adequatefinance to the small and marginal farmers, tenantfarmers, oral lessees and landless labourers etc.●Debt Swap scheme is being implemented under whichfinance is provided to the villagers who have availedfinance from informal sources at exorbitant rate ofinterest to make them free from the clutches of theprivate money lender.●Financial inclusion is being implemented underwhich all households will be provided with various●The Journal of Indian Institute of Banking & Finance January - March 2011 49


special featurebanking facilities including credit through BusinessCorrespondents model at the door steps of the villagers.We are confident that with these steps all bankingfacilities will be provided to the villagers and they will notbe required to go to informal sources for finance.SR (Canara Bank) : The performance of the bank underlending to agriculture has been consistent over the years.The Bank has been achieving the mandated level of18% of the Adjusted Net Bank Credit (ANBC). As atst31 March 2010, the outstanding under agriculture was18.55% of ANBC.The share of agricultural credit to small / marginalfarmers, tenant farmers and oral lessees etc., as at theend of March 2010 was `10,756 crore out of the totalagricultural lending of `25,052 crore, amounting to 43%of the total outstanding level, involving about 20 lakhaccounts. The Bank has initiated several schemes for thebenefit of these category of farmers, such as, Krishi MitraScheme for financing tenant farmers without proper landrecords; Kisan Tatkal Scheme for instant credit to meetpost harvest expenses, Debt Swapping Scheme to prepaynon-institutional debts; Financing Joint Liability Groupsof Tenant farmers etc., in addition to schemes like KisanCredit Card, Kisan Suvidha, Agricultural Gold loan etc.The Bank has also drawn a road map to implement itsFinancial Inclusion programme over the next three yearsso as to cover the excluded category of people / farmersunder its banking network so that they also avail thebenefits of the bank credit including agricultural credit.RP (Corporation Bank) : It is true that informal lendingneeds to be accessed by marginal farmers and landlessagricultural labourers in our country much more thanloans from commercial banks. The reasons for the sameare (i) Unviability of banking transactions on a very smallscale to meet the small loan requirements of marginalfarmers and landless labourers (ii) Limited accessibility ofbank credit to these segments because of inconvenientlocation of bank branches.Our Bank has taken up greater Financial Inclusionas the solution to meet the credit and other bankingrequirements of the above categories of people whohave been financially excluded so far. Our model ofFinancial Inclusion has been hugely successful andhas been applauded by Reserve Bank of India and alsoGovernment of India at various fora. So far, we haveopened about 5.50 lakh no-frills accounts and about`27 crore has been sanctioned as small overdraftsto the holders of these accounts. Besides, the villagelevel house-hold survey conducted during the FinancialInclusion drive serves as a ready reference tool toidentify unbanked villagers who are in need of bankcredit. The village level credit plan drawn up by thebranches and actualization of the same through closefollow-up is effectively meeting the credit requirementsof marginal farmers and landless labourers in all thevillages where our Financial Inclusion model is beingimplemented. We plan to extend the same to a largernumber of villages in the near future.Our Branchless Banking initiative is the solution wehave implemented to meet the challenge of makingsmall banking transactions viable. In this model aBusiness Correspondent is engaged, who is providedwith a hand-held device which can identify thebiometric details of the account holder. It enables theBusiness Correspondent to disburse loans of small valueat the door steps of the villagers at a time convenientto them. Using information technology extensively, wehave designed a smart card which is given to the accountholder and which can be read by the hand-held deviceof the Business Correspondent. We have also openedbio-metric ATMs at some places, to enable illiteratecustomers transact in their accounts away from theregular branch at their convenient times.This is a win-win situation for all, since in this model, thereis no need to open a full-fledged bank branch to meet thebanking requirements of under-privileged sections of therural population and most of their banking needs aremet at their village effectively. In addition, we have loanschemes in our Bank designed especially to meet thespecial credit requirements of small & marginal farmerslike (i) Land purchase scheme for small & marginalfarmers (ii) Scheme for taking over liabilities of farmersfrom non-institutional money lenders etc.TMB (Indian Bank) : Agricultural Lending and RuralDevelopment are the niche areas for the Bank in the lastmany years. Our commitment to agriculture in terms oftotal assets is 9.02%. The Bank has 504 rural and 480semi-urban branches, which constitute 55% of the totalbranches of the Bank.50January - March 2011The Journal of Indian Institute of Banking & Finance


Agriculture, Microfinance, Financial Inclusion andDevelopment of Small Enterprises & Rural Developmenthave become the key components in today's Bankingenvironment. The Bank has pioneered many newdimensions to rural development in the country likeSelf Help Groups - 1989, Microsate Branches (exclusiveMicrofinance Branches) - 2005, Financial InclusionProject - 2005, Banking Service Centers - 2008 etc.As of March 2010, the Priority Sector and Agriculturecredit to Adjusted Net Bank Credit (ANBC) of the Bankstood at 44.38% and 18.73% as against the RBI's directiveof 40% and 18% respectively.The Bank has a plethora of products and servicesfor facilitating both production and investment creditadopts a distinct approach in serving the farmers. Croploans are disbursed to the farmers at concessional rateof interest (i.e. at 7%) upto `3.00 lakh. Credit assistanceis extended to Joint Liability Groups (JLGs) formed by thefarmers comprising tenant farmers, share Croppers andoral lessees. The Bank's has 96 specialized Agri. CreditIntensive Branches (ACI) for focused flow of farm creditin potential centers.Coming to credit plus initiatives for Rural Development, theBank has set up a Trust viz., “Indian Bank Trust for RuralDevelopment” (IBTRD). The Trust has established IndianBank Self Employment Training Institutes (INDSETI) atfive centres in Salem, Vellore and Tiruvallur in Tamilnadu,Chittoor in Andhra Pradesh and Puducherry. Besides, theTrust has established a Financial Literacy and CreditCounseling (FLCC) centre at Dharmapuri in Tamilnaduand Puducherry. These centers rendered guidance andcounseling to 1187 beneficiaries on various financialaspects such as savings, investments, credit and creditrestructuring during 2009-10 and continue their effortsthis year.Leveraging technology initiatives with CBS platform,the Bank has installed 74 Biometric ATMs uptoSeptember 2010 for the benefit of SHG members. Thisfacility has advantages like joint / dual authentication ofthe authorized representatives of SHGs, 24X7 servicesetc. It is more useful for the illiterate customers especiallyin rural areas who have been hitherto excluded from thebanking access.Coming to our experience in enhancing the flow of creditto the disadvantaged sections such as small farmers andmarginal farmers, tenant farmers (TF), oral lessees (OL)and share croppers (SC), I am proud to say that the Bankhas always surpassed the stipulated targets.The Bank disbursed `3,204.76 crore to 6,67,272small and marginal farmers during the year 2009-10 which accounts for 56% to total Direct Financedisbursed by the Bank against the RBI directive of40%. During the current fiscal, up to Sep. 2010 theBank has disbursed `1,683.69 crore to 3,32,585 smalland marginal farmers, which accounts for 50% of thedirect agriculture credit disbursed by the Bank.●The Bank disbursed to 16,462 new TF / OL / SCfarmers, achieving 4.07% during 2009-10, against theGoI directive of 2.50%. During the current financial yearupto September 2010, the same is 3.35% benefitting6,902 farmers.●special featureMicrofinance is a powerful tool to fight poverty. It facilitatessocial and economic empowerment of the people at theBottom of the Pyramid. To relieve the people especially,the womenfolk, from the clutches of local money lendersand make them self-dependent by undertaking incomegeneratingeconomic ventures, the Bank launchedthe SHG movement in 1989 in Dharmapuri District ofTamil Nadu under International Fund for AgricultureDevelopment project (IFAD).The Bank had set up 46 Micro Credit Kendras (MCKs),a special window for Microfinance in rural and semiurbanbranches, all over India to serve the SHGs. Takingthe fruits experience of microfinance from rural areasto urban and metro centres, the Bank first introduceda new microfinance delivery channel viz., MicrosateBranch (exclusive microfinance branch) at Chetput inChennai during 2005. This branch extends not onlymicro-credit but also renders credit plus services suchas Micro-insurance, Capacity Building, Skill Upgradation,Micro-marketing facilities etc. As of now, there are 29Microsate Branches in the Bank across India.In recognition of the Bank's services in Micro-Finance,the bank has been consecutively bagging the State LevelAward from NABARD for the 'Best Performance' inStates (Tamilnadu) since 2002.The Financial Inclusion Plan under implementationin the Bank offers vast scope to stretch its exposureto marginalised sections of the society. The Plan aimsto cover 1,538 villages with population above 2,000 andThe Journal of Indian Institute of Banking & Finance January - March 2011 51


special feature4,040 villages with population below 2000 spread across19 states in the next 2 years.The Bank would continue to keep pace and sustainits efforts for sustainable development and inclusivegrowth through technology driven and alternative deliverychannels like Microfinance, Business Correspondents,Biometric Smart Card Banking, Bio-metric ATM, InternetKiosk Banking, and Rural Mobile Banking etc. to help andreach the hinterlands.MN (Indian Overseas Bank) : It is true that the shareof agriculture in total assets of banks is falling. Onereason for this is the fast increasing share of servicesand manufacturing in the economy. Nevertheless, ourbank's experience in lending to agriculture and also inenhancing flow of credit to disadvantaged sections suchas small and marginal farmers, tenant farmers and orallessees has been satisfactory. Out of total disbursementunder agriculture 45% has gone to SF / MF and out ofoutstanding under agriculture 60% relates to SF / MF.Proportion of investment credit under agriculture is 30%.Incidence of marginal farmers seeking outside creditfrom informal sources is gradually declining due toconsolidation of institutional lending mechanism, achievedthrough hassle free lending methods and publicity. SHG /JLG model for tenant farmers and oral lessees hasimproved credit dispensation to this segment. Dedicatedofficers have been recruited and effectively deployed.The credit off take is fuelled by increased awarenessabout bank lending brought about by such institutionsas FLCCC, RSETI, Farmers' Club, etc. Ongoing FinancialInclusion will also reinforce this process.NP (Oriental Bank of Commerce) : Bank has formulatedsome specific schemes such as Oriental Bank GrameenProject based on SHG concept, financing to joint liabilityGroups and Krisak Saathi Scheme for repaying old debtsof distress farmers, to include disadvantaged sectionssuch as small & marginal farmers, tenant farmers, orallessees and landless labourers. The share of loans tosmall & marginal farmers, tenant farmers, oral lesseesand landless labourers is 45% of Direct Agriculture loansto farmers in our Bank.KRK (Punjab National Bank) : PNB, being a largestbank amongst the nationalised banks, has contributedsignificantly to development of this sector. The Bankhas fulfilled the needs of all categories of farmers,be they small / marginal farmers, share croppers, tenants,oral lessees or Self Help groups. PNB's various schemesprovide credit for development of various agriculture& allied activities including farm mechanization, minorirrigation, transport vehicles and wasteland development.Apart from financing traditional agriculture activities,the bank diversified its lending by targeting activitieslike horticulture, medicinal & aromatic plants, mushroomcultivation, organic farming, agri-clinics, agri business,fisheries, etc.The Bank has been supporting various employmentgeneration and poverty alleviation programmes. As aresult of strong commitment shown, the Bank has beenachieving the national goal of extending 18% of its netcredit to agricultural activities. Out of a total agriculturallending of `32,274 crore at the end of Sept 2010, thecomponent of direct lending to agriculture amounted to`25,072 crore. Besides, the Bank has also issued 34.36lakh Kisan credit cards.Agricultural growth is critically dependent on the useof modern inputs and technology. A pioneeringinitiative of the Bank is in setting up Farmers' TrainingCentres to provide FREE training for adoption ofmodern technology, enhancing agricultural productivity,diversification of crops, etc. The Bank has alreadyestablished 9 FTCs in 8 states which have alreadytrained more than 2.85 lakh farmers / rural youth / womenfor modernising their farming activities. In addition, thePNB Centenary Rural Development Trust has beenset up to train rural populace in repair of farm machineryand adoption of new farm technology to ensure higheragricultural productivity and hence improved returns.Further the Bank has actively popularized debt swapscheme to bring the small / marginal farmers, oraltenants, share croppers etc from the clutches of informalsector. We have recently enhanced the amount underthe Scheme from `50,000 to `1,00,000. We havepursued the beneficiaries of debt waiver / relief schemeto avail fresh dose of credit to improve their croppingpattern / income.PNB has also launched a massive campaign reachingout to those at the bottom of the pyramid with the helpof bio-metric technology in the Indo-Gangetic basinwhere the Bank has a dominant presence and a widerreach made possible through large branch network52January - March 2011The Journal of Indian Institute of Banking & Finance


special featureby virtue of which we envisage to expand our outreach tothe disadvantaged segments considerably.RK (Yes Bank) : Credit is necessary but not sufficientpre-condition for viable farming livelihood. As majorityof farming is still dependent upon monsoons, thefarm sector is subjected to significant level of risk atproduction stage as well as at a marketing stage.A number of other enablers / facilitating factors needto be in place for profitability of farming operations,which is necessary for ensuring timely repayment ofcredit. YES BANK has been developing innovativefinancial models, which leverage the outreach ofvarious stakeholders in agribusiness value chain, toovercome the 'last miles problems' in agribusiness andrural sectors. The identified stakeholder works as anextended arm of the bank and helps the bank indocumentation, disbursement and collection functions.One such innovative lending structure developed bythe bank for financing the honey farmers through ahoney exporting company has won the “Euro-moneyTrade Finance Deal of The Year 2007” award.The Bank has also created a specialized Inclusiveand Social Banking group which uses BusinessCorrespondents (BC) and Self Help Group (SHG)mechanisms for enhancing the flow of credit to thedisadvantaged sections such as small and marginalfarmers, tenant farmers, oral lessees and landlesslaborers. A pilot initiative is in progress in Pune district.Policy Measures to Augment Forex Liquidity- Interest rate ceilings on FCNR (B) and NR(E)RA deposits were increased by 175 basis points each from September 16, 2008providing more flexibility to Indian banks to mobilise higher foreign exchange resources.- The constraints on external commercial borrowings were eased through relaxing various conditions, viz., (i) enhancing all-in-costceilings for ECBs of average maturity periods of three to five years and over five years to 300 basis points above LIBOR and 500basis points above LIBOR, respectively; subsequently, the requirement of all-in-cost ceilings under the approval route wasdispensed with until December 2009; (ii) permitting ECBs up to US$ 500 million per borrower per financial year for rupee / foreigncurrency expenditure for permissible end-uses under the automatic route; (iii) the definition of infrastructure sector for availingECB was expanded to include the mining, exploration and refinery sectors; (iv) payment for obtaining license / permit for 3Gspectrum by telecom companies was classified as eligible end-use for the purpose of ECB; (v) dispensing with the requirementof minimum average maturity period of 7 years for ECB of more than US$ 100 million for rupee capital expenditure in theinfrastructure sector; (vi) permitting borrowers to keep their ECB proceeds offshore or keep it with the overseas branches /subsidiaries of Indian banks abroad or to remit these funds to India for credit to their rupee accounts with AD category-I banks inIndia, pending utilisation for permissible end-uses; (vii) allowing NBFCs exclusively involved in financing of the infrastructuresector to avail of ECBs under the approval route from multilateral / regional financial institutions and government-owneddevelopment financial institutions for on-lending to borrowers in the infrastructure sector, subject to compliance with certainconditions; and enabling housing finance companies registered with the national housing bank (NHB) to access ECBs subject toRBI approval and compliance to regulations laid down by NHB.- Access to short-term trade credit was facilitated by increasing the all-in-cost ceiling to 6-month LIBOR plus 200 basis points for lessthan three years' tenor. Furthermore, systemically important NBFCs not allowed hitherto were permitted to raise short-term foreignborrowings.- Interest rate ceiling on export credit in foreign currency was increased to LIBOR plus 350 basis points subject to banks not levyingany other charges.- Authorised Dealer (AD) category-l banks were allowed to borrow funds from their head office, overseas branches andcorrespondents and overdrafts in nostro accounts up to a limit of 50 per cent of their unimpaired Tier-1 capital as at the close of theprevious quarter or US$ 10 million, whichever was higher, as against the earlier limit of 25 per cent.- Indian companies were encouraged to prematurely buy back their FCCBs under the approval or automatic route, at prevailingdiscounts rates, subject to compliance with certain stipulated conditions. Extension of FCCBs was also permitted at the current allin-cost for the relative maturity.Source : RBI, Report on currency and finance, 2008-09.54January - March 2011The Journal of Indian Institute of Banking & Finance


special feature11. Even as Rating agencies are improving the rating tools on account of the lessons learnt in the recent crisis, itemerges that inability to effectively capture / simulate the business cycle changes will be a major challengefor rating of long term investments and credit exposures. What role do you see for credit rating agencies inimproving the quality of banks' asset books? Do you think that rating agencies must be made responsible?JPD (Allahabad Bank) : The recent economic crisis inUS and Euro Zone has been the effect of systemicfailure caused due to lack of regulations and effectivesupervision by the appropriate authorities. As such, itwould not be fair to hold the rating agencies responsiblesingularly. Banks must not be over-dependent on therating agencies for risk-rating their assets. This has alsobeen reiterated by the RBI. Banks have to assess theirloan portfolio and consequent risk capital as per thepeculiarities of its portfolio. We don't visualize any biggerrole for external rating agencies in this regard. As faras the responsibility is concerned, they should bemade responsible and accountable for their actions andconsequences as applicable to any other professional.MDM (Bank of Baroda) : There is always an impliedresponsibility on the part of rating agencies so that thefuture performance of the entities remains aligned withthe rating accorded to it. But in view of recent experienceof financial crisis, the rating agencies may have to finetune the rating matrix to make it more effective in capturingthe macroeconomic events more realistically than ispresently the case. Banks have also to internally reviewtheir own mechanism of rating to be able to estimatethe performance of the borrower. The external credit ratingagencies will have to be conscious to the fact that theperformance of the underlined entities should fall in linewith their estimates failing which their reputation is alwaysat risk. In its own interest rating agencies will have todevise better mechanism to assess the rating.ASB (Bank of Maharashtra) : Credit rating agenciesplay a vital role in enabling financial markets to operateefficiently by acting as information intermediaries,specializing in the appraisal of the creditworthinessof the counterparty.While marching towards the IRB approach for creditrisk, the banks are expected to develop their own RiskRating framework and reduce their dependence on suchinformation intermediaries. With their experience in creditdispensation and access to significant information fromborrowers / applicants, developing appropriate modelsfor risk perception should not be very difficult.However, host of factors are dynamic over a longtime horizon and their behavior and influence on thecounterparty, its projected revenues & ability & willingnessto pay is not fully predictable. The uncertainties in a longterm lending and investment, therefore, are difficult tocapture completely. Making the credit rating agenciesfully accountable for their errors occurred, if any, onsuch long term lending and investment propositionsmay not be therefore totally justified.In the Advanced Internal Ratings Based approach underBasel-II, Banks will rely on their own internal ratingssystem for measurement of credit risk. As a result, the roleof Credit Rating Agencies will be reduced to that extentin evaluating credit risk in banks' assets. However, theratings assigned by external rating agencies will continueto be used to supplement the internal rating process ifthe banks desire so. The Credit Rating Agencies will alsocontinue to play a role in the risk assessment of structureddebt obligations, facility rating, etc.Credit Rating Agencies are paid by the issuer ofsecurities, resulting in a conflict of interest. To ensurefair and accurate assessment the rating agencies mustbe made fully responsible and accountable. Though therating agencies are registered with SEBI, a regulator forthe rating agencies will help improve the quality of ratingsand the conduct of rating agencies.SR (Canara Bank) : Yes, I agree that rating agenciesmust be made responsible. While ratings do providea useful input in the decision-making process, thereis a manifest need to reduce reliance on credit-ratingagencies and move away from issue-rating to issuerrating.This requires the development of alternativemeasures of creditworthiness and of additional riskmanagement capacity.Rating of long term investments and credit exposuresrequires capturing the impact of changes in businesscycles during the maturity of the assets. Currentlythe rating agencies are taking into account theshort / medium term predictability rather than long term.Currently Indian banks are estimating their regulatorycapital requirement adopting basic approaches ofThe Journal of Indian Institute of Banking & Finance January - March 2011 55


special featureBasel-II framework. Accordingly banks are using theratings assigned by the credit rating agencies forcomputing risk weighted assets. Banks are expectedto use these ratings to evaluate the health of theircredit portfolio also.Ratings can help in improving the quality of banklending. But ratings methodologies used in the processesneed to be periodically reviewed to be transparent,credible, independent and objective, without in anyway being compromised by conflicts of interest, abuseof confidential information or other undue influences.Ratings Services need to conduct periodic default andtransition studies on rating trends containing informationas to the bases of its default analyses, key assumptionsand methodologies. These measures are necessary foran objective assessment of the credit ratings and trackrecord of rating companies.RP (Corporation Bank) : A credit rating is a professionalopinion given after studying all the available information ata particular point of time and considering the performanceof a particular industry in past, prospects in future andinterrelations within the economy. It is more important thatthe rating agency must act judiciously to assign the ratingtaking into account the information pertaining to pastbusiness cycles and the likely adverse scenarios.Banks / financial Institutions should also developcapabilities to make their own assessment, rather thandepending on the rating agencies and should takerating assigned by the rating agencies as a supportiveinstrument. There should also be a regulatory body toregulate the rating agencies, as in the case of Audit Firms,to ensure proper and fair rating.TMB (Indian Bank) : Credit Rating Agencies areconsidered gatekeepers, because they issue ratingsthat help determine whether a company is worth lendingto, and at what cost. Rating Agencies evaluate thecreditworthiness of the financial instruments and issuea credit rating that is published for public use. Ratingsimprove market efficiency. RAs have become a central,imbedded feature of the financial markets.Credit ratings standardize data from borrowersaround the world to allow investors to compare therisk of investments in different countries on thesame rating scale. It has gained further influence overthe financial markets through governmental regulationsthat mandate the use of ratings and through privatecontract rating requirements.Rating agencies must be responsible for the ratingsgiven by them, as otherwise the investors and themarket would lose confidence in their ratings. This was amajor problem leading up to the global financial crisisas RAs rated billions of dollars of structured financeinstruments too highly, without understanding the risksand complexity of the MBSs and CDOs that they rated.Many investors did not fully understand these MBSsand CDOs, and CRAs played a central role in buildinginvestor confidence in these instruments.In the Indian context, the Regulator has made fourCRAs as accredited rating agencies for 'Bank LoanRating' based on which risk weights are assigned forcapital adequacy computation.SEBI has been working on fixing more responsibilitieson CRAs and their guideline issued in May 2010 is inline with this.MN (Indian Overseas Bank) : In India we have beenused to only issue rating. Issuer rating is of recent originand therefore data is a constraint for “Through the Cycle”rating which is more appropriate for long term ratingssince it takes into account the entire business cyclechanges.Reserve Bank of India allows use of external ratingassigned by approved rating agencies for bankexposures under Standardized approach of Basel-IIframework. As such, Bank's portfolio is covered partiallyby external ratings. However, since only solicited ratingsare allowed, this benefits the borrower in getting betterpricing than improving the quality of bank's asset books.Credit ratings assigned by the Credit Rating Agenciesare a matter of public interest as these are critical tocapital formation through the debt market operations,investor confidence, bank finances and for the efficientperformance of the economy. In India the credit ratingagencies are regulated by SEBI to a limited extent whichneeds to be strengthened. The rating agencies havebeen made responsible in the US through the recentlypassed Dodd Frank Act. A similar step as appropriateto the Indian context might make the rating agenciesaccountable for the rating they give.56January - March 2011The Journal of Indian Institute of Banking & Finance


NP (Oriental Bank of Commerce) : RBI prefersthat the assessments made by the domestic ratingagencies that have up to date and ongoing accessto information on domestic macro-economic conditions,legal and regulatory framework, etc., could be a bettersource for assigning preferential risk weights for bankingbook assets (excluding claims on sovereign), subject toadequate safeguards. This would facilitate the nationalsupervisory authorities to have greater access to thequality of assessment sources and methodologiesused by various rating agencies. But greater relianceneeds to be placed on internal ratings-based approachesof banks, which could be structured under an acceptableframework so that a standardised approach to internalrating could be adopted.At present the ratings assigned by Credit RatingAgencies are solicited in nature. Further, their ratings arepoint-of-time assessment of creditworthiness and are notrecommendations. However, in view of the acceptanceof the rating assigned by accredited credit agencies byRBI for provisions of Capital under Basel-II, the creditrating agencies may be made more responsible so thattheir ratings are more realistic and co-terminus with theeconomic and industry cycle prevailing in our country.KRK (Punjab National Bank) : Credit Rating Agencies(CRA) play a key role in financial markets by helpingto reduce the informative asymmetry between lendersand investors, on one side, and issuers on the other side,about the creditworthiness of companies (corporate risk)or countries (sovereign risk). CRAs' role has expandedwith financial globalization and has received an additionalboost from Basel-II which factored ratings of CRAs whilecalculating credit risk weights. However, rating agencieshave been found wanting in their role as far as accuracyand transparency of methodologies is concerned. Theyneed to be made accountable and regulated to ensurethat ratings are done professionally and are dynamicinstead of being sticky and generally with a lag. Unlessthese agencies practice improved governance, their utilityis bound to be limited. The credibility of Ratings canbe assured by default rates corresponding to differentcategories of ratings given by a CRA.AK (UCO Bank) : The recent crisis has highlighted thefact that total reliance on rating agencies for investment /credit decisions is not desirable as the ratings reflect theirspecial featureown assessments which is based on their internal ratingmodels not known to their clients.We feel that instead of depending on the rating agencies,the banks should strengthen their own risk assessmentsystems to make them more forward-looking andreflective of the operating environments. The systemshave to be geared up to anticipate how current trendswill unfold, how critical uncertainties will play out, andwhat new factors will come into play. This will enablebanks to predict future risks and losses better than everbefore and ensure asset quality.MVN (Union Bank of India) : The role of CreditRating Agencies (CRAs) is being questioned inaftermath of global crisis. The world has witnessedhow ratings quality suffered with the collapse of thetop rated structured finance products. That is whyduring this crisis regulatory attention has focusedmainly on Credit Rating Agencies. The credit ratingshould be based on long-term expected quality andagencies should be able to rate through the cycle.Having said so there are genuine difficulties in detectinglong-term trends.Ideally, the pricing of bank's long-term asset bookshould also factor in business cycle componentsof risk. But the question is whether CRAs are ableto capture those. There are some models availablewith CRAs but none has been proved to be accurateso far. In fact, even academic literature has difficultiesin detecting long-term trends.The rating agencies have their own mandate andmodels. It is difficult to make them responsible for aparticular 'event' per se. Instead, one should look forsubjecting CRAs to greater transparency. There isalso a proposal for 'issuer pays model'. It is difficultfor any market player to establish how the ratingplayed a 'real and substantial part' in the investmentdecision. Also, companies and governments need toask themselves why they have become reliant on CRAs,rather than conducting their own due diligence.While banks should be moving towards advancedapproaches with less reliance on rating agencies, therating agencies in turn have to take a holistic approachwhile awarding ratings having regard to end use, assetbubbles and financial stability.The Journal of Indian Institute of Banking & Finance January - March 2011 57


special featureBS (United Bank of India) : The rating agencies withtheir special expertise play a vital role in providing inputsto banks for improving the quality of assets. Their skillsplay a supportive role in rating and assessing the qualityof bank credit and investments. Hence their serviceis very important to the banks. But, banks should notdepend on them blindly without any monitoring sincethe rating agencies in spite of improving their ratingtools, are subject to various limitations particularly in thearea of long term investment and credit exposures,where the changes in the business cycle could be criticalin affecting the quality of the assets. Hence, accuracyin forecasting the business trends is an essentialparameter for rating of long term credit or investmentexposure. As has been observed the rating agencies areyet to develop expertise to accurately forecast changesin business cycle. Therefore, although services of therating agencies are essential for the banks for improvingthe quality of the assets the banks should also remaincautious and vigilant to overcome the shortcomings inthe rating system as far as external factors includingmacro economic factors are concerned.AT (Vijaya Bank) : Rating Agencies, I feel, have donea reasonably good job in providing triggers to majorevents. While I don't dispute the fact that rating agenciesmust be held accountable, the bigger challenge isto overcome sudden bouts of volatility that becomesendemic within no time. Banks and FIs would alsoneed to be more responsive to triggers, act in syncwith regulatory guidance and ensure diligence in theexposure to sensitive segments.RK (Yes Bank) : Primarily Banks need to make theirown independent credit assessment of each customerrather than solely relying on ratings generated by thecredit rating agencies (CRA's). CRA's currently play amore critical role in reducing information asymmetryin investment products rather than loan products forlarge and medium size corporate. Having said that,the CRA's with the right rating scale and methodologycan play a very meaningful role in the credit assessmentof the small enterprises. In terms of accountability,CRA's need to be regulated by way of an oversightfrom a statutory body to ensure the integrity andindependence of the rating process with holistic andtimely interventions to proactively manage systemic& individual risks.IT GovernanceInformation Technology Governance is a subset of corporate governance focused on information technology systems and their performanceand risk management. While an effective corporate governance strategy allows an organisation to manage all aspects of its business in orderto meet its objectives, IT governance helps to ensure the delivery of the expected benefits of IT in a controlled way and enhance the long termsustainable success of the organisation. The primary goals of IT Governance are to assure that the investments in IT generate business value,and to mitigate the risks that are associated with IT. As IT infrastructure has evolved as the backbone to organisational activities of banks, ITGovernance assumes critical significance. Setting up of an efficient IT infrastructure in banks involves enormous investment. Therefore, interms of its continuous availability and return on investment, it requires basic governance principles to be enunciated.Standard IT governance frameworksISO / IEC 38500The world's formal international IT Governance Standard, IS / IEC 38500 was published in June 2008. ISO / IEC 38500 sets out a verystraightforward framework for the board's governance of Information and Communications Technology.ITIL® / CobIT® / ISO 17799There are three widely-recognised, vendor-neutral, third party frameworks that are often described as 'IT governance frameworks' viz., ITIL®,CobiT® and ISO 17799. While, on their own, they are not completely adequate to that task, each has significant IT governance strengths.ITIL®, or IT Infrastructure Library®, was developed by the UK's Office of Government Commerce as a library of best practice processes for ITservice management. Widely adopted around the world, ITIL is supported by ISO / IEC 20000:2005, against which independent certificationcan be achieved. CobiT®, or Control Objectives for Information and related Technology, was developed by America's IT Governance Institute.CobiT is increasingly accepted as good practice for control over information, IT and related risks. ISO 17799, now renumbered as ISO 27002and supported by ISO 27001, (both issued by the International Standards Organisation in Geneva), is the global best practice standard forinformation security management in organisations.Without an effective IT governance to deal with these constraints, IT projects will have a higher risk of failure. Each organisation faces its ownunique challenges as their individual environmental, political, geographical, economic and social issues differ. Any one of these issues canpresent obstacles to providing effective governance. Common among such inhibiting factors are poor strategic alignment, lack of projectownership, poor risk management and ineffective resource management.Source : RBI, Reserve Bank of India, Annual Report, 2009-10.58January - March 2011The Journal of Indian Institute of Banking & Finance


special feature12. The accounting and disclosure systems in Indian banking are well laid out. The size and depth of financialreporting as on date is possibly too large. In this back ground, what will be the benefits of IFRS to the bank /customers / stakeholders?JPD (Allahabad Bank) : The benefits of IFRS to theBank / Customers / Stakeholders are as follow :Improve access to International Capital Markets :Indian banks are expanding or making significantacquisitions in the global arena, for which largeamounts of capital is required. The majority of stockexchanges require financial information preparedunder IFRS. Migration to IFRS will enable Indianbanks to have access to international capital markets,removing the risk premium that is added to thosereporting under Indian GAAP.Lower Cost of Capital : Indian banks also raisedfund from abroad and the migration to IFRS willlower the cost of raising funds, as it will eliminatethe need for preparing a dual set of financialstatements and the investors will believe in thefinancial statements prepared based on IFRS.●Enable Benchmarking with Global Peers andImprove Brand Value●Escape Multiple Reporting : Convergence to IFRS,by all group entities, will enable banks' managementsto view all components of the group on onefinancial reporting platform and this will eliminatethe need for multiple reports and significantadjustment for preparing consolidated financialstatements or filing financial statements in differentstock exchanges.●Reflects True Value of Assets : Indian reportingstandards are based on conservative approach anddoes not reflect the true value of assets●Comparability : Convergence to IFRS will enhancecomparability and reporting transparency●Banks, as lender of funds, can perform accuraterisk evaluation of borrowers. As a result, they canoffer their loan products at competitive prices totheir clients and can improve the relationship withthem in the long run.●MDM (Bank of Baroda) : As part of prudentialnorms, the banks continue to improve their standardof disclosures / transparencies on a continuous basis.Notwithstanding such better corporate governancestandards, moving over to IFRS provides a bettervisibility in the international market. IFRS is expectedto infuse better confidence to the customers andstakeholders that is essential in a globalized bankingenvironment. Improving domestic financial reportingsystem will have to be aligned to IFRS standardsto provide the much needed recognition to thestandards. When operating in a global financialsystem IFRS helps in international integration ofstandards that lends more credibility to the overseasmarket players. The banks may work towardseventual migration to IFRS standards by retuning theirinternal accounting systems and MIS generationsystem. Upgraded technology and standard operatingplatform like CBS will be better able to speed upthe process.ASB (Bank of Maharashtra) : Adoption of IFRS willhave the following benefits.Improves Comparability and transparency : IFRSwill improve comparability of performance ofIndian Banks with their global peers and greatertransparency about their activities. This will help ininitiating new relationships with investors, customersand suppliers across the globe.●Access to Global Capital markets & reducedCost of capital : Convergence of accountingstandards will eliminate barriers to cross borderlistings. Thus, it will enable banks to tap into theglobal capital markets. Even where listing onverseas exchanges is allowed using Indian GAAP,international investors attach a risk premium tofinancial statements not prepared according tointernational standards. Adoption of IFRS willreduce this risk premium resulting in lower Costof Capital. Investors will also benefit as they willhave greater avenues for investment.●Impetus to Cross border acquisitions : Comparableand transparent financial information will provide●The Journal of Indian Institute of Banking & Finance January - March 2011 59


special featurean impetus to cross-border acquisitions. Postacquisitionintegration efforts and cost will alsobe lowered. It will also enable partnership andalliances with foreign entities.More accurate presentation of economic value :Balance sheet items will be reported at fair valueinstead of historical costs. This will enable financialstatements to closely reflect economic value.●Avoidance of multiple reporting and reduced costof finance function : Requirement for multiple setsof financial statements will be avoided for entitiesoperating in different jurisdictions reducing complexityand costs involved in financial reporting.●Economic growth : Growth in cross-border capitalflows and transactions will provide a boost to globaleconomic growth.●SR (Canara Bank) : Convergence with IFRS willhelp the banks to raise capital from foreign marketsas it can create confidence in the minds of foreigninvestors that their financial statements comply withglobally accepted accounting standards. With thediversity in accounting standards across countries,banks which operate in different countries facemultiple accounting requirements. The burden offinancial reporting will lessen with convergence ofaccounting standards as it simplifies the process ofpreparing financial statements.Convergence with IFRS will also benefit the economy.It facilitates maintenance of orderly and efficientmarkets and also helps to increase capital formationand international investments.Financial statements prepared using a commonset of accounting standards help investors betterunderstand investment opportunities as comparedto financial statements prepared using different setof accounting standards.RP (Corporation Bank): Providers of Capitaland hence users of financial statements are nolonger limited to a single country and operate ona global basis. As a result they increasingly expectthe financial statements to be presented in acomprehensive, transparent and commonly understoodformat. In this regard, the International AccountingStandards Board (IASB) has developed the IFRSfor financial reporting operations and convergence.IFRS has gained significant momentum in recentyears.Potential benefits of convergence with IFRS :1) Increased compatibility and comparability amongthe financial statements of sectors, countries andcompanies.2) Improved communication and interaction withinvestors and analysts, which may provide companieswith a competitive advantage and also wider accessto capital at relatively lower cost.3) The usage of IFRS is likely to enhance thereliability and image of financial reporting by Indianindustry across the world. IFRS compliant financialstatements are acceptable for financial reportingoperations for an increased number of countriesacross the world.4) Convergence with IFRS will eliminate the needfor multiple reporting in most cases as the sameset of financial statements can be used both forreporting at the entity level and at consolidatedlevel, in respect of global listing, filing with overseasregulatory authorities etc. The processing ofconvergence with IFRS generally leads toharmonization of internal and external reportingwhich can assist entities in not only reducing costbut also ensuring consistency in financial reporting.TMB (Indian Bank) : Moving to IFRS provides manybenefits to entities, some of them are :IFRS Balance sheet is closer to economic value.The Historical cost will be substituted by fairvalues for assets / liabilities which will enablecorporate to know its true value.●IFRS-compliant Balance sheet of Indian entitieshelps foreign investors to understand and toobjectively interpret the financial performance ofIndian entities, thereby resulting in inflow of foreigninvestments.●It reduces the risk premium built-in now byinvestors who are not conversant with IndianGAAP. The increased comparability of financialinformation on adoption of IFRS and the eventualbetter quality of communication to investors will●60January - March 2011The Journal of Indian Institute of Banking & Finance


educe investor's anxiety, reduce risk and eventuallyminimize the cost of capital of IFRS compliant entities.Improves the comparability of entities : On adoptionof IFRS, Banks can bench mark their performancewith global counterparts resulting in enhancedcomparability and reporting with transparency.●IFRS facilitates cross border acquisitions : IFRShelps Indian entities to acquire foreign entities byproviding transparent and comparable financialinformation. It also enables partnerships andalliances with foreign entities and lowers cost ofintegration in post acquisition period.●The benefits to customers / stakeholders are :Customers / stakeholders will be able to analyze,interpret and compare with the financial statementswith Global entities.●IFRS balance sheet helps to understand the fairvalue of an entity.●As the disclosure norms are enormous underIFRS, it helps create confidence and credibility ofaccounts.●The quality of transparency helps the investors /customers to take right decision for investing.●MN (Indian Overseas Bank) : The RBI hasconstituted a Working Group to recommend aroad map for the smooth migration of Indian banksto IFRS. A deadline of April 2013 has also beengiven to the banks. Given the Indian banks prowessto adapt to international standards promptly, themigration to the global accounting standards shouldbe on schedule. The RBI guidelines to be issuedwould make this transition smooth and easy. Ofcourse, there will be some convergence problem forsome banks.IFRS will benefit the banks. It is a global bestpractice which makes valuation issues more realisticby switching over from the historical cost methodto fair value. The universality of the accountinglanguage will make comparison among banks easier.This would then make it more convenient for banksto tap external markets for their needs.From the Customers point of view, the new methodwill present a more transparent picture of the bank'sspecial featurebalance sheet. The disclosures with reference tofinancial ratios would help them make their decisionsbetter. IFRS will provide a level playing field fordecision making both by borrowers and depositors.As for other stakeholders, IFRS will be more rigorousbut at the same time more user-friendly. Fair valuewould enable assessment of ROA / ROE in atransparent manner. Comparison of peers would beeasy and simple.NP (Oriental Bank of Commerce) : No doubtthat Indian accounting disclosure system is welllaid by the Banking Industry. The Indian FinancialReporting System (Accounting Standards) avoidedany major stress on account of contagion from theglobal financial crisis. Our overall regulatory frameworkand the specific regulatory measures played animportant role in preventing instability in the Indianbanking system during the global financial crisisin particular, and in avoiding any banking crisis ingeneral in the past.The proposed plan for convergence to InternationalFinancial Reporting Standards (IFRS) would meanIndia would join a league of more than 100 countries,which have converged with IFRS. As per RBIregulation the banks will have to be converted toIFRS by April 1, 2013.The benefits of this convergence are mutual andbroad for Banks, Investors and the Economy. Theconvergence benefits for the Banks are increasinggrowth of its international business. It facilitatesmaintenance of orderly and efficient capital marketsand also helps to increase the capital formation. Itencourages international investing and thereby leadsto more foreign capital flows to the country.Investors and stakeholder want the informationmore relevant and comparable across the jurisdictions.Financial statements prepared using a common set ofaccounting standards help investors better understandinvestment opportunities as opposed to financialstatements prepared using a different set of nationalaccounting standards. For better understanding offinancial statements, global investors have to incurmore cost in terms of the time and efforts to convertthe financial statements so that they can confidentlycompare opportunities.The Journal of Indian Institute of Banking & Finance January - March 2011 61


special featureWe believe that for Indian banking system, financialimpact of convergence with IFRS will be significant,particularly, in areas relating to loans loss provisioning,financial instruments and derivatives accounting.We also expect that in addition to the financialaccounting impact, the convergence process is likelyto entail several changes to financial reportingsystems and process adopted by banking in India. Thesechanges would need to be planned, managed, testedand well executed after deliberation. This also needsto strengthen a data capture system to enable theimpairment assessment after determining tacticallywhere information will be collected / who will make theimpairment assessment / templates and informationgathering and storage systems, etc.Our Bank is moving towards a well convergenceproposition for which we have engaged E&Y asConsultant who have carried out a preliminary studyand the same is under process.KRK (Punjab National Bank) : Accounting standardsand the integrity of its implementation lies at theheart of a successful market economy. It is a welcomefeature of the Indian economy that Indian AccountingStandards are broadly in line with InternationalAccounting Standards, which are now known asInternational Financial Reporting Standards (IFRSs).To be sure, there are some gaps in areas relatingto the convergence of Indian Accounting Standardswith IFRSs in developing sector-specific guidance,authority for issuance of standards and the training ofprofessionals. These issues are being addressed.As transactions in the business world are gettingincreasingly more complex with the liberalisationand globalisation across the globe, we need moresophisticated accounting standards. Thus adoptingIFRS is expected to fetch benefits to customers aswell as banking sector in India as the banking isalso becoming complex due to the enlarged offeringsby banks of products that can be customized tomeet the specific needs of the customers.The stakeholders / customers would be benefited inas much as accounting information made availableis expected to be more reliable, relevant, timely andmost importantly comparable across different legalframeworks. It would facilitate better understandingand confidence among the stakeholders / investors,by knowing the market related value of each balancesheet item.Thus adoption of IFRS by the banks would facilitateuse of “one accounting language company-wide”.Henceforth, a banking business with overseas officesand subsidiaries, can present accounts in a waycomparable to foreign competitors, making comparisoneasier.AK (UCO Bank) : The disclosures in the financialstatements bring about transparency so essentialfor a healthy financial system. That is why IFRScalls for extensive disclosures. It requires significantamount of additional disclosures compared to currentdisclosures made by the banks under Indian GAAP(Generally Accepted Accounting Principles). Extensivequalitative and quantitative disclosures related tofair values for each category of financial assets andfinancial liability, reclassifications, de-recognitions,pledges of assets, migration & sensitivity analysis,etc. are required to be disclosed under IFRS. RiskManagement practices and procedures in respectof credit, liquidity and market risks associated withbanks financial assets and liabilities and the efficiencyof the management strategy in mitigating the sameare also to be disclosed. Related Party disclosures,especially transactions with other government ownedentities; segment wise disclosures of loans etc., area few among the overall disclosure requirements.The benefits of IFRS to bank / customers / stakeholderswould be :It will be as per globally accepted reporting anddisclosures standard whereby almost all relevantinformation about a bank is made available.●There will be transparent and qualitative disclosure.●IFRS would follow Fair value method of valuationwhich is better than the conservative approach.●Recognition of income and expenses will be donefollowing some prudential basis.●MVN (Union Bank of India) : IFRS is a principlebasedmodel. IFRS requires extensive use of fairvaluations or measurement of assets and liabilities.The objective of IFRS is to set the balance sheetright, and hence a significant volatility may come in62January - March 2011The Journal of Indian Institute of Banking & Finance


profit & loss statement. I see four distinct advantagesof moving to IFRS.First, this would provide improved access to globalmarkets as majority of the stock exchanges globallyrequire financial information as per IFRS. If thefinancial information is as per Indian AccountingStandard then a risk premium is added to pricing.Second advantage is a corollary of the first asconvergence with IFRS would mean that the Indiancompanies need not prepare two sets of FinancialStatements in order to comply with the requirementsabroad. This would lead to lower cost of administrationand capital. As our markets get more integratedwith the global markets, the third advantage of movingto IFRS would be in benchmarking performance ofIndian companies and banks with their global peers.Fourth advantage I see is that in Indian GAAP, barringa few exceptions, net assets acquired is recordedon the carrying value instead of fair value. Here thetrue value of the combination is not reflected. IFRSovercomes this flaw as it mandates accounting ofbusiness combinations at fair value.BS (United Bank of India) : Different countries ofthe world have their nationally accepted accountingstandards. They have been following the principles ofInternational Accounting Standards (IAS) as part oftheir accounting standards. The interpretation of manyof the principles of IAS varies significantly in differentcountries. As a result there is lack of transparencyand non-comparability of financial statements ofvarious entities in different parts of the world. In thisera of globalisation standardized approach for financialreporting and comparability of data is very essential.Along with more than 100 countries of the world,India is also seeking to converge to InternationalFinancial Reporting Standard (IFRS). Indian bankswill have to move to IFRS by April 1, 2013. IFRSwould be significant for banks in India, particularlyin areas relating to loan loss provisioning, financialinstruments and derivative accounting. It is alsolikely to have a significant impact on the financialposition and financial performance, on key parameterslike capital adequacy ratios and the outcomes ofvaluation metrics that analysts use to measure andevaluate performance.The aim of setting standards is to bring about uniformityin financial reporting and to ensure consistency andcomparability in the data published by differententerprises globally.IFRS, when implemented will provide the followingbenefits :It will facilitate the companies to follow the standardglobal accounting practices leading to smooth andfree-flow of international capital to them.●Regulating agencies will be benefited since country /location-wise accounting norms will go away andthe associate problems and complexity of differentaccounting standards will be reduced to a great extent.●The investors will have better understanding of thefinancials of the companies and thereby will be moreequipped to evaluate and compare the investmentopportunities.●special featureAT (Vijaya Bank) : Ours is possibly one of thebest accounting and disclosure systems in theworld, with quality financial reporting as one of thecornerstones under corporate governance mechanism.Convergence to IFRS will certainly to be India'sadvantage as the process of India's globalizationgathers further momentum. It is expected that by2015, more than 150 countries will move to the IFRSplatform - providing a single language of businessensuring compatibility and comparability of financialstatements the world over. Cross border movementof cost-effective capital, professional manpower andincrease in cross border collaborative ventures aresome of the benefits that IFRS can spill over to banksand its stake holders.RK (Yes Bank) : Though IFRS would result inpro-cyclicality of earnings, which is a significantdrawback for a public trust institution like a bank, webelieve that moving to IFRS would create uniformityin accounting norms of Indian banks with their globalcounterparts thereby improving the ability of internationalstakeholders to assess Indian Banks on an equivalentbasis. We believe that this will be beneficial to banks inthe long run in managing / optimizing counter party risksand resultant exposures.The Journal of Indian Institute of Banking & Finance January - March 2011 63


special featureBooks Added to the IIBF Corporate LibraryNo. Title Author Publisher & Year of Publication1. Agricultural Growth in India : Role of Technology, A. Vaidyanathan O. U. P (India), 2010Incentives and Institutions2. Banking Development and Challenges D. T. Pai Author, 20113. Banking Services for the Poor : Managing for Robert Peck Christen Academic Foundation, 2010Financial Success4. Big Book of Customer Service Training Games Peggy Carlaw & Tata McGraw Hill, 2004Vasudha Kathleen Deming5. Broom and Groom Kiran Bedi & Wisdom Village, 2010Pavan Choudary6. Dealing with Difficult People Karen Mannering Hodder Education, 20087. Economic Growth in India : History and Prospect P. Balakrishnan O.U.P (India), 20108. Emotional Intelligence Jill Dann Hodder Education, 20089. Fault Lines : how Hidden Fractures still Raguhram G. Rajan Collins Business, 2010Threaten the World Economy10. Financial Management with CD Rajiv Srivastava O.U.P (India), 2008& Anil Misra11. Happiness at Work : be Resilient, Motivated Srikumar S. Rao Tata McGraw Hill, 2010and Successful - No Matter What12. Higher Standard of Leadership : Lessons Keshavan Nair Tata McGraw Hill, 2010From the Life of Gandhi13. How India Earns, Spends and Saves : Rajesh Shukla Sage Publicaitons, 2010Unmasking the Real India14. I can do Financial Planning Swapna Mirashi Academic Foundation, 201015. Law Relating to Guarantees: with Pro-Formas ofthBank Guarantees and Indemnity Bonds, 6 Edition S. N. Gupta Universal Law Publishing, 201016. License to Live : a Seeker’s Journey to Greatness Pirya Kumar Embassy Book Distributors, 201017. Managing Risk and Creating Value Mike Goldberg & IBRD / The World Bank, 2010with MicrofinanceEric Palladini18. Managing Yourself Bernice Walmsley Hodder Education, 201019. Nordstorm Way to Customer Service Excellence : Robert Spector &a Handbook for Implementing Great Service in Patrick McCarthy John Wiley & Sons, 2005your Organization20. Reminiscences of a Central Banker V. G. Pendharkar Author, 2008rd21. Risk Management in Banking, 3 Edition Joel Bessis John Wiley & Sons, 201022. Services Marketing : Concepts, Practices and S. Shajhan Himalaya Publishing, 2009ndCases from Indian Environment, 2 Edition23. Short History of Nearly Everything Bill Bryson Broadway Books, 200524. Successful Workplace Communication Phil Baguley Hodder Education, 200925. When the Penny Drops : Learning R. Gopalakrishnan Portfolio Penguin, 2010What’s not Taught64January - March 2011The Journal of Indian Institute of Banking & Finance


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