CU-BBA-SEM-III-Banking- Second Draft-converted

• Recapitalization would need to be supplemented by a slew of other steps, including corporate governance reforms, lower entry barriers, strengthened financial regulation, the creation of a competitive corporate debt market, and effective debt recovery mechanisms, to create a strong banking system. Three areas to be prioritized: 1. Improving governance and institutional power, particularly in PSBs. • These changes are as critical as a recapitalization in terms of sequencing, and they will need to be followed in parallel. • In order to combat nonperforming assets (NPAs), it is important to reform the banking sector. In China, for example, banking sector reforms centered specifically on tightening financial regulation and supervision, improving corporate governance, and increasing transparency, in addition to recapitalization. Following the East Asian Financial Crisis in the late 1990s, South Korea established the Financial Supervisory Service (FSS) to ensure bank supervision. The government has already recognized the need for better bank governance to some degree. • The Indra Dhanush Plan proposed the establishment of an independent Bank Board Bureau to oversee bank officials' jobs. The creation of a fully autonomous Bureau could have a significant impact on PSB governance. Greater transparency will ensure that banks' lending activities are consistent with credit allocation that is profitable. We must ensure that implementation occurs as soon as possible. 2. The growth of corporate bond markets is another field in need of improvement. • Bond markets must serve as a supplement to banks as essential sources of capital. • Over time, the share of bond markets as a source of corporate debt will hopefully increase, while the share of banks in lending will decrease, as liquid and deep bond markets allow companies to collect debt at low costs. 3. The banking sector's third field of change is to continue to make it more sustainable. • India should continue to allow private and international players to enter the sector in order to promote greater competition and innovation; the new policy of “on-tap” banking licensing is a positive move in this direction. However, the entry conditions could be loosened even further to lower entry barriers. Advocating for a subsidiary structure would not only allow international banks to join the Indian banking market, but it will also help reduce exposure to global shocks. • Greater competition in the long run would improve the sector's productivity and profitability. In the past, India's banking sector reforms, especially in the 1990s, have centered on increasing competition, improving governance, and tightening regulations. Future reforms should build on these foundations and learn from past mistakes. 101 CU IDOL SELF LEARNING MATERIAL (SLM)

4.13 PROTAGONIST TO ECONOMIC TRANSFORMATION As the Indian economy enters 2018, it is likely to undergo a subtle but significant transformation. For the first time, the country's per capita dollar income would surpass $2,000, a milestone that in global economic history has been linked to a multifold increase in domestic demand as affordability improves, turning once-luxury items into necessities. In this economic transition, the Indian banking system would have to play a leading role. Not only will we see a steady increase in banking services, but the complexity of solutions and distribution will also grow. The following factors aided in the growth of private sector banks' market share: Vintage: Since public sector banks provide the majority of industrial infrastructure funding, their balance sheets are inevitably impacted by market downturns. Most new age private sector banks, on the other hand, arose in the post-liberalization period with the majority of their expansion in the 2000s, and were devoid of any asset quality baggage. Newer vintages have aided private sector banks in investing in the most cutting-edge technology-intensive technologies and expanding their skills, all of which are critical in identifying new revenue streams and improving customer experience. The expansion of point-of-sale machines is an example of private banks' early adoption of technology. Despite having just 18% of the credit market in 2012, private sector banks began to extend their scope by installing point-of-sale devices, which they had 80% of in 2012. Although public sector banks have made significant progress since then, private sector banks still hold a majority share of 57 percent, indicating that this will continue to be a reliable source of revenue. Other income accounts for 20% of overall income for private sector banks compared to 14% for public sector banks, indicating that diversification pays off. Productivity: • Analyzing the cost-to-income ratio to determine productivity • CI – for banks, (employee expenditure + other operating expenditure/ (net interest income + other income) There is a clear distinction between public and private sector banks. • For private banks, CI has been on the decline for many years, dropping from 47% in FY12 to 43% in FYI 7. In the same time frame, however, this ratio for public sector banks has risen from 44% to 49%. • Keeping overall costs under control is a significant competitive advantage because it increases the return on investment, allowing the company to compete on all fronts: it offers a sufficient return to current shareholders while still allowing the company to raise additional capital for growth. Agility 102 CU IDOL SELF LEARNING MATERIAL (SLM)

Private Sector Banks are also nimble when it comes to making decisions about early stress detection, resolution, and recovery. So far, this has worked in their favour, with human resource challenges and asset quality issues (following the RBI's recent Asset Quality Review) having a disproportionately greater effect on public sector banks. 4.14 RBI ALONG WITH INDIAN BANKS Public Sector Banks Though public sector banks have lagged behind their private sector counterparts over the last decade, recent governance structural reforms will enable them to improve their role in the future. • Governance changes such as the establishment of a Bank Board Bureau, the division of the CMD's post into a non-executive Chairman and a CEO, and the proposal for a longer CEO term (5 years) are expected to increase performance in the long run. • The establishment of CRILC (Central Repository of Information on Large Credits) and the introduction of the IBC (Insolvency and Bankruptcy Code) have provided an institutional mechanism for information sharing and asset resolution. This will free up a significant amount of capital that is currently trapped on banks' balance sheets, sharpening their appetite for credit expansion. • The government's recent announcement of a large-scale recapitalization programme for public sector banks worth Rs 2.11 lakh crore could be a game changer. Although timely and ensuring that public sector banks can meet Basel III regulatory criteria, it also includes space for ‘growth capital' for banks that can demonstrate superior performance metrics. This is an effective way to encourage competition among public-sector banks, which will ultimately benefit the economy. Next Generation Banking With India on track to become the world's fourth largest economy by 2025, the following four dimensions will form and drive the banking landscape: • Development: This refers to the government's financial inclusion agenda as well as other important sectoral and structural reforms. • Deregulation: better financial intermediation and savings policies. • Demographics: The market is increasingly dominated by young, digitally savvy people. • Disruption: This refers to the digitization of banking, telecommunications, and financial services. Banking, telecom, and financial space digitization and incorporation The following seven trends will describe India's next generation banking, based on these four Ds 103 CU IDOL SELF LEARNING MATERIAL (SLM)

Transforming banking • In the future, technology will determine banking contours. Big data, cloud computing, smart phones, and other similar technologies fall under this category. • Customers' interactions with banks would be redefined by ‘omnichannel,' not multichannel. Personalized deals on customers' cell phones, the use of a home video- conferencing device for personalized connect, and the use of face-detection technology for efficient cross-sell are only a few of the ways that technology can help banking in the future. • Given India's high mobile density, the potential for using this technology to provide financial services is enormous. The JAM Trinity (Jan Dhan-Aadhar Mobile) has the power to transform the face of banking in this regard. Creative Destruction of Banks • Outsourcing services such as customer identification, fraud detection, payment processing, and account infrastructure KYC processing to existing technology service providers may be critical steps forward in terms of banking innovation. • Cashless banking would revolutionize ease of doing transactions with more penetration of the Internet and cell phones metamorphosing into a personal bank branch following demonetization and active policy focus on cashless economy. • Branchless banking could aid in revenue generation and cost control by allowing for economies of scale. • Banking business model advances could be paired with national platforms like Aadhaar to cut consumer acquisition costs by 40%, making branchless banking even more feasible. • ATM penetration in India is low, with only 11 ATMs per 1 million people, compared to 37 in China and 52 in Malaysia. Solar ATMs could cut the cost of installation by almost half and serve power-scarce rural areas. Infrastructure Financing • India currently holds around 5% of the global infrastructure sector, which is projected to grow to 9-10% by 2025. • For long-term funding, futuristic development models will grow along the lines of the 5:25 system and the Private-Public-Partnership (PPP) model. • Infrastructure Debt Funds, Green Banking, and Viability Gap Funding are some of the latest arrangements that will be accessible. • The MSME sector accounts for 8% of the country's GDP. The MSME sector's total debt finance demand is expected to be USD 650 billion, according to SIDBI. • In the coming years, new mechanisms such as Cluster-Based Financing, Capital Subsidy Policy for Technology Upgrading, MUDRA Bank, Credit Guarantee Schemes, Incubation Centers, and start-up facilities will play a key role. 104 CU IDOL SELF LEARNING MATERIAL (SLM)

A few creative ideas that could become a differentiating fact in the next 15-20 years are as follows: • Account number portability (similar to mobile number portability) • Efficient Big Data Analytics use • Supermarket debt securitization final thoughts If Indian banks fully embrace these expected reforms, they will not only help propel the Indian economy to the top four in the world in the next five years. 4.15 GOVERNMENT INITIATIVES • In his first speech from the Red Fort on August 15, 2014, Prime Minister Narendra Modi declared the need for concerted efforts to ensure that every household has a banking account. • The Pradhan Mantri Jan Dhan Yojana (PMJDY) envisions universal access to banking services, with each household having at least one basic banking account. It also consolidates the government's efforts to increase the number of households using banking services. Considering the overall amount of bank deposits with commercial banks, the growth has been impressive. The number of Rupay cards has risen as well. • The size of the branch network grew quickly in rural areas, though it grew at a faster pace in urban and metropolitan areas. • Public sector banks, which have long been active in social banking, continue to play an important role in providing banking services to the unbanked, but the share of private banks, both in terms of the number of accounts and the amount of money owed, has grown dramatically in the last decade. • Commercial banks play a significant role in extending credit in the northern region, especially in rural and semi-urban areas, as they previously operated Pigmy, Honey deposit, or Jeevan Nidhi Schemes, which have migrated to no-frill or simple saving accounts in recent years. • Commercial banks have been more active in extending credit to the agriculture sector than RRBs Cooperative Banks, resulting in a substantial increase in credit in urban areas in the Eastern and North-Eastern regions. 4.16 INNOVATION IN EXTENDING CREDIT • To reach out to the unbanked, commercial banks started looking at alternatives to traditional branch locations such as mobile trucks, banking kiosks, and Business Correspondents (BCs). The BC channel launched a method of inculcating banking culture to a significant number of unbanked customers who had never visited a bank branch. 105 CU IDOL SELF LEARNING MATERIAL (SLM)

• Customers save time and money by not having to travel to a branch to complete a purchase. • Savings are also significant in rural areas because visiting a branch to complete a transaction takes around 2-6 hours, which means time away from daily activities. With BCS, banking outlets have now been built in remote areas or in the midst of slums, places where banking penetration was poor or non-existent. As a result, commercial banks have been able to reach nearly 6 lakh villages with banking services, primarily via BCS. • By BCS, the amount invested in a simple savings account increased by approximately 26 times. During the same time span, the number of via branches increased by 15 times. • During the time, the sum transacted by the use of information technology grew at the fastest rate. Finally, PMJDY has shown promising results: the amount in simple savings accounts and transactions made using technology have increased significantly since 2014. 4.17 ISSUES AND SUGGESTIONS • Financial inclusion should be extended to the disabled, including the elderly whose locomotor activity, vision, and hearing are impaired. • Technological challenges, such as frequent computer breakdowns and a lack of communication, must be addressed to improve consumer trust in informal banking. • Facilities such as biometric-enabled and multilingual hand-held devices are needed to instill trust in rural populations. • Technological advancements such as integrated devices that can make cash withdrawals and deposits, the ability to scan documents to expedite new account opening and loan disbursements, and voice commands and narration for available services may all help to increase banking penetration. • Financial inclusion instruments must also be taken into account. • Standard commercial bank instruments are structured for salaried segments of society, such as recurring deposit schemes, which will need to vary in rural areas depending on income patterns dependent on the agricultural production cycle. • Since financial literacy is a challenge, bankers have used a variety of strategies to reach out to larger segments of the population, especially in villages. • It is critical to establish a relationship with customers, especially villagers, prior to entrusting them with their money. • To improve financial literacy, several banks have implemented a variety of programmes, including conducting college-level quizzes, creating comic books, and hosting magic shows, among others. 106 CU IDOL SELF LEARNING MATERIAL (SLM)

• In order to increase financial literacy among the unbanked, it is essential to standardize literature and materials. 4.18 SUMMARY • Central banks are self-governing national institutions that provide financial and banking services, with a primary emphasis on monetary policy, or the control of money supply in a country's economy. • To keep inflation under control and the financial system stable, monetary policy is needed. The Federal Reserve, the European Central Bank, the Bank of England, and the Reserve Bank of India all play important roles on a national and international level. • Monetary policy is one of the most important responsibilities of all central banks. They are expected to adjust the amount of currency in circulation based on what is best for the economy. • The three key instruments of monetary regulation used by central banks are (1) open- market operations, (2) interest rates, and (3) reserve requirements for commercial banks. • In India, monetary policy is an effective instrument for managing the country's economy. The Reserve Bank of India (RBI) is the monetary authority of India's central bank, and it regulates the supply of money and bank credit. It is in charge of ensuring that the banking system meets legitimate credit conditions rather than being used for speculative or unproductive purposes. • A central bank's primary goal is to maintain the country's financial and economic stability while also controlling inflation. • The Reserve Bank of India (RBI) was created on April 1, 1935, under the Reserve Bank of India Act, 1934. The RBI was founded in response to the recommendations of the Hilton Young Commission, which issued its report in 1926. • India's monetary policy is based on the concept of \"growth with stability.\" The policy aids in the control of money's supply, expense, and usage. • The central board of directors is in charge of the RBI's management and general operations. The central board of directors is appointed by the Indian government for a four-year term. • The Central Board of Directors consists of full-time officials, including the Governor and no more than four Deputy Governors. • The RBI's traditional duties are primarily the basic and fundamental functions, such as issuing currency notes, acting as a banker to other banks, advising the government on financial matters, managing exchange rates, credit control, and regulating and supervising commercial banks. 107 CU IDOL SELF LEARNING MATERIAL (SLM)

4.19 KEY WORDS • CRILC -Central Repository of Information on large Credits. • NCLT -National Company Law Tribunal. • GCC - General Credit • ARC - Asset Reconstruction companies • NHB - National Housing Bank. 4.20 LEARNING ACTIVITY 1. Prepare a brief note on the various powers of RBI in regulating Indian Economy. ___________________________________________________________________________ ___________________________________________________________________________ 4.21 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is meant by IMF? 2. What is its role in Banking Sector? 3. State the meaning of monetary policy? 4. What is Repo & Reverse Repo? 5. Explain the RBI along with Indian banks? Long Questions 1. What are the Monitory Policy Tools? 2. What is the supervisory role played by RBI? 3. Make a brief report on the Acts & Reforms that have been brought about in banking sector in India. 4. What are Non-Banking Financial Institutions (NBFI) & what are their contributions in shaping up Indian Economy. 5. Prepare a detailed note on Reserve Bank of India along with its role play, powers in regulating Indian Economy. B. Multiple Choice Questions 108 CU IDOL SELF LEARNING MATERIAL (SLM)

1. ________ is a Non-Banking Financial Institution a. IDBI b. IFCI c. UTI d. All of these 2. Bank Rate is the rate at which --------can borrow from RBI. a. Banks b. Industries c. State Govts. d. Farmers. 3. Repo rates is the rate at which----------lends money to various Banks. a. IDBI b. RBI c. ICCI d. SBI 4. Reserve Bank of India was nationalized in the year_____ a. 1947 b. 1949 c. 1952 d. 1979 5. Cash reserve ratio (CRR) is the minimum amount of cash that commercial banks must maintain with the ______ in the form of deposits a. Govt Treasury b. IDBI c. RBI d. UTI Answers 1 – d , 2- a , 3 – a , 4 –b , 5 –c . 4.22 REFERENCES Text Books 109 CU IDOL SELF LEARNING MATERIAL (SLM)

• T1, J.N. Jain & R.K. Jain, Modern Banking and Insurance: Principles and Techniques, Regal Publications, New Delhi, 2016 • T2, A. Ranga Reddy, C. Rangarajan: Rural Banking and Overdues Management, Mittal Publication Reference Books • R1, Muraleedharan, D, Modern Banking: Theory and Practice, PHI Learning, New Delhi, 2009. • R2, P Kandasamy , S Natarajan & R Parameswaran, Banking Law and Practice, Revised edition , S.Chand publication, New Delhi, 2012. 110 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 5: ACCOUNTS Structure 5.0 Learning Objectives 5.1 Introduction 5.2 Meaning 5.3 Types of Accounts 5.4 Types of Bank Accounts 5.5 Importance of Bank Accounts 5.6 Procedure for Opening an Account 5.7 Know your customer (KYC) guidelines of RBI 5.8 Risks in Account Opening 5.9 Closure of Accounts 5.10 Steps to close a Bank Account 5.11 Summary 5.12 Keywords 5.13 Learning Activity 5.14 Unit End Questions 5.15 References 5.0 LEARNING OBJECTIVES After studying this unit, students will be able to • Explain the various types of accounts and bank accounts • Interpret the KYC guidelines • Discuss the procedure for opening a bank account • Explain the importance of bank account • Identify the risks in account opening 5.1 INTRODUCTION Accounting is the process of documenting financial transactions in the form of financial statements using both numbers and text. It's a must-have for billing clients, keeping track of assets and liabilities (debts), calculating profitability, and tracking cash flow. Stakeholders include company owners, lenders, staff, administrators, consumers, and others. The system is primarily self-regulatory and structured for users of financial data. Financial statements are used by stakeholders to make company, lending, and investment decisions. Accounting encompasses a wide range of specializations and functions. Accountants who work for a single business company are referred to as private (internal) accountants. Small 111 CU IDOL SELF LEARNING MATERIAL (SLM)

business accountants can take on general accounting responsibilities such as bookkeeping and bank reconciliation. Tax accountants, audit accountants, and advisory accountants are the three types of accounting professionals. Federal, state, and local tax filings are the subject of the tax field. The aim of auditing is to check the accuracy of financial statements and internal controls. Advisory services are firms that provide general financial advice. Public accounting companies work for a variety of customers, while private accounting applies to working for a single company. 5.2 MEANING An account is a record in an accounting system that keeps track of a particular asset, liability, equity, income, or expense's financial activities. When business activities occur during the accounting period, these documents grow and shrink. The general ledger stores each individual account and is used to file financial statements at the end of each accounting period. 5.3 TYPES OF ACCOUNTS Assets, liabilities, equity, income, and cost are the five forms of accounts. Sub-accounts are used to record transaction information in each account form. Cash reserves, for example, may include a variety of different cash and savings accounts. Asset accounts: Accounts receivable, inventory, provision for questionable accounts (contra account), prepaid cost, savings, land, plant, and facilities, accrued depreciation (contra account), intangible assets, accumulated amortization (contra account), and some are asset accounts. Liability accounts: Accounts payable, notes payable, unpaid expenditures, deferred income, long-term bonds payable, and some are liability accounts. Equity accounts: Common stock, extra paid-in capital, retained earnings, treasury stock (contra account), and other equity accounts are available. Revenue accounts: Sales and other revenue accounts Expense accounts: Selling, general, and administrative expenses, interest, maintenance, depreciation (non-cash), amortization (non-cash), and other expenses are all expense accounts. 5.4 TYPES OF BANK ACCOUNTS The various types of bank accounts are: 1. Saving Account 2. Regular Savings 112 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Current Account 4. Recurring Deposit Account 5. Fixed Deposit Account 6. DEMAT Account 7. NRI Accounts 1) Savings Account a) Basic Savings Bank Deposit Accounts (BSBDA) • This account will be treated like a standard banking account. • There is no requirement to maintain a minimum balance on this account. • Account holders will receive an ATM card/ ATM cum Debit card, as well as a Rupay card. • Although there will be no cap on the amount of deposits that can be made per month, account holders will be limited to a maximum of four withdrawals per month, including ATM withdrawals. • All of the above services will be provided free of charge. Non-operation/activation of an in-operation simple saving bank deposit account would be free of charge. • An overdraft facility of up to Rs. 5000/- will be given for this account. b) Basic Saving bank Deposit Accounts Small scheme (BSBDS) • These are accounts with a more relaxed KYC, requiring only a self-attested address proof and a snapshot as a minimum record. • In a given year, total credit should not exceed 1 lakh rupees. • At any given time, the maximum balance should not exceed Rs. 50,000/-. • Cash withdrawals and transfers are limited to Rs.10,000/- per month. • After completing usual KYC formalities, remittances from a foreign account cannot be credited to this account. • This account can only be opened at bank branches that are connected to the Core Banking Solution or at branches where the conditions can be manually monitored. 2) Regular Savings Bank Account • This account is open to any resident citizen (single accounts, joint accounts with two or more individuals, associations, clubs, etc.). • The depositor has a modest credit option. • Each year, two free check books will be distributed. • Access to Internet banking will be offered at no cost. • Cell phones are used for balance inquiry, NEFT, bill payment, and mobile recharge, among other things. • Students can open a zero-balance account by submitting the necessary documents. 113 CU IDOL SELF LEARNING MATERIAL (SLM)

3) Current Account • This account is open to any resident citizen, including single accounts, joint accounts with two or more individuals, associations, limited companies, religious institutions, educational institutions, charitable institutions, clubs, and so on. • You can make payments an infinite amount of times. • Money may be sent to the corresponding account from anywhere in the world. • There will be an overdraft facility open. • Internet banking is a possibility. 4) Recurring Deposit Account • This account may be opened in single or joint names by any resident person, two or more individuals in joint accounts, Associations, clubs, Institutions/Agencies expressly approved by the RBI, etc. • Periodic/Monthly instalments can be made for any volume, starting at Rs.50/- and going up. • An account may be opened for any length of time between 6 and 120 months, in multiples of one month. • The monthly payment number chosen at the start of the scheme will be paid every month. • Once the number of instalments is set, it cannot be changed. • Every quarter, the authorized rate of interest is multiplied. • Consumers will be charged the balance due at maturity one month after the last instalment is deposited. • The depositor will receive a passbook. • According to the most recent amendments in the Income Tax Act, TDS can be applied to interest on cumulative deposits as well. 5) Fixed Deposit Account A) Short Deposit Receipt • Banks accept deposits from customers for periods ranging from seven days to ten years. • ‘Short Deposits' are deposits with a term of seven days or less but not more than 179 days. • The minimum amount that can be deposited under this scheme for a duration of 7-14 days is Rs. 5 lakhs. B) Fixed Deposit Receipt • This account is open to any resident citizen (single accounts, joint accounts with two or more individuals, associations, minors, societies, clubs, etc.). 114 CU IDOL SELF LEARNING MATERIAL (SLM)

• The minimum FDR in metro and urban branches is Rs. 10,000/-, while it is Rs. 5000/- in rural and semi-urban branches and for senior citizens. • Margin money, earnest money, and court attached/ordered deposits would not be subject to the minimum sum requirement for subsidies kept under government- sponsored schemes. • Depositors can request repayment of their funds prior to maturity. It is possible to repay the loan until it matures. • Interest rates vary by bank, depending on the duration of the deposits and when the bank adjusts the rate. • Senior citizens receive an additional 0.50 percent interest rate on deposits of one year or more. 6) DEMAT Account • A DEMAT account is used to perform stress-free stock transactions. • Individuals, Non-Resident Indians, Foreign Institutional Investors, Foreign Nationals, Corporations, Trusts, Clearing Houses, Financial Institutions, Clearing Members, Mutual Funds, Banks, and Other Depository Accounts are all examples of non- resident Indians. • To open this account, a person must fill out a form, submit a photo of the applicant, as well as a photocopy of their voter ID, passport, Aadhar card, or driving license, and the applicant's Demat account number will be given to them immediately after the application has been processed. • Opening and retaining Demat accounts, Dematerialization, Re-materialization, Purchases, Sales, Pledging and Un-pledging, and secure custody are all services given under this account. 7) NRI Accounts The choice of an NRI account is available to meet the banking needs of a Non-Resident Indian or a Person of Indian Origin. The NRI Accounts are further divided into three types: a) NRO (Non-Resident Ordinary Rupees) Account b) NRE (Non-Resident External Rupees) Account c) FCNR (Foreign Currency Non-Resident) Account • NRO Account (Non-Resident Ordinary Rupees): This account allows you to easily pass your foreign earnings to India. It can be opened as an FD, RD, Current, or Savings account. Individually or jointly, these accounts may be opened. 115 CU IDOL SELF LEARNING MATERIAL (SLM)

• NRE (Non-Resident External Rupees) Account: An Indian citizen's account must be transformed into an NRE account when he or she goes abroad to work. This account can be opened jointly with a resident of India. • FCNR Account (Foreign Currency Non-Resident): This account may be used to manage an international currency. It can only be taken out in the form of a term deposit and only after the maturity date has passed. 5.5 IMPORTANCE OF BANK ACCOUNTS Here are some great reasons to have a bank account to help you handle your finances: • Transfers are made easier with bank accounts. If you have a bank account, you can quickly withdraw money and make payments. • Having a checking account provides a safe treasury for your hard-earned money, because even if the bank or credit union is close by, you will still be able to get your money back. • Since most banks and financial institutions provide free or low-cost services to account holders, bank accounts are less expensive. • It's a simple way to make money. When you deposit money in a savings account, most banks give an interest rate. Your money will expand over time as a result of the interest. • It provides fast credit access. Having a bank account is advantageous since it allows consumers to access credit for personal loans, home loans, college loans, and other purposes. 5.6 PROCEDURE FOR OPENING AN ACCOUNT There are several steps for opening an account. They are as follows: • Select your bank account type • Choose the right bank for your account • Gather the required documentation • Complete the application process • Fund your bank account • Start using your bank account 1. Select Your Bank Account Type Different types of bank accounts will assist you in achieving various objectives. If you don't already have a bank account, you can start with: • Checking account • Savings account. 116 CU IDOL SELF LEARNING MATERIAL (SLM)

• Money Market Account • Certificate of Deposit (CD) Checking Account The most basic form of bank account is a checking account. They are the most popular because they provide simple, day-to-day access to your money. Checking accounts are mainly used for making payments (bills, regular expenses), collecting direct deposits, and withdrawing cash from ATMs, in addition to providing a safe place to keep your money. Debit cards and cheque-books are usually included with checking accounts. Savings Account A savings account is for money that you don't want to spend right away. Interest is paid on these accounts, but rates have been poor for many years. One way to make use of a savings account is to establish an emergency fund. Credit unions and online banks are likely to offer better interest rates than conventional banks. Money Market Account A money market account pays more interest than a savings account on occasion. It also allows you easy access to your money by allowing you to write checks and use debit cards. Money market accounts usually have a minimum balance requirement and can restrict the amount of transactions you may make each month. Certificate of Deposit (CD) A time deposit, also known as a CD, is a low-risk investment option. You agree to keep the money in the account for a set period of time, and the bank commits to a fixed interest rate, which is typically higher than other forms of accounts. 2. Choose the Right Bank for Your Account Many different institutions allow you to open a bank account. You can choose one of the three main bank categories to narrow down your options: • Traditional (brick and mortar) bank, • Online bank • Credit union. 117 CU IDOL SELF LEARNING MATERIAL (SLM)

Consumer Bank Pros Cons Type Fees are going up. A large physical branch network. Interest rates that is lower. Traditional Bank A plethora of financial products and Profits can take precedence over services are available. consumers depending on the business model and size. In certain cases, there is no way to Cost reductions result from having get help in person. fewer or no branches. It may be more difficult to deposit Online Bank Lower fees and higher interest rates cash. favour customers. There will be less one-stop shops for all financial products. The organisation is non-profit and There are fewer branches and product member-owned. options. Credit Union Fees are lower. Only a single population is served. Interest rates that are lower (savings Online resources that isn’t as well- and loans). developed. 3. Gather the Required Documentation To open a bank account, you won't need to have your blood type, birth certificate, or firstborn child. Your bank, on the other hand, will want to check your identity. Your bank might require you to submit a copy of your driver's license and/or sign a signature card in some cases. Before you register for a new account, you'll need the following details in addition to your name, date of birth, and home address: • Previous Address (if you've relocated during the last two years) • Social Security Number or Individual Taxpayer Identification Number (ITIN) • Driver's License or Government-Issued ID • Contact Information (phone number/email address) 118 CU IDOL SELF LEARNING MATERIAL (SLM)

If you're opening a joint account, the bank would need the above details from someone who will have access to the account. If you're under the age of 18, you'll need a parent or guardian to manage and access your account. Their details will be required by the bank, and they must accompany you if you apply for the account in person. When you open a new bank account, most financial institutions demand a minimum deposit. If you're going to move money from another branch, you'll almost certainly need the account number and routing number. 4. Complete the Application Process The process of opening a bank account is reasonably quick and simple. You can visit your preferred bank or credit union, but many of their websites also allow you to apply online. That is, in most cases, the only way to open an account with an online bank. You may have to fill out a new bank account application. Typically, the application is less complicated than those used to apply for a job, a loan, or an apartment. If you want to apply online, your bank will walk you through a series of questions that will ask you what kind of account you want and what documents you'll need to prove your identity. In an online form, you'll type most or all of the information into text fields. 5. Fund Your Bank Account To open your new bank account, you'll almost certainly need to make a minimum deposit. It may be as little as $1. Checking accounts typically have lower minimum deposits than savings, money market, and certificate of deposit accounts. You can finance your new bank account in a variety of ways: • Cash • Debit Card • Wire Transfer • Check • Money Order • Direct Deposit Test deposits are used by certain banks to further check your identity. If you make your initial deposit with a check, for example, there could be a holding period. If you already have a bank account and are switching to a new one, you may want to close the old one. The majority of the time, you can do it over the internet. Remember to check your direct deposit details with your employer or some other agency that makes contributions to that account if you close an old bank account. Keep the account open 119 CU IDOL SELF LEARNING MATERIAL (SLM)

until you're sure all pending transactions have been completed. You'll also want to change your bank account details in mobile payment apps and move any automatic payments to your new account. You can name a beneficiary for your account as well. When you died, the money in your account will go to your beneficiary. If you don't appoint a beneficiary, your estate's executor can split your bank account funds according to your will. 6. Start Using Your New Bank Account You could now have a new bank account under your name if you followed the first five steps. It could take anywhere from a few minutes to a few days for your account to be fully functional. Here are some suggestions for what you should do next: • Keep an eye on your mail. If you open a checking account, you can expect to receive a debit card and checks. • Have your boss set up direct deposit for you. Your paycheck should be deposited into a bank account. • Get the app for your bank. Your bank most likely has an app that allows you to make deposits and check your balance from anywhere. • Keep track of your purchases. You'll be able to look up a history of your purchases on the internet. Check them on a regular basis. 5.7 KNOW YOUR CUSTOMER (KYC) GUIDELINES OF RBI In 2002, the Reserve Bank of India (RBI) released an order requiring all banks to follow the \"Know Your Customer\" procedure for all new and existing domestic and non-resident customers. It aids in the verification of a customer's identity and residential address through the use of relevant documentary evidence. As a result, proper KYC prohibits the financial system from being used for money laundering and terrorist funding. These \"Rules\" would aid in the prevention of illegal funds entering the banking system. It is a legal obligation for both religious and non-religious trust accounts to comply with all KYC procedures. All banks must adhere to the RBI's KYC guidelines and cash transaction rules. The RBI's KYC Rules endorse certain banks' current practices and make it a condition for all banks to follow in regards to all of their customers who have domestic / non-resident rupee / foreign currency accounts. Specimen signature and verification 120 CU IDOL SELF LEARNING MATERIAL (SLM)

In the presence of bank employees, a customer's specimen (sample) signature is obtained on the account opening form, which is then attested by an authorized bank officer on the form itself. Customers are identified mostly by their signatures on checks and vouchers, which are compared to a specimen signature on file to verify the authenticity of the customer's signature. Power of attorney A depositor may wish to conduct his business through someone else on occasion. Banks can support this agreement if the account holder grants power of attorney to his or her representative. A power of attorney is a document that is properly stamped and sent to the bank by the account holder in accordance with the Stamp Act. A power of attorney allows the individual whose name appears on the contract, such as an attorney or an agent, to run the account in the place of the account holder. Account Opening Requirements The account opening procedure is crucial for KYC documentation. The account opening process is the start of the bank's relationship with the customer. When a customer accepts the banks' terms and conditions for the goods and services that will be provided in this partnership, the process begins. In general, the procedure entails the client signing contracts or forms for account opening and providing various required documentation, such as a PAN card, address evidence, photographs, and so on. Opening Accounts of Individuals – For KYC Procedure Opening a bank account is the start of a trusting relationship. The KYC protocol requires a face-to-face meeting with the applicant at the branch, the customer's office, or their home. The following documents are needed for the account to be opened: • Completed and signed Relationship/Application form by all applicants. • A recent photograph of each applicant is needed. • All applicants' proofs of identity and address; and • Copy of PAN Card for Proprietary Firms Opening Opening Accounts of Proprietary Firms – For KYC Procedure The following documents are needed for proprietor firms to open an account: • Account opening form signed by the proprietary on behalf of the company. • A recent portrait of the business owner • Evidence of the owner's identity. • Proof of the firm's name, address, and activity; and • A copy of the proprietor's PAN card 121 CU IDOL SELF LEARNING MATERIAL (SLM)

Opening Accounts of Partnership Firms – For KYC Procedure The following documents are needed for partnership firms to open accounts: • Account opening form signed by both partners, along with their photographs. • Proof of the partners' identities. • A copy of each partner's PAN card. • A copy of the partnership deed that has been stamped and registered. • A letter on the firm's letterhead stating the partnership. Opening Accounts of Limited Companies – For KYC Procedure The documents required for opening accounts of private and public limited companies are, • Account opening form signed by all authorized signatories with their photographs • Account opening form signed by all authorized signatories with their photographs The Company Secretary will verify the signatures. • Approved signatories' proof of identity • A copy of your PAN card • A copy of the Chairman's/Company Secretary's signature on the Board Resolution. • CS's most recent list of all directors, including their names, duly dated and signed. • Copies of the Certificate of Incorporation and Commencement of Business (only for public limited companies) and the Memorandum and Articles of Association Individuals should not use business entities as a \"front\" for maintaining bank accounts, according to banks. Banks should investigate the entity's control structure, as well as the source of funds and the natural persons with a controlling interest and who make up the management. 5.8 RISKS IN ACCOUNT OPENING The risks in account opening are: Risk 1: The customer experience and cost of inefficiency Account opening delays caused by NIGO (not in good order) paperwork would damage the client relationship and increase the firm's operating costs. Customers expect advisors to guide them smoothly through the account onboarding process. Advisors run the risk of consumer frustration from the start if the process does not run smoothly. Furthermore, overcoming NIGO conditions significantly raises the cost of doing business. The mutual fund companies' data specifications are the subject of the industry's straight-through-processing initiative. Broker-dealers, on the other hand, must collect even more information from their investor 122 CU IDOL SELF LEARNING MATERIAL (SLM)

customers than the fund firms do. As a result, advisors must gather all information needed by the fund company and the broker-dealer in a timely and accurate manner. Delays will occur if all information is not collected. A minor mistake or illegible handwriting on a new account application, in addition to not gathering all necessary details, can significantly delay the opening of the account by redirecting the business back to the front office. The information gathered must also flow smoothly into other processes, which may lead to additional delays. To reduce the risk of customer dissatisfaction and increased costs as a result of NIGO delays, an integrated solution that incorporates systems such as CRM, forms management, e- signature, and STP fund company account opening with a single data warehouse that feeds automated supervisory systems will be used. Risk 2: Data integrity Inaccurate data collected during account opening can impede middle office efficiency Account opening data that is inaccurate can stymie middle office productivity. The account opening process allows us to gather information about the customer, which will be used to direct the account's investment policy and trading decisions. Firms must ensure that all relevant data is collected early in the process, as that data will serve as the basis for all account-related decisions. Protecting data integrity during account opening enables the middle office, which oversees each account's risk profile and investment plan, to function effectively with the same data. If inaccurate data is obtained, entered, and stored in the firm's databases, the advisor's ability to make appropriate investment decisions for that client may be harmed. The ability to activate acceptable flags indicating risk conditions would also be harmed by inaccurate and incomplete data. Firms should implement controls during account opening that enable them to edit and check the accuracy of information as part of the workflow and cornerstone of their operational processes to minimise the risk of inaccurate data and preserve data integrity. Risk 3: Principal review and approval Manual supervisory checks are inconvenient, costly, and cause delays in business processing. Prior to application, direct-to-manufacturer company must also be inspected and authorised. This ongoing requirement would make it difficult to use the fund company's non-automated STP services. Many supervisory systems still rely on slow and inefficient manual inspection of check-and-app business. For example, automating the new account approval process will reduce review time from 15 minutes to five minutes, resulting in a more agile account opening process and a better overall client experience with more timely approvals. Automation is critical to processing direct business in a STP sense, and companies must 123 CU IDOL SELF LEARNING MATERIAL (SLM)

address this necessity as a cornerstone component of their STP initiative. Automated supervision relies on data being captured in a database that can be used for this purpose. Risk 4: Books and records compliance Non-compliance with books and records standards can be caused by account opening paperwork. Broker-dealers must keep books and documents related to transactions and sales separate from consumer accounts, according to SEC Rule 17a-3 and Rule 17a-4. Firms must also submit confirmation notes to customers, along with details about their suitability profiles. The information gathered during account opening is a critical component of what will eventually become the firm's books and records, establishing a reference profile against which regulatory compliance will be assessed. During a regulatory audit, these records will be examined to ensure compliance. When a company's books and documents aren't up to snuff, it risks paying hefty penalties and legal fees. Firms should ensure that the information obtained during account opening that feeds into the firm's books and records is accurate, usable across multiple systems, and auditable to reduce the risk of non-compliant books and records. When gathering the information, they should keep in mind that the data will later serve as the baseline profile from which regulators will assess compliance. Risk 5: Know your customer and suitability compliance Non-compliance with the conditions for knowing the client and suitability Investor clients must be known and protected by the advisor and broker-dealer. The fiduciary principle for investment advisors states that the consultant has a fiduciary obligation to the investor to manage their assets in their best interests. Enhanced provisions for \"know-your- customer\" and suitability criteria (FINRA Rule 2090 and FINRA Rule 2111) took effect this month, bringing broker-dealers closer to a fiduciary level. The broker-dealer regulations state that the company must collect certain customer data and prepare a detailed suitability and risk profile. The broker-dealer must also be able to demonstrate that a suggested investment is appropriate for the investor, according to the suitability criteria. Recommendations must meet strict criteria that will be enforced during client reviews and regulatory challenges. The bar has been increased, and businesses must now keep expanded records on a point-in-time basis in order to reach the new norm. Broker-dealers must obtain the data needed to properly monitor the client's assets to reduce the likelihood of non-compliance with these criteria. In addition, the broker-dealer must use the information to comply with Rules 2090 and 2111. Firms should check their data with these provisions in mind during internal enforcement processes to avoid being found in violation of these regulations during an audit or being subjected to litigation. A robust account on-boarding workflow with comprehensive data collection and retention is an important step in the investor relationship lifecycle, and 124 CU IDOL SELF LEARNING MATERIAL (SLM)

uncertainties and increased expenses associated with account opening are not limited to the front office. If performed incorrectly, account on-boarding poses risks that spread from the front to the centre and even to the back office, affecting data processing and organisational processes around the organisation. Firms will change mindsets, build procedures, and incorporate technologies to reduce risks and enhance business by being mindful of the possible risks and costs associated with account opening. 5.9 CLOSURE OF ACCOUNTS Having a small number of bank accounts is beneficial, but having too many accounts can be problematic. And you must maintain a certain level of balance on and of them. As a result, it's a good idea to close bank accounts that aren't in use. If you're one of the people who has an unnecessary bank account, you should close it. Here are some guidelines to help you close your bank account. But, before you do so, remember to disconnect your bank account from any payment sites or utility apps such as Paytm, Uber, Swiggy, and so on. • Before you close your bank account, there are a few things you should remember. • You will not be able to reopen your account after it has been closed. • Before closing the account, you should reduce the balance to zero. • If there are any outstanding dues, you should pay them before closing the account. • Before closing an account, make a copy of the entire bank statement for future reference. 5.10 STEPS TO CLOSE A BANK ACCOUNT Here are some guidelines to help you close a bank account. Bank Visit Your bank account cannot be closed electronically. You must go to the branch where you first opened the account. As a result, you must go to the home branch where you have an account and request that it be closed. Account closure form If you have a joint account, both account holders must sign the closing form to give their consent. There is also a general format given below that can be used. Complete the form fully. When you obtain the account closing form, fill it out fully. You must fill in all of the following information: 125 CU IDOL SELF LEARNING MATERIAL (SLM)

• Account holder's name • Account number • Contact number • Account holder's signature • Reasons for closing the account Submit required document After completing the closure form, send it to the bank with the following information: • Cheque Book: After closing an account, you must return the cheque book as well as any remaining cheque leaves to the appropriate bank branch. • Passbook: When closing an SBI account, you should also hand over your passbook to the bank. • Debit Card: The account holder must also return his or her debit card, which is used to make ATM withdrawals. • ID proof: Before closing your account, some banks can request ID and address proof. Closure charges Some banks charge a fee for closing an account. SBI Bank, for example, does not charge a fee if an account is closed within 14 days of its opening. If you close your SBI bank account after 14 days but before one year, you'll be charged a fee. Keep these considerations in mind, and don't let unused bank accounts sit idle, as there's no point in overburdening yourself with details and statements from so many banks. Close any unnecessary accounts that aren't beneficial to your financial situation. 5.11 SUMMARY • Accepting deposits from the general public is one of a commercial bank's primary duties, and in exchange, the bank will pay the account holder interest earnings on the money deposited, depending on the form of deposit account. Aspects of account opening and Know your customer (KYC) is the first step that anyone can take when entering a bank to establish a relationship with the institution and open a deposit account. • Savings Accounts are part of standard banking services, and although there is no limit on the amount of deposits that can be made each month, account holders are limited to a maximum of four withdrawals per month, including ATM withdrawals. • The above services will be provided free of charge. Non-operation/activation of an in- operation simple saving bank deposit account would be free of charge. • Any resident individual single accounts, joint accounts with two or more individuals, associations, clubs, and so on can open a Regular Savings Bank Account. The depositor has a modest credit option. The use of the internet banking system would be free of 126 CU IDOL SELF LEARNING MATERIAL (SLM)

charge. Mobile phones are used to check balances, make NEFT transfers, pay bills, and recharge mobile phones, among other things. • A current account is open to any resident citizen, including single accounts, joint accounts with two or more individuals, associations, limited companies, religious institutions, educational institutions, charitable institutions, clubs, and so on. • Payments can be made as many times as you like. • Money can be sent to the corresponding account from anywhere in the world. • The general public begins their banking relationship by opening a savings bank account (SB Account) and depositing small sums of money when and when they have extra cash. • To open a deposit account, an individual must complete and send an account opening application form to the appropriate branch. The application form should be accompanied by documents such as a current account holder's introduction, an Aadhaar card or passport, a Ration or Pan card as proof of identity, 2 to 3 recent photographs of the individual, and so on. In addition, the Bank needs an initial deposit sum to be deposited. • In 2002, the Reserve Bank of India (RBI) released an order requiring all banks to follow the \"Know Your Customer\" (KYC) protocol for all new and existing domestic and non- resident customers. It aids in the verification of a customer's identity and residential address through the use of relevant documentary evidence. As a result, proper KYC prohibits the financial system from being used for money laundering and terrorist funding. 5.12 KEYWORDS • KYC -Know your customer. • ATM – Automatic Teller Machine. • NRO -Non Resident ordinary Rupees Account • NRE -Non Resident External Rupees Account • FCNR -Foreign Currency Non-Resident Account. 5.13 LEARNING ACTIVITY 1. Experience the Banking Activity by way of opening a Current Account & Demat Account. ___________________________________________________________________________ ___________________________________________________________________________ 5.14 UNIT END QUESTIONS A. Descriptive Questions 127 Short Questions 1. Differentiate between Debit Cards & Credit Cards. CU IDOL SELF LEARNING MATERIAL (SLM)

2. What is Demat Account? Where it is utilized? 3. What is PAN Card & who issues them? 4. What are NRI Accounts? What are its special features? 5. What is the advantage of ATM machines? Long Questions 1. Describe the requirements to open a normal Savings Bank Account. 2. How does a Current Account differ from Savings Bank & what are its special features? 3. What is a Fixed Deposit Account? What are its advantages when compared with a Savings Bank Account & Current Account? 4. What is KYC? Why is it important while opening any account in Banks. 5. Describe the Accounts opening procedure for Proprietary Firms and Limited Companies. B. Multiple Answer Questions: 1. Savings Bank deposit gives_______ interest when compared with Fixed Deposit. a. Higher b. Lower c. Equal d. None of these. 2. Current Account & Savings Account are of ______ type. a. Same b. Different c. Comparable d. None of these. 3. KYC is essential to apply for _______ a. Any Bank Account b. Passport application. c. Ration card application d. None of these. 128 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Procedure for opening an Account is_______ for Proprietary firms, Partnership firms, Limited Companies. a. Same b. Different c. Marginally different d. None of these. 5. All public sector & Private sector Banks are controlled by______Bank. a. Reserve Bank. b. IDBI Bank c. Cooperative d. None of these. Answers 1 – b, 2 –b, 3 – a, 4 – b, 5 – a. 5.15 REFERENCES Text Books • T1, J.N. Jain & R.K. Jain, Modern Banking and Insurance: Principles and Techniques, Regal Publications, New Delhi, 2016 • T2, A. Ranga Reddy, C. Rangarajan: Rural Banking and Overdues Management, Mittal Publication Reference Books • R1, Muraleedharan, D, Modern Banking: Theory and Practice, PHI Learning, New Delhi, 2009. • R2, P Kandasamy, S Natarajan & R Parameswaran, Banking Law and Practice, Revised edition , S.Chand publication, New Delhi, 2012. 129 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 6: LOANS AND ADVANCES Structure 6.0 Learning Objectives 6.1 Introduction 6.2 Important Principles of Lending in Banking 6.3 Types of Loans in India 6.4 How to apply for a loan and its steps 6.5 Bank Profitability 6.6 Non-Performing Assets 6.7 Capital adequacy 6.8 Summary 6.9 Keywords 6.10 Learning activity 6.11 Unit End Questions 6.12 References 6.0 LEARNING OBJECTIVES After studying this unit Students will be able to • Discuss the principles of lending in banking • Explain about profitability of banks • Identify the types of loans in India • Outline the non-performing Assets • Explain about Capital Adequacy 6.1 INTRODUCTION When conducting lending and credit operations, a banker adheres to some fundamental lending standards. Banks compete with public funds by taking deposits and lending to their customers in order to make profits. To ensure the protection, security, and profitability of the money they lend, banks adhere to some basic lending principles. Lending is one of the most important activities of commercial banks, and it is their primary source of revenue. Borrowers vary in terms of their reason for the advance, activities, financial health, repayment capability, and risk, so the bank follows certain key principles and considerations before making a lending decision. 130 CU IDOL SELF LEARNING MATERIAL (SLM)

6.2 IMPORTANT PRINCIPLES OF LENDING IN BANKING These fundamental principles of bank lending have a significant impact on the loan policies and credit operations of banks. Here are some relevant lending principles: • Safety • Liquidity • Diversity • Profitability • Stability Safety Liquidity is the foundation of bank lending. Since they are lending public money that depositors can withdraw at any time, banks only lend for short periods of time. As a result, they allow loans backed by liquid assets that can be turned into cash at any time. A bank chooses securities with plenty of liquidity for its investment portfolio. It is important because the bank must be able to sell all of the securities on short notice without adversely impacting their market values if it requires cash to meet the urgent needs of its clients. Government bonds issued by the federal, state, and local governments, for example, can be quickly sold without affecting stock prices. Shares and debentures of major manufacturing companies are also included in this category. Ordinary company shares and debentures, on the other hand, are difficult to sell without a loss of value. As a result, banks should put their money into government bonds, as well as shares and debentures in respectable manufacturing firms. When deciding on an investment portfolio, a commercial bank should consider diversification. Rather than investing all of its surplus funds in a single safe, it should diversify its portfolio. It should invest in shares and debentures from a wide range of sectors in different parts of the world. The same definition should be applicable in the case of state and local governments. Diversification allows a bank's investment portfolio to be less risky. The diversity principle also applies to lending to a broad variety of firms, industries, businesses, and occupations. A bank should consider the adage \"don't put all your eggs in one basket.\" By lending to a number of trades and industries in different parts of the world, it can spread its risks. Liquidity This is the basic principle that guides a bank's investment decisions. It must be financially viable. As a consequence, it should invest in securities that have a predictable and fair return. The interest rate, dividend rate, and tax benefits provided by stocks and shares decide their ability to earn money. 131 CU IDOL SELF LEARNING MATERIAL (SLM)

Another important idea in a bank's investment policy is to invest in stocks and shares that have a high level of market stability. The bank simply cannot afford to lose all of its assets. As a result, it should invest in stocks of well-known companies with a low probability of price declines. Government bonds and corporate debentures have fixed interest rates. Their value fluctuates in response to changes in the economy's interest rates. Diversity A commercial bank should use the concept of diversification when deciding on its investment portfolio. It should invest its surplus funds in a variety of securities rather than a single form of security. It should choose shares and debentures from a variety of industries located in various parts of the world. In the case of state governments and municipal governments, the same concept should be applied. Diversification helps to reduce the risk of a bank's investment portfolio. The theory of diversity also extends to lending to a wide range of companies, sectors, enterprises, and professions. The maxim \"don't put all your eggs in one basket\" should be followed by a bank. It can diversify its risks by lending to a variety of trades and industries in various parts of the world. Profitability This is the foundational concept for a bank's investment decisions. It must be profitable enough. As a result, it should invest in securities that guarantee a reasonable and consistent return on investment. The ability of stocks and shares to earn money is determined by the interest rate, dividend rate, and tax benefits they provide. The interest on government securities issued by the federal government, states, and local governments is mostly tax-free. Rather than investing in new company stock, which are also tax-free, the bank should invest more in those securities. This is due to the fact that new company shares are risky investments. Stability Another critical concept of a bank's investment strategy should be to invest in stocks and shares with a high degree of market stability. The bank cannot afford to lose any of its securities' worth. As a result, it should put its money into shares of well-known companies with a low likelihood of price declines. Interest rates on government bonds and corporate debentures are fixed. Their value fluctuates in response to interest rate shifts in the economy. However, the bank is forced to liquidate a portion of them in order to satisfy its cash-in-hand requirements during the financial crisis. Aside from that, they run to their full term of 10 years or more, and fluctuations in the market 132 CU IDOL SELF LEARNING MATERIAL (SLM)

rate of interest have no effect on them. As a result, bank investments in debentures and bonds are more stable than company stock. 6.3 TYPES OF LOANS IN INDIA In India, there are several different forms of loans. Despite having a range of assets that they can mortgage to obtain loans at a lower interest rate, most people prefer a personal loan over other forms. One of the reasons for this situation is a lack of understanding of the various types of loans available in India. A loan, by definition, is a set sum of money that you can borrow from a lender (usually a bank) with the promise of repaying it within the agreed-upon time frame. For various forms of loans, the lender charges a set rate of interest. The creditor repays the loan sum plus interest in instalments according to the terms of the arrangement between the two parties. Loans are beneficial to people from all walks of life, particularly those in the middle and lower classes. Taking out a loan will help you realize your dream. Loans will assist you in obtaining amenities such as a house, automobile, or education. In India, various types of loans are available. You can choose a loan based on your needs. However, before taking out a loan, it is a good idea to look into the different loan options. Here's some detail on the 20 different types of loans available in India. A loan is money that a borrower borrows from a lender with the intention of repaying it within a certain time frame. In addition to the principal, the creditor would have to pay extra interest. The following are the various types of loans available in India: Home Loan In India, the most common form of loan is a home loan. A bank will issue you a home loan to help you buy a house. There are two types of home loans: fixed interest and variable interest. Purchasing a variable interest rate loan is a smart idea. You will even get a tax break if you take out a home loan. Interest rates range from 7.5 to 11%. Physical property is referred to as collateral. How much do you think you'll be able to get? – 85% of the property's value Advantages and disadvantages • If your income is huge, you can get a bigger loan. • Repayment flexibility • Tax advantages • A limit of 85 percent of the property value can be borrowed for a home loan. 133 CU IDOL SELF LEARNING MATERIAL (SLM)

Education Loan Banks provide education loans to those who need them. Students who are financially disadvantaged benefit from these loans because they have greater help in terms of study opportunities. Students who want to pursue higher education can get a loan from any Indian bank. They must refund the money from their payment until they have found work. Education loans are eligible for both Indian and international students. The education loan qualifies for a tax deduction under section 80E. 8.5-14.5 percent interest rate Collateral varies from one bank to the next. How much do you think you'll be able to get? – Depends on the value of the collateral. Advantages and disadvantages • Extended repayment period • Tax advantages • High interest rates Car Loan or Vehicle Loan Vehicle loans assist you in realizing your dream of owning a car or motorcycle. Almost every bank offers this form of loan. It's a secured loan, which means the bank has the right to repossess the car if the borrower doesn't pay the payments on time. If you want to buy a new car, you can take out an auto loan or a car loan. This loan is available from the bank. To be eligible for this loan, you must have evidence of income. Rate of interest: 9.0-10.6 percent How much do you think you'll be able to get? – Depending on your income documents, you might get up to 90% of the vehicle's value. Personal Loan A personal loan is an unsecured loan provided by a bank or financial institution. This loan is granted solely on the basis of your credit history and credit score. 11-16.5 percent interest rate No collateral is needed. How much do you think you'll be able to get? – Determined by your credit history. Advantages and disadvantages • If you default, banks would not be able to seize your money. • Loans are easily disbursed, but they require a formal application. 134 CU IDOL SELF LEARNING MATERIAL (SLM)

• Only salaried, self-employed, or skilled people are qualified. • Personal loans are prohibitively expensive. Loan against Car If you own a car, you might be eligible for a loan against it. Interest rate: 9% to 13% Your Vehicle as Collateral How much do you think you'll be able to get? – 70-75 percent of the worth of your car Advantages and disadvantages • If your car model is common and has a high resale value, you might be able to get a larger loan; however, banks may not lend against vehicles older than five years. Loan against Mutual Funds or Shares If you have money invested in stocks or mutual funds, you will get a loan against it. Rate of interest: 12-16% Investment in mutual funds and stocks as collateral How much do you think you'll be able to get? – Up to 60% of the value of equity funds and 50% of the value of bonds. Advantages and disadvantages • On complete repayment/closure of the loan, a dividend will be charged. • In the event of a share price correction, the bank may sell stock or request additional collateral investments. Loan against FD • You can apply for a loan against a fixed deposit if you have money in one. • Rate of interest: 1-2 percent higher than the FD rate 6.5% to 7.5 percent • Complementary: Your Fixed Investment • How much do you think you'll be able to get? – Up to 90% of the value of the deposit • Advantages and disadvantages • • After making the deposit, the loan may be taken the following day. • • If the deposit is kept together, the loan documents must be signed by both account holders. • • If the loan is not repaid, the bank can close the account in order to recover the loan amount. Loan against Life Insurance 135 CU IDOL SELF LEARNING MATERIAL (SLM)

This form of loan is secured by the documents of a life insurance policy. 12.5 percent interest rate Life Insurance Policy as Collateral How much do you think you'll be able to get? – 85-90 percent of the policy's surrender value Advantages and disadvantages • A loan may be used for any kind of financial need. • Only policies that are available for a loan may be used to apply for a loan. • The policy must be assigned in the lender's name. Loan against Property 11-15 percent interest rate Physical property is referred to as collateral. How much do you think you'll be able to get? – 60–70% of real estate documents Advantages and disadvantages • The documentation is identical to that required for a home loan, but the processing period is shorter. • There are fees for paying in advance. Top up Home Loan Home repair or modification loan is another name for a top-up home loan. This is a loan in addition to the home loan. Rate of interest: 10.5-12 percent Complementary: Existing Mortgage How much do you think you'll be able to get? – Up to 70% of a current mortgage Gold Loan The gold loan is the quickest and simplest to obtain of all the forms of loans available in India. When gold prices were increasing at an exponential rate, this form of loan was very common. The recent decline in gold prices has resulted in losses for gold companies. Price of interest: 9% to 11% Physical Gold as collateral How much do you think you'll be able to get? – Gold is worth 75% of its face value. Advantages and disadvantages • Mortgage approval can be received more quickly. 136 CU IDOL SELF LEARNING MATERIAL (SLM)

• A loan application does not necessitate a large number of papers. • You must apply your gold holdings, which the lender can sell if the loan is not paid back on time. Loan from PPF Interest rate is 2% higher than the PPF rate. No collateral is needed. How much do you think you'll be able to get? – The number can only be up to 25% of the remaining balance at the end of the second year. Construction Equipment Loans This loan may be used to purchase equipment for farming or service. 12 percent interest rate Nil collateral How much do you think you'll be able to get? – 95% of the total invoice amount Business Loan A business loan may be used to start or expand a company. 9.5-14 percent interest rate Collateral varies depending on the needs. How much do you think you'll be able to get? – Adaptable Advantages and disadvantages • If your company is doing well, you can get a business loan without putting up any collateral. • You can take out this loan for a longer period of time, but the interest rates are high. Rural Loans Rural loans are mostly intended for rural farmers to cover agricultural and development costs. Interest rates range from 7.5 to 11%. How much do you think you'll be able to get? – Proof of income is needed. Mudra Loan Mudra Loan is a form of loan that is used to Mudra loan is a business loan provided by the Indian government to small and medium-sized businesses. Price of interest: 9% to 12% (Depends upon bank) 137 CU IDOL SELF LEARNING MATERIAL (SLM)

No collateral is needed. How much do you think you'll be able to get? – Up to ten thousand dollars for small businesses Advantages and disadvantages • Excellent loan choice for small businesses • Easy to obtain financing from Mudra • Loan cap of only ten thousand dollars Cash against Invoice You can choose cash against invoice if you have already received the order and need cash to complete the transaction. Interest rate: 9% to 13% How much do you think you'll be able to get? – 90–100% of the invoice volume Advantages and disadvantages • Quicker processing • Shorter repayment periods Over Draft Overdraft is a term used to describe the method of requesting loans from banks. It means that customers will withdraw more money from their accounts than they have deposited. The bank will have an overdraft against the asset. Individuals can use this facility to meet their emergency needs. Interest rate: 1-2 percent higher if asset documents are submitted (Usually FD) Documents that serve as collateral How much will you get? – This is determined by the asset value. Working Capital Loan If you need working capital to run your company, a working capital loan is an option. Interest rate: 10% to 12% How much do you think you'll be able to get? – It all depends on the tax returns and financial statements. Advantages and disadvantages • Quicker processing • Higher interest rate • Shorter repayment period 138 CU IDOL SELF LEARNING MATERIAL (SLM)

Loan from unorganized sector The unorganized sector is the final choice for obtaining a loan. In the vast majority of cases, this choice is not recommended. This form of loan is extremely difficult to obtain and extremely expensive. Interest rate: 18% to 25% How much do you think you'll be able to get? – Is contingent on collateral Advantages and disadvantages • This loan is difficult to obtain, and the interest rate and payment periods are unreasonably long. 6.4 HOW TO APPLY FOR A LOAN AND ITS STEPS How to Apply for a Loan? Contrary to popular belief, applying for a loan is not a difficult task. You should take special care to ensure that you provide banks with all of the required documentation. Different types of loans in India require different sets of documents. Steps for Applying for Loan 1. Loan Application Form: You must complete an application form for the type of bank loan you need. You must ensure that all of the information on the form is true and accurate. 2. CIBIL Score Check: The bank then runs the CIBIL report to determine your credit card score. Apart from the current loan you are trying to apply for, CIBIL keeps track of and maintains information of the money/loans you need to repay. Your loan application will be accepted quickly if you have a good credit score. 3. Submitting the Required Documentation: The applicant must submit a number of documents in addition to the loan application form. Along with the application form, you must apply documents such as proof of identity, proof of income, and other certificates. 4. Loan Approval: The bank verifies all of the information you've given after you've submitted the application form and all of the necessary documentation. The bank accepts your loan application after the verification is completed and the findings are satisfactory. 6.5 BANK PROFITABILITY Banks benefit from making more money than they spend on expenses, just like any other company. The fees it charges for its services and the interest it receives on its assets account for the majority of a bank's earnings. The interest charged on its obligations is the largest cost. 139 CU IDOL SELF LEARNING MATERIAL (SLM)

A bank's main assets are its loans to individuals, companies, and other organizations, as well as the shares it owns, while its major liabilities are its deposits and the money it borrows from other banks or sells in the money market. Banks boost earnings by using excessive leverage, which aided in the onset of the Great Recession from 2007 to 2009. A return on assets and a return on equity can also be used to calculate profits. Banks gain a much higher return on equity than they do on assets due to leverage. For example, all financial institutions insured by the FDIC, which includes most banks, received an average return on assets of 0.97 percent in the first quarter of 2016, while the return on equity was 8.62 percent. Profit Measures: • Return on Assets and • Return on Owners' Equity Businesses use assets to produce revenue. A bank's assets are loans and shares, which provide the majority of the bank's revenue. A bank must have money to make loans and purchase securities, which comes mainly from the bank's owners in the form of bank capital, from depositors, and from money borrowed from other banks or sold as debt securities. A bank buys assets primarily with funds raised from its liabilities, as shown by the following classic accounting equation: Assets = Liabilities + Bank Capital (Owners' Equity) However, not all assets can be used to generate profits because banks need cash to meet customer cash withdrawal demands. This vault cash is stored in the company's vaults, as well as other locations on the premises such as tellers' drawers and automated teller machines (ATMs), and receives no interest. Banks must still hold funds in Federal Reserve accounts that paid no interest prior to October 2008. Due to the Great Recession at the time, the Federal Reserve began paying interest on bank deposits, but at a much lower rate than market rates. A bank must also hold loan loss provisions in a separate account to cover potential losses if borrowers default on their loans. Money in a loan loss contingency account is not considered income and thus does not add to earnings. The amount of fees it receives on its services and its net interest income are used to calculate the ROA: Interest Received – Interest Paid = on Liabilities on Assets Net Interest Income Interest Earned on Interest Paid on =- Securities + Loans Deposits and Borrowing 140 CU IDOL SELF LEARNING MATERIAL (SLM)

Net interest income: The interest rate spread, which is the average interest rate received on assets minus the average interest rate charged on liabilities, is a factor in net interest income. Interest Rate Spread = Average Interest Rate Received on Assets – Average Interest Rate Paid on Liabilities Net interest margin: The net interest margin (NIM) measures how much a bank earns money on its assets. A well-managed bank with a high net interest income and margin signals potential profitability. Net Interest Margin = Net Interest Income/ Average Total Assets The ROA for banks: Fee Income + Net Interest Income – Operating Costs = Average Total Assets ROA Net Income = Average Total Assets Since income is measured over a period of time, but assets are estimated at a specific point in time, average assets are used: Average Total Assets = Total assets at start of fiscal year + Total assets at end of fiscal year 2 The bank's investors are mainly interested in the return on equity because it is the return on their investment, and it is based not just on the return on assets, but also on the overall value of the assets that generate profits. However, in order to buy more assets, a bank must either 141 CU IDOL SELF LEARNING MATERIAL (SLM)

increase its liabilities or increase its capital. As a result, if the owners want to receive a higher return, they would choose to use liabilities rather than their own money because the return would be significantly higher. A bank uses leverage as it raises its liabilities to pay for assets; otherwise, the bank's profit will be limited by the fees it might charge and the interest rate spread. However, the interest rate spread is constrained by the amount of money a bank must pay on its liabilities and the amount of money it can charge on its assets. Banks must pay a minimum market rate to draw depositors because deposits compete with other assets. Similarly, because of competition from other banks, banks can only charge a certain amount for loans, and companies can obtain loans by selling debt securities, such as commercial paper or bonds, on the capital markets. As a result, interest rate spreads are narrow, and a bank can only increase its net interest income by raising the number of loans it makes relative to the amount of bank capital it has: Leverage Ratio = Bank Assets/Bank Capital Now the return for the owners is easy to calculate: ROE = Return on Assets × Leverage Ratio Net Income Bank Assets = × Bank Assets Bank Capital Net Income = Bank Capital Banks use leverage in the same way as a company might use debt to boost profits. After all, deposits are simply money owed to depositors by the bank. As a result, the leverage ratio is the same as the debt ratio used to calculate leverage in other forms of businesses. Increased leverage will boost return on equity, but banks can only go so far because increased leverage also means increased risk. Take, for example, the following hypothetical bank: Assets in the bank = $100 $95 in bank liabilities 142 CU IDOL SELF LEARNING MATERIAL (SLM)

$5 in bank capital This is a 20-to-1 leverage ratio ($100/$5). The bank's reserves would be wiped out if the value of its assets falls by just 5%. The Federal Reserve limits the amount of leverage that banks that are depository institutions can use to secure the banking system's protection. The leverage ratio is typically between 10 and 12. To put it another way, a bank's assets may be worth at least ten times its money, but not much more. 6.6 NON-PERFORMING ASSETS The quality of assets on a bank's balance sheet is used to determine its health and financial status. Any financial institution that has a large percentage of assets that are not returning, or Non-Performing Assets, should be concerned. Simply put, NPA refers to the amount of a loan that has not been repaid by the borrower. When an asset stops generating profits for the bank, it is classified as non-performing. If a loan is past due for more than 90 days, it is classified as a non-performing asset (NPA). NPA refers to a loan whose interest and/or principal instalments have been ‘overdue due' for a period of 90 days. The term \"overdue\" refers to a case in which a loan is not paid by the bank's deadline. In terms of a bank's wellbeing, the higher the NPA, the worse the bank's health. The majority of efforts to improve a bank are focused on NPA management. Assets are categorized according to whether or not they will be returned or repaid on a regular basis. There is the standard asset, which has been repaid on time on a regular basis. Asset quality is deteriorating, as evidenced by NPAs, substandard assets, questionable assets, and loss assets. How are properties classified? A bank's assets are listed according to their repayment status. Asset quality is divided into four categories: standard assets, non-performing assets, substandard assets, doubtful assets, and loss assets. Credit vulnerabilities and the level of reliance on collateral protection for payment of dues should be considered when classifying assets into various categories for a bank. Banks must disclose the number of nonperforming assets (NPAs) to the Reserve Bank's Regional Office within two months of the year's end, using the specified proforma. Non-performing Asset (NPA) When an asset stops generating profits for the bank, it is classified as non-performing. 143 CU IDOL SELF LEARNING MATERIAL (SLM)

Any asset that has not returned principal or interest in the last 90 days is called a nonperforming asset (NPA). NPA refers to a loan whose interest and/or principal instalments have been ‘overdue due' for a period of 90 days. The term \"overdue\" refers to a case in which a loan is not paid by the bank's deadline. The following diverse classes of assets should be defined by banks: (i) Standard Assets (ii) Sub-standard Assets (iii) Doubtful Assets (iv) Loss Assets Standard asset A standard asset is one that does not reveal any flaws and does not pose a higher risk to the company than normal. An asset like this should not be considered a non-performing asset. Substandard asset A substandard asset is one that has been nonperforming for less than or equivalent to 12 months. Such an asset would have well-defined credit vulnerabilities that jeopardize the debt's liquidation and are marked by the distinct probability of a loss to the banks if deficiencies are not fixed. Doubtful asset If an asset has been in the substandard category for more than 12 months, it will be rated as doubtful. A loan classified as dubious has all of the flaws found in assets classified as sub-standard, with the added feature that the flaws make complete collection or liquidation highly questionable and improbable based on currently established evidence, circumstances, and values. Loss asset A loss asset is one that has been reported as a loss by the bank, internal or external auditors, or an RBI inspection, but the balance has not been completely written off. In other words, such an asset is considered uncollectible and of such low value that it is not warranted as a bankable asset, despite the possibility of salvage or recovery value. Resources that are losing money should be written off. If loss assets are allowed to stay on the books for whatever reason, the full amount owed should be covered. This ensures that the 144 CU IDOL SELF LEARNING MATERIAL (SLM)

entire sum of the loss assets should be kept from other sources, such as the bank's benefit, to cover the loss. Provisioning is a method used to resolve asset quality deterioration in a bank's assets. The lower the asset quality, the higher the provisioning coverage ratio would be. Banks should make differential provisions for substandard assets, uncertain assets, and loss assets. Non-Performing Assets (NPA) in Indian Banks According to the Reserve Bank of India (RBI), gross non-performing assets in Indian banks, specifically public sector banks, are estimated at around Rs 400,000 crore (US$61.5 billion), accounting for 90 percent of total non-performing assets in India, with private sector banks accounting for the rest. Reasons for the Rise in NPA levels • The Indian economy was booming from 2000 to 2008, and banks, especially public sector banks, began lending heavily to businesses. • However, as a result of the financial crisis in 2008-09, corporate profits plummeted, and the government prohibited mining ventures. The problem became more severe when environmental permits were delayed, impacting the infrastructure sector electricity, iron, and steel resulting in raw material price fluctuations and a supply shortage. • Another explanation is that banks have relaxed lending standards, particularly when it comes to large corporations, allowing them to skip financial and credit review. Recent Developments and Ways to Tackle NPA • Insolvency and Bankruptcy Code (IBC) – The RBI's drive for the IBC is expected to speed up the resolution process while maintaining control over asset quality. The provision criteria would change, with the requirement for a higher proportion of provisions helping to improve the books. • Credit Risk Management – This entails credit evaluation and tracking accountability and credit through various benefit and loss assessments. Banks should perform a sensitivity analysis and develop protections against external factors when performing these studies. • Credit monitoring is being tightened – To keep track of alerts, a correct and reliable Management Information System (MIS) must be enforced. In an ideal world, the MIS will identify problems and send timely warnings to management, allowing them to take appropriate action. • Banking Law Amendments to Grant RBI More Control – Currently, the RBI can only perform a lender inspection and does not have the authority to set up an oversight committee. The RBI will be able to track vast accounts and establish oversight committees as a result of the law change. 145 CU IDOL SELF LEARNING MATERIAL (SLM)

• More “Haircuts” for Banks – PSU lenders have been setting aside a considerable portion of their earnings for provisions and losses due to nonperforming assets (NPAs) for quite some time. The situation is so dire that the RBI may order them to build a larger reserve and, as a result, report lower income. • Stricter NPA recovery – It is also suggested that the government amend the laws to allow banks more power to recover NPAs rather than playing the \"wait-and-see\" game. • Corporate Governance Issues – Banks, especially those in the public sector, must develop proper guidelines and structure for senior-level appointments. • Accountability – Today, lower-level executives are often held accountable; nevertheless, senior-level executives make big decisions. As a result, if Indian banks are to address the issue of nonperforming assets (NPAs), senior executives must be held accountable. To solve the issue of nonperforming assets, banks should consider \"raising money.\" 1. Using unclaimed deposits – In the same way that the government can set aside funds for unclaimed dividends, it can set aside funds for unclaimed deposits. In exchange, these funds can be used to provide liquidity to banks. 2. Bank Asset Monetization – In this situation, banks with retail franchisees can generate value by auctioning a bank assurance association rather than operating it like an insurance business themselves. The current setup prevents capital inflows and provides little wealth to the shareholders. 3. Make the Cash Reserve Ratio (CRR) more appealing – Currently, the RBI requires Indian banks to keep their CRR below a certain level, below which the RBI does not pay interest. As a result, banks lose a significant amount of interest income. It is possible to reduce capital requirements by making the CRR more financially rewarding for banks. 4. Central bank refinancing – In 2008-09, the US Federal Reserve invested $700 billion on stressed assets as part of the \"Troubled Asset Relief Program.\" Indian banks may create a similar structure by directly involving the RBI or by forming a Special Purpose Vehicle (SPV). 5. Structural reform to include private capital – The pay system and governance of banks is causing a business issue. Banks should be managed by a board of directors, with the aim of reducing the government's stake and making financial institutions more appealing to private investors. The issue of NPAs in Indian banks can be effectively monitored and regulated using the potential solutions outlined above, allowing banks to achieve a clean balance sheet. NPA Provisioning 146 CU IDOL SELF LEARNING MATERIAL (SLM)

Aside from the technical term, provisioning refers to the sum set aside by banks from their earnings or income in a given quarter to cover non-performing assets, or assets that could become liabilities in the future. It is a mechanism by which banks compensate for bad assets while maintaining a healthy balance sheet. Provisioning is performed in accordance with the asset's type. The categories were discussed in the previous section. Not only does provisioning depend on the type of asset, but it also depends on the type of bank. Tier-I and Tier-II banks, for example, have different provisioning standards. GNPA and NNPA Banks are expected to report their nonperforming assets (NPAs) to the public and the RBI on a regular basis. There are mainly two metrics that can be used to assess a bank's NPA situation. A bank's nonperforming assets (NPAs) will be listed in its standalone financial statements. NPA in Absolute Numbers GNPA: GNPA stands for gross non-performing assets. GNPA is a numerical value. It indicates the cumulative amount of gross non-performing assets held by the bank in a given quarter or financial year. NNPA: NNPA stands for net non-performing assets. The net NPA is calculated by subtracting the bank's provisions from the gross NPA. As a result, net NPA tells you the exact value of non-performing assets after the bank has set aside funds for them. NPA Ratios NPAs may also be calculated as a proportion of overall progresses. It allows us to estimate how much of the overall advances is unrecoverable. The formula is straightforward: • The GNPA ratio is the proportion of total advances to total GNPA. • The NNPA ratio calculates the ratio of net NPA to total progresses. High nonperforming assets (NPAs) can be unfavorable to a bank. This is due to the fact that they are non-performing properties. High nonperforming assets (NPAs) indicate that banks have an excessive number of loans that have become non-functional or are not generating any interest income. Banks may either leave NPAs on their books in the hopes of recovering them or make arrangements for them. Otherwise, banks would write off the loans as bad debt. Apart from nonperforming assets, there are several other considerations to consider when evaluating a deposit. Reasons for NPAs in Banks An account does not become a non-performing asset (NPA) overnight. It sends out signals well enough ahead of time that action can be taken to prevent the account from falling into the NPA group. Accounts become non-performing assets (NPAs) for a variety of reasons that 147 CU IDOL SELF LEARNING MATERIAL (SLM)

are related to both the borrower and the lender, as well as factors outside their control. According to an internal RBI report, the following factors, in order of importance, contribute to NPAs. Internal Factors • Funds diverted for expansion, diversification, and modernization. • Taking on new tasks. • Assisting, encouraging, and associating with issues. • Project implementation time and cost overruns. • Ineffective leadership. • A strained working relationship • Inadequate technology/technical issues • Obsolescence of products, etc. • Bad credit Banks' appraisals, reporting, and follow-up are all flawed SWOT analyses. External Factors • Input or power shortages • Recession • Increased prices • Changes in the exchange rate • Government policy changes such as excise, import and export tariffs, emission control orders, and so on. • Due to management's tardiness in recovering loans extended to large corporate houses with as many as 7000 willful defaulters, lenders' legal recourse is time consuming and slow. • The absence of daily industrial visits causes a gradual deterioration of liquidity, and units begin to default on loan payments. • Political instrument – credit directed to SSI and the rural market. • Debtors' use of political clout to manipulate creditors has resulted in high industrial bad debts. The reasons for rising NPAs, according to the Economic Survey 2012-13, are as follows. a) PSBs' transition to a system-based approach to identifying nonperforming assets (NPAs); b) the country's current macroeconomic situation; c) recent increases in interest rates; d) lower economic growth; and e) historically aggressive lending by banks, especially during boom times. NPAs Effect on the Performance of Banks A high level of nonperforming assets (NPAs) has a negative effect on a bank's profit and growth. The high levels of nonperforming assets (NPAs) have become a big benefit 148 CU IDOL SELF LEARNING MATERIAL (SLM)

stumbling block. Recovery is an important aspect of the bank, by the way. The best bank productivity is determined by the best workers. Even though the overall size of the portfolio is increasing, bad assets are increasing not only in absolute terms but also in percentage terms. If NPAs were stable, their percentage as a part of the total advance would have remained constant, but this is not the case, so the quantum of bad loans is increasing faster than the overall growth in loans. The method for resolving NPAs under the Mergers Act. Lenders have been given breathing room to absorb NPA write-offs thanks to deferred loss write-off provisions. It's too early to say if the NPA resolution process in Asian countries has been successful. Banks must charge a higher rate of interest to their profitable and attentive customers. The customer is the one who uses the loan facility, and NPAs represent late payments. They also increase the system's processing costs, denying diligent credit consumers the advantage of a lower rate that would help them be more productive and competitive. NPAs are not only a concern for banks, but they are also harmful to the economy. Our slow-moving legal framework has stymied the recovery of large sums of money from willful defaulters, leading to the creation of assets rehabilitation funds to take over banks' bad debts. As a result, this financial year, SBI, ICICI Bank, and HDFC have recognized the recovery of nonperforming assets (NPAs) while also acknowledging that “there is no simple solution to the problem of improving recovery on existing bad advances or loans.” The issue of nonperforming assets (NPAs) in the Indian banking system is very strong, owing to our lax credit policies, which have rendered our banking system vulnerable and unsound. As with cancer, the ripple effect of NPAs is progressively felt in all aspects of the economy, including saving, expenditure, development, jobs, and services, affecting resources and economic growth. PSBs, especially the larger ones, have been focusing on understanding NPAs and refusing to compromise on asset restructuring, even though it spooked the markets or hurt investor sentiments; there is no proposal to build a bad loan to relieve lenders of bad loans. The cumulative bad loan in the banking sector has risen to Rs 10,00,000 crore, with the majority of these bad loans owed by large corporations. Concessions, on the other hand, are made to them. Huge amounts of bad loans are being issued and written off from bank profits, forcing many lenders to report losses. More than 7,000 deliberate and willful defaulters owe the banks a total of Rs 60,000 crore. Their names aren't even mentioned. 6.7 CAPITAL ADEQUACY Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its risk. It is also known as the Capital to Risk (Weighted) Assets Ratio (CRAR). In other words, it is the ratio of a 149 CU IDOL SELF LEARNING MATERIAL (SLM)

bank’s capital to its risk-weighted assets and current liabilities. This ratio is utilized to secure depositors and boost the efficiency and stability of financial systems all over the world. Capital Adequacy Ratio Formula: The CAR or the CRAR is computed by dividing the capital of the bank with aggregated risk- weighted assets for credit risk, operational risk, and market risk. This is calculated by summing a bank’s tier 1 capital and tier 2 capitals and dividing the total by its total risk-weighted assets. That is: Tier 1 CAR = (Eligible Tier 1 capital funds) = (Market Risk RWA + Credit Risk RWA + Operational Risk RWA) Total CAR = (Eligible Total capital funds) ÷ (Credit Risk RWA + Market Risk RWA + Operational Risk RWA) CAR Formula: CAR = (Tier 1 capital + Tier 2 capital)/risk weighted assets Note that two types of capitals are measured here. Tier 1 capital allows a bank to bear losses without having to stop trading. Ordinary share capital, equity capital, audited income reserves, and intangible assets are all part of core capital. This is money that is still available and can be used to absorb a bank's losses without forcing it to shut down. Tier 2 capital will bear losses if the bank is closing down, but it provides less security to depositors. Unaudited reserves, unaudited retained earnings, and general loss reserves make up this category. This capital is used to absorb losses if a bank loses all of its tier 1 capital and to cushion losses if the bank is closing down. Risk-weighted assets: These assets are used to determine the minimum amount of capital that banks should hold in order to reduce the risk of insolvency. The risk evaluation determines the capital requirement for all forms of bank assets. Why is Capital Adequacy Ratio important? Central banks and bank regulators settle on the CAR to keep commercial banks from taking on too much debt and becoming insolvent. The CAR is necessary to ensure that banks have sufficient space to absorb a decent number of losses before being insolvent and losing depositor funds. A bank with a high CRAR/CAR is considered safe/healthy and likely to meet its financial obligations in general. Depositors' assets are given a higher priority than the bank's capital when a bank is closing down, meaning depositors can only lose their deposits if the bank's loss exceeds its capital. As a result, the higher the CAR, the more the bank's depositors' funds are protected. The 150 CU IDOL SELF LEARNING MATERIAL (SLM)