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

CAR ensures that the chance of a bank going bankrupt is minimal, which helps to keep an economy's financial system stable. What is the current Capital Adequacy Ratio in India? A CAR of 8% is recommended by the Basel III Norms. In India, the Reserve Bank of India (RBI) requires scheduled commercial banks to maintain a CAR of 9%, whereas public sector banks must maintain a CAR of 12%. The Bank of International Settlements divides capital into Tier 1 and Tier 2 categories based on the capital's role and efficiency. The primary way to assess a bank's financial health is to look at its Tier 1 capital. It contains retained earnings and shareholder's equity, all of which are disclosed on financial statements. Tier 1 capital is capable of bearing losses without disrupting company activities since it is the central capital kept in reserves. Tier 2 stock, on the other hand, consists of revalued stocks, unidentified reserves, and hybrid securities. Supplementary capital is a form of capital that has a lower quality, is less liquid, and is more difficult to quantify. Risk-weighted assets make up the lower half of the equation. The amount of a bank's assets, weighted by risk, is known as risk-weighted assets. Different types of assets, such as cash, debentures, and bonds, are typically held by banks, and each type of asset carries a different level of risk. The probability of an asset losing value is used to determine risk weighting. Risk weightings for stable asset classes, such as government debt, are similar to zero percent. A debenture, for example, has a higher risk weighting because it is supported by little to no collateral. This is due to the increased risk that the bank will be unable to recover the loan. Risk weighting can be applied to the same asset class in different ways. If a bank lends money to three different companies, the loans will have different risk weightings depending on each company's ability to repay the loan. Calculating the Capital Adequacy Ratio (CAR) – Worked Example Let us look at an example of Bank A. Below is the information of the Bank A’s Tier 1 and 2 Capital, and the risks associated with their assets. 151 CU IDOL SELF LEARNING MATERIAL (SLM)

Bank A has three types of assets: Debenture, Mortgage, and Loan to the Government. To calculate the risk-weighted assets, the first step is to multiply the amount of each asset by the corresponding risk weighting: • Debenture: $9,000 * 90% = $8,100 • Mortgage: $45,000 * 75% = $33,750 • Loan to Government: $4,000 * 0% = $0 As the loan to the government carries no risk, it contributes $0 to the risk-weighted assets. The second step is to add the risk-weighted assets to arrive at the total: • Risk-Weighted Assets: $8,100 + $33,750 + $0 = $41,850 The Capital Adequacy Ratio of Bank A is as follows: Where: • CAR: $4,000 / $41,850 = 10% Bank A has enough liquidity to cushion future losses and secure depositors' money because it has a CAR of 10%. All banks are expected to have a Capital Adequacy Ratio of at least 8% under Basel III. Tier 1 Capital is more critical than Tier 2 Capital, so banks are expected to have a certain amount of it. Tier 1 Capital divided by Risk-Weighted Assets must be at least 6% under Basel III. 152 CU IDOL SELF LEARNING MATERIAL (SLM)

6.8 SUMMARY • When conducting lending and credit operations, a banker follows certain basic lending principles to ensure the protection, security, and profitability of the money it loans. Banks compete with public funds by taking deposits and lending to their customers in order to make profits. • Banks follow some important Principles of Lending in Banking such as Safety, Liquidity, Diversity, Profitability, and Stability, which are one of the most important functions performed by commercial banks and a major source of income for them. • The core principles of lending are based on the concepts of protection, profitability, and advance liquidity. In response to changing economic conditions, lending requirements are updated or adjusted from time to time. • After the nationalization of fourteen commercial banks in 1969, the idea of lending changed dramatically. The concept of security-based bank finance gave way to the concept of need-based finance, though collateral securities were still accepted everywhere they were available. • The choice of a borrower is a critical aspect to consider during the care process. There have been several cases of parties engaging in different forms of frauds and forgeries in order to defraud banks and obtain financing. Banks will escape the majority of these situations by adhering to KYC (Know Your Customer) standards in letter and spirit. • When considering new plans, caution advice and defaulter lists from the RBI/ECGC/CIBIL Report/Reports from other banks must be checked as a rule and without fail. Trade circle inquiries, as well as information from newspapers and magazines, can sometimes provide valuable information that is of interest to the bank. • Before approving a loan or credit cap, a thorough assessment is needed. A cautious banker ensures that the borrower's financing is neither over-financed nor under- financed. Inadequate funding destroys a project and, as a result, sinks bank financing. Over financing allows the borrower to divert funds for purposes other than those for which he obtained the loan, putting the repayment plan in jeopardy. • A bank's primary concern is the redemption of an advance. Repayment may come from a variety of sources, like business/salary income or some other source of income. Working capital accounts, such as Cash Credit or bills purchase/discount services, can be self-liquidating until the selling proceeds are realized. • Loans are advantageous, especially to the middle and lower classes. In India, there are more than 20 different forms of loans. A loan can be chosen depending on one's needs. 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. 153 CU IDOL SELF LEARNING MATERIAL (SLM)

6.9 KEY WORDS • CAR - Capital Adequacy Ratio. • GNPA - GNPA Gross non-performing assets • NNPA - NNPA Net non-performing assets • ROC - Registrar of Companies • CIBIL -Credit Information Bureau of India Ltd. 6.10 LEARNING ACTIVITY 1. Sketch out a procedure to get a loan of Rs 50 Lakhs towards expanding your Business activity from a private Bank. ___________________________________________________________________________ ___________________________________________________________________________ 6.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Why do Banks lend money to borrowers? 2. How do Banks make profits? 3. What is the most sought about loan from Banks & what are its features? 4. What precautions Banks should take to avoid Non Performing Assets? 5. What guidelines a Banker follows before sanctioning a loan? Long Questions 1. List out the steps followed by a Bank before sanctioning a loan. 2. How does a Bank carry out a Credit proposal? 3. Describe the various types of Loans available in India? 4. How do Banks end up with Non-Performing Assets & what is its impact on its overall profitability? 5. What are the factors governing the Profitability of Banks? B. Multiple Answer Questions: 1. While lending Money to a borrower a Banker looks at______of the money given as loan. a. Safety b. Liquidity 154 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Repayment d. All of these 2. In India around ______types of Loan are available for borrowers. a. 20 b. 25 c. 18 d. 25 3. Assets of a Bank are classified in to _______ a. Standard Assets b. Non-performing Assets c. Doubtful Assets. d. All of these 4. before sanctioning loans to a borrower Bankers verify_________ a. KYC b. CIBIL c. ECGC Reports d. All of these 5. Most popular loan schemes that people approach is _______ a. Home loan. b. Vehicle loan. c. Business loan d. All of these. Answers: 1 – d, 2 – a, 3 – d, 4 – d, 5 – d. 6.12 REFERENCES Text Books • T1, J.N. Jain & R.K. Jain, Modern Banking and Insurance: Principles and Techniques, Regal Publications, New Delhi, 2016 155 CU IDOL SELF LEARNING MATERIAL (SLM)

• 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. 156 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 7: BANKING OMBUDSMAN Structure 7.0 Learning Objectives 7.1 Introduction 7.2 Definition 7.3 Role of banking ombudsman scheme in banking sector 7.4 Procedure For Filling A Complaint 7.5 Grounds Of Complaints 7.6 Reason to file a complaint 7.7 Summary 7.8 Keywords 7.9 Learning Activity 7.10 Unit End Questions 7.11 References 7.0 LEARNING OBJECTIVES After studying this unit students will be able to: • Explain about banking ombudsman • Discuss the role of ombudsman in banking sector. • Identify the procedure of banking ombudsman in banking sector • Interpret the grounds of complaint to banking ombudsman. • Discuss the reasons to file a complaint 7.1 INTRODUCTION Banks now have a variety of services in addition to receiving deposits from the general public. It is common for conflicts to arise between banks and their customers during this process. The banking law also has a well-established mechanism for resolving disputes between banks and their customers. At the same time, another redress mechanism is established to provide a fast, reliable, and low-cost forum for the resolution of disputes involving deficient banking services. In this regard, the RBI has developed the Banking Ombudsman Scheme, which provides a critical mechanism for consumers to pursue redress against banks. The Banking Ombudsman is a new institution for India, and it is a new institution for banking customers in addition to previously available structures such as courts and platforms for redressing their grievances. 157 CU IDOL SELF LEARNING MATERIAL (SLM)

On January 1, 2006, the Scheme went into effect. This scheme was created in order to resolve customer grievances against banks in a timely and cost-effective manner. The following are the broad objectives of this scheme: • To allow the resolution of complaints relating to certain bank services; and • To encourage the satisfaction or settlement of such complaints. Under India's Banking Ombudsman Scheme 2006, a senior official appointed by the Reserve Bank of India (RBI) or a quasi (nominal) judicial authority works as a Banking Ombudsman. The Banking Ombudsman is responsible for resolving consumer concerns about banking service deficiencies. The Reserve Bank of India has named 15 Ombudsmen in state capitals to resolve consumer concerns about banking services. 7.2 DEFINITION An ombudsman is an official, usually appointed by the government, who investigates complaints (usually lodged by private citizens) against businesses, financial institutions, universities, government departments, or other public entities, and attempts to resolve the conflicts or concerns raised, either by mediation or by making recommendations. 7.3 ROLE OF BANKING OMBUDSMAN SCHEME IN BANKING SECTOR • The Reserve Bank of India (RBI) has launched a banking ombudsman scheme to efficiently interpret its rules and guidelines in order to reach an amicable resolution to conflicts between banks and their customers. Customers want fast, effective, and painless resolutions to all of their bank problems and disputes, without having to run from pillar to post to register their complaints. This new banking ombudsman scheme was created to assist customers in resolving the majority of their complaints against banks, based on the basic premise that every customer deserves a fair and prompt resolution of their complaints. The RBI created the office of banking ombudsman in 1995 to handle customer service grievances, disputes between customers and banks, and disputes between different banks. The banking ombudsman is a well-known person who is knowledgeable about legal provisions, banking regulations, financial services, public administration, and management. A civil servant appointed to this role should hold the rank of Joint Secretary, while a banking professional should have worked as a full-time director in the public sector or in a similar position. A 158 CU IDOL SELF LEARNING MATERIAL (SLM)

committee of four people, consisting of three Deputy Governors of the Reserve Bank of India and the Additional Secretary (Financial Sector), as well as a special invitee from the Department of Economic Affairs, appoints the banking ombudsman. The appointment is for a three-year term. Customers' concerns about commercial banks, regional rural banks, and scheduled co-operative banks can be considered by the Ombudsman. Customers can also file complaints about Housing Finance with the Banking Ombudsman, who has the authority to adjudicate the grievances posed by the aggrieved. • With effect from 1995, RBI implemented the Banking Ombudsman Scheme under Section 35 A of the Banking Regulation Act, 1949. • India's Banking Ombudsman Scheme was first implemented in 1995 and revamped in 2002. • In 2006, the Banking Ombudsman Scheme was created. • The Banking Ombudsmen handled about 36,000 complaints between 2002 and 2006. • The Reserve Bank of India appoints the Banking Ombudsman. • The RBI appoints a senior official as the Banking Ombudsman. He is in charge of handling and resolving consumer concerns about deficiencies in some banking facilities. • Banking Ombudsman offices are mainly located in state capitals. • There have been about 15 Banking Ombudsmen named. • The Banking Ombudsman Scheme covers all Scheduled Commercial Banks, Regional Rural Banks, and Scheduled Primary Co-operative Banks. 7.4 PROCEDURE FOR FILLING A COMPLAINT Before filing a complaint with the Banking Ombudsman, the plaintiff must have made a written submission to the bank, and the bank must have: • Rejected the complaint; or • Not responded within one month after receiving the complaint; or • The complainant is dissatisfied with the bank's response. • If no response is issued, the bank must be notified within one year and one month of the date of the representation. 159 CU IDOL SELF LEARNING MATERIAL (SLM)

After completing the preceding steps, any individual who has a grievance against a bank on any of the above qualifying grounds may file a complaint with the Banking Ombudsman, either directly or through an appointed representative (other than an advocate). Complaints about credit card operations and other centralized facilities should be filed with the Banking Ombudsman in the jurisdiction where the customer's billing address is located. The complaint should be submitted in writing, and the plaintiff or his appointed representative should sign it. The following details should be mentioned specifically in the complaint: • The complainant's full name and address. • The name and address of the bank's branch or office where the complaint is filed. • The events that led to the lawsuit. • The essence and duration of the complainant's loss, as well as the relief sought. The claimant should provide copies of any documentation he intends to depend on in the complaint, as well as a statement that the complaint is maintainable. A complaint submitted electronically should be considered by the Banking Ombudsman, and a printout of the complaint should be held on the Banking Ombudsman's file. 7.5 GROUNDS OF COMPLAINTS The following grounds for complaint can be used to file a complaint: 1. Any undue delay or non-payment of cheques, draughts, bills, and other similar items. 2. Non-acceptance of small denomination notes without justification. 3. Adding a fee to the acceptance of small-denomination notes. 4. Any delay in inward remittance payment or nonpayment of inward remittances 5. If a financial institution refuses to accept taxes or delays in doing so (as required by RBI or Government of India). 6. Any hiccups in the issuance of government securities 7. Government securities are not issued or redeemed. 8. Bankers forcefully close deposit accounts for no apparent cause. 9. If a bank refuses to close a customer's account, 10. If a banker is purposefully delaying the closure of accounts. 11. Noncompliance with the Banking Codes and the Standard Board of India. 12. If a banker fails to follow the Reserve Bank of India's guidelines or orders, or violates the Reserve Bank's directives in relation to banking or other services. 160 CU IDOL SELF LEARNING MATERIAL (SLM)

13. Non-acceptance of coins tendered or charging of commission in relation to them without appropriate justification. 14. Failure or delay in the issuance of draughts, pay orders, or banker's checks. 15. Work is not completed within the designated working hours. 16. Failure or delay in obtaining a bank loan. 17. Non-resident Indians with accounts in India have filed complaints about remittances from abroad, deposits, and other bank-related issues. 18. Failure to open bank accounts for no apparent cause. 19. Charges imposed by the banker without proper advance notice to the client. 20. Any breach of the RBI's ATM/Debit Card/Credit Card guidelines or instructions. 21. Non-disbursement or a gap in the disbursement of a pension is number 21. Other Grounds In the case of loans and advances, a consumer may also file a lawsuit on the following grounds of service deficiency: 1. The Banking Ombudsman may also handle any other matter that the Reserve Bank may specify from time to time. 2. Non-acceptance of a loan application for no apparent cause. 3. Any breach of the bank's adopted fair practices code for lenders or its Code of Bank's Commitment to Customers, as the case may be. 4. Any breach of the RBI's instructions, guidelines, or recommendations 5. Any non-compliance with Reserve Bank interest rate directives. 6. Any delays in loan applications being approved 7.6 REASONS TO FILE A COMPLAINT A In the case of loans and advances, a consumer may also file a lawsuit on the following grounds of service deficiency: • The Banking Ombudsman can also deal with any other issues that the Reserve Bank can specify from time to time. • Non-acceptance of a loan application for no apparent cause. • Any breach of the bank's adopted fair practices code for lenders or its Code of Bank's Commitment to Customers, as the case may be. • Any violation of the RBI's instructions, guidelines, or recommendations • Any non-compliance with Reserve Bank interest rate directives; 161 CU IDOL SELF LEARNING MATERIAL (SLM)

• Any delays in the approval of loan applications. 7.7 SUMMARY • The banking legislation already has a well-established mechanism for resolving disputes between banks and their customers. At the same time, another redress mechanism is established to provide a fast, reliable, and low-cost forum for the resolution of disputes involving deficient banking services. In this regard, the RBI has developed the Banking Ombudsman Scheme, which provides a critical mechanism for consumers to pursue redress against banks. • The Banking Ombudsman is a new institution for India, and it is a new institution for banking customers in addition to previously available structures such as courts and platforms for redressing their grievances. • In 1995, the RBI created the office of banking ombudsman to handle customer service grievances, disputes between customers and banks, and disputes between different banks. • The ombudsman scheme seeks to resolve concerns about bank facilities and to make the satisfaction or resolution of those complaints easier. • This new banking ombudsman scheme was established to assist customers in resolving the majority of their complaints against banks, based on the basic premise that every customer deserves a fair and timely resolution of their complaints. • A banking ombudsman is a well-known person who is knowledgeable about legal provisions, banking regulations, financial services, public administration, and management. • The Banking Ombudsman renders a decision not just in accordance with the law, but also on moral grounds, believing that justice should be served fairly. 7.8 KEYWORDS • RBI -Reserve Bank of India. • NBFC -Non Banking Financial Companies • Debit Card: An Electronic card issued by a Bank which facilitates easy purchase of any desired material without the need for currency & the amount of purchase gets deducted from the individual’s savings account. • Credit Card: An Electronic card that gives credit to the purchases made by any person &which will be charged to their savings account along with interest charges on a monthly basis. • Ombudsman -An official appointed by RBI to address complaints against Banking services by customers. 162 CU IDOL SELF LEARNING MATERIAL (SLM)

7.9 LEARNING ACTIVITY 1. Prepare a note on role of Ombudsman in Banking sector & their relevance with respect to improvement in services provided to customers. ___________________________________________________________________________ ___________________________________________________________________________ 7.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is meant by Ombudsman? 2. What sort of services bank customers can expect from them? 3. List out the points upon which one can file a Complaint with Ombudsman? 4. List out the various types of Banks that are covered under Ombudsman scheme? 5. Discuss the reasons to file a complaint. Long Questions 1. When was Ombudsman services introduced in banking sector and discuss its outcome? 2. Ombudsman services -Is it available in Non-Banking Financial Institutions? Why is it necessary to introduce it there also? 3. Discuss the role and procedures of banking ombudsman 4. Explain the grounds of complaints in detail B. Multiple Choice Questions 1. Banking Ombudsman Scheme has been introduced by RBI which provides a key mechanism for consumers to seek redressal against _____ a. Banks b. Non-Banking financial Institutions c. SEBI d. None of these. 2. The Ombudsman scheme came in to effect from ________. a. 2001 b. 2006 c. 2005 163 CU IDOL SELF LEARNING MATERIAL (SLM)

d. 1996 3. Banking Ombudsman is a senior official appointed by ______ a. RBI b. Finance Ministry. c. Prime Minister d. None of these. 4. One can file a complaint on the following grounds of complaints like ______ a. Any delay in issuing government securities b. If any banker refuses to close the accounts c. If any banker deliberately delaying in closing the accounts. d. All of these 5. Complaints can be filed with ombudsman when _______ a. If the reply is not received from the bank within a period of one month b. If bank rejects the complaint. c. If the complainant is not satisfied with bank's reply. d. All of these three Answers 1- a, 2 – b, 3 – a, 4 – d, 5 -d. 7.11 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. 164 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 8: MERGERS AND ACQUISTIONS 165 Structure 8.0 Learning Objectives 8.1 Introduction 8.2 Definition 8.3 Purpose of merger and acquisition 8.4 Merger and Acquisition in the Indian banking sector 8.5 Merits of Bank merger and acquisition 8.6 Demerits of Bank Merger and Acquisition 8.7 Procedure for Mergers and Acquisition in the banking industry 8.8 Types of Mergers and Acquisitions 8.9 Recent merger and acquisitions in banking 8.10 Roles and Responsibilities of Merger and Acquisition 8.11 Process of merger and acquisition 8.12 Impact of merger and acquisition 8.13 Summary 8.14 Keywords 8.15 Learning Activity 8.16 Unit End Questions 8.17 References 8.0 LEARNING OBJECTIVES After studying this unit students will be able to: • Explain about merger and acquisition in banking sector • Explain the types of merger and acquisition • Identify the merits and demerits of mergers and acquisition • Discuss the process of merger and acquisition • Outline the impact of merger and acquisition CU IDOL SELF LEARNING MATERIAL (SLM)

8.1 INTRODUCTION In India, the banking system has undeniably won numerous outstanding achievements for the world's largest and most diverse democracy in a relatively short period of time. The banking sector or industry reform process is a key component of the government's strategic plan to reposition and integrate the Indian banking sector into the global financial system. The Indian banking sector has undergone many reforms, as well as a slew of profitable mergers and acquisitions, all of which have aided its expansion. Mergers and acquisitions are the most common tactic used by businesses to improve and retain their market position. M&As are thought to be a quick and efficient way to enter new markets and introduce new technologies. For example, Punjab National Bank purchased New Bank of India in 1993. Except for State Bank of India and its affiliate banks, the only other nationalized bank to merge was Bhartiya Mahila Bank with State Bank of India in 2017. The government consolidated 27 public sector banks in August of this year, reducing the number of public sector banks to 12. Oriental Bank of Commerce, United Bank of India, and Bank of India merged to form the second largest PNB. 8.2 DEFINITION Merger is defined as “a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity.” On the other hand, “an acquisition is when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s shareholders.” 8.3 PURPOSE OF MERGER AND ACQUISITION The primary goal of mergers and acquisitions is to increase corporate growth. It is also done to reduce the amount of money that would be spent on creating a new agency. Mergers and acquisitions are used for a variety of reasons, including: Procurement of Supply: Through mergers and acquisitions, one business may purchase the supply chain of another. Purchase cost savings are passed on to another business in the form of discounts, transportation cost savings, and buying department overhead costs, among other things. Production Faculties: 166 CU IDOL SELF LEARNING MATERIAL (SLM)

The production chains of both firms will be combined, allowing the business to benefit from economies of scale in terms of plant and resource usage. A business may also benefit from improved technology and know-how from another company. Financial Strength: It also aids in the improvement of liquidity and direct access to cash resources. It also aids in the use of tax advantages. Market Expansion: Mergers and acquisitions reduce competition while protecting existing competitors. In addition, the cost of advertising is reduced. General gain: The organization gains access to another company's talent pool, allowing it to better control its affairs. In addition, the company's reputation is enhanced, and it attracts a large number of clients. Advancement of technology: The acquiring company receives the acquired company's technology, which can aid in more productive development. Utilization of resources: If the acquired company is unable to control its resources, the acquiring company may make effective use of those resources. 8.4 MERGER AND ACQUISITION IN THE INDIAN BANKING SECTOR After the Indian government implemented the Liberalization, Privatization, and Globalization reforms in 1991, the Indian banking sector underwent a number of changes. All of this has changed the financial landscape in India. This has ushered in the shift from a controlled to a deregulated economy. All of the government's actions have made it easier for international firms to enter the country and increased competition. It does, however, improve the market's efficiency and competitiveness. In addition, technological developments have forced industries to adapt to the changing environment, and the banking sector has seen a number of mergers and acquisitions during this period. Economic reform, which began in 1991, has aided the Indian banking sector in undergoing significant transformation. The role of the banking system in any economy cannot be overstated. The banking system plays a major role in the growth of any economy. The Narsimham Committee report from 1991 reflected the need for financial sector reforms and creating competition in the banking sector. The report also offered suggestions for achieving 167 CU IDOL SELF LEARNING MATERIAL (SLM)

this goal. The central theme of the reforms was to provide Indian banks with the much- needed forum to operate from a vantage point of operational flexibility and functional autonomy, resulting in increased production, competitiveness, and profitability. [three] However, owing to political pressure and the practical problems that may arise in implementing the recommendations, the government has refused to consider them. Another committee, chaired by M Narsimham, was established in 1997 to recommend additional banking reforms. In 1998, the 2nd Committee issued a report recommending mergers between influential banks in both the private and public sectors. According to the Reserve Bank of India, 22 mergers took place between 1990 and 2007. Prior to 1997, most mergers were between two financially poor companies. Only after 1997 did banks with good financial positions begin to merge. SBI's merger with the State Bank of Saurashtra and the State Bank of Indore, for example. 8.5 MERITS OF MERGER AND ACQUISITION IN THE BANKING INDUSTRY 1. The size of the company grows, as does the number of customers. 2. Allows you to fill in the holes in your market, product, and technology. 3. Reduces the risk factor ratio to a minimum. 4. It improves the productivity ratio of companies and their activities. 5. Modernizes technology 6. Increases benefit. 8.6 DEMERITS OF MERGER AND ACQUISITION IN THE BANKING INDUSTRY 1. Risk culture and risk consistency have a negative impact on company profitability. 2. Uncertainty about the course of events. 3. Most mergers fail because they are done on paper rather than on the basis of an account. 8.7 PROCEDURE FOR MERGER AND ACQUISITION IN THE 168 BANKING INDUSTRY 1. The merger process is outlined in various state statutes or banking law acts. CU IDOL SELF LEARNING MATERIAL (SLM)

2. Before deciding on a merger, a group of executives from both banks, the exploit bank and the merging bank, meet and negotiate the modalities and other financial terms. Following the conclusion of the discussion, a theme was developed, as well as terms and conditions based on the theme. If the theme has been finalised, it is presented to the bank's board of administrators for consideration. The board debates it and confirms it whether it seems to be financially viable or beneficial to them. 3. After the proposed merger is authorised, an additional ordinary general meeting is held, attended by shareholders from various banks, to negotiate the merger and obtain their approval. 4. Following the board's approval of the proposed merger, a licenced appraiser is named to assess all banks. The appraiser assesses banks based on their share capitals, market value, assets, and liabilities. 5. Once the valuation process is completed and approved by many banks, submit the proposal to the RBI and SEBI for approval, along with all other necessary documents such as board approval, shareholder approval, and valuation report, among others. 6. Finally, after receiving approval from all of the establishment and authorised officers of each bank, the group meets to negotiate the share allocation, specifically what shares will be issued by the exploit bank to the shareholders of the merging bank. 7. Both the bank and the client will sign for it after all of the above procedures have been completed. 8.8 TYPES OF MERGER AND ACQUISITIONS The following are some examples of typical M&A transactions: Mergers A merger occurs when the boards of directors of two corporations agree to combine and obtain shareholder approval. For example, in 1998, Digital Computers and Compaq agreed to merge, with Compaq absorbing Digital Computers. In 2002, Compaq merged with Hewlett- Packard. CPQ was Compaq's pre-merger ticker symbol. The new ticker symbol was created by combining this with Hewlett-(HWP) Packard's ticker symbol (HPQ). Acquisitions In a straightforward takeover, the purchasing entity acquires a controlling interest in the acquired company, which retains its name and organisational structure. Manulife Financial Corporation's purchase of John Hancock Financial Services in 2004 is an example of this form of deal, in which both firms kept their names and organisational structures. 169 CU IDOL SELF LEARNING MATERIAL (SLM)

Consolidations By merging core businesses and leaving old organisational structures, consolidation creates a new entity. Both companies' stockholders must accept the merger, in which they will obtain common equity shares in the new company. Citicorp and Traveller’s Insurance Company, for example, declared a merger in 1998, resulting in Citigroup. Tender offers In a tender offer, one company agrees to buy the other company's outstanding stock at a fixed price rather than the market price. The purchasing business informs the other company's shareholders directly, bypassing management and the board of directors. Johnson & Johnson, for example, made a $438 million tender offer to buy Omrix Biopharmaceuticals in 2008. Most tender offers result in mergers, even though the acquiring company can continue to exist especially if there are some dissenting shareholders. Acquisition of assets In an asset purchase, one company buys the assets of another company outright. The corporation whose assets are being purchased must get shareholder approval. During bankruptcy proceedings, other businesses bid on various assets of the bankrupt business, which is liquidated after the assets are transferred to the acquiring firms. Management acquisitions A management acquisition, also called a management-led buyout (MBO), occurs when a company's executives buy a majority interest in another company and take it private. In order to help finance a deal, these retired executives often team up with a financier or former corporate officers. The majority of shareholders must accept such M&A deals, which are normally funded disproportionately with debt. 8.9 RECENT MERGER AND ACQUISITIONS IN BANKING The recent mergers are: Year of Merged Name of the Banks Acquired Name of the Banks Merged into 2019 August Indian Bank Indian Bank and Allahabad Bank 170 CU IDOL SELF LEARNING MATERIAL (SLM)

2019 August Union Bank Union Bank, Andhra Bank and 2019 August Canara Bank Corporate Bank 2019 August Punjab National Bank Canara Bank and Syndicate bank 2019 April Bank of Baroda Punjab National Bank, Oriental bank 2018 December IDFC First Bank of commerce and United bank of India 2017 April State Bank of India Vijaya bank and Dena Bank 2017 April State Bank of India IDFC Bank and Capital First ltd. 2014 Nov Kotak Mahindra Bank Bhartiya Mahila Bank (BMB) 2010 May ICICI Bank All the 5 associates of SBI ING Vyasa Bank Bank of Rajasthan Some of the past merged are: • Grind lay Bank merged Standard Charted Bank • Times Bank with HDFC Bank • Bank of Madura with ICICI Bank • Nedungadi Bank with Punjab National Bank • Post Mergers of Banks 90’s and 2000 Successful Approach to Mergers and Acquisition Integration Name of the Banks Name of the Banks Merged into Years of Merged Acquired 1985 Canara Bank Lakshmi Commercial Bank 171 CU IDOL SELF LEARNING MATERIAL (SLM)

1993 Punjab National Bank New Bank of India 1994 Bank of India Bank of Karad 1999 Union Bank of India Sikkim Bank 2000 HDFC Bank Times Bank 2001 ICICI Bank Bank of Madura 2008 HDFC Bank Centurion Bank of Punjab 8.10 ROLES AND RESPONSIBILITIES OF MERGER AND ACQUISITION M&A roles and responsibilities form a major part in the Investment banking industry. The various roles and responsibilities that you may have to undertake during the job are: Pitching The investment banker makes a presentation to the client about how nice they are and why the client should recruit them. Execution The banker will go here to complete the transactions. Here, the banker introduces his firm to prospective customers and seeks to persuade them of his client's merits. Executing the Sell-Side M&A Deals Here, the client approaches the investment banker for assistance; the client expresses his desire to sell his business and requests assistance from the investment bank. Executing the Buy-Side M&A Deals The client comes to the investment bank with the goal of purchasing a company. Clients need assistance in either locating such an organization or assisting with the funding process. MA& Tasks may involve • Investigating business dynamics and expansions can be one of the MA& tasks. • Creating M&A plans, identifying industries and groups of companies that may be potential market opportunities for clients. 172 CU IDOL SELF LEARNING MATERIAL (SLM)

• Conducting inquiries into the financial and economic standing of companies involved in a deal. • Financial simulations. • Creating and providing clients with appropriate financial strategies. • Creating a ‘pitch book' for a company • Managing the day-to-day operations of a mergers and acquisitions proposition. • Providing capital structure guidance to colleagues in corporate finance. • Handling transactions, overseeing terms negotiations, and designing fund-raising plans • Creating new takeover schedules. • Giving orders to coworkers and experts, such as attorneys. • Ensuring that all legal aspects of a transaction have been taken into account. 8.11 PROCESS OF MERGER AND ACQUISITION The following is a step-by-step breakdown of the M&A process: 1. Company and buyer analysis Potential synergies, restructuring needs, risks involved, capital structure, and other factors should all be considered during this phase. 2. Analysis of pricing mechanism Cash or equity, different pricing systems, terms and conditions, and other problems must all be considered. 3. Share data analysis It's crucial to figure out whether the company is publicly traded or not, who the minority shareholders are, and what the status of the share certificate is at this stage. 4. Presentation and consultation with management The buyer, the seller, and the management all meet here. 5. Letter of intent The letter of intent and the confidentiality agreement are the issues to consider at this point. 6. Due diligence procedure Examining public registers, annual reports, and financial statements are all part of this process. 7. Acceptance Preparation of applications and filings are critical issues here. 173 CU IDOL SELF LEARNING MATERIAL (SLM)

8. Signatures The share transfer certificate is crucial in this situation. 9. Approval Here, applications and filings must be sent to the Competition Authority and the Financial Supervisory Authority for approval. 10.Closing At this point in the process, the closing memorandum and payment of the purchase price are crucial. 8.12 IMPACT OF MERGER AND ACQUISITION Mergers and acquisitions, or M&A, is a field of corporate law that deals with businesses buying or combining with one another. M&A lawyers help their clients find the right funding for mergers and acquisitions, as well as offer guidance on the preparation, negotiation, and execution of contracts for the sale of company assets. M&A deals are among the most complicated and significant activities in a company's existence. 2018 was a major year for mergers and acquisitions in Indian companies. In 2018, India was involved in the field, with a total of $129 billion in mergers and acquisitions. Inbound M&A operation hit $55 billion in 2018, up 77 percent from 2017. The number of mergers and acquisitions also increased, rising 17.2 percent from 2017. In addition, India saw five deals worth more than $5 billion, with an average M&A transaction size of $127.8 million, up from 82.8 million in 2017. Just one transaction worth more than $5 billion occurred in India in 2017, the $11.6 billion Idea-Vodafone merger. The retail sector, which accounted for 33.1 percent of India's inbound M&A operation in 2018, with a total transaction value of $18.5 billion, was the industry with the most M&A activity in 2018. The materials sector is the second most important industry in terms of value, accounting for 17.2 percent of M&A activity. With a market share of 12.3 percent, the healthcare industry came in third. M&A activity in the banking sector has increased both globally and in India. Banks, like many other companies and industries, want to protect themselves from threats while still taking advantage of opportunities. As of today, India's banking sector is mature in terms of supply and product range, with banks' balance sheets being clean, solid, and clear. Increased retail credit demand, expansion of ATMs and debit cards, improved macroeconomic conditions, diversification, interest rate spreads, and regulatory and policy changes, especially the Banking Regulation Act, are the key growth drivers in the Indian banking industry. Development, synergies, managerial performance, strategic motives, market entry, tax shields and financial protections, and regulatory interventions are some of the reasons for banking 174 CU IDOL SELF LEARNING MATERIAL (SLM)

sector consolidation in India. The risks associated with bank mergers and acquisitions, on the other hand, include the large scale of a new entity, a lag in profitability, a lack of valuation method, differences in structure, processes, and procedures between the banks, as well as a lack of competent management. In the Indian banking industry, mergers and acquisitions result in the creation of a new large company, massive scale economies, and increased distribution. The acquisition of Centurion Bank of Punjab by HDFC Bank in 2008 is an example of this type of transaction. This merger resulted in a company with the seventh largest asset size in India and distribution networks that included 1,148 branches and 2,358 ATMs (the largest in terms of branches in the private sector). Among the disadvantages of merger and acquisition in the Indian banking industry are cultural misalignment between merging banks, technical issues and misalignment, and a slower growth rate, to name a few. 8.13 SUMMARY • A merger is known as \"a merger of two or more firms in which the selling firm(s) assets and liabilities are acquired by the buying firm.\" The purchasing company maintains its original name, despite the fact that it could be a somewhat different organization after the merger.” • “An acquisition, on the other hand, is when one company buys the majority or all of the shares of another company in order to acquire ownership of that company.” Buying more than half of a target company's stock and other properties helps the acquirer to make decisions about the newly purchased assets without the company's shareholders' approval.” • Since the two companies' supply chains will be combined, the business will be able to take advantage of economies of scale in terms of plant and resource usage. A business may also benefit from improved technology and know-how from another company. • By merging core businesses and leaving old organizational structures, consolidation creates a new entity. • During bankruptcy proceedings, other businesses bid on various assets of the bankrupt business, which is liquidated after the assets are transferred to the acquiring firms. • Pitching is where an investment banker makes a pitch to a client about how nice they are and why they should recruit them. 8.14 KEY WORDS • CCI -Competition commission of India. • M&A -Mergers and Acquisitions. • PSB -Public Sector Banks, • BOB -Bank of Baroda. 175 CU IDOL SELF LEARNING MATERIAL (SLM)

• NPA -Non Performing Assets. 8.15 LEARNING ACTIVITY 1. Prepare a detailed note on recent Merger of Banks & list out the Merits & Demerits of the same. ___________________________________________________________________________ ___________________________________________________________________________ 8.16 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is meant by Merger & Acquisitions in Banking Sector? 2. Explain the Merits of bank merger and acquisition 3. Explain the demerits of bank merger and acquisition 4. Discuss the purpose of merger and acquisition 5. List out the various steps involved in Mergers & Acquisitions. Long Questions 1. Elaborate merger and Acquisition in the Indian banking sector 2. Classify the types of Mergers and Acquisitions 3. Discuss the recent merger and acquisitions in banking 4. Explain the roles and Responsibilities of Merger and Acquisition 5. Discuss the process of merger and acquisition 6. Explain the impact of merger and acquisition B. Multiple Choice Questions 1. Mergers will help the banks to _______ up its business and gain a large no. of customers quickly. a. Scale b. Stabilize c. Safeguard d. None of these 2. Allahabad Bank will merged with--------Bank. 176 a. ICICI Bank CU IDOL SELF LEARNING MATERIAL (SLM)

b. Indian Bank c. C.PNB Bank d. State Bank. 3. Syndicate Bank will get merged with ----------Bank. a. Canara Bank. b. IOB c. ICICI d. DIDBI 4. Government of India (GOI) has consolidated 10 Public Sector Banks into ------ banks. a. 4 b. 5 c. 3 d. 6 5. Amalgamation of two banking companies is under the provisions of --------- of the Banking Regulation Act, 1949. a. section 40 b. section 42 c. section 44 d. None of these Answers 1 – a, 2 – b, 3 – a, 4 – a, 5 – c. 8.17 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, Dr. Ashu Vyas Maharshi (Prof), Mergers and Acquisitions in banking sector of India, International Journal of Research in Social Sciences, Vol.9 (2019). 177 CU IDOL SELF LEARNING MATERIAL (SLM)

• R2, K. Subhashree and M. Kannappan, Merger and Acquisition in Banking Industry, International Journal of Pure and Applied Mathematics, Vol 119, No. 17, (2018). 178 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 9: BANKING ACTS Structure 9.0 Learning Objectives 9.1 Introduction 9.2 Important banking acts 9.3 Phases of Reform in Banking Sector 9.4 Sarfaesi Act, 2002 9.4.1 Sarfaesi act, how it works 9.4.2 Act- background 9.4.3 Rights of borrowers 9.4.4 Pre-conditions 9.4.5 Methods of recovery 9.4.6 Powers of debt recovery tribunal 9.4.7 Amendments to Sarfaesi act, 2016 9.5 Insolvency and Bankruptcy Code 2016 9.6 Summary 9.7 Keywords 9.8 Learning Activity 9.9 Unit end Questions 9.10 References 9.0 LEARNING OBJECTIVES After studying this unit, students will be able to • Explain about the SARFAESI act • Identify the important banking acts • Discuss the phases of reform in banking sector • Explain about the amendments to SARFAESI act,2016 • Explain the insolvency and bankruptcy code 2016 9.1 INTRODUCTION Various banking reforms and acts have been implemented in India as part of the increasing movement toward globalization and economic liberalization in order to improve the health and financial soundness of banks and improve operational efficiency so that Indian banks can meet internationally agreed performance standards. The implementation of banking reforms was based on the recommendations of various committees. The following are the committees that recommended banking sector reforms: 179 CU IDOL SELF LEARNING MATERIAL (SLM)

• The first Narasimhan Committee- 1991 Years • The Verma Committee – 1996 1860 • The Khan Committee – 1997 1881 • The Second Narasimhan Committee – 1998 1882 1891 9.2 IMPORTANT BANKING ACTS 1899 1912 The list of important banking Acts are: 1925 Serial No. Names of the Banking Acts and Reforms 1934 1934 1. Societies Registration Act 1938 1944 2. Negotiable Instrument Act 3. Indian Trusts Act 4. The Bankers’ Books Evidence Act 5. Indian Stamp Act 6. Co-operative Societies Act 7. Provident Funds Act 8. Indian Partnership Act 9. The Reserve Bank of India Act 10. Insurance Act 11. Central Excise Act 180 CU IDOL SELF LEARNING MATERIAL (SLM)

12. Public Debt Act 1944 13. International Monetary Fund and Bank Act 1945 14. Employees’ State Insurance Act 1948 15. The Industrial Finance Corporation of India Act 1948 16. The Banking Companies (Legal Practitioner 1949 Clients’ Accounts) Act 17. The Industrial Disputes (Banking and Insurance 1949 Companies) Act 18. The Banking Regulation (Companies) Rules 1949 19. The Banking Regulation Act 1949 20. Chartered Accountants Act 1949 21. Contingency Fund of India Act 1950 22. The State Financial Corporations Act 1951 23. Employees Provident Fund and Miscellaneous 1952 Provisions Act 24. The Reserve Bank of India (Amendment and 1953 Misc. Provisions) Act 25. The Industrial Disputes (Banking Companies) 1955 181 CU IDOL SELF LEARNING MATERIAL (SLM)

Decision Act 26. The State Bank of India Act 1955 27. Life Insurance Corporation Act 1956 28. Companies Act 1956 29. Central Sales Tax Act 1956 30. The State Bank of India (Subsidiary Banks) Act 1959 31. The Subsidiary Banks General Regulation 1959 32. The Deposit Insurance and Credit Guarantee 1961 Corporation Act 33. Customs Act 1962 34. Unit Trust of India Act 1963 35. Limitation Act 1963 36. Nationalization of Banks Act (However, the 1964 government decided to nationalize 14 major commercial banks on 19th July 1969) 37. Banking Laws (Application to Co-operative 1965 Societies) Act 38. Banking Companies (Acquisition and Transfer of 1969 182 CU IDOL SELF LEARNING MATERIAL (SLM)

Undertaking) Act 39. The Nationalized Banks (Management and 1970 Miscellaneous Provisions) Scheme 40. The Banking Companies (Acquisition and 1970 Transfer of Undertakings) Act 41. The Regional Rural Banks Act 1976 42. Foreign Contribution (Regulation) Act 1976 43. The Banking Companies (Acquisition and 1980 Transfer of Undertakings) Act 44. The Export-Import Bank of India Act 1981 45. The National Bank for Agriculture and Rural 1981 Development Act 46. Chit Fund Act 1982 47. Sick Industrial Companies (Special Provisions) 1985 Act 48. Shipping Development Fund Committee 1985 (Abolition) Act 49. Banking Companies (Regulation)Rules 1985 50. The National Housing Bank Act 1987 183 CU IDOL SELF LEARNING MATERIAL (SLM)

51. SIDBI Act 1989 52. SIDBI General Regulations 1990 53. Securities and Exchange Board of India Act 1992 54. The Special Court (trial of Offences relating to 1992 Transactions in Securities) Act 55. The Industrial Finance Corporation (Transfer of 1993 Undertakings and Repeal) Act 56. Recovery of Debts due to Banks and Financial 1993 Institutions Act 57. Debts Recovery Appellate Tribunal (Procedure) 1994 Rules 58. Industrial Reconstruction Bank (Transfer of 1997 Undertaking & Appeal) Act 59. Foreign Exchange Management Act 1999 60. Insurance Regulatory and Development 1999 Authority Act 61. Prevention of Money Laundering Act 2002 62. Fiscal Responsibility and Budget Management 2002 Act 63. The Securitization and Reconstruction of 2002 184 CU IDOL SELF LEARNING MATERIAL (SLM)

Financial Assets and Enforcement of Security Interest Act 64. Industrial Development Bank (Transfer of 2003 Undertaking & Repeal) Act 65. Credit Information Companies (Rules & 2005 Regulation) Act 66. Government Securities Act 2006 67. The Banking Ombudsman Scheme 2006 68. Factoring Act Rules 2011 69. SARFAESI (Central registry) Rules 2011 70. Securities Law (Amendment) Act 2014 71. The Regional Rural Banks (Amendment) Act – 2014 Diluted the sharing pattern by limiting the composite share of Central Government and sponsor bank to 51% 72. The Insurance Laws (Amendment) Act- pushed 2015 FDI limit to 49% 73. The Companies Act (Amended) (legislated in 2015 1956) 185 CU IDOL SELF LEARNING MATERIAL (SLM)

9.3 PHASES OF REFORMS IN BANKING SECTOR The banking sector reforms were carried out in two stages. The first phase of reform aimed to improve the policy framework, institutional framework, and financial health of the country. • Improvements to the policy framework included interest rate deregulation, lowering the Cash Reserve Ratio to the initial level, phasing out the Statutory Liquidity Ratio, and expanding the reach of priority sector lending by linking lending rates to advance scale. • Enhancement of the Institutional Framework: this emphasized recapitalization, improving the supervisory structure, and fostering a competitive climate. • To improve the banking sector's financial soundness, prudent norms were imposed and measures were taken to reduce the proportion of nonperforming assets (NPAs). The Second Phase of banking sector reforms focuses on rehabilitating the banking industry's structure, human resource growth, and technical advancements in order to strengthen the banking system's very core. 9.4 SARFAESI ACT, 2002 The SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) is an Indian law passed in 2002. It helps banks and other financial institutions to recover loans by auctioning residential or commercial assets. Under this act, India's first asset reconstruction company (ARC), ARCIL, was created. Secured creditors (banks or financial institutions) have several rights under section 13 of the SARFAESI Act, 2002, for the protection of security interests. If a borrower of financial assistance defaults on a loan or instalment and his account is listed as a Non-performing Asset by a secured creditor, the secured creditor to request repayment of the due in full within 60 days by written notice to the borrower, specifically specifying the amount due and the intention to implement before the period of limitation expires. If he does not pay his debts in full within 60 days, he will be prosecuted without the intervention of a court or tribunal. Secured creditor may take possession (including sale, lease, assignment) of the secured asset, take over management of the borrower's company, appoint a manager for the secured asset, or proceed against the guarantor or sell the pledged asset, if any, without taking any of these actions. This act is used by banks to recover NPAs (nonperforming assets). When non-performing assets are backed by securities paid to the Bank by hypothecation, mortgage, or assignment, this is a possibility. Banks can seize securities (except agricultural land) without the interference of a court in the event of a loan default. 186 CU IDOL SELF LEARNING MATERIAL (SLM)

The SARFAESI Act only applies to secured loans in which the underlying security, such as hypothecation, pledge, and mortgages, can be enforced by the bank. Unless the protection is null or false, court interference is not needed in such cases. If the asset in question is an unsecured asset, the bank would have to file a civil lawsuit against the defaulters with the court. 9.4.1 SARFAESI ACT-How it works? The SARFAESI Act of 2002 grants banks the authority to “seize and desist.” Banks will send a written notice to a defaulting borrower requesting it to pay off its debts within 60 days. If the borrower does not respond to the notice, the Bank will take one or more of the following actions: • Take ownership of the loan security • Sell, lease, or grant the right to the security • Manage the security or appoint someone to manage it The SARFAESI Act also establishes Asset Reconstruction Companies (ARCs), which are supervised by the RBI and are responsible for acquiring assets from banks and financial institutions. The Act allows banks and financial institutions to sell financial assets to asset reconstruction firms (ARCs). The Reserve Bank of India has released guidance to banks on how to go about selling financial assets to ARCs. 9.4.2 SARFAESI ACT-Background The Recovery of Debts Owed to Banks and Financial Institutions Act of 1993 was the prior law enacted for the recovery of default loans. This act was passed after the government received the recommendations of the Narasimhan Committee – I. This act established courts such as Debt Recovery Tribunals and Debt Recovery Appellate Tribunals for the quick resolution of disputes involving ever-increasing unpaid debts. However, the act included many loopholes that were used by both creditors and lawyers. This prompted the government to review the act, and a new committee chaired by Mr. Andhyarujina was formed to look into banking sector reforms and legal system changes. This committee recommended that new legislation be enacted to allow for the creation of securitization and restructuring firms, as well as to allow banks and financial institutions to seize non-performing assets. For the first time, secured creditors were able to recover their debts without the interference of the court thanks to the Sarfaesi Act. However, the act's adoption was questioned in court shortly after it was passed, delaying its implementation by two years. 187 CU IDOL SELF LEARNING MATERIAL (SLM)

9.4.3 SARFAESI ACT- Rights of Borrowers • • Despite the fact that the SAFAESI act was able to provide effective measures for secured creditors to recover long-standing dues from non-performing assets, the rights of borrowers could not be ignored, and have been duly incorporated into the law. • Borrowers may remit the dues at any time until the sale is completed, avoiding losing the security. • • If the Approved Officer engages in any unhealthy or immoral conduct, he will face criminal charges. • • The borrowers will be entitled to compensation as a result of their actions. • • Borrowers should go to the DRT first and then the DRAT in order to get their complaints resolved. The restriction periods are 45 and 30 days, respectively. 9.4.4 SARFAESI ACT-Pre conditions • The Act establishes four requirements for a borrower to enforce his or her rights. • The debt is secured; • The debt has been listed by the banks as a nonperforming asset (NPA). • The unpaid debts total more than one lakh rupees, representing more than 20% of the principal loan sum plus interest, and the protection to be implemented is not agricultural property. 9.4.5 SARFAESI ACT-Methods of Recovery The RBI is responsible for the registration and supervision of securitization and reconstruction companies under this act. These businesses are allowed to raise money by selling security receipts to eligible institutional buyers (QIBs), allowing banks and financial institutions to take ownership of securities provided for financial assistance and sell or lease them to take over control in the event of default. The following are the two key strategies for recovering NPAs under this act: Securitization: Securitization is the process of securing a loan. The process of issuing marketable securities secured by a pool of existing assets, such as auto or home loans, is known as securitization. An asset is sold after it has been turned into a marketable security. By forming schemes for acquiring financial assets, a securitization or reconstruction company may collect funds from only QIB (Qualified Institutional Buyers). Asset Reconstruction: India's Asset Reconstruction Companies were formed after the SARFAESI Act was enacted. It can be accomplished by careful management of the borrower's company, or by taking over or selling a portion or the whole business, or by rescheduling the borrower's debt payments, or by enforcing a security interest in compliance with the provisions of this Act. 188 CU IDOL SELF LEARNING MATERIAL (SLM)

Furthermore, the act exempts security receipts from being recorded. This means that when a securitization or reconstruction company issues receipts, the holder of the receipts is entitled to undivided interests in the financial properties, and registration is not required unless the Registration Act 1908 requires it. The following situations, however, necessitate the registration of the security receipt: 1. There is a receipt transfer. 2. A security receipt establishes, declares, assigns, limits, and extinguishes any right, title, or interest in real property. The Sarfaesi Act applies to any movable or immovable asset that is used as insurance, whether by a mortgage, hypothecation, or the development of a security interest. The act contains certain exceptions, such as personal possessions. Under the provisions of the SARFAESI Act, however, only the property provided as protection can be pursued. If the borrower's property is a mortgaged residential home, it is also not excluded from the Sarfaesi Act. 9.4.6 SARFAESI ACT-Powers of Debt Recovery Tribunal The debt Recovery Tribunals have been given the authority to hear complaints about banks abusing their powers. Every individual who is aggrieved by a Debts Recovery Tribunal order has thirty days from the date of receipt of the order to file a complaint with the Appellate Tribunal. SARFAESI Act – Role of Chief Metropolitan Magistrate or District Magistrate The Chief Metropolitan Magistrate or District Magistrate is tasked with assisting secured creditors in obtaining custody of the secured asset. These officers will ensure that once the creditor has given him written confirmation that all other formalities of the act have been completed, the CMM or DM will take custody of the asset and any related documentation and forward them to the protected creditor. Now, it's important to remember that the CMM's or DM's actions cannot be challenged in any court or before any authority. SARFAESI Act – Role of High Court The High Court's Position in the SARFAESI Act Just a few matters relevant to the act's enforcement in Jammu and Kashmir are allowed to be taken to high courts under the act. However, under Article 226 of the Indian constitution (Power to issue writs), High Courts have been hearing writ petitions. SARFAESI Act – Proposed amendments to the Sarfaesi Act The bill to amend the act had been authorized by the government. The Enforcement of Security Interest and Debts Laws (Amendment) Bill, 2011, amends two statutes: the Sarfaesi 189 CU IDOL SELF LEARNING MATERIAL (SLM)

Act of 2002 and the Recovery of Debts Due to Banks and Financial Institutions Act of 1993. (DRTAct). Banks and asset reconstruction companies (ARCs) will be able to turn any portion of a defaulting company's debt into equity under these amendments. As a result of this conversion, shareholders or ARCs will be more likely to become equity holders rather than creditors of the company. If no bids are received during the auction, the amendments also allow banks to bid on any immovable property they have put up for auction themselves. Banks will be able to adjust the debt with the amount paid for the property in this situation. This allows the bank to secure the asset as part of the defaulted loan's repayment. Banks will later sell this property to a new bidder to fully pay off the debt. According to the Banking Regulation Act of 1949, lenders can only keep this property on their books for seven years. 9.4.7 SARFAESI ACT-Amendments to SARFAESI Act in 2016 It requires the District Magistrate (DM) to seize collateral within 30 days in order to protect creditors. It allows District Magistrate (DM) to assist banks in taking over the management of a business if the company has to consolidate property records from different registration systems with a central registry that keeps track of protected asset transactions. 9.5 INSOLVENCY AND BANKRUPTCY CODE (IBC) 2016 The Insolvency and Bankruptcy Code of 2016 was enacted by Parliament. It was signed into law by the President in May of 2016. The legislation was enacted in response to banks' massive pile-up of non-performing loans and delays in debt settlement. Insolvency resolution in India took 4.3 years on average, compared to one year in the United Kingdom and 1.5 years in the United States of America. This time is sought to be decreased, as well as the resolution of large-ticket loan accounts. What is the purpose of the IBC? Companies, alliances, and entities are all subject to the IBC. It establishes a time-bound procedure for resolving insolvency. When a debtor defaults on a payment, creditors gain ownership over the debtor's assets and are forced to make decisions about how to handle the insolvency. Both the debtor and the creditor will initiate ‘recovery' proceedings against each other under the IBC. Who regulates the IBC proceedings? As a regulator, the Insolvency and Bankruptcy Board of India has been constituted to oversee these proceedings. IBBI has ten members, including representatives from the Finance and Law Ministries, as well as the Reserve Bank of India. What is the procedure to resolve insolvency under the Code? 190 CU IDOL SELF LEARNING MATERIAL (SLM)

When a default occurs, the debtor or creditor may begin the resolution process. The procedure is overseen by an insolvency specialist. The professional manages the debtor's properties and offers financial details from the debtor's information utilities to the creditor. This procedure lasts 180 days, during which time any civil action against the debtor is prohibited. 9.6 SUMMARY • Various banking reforms and acts have been implemented in India in response to the increasing trend of globalization and economic liberalization, with the aim of improving bank health and financial soundness, as well as operational quality, so that Indian banks can meet globally agreed performance standards. • The banking sector reforms were carried out in two stages. The first phase of reform aimed to improve the policy structure, institutional framework, and financial health of the nation. The Second Phase of banking sector reforms focuses on rehabilitating the banking industry's structure, human resource growth, and technical advancements in order to strengthen the banking system's very core. • The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI Act) of 2002 is an Indian law that allows banks and other financial institutions to sell residential or commercial properties in order to recover loans. • The SARFAESI Act only applies to secured loans in which the underlying security, such as hypothecation, pledge, and mortgages, can be enforced by the bank. Unless the protection is null or false, court interference is not needed in such cases. If the asset in question is an unsecured asset, the bank would have to file a civil lawsuit against the defaulters in court. • The SARFAESI Act of 2002 grants banks the authority to “seize and desist.” Banks will send a written notice to a defaulting borrower requesting it to pay off its debts within 60 days. • The SARFAESI Act also establishes Asset Reconstruction Companies (ARCs), which are supervised by the RBI and are responsible for acquiring assets from banks and financial institutions. The Act allows banks and financial institutions to sell financial assets to asset reconstruction firms (ARCs). The Reserve Bank of India has released guidance to banks on how to go about selling financial assets to ARCs. • As a regulator, the Insolvency and Bankruptcy Board of India has been constituted to oversee these proceedings. IBBI has ten members, including representatives from the Finance and Law Ministries, as well as the Reserve Bank of India. 191 CU IDOL SELF LEARNING MATERIAL (SLM)

9.7 KEYWORDS • SARFAESI Act -The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest • DM -District Magistrate • QIB -Qualified Institutional Buyers. • CMM -The Chief Metropolitan Magistrate • IBC – Insolvency and Bankruptcy Code 9.8 LEARNING ACTIVITY 1. Make a brief note on the impact of SARFAESI Act which provided an effective tool towards speedy recovery of secured loans. ___________________________________________________________________________ ___________________________________________________________________________ 9.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is the necessity for Reforms & Acts in Banking Sector? 2. Name the four committees set out to bring Banking Reforms. 3. Name the four conditions stipulated in SARFAESI Act for enforcing the rights by a creditor. 4. What is meant by Securitization? 5. Write a note on the Methods of Recovery suggested by SARFAESI Act for Long Questions 1. Describe the aim of the first phase &Second phase of Reforms & Acts. 2. Mention the important Banking Reforms & Acts. 3. Write briefly on SARFAESI Act. Explain its role & benefits obtained. 4. Describe the Rights of Borrowers as per Sarfaesi Act. 5. Write a note on the proposed Amendments to Sarfaesi Act. 6. Discuss in detail about insolvency and bankruptcy code B. Multiple Answer Questions 1. Various banking reforms and acts have been introduced in India to ______ the health and financial soundness of banks. a. Upgrade, 192 CU IDOL SELF LEARNING MATERIAL (SLM)

b. Maintain, c. Protect, d. None of these 2. There were _______ committees that were set up to constitute the Banking sector reforms a. Four, b. Five, c. TWO, d. Six 3. SARFAESI Act------ banks and other financial institution to auction residential or commercial properties to recover loans. a. Prohibits b. Allows c. Monitors d. None of these 4, SARFAESI Act is effective only for --------secured loans where bank can enforce the underlying security e.g. hypothecation, pledge, and mortgages. . a. Secured b. Unsecured c. Housing d. None of these 5. SARFAESI Act was passed after the recommendations of the -------------- a. Narasimhan Committee. b. B. Verma committee c. C. Khan committee d. None of these. Answers: 1-a, 2-a, 3-b, 4-a, 5–a. 193 CU IDOL SELF LEARNING MATERIAL (SLM)

9.10 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. 194 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 10: BASEL NORMS Structure 10.0 Learning Objective 10.1 Introduction 10.2 Meaning 10.3 Regulations issued by Basel committee 10.4 Banking Parameters 10.5 Significance of Basel norms 10.6 Impact of Basel norms 10.7 Summary 10.8 Keywords 10.9 Learning Activity 10.10 Unit End Questions 10.11 References 10.0 LEARNING OBJECTIVE After studying this unit students will be able to: • Explain about Basel Norms • Describe about Basel I, II, III • Discuss the banking parameters • Explain the importance of Basel norms • Identify the impact of Basel norms 10.1 INTRODUCTION Basel is a Swiss city that also serves as the headquarters of the Bureau of International Settlements (BIS). The BIS promotes cooperation among central banks with the aim of achieving financial stability and establishing common banking regulations. In the year 1930, it was created. The Basel Committee on Banking Supervision (BCBS) is made up of members from 27 countries' central banks and regulatory agencies (including India). The Basel accord is a series of BCBS agreements that primarily concentrate on risks to banks and the financial system. Basel-I, II, and III are three sets of regulations provided by the Basel Committee as of 2018. 195 CU IDOL SELF LEARNING MATERIAL (SLM)

The agreement's aim is to ensure that financial institutions have sufficient resources on hand to fulfil their commitments and withstand unforeseen losses. The Basel accords for the banking system have been ratified by India. The Basel Committee, as previously mentioned, establishes these standards. The Committee's findings aren't legally binding. Rather, the Committee develops supervisory principles and recommendations, as well as best practice statements, in the aim that individual national authorities will put them into effect. In this way, the Committee promotes convergence toward common standards and monitors their implementation while avoiding thorough harmonization of supervisory approaches among member countries. As a result, depending on the type of financial structure India desires, it may accept or reject them. 10.2 MEANING The Basel Committee on Banking Supervision issues international banking legislation known as Basel norms or Basel accords. The Basel norms are an attempt to harmonise banking regulations around the world in order to improve the global banking system. It is a compilation of Basel Committee on Banking Supervision agreements that focuses on the threats that banks and the financial system face. 10.3 REGULATIONS ISSUED BY BASEL COMMITTEE Basel-I, II, and III are the three sets of regulations provided by the Basel Committee. Basel I is a city in Switzerland. Basel-I • It was first released in 1988. • It was almost exclusively based on credit risk. • Credit risk refers to the probability of a default if a borrower fails to repay a loan or fulfil contractual obligations. It used to refer to the possibility of a lender not receiving the principal and interest owed to them. • It defined capital requirements for banks as well as the framework of risk weights. • A minimum capital requirement of 8% of risk-weighted assets was set (RWA). • RWA refers to assets of varying risk profiles. • For example, as opposed to personal loans with no collateral, an asset backed by collateral carries less risks. • In 1999, India adopted the Basel-I guidelines. Basel-II • BCBS issued Basel II guidelines in 2004. • These were the refined and reformed Basel I agreements. • The recommendation is focused on three pillars, as the committee refers to them. 196 CU IDOL SELF LEARNING MATERIAL (SLM)

• Capital Adequacy Requirements: Banks should have a capital adequacy ratio of 8% of risk assets at all times. • Supervisory Review: Banks were required to establish and use better risk management strategies in order to track and handle all three types of risks that a bank faces, namely credit, business, and operational risks. • Market Discipline: Enhanced disclosure standards are required. Banks must report their CAR, risk exposure, and other information to the central bank. • The Basel II norms are yet to be completely adopted in India and elsewhere, despite the fact that India complies with them. Basel III • Basel III recommendations were published in 2010. • These guidelines were put in place in response to the 2008 financial crisis. • It was thought that the mechanism needed to be strengthened further because banks in developing economies were undercapitalized, over-leveraged, and reliant on short-term funding. • It was also felt that Basel II's capital quantity and quality were inadequate to contain any additional risk. 10.4 BANKING PARAMETERS The guidelines concentrate on four main banking parameters: capital, leverage, financing, and liquidity, with the goal of promoting a more resilient banking system. 1. Capital: The capital adequacy ratio should be held at 12.9 percent. Tier 1 and Tier 2 capital ratios must be held at 10.5 percent and 2% of risk-weighted assets, respectively. In addition, banks must retain a 2.5 percent capital conservation buffer. The counter-cyclical buffer should be held at a level of 0-2.5 percent. Capital was divided into two categories: Tier 1 and Tier 2. • Tier 1 capital is a bank's permanent and dependable core capital. It contains all equity capital and assets that have been disclosed. • Tier 2 money refers to additional funds. It contains balances that aren't disclosed, general provisions, provisions for non-performing assets, and cumulative non- redeemable preferred shares, among other things. 2. Leverage: At least a 3% leverage rate is needed. The leverage rate is the proportion of a bank's tier-1 capital to total combined assets on average. 3. Liquidity and funding: Basel III defined two liquidity ratios: the LCR and the NSFR. • Banks would be required to hold a buffer of high-quality liquid assets necessary to cope with cash outflows experienced in an acute short-term stress scenario as defined by 197 CU IDOL SELF LEARNING MATERIAL (SLM)

supervisors under the liquidity coverage ratio (LCR). This is to avoid circumstances such as the \"Bank Run.\" The aim is to ensure that banks have enough liquidity in the event of a 30-day stress scenario. • The Net Stable Funds Rate (NSFR) mandates that banks maintain a consistent funding profile for their off-balance-sheet assets and operations. The NSFR mandates that banks fund their operations with safe sources of capital (reliable over the one-year horizon). The NSFR criterion is 100 percent at the very least. As a result, LCR assesses short- term (30-day) resilience, while NSFR assesses medium-term (1-year) resilience. In India, the deadline for implementing Basel-III was March 2019. It has been rescheduled for March 2020. The RBI agreed to postpone the introduction of Basel norms for another six months due to the coronavirus pandemic. • Giving banks more time under Basel III means a lower capital burden in terms of provisioning conditions, including nonperforming assets (NPAs). • This extension will have an effect on how international players see Indian banks and central banks. 10.5 SIGNIFICANCE OF BASEL NORMS • Banks lend to a variety of borrowers, each with their own set of risks. • They lend money from public deposits as well as money generated in the economy, i.e. equity and debt. • As a consequence, the bank is exposed to a number of default threats, which causes them to decline at times. • As a result, banks must set aside a certain amount of capital as a buffer against the possibility of non-recovery. • To address this danger, the Basel Committee created the Basel Norms for Banking. 10.6 IMPACT OF BASEL NORMS • Enhanced supervisory vigilance • Reorganization of institutions with further mergers and acquisitions • Chances of increased foreign arbitrage • Bank capital- Increased NPA, reduced Tier II CAR Ratio • Increased Tier I capital requirement 10.7 SUMMARY • The Basel norms are an attempt to harmonise banking legislation around the world in order to improve the global banking system. 198 CU IDOL SELF LEARNING MATERIAL (SLM)

• Capital Adequacy Requirements: Banks should have a capital adequacy ratio of 8% of risk assets at all times. • The Net Stable Funds Rate (NSFR) mandates that banks maintain a consistent funding profile for their off-balance-sheet assets and operations. • Banks lend to a variety of borrowers, each with their own set of risks. • Systematic risk has been reduced, and economic finance tension has been absorbed. 10.8 KEYWORDS • LCR-Liquidity Coverage Ratio • NSFR -Net Stable Funds Rate • BCBS-Basel Committee on Banking Supervision • PSL- Priority Sector lending • CCCB - Countercyclical capital buffer 10.9 LEARNING ACTIVITY 1. Learn about the crisis that happened in US Banking sector in 2008 and importance of Basel III norms ___________________________________________________________________________ ___________________________________________________________________________ 10.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is meant by Base norms? 2. What is meant by CRR? 3. Explain the term SLR? 4. Write a short note about CAR? 5. Discuss about NSFR. Long Questions 199 1. Explain about Basel I 2. Explain about Basel II 3. Explain about Basel III 4. Discuss about the banking parameters in detail 5. Interpret the impact of Basel norms CU IDOL SELF LEARNING MATERIAL (SLM)

B. Multiple Choice Questions 1. Banks should maintain a minimum _______________of 9% of risk assets. a. CRR b. SLR c. CAR d. None of these 2. Basel III has created 2 liquidity ratios are_________ a. CRR, SLR b. LCR c. NSFR d. Both b & c 3. BCBS stands for________ a. Banking committee on BASEL supervision. b. Basel committee on banking Supervision c. Banking committee on business standards d. None of these Answers 1-c, 2-d, 3-b 10.11 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,https://www.allresearchjournal.com/archives/2016/vol2issue10/PartB/2-10-3772.p df 200 CU IDOL SELF LEARNING MATERIAL (SLM)