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Orientation Programme for Branch

Managers/ Senior Officers of


Reading Material

National Bank for Agriculture and

Rural Development

Orientation Programme for Branch Managers/ Senior Officers of

Sl No


Page No.

Changing Banking Scenario- Challenges before Cooperative



Role and Responsibilities of Branch Managers


Important Provisions
Cooperative Banks



Branch as Profit Centre- Business Development Plan- Break

Even Analysis


Deposit Mobilisation


Business Diversification- New Business Opportunities


Credit Management- Credit Appraisal- Follow up


Documentation for Loans and Advances


Prudential Norms as Applicable to Cooperative Banks



NPA and Recovery Management



Risks in Banks- Asset Liability Management



Fee based/ Non Fund Income



Internal Control System



Computerisation- An Overview of Hardware and SoftwareIT Secuirty



Customer Relationship Management- KYC Norms- CP Act



MIS- Submission of Returns



Inter Personal Relationship and Communication










A: Banking Sector Reforms
Bank credit to productive sectors of the economy has a critical role in sustaining the
growth process. As the economy grows and becomes more sophisticated, the banking
sector has to develop pari pasu in a manner that supports and stimulates the growth of
the economy. Post nationalisation, the Indian banking system registered a tremendous
growth because of sharp increase in rural network that led not only to phenomenal
increase in deposit but also to large-scale credit widening and deepening. There was a
marked rise in credit flow towards economically important but neglected sectors/activities,
most notably agriculture and small scale industries. Despite the undeniable and multifold
gains of bank nationalization, it may be noted that until the beginning of 1990s the
financial system was saddled with a highly inefficient and financially unsound banking
sector. Some of the reasons for this were (i) massive preemption of banks resources to
finance Governments budgetary needs through high reserve requirements, (ii)
administered interest rates, (iii) directed credit (iv) lack of autonomy with the bank
management in decision making (v) lack of competition (v) political interference and
corruption. There were serious concerns about the profitability and viability of many
Starting from such a position, it is widely recognized that the Indian financial sector over
the last decade has been transformed into a reasonably sophisticated, diverse and
resilient system. However, this transformation has been the culmination of extensive well
sequenced and coordinated policy measures aimed at making the Indian financial sector
efficient, competitive and stable. The first phase of current reform of financial sector was
initiated in 1992, based on the recommendations of Committee on Financial System (CFS
or Narasimham Committee). The main objectives of the financial sector reform process in
India initiated in the early 1990s have been to

Remove financial repression that existed earlier;

Create an efficient, productive and profitable financial sector industry;

Enable price discovery, particularly, by the market determination of interest rates that
then helps in efficient allocation of resources;

Provide operational and function autonomy to institutions;

Prepare the financial system for increasing international competition;

Open the external sector in a calibrated fashion;

Promote the maintenance of financial stability.

From the beginning of financial reforms, India has resolved to attain standards of
international best practices but to fine tune the process keeping in view the underlying
institutional and operational considerations. Reform measures introduced across sectors
as well as within each sector were planned in such a way so as to reinforce each other.
Implementation of the recommendations of these two Committees were carefully
sequenced ensuring that the progress of banking sector reforms takes place steadily
without causing any systemic disruptions. The Banking Sector Reforms in India were
initiated in 1992. The objectives of reforms were :

Strengthening of the banking system for improved productivity and profitability;










transparency norms to be placed at par with international standards;

Make all the banks internationally competitive;

Updation of technology and HRD in banking system;

Removal of operational rigidities in credit delivery system without loosing sight of

social responsibilities

The major initiatives undertaken in pursuance of the recommendations of the various

Committees in banking sector reforms are summarized as under :i. Prudential Measures

In order to strengthen the financial position of banks, minimum Capital to Risk

Weighted Assets Ratio (CRAR) was prescribed at 8%, which was further increased to 9%
from the year ending March 31, 2000.

With a view to adopting the international best practices in regard to income

recognition, asset classification and provisioning, the norms introduced in April, 1992 are
being progressively reviewed and revised. . The significant initiatives taken in these
regard are prescription of provisioning requirement of 0.25% for standard (or performing)
assets in respect of direct advances to agriculture and SME sectors and 0.40% for others,
reduction of the time period for classification of doubtful asset from 24 months to 18
months with effect from March 31, 2001 and from 18 months to 12 months with effect
from March 31, 2005, introduction of 90 days norms for classification of NPAs with effect
from March 31, 2004.

The ceiling on exposure to a single borrower has been reduced from 20 per cent to 15

per cent of the banks capital funds and group borrower exposure limit has been reduced
from 50% of bank's capital funds to 40% with effect from April 1, 2002. Capital funds for
the purpose has been redefined to place it on par with the capital funds as defined for
capital adequacy purposes with effect from March 31, 2002, etc.

Banks were also advised to classify investment portfolio into three categories viz.,

Held to Maturity, Available for Sale and Held for Trading, effective from September 30,
2000, in line with international best practices.

With the gradual liberalisation of the Indian Financial System and growing integration

of the domestic market with the external markets, the risks associated with banks
operations have become increasingly complex, requiring strategic management. RBI has
issued guidelines on Asset-Liability Management (ALM) systems and on integrated risk
management systems in banks. Due to diversity and varying size of balance sheets,
banks have been advised to design their risk management architecture, taking into
consideration the size, complexity of business, risk philosophy, market perception and the
level of capital. With a view to fine-tune the risk management systems in banks and to
help smaller banks in achieving the minimum standards, RBI has issued guidance notes
on credit and market risk. In order to mitigate the risk in country exposures, RBI has also
issued the guidelines on country risk management.

The transparency and disclosure standards as prescribed under International best

practices are being implemented in a phased manner. Disclosures requirements have

been further broad-based and banks have been advised to disclose maturity pattern of
deposits, borrowings, investments and advances and foreign currency assets and
liabilities, movements in NPAs and lending to sensitive sectors with effect from March 31,
2000. From year ended March 31, 2001, banks were advised to disclose total advances
against shares, total investments made in equity shares, convertible debentures and
equity oriented mutual funds and total amount of standard/ sub-standard assets
subjected to restructuring. Further, from year ended March 31, 2002 the banks are
required to disclose movement of Provisions held towards NPAs, movement of Provisions
held towards depreciation of investments and the total amount of standard/ sub-standard
assets subjected to CDR, etc. From the year ended March 31, 2003, banks have been
advised to disclose Country risk exposures, i.e., (i) risk category-wise country exposures,
and (ii) the extent of aggregate provisions held there against.
ii. Competition Enhancing Measures

Granting of operation autonomy to public sector banks, reduction of public ownership

in public sector banks by allowing them to raise capital from equity market up to 49% of
paid-up capital under the automatic route, subject to conformity with the guidelines issued
from time to time.

Transparent norms for entry of Indian private sector, foreign and joint-venture banks

and insurance companies, permission for foreign investment in the financial sector in the
form of Foreign Direct Investment (FDI) as well as portfolio investment, permission to
banks to diversify product portfolio and business activities.
iii. Measures Enhancing Role of Market Forces

The statutory pre-emption in the form of SLR and CRR have been brought down in a

phased manner to 25% and 5.75 respectively.

The interest rates have been deregulated in a phased manner. All lending rates have

been deregulated except lending to small borrowers and a part of export finance. Interest
rates on deposits are now almost free except for prescription in respect of savings
deposits and foreign currency deposits. The interest rate on Government borrowings is
also now market determined.

Introduction of pure inter-bank call money market, auction-based repos-reserve repos

for short-term liquidity management, facilitation of improved payments and settlement


Banks are given greater autonomy in the areas like branch rationalisation, credit

delivery, recruitment and creation of posts, etc, subject to fulfilment of certain criteria.
iv. Institutional and Legal Measures

Setting up of Lok Adalats, debt recovery tribunals, asset reconstruction companies,

settlement advisory committees, corporate debt restructuring mechanism, etc. for quicker
recovery / restructuring.

Promulgation of Securitisation and Reconstruction of Financial Assets and

Enforcement of Securities Interest (SARFAESI) Act and its subsequent amendment to

ensure creditor rights.

Amendment of the Negotiable Instruments Act, effective from February, 2003.

Introducing the concepts of electronic cheque and cheque truncation.

Prevention of Money Laundering Act, 2002 to combat the menace of tainted money.

Setting up of Credit Information Bureau for information sharing on defaulters as also

other borrowers.

Setting up of Clearing Corporation of India Limited (CCIL) to act as central counter

party for facilitating payments and settlement system relating to fixed income securities
and money market instruments.
v. Supervisory Measures

Establishment of the Board for Financial Supervision as the apex supervisory

authority for commercial banks, financial institutions and non-banking financial


Introduction of CAMELS supervisory rating system, move towards risk-based

supervision, consolidated supervision of financial conglomerates, strengthening of off-site

surveillance through control returns.

Recasting of the role of statutory auditors, increased internal control through

strengthening of internal audit.

Strengthening corporate governance, enhanced due diligence on important

shareholders, fit and proper tests for directors.

vi. Technology Related Measures

Setting up of INFINET as the communication backbone for the financial sector,

introduction of Negotiated Dealing System (NDS) for screen-based trading in government

securities and Real Time Gross Settlement (RTGS) system.
B: Challenges before Cooperative Banks
Faced with mutually interdependent forces of competition, regulation, technology, and
expectations of the customers, banks are now set for a range of roles. Existing products
and services are changing way for value-added ones thanks to the one-upmanship game
among competing banks, sparked off by soaring consumer-demands. For example, cashmanagement products may soon morph from its current form into products that use
payment gateways and alternate settlement mechanisms-for quicker movement of money
across manufacturers, suppliers, distributors, and customers.

Banks are increasingly

finding that the most viable way of differentiating themselves will be to successfully
manage customer relationships and enhance the overall customer experience.

Old World
Confined marketplace
Competition between banks
Limited product line
One-size-fits-all product
Focus on business growth
Revenues through margin

New World
Unlimited market space
Competition from brands
Extensive product breadth
Customisation and innovation
e-Enabled, multi-channel players
Focus on revenue growth as well as cost-reduction
Revenue generated through fees and value-added services

Other spatial restrictions like that of service area approach for bank branches being
relaxed and approval to universal banking, mobile banking and Business correspondents
and business facilitators, etc. have left no area untouchable for any operant in the
banking system. The credit to agriculture, especially the crop loans, has not remained as
an exclusive domain of cooperative credit structure. When the cooperative banks share
in the agricultural sector is declining as is clear from following graphs, public sector
commercial banks & private sector banks are emerging as new champions in agricultural
and rural banking.

Thus, there is a paradigm shift form the sellers market to buyers market in the industry
forcing bankers to change their approach from conventional banking to convenience
banking and mass banking to class banking. The shift has also increased the degree of
accessibility of bank to common man for his varied of needs and requirements.
C: Revival package for STCCS (Vaidyanathan Committee)
Most of the developments taking place in the banking sector have bypassed
cooperatives. The short term rural cooperative credit structure (CCS), which should play
a central role in this respect, is unable to do so. Concerned at this state of affairs, the
Central Government had set up a special Task Force in August 2004 to suggest an
implementable action plan for reviving the CCS. The Task Force submitted its report on
04 February 2005.

The recommendations were accepted by GoI in principle.


recommendations were discussed by National Development Council on 27 June 2005,

and State Chief Ministers on 09 September 2005 followed by meeting of Finance and
Cooperation Ministers of selected States on 29 September 2005. Based on discussions
and consensus, a special Revival Package for restructuring of the CCS was announced,
a gist of which is given hereunder :i. Objectives

The revival package is aimed at reviving the short-term rural cooperative credit structure
(CCS) and to make it a well-managed and vibrant medium to serve the credit needs of
rural India, especially the small and marginal farmers. It seeks to :(a) provide financial assistance to bring the system to an acceptable level of health;
(b) introduce legal and institutional reforms necessary for their democratic, self-reliant and
efficient functioning; and
(c) take measures to improve the quality of management..

ii. Approach
The proposed financial assistance is a one-time measure only. Financial assistance will
be conditional and released only on the implementation of the recommendations for legal
and institutional reforms. States would have the option to participate or not to participate
in the package. Those choosing to participate will be entitled for financial assistance
under the package if they agree, through the mechanism of a formal MOU or Exchange of
Letters with the Central Government, to implement (in a phased manner and within a
period of 3 years), the legal and institutional reforms envisaged. States not ready to
make the choice immediately will be given two years to take a decision on this matter.
Financial assistance under the package would cover accumulated losses in the CCS.
This, however, does not mean writing off of the loans which are yet to be repaid by the
borrowers. The cooperatives will have to continue to make efforts to recover these loans
and thereby improve their financial health.
III. Financial Package
Introduction : Financial restructuring will start with first bringing the Primary Agricultural
Cooperative Societies (PACS) to an acceptable level of financial health through cleansing
of their balance sheets and strengthening their capital base, and then move on to the
upper tiers. This step will enable PACS to clear their dues to the upper tiers and thereby
reduce the accumulated losses of District Central Cooperative Banks (DCCBs). The
DCCBs will thereafter be provided assistance to clear the balance of accumulated losses,
if any, and to reach a minimum norm of capital adequacy. The same process will apply to
the State Cooperative Banks (SCBs).

Financial restructuring will include criteria for determining the eligible purposes and
institutions, quantum of assistance required, pattern of sharing the liability, conditionalities
attached and the time frame.
Eligible Purposes : Financial assistance under the package will be available for wiping
out accumulated losses, covering invoked but unpaid and un-invoked guarantees given
by the State governments and other dues to the CCS from them, and increasing the
capital to a specified minimum level. In order to ensure that the CCS continues on sound
financial, managerial and governance norms, technical assistance will also be provided to
upgrade institutional and human resources of the CCS.
Accumulated Losses : Accumulated losses in the CCS cover following losses :

non-repayment of loans for agricultural and other businesses given by the


ii. non-repayment of loans to individuals for other purposes like consumer goods,
housing, gold loans etc.;
iii. losses on account of non-credit businesses like public distribution system (PDS),
procurement of food grains on behalf of government, sale of fertilisers etc.;
iv. non-repayment of loans issued under government guarantees where the State
government has not yet paid to the cooperatives although guarantees have been
invoked/ un-invoked;
v. non-payment of dues from governments on account of waivers or subsidies
announced by them; and
vi. losses due to frauds, etc.
The magnitude of the accumulated losses will be determined by special audits of all the
societies in the CCS using uniform criteria and standards.

The package will include assistance necessary to bring all cooperatives,

including PACS, to a minimum Capital to Risk Weighted Assets Ratio (CRAR) of 7%.
While this ratio will be raised within three years to 9 % by PACS, DCCBs and SCBs shall
raise their CRAR as prescribed by the Reserve Bank of India (RBI). This increase in
CRAR shall be met by the CCS from its own resources.
Refund of share capital to State Governments : The share of the State government in
the equity of each institution in the three tiers shall be brought down below 25% of the
total subscribed share capital within a period of three years, subject to the condition that

there will be only one government representative on the Board of a DCCB or SCB to
represent the equity of the State government. The CEO of the DCCB or SCB shall not be
regarded as the representative of the State Government for the purpose of this
paragraph. However, there would be no State government nominee on the board of a
PACS even if it has received equity contribution from the State government.
Where the State Governments equity is more than 25%, the amount in excess of 25%
shall be converted into a grant by the State Government to the concerned CCS entity. In
other words, there will be no liability devolving on the CCS entity insofar as retirement of
State Government equity is concerned, and no funds will flow towards reducing the State
Governments equity to a maximum of 25%.
A State Govt. or an individual CCS entity which wishes to reduce the State Government
equity further will be free to do so. In the interest of cooperatives becoming fully
democratic, autonomous and self-reliant institutions, it is desirable that State Government
equity participation be progressively reduced further and eliminated within a reasonable
period of time. This can also be achieved by the societies in the CCS by moving over
their registration to the parallel Acts wherever States have enacted such a law.
Cost of Special Audit: The quantum of financial assistance will cover accumulated
losses as of 31 March 2004. For this purpose, a special audit of accounts will be carried
out for all the PACS, DCCBs and SCBs based on uniform accounting criteria. This special
audit will ensure that in the event of insufficient provisioning made by the CCS, they do
not get under capitalised. The special audit will be conducted under the supervision of the
Implementing agency, NABARD.
The arrangements for conduct of the special audit (including the agencies and personnel)
will be worked out by NABARD in consultation with each State as soon as MOU for
implementation of the package is signed by that State government.
Technical assistance: The financial package will also cover the costs of training and
capacity building to improve the financial management skills of staff and board members;
for installation of uniform accounting and monitoring systems; as well as for
computerisation. This grant assistance from the Central Government will be phased over
a period of two to three years based on necessity and will culminate with the completion
of implementation in each State.

Eligible Institutions : The revival package is based on the premise that the CCS should
be capitalised fully irrespective of whether a particular cooperative entity does or does not
satisfy the eligibility conditions.

In other words, the capitalisation will cover all the

societies in all the three tiers of the CCS.

In regard to PACS which satisfy the eligibility criteria, the capitalisation will be direct; in
regard to others, the capitalisation will take place in the next upper tier.
The capitalisation, based on the independent special audit, will be sequential in nature,
and each higher tier will be capitalised only after the beneficial impact of the lower tier has
been factored in.
All PACS with a recovery level of at least 30% of the demand as on 30.06.2004 will
qualify for being covered under the revival package and to receive financial assistance.
State govt.s will be under obligation to determine the future set up of PACS with recovery
levels of less than 30%. State governments will take appropriate steps to ensure the flow
of agricultural credit to farmers in the operational areas of such non-qualifying PACS.
Capitalisation will be full for the PACS with recovery levels of 50% and above. The PACS
with recovery levels between 30% to 50% will receive financial assistance in three annual
back-ended instalments at the beginning of each succeeding year subject to their
achieving an incremental increase in their recovery rate by at least 10 percentage points
on 30 June 2006 against the benchmark recovery achieved on 30 June 2004, and an
annual increase of 10 percentage points thereafter. As and when a PACS achieves 50%
recovery, the entire assistance will be released without waiting for the year to year
recovery benchmarks.
Within the above eligibility criteria, the release of financial assistance will be contingent on
the fulfilment of legal and institutional reforms and other conditionalities as stated in the
report of the Task Force and in the MOUs / Exchange of Letters executed by these
agencies with their upper tiers spelling out the Action Plans for Revival (APR).
It needs to be emphasised that the CCS cannot be financially viable institutions on a
sustainable basis unless recovery levels are improved beyond these levels. It will be
necessary for them to become more strict on recovery and achieve recovery rates of at
least 85% over the next 5 years.

For the North Eastern States, scheduled areas and tribal districts, the Central
Government may consider relaxing the eligibility levels for PACS and DCCBs.
iv. Sharing Pattern
The liability for funding the financial package will be shared by the Central Government,
State governments, and the CCS based on origin of loss and existing commitments.
The Central Government will bear 100% of the losses arising out of direct credit business
of PACS, 100% of the losses arising out of the agricultural credit business of DCCBs and
SCBs and a portion (in terms of para 4.57 of the Report of the Task Force) of their losses
out of non agricultural credit business, 50% of the losses due to PDS and input
distribution undertaken in pursuance of national policy, the requirement of resources to
raise CRAR to 7%, and the full cost of technical assistance for human resource
development, computerisation and improving accounting systems.
State governments will bear 50% of the losses on account of PDS and input distribution,
all dues pertaining to invoked and un-invoked guarantees and other receivables, and a
portion (in terms of para 4.57 of the Report of the Task Force) of losses out of non
agricultural business of DCCBs and SCBs.
The CCS will bear the losses arising out of activities like direct advances taken up on
their own and losses due to frauds etc. The actual magnitude of the share will be
determined on the basis of the findings of the special audit.:
The Central Government will provide its share as grants. The States are expected to
meet their share from their budget or by open market borrowing. The Centre will also
consider assistance on more liberal terms for special category States and for specified
scheduled areas and tribal areas to meet their liability under the package.
v. Regulation
The fiduciary nature of relationship between the RBI and a cooperative bank which
accepts public deposits entails, by definition, that the Regulator should have the authority
not only to lay down prudential norms but also in regard to those aspects of management
which have a bearing on the financial health of the institution. It is also essential to ensure
that the directives of the Regulator are implemented strictly and expeditiously. The
Banking Regulation Act and the respective Cooperative Societies Acts would accordingly
be suitably amended to empower the RBI to lay down the regulations and guidelines for

these purposes. The Registrar of Cooperative Societies in the States (RCS) will
implement and monitor these regulations and guidelines within a given timeframe.
Similarly, a timeframe not exceeding one month needs to be prescribed for the RCS to
take action on matters mentioned in section 2(gg) or section 13D of the DICGC Act. In all
other matters of administration and regulation, the RCS shall be the authority responsible
for laying down regulations/guidelines.
vi. Legal and Institutional Reforms
Introduction : The root cause of the poor financial state of cooperative societies lies in
poor management and governance. Unless these are improved, the entire capitalisation
amount would be wasted. This calls for amendments in the relevant Acts such as
Cooperative Societies Acts of the States, BR Act, NABARD Act, DICGC Act etc. along the
lines suggested by the Task Force and a commitment on the part of States that the laws,
as amended, will be implemented strictly.
Reforms in the Cooperative Societies Act : As carrying out legal amendments is a
time consuming process, the State governments may issue Executive Orders under the
existing powers to bring in the desired reforms which will relate to:

Ensuring full voting membership rights on all users of financial services including
depositors in cooperatives other than cooperative banks


Removing State intervention in all financial and internal administrative matters in



Providing a cap of 25% on State government equity in cooperatives and limiting

participation in the Boards of cooperative banks to one nominee. Any State
government or a cooperative wishing to reduce the State governments equity further
would be free to do so and the cooperative will not be prevented from doing so


Allowing transition of cooperatives registered under the State Cooperative Societies

Act to migrate to the Parallel Act (wherever enacted)


Withdrawing restrictive orders on financial matters


Permitting cooperatives in all the three tiers freedom to take loans from any regulated
financial institution and not necessarily from only the upper tier and, similarly, placing
their deposits with any regulated financial institution of their choice, beyond certain
thresholds. The threshold limits may be determined by the State Government/RCS
concerned for each entity or class of entities having regard to the funds required by
the entity to achieve the basic objectives of the CCS.


Permitting cooperatives under the Parallel Act (wherever enacted) to be members of

upper tiers under the existing Cooperative Societies Acts and vice versa


Limiting powers of State governments to supersede the Boards


Ensuring timely elections before the expiry of the term of the existing Boards


Facilitating regulatory powers for RBI in the case of cooperative banks


Prudential norms including CRAR, for all financial cooperatives including PACS, as
per the directions of RBI.
A model Cooperative Law that can be enacted by the State governments has been
suggested. It is also recommended that in States where there are already two laws (the
old Cooperative Societies Act and the new Act on the lines of the model Act), it would be
better to gradually converge and have only one Act so as to reduce confusion and legal
problems. In respect of States which do not pass the model Act, a separate chapter for
Agricultural and Rural Credit Societies incorporating the salient provisions of the model
Act may be incorporated in the existing Cooperative Societies Acts.
Reforms in the BR Act 1949 : Amendments to the BR Act would include the following :


All cooperative banks would be on par with the commercial banks as far as regulatory
norms are concerned.


RBI will prescribe fit and proper criteria for election to Boards of cooperative banks.
Such criteria would however not be at variance with the nature of membership of
primary cooperatives which constitute the membership of the DCCBs and SCBs


However, as financial institutions, these Boards would need minimum support at the
Board level. Hence, the RBI will prescribe criteria for professionals to be on the
Boards of cooperative banks. In case members with such professional qualifications
or experience do not get elected in the normal electoral process, then the Board will
be required to co-opt such professionals to the Board and they would have full voting


The CEOs of the cooperative banks would be appointed by the respective banks
themselves and not by the State government.

However, as these are banking

institutions, RBI will prescribe the minimum qualifications of the CEO to be appointed
and the name proposed by the cooperative bank for the position of CEO would have
to be approved by RBI

Cooperatives other than cooperative banks as approved by the RBI shall not accept
non-voting member deposits.

Such cooperatives would also not use words like

bank, banking, banker or any other derivative of the word bank in their
registered name.
vii. Benchmark Activities
Release of financial assistance under the financial package will be back ended and linked
to achievement of pre-defined benchmarks in respect of legal, institutional and regulatory
reforms and will, therefore, be phased over a period as per progress in implementation.
viii. Implementation Mechanism
NABARD would be designated as the implementing agency for the scheme. However, for
guiding and monitoring the implementation of the scheme at national, state and district
levels, Implementing and Monitoring Committees would be constituted. At the national
level, this committee would comprise Secretary or Additional Secretary (Financial Sector)









Government(s), and two eminent co-operators. At the State level, the committee would
comprise the Secretary (Finance), Secretary (Cooperation) and RCS, representatives of
NABARD, SCBs and a Chartered Accountant. At the district level, a similar committee
would be constituted including the District Collector or an officer of appropriate level. A
dedicated team of officers from NABARD would support each of these committees to help
implement the scheme.
ix. Deposit Guarantee Scheme
Such a scheme will be applicable only to the PACS. Consequent upon implementation of
the report, the deposits with the PACS will be only member deposits. For ensuring the
safety of such deposits, NABARD may be asked to design a deposit protection scheme.
With the implementation of the recommendations of Vaidyanathan Committee, it is
expected that the rejuvenated cooperative credit structure will play a vital role in the
banking sector of the country.
Due to stiff competition for other payers in the rural credit, cooperative banks are facing
serious challenges at this juncture. The enhanced role of the banking sector in Indian
economy and the increasing levels of competition have placed numerous demands on
co-operatives. Globalization has also resulted in improved risk management practices.
In such circumstances, the cooperatives shall have to shoulder greater responsibilities

and step up their network of services to ensure sustainable growth in agriculture

The cooperative banks have to face the latest challenge in the form of technology
adoption. Ironically to mention, many cooperative banks do not even have computers in
many of their branches. Presently, the role of cooperatives, no longer remains confined
to their traditional activities, but expanded to new economic ventures as in the case of
other enterprises in the public or the private sector. It is high time for the cooperative
banks to understand the changing environment in banking and rise with suitable
strategies to meet the future confidently. The revival package offered by the GOI is to
rejuvenate the rural cooperative credit structure.

The cooperatives which are the

beneficiaries of the financial package, should therefore, utilize it effectively, change

according to the present days requirement and offer according to the customers
expectations so as to withstand the competition.


Successful branch managers are very self-disciplined, intelligent, responsible and
presentable people. You would need to be positive, enthusiastic, have good leadership
skills, get on well with people, be firm but just and have the ability and perseverance to try
and help the bank achieve its goals. If you are able to motivate people and make them
feel that they are an important cog in the business wheel, you will be a good example to
them. No-one would expect you to solve all the problems but if employees know that you
are doing your best to make life for everyone in the branch as profitable, productive and
enjoyable as possible, they are much more likely to concentrate on doing their best.
Every worker in a business is given a specific task or tasks to do by the manager who
does the planning co-ordinating and organising of activities to reach the required goals
and you would be the one to give orders and exercise control over the entire process.
Good communication skills are vital as customers are the main source of income and
have to be treated with respect and tact.
A branch manager is responsible for the management of a branch and your
responsibilities would include the profits of the branch, costs, security, administration,
training of staff members and staff development. The planning, organising, co-ordinating
and control of the branch would be entirely in your hands. Matters such as productivity
and personnel performance, motivation of staff, staff benefits and the payments of wages
would also be your responsibility.
If we think of a model branch, what are the things that would come to our mind? Naturally,
a branch earning profit where both customers and employees are happy. A model branch
is likely to have following profile:

Business goals like deposit mobilization, lending, recovery etc. are attained

Customer satisfaction is high and complaints are minimum

Staff productivity is optimum

Work environment is conducive to staff development

Staff discipline is at its best

House keeping is up-to-date

Frauds are minimum

Audit rating is high

Government programmes are implemented to the satisfaction of authorities

In short a successful branch manager has to live up to the expectations of the owners,
customers, regulators and the staff of the bank.
Planning: A branch manager has to plan the business of the branch in consultation with
the head office of the bank. The business plan of the branch has to be in consonance with
the overall Development Action Plan of the bank. The plan should take in to account the
views of the staff and potential available in the area of operation. The plan of the branch
should comprise of the following:

Infrastructure: Layout and upkeep of premises, cleanliness, face-lifting, furniture

and fixtures, safe deposit vaults, security management and maintenance of old

Manpower planning including human resources development.

Deposit planning

Credit planning

Recovery planning

Profit planning

Planning of mechanization and computerization

Planning for housekeeping, compliance with audit reports

Planning for improvement in customer services

Planning for implementation of Government sponsored programmes

Organising: The branch manager should organize all departments, officers and staff to
ensure attainment of branch goals. This has to be done by formulating action plans and
strategies for each business segments. Role and functional clarity should be made
understood at all level of staff. While organizing the 7 S framework advocated by Peters
and Waterman may be kept in mind. The 7 S represent Structure, Strategy, Systems,
Staff, Styles, Skills and Super-ordinate goals (visionary objectives/ goals specific to the
manager). Out of the 7 S, the first four are considered to be hard core and not amenable
to much change. However, the remaining 3 S (Styles, Skills and Super-ordinate goals)
are considered soft core of an organization where changes, improvement, modification
and development can be made. The branch manager has to concentrate on these 3 S to
give shape to the branch as a unit which will be able to carry out long range plan

successfully. Confusion within the branch set up should be cleared regularly for better
cohesion and team work.
Monitoring and control: Each planning process needs periodical review, monitoring and
control. The areas of branch performance requiring regular monitoring include deposit
mobilization, credit deployment, level of customer satisfaction, profitability, housekeeping,
human resource development, branch upkeep and maintenance and security. The
periodicity of review depends on the areas of functioning, its urgency and importance.
The review schedule for different areas may be daily, weekly, fortnightly, half-yearly and
annual. Each area of performance needs different level of attention and the periodicity of
review changes accordingly. The most common and effective method of review is through
periodical meetings with the staff and other stakeholders. The staff should be encouraged
to actively participate in such meetings. The staff should be made accountable for
performance in the respective parameters. The performance of the branch also depends
largely on the performance of the affiliated PACS. The performance of the can be
reviewed by convening periodic meetings and visiting them at regular intervals.
Branch administration and human resources development: One of the important
functions of the branch manager is to ensure smooth administration of the branch.
Motivation of branch staff, their performance appraisal, discipline management, capacity
development of staff, counseling of staff, etc. are some of the core functions of a branch
manager. Skill and tact is required to manage the day to day business of the branch. The
staff should find the branch manager approachable and friendly. The staff should perceive
him to be a man who means business. The branch manager should exhibit firmness in
dealing with matters relating to staff discipline. He is constantly evaluated by the staff. Any
slip would mean more hard work to regain the confidence. A hard working, sincere and
equity based professional branch manager is always respected and accepted by the staff.
The business growth of the branch depends on the skill and commitment of the staff. The
skill and capabilities of the staff should be regularly evaluated. Depending on the
perceived needs, the branch manager should endeavour for skill development of the staff
through on the job training as well as recommending for institutional training.
Housekeeping: It is one of the most important functions of a branch manager.
Housekeeping includes periodical balancing of books, submission of statements and
returns, cash management, reconciliation of outstanding inter branch entries, suspense
accounts, review of borrowal accounts, timely renewal of documents in advance
accounts, etc. With growing emphasis on staff accountability for loss in bad advances,

lack of follow up of sticky advances, non-attendance to audit irregularities, frauds and

forgeries, greater attention to housekeeping has assumed significance. Branch managers
have to devote considerable time to this aspect of branch functioning. Banks give much
emphasis to housekeeping as a parameter for evaluation of branch performance. All
officers and staff of the branch are to be motivated and made to realize the importance of
housekeeping and clearance of arrears. The staff should understand that one of the prime
objectives of the branch is to remain up to date in all parameters of housekeeping. Bad
housekeeping affects the profitability of the branch and may lead to serious frauds. In the
event of arrears in housekeeping, the branch manager should tackle the problem on war
footing by forming task force and monitor the progress on day to day basis.
Leading: The branch manager is not only the official head of the branch but also the
leader of the team. Branch managers can not afford to ignore the role as a leader. He is
required to inspire and influence his staff to achieve the goals of the branch. He has to be
a visionary, a dreamer and a proactive change agent who believes in doing right things
and doing things rightly. A branch manager should have the following attributes of a

Team building


Good communication skills

Commitment and involvement

Courage and decision making

Creative and innovative

Willingness to take responsibility

Equity and reasonableness


Cordial and warm hearted

Marketing: While planning for the business, the branch manager has to take into account
several factors like, the market share of the branch in deposits and advances, growth rate
of business in the past three years, strength of the branch compared to the competitors,
etc. The plan should also specify the initiatives required to achieve the projected business
targets. The branch may be already having a number of loyal customers but the growth in
the business of a branch depends on the ability to market the products. With the
increased emphasis on market orientation in favour of the customer, proper and timely

counseling to existing and potential customers by branch managers is an important

dimension of marketing of bank products. Success of a branch manager depends to a
large extent on how he establishes rapport with his customers, understands their needs
and offers appropriate services. This will involve approaching key individuals, institutions,
government agencies, administrators and professional groups for canvassing business.
The branch manager has to develop effective follow-up of these contacts/ visits as results
need not come from sporadic attempts. Proper systems will have to be developed and
staff to be given responsibility to follow up with the prospective customers.
Customer service: Performance of a bank branch depends on the ability to mobilize and
retain customers. Customer satisfaction being critical to the functioning of a bank branch,
it is imperative for a branch manager to set example in customer service. The branch
manager must create a conducive atmosphere for the staff to realize the importance of
customer service. Banks today extend a variety of services under one roof. With
emphasis on mass banking, banks have started reaching a wider section of the society.
The day of walk-in business is over. Banks have to reach out to the customer. Various
products and services have been designed to meet the requirements of customers in
different segments. Alongwith the variety, the delivery of products has also become
complex. The essentials of a good delivery systems are speed accuracy, timeliness,
courtesy and concern. The requirements vary from customer to customer. Speed may be
very important to a businessman but may not be very important to a retired person.
Similarly, timeliness may vary from person to person. But courtesy, concern and accuracy
are the elements which every customer will like to have. The image of the branch is to be
built up where the customer feels proud to deal with the bank. The branch manager must
remember and keep reminding the staff the following important aspects for good
customer service:

Banking is a business of service

Banks deal with people

Earning confidence of customer is essential

Customers expect courtesy

Customers do not like to be ignored

Service delayed is service denied

Customers expect to be heard

Customers expect us to be sincere

Customers are not aware of the internal systems and procedures

The reputation of a branch depends on each and every employee of the branch

Customers like smiling faces

A satisfied customer may bring a new customer to the bank but a dissatisfied customer
may take away 10 customers. It is therefore, important to pay due attention to customers
complaints. Handling a customers complaint is an art which every branch manager has
to develop. Complaints should be viewed as opportunities correct deficiencies in service.
It is a feedback which the branch manager receives free of charge to find out the
operational deficiencies.
Public relations: The branch manager is the public face of the bank. The image of the
bank is dependent on him. His behaviour and actions reflect organizational culture of the
bank. He must be aware that he represents the bank all the 24 hours of a day. This casts
enormous responsibilities on him to build and improve the image of the bank. The job
involves establishing relationship and building rapport with:

Important customers, opinion leaders, commercial establishments, district

administration including police authorities, government agencies, etc.

Societies and Welfare trusts undertaking social activities.

Local press and publishers

Important professionals like lawyers, doctors, etc.

Religious and welfare institutions running schools, colleges, hospitals etc.

Landlord of the premises taken on hire.

Reporting: The branch manager is the Chief Executive Officer of the bank at branch
level. He has to periodically report the progress of the branch to the Head Office and seek
guidance from time to time. Banks are required to comply with the statutory norms like
maintenance of Cash Reserve ration and Statutory Liquidity Ratio prescribed by the
regulators. Compliance with these norms depends on the timely submission of accurate
data to the Head Office. He has to regularly submit all returns and statements prescribed
for the branch. He has to apprise the Head Office about all the needs of the branch like
manpower requirements, training needs of the personnel, addition/ alteration of the
branch premises, furniture/ fixtures, etc. The branch manager is required to report the
difficulties and problems faced by the customers and suggest and seek solution to such
issues. There should be no delay in submission reports and returns.

Seeking guidance: If the branch has a reputation of being a problematic branch, it is

advisable to contact the past managers of the branch to know their view points and the
origin of the problem. Information on action taken by the past managers may also be
collected. The view points of the past managers will give deeper insights in to the problem
and will be of immense help take further remedial measures. The branch manager is also
required to have regular dialogue with the development authorities and seek guidance in
implementation of development programmes.
Meetings: As the representative of the bank, the branch manager is required to attend a
number of meetings convened by bankers, government and development authorities. In
many cases, the branch managers are required to attend the Board meetings of Primary
Agricultural Cooperative Societies. The branch manager is also required to convene
meetings of customers and other stakeholders of the bank. The views of the banks are
required to be presented in such meetings. He should make thorough preparations before
each meeting and equip himself with all relevant information and present the banks point
of view forcefully.
Audit and inspection: It should be understood that audit and inspections are not fault
finding missions. They are meant primarily to ensure adherence to the laid down systems
and procedures of the bank leading to better risk management and profitability. The
branch manager is required to extend full cooperation during the audit and inspection of
the branch. All information sought by the auditors/ inspectors must be provided without
any hesitation. Top priority should be accorded to rectification of defects/ deficiencies
pointed by the auditors/ inspectors. Instances of defects/ deficiencies pointed out by the
auditors/ inspectors need not be only defects. There may be similar defects/ deficiencies
in the branch. Apart from rectifying the defects, the branch manager should put in place
proper systems to ensure that such defects do not recur in future.
Feedback: The branch managers are the eyes and ears of the bank. The deposits and
lending schemes as also other products of the bank are implemented by the branches.
The Head Office can not devise the schemes/ products on their own. In fact the schemes
should be devised by the Head Office on the basis of suggestions received from the
branches. It is the responsibility of the branch managers to suggest new products on the
basis of their assessment of customers needs.
Dealing with the PACS: Primary Agricultural Cooperative Societies (PACS) are the most
important business partners of DCCBs. Apart from being customers, they are also the

owners of the bank. As the PACS are not resource based organizations, the bank
provides resources to them and does bulk of its lending through them. PACS are the
extended arms of the bank in reaching out to the ultimate customers. The success of a
branch depends on the ability of the PACS to borrow funds from the branch, lend to the
members and recover the loans in time. The branch manager has to treat the PACS not
only as a business channel but also as partners in progress. Keeping track of the
activities of the PACS and helping them to grow as vibrant institutions are the primary
responsibilities of the branch manager.
PACS are required to prepare Business Development Plans (BDP) and enter into MoU
with the DCCBs. All support required for implementation of the BDP are required to be
provided by the branch manager. The resource requirements of the PACS are required to
be met in full, if necessary, by borrowing from higher financial institutions. The branch
manager should guide the PACS in all business matters including appraisal and sanction
of loans, recovery of dues from members and non fund based activities. He should visit
the PACS regularly and guide them in housekeeping and internal control systems. As the
success of the branch depends on the success of affiliated PACS, it is necessary to
collect information from the PACS on various business parameters at regular interval. The
branch manager should ensure regular submission of returns by the PACS, review the
progress and guide them in business development. PACS should be provided necessary
assistance at the time of recovery of loans. As most of the PACS do not have requisite
skill in appraisal, sanction and documentation of term loans, it is the responsibility of the
branch manager to arrange for suitable training for the staff of the PACS. The branch
manager may take initiative in capacity building of the staff of PACS and use PACS as
business facilitator/ business correspondent of the bank.
Branch managers of DCCBs have a variety of roles and enormous responsibilities. The
survival and growth of the bank depends on their attitude and initiatives.


1. The Negotiable Instruments Act, 1881
Negotiable instrument
A negotiable instrument means a promissory note, bill of exchange or cheque payable
either to the order or to the bearer. (Section - 13)
Promissory Note
A promissory note is an instrument in writing (not being a bank note or a currency note)
containing an unconditional undertaking, signed by the maker, to pay certain sum of
money only to, or to the order of a certain person, or to the bearer of the instrument.
(Section - 4)
Requisites of promissory Note

The promissory note must be in writing;

Must contain an undertaking to pay;
The promise to pay should be unconditional;
The promissory note must be signed by the maker;
The maker must be certain;
The sum payable must be certain;
The instrument must contain a promise to pay money and money only;
The payee must be certain.
Mention of consideration (value received), place and date are not essential of the
promissory note and their omission does not render the instrument invalid.

Promissory notes are chargeable with stamp duty as per Indian stamp Act, 1899.
Bill of Exchange

A Bill of Exchange is an instrument in writing containing an unconditional order, signed

by the maker, directing a certain person to pay a certain sum of money only to, or to
the order of, a certain person or to the bearer of the instrument. (Section - 5)
Requisites of a Bill of exchange

The bill of exchange must be in writing;

Must contain an order to pay;
The order contained in the bill should be unconditional.
Must be signed by the drawer;
the drawee must be certain.
The sum payable must be certain;

The instrument must contain an order to pay money and money only;
The payee must be certain.
Drawer, Drawee, Payee, Acceptor

Maker of a bill of exchange or cheque is called drawer.

The person directed to pay is called drawee.
The person named in the instrument, to whom or to whose order the money by the
instrument is directed to be paid is called payee

After the drawee of a bill has signed his assent on the bill and delivered the same to
holder, he is called acceptor. (Section - 7)
Holder and Holder in due course

The holder of a promissory note, bill of exchange or cheque mean any person who is
entitled in his own name to the possession ,
entitled to receive or recover the amount due thereon from the parties thereto.
Holder-in-due-course enjoys a better status. Holder-in-due-course means a person
who becomes the possessor of a negotiable instrument

for a consideration .
before the amount becomes payable
there is no sufficient cause to believe that any defect existed in the

title of the person from whom he derived his title.(Section - 8, 9)

Negotiation (Section - 14)

When a negotiable instrument is transferred to any person so as to constitute that

person, the holder thereof, the instrument is said to be negotiated.

Negotiation of a negotiable instrument has following features:

In case of transfer of a negotiable instrument, consideration is presumed to have
been given until contrary is proved;

Notice of transfer is not necessary;

The transferee of a negotiable instrument, if he is a holder in due course, takes
the instrument free from any defect in the title of his transferor and thus, at times
may acquire a better title than his transferor.

When the maker or holder of a negotiable instrument signs the same, for the purpose
of negotiation, on the back or face of the instrument or on a slip of paper annexed
thereto, he is said to endorse the instrument. He is called endorser.


Endorsement of a promissory note, bill of exchange or cheque is complete only by

delivery, actual or constructive, made by the endorser, or by his duly constituted agent
with the intention of passing the property therein.
Who may endorse?

The holder of a negotiable instrument or the maker signing it otherwise than as such
maker may indorse;

The payee also;

A stranger cannot endorse a negotiable instrument; if a person, who is neither a
maker nor the holder of an instrument. backs it with his signature, he thereby neither
becomes an endorser nor incurs the liability of such a person.
Endorsement "in blank:" and "in full"

If the endorser signs his name only, the endorsement is "in blank".
If adds a direction to pay the amount mentioned in the instrument to, or to the order of
a specified person and then signs. the endorsement is said to be "in full".
"Endorsement in full" is also called "special endorsement".
Where amount is stated differently in figures and words

If the amount undertaken or ordered to be paid is stated differently in figures and

words, the amount stated in words shall be the amount undertaken or ordered to be
Instrument payable on demand

The following instruments are payable on demand:

A promissory note or bill of exchange is payable on demand when it is expressed
to be payable "on demand" or "at sight" or "on presentment".

When no time for payment is specified in it.

A cheque is always payable on demand and it cannot be expressed to be payable
otherwise than on demand.

The maturity of a promissory note or bill of exchange is the date at which it falls due.
Days of grace

Every promissory note or bill of exchange which is not expressed to be payable on

demand, at sight or on presentment, is at maturity on the third day after the day on
which it is expressed to be payable

When the day of maturity is a public holiday, the instrument shall be deemed to be
due on the next preceding business day.

A cheque is a bill of exchange drawn on a specified banker and not expressed to be

payable otherwise than demand. (Section - 6)

A cheque differs from a bill of exchange in the following two respects:

A cheque is always drawn on a banker whereas a bill may be drawn on anyone
including a banker. Thus, the drawee of a cheque is always a banker.
Parties to a Cheque

There are essentially 3 parties to a cheque.

They are the drawer, drawee and the payee.
Payee is one who is the beneficiary of the instrument.
He is entitled to receive payment of the cheque.
A payee need not necessarily be a third party.
The payee may be either the drawer himself or the drawee or any one else.
When the drawer is the payee, the cheque is drawn as payable to self and when the
drawee is the payee, the cheque is drawn as payable to Yourselves.

Format of a cheque

The law has not prescribed any format of a cheque.

As such, different banks have evolved their own formats.
It is not necessary under law that only such forms as supplied by the bank must be
Essential features of a cheque

Every cheque must contain the following essential features without which it will not be
treated as a negotiable instrument at all.

Payee's name
Amount in words and figures
Signature of the drawer
Drawee's name and address.

A cheque will not be treated as a complete instrument if any one of the above features
is absent However, the serial number of a check and account number written on a
check are not essential feature of a cheque. They are incorporated in a cheque for
accounting convenience only.

Stale and postdated cheques

Although the N I Act is silent as to the validity period of a cheque, it is customary

amongst the bankers that the validity period of a cheque is restricted only to six

If a cheque bears a date which is more than six month's old, it is treated as Stale or
out-of date.

Payment of stale cheques may be refused unless the date is duly altered and
authenticated by the drawer.

When a cheque bears a date which has not yet arrived, it is known as a postdated

Payment of postdated cheques also should not be made for the following reasons:Making payments in advance is against the direction of the drawer,
Any eventuality like death. bankruptcy, insanity of the drawer before the date of the
check will make the banker liable.

Payment of postdated cheque may result in reduction of balances due to which

some other cheques will have to be wrongfully dishonored.

Payment of a postdated cheque is not a payment in due course and as such the
banker looses statutory protection.
Undated, incomplete and impossible dated

A cheque not bearing any date is known as undated cheque.

The proper date should be filled in preferably by the drawer himself.
Banker should not Fill the date by himself.
When the date is not written in full, the cheque is said to be incompletely dated.
Such cheques are usually returned for corrections by the drawer under his signature.
A date which never occurs in the calendar, is known as impossible date.
The cheques bearing such impossible dates may be paid treating them as being
drawn on the last day of the month in which they are drawn.

Bearer and Order cheques

A bearer cheque is one which bears the words "or bearer" after the payee's name.
Payment of a bearer cheque will be made to any bearer of the instrument.
It is not necessary for the bearer to get himself identified.
A bearer instrument can be easily converted into order instrument just by striking off
the word bearer.

Once the word bearer is cut, the cheque automatically becomes an order instrument.
Once a bearer always a bearer-means that whenever there are contradictory
instructions on a claque, one of which is a bearer instruction, the bearer instruction
will have priority.

Signature of the drawer

In case of payment of cheques with forged signatures, the bank is liable for the
wrongful payment.

Even if the signature forged on the cheque is very difficult to detect, the bank is still
held liable.
Crossing of a cheque

A crossing is drawing of two parallel transverse lines across the face of the

The purpose of crossing is not to pay it across the counter.

Payment has to be routed through the account.
There are two types of crossings: General crossing
Special crossing
General Crossing

Payment has to be routed through any account

But direct payment in cash should not be made
Special crossing

When two transverse parallel lines are drawn across the face of the cheque with the
name of the banker in between these lines, it is known as a special crossing.

Usually special crossings are made by the bankers.

Some other restrictive crossings are: Account payee crossing, not negotiable
crossing, double crossing.
Account payee crossing

It is a sort of general crossing where "Account payee only" is written within the

The purpose of the Account Payee Crossing is to restrict payment of the cheque
through credit to the account of the payee only whose name is-mentioned in the

All endorsements made on the Account Payee crossed cheque will have no bearing.
The payment has to be made to the payee mentioned therein, but not the endorsee.
Not Negotiable crossing

The words "not negotiable" are written within the crossing.

The non-negotiable crossing does not restrict further negotiation.
However, the transferor cannot transfer a better title to the transferee than what he
himself has got.

In other words, the transferee is deriving a title subject to the defects in the title of the

As such, a not negotiable crossing is a caution for the transferees to verify the title of
the transferor before accepting any instrument with a 'not negotiable' crossing.
Double Crossing

When a cheque is crossed to two bankers, it is known as Double Crossing.

Usually payment of cheque with double crossing is not made unless one of the
bankers mentioned in the crossing is acting as agent of the other.
Material Alteration

Material alterations are those alterations which affect the rights and liabilities of the
parties to the instrument.

All material alterations have to be authenticated by the drawer under his full signature.
Some examples of material alterations are:
Material alterations

Non-material alterations

Alterations in essentials of a cheque viz.

Date, amount, payee's name, drawee's
name, signature of the drawer
Converting an order cheque into bearer Converting a bearer cheque into an order
cheque by striking off the word bearer
Converting a crossed cheque into an open Converting an open cheque into a crossed
cheque by cancelling the crossing ( except cheque or converting a generally crossed
cancellation of special crossing by bankers)
cheque into a specially crossed cheque .
Converting an endorsement in blank into
Converting a restrictive endorsement into
either endorsement in full or restrictive
either an endorsement in blank or full
Protection to a paying Banker

The paying banker gets protection only if he makes payment of a cheque according to
the provisions of N I Act.

Section 10 of the N I Act is one of the most important sections which affords such a
protection to the paying banker.
Payment in due Course

Payment in due course means payment in accordance with the

apparent tenor of the instrument;
in good faith and without negligence;
to any person in possession thereof.

under circumstances which do not afford a reasonable ground for believing that he
is not entitled to receive payment of the amount therein mentioned.


- 10)

In order to get legal protection. a drawee / banker has to make payment of the
instrument/ check according to the instructions that are visible on the instrument.

The banker should not have any malafide intention to defraud the customer.
He should not also violate the customs and practices of the banks in payment of the
instruments/ cheques.

Moreover, the banker should not have the knowledge of the defective title of the
person receiving the payment.
Protection in case of material alterations

According to section 89 of N I Act, the banker is protected in case of material

alterations provided the alteration itself is not apparently clear and the payment is
made in good faith and without negligence and in due course.
Protection in case of crossed cheques

According to Section 128 of the N I Act, the banker is protected in case of crossed
cheques only when the payment is made according to the crossing and in due course
in terms of Section - 10.
Protection in case of forged endorsements

According to Section 85(l) of the N I Act, the banker is protected in case of forged
endorsements provided the endorsement itself is in order and is a regular
endorsement and the payment is made in due course as per section 10 of the Act.
Protection in case of bearer cheques

According to section 85(2), the paying banker is protected in case of a bearer

instrument, if he makes payment in due course.

In case of any doubt about the rights of the bearer of the cheque, the banker has to
conduct inquires to satisfy himself and then only, make payment.

If he fails to make inquires, he is held liable even in case of bearer instruments as the
payment will not be treated as a payment in due course.
Collection of Cheque

The collection of cheques is a service rendered by a banker to the customers. The

collecting banker acts as an agent of the customer.

When the cheques are purchased by him from the customer, the banker exercises the
right of a holder for value.

Protection to the collecting banker

Section 131 of N I Act governs the protection given to the collecting banker.
According to this section, protection is given to the banker who has
in good faith and without negligence
received payment for a customer
of a cheque crossed generally or specially to himself
He shall not be liable to the true owner of the cheque, in case the title to the cheque
proves defective, by reasons only of having received the payment

Hence, the banker must collect cheques on behalf of its customers only;
If a crossed cheque, the banker cannot collect for a non-constituent .Cheque are to be
collected only for customers.

Protection is available to the collecting banker only when he collects the crossed
cheque; if he collects open cheques, he cannot claim protection under the section 131
of NI Act.
Section 138- Dishonour of Cheque for insufficiency of funds in the Act

Inserted w.e.f. 1.4.1989 by the banking, public financial institutions and Negotiable
instruments laws (amendment) Act, 1988

Grounds of dishonour :

Insufficiency of funds in the accounts

It exceeds the amounts arranged to be paid from that account.
Drawer deemed to have committed offence
Punishment for offence is imprisonment of 2 years (maximum) or fine to the extent of
twice the amount of cheque or both conditions to be fulfilled for application of Section:

Cheque presented with in 6 months

Cheque is returned for the afore said reasons
After the cheque is returned, 30 days notice to be issued to demand payment
The drawer fails to pay with in 15 days of receipt of notice.


Banking Regulation Act came into being in 1949. Prior to that, certain provisions of
Companies' Act 1913 were applicable to Banking Companies.
Important Provisions

The Act shall not apply to (a) a primary agricultural credit society and (b) a
cooperative land development bank

Section- 5 Interpretations
Section 5(b)

Banking means the accepting for the purpose of lending or investments of deposits of
money from the public, repayable on demand or otherwise and withdrawable by
cheque, draft or otherwise.

Banking Company means a Company which does business of banking.

Mere function of giving loans does not make a banking company.

Power of receiving money or deposits from customers and honouring their cheques is
essential characteristic of banking.

Section - 6 Forms of business which banking companies may engage in.

Section 6(1) gives an elaborate list of forms of business in addition to normal business
of banking that a banking company may engage in.
Section 6(2)

No banking company shall engage in any form of Business other than those referred
to in SS 6(1).

Section 7 - Use of words 'Bank, 'Banker, 'Banking Company'

No company other than a banking company shall use such words;

No company shall carry on business of banking unless it uses as a part of its name at
least one of such words.

Section 8 - Prohibition of Trading

No banking company shall directly or indirectly deal in buying or selling or bartering of

goods except in connection with realisation of security given to or held by it.

Goods means every kind of moveable property other than actionable claim, stocks,
shares, money, bullion etc.

Section 9

- Disposal of non-banking assets

Banks are prohibited from holding immovable property unless it is required for their
own use.

All properties acquired not for their own use should be disposed of within 7 years from
the date of acquisition.

RBI may extend the aforesaid period of 7 years by such period not exceeding 5 years
in specific cases.

Section 11 - Requirement as to minimum paid-up capital and reserves

No cooperative bank shall commence or carry on the business of banking in India unless
the aggregate value of its paid-up capital and reserves is not less than one lakh rupees.
Section-18 - Cash Reserve

Every cooperative bank, not being a scheduled SCB, shall maintain

by way of cash reserve with itself, or

by way of balance in current account with RBI or SCB of the state concerned, or
by way of net balance in current account a sum equivalent to at least 3 % of its
DTL as on last Friday of the second preceding fortnight.

Shall submit to the RBI before fifteenth day of every month a return showing the
amounts held on alternate Fridays during a month with particulars of its DTL on such
Liabilities in India shall not include:-

Paid-up capital , the reserves, or any credit balance in the PL account;

any advances taken from a State Govt., RBI, IDBI, EXIM Bank, NHB, SIDBI, NCDC,

in case of an SCB or a CCB, deposits representing reserve funds by any cooperative

society within its area of operation; in case of a CCB, any advance taken from the
concerned SCB.

in case of any cooperative bank which has granted an advance against any balance
maintained with it ,such balance to the extent of the amount outstanding in r/o such

in case of any cooperative bank, the amount of any advance or other credit
arrangement drawn and availed of against any approved securities

Section 19 - Restriction on holding shares in other cooperative societies

No cooperative bank shall hold shares in other cooperative societies except to such
extent and subject to such conditions as RBl may specify.

Not applicable for:

shares acquired through funds provided by the State Govt. on that behalf;

DCCBs to hold shares of affiliated SCB.

Section 20 - Restriction on Loans and Advances

No cooperative bank shall

make loans and advances on the security of its own shares;

grant unsecured loans or advances to any of its directors;
any firm or private company in which the director has interest.

This above clause shall not apply to grant of unsecured loans or advances made by a
cooperative bank

against bills for supplies or services made or rendered or bill of exchange

arising out of bona fide commercial or trade transactions;

trust receipts furnished to the cooperative bank;

If on examination of any return submitted by the bank, it appears that any loans or
advances are being granted to the detriment of the interest of the depositors of the
cooperative bank, RBI by order in writing, prohibit the cooperative bank from granting
such. further loans, or impose such other restrictions as it thinks fit.

Section 22 - Licensing of banking company

No cooperative society shall carry on banking business in India unless

it is a primary credit society;

it is a cooperative bank and holds a licence issued by RBI;

This Section shall not apply to a cooperative bank which is carrying on banking
business at the commencement of the Banking Laws for a period of one year from
such commencement.

Cooperative banks functioning prior to the commencement of the Act were required to
apply for licence to RBI within a stipulated period of three months;

The cooperative banks shall not be deemed to be prohibited from carrying on banking
business until they are notified by the Reserve Bank that licence cannot be granted.

Section 23 - Restriction on opening of new and transfer of existing places of


Without prior permission of RBI, no cooperative bank shall open a new place of
business in India or change otherwise than within the same city, town or village, the
location of an existing place of business;

For opening a temporary place of business for a period not exceeding one
month within a city, town or village where the Cooperative bank already has a
place of business for the purpose of affording banking facilities (occasions like
exhibition, conference, fair, mela etc.), no permission is necessary.

Permission of RBI is also not necessary for opening or changing the location
of branches by a Central Cooperative Bank within the area of its operation.
Section 23 (4A)

Any Cooperative Bank seeking permission of RBI for branch opening is required to
forward applications to RBI through NABARD;

NABARD shall give its comments on the merit of the cases and send to RBI.

An advance copy of the application shall be sent by the Cooperative bank directly to
the RBI.

Section 24 - Maintenance of Statutory Liquid Assets

A scheduled bank, in addition to average daily balances required to maintain u/s 42 of

RBI Act;

Every cooperative bank, in addition to the cash reserve required to maintain u/s 18 of
the BR Act, shall maintain in India

in cash;
in gold valued at a price not exceeding current market price; or
in unencumbered approved securities, (method of valuation as specified by
RBI from time to time) an amount which shall not, at c.o.b on any day, be less
than 25 % or such other percentage, not exceeding 40 % of the total of its
Demand and Time liabilities in India, as on the last Friday of the second
preceding fortnight..

For the purpose of this section, cash maintained in India shall include:

any balance maintained by a scheduled State cooperative Bank with the

RBI in excess of the balance required to be maintained by it under Section
42 of the RBI Act,

any cash or balances maintained by a cooperative bank, other than a

scheduled state cooperative bank, with itself or with the state cooperative
bank of the state concerned or in the current account with the RBI or by
way of net balances maintained in current Account in excess of the
aggregate of the cash or balances required to be maintained u/s 18 of the

any net balances in current account.

For the purpose of this sub-section

Approved securities, or a portion thereof, representing investment of

monies of Agricultural Credit Stabilisation Fund of a cooperative bank shall
not be deemed as unencumbered approved securities.

In case of a cooperative bank has taken an advance against any balance

maintained with the state cooperative bank of the state concerned or with
the central cooperative bank of the district concerned, such balances to
the extent to which it has drawn against or availed of shall not be deemed
to be cash maintained in India.

Section 24(3) - Ensuring Compliance

For ensuring compliance with the provisions, a banking company shall furnish to RBI,
not later than 20 days after the close of the month, a monthly return, showing
particulars of its Liquid Assets maintained and its Demand and Time liabilities at c.o.b.
each alternate Friday during the month.

Cooperative Banks to submit a copy of this return to NABARD.

Section 24A
RBI has power to exempt any cooperative bank from the whole of or any part of the
provisions of Section 18 or Section 24 of the Act.
Section 26 - Return of unclaimed deposits
Banks shall, within 30 days after the close of each calendar year, submit a return of all
deposits accounts, to the RBI with copy to NABARD, which have not been operated upon
for ten years.
Sections 27 to 31 - Submission of Returns
Copy of monthly returns and annual accounts required to be submitted by the
Cooperative banks also to NABARD as per the periodicity prescribed in the relevant
sections of the Act.
Section 35 - Inspection
NABARD has been empowered to inspect the cooperative banks other than primary
cooperative banks, without prejudice to the powers of RBI, to conduct such inspection.
Section 53 - Power to exempt

The Central Govt. May, on the recommendation of RBI, can

company or any class of banking
Act .

exempt any banking

companies, from any or all provisions of this

3. Co-operative Societies Act

Apex Society means a cooperative society whose area of operation extends to the whole
of the State and the primary object of which is the promotion of the objects and the
provision of facilities for the operation of other cooperative societies which are its
Area of operation means an area from which the persons are admitted as members
Central Society means a cooperative society the primary object of which is to facilitate
the working of other cooperative societies which are its members
Chartered Accountant means a member of the institute of Chartered Accountants of
India within the meaning of the Chartered Accountants Act, 1949
Cooperative Bank means a cooperative society which undertakes banking business.
Cooperative Credit Structure means State Cooperative bank, Central Cooperative
Cooperative society with limited liability means a cooperative society, the liability of
whose members is limited by its bye-laws.
Cooperative society with unlimited liability means a cooperative society, the liability of
whose members is unlimited for the purpose of contributing jointly and severally to any
deficiency in the assets of the society in the even of its being wound up.
Primary Society means a cooperative society the object of which is to promote the
common interests of its members and whose membership consists exclusively of
Registrar means a person appointed to perform the function of the Registrar of
Cooperative Societies under this Act and includes any person appointed to assist the
Registrar when exercising all or any of the powers of the Registrar.
Cooperative Principles as mentioned in the Act

Voluntary and Open Membership

Cooperatives are voluntary organisations, open to all persons capable of using their
services and willing to accept the responsibilities of membership, without
discrimination on basis of gender, social inequality, racial, political ideologies or
religious consideration.

Democratic Member Control

Cooperatives are democratic organisations controlled by their members, who actively

participate in settling their policies and decision making. Elected representatives of
these Cooperatives are responsible and accountable to their members.

Members Economic Participation

Members contribute equitably and control the capital of their Cooperative

democratically. Atleast a part of the surplus arising out of the economic results would
be the common property of the Cooperatives. The remaining surplus could be utilised
benefiting the members in proportion to their share in the Cooperative.

Autonomy and Independence

Cooperatives are autonomous, self help organisations controlled by their members. If

cooperatives enter into agreement with other organisations including Government or
raise capital from external resources, they do so on terms that ensure their
democratic control by members and maintenance of cooperative autonomy.

Education, Training and Information










representatives and employees so that they can contribute effectively to the

development of their Cooperatives. They also make the general public, particularly
young people and leaders aware of the nature and benefits of cooperation.
Cooperation among Cooperatives

Cooperatives serve their members most effectively and strengthen the Cooperative
movement, by working together through available local, regional, national and
international structures.

Concern for Community

While focusing on the needs of their members, Cooperatives work for the sustainable
development of communities through policies accepted by their members.

Registration of coop. Societies

A society which has as its objective, the promotion of the economic interest of its
members, in accordance with cooperative principles, or a society established with the
objective of facilitating the operations of such a society, may be registered under the
Act with or without limited liability.

Unless the Government by general or special order otherwise directs, the liability of
the society of which a member is a cooperative society shall be limited.

Restrictions on Individual membership

No individual shall be admitted as member of a central or apex society unless such

society has been exempted by the Registrar.

Associate Members

A Cooperative society may admit any person or self help group or a cooperative
society or any statuary body notified by the Government in this behalf as an associate
member in accordance with its bye laws.

An associate member shall not be entitled to any share in the assets or profits of the
cooperative society.

Voting Rights

Any person desirous of making a deposit in any unit of Cooperative Credit Structure
other than cooperative banks shall become a member of that society and on
admission he shall be entitled to full membership voting rights.

Each member shall have one vote in the affairs of the society.

In the case of equality of votes, the Chairman shall have a second or casting vote.

Where the Government is a member of the cooperative society, each person

nominated by the Government on the committee shall have one vote.

A member in default of any sum due to the society shall not be eligible to exercise his
right of vote.

Management of Cooperative Societies

Final Authority and its Meetings

The final authority in a cooperative society shall vest in the general body of the

Where the bye laws of a cooperative society provide for constitution of smaller body
consisting of delegates of members of the society elected or selected in accordance

with such bye laws, the smaller body shall exercise such power of general body as
may be prescribed in the bye laws of the society

Each delegate shall have one vote in the affairs of the society

A general meeting of a cooperative society shall be held once in a year for the
purpose of approval of

the programme of activities of the cooperative society

Consideration of the audit report and the annual report

Review of the performance of the society in the preceding year

Review of the state of affairs of the society including the list of defaulters long with
the amount of default

Creation of specific reserves and other funds and utilisation thereof

Conduct election of the managing committee, when due

Amendments of bye laws

Consideration of any other matter in accordance with bye laws

If a general body meeting is not held within the prescribed period, the Registrar, after
giving an opportunity of being heard, declare the members of the committee
disqualified for continuing as members of such committee and for being elected as
members of the committee of any society for a period of 5 years.

If the default is committed by an office bearer or an employee of the society, the

Registrar may after giving him an opportunity of being heard, impose a fine not
exceeding ten thousand rupees.

Election of Managing Committee

No person shall be elected to the Managing Committee unless he is a member of the


The Committee shall unless removed by the Registrar hold office for a period of 5
years from the date of election

Before the expiry of the term, the committee of each society shall arrange to hold
election of a new committee failing which the Registrar shall arrange to hold such
elections within a period of 90 days after the expiry of the term of the Committee and
the elected members of the outgoing committee shall be debarred from contesting the
elections of the committee of any cooperatives society for a period of 5 years.

No individual shall at any time be a member of a committee of more than two primary
societies, one central society and one apex society.

Nomination on a Committee

By virtue of having subscribed to the share capital of a cooperative society or

guaranteed the principal and interest in r/o debentures issued by the society or
guaranteed the principal and interest in respect of loans and advances to the society
or assisted the society with loans and grants, the Government shall have the right to
nominate on the Managing Committee of such society not more that three members
or one third of the total number of elected members of such committee whichever is

Provided that there shall not be any nominee of the Government in the Committee of
Primary Agriculture Cooperative Society irrespective of the fact that the Government
has contributed to the share capital or not.

In case of a Cooperative Credit Structure, the share capital contribution by the

Government shall not exceed 25% of the paid up share capital and the nomination
shall be limited to one only.

Provided further that in case of a cooperative bank, two professional directors having
experience as specified by the RBI shall be coopted in committee, with full voting
rights, if not already elected.

Election of Office Bearers

No committee member shall be eligible for election as Chairman or Vice Chairman of

any cooperative society if he has served for a continuous period of 10 years unless a
period of not less than 5 years has expired since he last served.

Appointment of Managing Director

Where the Government has subscribed to the share capital of a cooperative society to
the extent of 10 lakh rupees or more, the Government may nominate another member
to the nominated members and appoint him as Managing Director

In case of a cooperative bank, the appointment of Managing Director shall be made in

accordance with the guidelines of the RBI and such MD does not fulful the criteria
stipulated by the RBI shall be removed.

The MD of a cooperative society shall be its principal executive officer. All employees
of the society shall function and perform their duties under his superintendence and

Removal of Committee

If in the opinion of the Registrar, a committee persistently makes default or is

negligent in the performance of duties imposed on it or commits any act which

prejudicial to the interest of the society or its members, the Registrar may remove the
committee after giving it an opportunity to state its objections.

Provided that if the committee of a cooperative bank is superseded, the Registrar

shall do so with the approval of RBI.

The Registrar shall ensure implementation of regulatory prescriptions of the RBI

including supersession of the managing committee of Central Cooperative Bank or
the State Cooperative Bank and the appointment of administrators within one month
of being so advised by the RBI.

The Committee of PACS shall be superseded by the Registrar only under the
following conditions:

That a society incurs losses for three consecutive years or

That serious financial irregularities or frauds have been identified or

That there are judicial directives to this effect or there is perpetual lack of quorum

Removal of Committee Member

If in the opinion of the Registrar, any member of the committee persistently makes
default or is negligent in the performance of the duties imposed on him or commits
any act which is prejudicial to the interest of the society or its members, the Registrar
shall remove him as committee member after giving him an opportunity to state his

A member so removed shall be disqualified for being elected to any committee for a
period of not exceeding 5 years and the said period shall commence from the date of
passing such order.

The Registrar, at the request of RBI / NABARD, shall remove such members of
committee who do not fulfil criteria stipulated by RBI.

Functions of Federal Cooperative

Facilitate voluntary formation and democratic functioning of cooperative societies

Ensure compliance of the cooperative principles

Make model by laws and policies for consideration of its member cooperatives

Provide specialised training, education and data based information

Undertake research, evaluation and assist in preparation of perspective development

plans for its member cooperatives

Promote harmonious relations amongst member cooperatives

Help member cooperatives to settle disputes among themselves

Undertake business services on behalf of its member cooperatives

Provide management development services to its member cooperatives

Evolve code of conduct for observance by a member cooperative

Evolve viability norms for a member cooperative

Provide legal aid and advice to a member cooperative

Assist member cooperatives in organising self help and

Develop market information system, logo brand promotion, quality control and
technology upgradation.

Constitution of Common Cadre

The Registrar may require an apex society to constitute a common cadre of all or a
specific class of employees in the service of that society or in the service of the
central societies which are members of the apex society or of the service of the
primary society which are members of the apex society or the central societies.

There shall not be any cadre system in Cooperative Credit Structure

The Registrar shall circulate guidelines in consultation with the National Bank in
matters relating to personnel policy, staffing, recruitment, posting and compensation
of staff.

Privileges of Cooperative Societies

Cooperative societies to be bodies corporate

Any register of list of members kept by any cooperative society shall be prima facie
evidence of any of the following particulars entered therein

The date on which any person become a member

The date on which any such member ceased to be a member

The number of shares held by such member and the date from which so held and

The nominees of a member

Any register or list of mortgages and charge kept by the cooperative society shall be
prima facie evidence of any of the following particulars entered therein

The date on which the mortgage or charge was created by a member in favour of the

The particulars of the land or other immovable property mortgaged or charged and

The date on which declaration of the mortgage or charge was sent to the sub-registrar
or revenue authority as the case may be.

Admissibility of copy of entry in a book of cooperative society as evidence

Exemption from compulsory registration of instruments like shares in a cooperative

society and any debenture issued by such cooperative society.

Exemptions from stamp duty, any fee payable for registration of the documents, court
fees, payment of land revenue and taxes on sale or purchase of goods.

State aid to cooperative societies - Government may

subscribe to the share capital of a cooperative society

give loans or make advances to a cooperative society

guarantee the repayment of principal and payment of interest on debentures

issued by a cooperative society

guarantee the repayment of principal and payment of interest on loans and

advances to a cooperative society

guarantee the repayment of share capital of a cooperative society and dividends

thereon at such rates as may be specified by the Government

give financial assistance in any other form including subsidies to any cooperative


A cooperative society shall maintain the accounts books and other record in such form
and manner as may be directed by the Registrar by a general or special order from
time to time

A cooperative society shall prepare a balance sheet, profit and loss account, trading
account and such other statements relating to the working of the society on such
intervals s may be specified by the Registrar from time to time.

Cooperative Credit Structure other cooperative bank shall abide by all such directions
regarding financial norms as may be specified by the Registrar in consultation with the
National Bank.

Restriction on Borrowings

A cooperative society may receive deposits, raise loans and receive grants from
external sources to such extent and such conditions as may be specified in the bye

Provided that the total amount of deposits and loans received during any financial
year shall not exceed ten times of the sum of the subscribed share capital and
accumulated reserves.

Provided further that while calculating the total sum of subscribed share capital and
accumulated reserves, the accumulated losses shall be deducted.

A cooperative society may issue non-convertible debentures or other instruments

subject to the provisions of any law in force to raise resources for the fulfillment of its
objects to the extent of 25% of its paid up share capital.

Restriction on Loan

A cooperative society shall advance loans to its members, its employees under a
scheme approved by the Registrar or its depositors on the security of their deposits.

Provided that a cooperative society may make a loan to another cooperative society
who is not its member with the prior approval of the Registrar.

Atleast one third of the total amount of loan to be advanced by a cooperative credit
and service society, farmers service society, primary agriculture and rural
development bank or a cooperative urban bank, in a year, shall be sanctioned to the
members of the weaker section.

Loans and advances shall be made on such terms and conditions against such
securities, guarantee and for such purposes as may be prescribed.

Provided that all long term loans shall be advanced against mortgage or charge on
land or other immovable property.

In case land or other immovable property is not owned by the loanee, long term loans
may be advanced to him on furnishing two sureties and subject to the further
condition that he shall hypothecate or create a charge on the assets, movable or
immovable acquired out of such loan in favour of the society

All loan advanced under short term, medium term and long term duration for which
RBI / NABARD formulated the loan scheme shall not require the approval of the

The cooperative Credit Structure may take appropriate decisions regarding its loan
policies including individual loan decisions to its members keeping in view the
interests of the society and its members.

Investment of Funds

A Cooperative society may invest or deposit its funds

In the post office savings bank

In any of the securities specified in section 20 of the Indian Trust Act, 1882

In the shares or securities of any other cooperative society

With any bank carrying on the business of banking approved for this purpose by
the Registrar or in any other mode as may be prescribed

Cooperative Credit Structure may invest its funds with any regulatory financial

Distribution of Profits

A cooperative society may distribute profits as per audited balance sheet for any year
and from the remainder of such profits of past years, among the members to such
extent and under such conditions as may be prescribed by rules or bye laws.
Provided that

Atleast 10% of the profits of any year are carried each to the reserve fund and the
bad and doubtful debt fund

Not exceeding 5% of the profits is carried to the Cooperative Education Fund

Such percentage of the profits to carry to such other funds as are specified in the
bye laws or by the Registrar

The Registrar may require a cooperative society not to invest the whole or a part of its
funds mentioned above in the business of the society

There shall not be any compulsion on Cooperative Credit Structure for contribution to
any funds other than those required for improving the net worth / owned funds of a
cooperative society.

The Registrar shall lay guidelines in consultation with National Bank regarding
payment of dividend.

Acquisition or disposal of property

No cooperative society shall purchase, acquire lease, sell any land or construct any
building or other immovable assets of the society except with the prior approval of the

Writing off bad debts

No cooperative society shall write off as a whole or part of any debt or other sum due
to it or any assets without the prior sanction of the Registrar.


Every cooperative society shall get its account audited atleast once in each year by a
person authorised by the Registrar by general or special order in this behalf failing
which the Registrar shall get the accounts of the society audited at the expense of the

The Registrar may get the accounts of a society audited by a chartered accountant in
accordance with the guidelines approved by him.

The remuneration of the chartered accountant shall be approved by the Registrar and
the expenditure on this account shall be met out of the funds of the society.

Cooperative Credit Structure other than Primary Agriculture Cooperative Society shall
get its accounts audited by Chartered Accountant from a panel prepared by the
Registrar in consultation with the National Bank.

The Registrar shall get conducted a special audit of cooperative Credit Structure other
than Primary Agriculture Cooperative Societies on the request of the RBI and shall
endorse a copy of the report of such special audit to the RBI and National Bank.

The Registrar shall prepare a panel of qualified chartered accountants and fix the
remuneration in lieu of audit fees.

The Registrar shall prepare the guidelines for these auditors as to make the audit
more meaningful and effective.

None of the following persons shall be qualified for appointment as a Chartered


a body corporate

an officer or employee of the cooperative society

a person who is a member or who is in the employment of an officer or employee

of the cooperative society

a person who is indebted to the cooperative society or who has given any
guarantee or provided any security in connection with the indebtedness of any
third persons to the cooperative society for an amount exceeding five thousand

Inspection of Societies

The Registrar or any person authorised by general or special order in this behalf by
the Registrar, may inspect a cooperative society.

The apex society and the central society shall inspect every affiliated society annually
and shall prepare report regarding their administrative functioning and financial

Winding up of Cooperative Societies

If the Registrar after audit or an inquiry or an inspection conducted under the relevant
sections of the Act or on receipt of an application made by not less that three-fourths
of the members of a cooperative society, is of the opinion that the society ought to be
wound up, he may issue an order directing it to be wound up.

Further, the Registrar shall ensure implementation of regulatory prescriptions of the

RBI including winding up of Central Cooperative Banks and the State Cooperative
Bank and appointment of liquidator within one month of being so advised by the RBI.

The Registrar may of his own motion make an order directing the winding up of a
cooperative society where the number of members has been reduced to less than that
specified in the Act or where the society has not commenced working or has ceased
to function.

The Registrar may cancel an order for the winding up of a cooperative society at any
time, in any case, where in his opinion, the society should continue to exist.

A copy of the orders under this section shall be communicated by Registered Post to
the society and to the financing institutions, if any, of which the society is a member.

The winding up proceedings of a society shall be completed within a period of three

years from the date of the order of the winding up, unless the period is extended by
the Registrar.

Except where the society is brought under winding up process on application of

members, the Registrar shall issue a notice to the concerned society and the
financing institution, if any, and give a reasonable opportunity to show cause as to
why the society be not brought under winding up process.

Affiliation or disaffiliation with Federal Society

Any unit of the Cooperative Credit Structure with the prior approval of the Registrar,
may affiliate or disaffiliate with a federal society keeping in view the financial position
of the federal society. It shall have the freedom of entry and exit at any tier and there
shall be no mandatory restrictions of geographical boundaries for its operation.

Prohibition against the use of the word Cooperative

No person other than a cooperative society shall trade or carry on business under any
name or title of which the word Cooperative or its equivalent in any Indian language
is part.

Use of words bank, banking banker or any other word derivative of word

No Primary Agriculture Cooperative Society shall use the words bank, banking
banker or any other word derivative of word bank.

Employees to be public servant

Any employee of a cooperative society discharging duties under the provisions of the
Cooperative Societies Act or the rules made there under or any person appointed as
liquidator or arbitrator shall be deemed to be a public servant within the meaning of
Section 21 of the Indian Penal Code, 1860.


What is profit?: Profit is the net balance of income over all expenditures
i.e. Profit = Total income - Total expenditure
This is the common meaning of the word profit. However, profit is defined at different
levels. In banks, three words are used to elaborate profit - one Spread or Financial
Return is the financial earnings on funds less financial cost of funds, Operational profit is
the profit before making provisions and Net profit is after deduction of all the expenditure
and provisions.
Why Cooperative Banks should earn PROFIT?
A Cooperative Bank should earn profit due to the following reasons:
1. For its own long term survival and growth.
2. A Bank which has continuously earned profit over a long period of time is
financially strong. A financially strong Bank in turn, is always in a better position to
serve its members.

3. Profit is the major indicator of efficiency and competitiveness of the operations of a

Profit Planning
Profits in cooperative Banks do not come accidentally. Profit comes through careful
planning and strategy. A loss making bank should therefore plan to earn profit (i.e.
achieve current viability) immediately and should try to wipe out the accumulated losses,
(i.e. attain sustainable viability) in the balance sheet at the earliest. On the other hand, a
profit making bank should continuously strive to increase its profit.
Branch as Profit Centre
Profit of a bank is generally the sum total of profits made by its operational units. It is
therefore imperative that the branches of a cooperative bank should plan and strive hard
to maximise profit. The profit planning for the branch however is slightly different from that
of profit planning for the bank as a whole .The Banks branch does not have much
flexibility in its profit planning exercise as it has to act within the broad framework and the
guidelines issued by its Administrative office /Head office. It is also affected by several
external factors like the environment in which it is functioning and also the competition it
is facing from other institutions.

Approach towards Branch Profit Planning

The first stage for Branch profit planning is to identify several factors, internal as well as
external, which affect its profitability. It may be difficult to address some of the exogenous
factors. The factors such as interest rates on deposits and advances, fees to be charged

on various services, etc., are not really under the control of branches. However, keeping
in view the broad financial parameters envisaged in the Development Action Plan
analysis of the bank, the profit of a branch is a direct function of the following factors:
1. Quantum of Deposit & its mix
2. Deployment and management of resources mobilised through deposits:


Current account balances


Transfer of funds to controlling units

3. Borrowing and deployment of funds from other units/HO

4. Recovery and Management of Non Performing Assets
5. Miscellaneous income of the branch
6. Effective management of non-salary costs
7. Arresting of revenue leakage

Cash and Current account Management at the Branch


Branches are required to hold a minimum amount of cash at a certain percentage

of their deposits to meet their day -to -day requirements of cash. They are required to
plan in such a way that minimum idle cash is held by the branch since it directly affects
their profitability. The current account and also the cash have to be managed together.
Planning as well as management of cash at the Branch level involves:

Assessing peak average per day requirement of cash and fixing of a maximum cash
retention limit

Monitoring current account and fixing of maximum limit

Arrangement of depositing cash with the nearby commercial banks branches where
the branch is maintaining bank account or arrangement for transfer of such excess
cash to its Head office account


Arrangement for overdraft for DD purchase rather than keeping balances continuously
The above planning further requires the Branch:

To establish rapport with the nearby branches which are often in need of cash

To establish good rapport with the nearby commercial bank branch where the bank
account of the branch is opened

To encourage branchs business wherever possible which has regular demand for

To discourage business wherever possible which has high cash deposit tendencies

A close understanding among all the branch personnel about the necessity of
planning and implementation of such cash management


Arrangement for quick transfer of funds to HO for appropriate investment

Penal interest system:

In some banks the branches are notionally charged penal interest for violating the cash
retention limits and the limits fixed for current account. This is an effective deterrent on
the branches that lax in proper management of these assets.

Deposit Mix

Suitable deposit mix is another pre -condition for branch profitability. The final objective
towards profitability is to arrive at a suitable deposit mix for keeping the cost of deposits
low as far as possible. The branch has to make continuous efforts to mobilise low cost
deposits like Saving Bank deposits.

Advance Mix

The rural branch is to take utmost care for an appropriate advance portfolio since interest
on loans and advances is the major source of income contributing to profit of the branch.
The planning methodology in this respect for a branch of a cooperative bank may be
based on the following aspects:

For priority sector advances, quality lending should be resorted to. Further,

wherever concessional refinance from NABARD /SIDBI is available, the same may be
availed quickly. By this policy, the credit requirements of the area may be met as well as
the interest margin between rate of borrowing and rate of lending will be maximised.

For non -priority sector advances, lending is to be made according to the viability
of the project, character of the borrower, his repaying capacity etc.


Suitable marketing strategies by the branch may also contribute to get good nonpriority sector proposals


The risk of concentrating loans in a particular activity also needs to be avoided.


The branch should avoid financing the activities where the level of overdue is

Management of Recovery /Non -Performing Assets

The quality of asset portfolio plays a very important role in ensuring the financial
soundness of the branch. On the other hand, the prevalence of huge NPAs eats into the
profitability of the branch. While it will be ideal to have a zero level NPA, it may not be a
practicable proposition. It is, therefore, imperative that the branches should place due
emphasis to contain the NPA size through effective management of NPAs. Management
of NPAs may require following of different strategy to tackle different category of NPAs.
The techniques that can be utilized to manage the NPAs are:


Formulation of a recovery policy

Sound credit appraisal & management

Analysis of NPAs to understand the extent and severity of contamination

A vibrant recovery cell

Prevention of downgrading of existing Accounts / NPAs

Upgrading the asset quality


Fixing of suitable repayment schedule

Settlement of cases with DICGC

Formulation of policy on Compromise


Filing of Suits

Writing of the loss assets

Miscellaneous Income

Branch profitability is also a direct function of non-fund based business apart from
the traditional business. The commissions /fees from such business add directly to
the branch /bank profits.

The profit planning for Non-fund business should encompass the following areas:

Non-fund business

Issue of Demand
Draft (DD),
Lockers facility
Issue of Guarantee
Discounting of Bills

Cross selling of

What is the growth of the business? Is

the income from DD issue justifies the
income loss in keeping the balance in
current account?
What is occupancy rate?
Whether the charges are adequate and
collected regularly?
What are different types of guarantees
issued? Whether the fees are charged
correctly and collected promptly?
Whether the discounting facility is
Whether the discount rates are justifiable
in terms of time, risk, and amount?
What is the scope? What is the growth of
the business?
What is the composition of non-fund
income? What is the growth rate in this?

Transfer Price Mechanism

In branch banking set up, while some branches are predominantly deposits oriented,
other branches do advances. In such a situation, for branch, the simple profit norm of
excess of income over expenditure does not work. To solve the issue, a part of the profit
(loss) is notionally derived from interest earned on the funds transferred between
branches through their office account. This is the concept of Transfer Pricing and the
mechanism is called Transfer Price Mechanism.
The Transfer Price Mechanism aims at finding out suitable interest rates at which fund
surplus branches lend to Head Office and fund deficit branches borrow from Head Office.
There are three types of Transfer Price Mechanism:

Unitary Transfer Price System: Uniform interest rate for both lending to Head
Office and borrowing from Head Office


Dual Transfer price system: One rate for lending to Head Office and the other for
borrowing from Head Office


Multiple Transfer Price System: Multiple rates for different type of deposits and
advances as also for different category of branches

Branch profitability also depends upon the TPM policy followed by the bank. Branch may
adopt suitable strategies accordingly.
Arresting Revenue Leakage
Branches are to be vigilant to arrest revenue leakages. The main areas where revenue
leakage occurs are:

Under-charging or non-charging of interest on loans and advances, temporary

overdrafts in current and saving deposit accounts (if any )

Excess payment of interest on deposit accounts

Non- charging or undercharging of service charges, if any

Non recovery of application processing charges

These happen mainly due to lack of proper supervision and monitoring at the branch level
as well as at Head Office level. Constant efforts at the branch level as well as through the
internal control systems adopted by the bank may improve the position. Such
improvement may contribute to branch profit significantly.

Establishment costs /Cost of Management

A branch incurs several types of expenditure to carry out its functions. Apart from
payment of interest on deposits, other expenses incurred are:

Staff costs


Miscellaneous establishment costs (Rent, Taxes, Stationery, Electricity etc.)

Although the profit of the branch is direct function of these costs, the branch has limited
control over them. However, there are certain areas where control can be exercised .To
be so, cost consciousness among the branch staff is needed to be created. The
realisation should be - A RUPEE SAVED IS A RUPEE EARNED.
Any co-ordinated approach on the aspects discussed above adopted by a branch is
expected to contribute to its profitability.
Break Even Analysis

Average Working Funds
Total of Assets Sides of Balance Sheet Excluding

contra items

intangible assets like accumulated losses,

overdue interest reserve, if shown as contra i.e. not routed through the P & L
Account, etc.

Fixed assets like land ,buildings, fixtures, fittings, furniture, plant and machinery,
etc. and

branch adjustment (if the account happens to be shown on both sides of the
balance sheet, taking into account only the net balance).

For calculation of WF, monthly average figures of balance sheet items have to be

Financial Cost
The bank raises its resources through various forms, particularly the deposits and
borrowings. These resources cost to the bank.

Typically, these are interest costs

payable / paid on deposits and borrowings during a particular year. Average financial cost
of resources of a bank is calculated by dividing the cost paid on all resources by the
Average Working Fund. The efficiency in resource mobilising depends not only on the
interest payments but also on the size of cost free resources like own funds, interest free
deposits, etc. It is calculated using the following formula.
Interest paid or payable on Deposits and
Borrowings for the year*
Cost of Funds = ----------------------------------------------------------Average working Fund
*This figure has to be taken from the profit and loss a/c.

Cost of Deposit


Cost of deposits is the interest paid or payable for the year on the total average deposits
held during the year. This ratio also reflects the efficiency in raising deposits and is
comparable across banks. It is calculated using the following formula:
Interest paid or payable on Deposits for the
Cost of Deposit =
----------------------------------------------------------- X
Average Deposits**
*This figure has to be taken from the profit and loss a/c.
** This is the average of deposits for 12 months as per general ledger


Cost of Borrowing

Cost of borrowing is the interest paid or payable for the year on the total average
borrowing held during the year. This ratio also reflects the efficiency in borrowing. It is
calculated using the following formula:
Interest paid or payable on borrowing for the
Cost of borrowing =
------------------------------------------------------------- X 100
Average borrowing **
*This figure has to be taken from the profit and loss a/c.
** This is the average of borrowing for 12 months as per general ledger
Financial Return
The financial return is also called return on working fund. This is the return generated by
the bank by deploying its funds in loans and investments. Typically, these are
interest/dividend earned from investment and interest earned from loans and advances.
While calculating the return, only income recognised for the purpose of P&L account
should be taken for the calculations and the overdue unrealised income should be
excluded. Similarly, the average gross investments and loans have to be taken. This is
very different from the actual balance sheet of the bank, because the banks generally
show the assets net of depreciation and provisions in their balance sheet. The financial
return is calculated using the Formula:

Return on Fund =

Interest income realised/realisable on the

Asset *
-----------------------------------------------------------Average working Fund **


*This figure has to be taken from the profit and loss a/c.
** This figure is the average of 12 monthly positions as in General ledger
Yield on Loans
Yield on loans is the income recognised for the year on the total average loans held
during the year. This ratio also reflects the efficiency in credit management and is
comparable across banks. It is calculated using the following formula:

Yield on loans

Total income recognised on loans for the year

----------------------------------------------------------Average Gross Loans**


** This is the average of Gross loans for 12 months as per general ledger
Yield on Bank Balances
Yield on bank balances is the interest received or receivable on balances maintained with
banks for the year. This ratio also reflects the efficiency in maintaining bank balances. It is
calculated using the following formula:

Yield on bank balances =

Interest received or receivable on balances

for the year*
---------------------------------------------------------Average bank balances **

X 100

*This figure has to be taken from the profit and loss a/c.
** This is the average of bank balances for 12 months as per general ledger

Yield on Investments
Yield on investments is the interest/dividend received or receivable on investments held
for the year. This ratio reflects the efficiency in investments held during the year. It is
calculated using the following formula:

Yield on investments =

Interest/dividend received or receivable for

the year*
---------------------------------------------------------Average investments **

X 100

*This figure has to be taken from the profit and loss a/c.
** This is the average of investment for 12 months as per general ledger

Financial Margin
While the financial return is the income earned per Rs. 100 of the working fund deployed,
the financial cost is the cost incurred on mobilising Rs 100 of the working fund. The
difference between the financial return and the financial cost is called the financial
Financial Margin = Financial Return Financial cost

Weighted Average
For calculating the proportion of each cost element in the overall fund cost and for
calculating the contribution of each of the asset portfolio to the overall return, the concept
of weighted average is followed. This is done by multiplying the cost or return with the
proportion of each type of resource or asset in the total working fund. i.e. this calculation
gives weightage to different items of assets and liabilities as they exist in the bank. This
weightage (relative share) is multiplied by the cost or yield per Rs. 100 of that element.
Illustration: Weighted Average Cost of Funds of a bank is given below:

Sources of

Rs. lakh

share in
total (%)

Own funds
Other liab.





Cost per
Rs. 100


Average cost
per Rs. 100





The table indicates that the average cost of deposit in the year was 8.6%, the average
cost of borrowing was 6.2%. The total working fund was Rs. 200 lakhs. For the given
composition of working fund, the average cost of funds 6.28%. Similarly, the Weighted
Average Yield on Assets also could be worked out as under:
Illustration: Weighted Average Yield on Assets

Loans & Adv.
Other Assets




Yield per
Rs. 100

average Yield
per Rs.100

The table describes the pattern of deployment of funds in various forms of assets. The
average return on loans and advances during the years is 11.0%, the return on
investments is 10.0% (the break up of balances is not available). All the assets put
together gives an yield of 9.0%. Thus, the overall financial return on working funds is
9.00%, in which the loans have contributed 5.5% and the investments have contributed

The difference between the financial return and the financial cost i.e. average return on
working fund and the average cost of fund is called the financial margin of average
spread. In the above illustrations the financial margin works out to 2.72% (9.0-6.28)
Financial Margin (2 .72) = Financial Return (9.0) - Financial cost (6.28)
Transaction Cost
The transaction cost consists of costs of management (staff related cost) and all other
overhead costs incurred by the bank, other than financial costs (interest on resources
raised) and provision for assets. These include salaries, other payments made to staff,
expenses on stationery and printing, postage, rents, taxes, depreciation on assets,
provisions made for expenses, gratuity, bonus etc. The transaction cost is incurred for
managing the total working fund. Therefore, the transaction cost should also be computed
as a percentage of working fund. Provisions made towards bad debts, overdue interest
and other loss assets should not be included under transaction cost.
Total Cost of Management *
------------------------------------------------------------Average working fund**

Transaction Cost =

X 100

*This figure has to be taken from the profit and loss a/c.
** This figure is arrived as given in the previous illustration
Operating Margin
The difference between Financial Margin and the transaction cost is called the Operating
Margin, that is:
Operating Margin

Financial Margin Transaction Cost

Risk Cost
The risk cost is the cost to the bank due to business risks. This includes provisions made
against all types of assets during the year like provisions made towards both standard
and nonperforming assets, overdue interest and other loss assets. The provision for
depreciation of investments and fixed assts (which is part of transaction cost) should not
be included in this. The provisions against non-performing investments and loans have to
be included. Major part of the risk in banks business comes from loans and advances.
Risk Cost can be quantified as:

Risk Cost =

Provisioning made during the year *

------------------------------------------------------------Average working fund**

X 100

*This figure has to be taken from the profit and loss a/c.
** This figure is arrived as given in the previous illustration
Intermediation Cost
The sum of transaction cost and the risk cost is called intermediation cost. This indicates
the efficiency of financial intermediation by the bank.
Intermediation cost

Transaction Cost + Risk Cost

Miscellaneous Income
Banks derive income from various non-fund businesses and by charges, commission, etc.
These incomes can be clubbed together under miscellaneous income. This income
depends on the variety, depth and coverage of the market operations of the bank. This
income is also worked out as a ratio of working fund as below:
Miscellaneous Income

Total non-fund income *



Average working fund**

*This figure has to be taken from the profit and loss a/c.
** This figure is arrived as given in the previous illustration
Net Margin
Net margin represents the net profit ratio earned on the working fund. Thus, it is the
difference between the Operating Margin and the Risk cost added with the miscellaneous
income and is called the Average Net Margin on the working fund of the bank. It is
calculated as:
Net Margin

Operating Margin Risk Cost +Miscellaneous


The net margin multiplied with Average Working fund should match the annual net profit
of the bank for the year.
Cost of equity
Equity fund is also defined, as the net owned fund, which is the total own fund less the
accumulated losses. There is cost of retaining capital in business. Though presently many
banks do not pay dividend because of negative working results or marginal profits, in the
end shareholders would expect the return on their share capital. The expectations may
be decided by the other alternative investment opportunities available. Hence, equity
cost would become a relevant issue in the near future. The cost may be taken as the rate

of return obtainable in the next best alternative investment. However, for the present,
equity cost is taken as zero, as per the methodology advised by NABARD. For this
reason some of the banks that do not have sustainable operations have been given huge
capital support may show a good margin, although they may not in fact be sustainable.
Summary: Net Financial Margin is derived by netting risk cost with financial margin and
miscellaneous income taken as a percentage to working funds. It can be calculated as
1. Financial Return
2. Financial Cost
3. Financial Margin
4. Transaction Cost
5. Operating Margin
6. Miscellaneous Income as % of WF
7. Risk Cost as % of WF
8. Net Margin
9. Cost of Intermediation


(E + F) - G

Breakeven Level (BEL)

Break even level of business is the level of business at which the bank earns a financial
spread, which is just sufficient to meet all its intermediation costs. It is calculated as
Break Even

Transaction Cost + Risk Cost Misc. income*

------------------------------------------------X 100
Financial Margin**

*This figure is the absolute amount

** This figure is to be in percentage
A negative net financial margin means every 100 rupees of business is producing a loss.
Therefore, in case of negative financial margin, planning should first concentrate on
improving the yields, reducing the cost and bringing the margin to the positive side before
any estimate of breakeven level of business is made.

Banking as per the definition given in Section 5(b) of Banking Regulation Act,
1949 means the accepting for the purpose of lending or investments of deposits
of money from the public, repayable on demand or otherwise and withdrawable by
cheque, draft or otherwise.
Thus, one of the main functions of banking business is mobilisation of deposit which
constitutes an important source of working fund for the bank. The success of the banking
greatly lies on the deposit mobilisation performance of the bank as the deposits are
normally considered as a cost effective source of working fund. The District Central
Cooperative Banks (hereinafter CCB) have to increase their financial resources by way of

deposit mobilisation. Deposit mobilisation is an indispensable factor for the CCBs to

increase the resources in order to serve efficiently and effectively. The importance of
deposits of the cooperative banking structure is to provide satisfactory service to any
programme of agricultural production and industrial production hardly needs to be over
emphasised. It is, therefore, stressed that the CCBs must tap deposits from urban and
rural areas so that they may be able to provide funds in large amounts to primary
societies for farm and non-farm development.
Types of deposits accepted by CCBs
The following are the types of deposits that CCBs do generally accept:

Term Deposit ( Fixed,
certificates, etc. )

Cumulative, Recurring,

Pigmy, Call deposits, Cash

For each type of deposit, the CCBs have framed appropriate rules with the approval of
their Board and, wherever necessary, got the same approved by the Registrar of
Cooperative Societies.

The copies of the rules are also supplied to customers and

important rules are also printed on the pass books of the relative deposits.
Essential features of Current Deposit
The current deposit mostly meets the daily liquidity requirements of business community
and CCBs have enough scope to mobilise current deposits through their branches from
the business community in rural, semi urban and urban areas. The most important feature
of current deposit is that the depositor is required to maintain minimum balance while he
is permitted to make any number of withdrawals and deposits in the account without any
restriction. This account is very suitable for the business community as they can deposit
their daily proceeds of business in the account and meet their cash requirement as and
when needed. No interest is paid by the bank for balances in this deposit accounts
because of its frequency in operation. Higher the share of this deposit in total deposits,
the better.
Features of SB deposits
The savings bank account is a hassle free account. It offers banking services to a
customer with a small minimum balance, unlimited number of withdrawals and deposits in
the account. Interest is paid @ 3.5% per annum on the minimum balance maintained in
the account between the 10th and the last day of the month. Though it is a demand
deposit, the net outgo from savings bank account is generally less than 2% of the total
outstanding on any given normal business day. Hence, it forms a stable low cost resource

base to the CCBs. Higher the proportion of this deposit in total deposits, the better.
However, transaction cost involved in servicing savings deposit is slightly higher.
Features of Term Deposits
The basic features of term deposit is that the amount is repayable at the end of the fixed
term. While in fixed deposits, the amount is deposited in full at a time by the customer, the
customer deposits the money in fixed instalments at periodical intervals case of in
recurring deposits. The rate of interest payable on term deposits is linked to periodicity of
the deposit; normally higher the term, higher the rate of interest. Some fixed deposits
offer quarterly compounding of interest, thus, offering better returns to the depositor. In
case the depositor has any liquidity need, he could either foreclose the deposit at a lower
rate (applicable rate of interest less penal provision) or could raise a loan against deposit
@1- 2% ( as per the policy of the bank) above the rate of interest on the term deposit
Types of Depositors
Like different types of deposits accepted by CCBs, there are also different types of
depositors as indicated below :

Joint Account holders
Hindu Undivided Family (HUF)
Sole proprietary concern
Partnership concerns
Limited companies
Clubs / Associations
Cooperative institutions
Municipalities, Educational institutions, Local bodies and quasi Government
institutions, Government Agencies, such as, DRDA, FFDA, etc.
Procedure for opening of deposit accounts
A deposit account is opened in the bank in the name of the depositor on specific
application. Therefore, the bank should prescribe different types of account opening forms
for different classes of depositors and different types of deposits. The account opening
form should be filled in with all relevant particulars and signed by the respective
depositors. Along with the application the depositor has to submit documentary evidence
of his address, his specimen signature on the specimen signature card and introducer.
The account opening form should be scrutinised by the Manager/Accountant to ascertain
whether the essential details, such as, name, address of depositor, occupation,
instructions regarding operations on the account are properly filled in and whether the
depositor has signed the form.

Introduction for new deposit accounts

Exercising of control over new accounts is mandatory from the view point of their being
used as means or 'money laundering'. The expression 'money laundering' covers every
method used, to cover the illegal origin of money gained from criminal activity so that it
seems to have originated from legitimate source. Banks are typical targets for such
'money laundering' practices.
The bank is required to take steps to satisfy itself about the identity of depositors and also
to ensure that full and correct address of the depositor is recorded in its books.
Introduction should be treated as a substantive step having real significance and not
merely a formality. Telephone number of account holder, wherever available, should be
noted in the ledger and other reference books to facilitate urgent contact. This would be
of special significance in metropolitan and urban centres. Therefore, the cooperative bank
should invariably insist upon prospective depositors to furnish proper introduction.
Introduction is necessary (i) to get protection under Sec. 131 of Negotiable Instrument
Act (applicable for SB and CD accounts), (ii) to stop opening of deposit accounts in
fictitious/ benami names which helps in tax evasion (applicable for all deposits), (iii)
prevent fraud, (iv) to ensure that the account holder is a fit person to whom a cheque
book can be issued.
Who can Introduce
Introduction can be obtained from
a) An existing account holder
b) Any respectable member of public well known to branch.
c) Any permanent member of banks staff.
d) Valid Postal Identification Card (only for SB and term deposits).
e) Valid Passport.
f) In case of military personnel, accounts can be opened on the strength of an
introduction letter signed by the Commanding Officer of his unit and after the
verification of his identity card.
The bank can, at its sole discretion, accept or reject an introduction. Incidentally,
introduction by a newly opened account-holder should be avoided.
Introducers Personal Presence
Normally, the introducer should come to branch. In case the introducer does not come to
branch, a letter of thanks should be sent to him by registered post with acknowledgment
due. Caution should be exercised in operation till the receipt of acknowledgment.
Liability of an Introducer

The purpose of introduction is to identify the depositor properly. An introducer can not be
held responsible for any loss or damage caused to bank except when he has a clear
criminal intent.
Forged Introduction
In case the introduction is forged, the account is treated as not introduced at all.
Photographs for opening New Accounts
As per RBI guidelines, all banks are required to obtain photographs of all depositors In
case all types of deposits viz., SB, current, Term, recurring etc. while opening deposit
accounts with effect from 1.1.1994.
All types of constituents (individuals, firms, companies, trust, etc.) are covered under this
guideline. In case of companies/ firms/ trusts the photographs of all persons authorised to
operate account should be obtained. In case of guardian operated minors account the
photograph of the guardian should be obtained.
In case the account is operated by a purdanashin lady, the bank should obtain her
photograph. Care should be taken to ensure that the photographs obtained are recent
No photographs is necessary in case of accounts opened in the name of (i) Banks, (ii)
Local Authorities, and (iii) Government Departments. (Note : Photographs should be
obtained in case of Quasi Government Authorities).
Submission of Permanent Account Number (PAN)
The Central Board of Direct Taxes issued directives under Section 295 of Income Tax Act
and inserted Rule 114B & 114C in the Income Tax Rule, 1962, making it mandatory for
assesses to quote their PAN in specified transaction, which includes the following types of
transactions related to Banking industry.
Opening of Time Deposits exceeding Rs.50,000 in a bank by tendering cash

(for deposit accepted through account payee cheque/ DD/ transfer from
account, PAN is not compulsory).
Opening of an account with a banking company.
All assesses who are allotted PAN must compulsorily quote the number in documents
relating to the above mentioned transactions.
Where a minor enters into any of these transactions, he has to quote PAN of his
father/mother /guardian. In case a person not having PAN enters into any of these
transactions, he has to give a declaration in form 60 or form 61, as the case may be.

Form 60 is required to be submitted by a person entering into any of these transactions, if

he does not have a PAN (Rule 114B of Income Tax Rule, 1962)
Form 61 is required to be submitted by a person who does not have income chargeable
to tax.(Rule 114C of Income Tax Rule, 1962)
Responsibility of the Bank
While opening a term deposit of more than Rs.50,000 (through cash) or opening a new
SB/ Current account, the manager/officer of a Banking company must ensure the
1. If the depositor has PAN, he must quote the same in application form.
2. If the depositor has no PAN, he must submit declaration in form 60.
3. If the depositor has no income chargeable to tax or entire income is exempted from
tax, he must submit declaration in form 61.
The Manager/ Officer of the branch must forward a statement once in a half year as on
September 30 and March 31 every year to Director of Income Tax (Investigation) giving
the details about the term deposit opened, the name of the depositor and his PAN. The
bank is required to enclose copies of form 60, form 61 and passport obtained during the
half year. It is to be sent within one month from the close of the relevant half year. Though
this statement is required to be sent for opening of term deposits, it need not be sent for
opening of SB/ Current deposits. There is also no need to send form 60 or form 61 in
such cases.
Penalty for non-compliance
Sec.272-A of Income Tax Act, 1961, provides for penalty which can be levied on a bank
for non-compliance of these provisions. For each default/failure the penalty can be
minimum Rs.500 and maximum Rs.10,000.

The following precautions should be taken by the banks in opening/operating new deposit
accounts to prevent frauds/malpractices.

The introducer should have had dealings with the bank for at least six months
and maintained sufficient balance in the account.


Customers of the branch should be educated on the implication of introducing a

new account without having sufficient knowledge of the parties involved.


New accounts should be opened only with the photographs of the new
customers. If the introduction is not proper, account should be opened only after
thorough verification of antecedents of such parties.


Staff members should be advised to introduce only those depositors whom they
know personally for a long time.


New accounts should be opened by Branch Manager or the officer next below
him and not by other officials. The parties should be present in the branch for
opening new accounts. The instructions issued by RBI in terms of Know Your
Customer Norms should be strictly adhered to.


Documents connected with opening of all new accounts should be branded with
a caution note/remark 'Care-New Account' and such instruction should remain
for at least six months.


Cheque leaves of new accounts (issued during the first six months) should bear
the remark 'New Account'.


Loose cheque leaves should be issued to account holder only when he comes
personally with requisition letter/pass book. If the cheque book is to be issued
against a requisition letter, instead of the normal printed requisition slip, the
drawer should be asked to come personally to the branch, or such cheque book
may be sent by registered post to the account holder.


Withdrawals in the new account against large amounts of credits should be

scrutinised thoroughly.
Utmost caution must be exercised whenever
cheques/drafts of large amounts are deposited to new accounts and withdrawal
is sought within a short time against these credits. Whenever instruments of
large value are received for collection through clearing, as far as possible they
should be scrutinised through ultra violet lamp for chemical alterations, if any.


The proceeds of cheques/DDs sent for collection should not be credited directly
to a new Fixed Deposit account. Instead SB/Current account may be opened
with proper introduction and the proceeds may be credited to these accounts
initially and transferred to the FD account thereafter.


As a paying bank, the branches should check with the collecting bank about the
genuineness of high valued instruments.


The bank should exercise vigil on the transactions in the deposit accounts and
any transaction/set of transactions found to be suspicious in nature should be
reported to appropriate authority.

Insurance of Deposits
The CCBs should also bear in mind the following points to instil confidence in the mind of
the depositor.
1. One of the doubts in the minds of the depositor is about the safety of funds so
saved with CCBs. The CCBsshould take care of this by taking a deposit insurance
policy This will help both the bank and the depositor.
2. Quiet often, the depositor is in the habit of comparing the deposit product with a
similar product offered by some other bank. The CCBs thus, must try to know the
features of similar products offered by the neighbourhood bank branch like
interest rate, facilities offered, etc., so that they could improve their own deposit
products in due course.
In order to instill confidence about the safety of the deposits in the minds of the
depositors, the CCBs are required to obtain insurance cover from the DICGC under the
provision of Deposit Insurance and Credit Guarantee Corporation Act, 1961. DICGC, a

wholly owned subsidiary of the Reserve Bank, provides insurance cover on the deposits
of all Commercial Banks, Regional Rural Banks and the Co-operative Banks upto a
maximum limit of Rupees one lakh. This limit includes all deposits held by a depositor in
the same capacity and in all branches of the bank. However, the deposits in the name of
Central and State Governments, Banks (Commercial/ Co-operative/ Regional Rural
banks) & Foreign Government are not covered under the scheme.
Deposit Mix
The business of banking is primarily trading in money i.e. in other words buying money,
selling money and making money. Buying money means raising resources by way of
mobilisation of deposits and borrowings. Selling money means deployment of the
resources so raised profitably in loans and advances and investments. While banks buy
money, they pay a cost to the seller of money and while they sell money they do it for a
price which is usually higher than the cost paid. The difference between selling price and
cost price is the spread or interest differential for providing services in money trading. In
other words, it is also called interest spread or margin. The objective of any financial
institution is to earn maximum profit by maximising the interest spread or margin. Higher
the margin, higher is the profitability which is dependent on the ability of the bank to
mobilise resources at lower cost and deploy the same at higher price This can be
possible only when the organisation takes judicious decisions for resource mobilization at
lower cost and deploy the same at higher price. Although deposits constitute most
important and cost effective resources of the CCBs, the cost paid on different types of
deposits are different which is directly related to their nature and types. In order to keep
the average cost of deposits as low as possible for earning higher margin or spread, it is
essential to have appropriate deposit mix.
The term deposits or fixed deposits are high cost deposits for the reason that, they attract
higher rate of interest. It is, therefore, advisable that their contribution in the total mix of
deposits should be lesser than the proportion of Current and Savings deposits put
together so as to keep the deposit cost as low as possible. High proportion of term
deposits will increase the average cost of deposit.
The share of savings bank deposits in the total deposits need to be higher because
savings bank deposits provide scope to widen customer base and to increase low cost
Current account is zero interest deposit. The bank has to mobilise more current account
in order to save the interest cost on total deposits. Current accounts provide the scope to
increase business clientele for a bank. The business clientele provide more opportunities

to the bank to increase the volume of business transaction. Therefore, the share of
deposit under current account has to be increased.
Suitable deposit mix is one important pre-condition for bank/branch profitability. To
enhance profitability, banks take steps to minimise the interest expenditure and so banks
are forced to mobilise low cost deposits. Banks efficiency is measured based on the
deposit mix and on the quantum of low cost deposits in the mix. In the present context of
competition and with the emergence of private and multinational banks, an ideal mix of
deposits for the CCBs is a must to survive. Since the interest paid on deposit forms a big
burden on bank, the mobilisation of low cost deposits, like current deposit and savings
bank deposit is the urgent need for the bank. The final objective towards profitability is to
arrive at an suitable deposit mix to keep the cost of deposits low as far as possible. The
ideal deposit mix for the bank to ensure profitability is to have fixed deposits less than 50
per cent and savings and current deposits put together more than 50 per cent of total
deposits. Therefore, the bank should adapt itself to the changed situation in search of
new markets and to provide new services for existing customers to retain its market
But this deposit mix is dependent on certain factors. The branch is to take care of these
factors while planning for deposit mobilisation.

1. The extent of banking habit developed among the people in that area is the first
important factor to be considered by the rural banker to determine the suitable
deposit mix. In case, the branch of the CCB is located in an area where the
savings habit among the people is less developed, the branch should move very
closely with the rural people and build good rapport with the people. Different
marketing strategies may be adopted by the banks branch for increasing such

2. Secondly the bank has to give due consideration to the peoples occupation
pattern in its area of operation. If more number of non- farmers is living in the
area, there is more scope for mobilisation of current and saving deposits. In case
of farmers, since their income is seasonal in character, the nature of their deposits
may be both time and demand deposits. This gives enough idea to the bank to
decide the appropriate blend of deposit mix
3. The financial condition of the people is another contributing factor. Lower income
group people prefer only demand and time deposits.
Institutional Deposit viz-a-vis Individual Deposit:

Another indicator for deposit mix is the source wise composition of deposits. The
cooperative banks mostly depend on individual depositors as well as affiliated societies
for deposit mobilisation. All the registered primary cooperative societies have to deposit
all their appropriations out of profits with the CCB concerned. It is a statutory obligation.
Thus a part of the deposits of CCB comes from societies without any effort. The second
source of deposit is from individuals. This could be a voluntary source. Mobilisation of
deposits under this category would be the result of continuous publicity, effective
marketing management, convincing and courteous service of the bankers. For a
cooperative bank these two types of deposits are considered as stable deposits as they
are less volatile. Besides the above sources, the CCBs also mobilise deposits from
government departments as well as from non-government institutional sources. The
deposits received from institutional sources are highly volatile in nature and come in bulk
amount requiring the CCBs to maintain higher level of CRR and SLR in respect of these
deposits. However, they can not take any investment decision in respect of these
deposits because of their volatility which are withdrawn by the institutions very quickly as
per their requirements. Therefore they are very unstable in nature. These deposits create
frequent liquidity problems for resource poor banks like Cooperative Banks and in such a
situation the CCBs find it difficult to raise resources to overcome the liquidity problem.
Most of the times, to tide over such situation, they borrow money from higher financing
institutions at a higher cost and as such these deposits are considered not at all profitable
for CCBs. If the share of these deposits in total deposits is very high, the liquidity risk
profile of the bank is very high. Therefore, the policy of the CCB should be to keep
proportion of volatile institutional deposits as minimum as possible.
Strategy for Deposit Mobilisation
The cooperative banks mostly depend on individual depositors as well as cooperative
societies for deposit mobilisation. All the registered primary cooperative societies have to
deposit all their appropriations out of profits with the CCB concerned. It is a statutory
obligation. Thus a part of the deposits of CCB comes from societies without any effort
because such deposits are compulsory for the socieities. Mobilisation of such deposits
needs least efforts. Therefore any improvement in the deposits from societies does not
reveal the real effectiveness of the banks efforts towards deposit mobilisation. Thus
growth in deposits from public depicts the efficiency and effectiveness of any bank in
resource mobilisation.
Mobilisation of deposits from public for a bank is as essential as oxygen for human being.
In the post liberalisation scenario, the number of players in banking industry has

increased considerably which developed competition in bank marketing. The survival of

the fittest has been applicable for the banks as well.
One of the important objectives of the CCBs is the mobilisation of rural savings. It helps to
expand loaning operations. The philosophy of cooperation emphasizes that cooperative
institutions should function only with the funds pooled from members and not to rely
largely on external financial accommodation. The CCBs, which are the backbone of
cooperative finance, must become self-sufficient and self-reliant. Various Committees
have emphasised that with a view to enhancing the internal resources to stand on their
own, CCB must tap deposits from the rural and urban areas so that adequate finance will
be available for agricultural development in rural areas. For this the banks have to plan
for deposit mobilisation keeping the profitability and deposit mix aspects in mind. Thus,
the CCBs could devise clear strategies which would help them mobilise deposits from
public in the competitive environment. While the CCBs could devise their own strategies,
some of the indicative strategies are indicated below :

Introduction of new deposit product which should be more attractive than the
products offered by competitors.


Creating awareness among the members organisation of meetings, display on

boards in the premises of the society, printing briefly on the rear or back side of the
loan pass book, deposit pass book etc.


Approaching every household in the area


Opening no frill accounts


Organising more and more SHGs


Taking help of Farmers Clubs


Setting targets for opening of new deposit accounts


Providing better customer service


Approaching retail business units in the area of operation


Approaching service holders, school teachers etc. in the area


Retaining the existing depositors good and satisfactory service, timely payment
of deposits, timely renewal of deposits, issuing loans against deposits, etc.


Launching daily deposit scheme


Extension of business hours for non-cash transactions viz., issue of pass

books/statements of accounts, issue of cheque books, delivery of term deposit
receipts/drafts, acceptance of clearing cheques, acceptance of bills for collection,
issue of Term Deposit Receipts, acceptance of cheque for locker rent due,
acceptance of individual cheques for transfer credit etc., to provide wide range of
services to fulfill the need of and satisfy the customers.


Introducing insurance linked deposit products .


Using technology for deposit servicing etc.

Incentives to staff for deposit mobilisation

Banks are not expected to introduce deposit incentive schemes envisaging payment of
incentives to staff, comprising gifts in cash or in kind in relation to the number of deposit
accounts and total amount of deposits collected by them. While staff involvement in
deposit mobilisation is desirable and needs to be encouraged as hitherto, such business
promotional activities by the members of staff may be viewed as a part of their normal

The bank should, therefore, desist from formulating and operating incentive

schemes involving rewards/ award of prizes in cash/kind to the employees. Further, the
cooperative bank should not appoint its own staff members as agents for collection of any
type of deposit. The bank should also not provide any incentive to depositors other than
those permitted by Reserve Bank of India.
Pricing Deposits
The cost of deposit needs to take into the account two elements. One is the cost of
interest payments and the cost of maintaining the account and processing of transactions
thereof. Normally, the cost of processing deposit related products are priced as an add-on
product like drafts, cheque collection etc., which are charged to the account. Important
component, however, is the interest cost. Interest cost on deposit should be such that it
offers incentive for the savers and therefore, it is related to the rate offered on other forms
of savings in the market. This takes into account the elements of time, risk and return.
The CCBs have to recognise that the term of accepting deposits requires a view on the
future use of such deposits. In a falling interest rate scenario, it is not advisable to accept
deposit for long duration and at high rates of interest. In a volatile market the short-term
deposits should be priced more than the long-term deposits, say beyond three years. It is
better to discourage deposit collection at high costs, when the bank is not in a position to
make use of the deposits profitably.
As an illustration, procedure for ascertaining cost flow of one of the services viz. Deposits
has been elaborated below:
Direct Costs:

Interest payment

Salary of clerks and sub-staff plus that of supervising officers engaged in servicing

Assessment of proportionate staff salary for the activity to various activities in

proportion to time allocated.

Stationery consumed

Indirect costs

Assessment of proportionate overhead cost viz., Rent/ Taxes/Electricity etc. according

to pro-rata area occupied by the Department (concerned activity).

Notional cost of other staff involved, if any.

Notional cost of common services like Despatch /Cash Book /Telephone /Fax etc.

Proportionate cost of maintenance of administrative offices to be loaded in the case of

a branch taking up the activity on the basis of the ratio of branch business to total.

Calculate activity-wise cost per Rs 100/-/cost per voucher


Importance of Business Diversification
With liberalization of the economy, profit consciousness has come to all the Financial
Institutions viz., Commercial Banks, Regional Rural Banks or Cooperative Banks.
Commercial Banks have started broad basing the portfolio for quite some time and were
able to diversify to a great extent. RRBs which are coming to terms with the new profit
consciousness and the professional way of lending are also making efforts to diversify

their portfolio and spread their risk across various sectors. In case of Cooperative Banks,
despite their large lending volumes, diversification of the lending portfolio has not yet
taken a firm shape and all the tiers within the Cooperative System are catering to the age
old sectors / activity and had not paid much attention to the developments that are taking
place in the agriculture and rural development sectors which need substantial
In order to tap the business potential available in these sectors and also increase the Net
Interest margins / spread the time has come to look into the diversification by them
seriously. Since a big opportunity is awaiting in various sectors, the cooperative banks
have to diversify their credit portfolio and spread their risk so that even if one sector /
activity fails due to extraneous reasons the other sector / activity will be able to ensure the
cash flow to the system. In view of this, banks may look into the portfolios outlined below
for increasing their diversification.
Existing Business of Cooperative Banks
Generally Cooperative banks loan portfolio consists of more than 80% lending to crop
loans and remaining to small, petty business and CC lending. Some of the banks have
the following loan products in their portfolio.

o Crops loans to PACS through Kisan Credit Card (KCC) System

o Advances against fixed deposits
o Consortium financing along with State Cooperative Bank for loans & advances to
cooperative sugar mills

Cash Credit tp PACS for dealing in agricultural inputs, PDS items, consumer
goods etc.

Cash Credit to Cooperative Sugar Mills for working capital requirements

Cash Credit to Cooperative Marketing Societies for working capital requirements

Advance against pledge of sugar to Cooperative Sugar Mills

Cash Credit to Cooperative Processing Societies for working capital requirements

Cash Credit to Cooperative Consumer Stores for working capital requirements

Cash Credit to Primary Weaver Cooperative Societies for working capital


Cash Credit to Industrial Cooperative Societies for their working capital


Medium Term Loans to Salary Earners Societies

Medium Term (Conversion) Loans to PACS

Medium Term Investment Credit to individual farmers for taking agriculture and
allied activities.

It may be seen from the above that the cooperative banks are mostly financing units
within the cooperative fold. With the cleansing of the balance sheet of the PACS, most of
the PACS would be eligible to borrow a higher quantum of credit from DCCBs. With the
implementation of Prof. Vaidynathan Committee recommendations and Agricultural Debt
Waiver & Debt Relief Scheme, the cooperative banks are having substantial funds which
could be profitably deployed.
Diversification through Retail Banking
With the amendment of Cooperative Societies Act, freedom has been given to
Cooperative Banks regarding loan policies including loan decision to its members
keeping in view the interests of the society and its members. Further, they need not take
the approval of the RCS for all loan advanced under short term, medium term and long
term duration for which RBI / NABARD formulated the loan scheme. Hence, the banks design new products to suit the customers in the area of operation.
Hence, it can be well said that the time has come for cooperative banks to take up retail
banking. Retail banking refers to provision of banking services to individual customers,
small account holders such as savings products, personal loans etc. to suit the individual
requirements. Unlike wholesale banking, the focus of retail banking is to provide a wide
range of personal banking services, including offering savings and checking accounts, bill
paying services, mortgages and personal loans. Although retail banking is, for the most
part, mass-market driven, many retail banking products may also extend to small and
medium sized businesses. CCBs, besides financing for agriculture and allied activities,
could also finance individuals, proprietory / partnership firms directly against fixed
deposits, life insurance policies, pledge of gold / silver ornaments, etc. for purchase of
consumer durables and for other purposes. It may also provide cash credit facility to
businessmen / traders against collateral, pledge or hypothecation, temporary overdraft
facility to individuals, loans for purchasing auto rickshaw, taxi, other motor vehicles, etc.,
and non commercial vehicles like cars and two wheelers. The restrictions imposed by the
RBI in regard to financing of certain sectors as well as exposure norms prescribed by RBI
should also be adhered to. The salient features of the different types of retail loan
products and also the precaution to be taken while financing are furnished below:
Advances against Government / other trustee securities
The following precautions may be taken while granting advances against Government
securities. The security should be in the name of the borrower. In the case of Government

Promissory Notes, all the endorsements should be checked carefully to ascertain that
they are prima-facie in order. The endorsements can be got verified / certified by referring
to the Public Debt Office. In case of doubt, the relevant promissory note can be got
renewed in the borrower's name and thereafter, got endorsed in the bank's name.
After the process of transferring the security in the bank's name is completed, the market
value of the security should be ascertained with reference to quotations published by any
recognised stock exchanges. Advances granted should not ordinarily exceed 90 percent
of the market value so worked out. The advances should be sanctioned by a competent
authority. After the sanction of advances and execution of other documents, the bank
should enter the details of such securities in the securities ledger and particulars of
documents in the documents register. Due date diary should be maintained to watch that
the interest due on securities is collected up-to-date and credited to loan / overdraft
In the case of other Government securities, such as National Savings Certificates, etc.,
the bank should comply with the guidelines laid down under the respective rules, etc.,
especially the rule that a lien should be got recorded in favour of the bank against the
securities in the books of Post Office which issued these certificates.
Other trustee securities will be debentures and / or shares of various corporations which
have been declared as trustee securities. In the case of debentures, they may be got
registered in the bank's name by executing a transfer deed in favour of the bank. The
further safeguards to be observed by the CCBs while making advances against
Government and other trustee securities are indicated below:
a. Government and other trustee securities should be accepted from the bank's
constituents or from persons who are satisfactorily introduced to the bank. The
securities pledged to the bank should be duly transferred / endorsed in the bank's
b. In cases, where the securities stand in the names of third parties i.e. other than in
the name of the borrowers, a letter of guarantee should be obtained from the
borrowers regarding his/their good title to the securities and or letter of
renunciation by the registered holders of the securities. As regards securities in
the names of minors, a declaration from the guardian that the advance is intended
for the minor's benefit should be obtained and kept on record.
c. The market value of the securities should be periodically verified with a view to
ensuring that the margin retained is adequate.

d. Interest on the securities should be collected promptly and credited to the parties'
loan account.
Advances against shares, debentures and bonds
The following precautions may be taken while granting advances against shares:
a. The shares should be quoted on a stock exchange. Unquoted shares should not
be accepted as security for advances. For this purpose, the bank should prepare
an approved list which should be kept up-to-date.
b. The bank should maintain market price and drawing power registers to ascertain
periodically whether the stipulated margin is maintained in the account.
c. It should obtain adequate number of blank signed transfer deeds from the
borrower having regard to the marketability of the shares.
d. The bank's lien on the shares should be notified to the concerned companies.
e. A mandate should be obtained from the borrower authorising the bank to collect
the dividend on the shares as and when it is declared.

Shares standing in third party names should be accepted only after obtaining
letters of renunciation from them.

g. Ordinarily, partly paid shares of private limited companies, temporary receipts

issued by the company and broker's delivery orders should not be accepted
as security.
h. Large block of shares of any particular company should be avoided.

Maximum advance to an individual borrower against the security of existing

shares/ debentures should not exceed Rs.5.00 lakh. The minimum margin on
loans to individuals against shares/debentures/bonds should be 50%.

Advances against life insurance policies

The following precautions/safeguards are to be observed while making advances against
the security of life insurance policies:
a. Advances against life insurance policies should generally be granted by way of
demand loans and the life insurance policies offered as security must be, at least,
three years old. The banks should normally prefer endowment policies to whole
life policies.
b. The bank should verify from the Life Insurance Corporation of India (LIC) that no
prior assignment existed at the time of granting advances and an absolute
assignment in the bank's favour has been made by all the parties benefiting under
the policies and the assignment has been duly registered with it. As a minor

cannot borrow on pledge so as to bind himself on the security pledged, no policy

in which nominee or assignee is a minor should be accepted as security.
c. The bank should ascertain the surrender value of the policies including cash
bonus, if any, and keep a margin of 5% to 10% on the surrender value while
making advance against the life policies.
d. If the policies offered as security are in the name of person other than the
borrower, the bank should ensure that the borrower had an insurable interest in
the life of the assured.
e. The age of the policy holder should have been admitted either on the policy or by
a separate letter by the LIC and the bank should ensure that the policy is in force
as on the date of granting the advance. The last premium receipt from the LIC
should be obtained. These instructions apply in general terms to life insurance
policies of the Posts and Telegraph Department also.

The assignment may be made by an endorsement on the reverse of the policy.

The assignment in favour of the bank should be got registered with the
Corporation. In case, the assignment is on a separate sheet, it will have to be
adequately stamped. Loans should be granted only after the assignment is
acknowledged and registered by the Corporation.

g. The bank should obtain periodically the latest premium receipts to verify that the
policies are kept alive. The bank can also obtain standing instructions from the
borrowers for payment of premium by debit to their accounts.
h. All life insurance policies held as security for advances must be recorded in the
Securities Register and retained in the strong room.

Due dates of premium should be carefully diarised to ensure that they are
regularly paid.


If the policies mature before the debt is cleared, the policies and other requisite
documents should be forwarded to the LIC and the money be received. Any
surplus left over after adjusting the loan account should be paid to the borrower.

k. When a loan is repaid, the policies should be returned to the borrower after reassigning them in his favour and after making necessary entries in the Securities
Register. The borrower should acknowledge receipt of the policies, etc., in the
Securities Register. The Corporation should be advised of the re-assignment in
favour of the borrower.
Advances against gold / silver ornaments
The following precautions may be taken while granting advances under this category:

a. Ownership:

It should be ascertained whether the ornaments brought for pledge

belong to the borrower. The bank should insist on proper introduction of the
borrower before granting loans against gold ornaments.

It may obtain a

declaration from the borrower to the effect that the goods offered for pledge
belong to him / her.
b. The articles proposed to be pledged should be got appraised by a competent
person appointed by the bank for the purpose. The appraiser should fill in the
details such as gross weight, net weight, (after making due allowance for stones,
threads or strings, wax, etc.) rate at which they have been valued and the
estimated value. In the case of gold bars, etc. the markings of the recognised
bullion dealers should be examined.
c. Since the appraiser plays an important role in the process of issuing loans against
gold / silver ornaments, the bank should take adequate care to guard against the
false certificates likely to be given by the appraiser as to the content and quality of
gold / silver in the ornaments. With a view to avoiding the occurrence of such
malpractices, the bank should appoint an appraiser of good reputation / character
and take adequate security from him to safeguard against the prospect of risks.
d. The gold ornaments should be placed in a cloth bag and tied securely with a
string. A tag may be attached to the bag indicating the loan account number and
date of advance. Similar tag may also be kept inside the bag so that in case the
outside tag is lost or misplaced, there may not be any difficulty in identifying the
ornaments at a later date.
e. When the entire loan is repaid by the borrower, the bank should insist on the
return of the token issued by it and take out the ornaments from the safe after
making the necessary entries in the documents register. The borrower should be
asked to sign in the gold loan ledger in token of having received back the
ornaments. The documents executed by the borrower should also be taken out
and a remark 'Account Closed' should be made on each of them under

When there is a partial repayment of the advance, the bank should not normally
allow partial delivery of the ornaments pledged to it. In case, such a delivery is
essential, the bank should ensure that the value of the remaining articles will be
sufficient to cover the outstanding balance in the account.

g. Ornaments should be delivered to the borrower himself on repayment of the

bank's dues against his acknowledgement in the gold loan ledger. In case, the
borrower is unable to take delivery of the ornaments personally, but has
authorised a third party to take delivery on his / her behalf, the bank should obtain

a specific letter of authority from the borrower whose signature should be carefully
verified. The person presenting such letter should be properly identified and the
ornaments may be delivered on obtaining his / her signature in the gold loan
ledger, etc. After the ornaments are delivered, a letter may be issued to the
borrower advising him of the delivery of ornaments to his / her agent and asking
him / her to send an acknowledgement for the articles on receipt.
h. The following formalities have to be observed while settling the gold loan account
of the deceased borrowers.


Death certificate should be called for and recorded in the books

In the case of claims from nominees, the ornaments can be delivered to
the nominees against proper acknowledgement.

Where the amount exceeds Rs.25,000/- and there is no nomination the legal heirs should
produce proper legal representation from a competent Court. In case, the borrower has
left a WILL, probated copy of the WILL has to be produced. If no WILL has been left
behind by the deceased or the WILL cannot be executed for some reason or the other,
letters of administration issued by a competent Court have to be produced.
Advances for purchase of two wheelers, motor vehicles etc.
Since the value of motor vehicles depreciates considerably, advances for motor vehicles
should be confined as far as possible to new vehicles only. Old vehicles over 5 years in
use should not ordinarily be accepted as security. The bank should obtain the original
invoices in the case of new vehicles or an expert's valuation report in the case of old
vehicles. The registration certificate should be called for verification periodically to
ascertain whether there is any change in the ownership. The bank's charge may be got
registered with the concerned Regional Transport authorities. A deed hypothecating the
vehicle to the bank should be got executed by the borrower. It should be ensured that
various taxes have been paid up-to-date by the borrower. A comprehensive insurance
cover for the vehicle should be obtained. The bank should ensure the registration
certificate of the vehicle includes an endorsement to the effect that the charge of the bank
has been recorded with the Regional Transport Authority. The bank should obtain the
duplicate ignition keys of the vehicle financed and hold the same till the loan is cleared.
Advances against Indira Vikas Patras (IVPs) & Kisan Vikas Patras (KVPs)
Cooperative Banks may, at their discretion, sanction advances against the security of
IVPs & KVPs subject to the following terms and conditions:
a. There should be no premature encashment of IVPs / KVPs.

b. Lien cannot be registered on the certificate and hence, the bank should take
adequate precautions in this regard.
c. Utmost care for the safe custody of the certificate will have to be taken since the
IVPs are in the nature of bearer bonds and are freely transferable.
Advances against immovable properties
The bank should adopt the following safeguards for protecting its dues:
a. The prospective borrower should be asked to submit along with the application,
the documents of title relating to the property proposed for mortgage and the
latest municipal or land tax receipts. The documents, tax receipts and nonencumbrance certificates covering a period of the previous 12 years preceding the
date of application should be submitted to the bank's legal advisor for opinion. The
opinion should, inter alia, state in unambiguous terms as to whether the borrower
has a clear, marketable title to the property and has a right to mortgage the
b. The properties offered as security should then be valued preferably by an expert
such as a qualified engineer. Where a valuation by an expert is not feasible, the
properties may be evaluated by one or more directors or officer of the bank with
reference to the prevailing prices in the locality. While evaluating the properties,
the directors/officers should indicate the basis on which the value of the property
has been arrived at. The following factors may be considered in the valuation
(a) Locality, (b) Description of the property - whether a shop, residential building or
open land, (c) House or property number, (d) Leasehold or freehold. If it is a
leasehold property, the terms of lease may be indicated, (e) If there is any
construction on the land, the type of construction, when constructed, cost of
construction, the present condition, etc. (f) Annual income derived out of the
property, if any and capitalised value of the property, (g) Present estimated value
taking into account a few recent sales in the locality, (h) Demand for property in
the locality, (i) The price the property is likely to fetch in the event of a forced sale.
c. After the advance is sanctioned, required documents may be obtained from the
borrowers. Title deeds should be retained with the bank. The mortgage deed may
be got registered with appropriate authorities. Where the advance is granted by
way of equitable mortgage, the bank's charge may be notified to the concerned
authorities, wherever necessary. The bank should also maintain a register called
'Equitable Mortgage Register' wherein the date, day and time of handing over the

documents of title to the properties with an intention to secure the advance should
be recorded under the signature of the bank's responsible official. The day and
time of handing over the document to the bank should be after the advance is
availed of by the borrower.
d. Before allowing drawal from the account, the bank should obtain a second nonencumbrance certificate covering the period upto execution of the mortgage deed.
As a measure of abundant caution, a third encumbrance certificate may be
obtained about six months after execution of mortgage in favour of the bank in
order to verify whether any mortgage executed to a third party during the
intervening period was registered subsequent to execution of mortgage in favour
of the bank.
e. The bank should arrange for insurance of the mortgaged property.

Periodically, municipal or other tax receipts should be called for to ensure that the
borrower had paid taxes due on the property up-to-date. Wherever an advance is
to be made against leasehold property, the bank should keep on its records, a
copy of the lease deed and examine whether the terms of the lease are being
complied with. A receipt for the, lease rent paid from time to time should also be
kept on the bank's record.

Advances against pledge / hypothecation of goods & agricultural produce

Important aspects of advances against goods and agricultural produce are given below:
a. The bank should grant advances as far as possible, against pledge of goods. In
case, hypothecation facility is to be given to individuals, it should be allowed to
parties of reputation and standing.
b. The bank should prescribe a list of commodities which can be accepted as
security for the bank's advances. For each type of commodity or goods, the bank
should prescribe the margin to be maintained and indicate wherever necessary,
safeguards for storage of goods to be observed to avoid claims against the bank
for the loss that may arise to the goods on grounds of negligence, etc.
c. The bank should maintain a Market Price Register and Drawing Power Register.
The market value of the goods should be ascertained periodically and drawing
power worked out after applying the stipulated margin. The drawals from the cash
credit account should always be regulated by the drawing power so worked out.
Hypothecation of goods


The bank should assess the financial soundness of the borrower by scrutiny of the

balance sheet, profit and loss account, etc. Since the security is held in the custody of the
borrower, the bank should prescribe submission of periodical stock statements by the
borrower. The drawing power should be calculated from time to time and entered in the
drawing power register or cash credit ledger for regulation of drawals from the account
with reference to such drawing power.

The stocks should be periodically inspected by the bank's officials. Further, the

name board of the bank indicating its charge on the goods should be prominently
Pledge of merchandise

The goods to be accepted for pledge should be capable of being stored and easily

marketable. It would not be in the interest of the bank to accept as security perishable
commodities or commodities which would deteriorate in value due to storage. The
maximum period of storage with the bank should be prescribed, commodity-wise, having
regard to these factors. In the case of agricultural produce, crops of current season only
should be accepted as security for the bank's advances.

At the time of pledge, the borrower should be asked to give a letter to the bank

requesting it to take delivery. In this letter, the description of goods, quantity and value
thereof should be clearly indicated. It should be ensured that the goods as per the
description and quantity are actually handed over to the bank. The goods may be taken in
the bank's custody by its godown keeper or any other responsible official of the bank after
verifying all relevant details. After the process of storing the goods in the godown is
completed, the godown keeper should certify in the take delivery letter that he had taken
delivery of the goods as specified. This letter together with the godown keeper's
certificate, when received, should be entered in the bank's godown register or stock
register. The value of the goods as indicated by the borrower should be verified
independently with reference to current market prices or invoices. The drawing power
should be calculated and it should be mentioned in the 'Drawing Power Register' and in
the 'Cash Credit Ledger'.
Advances against plant and machinery
As far as possible, it would be preferable to accept new machinery as security. In this
case, the invoices available with the borrower may be sufficient for evaluation purposes.
The bank should not finance against plant and machinery acquired on hire-purchase

basis. In the case of old machinery, it should be got valued by a technical expert and also
a report be obtained that the machinery is in good condition. It should not finance against
obsolete machinery. The bank should ensure that the loan given is recovered during the
economic life of the machinery. The bank should verify as to whether the machinery
offered as security is fixed to the land or removable. In case, it is fixed, it should obtain a
mortgage deed. However, if the machinery is not embedded in the ground, a charge on
the machinery in the nature of hypothecation should be obtained.
Advances against supply bills
The facility is extended to approved Government Contractors who supply goods and / or
services to various Government Departments. The precautions to be taken in respect of
these advances are indicated below:
a. Since the facility is a clean advance, it should be extended to parties of sound
b. Apart from the usual documents, the bank should obtain an irrevocable power of
attorney from the borrower in favour of the bank for collecting the dues under the
various bills on his behalf. Such power of attorney should be got registered with
the concerned Department.
c. An undertaking from the borrower should be obtained to repay the amount to the
bank, in case the amount of bill is paid directly to him / her by any Government
Each bill when presented to the bank should be accompanied with the inspection notes or
an acknowledgement from the concerned Department for having received the goods. The
bank should scrutinise the bill to see whether it is drawn on proper authority and that the
amount of the bill is as per the contract. The bill should be endorsed in favour of the bank.
There should be provision for payment of the bill to the bank only and not to the
Advances against warehouse receipts
The warehouse receipts are not negotiable instruments and as such, endorsement and
delivery thereof do not confer a better title on the transferee than what the transferor has.
In view of this, the bank should exercise caution while granting advances against
warehouse receipts. It should be granted to persons of good standing and repute. The
bank should take the following safeguards:

a. The warehouse receipts should be drawn by the Central or State Warehousing

b. The bank should maintain on its record a specimen signature of the
warehouseman. It should be attested by a responsible official from the concerned
Corporation. In case, a warehouseman is transferred, the new incumbent's
signature may be kept on record duly attested by the outgoing warehouseman.
c. Normally, the goods are insured by the Corporation directly. It should, therefore,
be ascertained from the receipt whether the goods have been insured or not and
that payment of rent for the godown has been made.
d. It should be examined whether the value of the goods as indicated in the receipts
is in accordance with the prevailing market rates.
e. The warehouse receipt should be got endorsed in the bank's name. Its lien on
the goods should be got registered by the warehouseman.

Whenever a delivery is to be effected, the bank should discharge the warehouse

receipt and hand it over to the borrower. In case of partial delivery of goods, the
bank should issue a delivery order together with the warehouse receipt. In this
case, the warehouse receipt should be carried by the bank's employee and not by
the borrower. The warehouseman will indicate the balance of goods stored in the
warehouse. It should be ensured that the value of goods is sufficient to cover the
balance in the account.

Bills purchased and discounted

When a demand bill is purchased by the bank for a valuable consideration, the bank is
stated to have purchased the bill while in the case of a time bill purchased for its present
worth, the bank is stated to have discounted the bill. In both the cases, the bank becomes
the holder of the bill in due course, i.e. it becomes the owner of the bill with all rights and
obligations cast on it under the Negotiable Instruments Act, 1881. The following types of
bills are often presented to the bank for purchase / discount:
a. Cheques
b. Bank drafts
c. Hundies
d. Documentary bills covering lorry receipts, railway receipts, post parcels, etc. The
bills are classified under two broad categories viz. (i) clean and (ii) documentary.
Clean bills
Under this category, cheques, clean hundies, etc., are included. It should be ensured that
the bills arise out of genuine trade transactions and are not in the nature of

accommodation bills. Normally cheques drawn on self should not be purchased. The
drawer should not be allowed to retire the bills. The facility of purchasing bills should be
extended only to those parties for whom regular limits have been sanctioned by the bank.
Documentary bills
This type of bills are generally accompanied by documents of title to goods such as lorry
receipt, railway receipt, etc., and the invoice. These documents are normally required to
be handed over to the drawee against payment of the bill amount. Sometimes, in special
cases, the customer may instruct that the bills may be handed over to first class parties
against their acceptance of bills. When the documents are handed over against such
acceptance, they should be classified as clean bills. Documentary bills may be either
demand or time bills.
Cash Credit / Overdraft to retail business / traders / SSI units
Cash credit / overdraft limits are sanctioned by banks to meet working capital
requirements of units. The cash credit system enables the customer to make frequent
drawals from as well as repayments into the account to suit continuous nature of financial
transactions, thus facilitating the most economical use of the accommodation. A variation
of the cash credit system is the overdraft account. The overdraft indicates that the facility
is only provided to a party who has a deposit account with the bank. An overdraft account
starts with a credit balance in the account and is later allowed to run into debit or
permitted to be overdrawn.
Types of cash credit / OD

(a) Pledge
(b) Hypothecation

ii) Unsecured or clean


Secured Advances

(a) Pledge of stock

The stocks are held with the bank in its effective custody. Drawals from a pledge cash
credit account are allowed by the bank when goods are actually transferred to its custody.
The pledged goods are released as and when repayments are made into the account.
(b) Advances against hypothecation of stocks
Under the hypothecation advance, the bank does not get the possession of the goods;
instead, an equitable charge is created on the goods by virtue of an agreement executed

by the borrower in favour of the banks which inter alia empowers the bank to take
possession and realize its dues in the event of default.
The bank has to regularly obtain a statement of the value of stocks hypothecated to the
bank, besides at the time of permitting drawals.
ii) Unsecured or clean cash-credit Limits
Such a limit is provided not on the ground that party has no tangible security to offer but
that the nature of business dealings requires the advance to be unsecured for a limited
period of time.
Loans to individuals - for purchase of consumer durables, education purposes etc.
As per the McKinsey globals India consumer research Report Indian income will triple
over the next two decades. Over the next two decades, the countrys middle class will
grow from about 5 percent of the population to more than 40 percent and create the
worlds fifth-largest consumer market. In 2005 private spending reached about 17 trillion
Indian rupees($372 billion), accounting for more than 60 percent of Indias GDP, so in this
respect the country is closer to developed economies such as Japan and the United
States than are China and other fast-growing emerging markets in Asia. Extreme rural
poverty has declined from 94 percent in 1985 to 61 percent in 2005. In 1985, 93 percent
of the population lived on a household income of less than 90,000 rupees a year,by 2005
that proportion had been cut nearly in half, to 54 percent. The growth that has pulled
millions of people out of poverty is also building a huge middle class that will be
concentrated in Indias urban areas. Today 57 percent of private spending is spread
across rural areas. With the increase in rural income, growth in the middle class and with
the fast changing technology, there is a lot of scope for loans for purchase of consumer
durables. Further, the people joining professional courses are on the increase indicating
the potential available for issue of education loans. Cooperative banks can tap this
potential for diversification of their loan portfolio.
Diversification through Innovative Approaches
Credit linkage to SHGs
SHG is a neighbourhood affinity informal group of 10-20 poor persons. In exceptional
cases, it can be a minimum of 5. Its cohesiveness is on account of homogeneity, i.e. all
having commonality of problems/issues in earning livelihood. Either with spontaneity or
facilitated by an external agency, they have volunteered to build common fund through
regular weekly/fortnightly/monthly thrifts. Amount of regular thrift is uniform for all and
determined as per the capability of the member belonging to the lowest rung of the group.

SHG uses common fund to meet the emergent credit needs of the members ranging from
pure consumption to income generation purposes. whom to give, for what purpose, how
much, at what rate of interest and for what period are as per the decisions of the Group.











intervention/facilitation of any NGO, (ii) bank directly financing SHGs with NGOs acting as
facilitator, or (ii) financing indirectly to SHGs through on-lending to NGOs. The banks
should observe the following guidelines while financing SHGs:

a. Loans to SHGs may be given after assessing its maturity.

b. Quantum of loans to start from matching the group fund to 4 times of the fund.

c. The SHGs are free to decide the purposes.

d. Repayment period allowed by bank to SHG may range between 3 and 10 years.
e. Repayment periods by members to SHG may be shorter.
f. Interest rates on loans to SHGs may be decided by the bank.
g. Banks are to give loans without any physical collaterals as the SHG itself is a
social collateral or collateral substitute.
During visits to SHGs, the branch managers may examine the following aspects:
a. Primary purpose for which the Group has been formed.
b. Size of the group, aspects of composition, social and economic background of the
members, etc.

c. The style of functioning of the group, periodicity and amount of savings, periodicity
of meetings, nature of discussions and system of utilisation of savings.
d. Lending norms like rate of interest, recovery, size of loan, etc.
How Cooperatives can benefit from SHGs / Microfinance?
Self Help Groups can act as extended arms of the bank for reaching the clients. It is a
very cost effective way of covering the excluded populations and enroll them as business
clients. Further, some of the banks are using SHGs in their recovery efforts, deposit
mobilization and also in technology transfer related areas. Some of the CCBs in the
country had totally changed their business plan and had turned around with the SHG
Swarnajayanti Gram Swarozgar Yojana (SGSY)

The Government of India launched 'Swarnjayanti Gram SwarozgarYojana' (SGSY)

programme with effect from 01 April 1999 by restructuring various poverty alleviation
programmes. The objective of SGSY is to bring every assisted family above the poverty
line in three years by providing them income generating assets through a mix of bank
credit and Govt. subsidy. SGSY is a subsidy linked credit programme. Under SGSY, the
beneficiaries known as SWAROZGARIS, can either be individuals or groups. SGSY lays
special emphasis on the group approach, under which the rural poor are to be organised
into SHGs. In both the cases, the list of Below Poverty Line (BPL) households identified
through BPL census duly approved by the Gram Sabha will form the basis for assistance
to the Swarozgaris under SGSY.
Financing Tenant Farmers and Oral Lessees - Joint Liability Group Approach
General Features of JLG
a. It is an informal group comprising 4 to 10 members.
b. The JLG is primarily a credit group and savings by the JLG members is voluntary.
c. Each member will be jointly and severally liable for repayment of loans taken by
all individuals in the group.

d. The groups shall be organised by the like-minded farmers and not imposed by the
Bank or others.
e. Groups shall comprise members of same economic status and preferably running
similar farm related activities.

f. The farmers joining the group should be cultivating lands in the same village or in
a contiguous area and knows each other well and has interest and mutual trust to
continue as group members.
g. They should be engaged in agriculture and farm related activities for a period of
not less than one year in the area of operation of the Branch.
h. Only one member from a family should be included in the group.
Members may be encouraged to meet at a common place on a monthly basis to discuss
about common problems, the improved package of practices and other matters related to
farming & voluntarily contribute a small saving, which may be deposited in the group
account to develop a corpus fund.

a. To augment flow of credit to tenant farmers cultivating land either as oral lessees
or sharecroppers and small farmers, who do not have proper title to their land
holding, through formation and financing Joint Liability Groups (JLGs).

b. To extend collateral free loans to target clients through JLG mechanism.

c. To build mutual trust and confidence between banks and tenant farmers and
among group members.
Financing Model
a. Group would be eligible for accessing individual loans from the bank.
b. All members should jointly execute Joint Liability Agreement making each member
jointly and severally liable for repayment of loans taken by the individuals.
c. There has to be mutual agreement and consensus among all members about the
amount of individual liability. For this purpose, group has to submit a resolution
along with details of individual loans required by each member, as per MicroCredit Plan (MCP) signed by all the members.
d. Branch has to assess the credit requirement based on the extent of land
cultivated, crops grown, scale of finance, and credit absorption capacity of the
individuals in the group.
Purposes for which credit can be extended under the scheme
a. To meet the crop production requirements as per Micro-Credit Plan (MCP) of the
b. Other need based credit to meet the expenses, contingent to cultivation of crop.

c. Maximum ceiling: Rs. 2.50 lakh per group with a ceiling of Rs. 25000/- per
member including a limit of Rs. 2500/- for meeting the expenses contingent to
crop production.

d. Rate of interest: As applicable for short term crop production loans. 7.0% per
annum till the interest subvention scheme of GOI is in force and as per normal
rate applicable to such type of advances afterwards.

e. Repayment period: Repayment shall be fixed based on the crops grown and
possible time of harvest with some leverage for marketing and realization of
Individual approach:
To extend collateral free loans to tenant farmers / oral lessees / share croppers
individually, under the following circumstances:


Farmers cultivating lands under registered tenancy rights.


Farmers cultivating lands without registered tenancy rights, but their names
appear as cultivators in the land records.


Farmers cultivating lands as oral lessees and land owner is ready to join the
transaction as co-borrower.


Farmers cultivating lands as oral lessees, but land owner is not ready to join the
transaction as co-borrower.

Financing Model

a. In respect of the first three categories, tenant farmers will be financed by obtaining
registered tenancy deeds, or records of rights as a proof of cultivation, or joining of
land-owner to the transaction, as the case may be.
b. In the case of fourth category, where there is neither documentary proof of
cultivation nor the land owner willing to join the loan transaction as co-borrower,
branches shall adopt the following approach to extend need based credit.


A letter from Revenue Officials / Village Pradhan / Village Panchayat or

any Govt. Officials, confirming cultivation of lands by the applicant as
tenant farmer, shall be obtained and kept as record.


In case the tenant farmer is not in a position to produce the letter as

above, he may explore the possibility of giving a creditworthy third party
guarantee, who is a land holder as guarantor.


In case the tenant farmer is not in a position to comply with the above, the
Branch Manager shall make local enquiries so as to establish that the
applicant tenant farmer is a true cultivator of the land.

Purposes for which credit can be extended under the scheme

a. To meet the crop production requirements as per scale of finance and other need
based credit to meet the expenses, contingent to cultivation of crop.

b. To meet the investment credit requirements in any allied activity like dairy / sheep
rearing etc. or a non-farm activity in which the applicant has the requisite skill. This
shall be a separate loan in addition to the crop loan / KCC to be extended to the
tenant farmer, encouraging him to take up an alternate income generating activity.
Quantum of Loan

a. Quantum of loan: Quantum of loan shall be decided based on the crops to be

cultivated and scale of finance for such crops and a small component for meeting
the contingencies related to cultivation of crops. Some additional loan component
towards alternate income generating activity, as per need.

b. Maximum ceiling: Rs. 25000/- per member including a limit of Rs. 2500/- towards
consumption expenses.
Rate of interest

a. For short term crop production loans: @ 7.0% per annum till the interest
subvention scheme of GOI is in force and as per normal rate applicable to such
type of advances afterwards.
b. For income generating activities under allied activities / non-farm sector: As per
extant guidelines.
Financing of JLGs of Micro Entrepreneurs / Artisans in NFS
On the lines of JLGs of Small / Medium Farmers / Tenant / Oral Lesses and Share
Croppers, this scheme of financing of JLGs pursuing NFS activities has been formulated.
The objectives of the scheme is to augment credit flow to micro entrepreneurs, artisans,
individuals engaged in rural non-farm activities; to serve as collateral substitute for loans;
to build mutual trust and confidence between the bank and the customers; to minimize
the risks in the loan portfolio for the banks through group approach and to provide
sustainable livelihood opportunities to vulnerable section through JLG mechanism. The
general features of JLG, criteria for membership, financing models, execution of loan
agreement etc., are same as that of JLG of farmers. The quantum of loans would be
assessed based on the credit requirement based on the product / enterprise / activity to
be undertaken and the credit absorption capacity of the individual.
Financing of Handloom Weaver Groups
The scheme was evolved for implementation based on the experience gained in
implementation of the pilot project on Joint Liability Group approach. The objectives of
the scheme are: to augment flow of credit to handloom weavers outside the cooperative
fold by organizing them into handloom weavers groups on the lines of joint liability
groups; to extend hassle free loans to target clients through group mechanism; to build
mutual trust and confidence between banks and handloom weavers. A Handloom
Weavers Group (HWG) is an informal group of weavers comprising preferably of 5 to 10
individuals coming together for the purposes of availing bank loan either singly or through
the group mechanism against mutual guarantee. The general features of HWG, criteria
for membership, financing models, execution of loan agreement etc., are same as that of
JLG of farmers. The credit package for HWGs is flexible one which includes all credit
needs such as production, investment and consumption needs of members. The
quantum of loan would be assessed based on the credit requirement based on the
product / enterprise / activity to be undertaken and the credit absorption capacity of the
individual.subject to a maximum of Rs.50,000/- per individual initially under Model A and
Rs. 2 lakh for group of 5 members and Rs. 5 lakh for groups of 10 in Model B. The limit
may be enhanced subsequently based on the groups performance in credit management.

Financing of Master Weavers (MWs)

The scheme aims at augmenting flow of credit to Master Weavers, building mutual trust
and confidence between them & banks, bringing about recognition and credibility to their
activities and relationship with individual handloom weaver and to help enhance real
wages and other benefits of weavers so as to attain their sustainable livelihood and socioeconomic development.
General features/criteria for selection of Master Weavers
(1) He should have previous weaving experience.
(2) He should be employing weavers on wage basis on own/hired looms and










(yarn/dyes/chemicals) supply, designing and other services like cash advance for
meeting weavers' urgent needs.
(3) The weavers engaged by him should be mainly from unorganised sector, i.e.

outside the cooperative fold. Members of non-viable and defunct PWCS and
weavers in areas of weak cooperative credit structure could also be covered
under the scheme.
(4) The MW should be engaged in production and marketing of cloth and he should

not be functioning only as a trader who merely procures finished goods and sells
(5) He should not in any way be directly associated as functionary of PWCS.
(6) He should not be a defaulter to any other formal financial institution.
(7) The weavers employed by MW should preferably be residing and operating in the

same village/compact area . They should have been engaged in weaving and
other related activities for not less than one year.
Purpose/type of loan
The credit package for MW will be flexible. All credit needs such as production,
investment, marketing and consumption needs may be taken into account. The
consumption component in the package is exclusively to help MW in meeting
consumption needs of weavers on his rolls. Banks may provide support by way of cash
credit, short-term or term loans (MT/LT) depending upon the purpose with varying
repayment periods or an enterprise loan covering different purposes and with appropriate
repayment period.
Loan limit

The loan limit for a MW would depend upon project proposed and other factors i.e.., No.
of weavers engaged/to be engaged by him, No. of looms employed/to be employed, type
and quality of cloth produced, connected support services rendered by him including
marketing infrastructure, etc. The working capital component may be assessed with
reference to either Per Loom Scales of Finance (SoF) for various cloth varieties
fixed/recommended by the State Level Standing Committee (SLSC) or Anticipated Value
of Production (AP) on MWs / all Weavers A/c for the year (AP may be worked out
assuming a reasonable increase at not exceeding 20% over previous years production or
average of last 3 years production, whichever is higher). In the latter case, working
capital may be assessed at 50% of anticipated production worked out. The term loan
needs may be assessed based on the technology of weaving (pit loom, frame loom,
jacquard etc. or any upgraded and proven variety), pre-loom/post-loom accessories to be
purchased / made, workshed and marketing infrastructure such as sales outlets, delivery
vehicles, storage facilities, etc. The consumption needs of a weaver may have to be
assessed carefully and it should not be more than 15 to 20% of the working capital.
Diversification in Farm Sector
Diversification in agriculture can be broadly defined as producing increased number of
agricultural commodities. Diversification becomes necessary for developing countries
since growing of basic staples such as cereals alone cannot support the economic
development notwithstanding the need to ensure food security to the people. In essence,
diversification to commercial crops/commodities becomes an essential strategy that can
increase income levels in agriculture, reduce risks of crop failures and earn foreign
exchange. Further, diversification can be designed to help poverty alleviation,
employment generation and environmental conservation.
In the field of agriculture, diversification can be thought of in encouraging farmers to take
up cultivation of hybrid varieties of crops rather than the traditional ones. For example,
Hybrid paddy which needs approximately Rs. 8000 per acre as cost of cultivation, would
yield around 10 tonnes which is almost four times the normal yield of the paddy crop.
Farmer therefore, will be able to make good money out of this activity and at the same
time bank may be able to deploy more loan to the same activity. In this way, many other
crops like cotton, oilseeds, tomato and others have got hybrid seeds evolved for the
purpose and farmers are ready to take up the cultivation but credit being the constraint
are taking up their cultivation in a big way.

In case of Horticulture, Cooperative banks stake in its development is very low and many
of the CCBs had never given a thought to finance horticulture in a big way despite the
encouragement being given by GOI under the mission mode of National Horticulture
Mission (NHM). Under the NHM, GOI envisages to double the production of fruits and
vegetables to 300 million tons from the existing 140 million tons by the year 2012. If the
mission objective has to be achieved, investments need to be made in a big way in the
horticulture development and the role of Cooperative Banks so far in promoting these
activities is abysmal. There are many horticulture areas where banks can lend and at the
same time increase the prosperity of the farmers like lending to fruit orchards such as
mango, banana, grapes, citrus fruits, strawberry, etc. Of late, many scientific revolutions
have taken place in the cultivation of horticulture crops and a new technique for high
density plantation has come. In this High Density Plantation (HDP), the same variety of
the fruit crop will be cultivated but the density of crop will go up by two / three times than
the traditional ones which simultaneously hikes the unit cost for the activity. In the normal
traditional plantation, if the unit cost for mango is around Rs. 10,000 per acre, the unit
cost for HDP works out to Rs. 90,000 per acre. By promoting such activities, the banks
are not only increasing the credit portfolio but are also helping to generate substantial
quantities of horticulture produce which may in turn give scope for promotion of
processed industries and also other ancillary activities like cold storage, transportation,
etc in the area. All these new activities that will come around this principal activity of
horticulture would again give a great scope for the banks to increase their lending. Under
NHM and also in AMI Programme, subsidies are available to take up activities and the
banks should be able to promote these activities so that farmers and the area will get
substantial investments which may lead to overall prosperity.
Of late, there is a surge in demand for vegetables and the cultivation of vegetables is
being taken up mostly by borrowing money from moneylenders. Going by the quantum of
vegetables being cultivated in the country i.e. 90 million tons every year, the estimated
credit requirement for producing such a volume would be stupendous since banks and
specifically Cooperative banks are not great players in extending credit. Vegetable
cultivation may have to be looked into as business potential awaiting and also as a great
profit churner by Co-operatives which otherwise is being financed by moneylenders at
very high cost. Further, the demand for exotic vegetables and vegetables produced under
controlled conditions is rising which again needs a sizeable investment from the banking
sector. It is, therefore, necessary for the cooperative banks to look into this portfolio with
clear insight so as to make a profitable diversification.

In case of floriculture, the country produces substantial quantities of flowers for domestic
consumption, extraction of essential oils and also manufacture of pesticides (Pyrethrums)
Hence, the Cooperative banks may look into this portfolio for diversification.
Agro and Farm Forestry
Demand for forest based raw materials for industrial purposes is growing at fast pace and
that availability of the same from the traditional forest are dwindling day by day forcing the
industry to look into avenues of getting the forest species cultivated on farm land to
ensure continuous raw material supply. In this direction, good work has been done by
various Government agencies as well as private forestry companies to promote various
forestry species and the most important among them are Eucalyptus, Poplar, Bamboo,
Acacia, etc,. With the availability of clonal multiplication as well as tissue culture
technologies, the cultivation of forestry species have become very remunerative and the
gestation period of the crops had also come down. Many farmers in some of the states
are making good profit by cultivating clonal Eucalyptus, Tissue cultured bamboo, etc.
Moreover, these crops can be cultivated on degraded farm lands which are needed to be
put under green cover immediately, to ensure arresting of further degradation, ensuring
income to the land owners and continuous supply of raw materials to the industry.
Cooperative Banks may look into the option of extending finance to the forestry crops in a
big way. Forestry crops can be cultivated either as block plantations or they can even be
cultivated on bunds and in both the systems bankers are going to make brisk business
which again will lead to successful diversification of their portfolio.
Bio-fuels have become the talk of the town and prominent crops among them are
Jatropha and Pongamia. Oil extracted from both the crops is used for production of biodiesel after subjecting it to esterification.

Due to the produce price already fixed by

Government of India, growing of these crops proved to be profitable to the farmers

possessing marginal and sub-marginal lands which are otherwise not fit for cultivation of
regular crops. Keeping in view the vast stretches of degraded/marginal and sub-marginal
lands available in the service area of the Cooperatives, an effort should be made to make
a roster of such lands and try to promote these crops in a mission mode. CCBs and
PACS should take active interest in bringing such lands under green cover and this effort
would lead to deepening of credit flow in those areas.
Medicinal and Aromatic Plants

The demand for medicinal and aromatic plants is in the range of Rs. 3,00,000 crores and
is growing @ 15% every year. Fortunately India is one such country which can produce
almost all the medicinal and aromatic plants. However, lending done in this area is still
meagre due to unfamiliarity of the bankers with the concept. There are more than 30
varieties of medicinal crops and another 8-10 aromatic plants which can be successfully
cultivated in the country and demands for their products is on the rise. Another special
feature of these medicinal and aromatic plants is the ability to absorb substantial amount
of credit which in turn may give considerable scope for increasing credit volume to the
banks. Returns from the crops are also good and marketing channels have opened up at
many places and therefore, the Cooperative Banks may look into this area with all
seriousness and find out avenues to forge links with consuming industry and finance on a
tri-partite agreement mode. Cultivation of these crops also entails the farmers for capital
investment subsidy and banks can be sure of getting definite repayments because of
back-ended nature of subsidy being given by National Medicinal Plants Board. Further,
extraction of the alkaloids both from Medicinal and aromatic plants needs investments in
processing plants / extraction units at the local level which again opens up scope for the
bank to increase their lending in the agro-processing / non-farm sector activities.
Animal Husbandry
Though India is ranked number one in milk production in the world, the scope for the
activity is still very high because of the growing population. Dairy activity is being
promoted by Cooperatives for quite some time, but their lending is mostly confined to one
or two animal units only. Of late, dairying has become very profitable and is emerging as
a stand alone activity without linking it to any agricultural activity. In many places, farmers
with 5 to 10 acres of land are taking up dairy as a main activity and are cultivating grass
and legumes for the dairy activity exclusively without going for cultivation of other crops.
Return on the investment from the dairy activity is substantial and promoting Mini dairy
units of 10 to 20 animals is most profitable for a Cooperative bank to diversify into.

Poultry is another major activity which absorbs substantial amount of credit from the
banking system. Giving loans to big units is well known but the recent initiative of the
Veterinary Department of UP proved that backyard rearing of poultry birds (100 to 200
birds) by small and marginal farmers and people belonging to SC / ST categories can
give substantial returns to those people. In view of the quick as well as definite returns

the poor and marginal segments of the population are getting from this activity,
Cooperative Banks may consider to diversify into this activity in a big way by giving small
loans for backyard poultry to a large number of customers.
Diversification towards secondary sector
Of late, diversification into secondary and tertiary sectors has been taking place in the
rural economy. Rural non-farm sector, including, agro-processing is being promoted as
this sector holds promise for absorption of surplus labour from agriculture and for
improving living standards of the rural poor. Over a period of time, there has been an
expansion, accompanied by diversification, in the consumption basket. Consumption of
agro-processed commodities has assumed importance among different income groups.
Coinciding with such changes in consumption pattern, there has been an accelerated
growth in the output of several agro-based industries in recent times.
Diversification through New Clientele
Financial Inclusion
By financial inclusion, we mean the provision of affordable financial services, viz., access
to payments and remittance facilities, savings, loans and insurance services by the formal
financial system to those who tend to be excluded. The formal financial system has to
recognise the huge business potential coming from the unmet demand for financial
services from those who normally tend to be excluded. The focus on financial inclusion
comes from the recognition that financial inclusion has several externalities, which can be
exploited to the mutual advantage of those excluded, the banking system and society at
large. Banks need to understand the markets and develop products suited to the
clientele. Financial inclusion has to be viewed as a business strategy for growth and
banks need to position themselves accordingly.
Basic "no frills" bank accounts
In many banks, the minimum balance requirement and charges levied, although
accompanied by a number of free facilities, deter a sizeable section of population from
opening / maintaining bank accounts. At the first stage, there is a need for lowering the
entry barriers to the banking system and simplifying procedures. Thanks to developments
in micro finance, one of the myths held earlier by the banking system that the poor cannot
save, has been demolished. Experience has shown that the poor can and do save, may
be by way of thrift, and all they need is an appropriate product and access to the banking
system. Holding a savings product to a substantial extent reduces financial exclusion.

Keeping in view the need for the banking system to take urgent steps to bring about
financial inclusion in the country, the Reserve Bank of India exhorted banks to make
available a basic banking no frills account either with nil or very low balances as well as
charges that would make such accounts accessible to vast sections of the population.
The nature and number of transactions in such accounts would be restricted and would
be made known to customers in advance in a transparent manner.
A basic 'no frill' account is just the beginning of a relationship and can pave the way to the
customer availing of a variety of savings products and loan products for consumption,
housing etc. The account can be used for sanctioning small overdraft facilities and
making small value remittances at low cost. The same banking account can also be used
by State Governments to provide social security services like health and calamity
insurance under various schemes for the disadvantaged. Having such social security
cover makes the financing of such persons less risky from the banks point of view and
they can be financed for various purposes. Further, holders of the no-frills accounts who
would be beneficiaries of the Employment Guarantee Scheme of the Government of
India, can also be customers of banks over a longer time horizon.
General Credit cards (GCC)
It is almost a clich that rural credit should adhere to the basic requirements of timeliness,
adequacy and hassle-free delivery, apart from taking care of the financial needs of the
customer in a holistic manner, including consumption credit. To address these issues,
several 'credit card' schemes have been devised and implemented by banks over the
past. Such schemes have the flexibility of use and they fulfill the above requirements to a
substantial extent. But all these schemes have so far been activity-specific, i.e. for
farmers, artisans etc. The latest in the line is the General Credit Card (GCC) which does
not target any specific functional group, but has the potential to address the credit needs
of persons with small means having some income-generating activity, without bothering
so much about the nature of the activity. Banks have flexibility in fixing the limit based on
the assessment of income and cash flow of the entire household. The borrowers are
eligible for availment of the credit facilities provided under GCC as per their requirement
without any insistence on security and the purpose or end-use of the credit.
Financial Inclusion by Extension of Banking Services - Use of Business Facilitators
and Correspondents
With the objective of ensuring a greater financial inclusion and increasing the outreach of
the banking sector, the RBI has decided to enable banks to use the services of
NGOs/SHGs, micro-finance institutions (MFLS) and other civil society organisations

(CSOs) as intermediaries in providing financial and banking services through the use of
business facilitator and correspondent models as indicated below.
a. Business Facilitator Model : Eligible Entities and Scope of Activities
Under the Business Facilitator model, banks may use intermediaries, such as NGOs /
Farmers Club, cooperatives, community-based organisations, IT enabled rural outlets of
corporate entities, post offices, insurance agents, well functioning Panchayats, village
knowledge centres, agri clinics / agri business centers, Krishi Vigyan Kendras and
KVIC/KVIB units, depending on the comfort level of the bank, for providing facilitation
service. Such services may include identification of borrowers and fitment of activities,
collection and preliminary processing of loan applications including verification of primary
information/data, creating awareness about savings and other products and education
and advice on managing money and debt counseling, processing and submission of
applications to banks, promotion and nurturing self-help groups/joint liability groups, postsanction monitoring, monitoring and hand holding of self help groups/joint liability
groups/credit groups / others, follow up for recovery etc. As these services are not
intended to involve the conduct of banking business by business facilitators, no approval
is required from RBI for using the above intermediaries for facilitation of the services
indicated above.
b. Business Correspondent Model : Eligible Entities and Scope of Activities

Under the Business Correspondent model, NGOs / MFIs set up under the
Societies / Trust Acts, societies registered under the Mutually Aided Cooperative
Societies Acts or the Cooperative Societies Acts of States, registered NBFCs not
accepting public deposits and post offices may act as business correspondents.


Banks may give wide publicity in the locality about the intermediary engaged by












In addition to activities listed under the business facilitator model, the scope of
activities to be undertaken by the business correspondents will include disbursal
of small value credit; recovery of principal/collection of interest; collection of small
value deposits, sale of micro-insurance/mutual fund products/pension products /
other third party products, receipt and delivery of small value remittances / other
payment instruments.


The activities undertaken by the business correspondents would be within the

normal course of the banks banking business, but conducted, through the entities
indicated above at places other than the bank premises.


Banks may pay a reasonable commission/fee to the business facilitators /

Correspondents, the rate and quantum of which may be reviewed periodically.

NABARD's Farmers' Club Programme

Farmers Clubs are grassroots level informal forums. Such Clubs are organised by rural
branches of banks with the support and financial assistance of NABARD for the mutual
benefit of the banks concerned and rural people. The broad functions of the Farmers
Clubs would be to:

coordinate with banks to ensure credit flow among its members and forge better
bank borrower relationship,

organise minimum one meeting per month and depending upon the need, there
would be 2-3 meetings per month.

interface with subject matter specialists in the various fields of agriculture and
allied activities etc., extension personnel of Agriculture Universities, Development
Departments and other related agencies for technical know how upgradation.

liaison with Corporate input suppliers to purchase bulk inputs on behalf of


organise/facilitate joint activities like value addition, processing, collective farm

produce marketing, etc.; for the benefit of members.

undertake socio-economic developmental activities like community works,

education, health, environment and natural resource management etc.

What is Farmers' Club Programme?

Farmers Club Programme, was launched by NABARD to propagate the five principles of
Development through Credit.
The five principles are:

Credit must be used in accordance with the most suitable methods of science and

The terms and conditions of credit must be fully respected.

Work must be done with skill so as to increase production and productivity.

A part of the additional income created by credit must be saved.

Loan installments must be repaid in time and regularly so as to recycle credit.

Uses of Farmers' Club to Bank Branch

The formation of Farmers Club leads to better Banker-Borrower relationship. The
Farmers Clubs help the banks in mobilisation of deposits, Increase in the credit flow and

diversification of lending, generation of new business avenues, increase in the recoveries

and decline in NPAs, reduction in the transaction cost etc.
Who can organise Farmers' Clubs ?
Any bank operating in rural area, including Cooperative Banks can sponsor and organise
Farmers Clubs. They can hire services of NGOs/ KVKs /Agriculture Universities, if
required, for promotion of the clubs.
Set Up
Farmers Club is an informal forum in the villages. It can be promoted in a village/ cluster
of villages, generally in the Operational Area of a Bank. While Farmers Club should have
minimum of 10 members, no upper limit in the membership is envisaged. Every Club
would have two office bearers - One 'Chief Coordinator' and the other 'Associate
Coordinator'. The office bearers would be elected by Club Members on a democratic
basis for a term of two years. The office bearers should be residents of the area of the
operation of the club. No NGO representative can be office bearer of the club. The main
functions of the office bearers would be convening meetings, arranging meetings with
experts, maintenance of Books of Accounts, Coordination with Bank, Line Departments of
the State Governments, maintaining proper liaison with Bank
All villagers except willful defaulters can become members of the club. The club must
make endeavour to raise their own resources by way of contribution from members,
undertaking certain business services such as bulk procurement of inputs and collective
marketing of agricultural produce, etc.



Banks optimizes utilization of deposits by deploying funds for developmental activities

and productive purposes through credit creation process. Deposit mobilization & Credit
deployment constitute the core of banking activities and substantial portion of expenditure
and income are associated with them. In the case of deposits, baring few stray instances
of operational risks linked to the system and human failure culminating in fraud, forgeries
& loss, there may not be anything very alarming. But credit portfolio is the real dynamic
activity that requires close monitoring and continuous management.
It is very much essential to conduct credit investigation before taking up a proposal for
consideration. This preliminary study should lead to valuable information on borrowers
integrity, honesty, reliability, credit worthiness, management competency, expertise,
associate concern, guarantor, etc. A due diligence report shall invariably accompany the
credit proposal evaluation. Banks have to strictly adhere to the KYC (Know Your
Customer) norms to ensure bonafide identification of borrowers and should also follow
the prescribed Fair Practice Code on Lenders Liability, by evolving their own best
practices to be followed by the field functionaries, so as to avoid complaints from
customer at a later date.
Principles of sound lending
Lending has always been one of the most important functions of banks. Banks have
traditionally viewed advances from Safety, Liquidity, Profitability and Security. Banks have
also included National interest in the lending policy. Details of each item are discussed
SAFETY: Every banker, though he is interested on profits, is also concerned about the
safety of the funds lent by him. For this purpose he tries to minimize his risks. This he can
do in two ways:
a. By channellising his funds into different fields such as advances to trade, industry,
agriculture, professionals etc. and also by having different sizes of accounts. He
would normally prefer to give a larger number of small advances rather than a
small number of large advances so that risk in case of failure is reduced. He
would also prefer not to concentrate on any particular type of industry or trade.
Thus by a calculated diversification of advances he spreads his risks and
achieves a large measure of safety.
b. While studying each proposal for an advance carefully, he keeps in mind that an
ideal advance as one which is granted to a reliable customer for an approved
purpose in which the customer has adequate experience, safe in the knowledge

that the money will be used to advantage and repayment will be made within a
reasonable period from the income generated from the activity undertaken by him
from the advance. Thus while considering the proposal the bank ensures that:
(i)The purpose of the loan is not for speculation, or hoarding or for anti-social,
illegal or non productive purposes. It should not be prohibited or restricted by the
RBI regulations (ii) the proposal is technically, economically and financially viable.
(iii) The borrower has legal contractual capacity. He has the will as well as the
capacity to repay. His bonafides should never be in doubt. He also should have a
financial stake in the business.
LIQUIDITY: Normally banks want mobility of funds and keeping this in view and maturity
pattern of advances, funds are deployed for advances. Long term advances are given
only when the banks are able to properly appraise the projects.
PROFITABILITY: Banks as commercial institutions have always been interested in
deploying their funds profitably. Their resources come from the deposits they have
received from their customers and on which they have to pay interest. They Endeavour to
meet this interest and other establishment expenses from the interest they charge from
advances. Hence, while lending, the interest spread which banks earn is one of the
important factors.
SECURITY: Banks while making advances ensures that advances are backed by
securities that the borrowers are able to provide. Bankers expect the security offered has
the characteristics of marketability, assess ability of value, stability of price and
Credit Appraisal- Project approach
A number of reasons have been identified as the causes of the gap between project
performance as projected at the time of appraisal and the ultimate outcome. The chief
among them is poor appraisal of projects and absence of monitoring. Another important
cause of poor performance of projects has been the delay in implementation. If necessary
spadework in terms of preliminary studies and detailed formulation of the project is not
done, many surprises and shocks are likely to spring on the way. For project planning and
control, several network techniques like PERT (Programme Evaluation and Review
Technique) and CPM (Critical Path Method) are available. Besides the network
techniques, it is advisable to undertake a SWOT analysis to understand clearly the
strengths, weaknesses, opportunities and threats of the projects. Another cause of poor

performance has been the inadequacy of operating funds that were either assumed or
planned at the time of appraisal but were in the end not forthcoming.
The likelihood of any of these types of failure can be significantly reduced, if not
eliminated, if the appraisal of these investments is carried out in a systematic manner
which does not ignore real world economic uncertainties and is focused on the long term
financial and institutional sustainability of the project. To attain this, the financial,
economic and risk appraisals of the projects need to be carried out to assess the impact
of the degree of uncertainty of the key financial and economic variables.

To prevent the sanction of unviable projects

To ensure that good projects are not rejected

To determine whether the various components of the project are consistent

To assess the source and magnitude of the risks

To determine how to reduce risks and whether they are worth bearing

To ensure prompt recovery of loan


(i) Pre-sanction appraisal of the borrower

Pre-sanction appraisal of the borrower will have to be undertaken focusing on his income
stream, economic status, the assets already owned by him, his credibility, his capability
for taking up the project, his integrity, etc.
(ii) Commercial viability
Whatever is produced by a farmer should be marketable at a price that should ensure the
viability of the project and lack of marketing arrangement has been identified as one of
the main reasons for project failure. As such, marketing arrangements will have to be
given primary importance by the financing institution while appraising agricultural or
industrial projects. Various studies have shown that fruits and vegetable units catering to
the local markets are more successful than units depending on foreign market. It is
difficult to capture foreign market due to stiff competition from other countries and to
adhere to strict hygienic standards. It will take some more time for our units to comply
with international quality specifications and to compete in foreign markets. These aspects
need to be kept in view while appraising projects.

(iii) Technical appraisal of projects

(a) Location: The locational advantages viz. availability of good infrastructural facilities
like electric power, good network of communication facilities, transport facilities for quick
transport of inputs and produce, skilled workers, nearness to markets, availability of
Government subsidy, etc. need to be evaluated.
(b) Availability and source of Irrigation: Depending on the water requirement of the
crop proposed to be raised, the banker should satisfy himself of the availability of
sufficient irrigation facilities and the suitability of the water for the cultivation
(c) Availability of Seed/ Planting Material: Availability of good quality Seed/ Planting
Material at reasonable prices may also be ensured.
(d) Farm Machineries and equipments: The type of machineries and equipments and
the sources of their supply need to be analyzed carefully. Due consideration may also be
given for the after sales service.
(e) Environmental Aspects: In the case of projects especially under agriculture allied
activities, environmental aspects should also be taken care of.
Financial appraisal of projects
An investment decision after a certain point of time is irreversible. The decision, therefore,
requires careful planning and budgeting from the point of view of the farmer and scientific
appraisal by the banker. A project should earn sufficient income that should at least be
equal to the cost of funds invested in it. As such, before taking up financial appraisal of
any project, it is pertinent to ascertain the cost of capital invested in it.
Cost of capital: Cost of capital is the minimum return the project should give. It is the
weighted arithmetic average of the cost of various sources of long- term finance invested
in the project. Cost of capital is also the hurdle rate in capital budgeting. If the return on
the project exceeds its cost of capital, the earning of the farmer/entrepreneur is
enhanced. Suppose that in a project the farmer/entrepreneur invests equity bearing an
opportunity cost of 15% and debt costing 16% p.a. If the proportions in which equity and
debt are used are respectively 25% and 75%, the cost of capital works out to 15.75% as

Cost of capital = Proportion of equity x opportunity cost of equity +

Proportion of debt x cost of debt
= 0.25 x 15% + 0.75 x 16%
= 3.75% + 12.00%
= 15.75%
[It may please be noted that the cost of debt in the case of a taxable project = Rate of
interest + tax rate]
Suppose that the farmer/entrepreneur has to spend about 2% of the loan amount on
execution of mortgage documents and other expenses connected with the loan. For a
loan of Rs.5.00 lakh repayable over a period of 5 years, the net proceeds available to him
for investment would be Rs.4.90 lakh only. In this situation, the cost of debt will be slightly
higher as worked out hereunder:
Annual interest + Expenditure for availing the loan
Cost of debt = -----------------------------------------------------------------Net proceeds
= 0.80 + 0.02
= 16.70 %
Cost of capital = 0.25 x 15% + 0.75 x 16.70%
= 3.75 % + 12.50%
= 16.25 %
Treatment of taxes and subsidies: Subsidies and taxes are transfer payments. As such,
the financing bank need not take cognizance of subsidies and taxes while appraising
projects. However, in the case of taxable projects the financing bank is required to take
into account the tax liability while working out the repayment schedule, as tax is also a
cost for the entrepreneur.
Costs and Benefits: Having determined the cost of capital or the hurdle rate, the costs
and benefits of the project must be estimated. Costs and benefits must be measured in
terms of cash flows- costs are cash outflows and benefits are cash inflows.
Investment Appraisal Criteria
Once the stream of costs and benefits of an investment project are defined, the next
logical question to ask is: Is the investment project worthwhile? A wide range of criterion
has been suggested to judge the worth whileness of investment projects. They are
classified into two broad categories: traditional method and discounting criteria.

Traditional or non-discounting criteria


Payback Period


Accounting Rate of Return

(ii) Discounted Cash Flow (DCF) Criteria


Net Present Value (NPV)


Benefit Cost Ratio (B.C. Ratio) or Profitability Index


Internal Rate of Return (IRR).

As the Payback period and the Accounting Rate of Return do not take into account the
time value of money, the Discounted Cash Flow (DCF) Technique has been accepted
universally as the most scientific method to do financial appraisal of investment projects.
The DCF criterion has three techniques namely, Net Present Value (NPV), Benefit-Cost
Ratio (B-C Ratio) and Internal Rate of Return (IRR). DCF technique clearly recognizes
the time value of money. It is based on the premise that a rupee today is more valuable
than a rupee a year hence. An investment of one rupee today would grow to 1+r a year
hence (r is the rate of return earned on the investment). In an inflationary period, a rupee
today represents a greater real purchasing power than a rupee a year hence.
Net Present Value (NPV)
NPV is defined as the present value of the project cash flow discounted at the firms cost
of capital or opportunity cost of capital minus the discounted value of capital outlay. The
NPV represents the net benefit over and above the compensation for time and risk.
Hence, accept the project if the NPV is positive and reject the project if the NPV is
negative. The NPV method is based on the assumption that the immediate cash inflows
of the project are reinvested at a rate of return equal to the cost of capital of the project.
The NPV of a conventional project decreases if the discount rate increases.
Calculate NPV for a dairy project that initially costs Rs.16000/- and generates year-end
cash flows of Rs.4000/-, 6000/-, 6000/-, 6000/- and 6000/- through five years. The
borrowers contribution is 15% of the investment outlay and the balance 85% is bank
loan, which carries a rate of interest of 14% p.a. The opportunity cost of beneficiarys
margin money is 15% p.a.
Cost of capital = 0.15 x 15% + 0.85 x 14%
= 2.25% + 11.90%
= 14.15%

Cash inflows (Rs)


D.F @15%

Present value (Rs)




Less : investment outlay:
NPV : 2378


As the NPV at 15% discount factor (greater than the cost of capital at 14.15%) is +2378,
the project is financially viable and can be accepted.
BenefitCost Ratio
Present value of benefits
Benefit-Cost Ratio (BCR) =
---------------------------------Initial investment
Calculate the Benefit-Cost Ratio of a project involving initial outlay of Rs.1.00 lakh, which
generates year-end cash inflows of Rs.25000/-, Rs.40000/- Rs.40000/- and Rs.50000/through four years. The debt-equity ratio is 3:1 and the debt carries interest rate of 16%
p.a. The opportunity cost of the promoters capital is 15%.
Cost of capital = 0.25 x 15% + 0.75 x 16%
= 3.75% + 12.00%
= 15.75%

Cash inflows (Rs)


Benefit-Cost Ratio =

D.F. @16%

Present value (Rs)

Present value of benefits : 104510
---------- = 1.04

The decision rule is: Accept the project if BCR >1. As the B.C. Ratio at 16% discount rate
(greater than the cost of capital at 15.75%) is greater than 1, the project is financially
viable and can be accepted.
Internal Rate of Return (IRR)
The Internal Rate of Return of a project is that discount rate which makes its net present
value equal to zero. The calculation of the discount rate involves a process of trial and
error. As we go on calculating the net present value for higher values of discount rates in
multiples of 5%, at a particular discount rate we will find that the net present value is
negative. In other words, if the NPV for the discount rate of 25% is positive and that for
the discount rate of 30% is negative, we can infer that the exact IRR will lie in between
the discount rates of 25% and 30% which can be calculated using the following formula:

IRR = Lower discount rate + Different between the two discount rates X NPV at
lower Discount rate
--------------------------------------------------------------Absolute sum of the NPVs at both discount rates
Calculate the IRR of the project given in the previous paragraph.

Inflows (Rs)

D.F. Pesent D.F.

@ 15%

Less: Investment outlay

Net present value :
IRR = 15 + 5 x

+ 6910

@ 20%

Value (Rs)

0.833 20825
0.694 27760
- 4155

(6910 +4155)

= 15 + 5 x -------11065
= 15 + 3.12
= 18.12
As the IRR exceeds the cost of capital, which is 15.75%, the project is financially viable
and can be accepted.
Risk Analysis
The financial sector reforms have brought in a number of far-reaching changes in the
operational arena of banking. One such important dimension is risk management. Risk is
inherent in all lending decisions and elimination of risk is not at all possible. The driving
factor behind a lending decision is the expectation of return of the fund deployed with
value addition over a period of time. However, in reality often the outcome differs from the
anticipation. This has necessitated a systemic approach towards managing the risk and
risk management has emerged as the most critical element for the safe and sound
lending activity. The major risks banking institutions face in this era of financial sector
reform include credit risk, interest rate risk and project risk.

The risk analysis will provide the financing institution with a complete risk/income profile
of the project showing all the possible outcomes that could result from the decision to
lend money on a particular investment project.
Management and Manpower Assessment
It is very much essential for the financing bank to assess the managerial aspects of the
project and the capacity and experience of the farmer to implement the project or to
ensure the appointment of suitable and adequate number of personnel to match with the
type of manpower required. The manpower requirement should be realistically assessed.
Repayment schedule
The question to be answered is how much proportion of the net incremental income could
be considered as available for debt servicing? This will have to be determined after taking
into account the economic status of the borrower, his family size, his expenditure on
family maintenance, his other sources of income, his propensity to consume, the
economic life of the assets created out of the loan, the gestation period, tax liability on the
project, etc. Based on this, not more than 50 percent of the net incremental income could
be considered as repaying capacity of a small farmer. In the case of big farmers, the
repayment capacity could be higher and may go even up to 75 to 80 percent of the net
incremental income. Based on the above factors an appropriate repayment schedule for
servicing the term loan will have to be worked out. Based on the cash flow, banks may
adopt equal, equated or graded instalment method for fixing the repayment schedule.
Issues related to lending of agricultural advances
Short term loans for agricultural purposes
The loans for seasonal agricultural operations are generally advances without obtaining
any tangible security from the societies. As short term agricultural loans are made for
fixed periods, the bank should obtain time pro notes from the borrowing societies duly
signed by the persons authorised by the Managing Committee of the borrowing society
according to its bye-laws in this behalf. Their signatures should be verified from the
specimen signatures furnished with the loan applications. The pro note should clearly
indicate the amount borrowed from the bank, the rate of interest and the due date for

The society should be asked to furnish disbursement statements giving

details regarding the name of the borrowers, amounts advanced, date of disbursement,
purposes for which the loans have been made and their signatures. This statement
should be compared with the NCL statement enclosed with the loan application to

ascertain whether loans were advanced only to the extent sanctioned by the CCB earlier
and that defaulter members have not been financed.
Those banks which encourage disbursement of loans by cheques and have made the
necessary arrangements therefor should ensure that the cheques are issued by the
societies only in favour of the approved members and for the amount approved in each
case. The encashment of cheques should be carefully watched with reference to the
demand statement. The disbursement statements submitted by the societies should also
be verified by the bank's officials with the records of the societies. The loan account
ledgers should be balanced monthly and got tallied with the General Ledger balance.
Kisan Credit Card (KCC) Scheme
A scheme for issue of KCCs to farmers for uniform adoption by banks was introduced
from 1998-99. The scheme aims at provision of adequate and timely support from
banking system to the farmers for their cultivation needs including purchase agricultural
inputs such as seeds, fertilizers, pesticides, etc. The following are to be observed in
implementation of KCC:

Eligible farmers to be provided with a Kisan Credit Card and a pass book or cardcum-pass book.

The pass book to incorporate the name, address, particulars of land holding,
borrowing unit, validity period, a passport size photograph of the holder, etc.

Revolving cash credit facility involving any number of drawals and repayments
within the limit.

Limit to be fixed on the basis of operational land holding, cropping pattern and
scale of finance.

Entire production credit needs for full year plus ancillary

activities related to crop production to be considered while fixing limit.

Sub-limits may be fixed at the discretion of banks.

Card valid for 3 years subject to annual review.

As an incentive for good

performance, credit limits could be enhanced to take care of increase in costs,

change in cropping pattern, etc.

Each drawal to be repaid within a maximum period of 12 months.

Conversion/reschedulement of loans also permissible in case of damage to crops

due to natural calamities.

Security, margin, rate of interest, etc. as per RBI norms.

Operations may be through issuing branch/PACS.

Withdrawals through slips/cheques accompanied by card and passbook.

Crop loans issued under the scheme can be covered under the Rashtriya Krishi Bima
Yojana. The KCC holders as a group are also eligible for cover under Personal Accident
Insurance Scheme.

In the implementation of KCC, banks are required to ensure

extension of revolving cash credit facility and for renewal of limits, the usual formalities
are to be followed.
Term loans for agricultural purposes
The quantum of term loans to be granted to a borrower should depend on his
requirements to acquire the specified assets and repaying capacity generated thereafter.
The loans should be granted for purposes approved by NABARD. Banks have to
appraise the proposals as per the guidelines given earlier. Repayment under this
category are to be fixed depending on the type of activity and the life of asset. It is
desirable that the bank obtains separate promissory notes for the amount of each
instalment due for repayment.
Security norms for agricultural advances
The cooperative banks should not obtain collateral security by way of mortgage of land or
third party guarantee for crop loans upto Rs.25,000 where movable assets are created.
Similarly, banks should not obtain mortgage of land for term loans upto Rs.25,000 and for
farm loans upto Rs.10,000 where movable assets are created. Those loans can be
issued against charge created in favour of the society provided the administrative
arrangements for registration and enforcement of the charge are adequate and the bank
considers such security sufficient for loans of this size.

If, however, any of these

conditions is not fulfilled, loans above this limit should be issued against mortgage of land
in favour of the society. However, wherever feasible, equitable mortgage instead of
registered mortgage should be taken to save stamp duty. The bank should stipulate these
conditions while sanctioning medium term loans to the societies.
Verification of utilisation
The bank should obtain disbursement and utilisation certificate from the borrowing
societies in respect of loans issued by it. There should be adequate machinery at the
bank's level to verify independently the utilisation reported by the borrowing societies. It
is desirable that the cooperative banks should increasingly adopt the project approach
rather than sporadic or scattered lending.
Cash credits and overdrafts

A cash credit facility is granted where normally the drawing power in the account
fluctuates whereas in the case of overdraft drawing power remains static. Traditional
bankers distinguish between these terms as under:
An overdraft account starts with a credit balance in the account and later it is allowed to
run in debit, or permitted to be overdrawn. In a cash credit account drawals may be
allowed the moment a credit limit is sanctioned, without there being a credit balance to
begin with. A minimum interest clause is generally stipulated to discourage borrowers
from getting large cash credit limits sanctioned without availing of the facility.
Whenever a facility by way of cash credit or overdraft is allowed, the account should
reveal healthy fluctuations in the balances.
remain stagnant without proper reasons.

The accounts should not be allowed to

The sales and purchases of the borrower

should be properly reflected by credits and debits in the account. Before renewing the
cash credit limits, the operations in the account should be studied not only with reference
to the movement in the outstanding balance but also with reference to the credit and debit
summations thereto, vis-a-vis the quantum of purchases and sales effected by the
borrowing society as reflected by the Trading and P&L Account.
Advances against pledge/hypothecation of goods and agricultural produce
The policy and procedure to be followed for cash credit advances on a clean basis or
against the security of goods on pledge or hypothecation basis for different purposes as
per the guidelines issued by RBI/NABARD. A few important aspects of advances against
goods and agricultural produce are given below:

In the case of hypothecation advances, the ownership as well as possession

remains with the borrower whereas, in the case of pledge advances, the
possession is with the bank or its authorised agent. Thus, the control over the
security is more effective in the case of pledge advances rather than
hypothecation advances. The bank should, therefore, grant advances as far as
possible, against pledge of goods. In case hypothecation facility is to be given to
individuals, it should be allowed to parties of reputation and standing.


The bank should prescribe a list of commodities which can be accepted as

security for the bank's advances. Such list should be periodically reviewed by the
Board. For each type of commodity or goods, the bank should prescribe the
margin to be maintained and indicate wherever necessary, safeguards for storage

of goods to be observed to avoid claims against the bank for the loss that may
arise to the goods on grounds of negligence, etc.

The bank should maintain a Market Price Register and Drawing Power Register.
The market value of the goods should be ascertained periodically and drawing
power worked out after applying the stipulated margin. The drawals from the cash
credit account should always be regulated by the drawing power so worked out.

Hypothecation of goods
The bank should examine the financial position of the borrower by a scrutiny of the
balance sheet, profit and loss account, etc. and if necessary, by verification of the
relevant records. Since the security is held in the custody of the borrower, the bank
should prescribe submission of periodical stock statements by the borrower.


statements should contain full particulars such as the opening stock at the beginning of
the period, total purchases and total sales during the period, balance at the end of the
period, the market rate, total value of the goods, insurance and stock held at the various
places. The bank may prescribe submission of such statements either weekly, fortnightly
or monthly depending upon the turnover of the borrowers' business.

When such

statements are received, they should be carefully examined to ensure that commodities
other than those indicated in the sanction have not been included, the market rate is
correctly furnished and that insurance is adequate to cover the value of the goods, etc.
Further, the drawing power should be calculated from time to time and should be entered
in the drawing power register or cash credit/overdraft ledger so that the drawal from the
account could be regulated with reference to such drawing power. It should also be seen
that the total purchases and sales made during the period have been properly reflected in
debit and credit summations in the account.
The stocks should be periodically inspected by the bank's officials. The fact that such
inspections have been carried out regularly should be noted in an 'Inspection Register' to
be maintained for the purpose. The borrower may be asked to maintain a 'stock register'
so that at the time of inspection, verification of the goods will be easy. Further, the name
board of the bank indicating its charge on the goods should be prominently displayed.
This serves as a notice to the public regarding the bank's interest in the goods remaining
with the borrower.


Document means any matter expressed or described upon any substance

by means of letters, figures or marks or by more than one of these means
which are intended to be used or which may be used, for the purpose of
recording that matter."
In common usage the term 'documents' is related to written record created for the
purpose of evidence while lending the bank funds. In fact, several other records are also
documents and may prove equally useful in establishing certain rights. For example, the
account opening forms, pay-in-slips, balance confirmation letters or even a simple letter
written by the party to the Bank may help in establishing the debt or other vital facts and
may prove to be very important documents. However, in this chapter, we shall confine our
discussion to loans and advances documents only.
Documentation enables to protect the lender against persons who may prove scrupulous
later on and the initial judgment about their credibility may go wrong. From the legal point
of view, oral evidence in civil suits does not serve much purpose. Thus, documents
should definitely be taken to protect the banker against willful defaults.
Procedure for Sanction of loans
Suitable loan application form may be devised in respect of loans to individuals, firms,
etc. Similarly separate application form may be devised for loans under NFS activities.
The application when received by the bank, should be marked with the date, stamp and
entered serially in the 'Loan Application Register'. The banks should maintain separate
loan application registers for different types of agricultural and non agricultural loans.
The applications on receipt should be carefully scrutinized by the concerned loan clerk to
ensure that all the details have been filled in.

The loan application together with the

office note should be put up to the sanctioning authority either for sanction of the advance
applied for, sanction of a reduced amount or for rejection. The sanctioning authority
should indicate on the application the fact of sanction or otherwise and other terms such
as rate of interest, security to be obtained, margin, terms of repayment, etc. In case an
application is rejected, reasons therefor should also be recorded. The date and amount
of sanction should be recorded in the loan application register which should be duly
authenticated by a responsible official of the bank. When an advance is sanctioned, the
name of borrower, rate of interest, margin, if any documents taken and the validity period
of such documents, cheque series issued, if any, repayment schedule, operative
instructions, etc. should be entered in the respective personal ledger of the borrowers.
The terms and conditions of loan/advance facility sanctioned should be communicated to

the individual concerned. The banks should maintain borrower-wise register showing
details of limits sanctioned for various purposes.
After the loan is sanctioned, the borrower may be asked to execute various documents in
favour of the bank. The nature and type of documents to be executed by the borrower
will depend on the type and nature of advance granted. The bank may ordinarily obtain
the following documents:

Demand/Time promissory note


Letter of continuity in the case of cash credits and overdrafts


Letter of pledge/hypothecation, etc. creating a charge on the assets offered as



Mortgage and guarantee deeds.

The documents obtained from the borrowers should be carefully examined by the bank.
It should, in particular, be ensured that the authorized persons have signed on behalf of
the borrowers, the signatures of the persons signing the document tally with those
available on the bank's record and the terms and conditions of sanction have been duly
incorporated in the various documents. All such documents should be entered in the
'Documents Register' maintained for the purpose and in the Due Date Diary Register to
watch the limitation period of the documents. The entry in the register should be checked
by a responsible officer of the bank. The documents should thereafter be arranged, if
possible, in society-wise dossiers and kept in the bank's safe/strong room under joint
custody. The documents should be verified periodically by a responsible official of the
bank with a view to ensuring that they have not been barred by limitation. Balance
confirmation certificates and revival letters received from the borrowers should be kept
along with the documents and the receipt of such confirmation certificates and revival
letters should be posted in the Due Date Diary.
Documents are taken to create a legally valid and effective charge over these assets and
also bind the borrower and guarantor personally. Documents contain specifically and
precisely the terms and conditions of the contract between the bank and the borrower and
will be minutely examined and interpreted by the Court of Law in case of legal recourse. It
is, therefore, imperative that right type of documents, properly filled up, adequately
stamped and correctly executed must be taken. Documents as well as their execution will
vary according to:

(a) Type of borrower, and

(b) Nature of security offered and the type of charge to be created upon.
Broadly speaking, the following types of borrowers approach the banker for loan facilities
and the important precautions to be taken in each case are being given therein:
Individual: When an individual borrows money, not much complication will be involved in
the execution of documents. The Demand Promissory Note with "I" notings will be
obtained and on all other papers too he will simply sign in his individual capacity.
Minors: Minors cannot enter into a contract since they lack capacity to contract (Sec.11
of the Indian Contract Act). However, the guardian may borrow on behalf of the minor for
the necessities of minor or for the benefit of the estate of the minor. The documents
signed by guardian on behalf of the minor should clearly state him as guardian;
otherwise, the minor's estate will not be liable for the debt.
If a minor decides to ratify a loan raised by him during his minority, after he attains
majority it will become binding on him.
Sole-proprietorship concern: Although an individual is the owner of such a concern, the
Demand Promissory Note (D/P Note) with "We" notings will have to be used in this case.
The proprietor will sign on D/P Note and other documents on behalf of the firm as well as
in his individual capacity.
Joint borrowers: They will sign jointly and the D/P Note with the wording "We jointly and
severally promise to pay" will have to be got executed. On all other documents too they
will sign in the same manner.
Hindu Undivided Family (HUF): Such a family is represented by a Karta, who will
always be a male member. A minor male child can act as Karta of the family through his
natural guardian mother, where the father's whereabouts are not known at the time. Karta
has the implied authority to borrow for the benefit of the family business and bind the HUF
property of all other copartners also. However, the DIP Note with joint and several clause
will have to be executed and the Karta will sign on behalf of the firm and all the
coparceners including the Karta will also sign in their individual capacities. On all other

documents Karta may only sign on behalf of the firm. In case of any minor coparceners,
his guardian should execute the documents on behalf of the minor whose date of birth
should be properly recorded. However, in such cases, the bank may obtain a declaration
from the Karta that it will be his duty to inform the Bank regarding any birth/death in the
Partnership firm: Section 4 of the Indian Partnership Act defines partnership as the
"relation between persons who have agreed to share the profits of a business carried on
by all or any of them acting for all." Persons who have entered into such an arrangement
are called partners and the collective name under which they work is called a firm.
A corporation incorporated under some Special Act or a company registered under the
Companies Act, 1956, being artificial or juridical person created by law, can enter into a
partnership through its authorized agents. Similarly, there can be a valid partnership
between a Karta representing a Joint Hindu Family and a stranger or even a co-partner
(in respect of his separate property). However, a minor cannot become a partner in the
firm but he may be admitted to the benefits of partnership.
Although the partners are jointly and severally liable for the debts of the firm (Section, 25
of the Partnership Act) in case of dissolution of firm the firm's assets are to be utilized for
meeting the firm's debts first and similarly the private assets of the partners are to be
used for meeting the private liabilities first and if there is a surplus in any of the two, it can
be utilised for the other (Section 49 of the Partnership Act). In order to overcome this
'priority system and for making the Bank a creditor against private assets simultaneously,
the D/P Note is to be got executed in both the capacities, i.e.., representative as well as
individual. In other words, the partners will first sign on behalf of the firm and separately
they will sign in their individual capacity too. On the rest of the documents, their
signatures only in the representative capacity are sufficient.
If there are many partners and all the signatures cannot be obtained over the revenue
stamps, it would be all right if one or two are obtained over the stamps and rest on the
remaining space.
In cases, where partnership deed is provided to the Bank, important clauses, particularly
relating to borrowing powers, should be carefully studied. An undertaking from the
partners, that any change in the deed will be notified to the Bank, should also be

There is no implied authority to a partner to mortgage immovable property. So in case of

mortgage, either all partners should sign or one partner must be authorised by all to
create mortgage.
A 'charge' means creation of some interest or right in the security. By charging, the
security becomes available as a cover for the advance. Thus through charge, only a right
in the security is created and the ownership remains with the borrower only.
Based on the nature of security, six types of charges are possible.
Pledge: This is like bailment of goods where the possession comes to the pledgee
(creditor) but the ownership remains with the pledger (borrower). If the debt is paid, the
goods will have to be returned and if it is not paid, the pledgee may dispose of the goods
after giving due notice. The pledge agreement is to be obtained in these cases. Even if
the pledger is a company, there is no need to register the charge under Section 125 of
the Companies Act. 1956.
Most of the pledge agreement forms of banks contain a clause that the Bank shall have a
right to sell the pledged goods without giving a notice. This is not valid (Section 176 of
Contract Act) and in no case the goods should be sold without proper notice. In other
words, requirements of reasonable notice of sale are mandatory and cannot be
contracted out of.
Hypothecation: In this type of charge, the possession as well as the ownership remains
with the borrower himself and only the creditor's name is displayed with the goods. The
borrower can dispose of or even create another charge, although illegally because of the
creditor's interest over the goods. Except in the case of a limited company (due to
registration with the Registrar) the borrower may even create pledge of such goods and
the pledge will supersede the earlier charge of hypothecation. As such the display of
creditor's name over the goods may help in avoiding such complications.
For creating such a charge, a hypothecation agreement has to be executed. These
agreements are of various types depending upon the type of security, like goods, plant
and machinery, vehicles and livestock. In the hypothecation agreements, there is usually
a power to convert hypothecation into pledge on default of payment or on happening of
certain specified event. But exercising this power in actual practice is very difficult since
actual possession will have to be first taken. If the borrower refuses to co-operate, if will

not be legal for the lender to take possession forcibly even though such a power is
included in the agreement. It may amount to breach of peace, wrongful entry, etc., for
which a criminal complaint may be filed by the borrower against the lending Bank's
Lien: Lien is the right of the creditor to retain the securities belonging to the borrower till
his dues are paid. There can be two types of lien, viz. (a) Particular and (b) General.
In case of 'particular lien' only the security against which the debt has arisen can be
retained. One can only retain it and does not have the right to sell. But in 'general lien'
the creditor has the right to retain any security against any debt. He can also dispose of
the security after giving due notice.
The bankers, under the law, enjoy powers of general lien and can detain any security
(except lodged for specific purpose) for any debt.
Set-off: Set-off means the right to adjust the debit balance in the loan account of the
customer against the credit balance in the account of the same customer (standing in the
same right).
For set-off purposes, the Bank's all branches constitute as one unit.
In order to make the lien and set-off rights more effective, some banks obtain General
Letter of Lien and Set-off from the borrowers.
In case of partnership firms, if the partners have signed the Demand Promissory Note in
their individual capacity too, the bank can exercise the right of set-off for a debt owed by
the firm against the money in the hands of the bank belonging to the same set of
partners, though functioning as a different partnership, provided the money is not subject
to any trust or fiduciary obligation with which the set-off would be inconsistent.
Assignment: This means transfer of a right and the word is generally used in case of LIC
Policy and Government Supply Bills. While accepting these items as primary security, a
written notice is sent to the Life Insurance Corporation or to the Government Department
indicating the bank's charge over it. This will mean that the Corporation or the Department
is stopped from making direct payment to the borrower and only the banker is supposed
to receive it.

Mortgage: Mortgage means transfer of interest in immovable property for the purpose of
securing the payment of money advanced or to be advanced. In other words, the debt
can be past, present or future.
The person who borrows money and offers his property is called a mortgagor (transferor)
and the creditor is called a mortgagee (transferee). Immovable property means land or
attachments to it like trees and shrubs.
The following are the six types of mortgages and the most popular out of them are the
first two:
1. Equitable Mortgage or Mortgage by Deposit of Title Deeds
2. Simple or Registered Mortgage
3. English Mortgage
4. Mortgage by Conditional Sale
5. Usufructuary Mortgage
6. Anomalous Mortgage.
Equitable Mortgage
Section 58 (f) of the Transfer of Property Act, 1882 defines mortgage by deposit of title
deeds (popularly known as an equitable mortgage) as follows:
"Where a person in any of the following towns, namely, the towns of Calcutta. Madras
and Bombay, and in any other town which the State Government concerned may, by
notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent,
documents of title of immovable property, with intent to create a security thereon, the
transaction is called a mortgage by deposit of title deeds."
Four essential components can be observed in this definition, ie., (a) debt, (b) deposit of
title deeds, (c) in a notified town and (d) an intention that the property offered through the
title deeds will stand as security for the debt.
The equitable mortgage is like an oral transaction and neither requires registration nor
attracts stamp duty. The idea underlying it is that the owner of immovable property, whose
title is evidenced by the documents in his possession, can raise a loan by depositing the
documents, with an intention to create a security. The main essence of this type of charge
is deposit of title deeds by the debtor with the creditor. If the creditor parts with the
possession of title deeds, the mortgage would stand discharged.
For creation of such a mortgage, only original title deeds should be accepted. Accepting
duplicate title deed or a Photostat copy of it will not serve any purpose.

The delivery of the title deeds must take place in a notified town. Any deposit of title
deeds made in a non-notified town will not create a valid equitable mortgage. Thus, if the
property is situated at a non-notified station, the title deeds of it should be accepted by a
branch situated in a notified town. The title deeds are to be deposited first and the
memorandum of deposit of title deeds should be dated after the date of actual deposit of
title deeds.
In case of mortgage of property by any joint stock company, charge has to be filed, with
the Registrar of Companies within 30 days of the execution of documents. Failure to do
so may result in the Bank's becoming an unsecured creditor. If additional facilities are
sanctioned to the company, the charge for additional amount should also be got
The banks should also obtain a letter of undertaking from the borrower to pay the rents,
taxes, insurance premium, etc., in time. Before creating an equitable mortgage, banks
should obtain the following two certificates from their lawyer.
(a) Validity Certificate: The lawyer will certify that the original title deed, i.e., sale deed or
sale certificate, is found to be correct, genuine and the mortgagor has a good and
marketable title of the property and can validly transfer his right in the property.
(b) Non-encumbrance Certificate: The lawyer will certify that he has made a search in the
books of the Registrar or Sub-Registrar of Assurances for a period of at least 12 years
and has found that the property is free from any previous mortgage, charge or
encumbrance. Receipt for search fee paid should also be taken from the lawyer.
In case of leasehold property, the lawyer should examine the terms and conditions of
lease and also find out whether the lessor's consent to create the mortgage of the
property is necessary or not. Last ground rent receipt should be obtained from the
borrower to verify that the rent is not in arrears.
Simple Mortgage
Where without delivering possession of the mortgaged property the mortgagor binds
himself personally to pay the mortgage money, and agrees expressly or impliedly that in
the event of his failing to pay according to his contract, the mortgagee shall have a right
to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far

as may be necessary, in payment of mortgage money, the transaction is called a simple

The phrase `cause the property to be sold' simply means that the property cannot be
disposed of directly but can be sold through the Court. In this type of mortgage, a
mortgage deed is prepared, witnessed and registered with the Sub-Registrar of
Assurances. It is a legal mortgage and attracts ad valorem stamp duty. However, in
certain States, stamp duty has been partly or completely waived if the simple mortgage of
agricultural land is created for an agricultural purpose.
Precautions for documentation
Situations when the documents are not accepted by the Courts.
The court may reject the documents or impose penalties in any of the following six
1. When documents are kept blank or incomplete.
2. When documents are unstamped or under stamped.
3. When documents are not registered, which are required to be registered?
4. When documents are attested, which do not require attestation?
5. When documents are not attested, which require compulsory attestation?
6. When documents are barred by limitation.
We now take up each of these aspects for discussion of the implications involved.
Blank or Incomplete Documents
The loan officers or branch managers should develop a habit of not disbursing any loan
till documents are duly filled in. Generally, the tendency is to obtain signature of the party
on blank documents and keeping them in safe without properly filling them. When the
inspection of the branch takes place, the branch officials try to fill up documents in hurry
and very often serious lapses are created.
Stamping of Documents
Section 17 of the Indian Stamp Act, 1899 provides that all documents chargeable with
duty and executed by any person in India shall be properly and duly stamped before or at
the time of execution. If the documents are not properly stamped, either the documents
may become inadmissible in evidence or may attract penalty. Certain documents like
Demand Promissory Note (D/P Note (D/P Note) and Bill of Exchange if unstamped or

under stamped will be void ab initio and will not be admitted in evidence or relied upon in
any suit for establishing any right there under. The same is true for Balance Confirmation
letters although opinions differ on this point. Revenue stamps of the required value are
required on the D/P Note. If stamps of exact value are not available, stamps of more
value can be used. In case of bill of exchange the stamp duty is ad valorem, i.e.,
according to value and for Balance Confirmation letters it is fixed but differs from State to
State. While stamping the D/P Note, two precautions should be taken:
1. As far as possible, the signature of the party should be obtained over the stamps and
that too in such a way that partly they come on the D/P Note paper too. If part of the
signature goes over the D/P Note paper also, it will help the banker in proving that the
D/P Note was properly executed in case the stamp later on gets removed somehow. The
space where the stamp remained can be examined by experts and they may certify that
the stamp was very much there. But if the signature (only over the stamp) also gets lost
with the stamp, the task of the banker will become doubly difficult.
2. The second precaution in stamping of D/P Notes is that the stamps used should be
effectively cancelled which means that they should be cancelled in such a way that they
cannot be used again. Although crossing over them will make them non-usable but the
risk in that case is that a scope of argument for the party, that stamp might have been
affixed and crossed later on, is left out. Hence the safest course would be to obtain the
signature of the party over the stamps themselves. In one case, drawing a line with a pen
across the stamp was held not to constitute an effective cancellation since somebody
could easily sign over the line and reuse the stamps.
Barring the above said 3 documents, all other documents can be validated by paying 10
times (of the shortage) penalty in case of unstamping and under stamping. The court,
however, has the discretion to grant or refuse such permission. The stamps to be used on
the loan documents are generally of 3 types;
1. Adhesive Revenue Stamps,
2. Special Adhesive/Impressed/Embossed Stamps,
3. Bill of Exchange Stamps.
Adhesive revenue stamps are to be affixed on Demand Promissory Notes, Receipts and
Balance Confirmation Letters.

Special adhesive stamps are to be used only for certain kinds of documents. They bear
inscriptions such as "Advocate", "Attorney", "Notarial", "Share Transfer", "Insurance",
"Agreement", etc. These stamps cannot be used for payment of duty on documents other
than prescribed on it. These stamps are used for pledge and hypothecation agreements
as well as guarantee deed. These are cancelled by the treasury by signing across the
stamp. The law of stamp duty in India varies from State to State since the subject of
stamp duty finds its place in the concurrent list of the 7th Schedule to the Constitution.
If material alterations in a document already executed and stamped are made, it will need
fresh stamping. But this may not apply in case where the alterations are made while the
instrument is still incomplete and for the alterations which are of immaterial nature or
have been made to correct a mistake or supply an omission.
Unregistered documents
After stamping and execution of documents comes the question of registration. The
object of the Stamp Act is to collect revenue while the object of the Registration Act, on
the other hand, is to prevent people from being duped. By registration, it becomes a
constructive notice. All documents do not require registration but in the following cases,
registration is necessary:
a. The assignment of a Life Insurance Policy is to be registered by the assignee with the
Life Insurance Corporation of India. No stamp duty is required for this purpose.
b. In case of simple mortgage, the mortgage deed is to be registered with the Registrar of
Assurances and such deed will attract ad valorem stamp duty.
c. In case of advances to a limited company, certain charges are to be registered with the
Registrar of Companies under Section 125 of the Companies Act, 1956. These charges
attract some nominal stamp duty.
Attestation and Non-attestation of Documents
Some documents require compulsory, attestation, e.g., Mortgage Deed and Sale Deed of
immovable property. At least two witnesses are required on these documents.
On the other hand, certain documents like Hypothecation and Pledge agreements, which
need not be attested, if attested will become like Bond and then attract ad valorem stamp
duty. Witnessing is accepted in the case of illiterates, blind, pardanashin lady, drunkards,

etc. But this should be done on a separate paper so as not to make the loan documents
as Bonds.
Limitation Act
The Limitation Act, 1963 deals with the subject of limitation in case of documents and
Section 3 of this Act speaks as follows:
"Every suit instituted, appeal referred and application made after the prescribed period
shall be dismissed although limitation has not been set up as a defence."
The limitation period normally is 3 years and in case of mortgage of immovable property it
is 12 years. Generally, the period starts from the date of documentation but it may differ in
certain cases. The basis of calculation of limitation period in various types of facilities is
as follows:
Type of Loan/Advance
1. Demand Loans

Basis of Calculation
3 years from the date of D/P Note

(supported by D/P Notes)

2. Term Loans

3 years from the due date of installment.

If the entire amount is recalled, then 3
years from the date of recall.

3. Bills facility

3 years from the due date of each

bill both against the drawee and
the borrower.

4. Guarantees

3 years from the date of guarantee.

5. Clean Overdraft

3 years from the date of overdraft.

6. Mortgage

12 years from the date of execution

of mortgage deed. For Equitable
Mortgage 12 years from the date
of deposit of Title Deeds.

7. Cash Credit facility

3 years from the close of the year

in which last entry (debit or credit)
under borrower's handwriting is made.

The limitation period can be extended under the following circumstances:

If the debtor either personally or his agent duly authorized in this behalf acknowledges the
debt before the expiration of the limitation period. The limitation will start afresh from the
date of such acknowledgment. Even if the acknowledgment does not contain the amount
of debt or time for payment or contains refusal to pay or is addressed to a person other

than the creditor, it will be considered as acknowledgment. In other words, simple

admission of liability is sufficient for making an acknowledgment.
If the debtor or his duly authorized agent makes part payment in the handwriting of
himself or such agent, fresh limitation period will start from the date of such part payment.
Even if the debt is time barred, a fresh promise to pay confers a fresh cause of action but
the promise must be express and clearly stated. Although limitation period is extended by
taking acknowledgment of debt or by accepting part payment, in case of cash credit and
overdraft accounts it is desirable to renew the document at the time of review of the limit
or at least after 2 years. While renewing documents, the old account should be closed
and a new account by transferring balance should be opened. But in case of limited
companies, where the charge has been registered with the Registrar of Companies, fresh
documents should not be obtained and the procedure described earlier in this chapter
should be adopted.
Limitation only bars the remedy in Court of Law. However, it does not extinguish the right.
For example, in case of advance against a Fixed Deposit Receipt, even though the D/P
Note might have become barred by limitation, the banker's right of set-off remains against
the amount covered under the Fixed Deposit Receipt. Thus, the debtor-creditor
relationship continues until the debt is paid.
In fact there need be no anxiety even in cases which have become barred by limitation.
Such debt can also be renewed even without the element of consideration since as per
Section 25 (3) of the Indian Contract Act; a written promise for a debt barred by limitation
is perfectly valid. But in such cases all the formalities relating to contact should be
fulfilled, i.e., there should be (a) a proposal from the borrower to pay the time-barred debt,
(b) acceptance of proposal by the creditor and thereafter (c) a promise by the borrower
the form of an agreement. If a fresh advance is made and the amount payable under the
time-barred debt is also included in the fresh documentation, this will be perfectly valid.
Transfer of property Act
The Act proposes to prescribe law relating to transfer of property by act of parties. Thus,
the Act applies only to voluntary transfer or property. It does not cover transfer of property
by will.
Section 4 of the Act clarifies that the part of the Act which relates to contracts shall be
taken as part of Indian Contract Act and some specified sections shall be read as

supplemental to Indian Registration Act. Thus, the Act is complimentary to Indian Contract
Act and Registration Act. The Act applies both to movable and immovable property.
Method of Execution of Documents
The set of documents as well as types of documents differ from 'bank to bank. The
method of execution of Demand Promissory Note and of other documents is not much
different. However, it will be correct if signatures on D/P Note are obtained both in joint
and individual capacity for partnership firms but on other documents only in joint capacity.


In line with the international practices and as per the recommendations made by the
Committee on Financial System (Chairman Shri M. Narasimham), the Reserve Bank of
India has introduced, in a phased manner, prudential norms for income recognition, asset
classification and provisioning for the advances portfolio of the banks so as to move

towards greater consistency and transparency in the published accounts. The policy of
income recognition should be objective and based on record of recovery rather than on
any subjective considerations. Likewise, the classification of assets of banks has to be
done on the basis of objective criteria which would ensure a uniform and consistent
application of norms. Also, the provisioning should be made on the basis of classification
of assets based on the period for which the asset has remained non-performing/overdue
as also availability of security and its realisable value.
Why Prudential Norms?

Balance sheet should reflect a bank's actual financial position.

A proper system for recognition of income, classification of assets and
provisioning for bad debts on prudential basis is necessary.

Committee on Financial system (Narasimham Committee) has recommended that

the income recognition should be objective rather than subjective and based on
actual recovery.

Uniform application of the rules.

What are the Prudential Norms?
The Prudential Norms comprise of:a. Income Recognition Norms
b. Assets Classification Norms
c. Provisioning Norms
d. Capital Adequacy Norms
Agencies and Applicability of the Norms

Only the first three Norms are applicable to RRBs and Cooperative Banks.

The Prudential Norms are made applicable to PACS w.e.f. 01 April 2010.

Definition of Non-performing Asset (NPA)

An asset becomes non-performing when it ceases to generate income for the bank. A
non-performing asset (NPA) is defined generally as a credit facility where

interest and / or instalment of principal remain overdue for more than 90 days in
respect of a term-loan.

the account remains `out of order' for more than 90 days, in respect of overdraft/
cash credit (OD/ CC).

the bill remains overdue for more than 90 days in the case of bill purchased and

interest and / or instalment of principal remains overdue for two harvest seasons,
but for a period not exceeding two half years in the case of an advance granted
for agricultural purposes.

any amount to be received remains overdue for more than 90 days in respect of
other accounts.

Treatment of agricultural advances

A loan granted for short duration crops will be treated as NPA if the instalment of
the principal or interest thereon remains unpaid for two crop seasons beyond the
due date.

A loan granted for long duration crops will be treated as NPA, if the instalment of
principal or interest thereon remains unpaid for one crop season beyond the due

This norm is applicable to all direct agricultural advances listed in the Annexure.
For the purpose of these guidelines, long duration crops would be crops with
crop season longer than one year, and crops which are not long duration crops,
would be treated as short duration crops.

In respect of agricultural advances other than those specified in the Annexure,

identification of NPA would be done on the same basis as non-agricultural
advances which at present is the 90 days delinquency norm.

Crop loans for each season, viz., Rabi and Kharif has to be treated as separate
account and IRAC norms have to be applied accordingly.

The crop season for each crop, which means the period up to harvesting of the
crops raised, would be as determined by the State Level Bankers Committee in
each State.

Depending upon the duration of crops raised by an agriculturist, the above NPA
norms would also be made applicable to agricultural term loans availed of by him
as indicated in the Annex.

Treatment of advances for allied agricultural activities & non farm sector
Credit facilities granted for other allied agricultural activities as well as for non-farm sector
activities should be treated as NPA if amounts of instalments of principal and/ or interest
remain outstanding for a period of one quarter from the due date.
Project / Housing Loans, etc.

In case of projects (industry, plantation, etc.) where moratorium is given for payment,
[ loan becomes due only after moratorium or gestation period is over] such a loan
becomes overdue if instalment is not paid on due date.

Similarly, in the case of housing loans or similar advances granted to staff members
where interest is payable after recovery of principal, such loans should be classified

as NPA when there is a default in repayment of principal on due date of payment and
overdue criteria will be the basis for classification of assets.
Consortium advances
In respect of consortium advances each bank is required to classify the borrowal
accounts according to its own recovery, i.e., on the record of recovery of the individual
member banks. The banks participating in the consortium should, therefore, arrange to
get their share of recovery transferred from the lead bank of the consortium.
Treatment of different facilities to borrower as overdue (NPA)

Short-term agricultural advances are granted by SCBs to CCBs / PACS and CCBs to
PACS for the purpose of on-lending. In respect of such advances as well as advances
for other purposes, if any, granted under on-lending system, only that particular facility
which became irregular should be treated as NPA and not all the other facilities
granted to them.

Crop loans for each season, viz., Rabi and Kharif have to be treated as separate
account and accordingly IRAC norms have to be applied.

In respect of all other direct loans and advances granted to a borrower, all such loans
will become NPA even if one loan A/c becomes NPA.

Out of order status

In respect of cash credit / over draft facility an account should be treated as `out of
order', if the outstanding balance remains continuously in excess of the sanctioned
limit / drawing power.

In cases where the outstanding balance in the principal operating account is less than
the sanctioned limit/ drawing power, but there are no credits continuously for six
months as on the date of Balance Sheet or credits are not enough to cover the
interest debited during the same period, these accounts should be treated as 'out of

Any amount due to the bank under any credit facility is `overdue', if it is not paid on due
date fixed by the bank.
Performance of the account as on the date of Balance Sheet

The performance of the account as on the date of Balance Sheet only has to be taken
into account for the purpose of NPA. Subsequent developments should not be
considered for determining NPAs.

If interest and/ or instalment of principal has remained unpaid for any two quarters out
of the four quarters ending 31 March of the year concerned, the credit facility should

be treated as NPA although the default may not be continuously for two quarters
during the year.
Income Recognition Norms
Income Recognition Policy

The policy of income recognition should be based on record of recovery and therefore
unrealised income should not be taken to Profit and Loss Account by SCBs/ CCBs.

However, in the case of certain States where the State Cooperative Act/ Rules/ Audit
Manual provide for taking such unrealised interest to the income head in the P & L
A/c, it is necessary for those SCBs/ CCBs to make full provisioning for equivalent
amount by charging to P & L A/c.

In other words, the SCBs/ CCBs which are charging interest on all overdue loans and
if such interest remains unrealised the same may be taken to income account
provided matching provision is fully made for the same by charging to P & L A/c.

Fee, commission and other income may be treated as income only when the account
is classified as `standard'.

Besides, a matching provision should be created to the extent such items were
treated as income in the previous year but not realised in the subsequent year.

Fees and commission earned by banks as a result of renegotiation or rescheduling of

outstanding debts should be recognised on an accrual basis over the period of time
covered by the renegotiated or rescheduled extension of credit.

Even in case of credit facilities backed by Government guarantee, overdue interest

can be taken to P & L account only if matching provision is made.

The bills purchased/ discounted should be treated as overdue, if the same remain
unpaid. Interest may be charged to such bills and the same may be taken to P & L A/c
provided matching provision is made.

Accrued interest on investments may be taken to P & L Account till maturity. However,
the same has to be provided for fully, if interest is not realised on due date/ date of

Reversal of Income

If any advance, including bills purchased and discounted, becomes NPA as at the
close of any year, interest accrued and credited to income account in the
corresponding previous year, should be reversed or provided for, if the same is not
realised. This will apply to Government guaranteed loan accounts also.

In respect of fees, commission and similar incomes that have accrued and credited to
income account in the corresponding previous year, should be reversed or provided
for with respect to past periods, if uncollected.

Appropriation of recovery in NPAs

Interest realised on NPAs may be taken to income account provided the credits in the
accounts towards interest are not out of fresh / additional credit facilities sanctioned to
the borrowers concerned.

In the absence of a clear agreement between the bank and the borrower for the
purpose of appropriation of recoveries in NPAs (i.e., towards principal or interest due),
banks should adopt the accounting principle and exercise the right of appropriation of
recoveries in a uniform and consistent manner.

Norms for asset classification

Classification of agricultural and non-agricultural loans is required to be done into four
categories, on the basis of age of overdues, as under:
Standard Assets
Standard asset is one which does not disclose any problem and which does not carry
more than normal risk attached to business. Thus, in general, all the current loans,
agricultural and non-agricultural loans which have not become NPA may be treated as
standard asset.
Sub-Standard Assets
A Non-performing asset may be classified as sub-standard on the basis of the following

An asset which has remained overdue for a period not exceeding 3 years in respect of
both agricultural and non-agricultural loans should be treated as substandard.

In case of all types of term loans, where instalments are overdue for a period not
exceeding 3 years, the entire outstanding in term loan should be treated as substandard.

An asset, where the terms and conditions of the loans regarding payment of interest
and repayment of principal have been renegotiated or rescheduled, after
commencement of production, should be classified as sub-standard and should
remain so in such category for atleast one year of satisfactory performance under the
renegotiated or rescheduled terms.

In other words, the classification of an asset should not be upgraded merely as a

result of rescheduling unless there is satisfactory compliance of the above condition.

Doubtful Asset
A Non-Performing Asset may be classified as doubtful on the basis of following criteria:

As asset which has remained overdue for a period exceeding 3 years in respect of
both agricultural and non-agricultural loans should be treated as doubtful.

In case of all types of term loans, where instalments are overdue for more than 3
years, the entire outstanding in term loan should be treated as doubtful.

As in the case of sub-standard assets, rescheduling does not entitle a bank to

upgrade the quality of advance automatically.

Loss Asset
Loss assets are those where loss is identified by the bank / auditor / RBI / NABARD
inspectors but the amount has not been written off wholly or partly. In other words, an
asset which is considered unrealisable and / or of such little value that its continuance as
a doubtful asset is not worthwhile, should be treated as a loss asset. Such loss assets will
include overdue loans in cases

where decrees or execution petitions have been time barred or documents are
lost or no other legal proof is available to claim the debt,

where the members and their sureties are declared insolvent or have died leaving
no tangible assets,

where the members have left the area of operation of the society (refers to the
borrower in whose name the respective Loan Account with SCB/ CCB) leaving no
property and their sureties have also no means to pay the dues

where the loan is fictitious or when gross misutilisation is noticed, and

amounts which cannot be recovered in case of liquidated societies.

Guidelines for classification of assets

Broadly speaking, classification of assets into above categories should be done taking
into account the degree of well-defined credit weakness and the extent of
dependence on collateral security for realisation of dues.

Banks should establish appropriate internal systems to eliminate the tendency to

delay or postpone the identification of NPAs, especially in respect of high value

Accounts regularised near about the balance sheet date

The asset classification of borrowal accounts where a solitary or a few credits are
recorded before the balance sheet date should be handled with care and without
scope for subjectivity.

Where the account indicates inherent weakness on the basis of the data available, the
account should be deemed as a NPA.

In other genuine cases, the banks must furnish satisfactory evidence to the Statutory
Auditors/ Inspecting Officers about the manner of regularisation of the account to
eliminate doubts on their performing status.

Thus, if these accounts of the borrowers have been regularised by repayment of all
overdue amounts, such accounts need not be treated as NPA and straight away they
may be upgraded to standard category.

The status of an NPA account in doubtful category cannot be changed on account of

part payment of dues.

It is difficult to envisage a situation when only one facility to a borrower becomes a

problem credit and not others. Therefore, all the facilities granted by a bank to a borrower
will have to be treated as NPA and not the particular facility or part thereof which has
become irregular. [This norm will not be applicable in the case of onlending through
Accounts where there is erosion in the value of security

A NPA need not go through the various stages of classification in cases of serious
credit impairment and such assets should be straight away classified as doubtful or
loss asset as appropriate.

Erosion in the value of security can be reckoned as significant when the realisable
value of the security is less than 50 per cent of the value assessed by the bank or
accepted by RBI/NABARD at the time of last inspection, as the case may be.

Such NPAs may be straight away classified under doubtful category and provisioning
should be made as applicable to doubtful assets.

If the realisable value of the security, as assessed by the bank/ approved valuers/
RBI/ NABARD is less than 10 per cent of the outstanding in the borrowal accounts,
the existence of security should be ignored and the asset should be straight away
classified as loss asset. It may be either written off or fully provided for by the bank.

Advances against Term Deposits, NSC's, KVP/ IVP, etc.

Advances against term deposits, NSCs, IVPs, KVPs and life policies need not be treated
as NPAs. Advances against gold ornaments, government securities and all other
securities are not covered by this exemption.

Loans with moratorium for payment of interest

In the case of bank finance given for industrial projects or for agricultural plantations,
etc., where moratorium is available for payment of interest, payment of interest
becomes `due' only after the moratorium or gestation period is over. Therefore, such
amounts of interest do not become overdue or NPA, with reference to the date of
debit of interest. They become overdue after due date for repayment of instalment of
principal or after the due date for payment of interest, if uncollected.

In the case of housing loan or similar advances granted to staff members where
interest is payable after recovery of principal, interest need not be considered as
overdue from the first quarter onwards. Such loans/ advances should be classified as
NPA only when there is a default in repayment of instalment of principal or payment of
interest on the respective due dates.

Conversion or Reschedulement of loans

In cases of conversion or re-schedulement, the term loan as well as fresh short-term

loan may be treated as current dues and need not be classified as NPA.

The asset classification of these loans would thereafter be governed by the revised
terms and conditions and would be treated as NPA if interest and / or instalment of
principal remains unpaid, after it has become overdue, for two harvest seasons but for
a period not exceeding two half years.

However, term loans which have been rephased / rescheduled after they have
become NPA, should continue to be classified in the same category. (Rescheduling/
Rephasement will not change the NPA status)

Government guaranteed advances / investments

With effect from the year ending March 31, 2007, State Government guaranteed
advance and investment in State Government guaranteed securities would attract
asset classification and provisioning norms, if interest and / or instalment of principal
or any other amount due to the bank remains overdue for more than 90 days.

Availability of security/ net worth of borrower/ guarantor

The availability of security or net worth of borrower/ guarantor should not be taken into
account for the purpose of classifying an advance as NPA or otherwise, as income
recognition and classification of assets is based on recovery.
Treatment of Amount involved in frauds
Amount involved in frauds should be classified as Sub Standard, Doubtful and Loss
assets depending upon the prospects of recovery within a reasonable time frame, say 2
years, in each case on the basis of availability of insurance cover, court decree, security
deposit/ fidelity guarantee (in the case of employees).
Deficit in Cadre fund

The amount outstanding in the Cadre fund has to be considered as loss asset and should
be provided for fully, if no firm commitment from the State Government is forthcoming
supported by suitable provision in the State budget.
Asset Classification to be done at Branch Level
Asset Classification has to be done at branch level as the lending is done by the
branches of the bank and relevant records are maintained at their level. However,
provisioning is to be done at bank level (HO) as preparation of financial statements for the
entire bank is done at HO level.
Provisioning Norms on the basis of Asset Classification
Need for provisioning
Provisioning is necessary considering the erosion in the value of security charged to the
banks over a period of time. Therefore, after the assets of CCBs/ SCBs are classified into
various categories (viz., standard, sub-standard, doubtful and loss assets) necessary
provision has to be made for the same. The details of provisioning requirements in
respect of various categories of assets are mentioned below:
Standard Asset

Banks are required to make provision on Standard assets agricultural and SME
sectors at a minimum of 0.25% of the total outstanding in this category.

For all other Standard Assets, they have to make a general provision at a minimum of
0.40 per cent.

The provision made on Standard assets may not be reckoned as erosion in the value
of assets and will form part of owned funds of the bank.

The advances granted against term deposits, National Savings Certificate (NSC)
eligible for surrender, Kisan Vikas Patra (KVP), Indira Vikas Patra (IVP), Life policies,
Staff loans would attract provision of 0.25% prescribed for Standard assets.

The provision towards standard assets need not be netted from gross advances and
should be shown separately as "Contingent provision against Standard Assets" under
"Other liabilities and provisions - others".

Sub-standard Asset
A general provision of 10% of total outstandings in this category may be made.
Doubtful Assets

100% is to be made to the extent to which the advance is not covered by

realisable value of securities to which the bank has a valid recourse and the
realisable value is estimated on a realistic basis.

o Over and above this, provision is to be made depending upon the period for which
an asset has remained overdue, 20% to 100% of the secured portion on the
following basis:
Overdue above 3 years, and upto 4 years
Overdue over 4 years, but not exceeding 6 years
Overdue exceeding 6 years.

% Provision

Loss Asset

The entire loss asset should be written off.

If the assets are permitted to be retained in the books for any reasons, 100% of the
outstandings thereof should be fully provided for.

With effect from 31 March 2004, SCBs and CCBs should move over to
charging of interest on monthly rests by 01 April 2004 except for agricultural
loans and loans for activities allied to agriculture. However, banks should
continue to classify an account as NPA only if interest charged during any
quarter is not serviced fully within 90 days from the end of the quarter.

Agricultural Loans as secured

All agricultural loans may be treated as fully secured as the same are disbursed against
charge on land as provided in the respective State Cooperative Societies/ Acts/ Rules.
Treatment to P.F. and Gratuity amount
Liabilities towards PF and gratuity should be estimated on actuarial basis and fully
provided for.
Loans exempted from provisioning
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies
are exempted from provisioning. Therefore, the above accounts may not be classified as
NPA. As they are treated as standard assets, a provision of 0.25% of the total loans
outstanding prescribed for standard assets should be made.
Loans against gold/ Govt. Securities
Advances against gold ornaments, government securities and all other kinds of securities
are not exempted from provisioning requirements.

Depreciation in investments - accounting procedure

The investment portfolio of a bank would normally consist of both approved securities
(predominantly Government Securities) and `Other securities' (shares, debentures
and bonds of Cooperative and other institutions).

Investments in approved securities should be bifurcated into `permanent' and `current'


Permanent investments are those which banks intend to hold till maturity and current
investments are those which banks intend to deal in i.e., buy and sell on a day-to-day
basis. There is, however, no minimum percentage stipulated for bifurcation of
investments into 'permanent' and 'current' category.

As regards current investments and other securities, they should be valued at lower of
cost price or market value.

Investments in shares of cooperative institutions may be valued at carrying cost price.

Provision for other assets/ outstanding liabilities

Loss in respect of cash balances/ deposits with other banks, amounts in branch
adjustment accounts, frauds and embezzlements, and depreciation on building, furniture
and vehicles, etc. may be assessed and fully provided for as per the existing practice.
Back-end subsidy scheme

Banks are permitted to take the loan outstanding under the Back-end SubsidyScheme net of subsidy amount and make provision only on the balance amount.

This relaxation is for the purpose of making provisions only and not for other
purposes, such as for computation of gross loans and advances, asset classification,

SCBs/DCCBs are required to voluntarily set apart provisions much above the
minimum prudential levels after seeking their Boards approval.

Inter Branch Adjustment Accounts- Provisioning for Net Debit Balances

The SCBs/DCCBs have to segregate the debit and credit entries in the inter branch
account and arrive at the net position. In case of a net debit balance, it will attract 100
per cent provisioning in respect of those entries that remain outstanding for more than
six months

In case the accounts is maintained in different categories e.g. DD purchase /

discounted, expenses incurred on behalf of the branches, etc., it may be noted that
net debit position in one category must not be utilised for setting off net credit in
another category.

Direct Finance to Farmers for Agricultural Purposes
a. Short-term loans for raising crops i.e. for crop loans.
b. In addition, advances upto Rs.1 lakh to farmers against pledge/ hypothecation of
agricultural produce (including warehouse receipts) for a period not exceeding 6
months, where the farmers were given crop loans for raising the produce, provided
the borrowers draw credit from one bank.
c. Medium and long-term loans (Provided directly to farmers for financing production and
development needs).

Purchase of agricultural implements and machinery

Purchase of agricultural implements - Iron ploughs, harrows, hose, land-levellers,

bundformers, hand tools, sprayers, dusters, hay-press, sugarcane crushers, thresher
machines, etc.

Purchase of farm machinery - Tractors, trailers, power tillers, tractor accessories, viz.
disc ploughs, etc.

Purchase of trucks, mini-trucks, jeeps, pick-up vans, bullock carts and other transport
equipment, etc. to assist the transport of agricultural inputs and farm products.

Transport of agricultural inputs and farm products.

Purchase of plough animals.

Development of irrigation potential through

Construction of shallow and deep tube wells, tanks, higher etc. and purchase of
drilling units.

Constructing, deepening clearing of surface wells, boring of wells, electrification of

wells, purchase of oil engines and installation of electric motor and pumps.

Purchase and installation of turbine pumps, construction of field channels (open as

well as underground), etc.

Construction of lift irrigation project.

Installation of sprinkler irrigation system.

Purchase of generator sets for energisation of pumpsets used for agricultural


Reclamation and Land Development Schemes

Bunding of farm lands leveling of land, terracing, conversion of dry paddy into wet
irrigable paddy lands, wasteland development, development of farm drainage,
reclamation of soil lands and prevention of salinisation, reclamation of ravine lands,
purchase of bulldozers, etc.

Construction of farm buildings and structures, etc.

Bullock sheds, implement sheds, tractor and truck sheds, farm stores, etc.

Construction and running of storage facilities

Construction and running of warehouses, godowns, silos and loans granted to farmer
for establishing cold storage used for storing own produce.

Production and processing of hybrid seeds for crops

Payment of irrigation charges, etc.

Charges for hired water from wells and tube wells, canal water charges, maintenance
and upkeep of oil engines and electric motors, payment of labour charges, electricity
charges, marketing charges, service charges to Customs Service Units, payment of
development cess, etc.

Other types of direct finance to farmers

Short-term loans
To tradition/ non-traditional plantations and horticulture.

Medium and long term loans

Development loans to all plantations, horticulture, forestry and wasteland.

Financing of small and marginal farmers for purchase of land for agricultural purposes

Capital Adequacy Norms

With a view to adopting the Basle Committee framework on capital adequacy which takes
into account the elements of risk in various types of assets in the balance sheet as well
as off balance sheet business and also to strengthen the capital base of banks, RBI
decided in April 1992 to introduce a risk asset ratio system for commercial banks in India
as a capital adequacy measure. Essentially, under the above system the balance sheet

assets, non funded items and other off balance sheet exposures are assigned weights
according to the perceived riskiness of the individual assets and banks have to maintain
unimpaired minimum capital funds equivalent to the prescribed ratio on the aggregate of
the risk weighted assets and other exposures on an ongoing basis. Although these
norms have not been made applicable to cooperative banks so far, it will be worthwhile
for them to comprehend the broad details of the capital adequacy framework which are
indicated below:

Strengthening the soundness and stability of the banking system.

Removing the inequality among the banks operating internationally and

competing with each other.


A common minimum capital standard to be achieved and maintained by banks

operating internationally.

Narasimham Committee has recommended adoption, in a phased manner, of the

minimum capital norm of 8% as suggested by Basle Committee.
Capital Funds
Capital is divided into two tiers - Tier I and Tier II.
Tier 1 capital

Tier 2 capital

Permanent shareholders

Undisclosed reserves;


Revaluation reserves;

Perpetual non-cumulative

General provisions/general loan-loss

preference shares;


Disclosed free reserves

Hybrid debt capital instruments (a

(Statutory Reserves, Capital

range of instruments which combine

Reserves etc.)

characteristics of equity capital and

Innovative capital instruments


Subordinated term debt;

Excess provisions towards depreciation on investments held in 'Investment

Fluctuation Reserve Account' will be eligible for inclusion in Tier II capital.

Banks are allowed to include the 'General Provisions on Standard Assets' in Tier II
capital. However, the provisions on standard assets together with other 'general
provisions/loss reserves' will be admitted as Tier II capital up to a maximum of
1.25% of the total risk weighted assets.

Tier II elements should be limited to a maximum of 100% of total Tier I elements

for the purpose of compliance with the norms.

Risk adjusted assets would mean weighted aggregate of funded and non funded
items. Degrees of credit risk expressed as percentage weightages, have been
assigned to balance sheet assets and conversion factors to off balance sheet

Banks investments in all securities should be assigned a risk weight of 2.5% for
market risk. This will be in addition to the risk weights assigned towards credit risk
since, in line with best practices, some capital cushion should also be provided for
market risk in addition to credit risk.

The value of each asset/item shall be multiplied by the relevant weights to

produce risk adjusted values of assets and off balance sheet items. The
aggregate will be taken into account for reckoning the minimum capital ratio.

The risk weights allotted to each of the items of assets in the balance sheet are
furnished hereunder:
Risk Weights for Calculation of CRAR


Item of Asset
Cash, Balances with RBI
Balances in Current Account with other banks
Investment in Government Securities
Investments in other approved securities guaranteed by Central / State
Investments in other securities guaranteed by Central Government
(including Indira / Kisan Vikas Patras)
Investments in other securities guaranteed by State Govts. (if the
security has become NPA, the risk weight will be 102.5%)
Investments in other approved securities not guaranteed by Central /
State Governments
Fixed Deposit / Certificate of Deposits, Money at Call & Short Notice with
other banks (CBs, SCBs & DCCBs)
Investments in bonds issued by All India Financial Institutions
Investments in bonds issued by Public Financial Institutions for their Tier
II capital
Capital Market Exposure
Deposits placed with SIDBI/NABARD in lieu of hsortfall in lending to
priority sector
All other investments (investments in shares of cooperative banks)
Loans and Advances including bills purchased / discounted
Loans guaranteed by Government of India
Loans guaranteed by State Governments (if the loan has become NPA,
then it will attract risk weightage of 100%)

Weight (%)


Loans granted to public sector undertaking of Government of India and

State Governments
Housing Finance (fully secured by mortgage of residential properties)
Commercial Real Estate Exposure
Advances against term deposits, life policies, NSC, IVPs and KVPs
where adequate margin is available
Loans to staff of banks which are fully covered by superannuation
benefits and mortgage of flat / house.
Other Assets
Premises, Furniture and Fixtures
All other assets


Off Balance Sheet Items (OBSI)

The credit risk exposure attached to off balance sheet items has to be first calculated by
multiplying the face value of the off balance sheet items by credit conversion factor
(CCF) as indicated in the table below. This will then have to be again multiplied by the
weights attributable to the relevant counter party as specified above.



Factor (%)

Direct Credit substitues i.e. General guarantees of indebted ness

and acceptances
Sale and repurchase agreements and asset sales with recourse
where the credit risk remains with the bank

100 %
100 %

NOTE : In regard to Off Balance Sheet items, the following transactions with non bank
counterparties will be treated as claims on banks and carry a risk weight of 20%.

Guarantees issued by banks against the counter guarantees of other banks.

Rediscounting of documentary bills accepted by banks. Bills discounted by banks

which have been accepted by another bank will be treated as a funded claim on a

Capital Adequacy Ratio: This ratio indicates the risk bearing capacity of the society.
Higher the ratio, higher is the risk bearing capacity.
The formula for calculation of Capital Adequacy Ratio is given below:

Capital Adequacy Ratio

Capital Funds (Tier I & II Capital)

= -------------------------------------------------------- X 100
Total of Risk Weighted Assets


The relevance of NPA management can be gauged from the following extract from
Narasimham Committee II Report.

NPAs constitute a real economic cost to the nation in that they reflect the
application of scarce capital and credit funds to unproductive uses. The money
locked up in NPAs are not available for productive use and to that extent that
banks seek to make provisions for NPAs or write them off, it is a charge on their
profits. To be able to do so, banks have to charge their productive and diligent
customers a higher rate of interest. It thus becomes a tax on efficiency. It is the
customer who uses credit efficiently that subsidises the inefficiency represented
by NPAs. This also raises the transaction costs in the system thus denying the
diligent credit customers the benefit of lower rates which would help them to be
more efficient and competitive. NPAs, in short are not just a problem for
Banks. They are bad for the economy

There are a number of internal and external factors which are responsible for low level of
loan recovery and mounting NPAs. For bringing about improvement in recovery, it is
essential that banks explore all the possibilities such as timely follow-up action, timely
rehabilitation, sale of assets, pursuing claims with the surety, compromise and as the last
resort, legal recourse.
Causes of NPA
The following are the common causes of NPAs / reasons for poor recovery of loans in

External factors

a. Calamities beyond the means of borrower to cope with

b. Political Interference in recovery process
c. Vitiated recovery climate
d. Failure of activity due to economic and managerial reasons
e. Geographical factors

Changes in policy environment

g. Changes in technology
h. Changes in economic conditions

Lack of availability of risk cover

ii. Internal factors

(a) Borrower Related:
a. Misutilisation of Loan
b. Diversion of Funds
c. Lack of Technical / Managerial Skills
d. Failure of activity for economic reasons

e. Poor maintenance of Assets


Personal accident, death etc.,

g. Shifting of place of residence/business

h. Wilful default
(b) Bank Related:
a. Improper identification of borrower/ activity
b. Inadequate appraisal
c. Delay in loan sanctioning
d. Under/ over financing
e. Insufficient gestation/ repayment period

Lack of post-disbursement follow-up

g. Lack of borrower contact

h. Inadequate understanding of borrower

Lack of recovery efforts


Inefficient internal control systems

k. Low motivation and commitment of staff

l. Perception of bank as a charity institution

m. Lack of information to borrower on due dates, amount etc
Management of Non Performing Assets
Management of NPA needs action in three dimensions.
i. Preventive action
ii. Remedial Action
iii. Credit Risk Management

Preventive Action:
To avoid creation of NPA, a banks must have a well-defined Credit Policy and procedure
in place. A good Credit Policy and Procedure will have the following elements:

a. Banks should have written credit policies that define target activities, risk
acceptance criteria, credit approval authority, credit origination and maintenance

b. Banks should establish proactive credit risk management practices like annual /
half yearly NPA studies and individual obligor reviews, periodic credit calls that are
documented, periodic visits to borrowers, and at least quarterly management
reviews of troubled exposures/weak credits.

c. Managers in banks should be accountable for managing risk and for establishing
and maintaining appropriate risk limits and risk management procedures for their

d. Banks should have a system of checks and balances in place around the
extension of credit which are:


An independent credit risk management function (bank level)


Multiple credit approvers (Loan Committee level)

e. Delegation of power to sanction credit should be granted to individual Secretary /

Manager based upon a consistent set of standards of experience, judgement and

f. Banks should ensure that there are consistent standards with reference to
documentation for extension of credit.

g. Banks should have a consistent approach towards early problem recognition and
remedial action.

h. Banks should maintain a diversified portfolio of loan assets.

i. In order to ensure transparency of risks taken, it is the responsibility of banks to
accurately, completely and in a timely fashion, report the comprehensive set of
credit risk data to Loan Monitoring Committee/ Board of Directors.
In order to prevent accumulation of NPAs and to ensure proper recovery of loans, the
following measures are suggested.
Recovery Policy
The banks should have a loan recovery policy stipulating the manner of recovery of dues,
targeted level of reduction in NPAs, norms for permitted waiver, decision levels, reporting
to higher authority for monitoring, write off/waiver cases etc. Guidelines and precautions
to be taken for settling banks dues by way of compromises, and one-time settlement
should be vetted by Board of Directors.

Special Recovery Drive

Special Recovery Drives may be organised wherever necessary and progress in recovery
of loan dues should be monitored on a monthly basis. Adequate attention should be paid
to upgrade sub-standard advances. Interest/Instalment should be recovered by

increasing the involvement of staff members. Recovery performance of all concerned

officials should be critically evaluated and outstanding performance should be
appropriately rewarded.
Credit appraisal and management
Credit appraisal, usually suffers from failure to assess the ability of borrowers,
understanding of activity and market, financial position of the borrower, monitoring end
use of funds and cash flow etc. Banks should upgrade the credit appraisal skills and
documentation by resorting to training interventions as poor appraisal of credit proposals
is a major source of potential NPAs.
Potential and border-line NPA accounts
Such loans require quick diagnosis and remedial measures so that they do not slip into
the NPA category. For this purpose, banks need to evolve a mechanism to monitor all
accounts where interest/ instalment due is not paid. banks having high value advances
should report the particulars of loans exhibiting high level of credit risks such as persistent
repayment defaults, request for over-drawals frequently, diversion of funds etc., to Board
of Directors. Further, irregularities such as reduction in value of assets charged, disposal
of assets without pro-rata reduction in the loans, non-compliance with legal requirements
in creation of charge etc., may also be reported.
Remedial Action
The management of NPA and recovery needs strategic framework as also an operational
framework. These should be imbibed appropriately into a well-documented Loan
Recovery Policy of banks. Some successful strategic measures for reducing NPAs are:
a. Case by case analysis of NPA accounts
b. Recovery volunteers
c. Special recovery drives


Recovery Teams ( Branch Manager & Directors hailing from the area / village)

e. Compromise /Write off /Rescheduling policy


Incentive for payments

g. Incentives to Staff
h. Working with borrowers

Legal engineering and effective use of legal provisions


Good rapport with government machinery

k. Effect use of insurance facilities


New ways of appraisal system or developing rating models

Some operational measures can include:

a. effect recovery


compromise mechanism in the bank

c. specific target oriented approach

d. pressure on guarantors
e. special recovery drive

help from Registrar / revenue authorities

g. Rescheduling of payments
h. Compromise with borrowers for final settlements

Filing of insurance claims


Write off loans as per policy

Credit Risk management

In any bank, credit-risk cannot be eliminated unless the bank chooses to be over
cautious about lending. Therefore, in addition to above strategic and operational
measures, there should be a policy that can measure and control the risk-return function.
This involves measurements of risk, establishing a manageable risk level and the
measures to cope with the risk. RBI has set out detailed guidelines for credit risk
management, although it may not be entirely applicable for a bank situation.
Nevertheless, each bank should have a credit risk management system in place. Some of
the tools of risk management are discussed in the following paragraphs.
a. Rephasement of Loans
b. Out of court settlements/compromise with borrowers
c. Calling up the advances and filing of civil suit/certificate cases
d. Prevention of downgradation of existing NPAs & Upgradation of Assets quality
e. Fixing up of suitable repayment schedule


Write-off the outstanding

Rephasement of Loans

Repayment of a term loan depends on income generating capacity of the borrower. It

may be difficult to get repayment of the term loan if the borrowing unit does not generate
profit. A Unit which does not earn profit may repay a few installments. But ultimately, a
unit not earning profit will not be able to repay the term loan. Therefore, it is necessary to
fix repayment schedule for a term loan according to income generating capacity of the


If repayment schedule is not fixed properly or a unit is not able to generate

expected profit, possibility may be explored in consultation with the borrowers, for
rephasement of the loan installments.

The classification of asset may improve if

performance of the loan account remains satisfactory for two years after rephasement.

Compromise with borrowers

A compromise may be called a negotiated settlement in which the borrower agrees to pay
a certain amount to the bank after getting certain concessions.

A large number of

proposals can be considered by the bank with a view to reducing the NPAs and recycling
the funds instead of resorting to expensive recovery proceedings spread over a long

Banks should try to recover their dues to the maximum extent possible at

minimum expenses. While entering into the compromise proposals, the following points
may be kept in mind:

a. Compromise proposals should be accepted by the bank keeping in view the

policy / guidelines.
b. A proper distinction should be made between willful defaulters and the
borrowers defaulting in repayment due to circumstances beyond their control.
c. Where security is available, its realisable value should be assessed.

d. Worth of the guarantor(s), if any, should be assessed. Many a time banks

may be able to recover the amount with the help of the guarantor available.
e. Borrowers credibility and his repaying ability should be assessed, if recovery
is to be made in installments as per the compromise proposal.

f. The proposal for write off/compromise should preferably be first processed by

a committee constituted by the bank.

g. The decision on compromise proposals should be subjected to close scrutiny

by Internal/External Inspectors/Auditors to ensure that they have been done in
the interest of bank.

Calling up the advances and filing of civil suit

If it is not possible to revive a unit or enter into a reasonable settlement with the borrower,
it is better to recall the advance at an early stage instead of waiting for a long time which
may result in deterioration of the security available. Further, if it is not possible to sell the
security without obtaining court order even after filing suit, compromise is possible with
the knowledge of court. At the same time, proper follow up of court is also essential.


Recovery of advances using legislation of Government

Banks should take advantage of the legislation enacted by the State Governments for
speedy recovery of over dues. They should promptly file cases against willful defaulters
and follow it up with them. Preparing village-wise list of defaulters and constant follow up
with the borrowers and monitoring may bring desired results.

Prevention of downgradation of existing NPAs and upgradation of Assets


Efforts in recovering overdue interest and installment of principal/principal will prevent

downgradation of existing NPAs and/or upgradation of assets quality which will ultimately
result in lesser provisions or no provisions to be made by the bank. It will improve banks

General Guidelines on NPA Management

A. Pre-Sanction/Disbursement
a. Improve the quality of advances through tightening of credit appraisal and
supervision of borrower accounts
b. While selecting persons/activities for financing, keep in mind all possibilities of
c. Provide credit to the borrower to continue the business hence, earning and
repayment capacity
B. Post-Disbursement
a. Improve recovery performance and inculcate the habit of timely repayment
among borrowers
b. Make continuous follow-up of loan accounts at least once in a quarter and
ensure recovery positively in the account and also the fact that the funds are
fully and properly utilised
c. Make continuous inspection of assets and note down the latest realisable
value of security
d. Enlist the co-operation of Government officials / co-operators for recovery.
C. NPA Accounts
a. Take up case-by-case analysis of overdues/NPA accounts and make suitable

b. Eensure that the standard accounts do not fall in NPA category. Analyse the
NPA accounts amount wise, borrower wise, age-wise etc. for follow up.
c. Make rescheduling

rephasing wherever

needed. A rescheduled

renegotiated account should show satisfactory performance before it can be

removed from the NPA category.
d. Make utmost efforts for recovery certificate file/protested accounts recovery as
it will drastically reduce write off/provisioning requirements.
e. Undertake write off exercise where inspite of all possible efforts, there are no
chances of any recovery.

Explore the possibility or striking a compromise through negotiator wherever

the chance of recovery is poor.

g. Make effort for out- of-court settlements in the case of suit filed accounts.


Risk and its management have assumed greater significance in recent years due to
changing financial risk exposures of institutions. Risk has been present always in the

banking business but the discussion on managing the same has gained prominence only
lately. Some banks have expanded their traditional credit product lines to include asset
securitisation and credit derivatives. Still others have greatly increased their transaction
processing, custodial services or asset management businesses, in the pursuit of
increased fee income. Therefore, the issue of risk management has gained new
recognition in recent times.
Banks are exposed to various types of risks due to their intermediation functions. Banks
mobilise funds from a variety of smaller units/ individuals and make larger loans to
individuals and industrial units. While the depositors are necessarily required to be paid,
loans are often made to risky borrowers. Making long term loans by borrowing for a
comparatively shorter period of time also exposes the banks to risks.
The major risks banks are exposed to are:-

Credit risk

Liquidity risk

Interest rate risk

Operational risk

Credit Risk: The credit risk is the likelihood of non repayment of funds lent by the bank. It
remains the predominant risk for most banks, despite changes in banking over the last
few years. Even in normal times, credit risk attracts considerable attention of credit
planners and is extremely important. Recovery management is an important aspect of
credit risk management which has been dealt with in a separate chapter.
Liquidity Risk: The second major category of financial risk is liquidity risk which basically
is inability of the bank to meet liquidity requirements. The liquidity risk arises from funding
of long-term assets by short-term liabilities or resources, thereby making the liabilities
subject to rollover or refinancing risk.
Interest Rate Risk: The third category of risk that has gained prominence is interest rate
risk. Interest rate risk arises because banks fix and refix interest rates on their resources
and on the assets in which they are deployed at different times. Changes in interest rates
can significantly impact the net interest income, depending on the extent of mismatch
between the times when the interest rates on asset and liability are reset. Any such

mismatches in cash flows (fixed rate assets or liabilities) or reprising dates (floating rate
assets or liabilities) expose banks net interest margin to variations.
Operational Risk: Operational risk emanates from failure of systems and procedures
and includes human and mechanical failures. If the systems and procedures are not
followed either inadvertently or intentionally, the bank is exposed to possibilities of losses.
Asset-Liability Management
Asset Liability Management is concerned with strategic balance sheet management
involving all market risks. Market risk, caused by changes in market variables, may
involve one or more of the following:
(1) Liquidity
(2) Interest rate risk
(3) Foreign Exchange risk
(4) Commodity Price risk
(5) Stock market risk
The guidelines issued by the RBI require banks to manage their liquidity and interest rate
risks on a continuous basis.
Objective of Asset-Liability Management
The objective of ALM is Exposure by choice, not by chance i.e. Risk by choice and not
by chance, Clean bet and not confused bet, bet with your head, not over your head.
Thus, the objective of ALM is not to eliminate risk, but to manage it. In this endeavour,
Risk and reward go together. Setting and articulating risk management objective is the
first logical step in establishing professional ALM function. Without clear objective, it is not
possible to decide whether a particular decision or transaction is right or wrong. Also, a
particular transaction cannot be measured in isolation, but in the context of its contribution
to the accomplishment of the overall objectives. A well-known saying is worth recalling, If
you dont know where you are going any road will take you there. How does it fit in the
overall scheme in a bank?

Three pillars of Asset Liability Management

ALM Information Systems

Management Information Systems

Information availability, accuracy, adequacy and expediency

ALM Organisation

Structure and responsibilities

Level of top management involvement

ALM Process

Risk parameters

Risk identification

Risk measurement

Risk management

Risk policies and tolerance levels.

Liquidity Risk Management

Measuring and managing liquidity needs are vital for effective operation of banks. By
assuring a bank's ability to meet its liabilities as they become due, liquidity management
can reduce the probability of an adverse situation developing. The importance of liquidity
transcends individual institutions, as liquidity shortfall in one institution can have
repercussions on the entire system. Therefore, liquidity has to be tracked through
maturity or cash flow mismatches. For measuring and managing net funding
requirements, the use of a maturity ladder and calculation of cumulative surplus or deficit
of funds at selected maturity dates is adopted as a standard tool. The format of the
Statement of Structural Liquidity is given in Annexure I. The Maturity Profile as given in
Appendix I could be used for measuring the future cash flows of banks in different time
buckets. The time buckets, given the Statutory Reserve cycle of 14 days may be
distributed as under:

1 to 14 days


15 to 28 days


29 days and upto 3 months


Over 3 months and upto 6 months


Over 6 months and upto 1 year


Over 1 year and upto 3 years


Over 3 years and upto 5 years


Over 5 years

While the mismatches upto one year would be relevant since these provide early warning
signals of impending liquidity problems, the main focus should be on the short-term
mismatches viz., 1-14 days and 15-28 days. Banks, however, are expected to monitor
their cumulative mismatches (running total) across all time buckets by establishing
internal prudential limits with the approval of the Board / Management Committee. The

mismatches (negative gap) during 1-14 days and 15-28 days in normal course may not
exceed 20% of the cash outflows in each time bucket.
The Statement of Structural Liquidity (Annexure I) may be prepared by placing all cash
inflows and outflows in the maturity ladder according to the expected timing of cash flows.
A maturing liability will be a cash outflow while a maturing asset will be a cash inflow.
While determining the likely cash inflows / outflows, banks have to make a number of
assumptions according to their asset - liability profiles. For instance, Indian banks with
large branch network can (on the stability of their deposit base as most deposits are
rolled-over) afford to have larger tolerance levels in mismatches in the long-term if their
term deposit base is quite high. While determining the tolerance, levels the banks may
take into account all relevant factors based on their asset-liability base, nature of
business, future strategy, etc. The RBI is interested in ensuring that the tolerance levels
are determined keeping all necessary factors in view and further refined with experience
gained in Liquidity Management.
In order to enable the banks to monitor their short-term liquidity on a dynamic basis over
a time horizon spanning from 1-90 days, banks may estimate their short-term liquidity
profiles on the basis of business projections and other commitments for planning
purposes. An indicative format (Annexure III) for estimating Short-term Dynamic Liquidity
is enclosed.
Interest Rate Risk (IRR)
The phased deregulation of interest rates and the operational flexibility given to banks in
pricing most of the assets and liabilities imply the need for the banking system to hedge
the Interest Rate Risk. Interest rate risk is the risk where changes in market interest rates
might adversely affect a bank's financial condition. The changes in interest rates affect
banks in a larger way. The immediate impact of changes in interest rates is on bank's
earnings (i.e. reported profits) by changing its Net Interest Income (NII). A long-term
impact of changing interest rates is on bank's Market Value of Equity (MVE) or Net Worth
as the economic value of bank's assets, liabilities and off-balance sheet positions get
affected due to variation in market interest rates. The interest rate risk when viewed from
these two perspectives is known as 'earnings perspective' and 'economic value'
perspective, respectively. The risk from the earnings perspective can be measured as
changes in the Net Interest Income (NII) or Net Interest Margin (NIM). There are many
analytical techniques for measurement and management of Interest Rate Risk. In the
context of poor MIS, slow pace of computerisation in banks and the absence of total
deregulation, the traditional Gap analysis is considered as a suitable method to measure
the Interest Rate Risk in the first place. It is the intention of RBI to move over to the

modern techniques of Interest Rate Risk measurement like Duration Gap Analysis,
Simulation and Value at Risk over time when banks acquire sufficient expertise and
sophistication in acquiring and handling MIS.
The Gap or Mismatch risk can be measured by calculating Gaps over different time
intervals as at a given date. Gap analysis measures mismatches between rate sensitive
liabilities and rate sensitive assets (including off-balance sheet positions). An asset or
liability is normally classified as rate sensitive if:

within the time interval under consideration, there is a cash flow;


the interest rate resets/reprises contractually during the interval;


RBI changes the interest rates (i.e. interest rates on Savings Bank Deposits, DRI
advances, Export credit, Refinance, CRR balance, etc.) in cases where interest
rates are administered ; and


it is contractually pre-payable or withdrawal before the stated maturities.

The Gap Report should be generated by grouping rate sensitive liabilities, assets and offbalance sheet positions into time buckets according to residual maturity or next reprising
period, whichever is earlier. The difficult task in Gap analysis is determining rate
sensitivity. All investments, advances, deposits, borrowings, purchased funds, etc. that
mature/reprise within a specified timeframe are interest rate sensitive. Similarly, any
principal repayment of loan is also rate sensitive if the bank expects to receive it within
the time horizon. This includes final principal payment and interim instalments. Certain
assets and liabilities receive/pay rates that vary with a reference rate. These assets and
liabilities are reprised at pre-determined intervals and are rate sensitive at the time of
reprising. While the interest rates on term deposits are fixed during their currency, the
advances portfolio of the banking system is basically floating. The interest rates on
advances could be reprised any number of occasions, corresponding to the changes in
The Gaps may be identified in the following time buckets:

1-28 days


29 days and upto 3 months


Over 3 months and upto 6 months


Over 6 months and upto 1 year


Over 1 year and upto 3 years


Over 3 years and upto 5 years


Over 5 years



The various items of rate sensitive assets and liabilities and off-balance sheet items may
be classified as explained in Appendix - II and the Reporting Format for interest rate
sensitive assets and liabilities is given in Annexure II.
The Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive
Liabilities (RSL) for each time bucket. The positive Gap indicates that it has more RSAs
than RSLs whereas the negative Gap indicates that it has more RSLs. The Gap reports
indicate whether the institution is in a position to benefit from rising interest rates by
having a positive Gap (RSA > RSL) or whether it is in a position to benefit from declining
interest rates by a negative Gap (RSL > RSA). The Gap can, therefore, be used as a
measure of interest rate sensitivity.
Each bank should set prudential limits on individual Gaps with the approval of the
Board/Management Committee. The prudential limits should have a bearing on the Total
Assets , Earning Assets or Equity. The banks may work out Earnings at Risk (EaR) or Net
Interest Margin (NIM) based on their views on interest rate movements and fix a prudent
level with the approval of the Board/Management Committee.
The classification of various components of assets and liabilities into different time
buckets for preparation of Gap reports (Liquidity and Interest Rate Sensitivity) as
indicated in Appendices I & II is the benchmark. Banks which are better equipped to
reasonably estimate the behavioural pattern, embedded options, rolls-in and rolls-out, etc
of various components of assets and liabilities on the basis of past data / empirical
studies could classify them in the appropriate time buckets, subject to approval from the
ALCO / Board. A copy of the note approved by the ALCO / Board may be sent to the RBI.
A scientifically evolved internal transfer pricing model by assigning values on the basis of
current market rates to funds provided and funds used is an important component for
effective implementation of ALM System. The transfer price mechanism can enhance the
management of margin i.e. lending or credit spread, the funding or liability spread and
mismatch spread. It also helps centralising interest rate risk at one place which facilitate
effective control and management of interest rate risk.
As the process of ALM depends on accuracy of data, the branch managers should strive
hard to provide timely and accurate data to the Head Office.

Maturity Profile Liquidity
Heads of Accounts
A. Outflows
1. Capital, Reserves and Surplus
2. Demand Deposits (Current and
Savings Bank Deposits)

3. Term Deposits

4. Certificates of Deposit,
Borrowings and Bonds (including
Sub-ordinated Debt)
5. Other Liabilities and Provisions
i) Bills Payable

ii) Inter-office Adjustment

iii) Provisions other than for loan
loss and depreciation in
iv) Other Liabilities
6. Export Refinance Availed
B. Inflows
1. Cash
2. Balances with RBI

Classification into time buckets

Over 5 years bucket
Savings Bank and Current Deposits may be
classified into volatile and core portions. Savings
Bank (10%) and Current (15%) Deposits are generally
withdrawable on demand. This portion may be treated
as volatile. While volatile portion can be placed in the
first time bucket i.e., 1-14 days, the core portion may
be placed in over
1- 3 years
The above classification of Savings Bank and
Current Deposits is only a benchmark. Banks which
are better equipped to estimate the behavioural
pattern, roll-in and roll-out, embedded options, etc. on
the basis of past data/empirical studies could classify
them in the appropriate buckets, i.e. behavioural
maturity instead of contractual maturity, subject to the
approval of the Board/ALCO.
Respective maturity buckets. Banks which are better
equipped to estimate the behavioural pattern, roll-in
and roll-out, embedded options, etc. on the basis of
past data/empirical studies could classify the retail
deposits in the appropriate buckets on the basis of
behavioural maturity rather than residual maturity.
However, the wholesale deposits should be shown
under respective maturity buckets.
Respective maturity buckets. Where call/put options
are built into the issue structure of any instrument/s,
the call/put date/s should be reckoned as the maturity
date/s and the amount should be shown in the
respective time buckets.
The core component which could reasonably be
estimated on the basis of past data and behavioural
pattern may be shown under over 1-3 years time
bucket. The balance amount may be placed in 1-14
days bucket.
The net credit balance may be shown in 1-14 days
Respective buckets depending on the purpose.
Respective maturity buckets. Items not representing
cash payables (i.e. income received in advance, etc.)
may be placed in over 5 years bucket.
Respective maturity buckets of underlying assets.
1-14 days bucket.
While the excess balance over the required CRR/SLR
may be shown under 1-14 days bucket, the Statutory

Balances may be distributed amongst various time

buckets corresponding to the maturity profile of DTL
with a time-lag of 14 days.
3. Balances with other Banks
(i) Current Account

(ii) Money at Call and Short

Notice, Term Deposits and other
4. Investments (Net of
(i) Approved securities

(ii) Corporate debentures and

bonds, PSU bonds, CDs and CPs,
Redeemable preference shares,
Units of Mutual Funds (close
ended), etc.
(iii) Shares/Units of Mutual Funds
(open ended)
(iv) Investments in Subsidiaries/
Joint Ventures
(v) Securities in the Trading Book
5 Advances (Performing)
(i) Bills Purchased and Discounted
(including bills under DUPN)
(ii) Cash Credit / Overdraft
(including TOD) and Demand
Loan component of Working
(iii) Term Loans
6. NPAs (Net of provisions,
interest suspense and claims
received from ECGC/DICGC )
(i) Sub-standard
(ii) Doubtful and Loss
7. Fixed Assets
8. Other Assets
(i) Inter-office Adjustment

(i) Non-withdrawable portion on account of

stipulations of minimum balances may be shown
under over 1-3 years bucket and the remaining
balances may be shown under
1-14 days bucket..
(ii) Respective maturity buckets

i) Respective maturity buckets excluding the amount

required to be reinvested to maintain SLR
corresponding to the DTL profile in various time
(ii)Respective maturity buckets. Investments classified
as NPAs should be shown under over 3-5 years
bucket (sub-standard) or over 5 years bucket
(iii)Over 5 years bucket.
(iv) Over 5 years bucket.
(v) 1-14 days, 15-28 days and 29-90 days according
to defeasance periods.
(i) Respective maturity buckets.
(ii) Banks should undertake a study of behavioural
and seasonal pattern of availments based on
outstandings and the core and volatile portion should
be identified. While the volatile portion could be
shown in the near-term maturity buckets, the core
portion may be shown under over 1-3 years bucket.
(iii) Interim cash flows may be shown under respective
maturity buckets.

(i) Over 3-5 years bucket.

(ii) Over 5 years bucket.
Over 5 years bucket
The net debit balance may be shown in 1-14 days
bucket. Intangible assets and assets not representing
cash receivables may be shown in over 5 years

Provisions may be netted from the gross investments provided provisions are held security-wise.
Otherwise provisions should be shown in over 5 years bucket.

(ii) Leased Assets

C. Contingent Liabilities / Lines of
Credit committed / available and
other Inflows / Outflows
1. (i) Lines of Credit committed to/
from Institutions
(ii) Unavailed portion of Cash
Credit/ Overdraft / Demand loan
component of Working Capital
limits (outflow)
(iii) Export Refinance - Unavailed
2. Letters of Credit / Guarantees

3. Repos / Bills Rediscounted

(DUPN) / Swaps INR / USD,
maturing forex forward contracts
etc. (outflow / inflow)
4. Interest payable / receivable
(outflow / inflow) Accrued
interest which are appearing in the
books on the reporting day
Note :

Interim cash flows may be shown under respective

maturity buckets.

(i) 1-14 days bucket.

(ii) Banks should undertake a study of the behavioural
and seasonal pattern of potential availments in the
accounts and the amounts so arrived at may be
shown under relevant maturity buckets upto 12
(iii) 1-14 days bucket.
Devolvement of Letters of Credit/Guarantees, initially
entails cash outflows. Thus, historical trend analysis
ought to be conducted on the devolvements and the
amounts so arrived at in respect of outstanding
Letters of Credit / Guarantees (net of margins) should
be distributed amongst various time buckets. The
assets created out of devolvements may be shown
under respective maturity buckets on the basis of
probable recovery dates.
Respective maturity buckets.

Respective maturity buckets.

(i) Liability on account of event cash flows i.e. short fall in CRR balance on reporting
Fridays, wage settlement, capital expenditure, etc. which are known to the banks and any
other contingency may be shown under respective maturity buckets.
(ii) All overdue liabilities may be placed in the 1-14 days bucket.
(iii) Interest and instalments from advances and investments, which are overdue for less
than one month may be placed in over 3-6 months, bucket. Further, interest and
instalments due (before classification as NPAs) may be placed in over 6-12 months
bucket without the grace period of one month if the earlier receivables remain
D. Financing of Gap :
In case the negative gap exceeds the prudential limit of 20% of outflows, (1-14 days and 15-28
days) the bank may show by way of a foot note as to how it proposes to finance the gap to
bring the mismatch within the prescribed limits. The gap can be financed from market

borrowings (call / term), Bills Rediscounting, Repos and deployment of foreign currency
resources after conversion into rupees ( unswapped foreign currency funds ), etc.

Interest Rate Sensitivity
Heads of Accounts
1. Capital, Reserves and Surplus
2. Current Deposits
3. Savings Bank Deposits

Rate sensitivity and time bucket

4. Term Deposits and Certificates

of Deposit

Sensitive and reprises on maturity. The amounts should

be distributed to different buckets on the basis of
remaining term to maturity. However, in case of floating
rate term deposits, the amounts may be shown under
the time bucket when deposits contractually become
due for reprising.
Sensitive and reprises on maturity. The amounts should
be distributed to different buckets on the basis of
remaining maturity.
Sensitive and reprises when interest rate is reset. The
amounts should be distributed to the appropriate bucket
which refers to the reprising date.
Sensitive and reprises on maturity. The amounts
should be distributed to the respective maturity buckets.
Upto 1 month bucket.
(a) Fixed rate : As per respective maturity. (b) Floating
rate : Reprises when interest rate is reset.

5. Borrowings Fixed
6. Borrowings Floating
7. Borrowings Zero Coupon
8. Borrowings from RBI
9. Refinances from other
10. Other Liabilities and
Bills Payable
Inter-office Adjustment
11.Repos / Bills Re-discounted
(DUPN), Swaps (Buy / Sell) etc.
1. Cash
2. Balances with RBI
3. Balances with other Banks
i) Current Account
ii) Money at Call and Short
Notice, Term Deposits and other
4. Investments (Performing).
i) Fixed Rate / Zero Coupon

Sensitive to the extent of interest paying (core) portion.
This may be included in over 3-6 months bucket. The
non-interest paying portion may be shown in nonsensitive bucket.
Where banks can estimate the future
behaviour/sensitivity of current/savings bank deposits to
changes in market variables, the sensitivity so
estimated could be shown under appropriate time

Reprises only on maturity and should be distributed to
the respective maturity buckets.
Non - sensitive.
Interest earning portion may be shown in over 3 6
months bucket. The balance amount is non-sensitive.
i) Non-sensitive.
ii) Sensitive on maturity. The amounts should be
distributed to the respective maturity buckets.
i) Sensitive on maturity.

ii) Floating Rate

5. Shares/Units of Mutual Funds
6. Advances (Performing)
(i) Bills Purchased and
Discounted (including bills under
(ii) Cash Credits / Overdrafts
(including TODs) / Loans
repayable on demand and Term

7. NPAs (Advances and

(i) Sub-Standard
(ii) Doubtful and Loss
8. Fixed Assets
9. Other Assets.
(i) Inter-office Adjustment
(ii) Leased Assets
(iii) Others
10. Reverse Repos, Swaps
(Sell/Buy) and Bills Rediscounted
11. Other products (Interest Rate)
(i) Swaps
(ii) Other Derivatives

ii) Sensitive at the next reprising date

(i) Sensitive on maturity.
(ii) Sensitive only when PLR/risk premium is changed.
Of late, frequent changes in PLR have been noticed.
Thus, each bank should foresee the direction of interest
rate movements of funding options and capture the
amounts in the respective maturity buckets which
coincides with the time taken by banks to effect
changes in PLR in response to changes in market
interest rates.
(i) Over 3-5 years bucket.
(ii) Over 5 years bucket.
(i) Non-sensitive.
(ii) Sensitive on cash flows. The amounts should be
distributed to the respective maturity buckets
corresponding to the cash flow dates.
(iii) Non-sensitive.
Sensitive on maturity.

(i) Sensitive and should be distributed under different

buckets with reference to maturity.
(ii) Should be suitably classified as and when

Annexure- I

Amounts to be shown net of provisions, interest suspense and claims received from ECGC / DICGC

ABC Bank, ___________ Branch

Maturity Profile of Assets and Liabilities
Fortnightly Return as on ________________________
(Amount Rs. Lakh)
Amount payable / amount maturing within

1. Deposits
i. Fixed Deposits - Individuals
ii. Fixed Deposits - Societies
iii. Reinvestment Scheme Deposits
iv. Reinvestment Scheme Deposits
v. RIS Special Scheme
vi. Reserve Fund Deposits - Societies
vii. Fixed Deposits - Societies
viii. Recurring Deposits
ix. Day Deposit
x. Day Deposit Suspense
xi. Call Deposit


Over 5 years

Over 3 years upto 5 years

Over 1 Year upto 3 years

Over 6 months upto 1 year

Over 3 months upto 6 months

29 Days to 3 months


15-28 Days

1-14 Days

the next

xii. Temporary Deposit

xiii. Family Benefit Scheme
xiv. Perennial Pension Scheme
xv. Security Deposit - Electric
xvi. Security Deposit - Staff
xvii. Security Deposit Locker
xviii. Security Deposit - Contractors
xix. Security Deposit cash handling
xx. Security Deposit Stamp Vendor
xxi. Security Deposit DD / Adult
xxii. Security Deposit Civil Supplies
xxiii. Other Deposits (other than Current
and Savings Bank Deposits)
2. Interest Payable on Deposits
i. On Savings Bank Deposits
ii. On Fixed Deposits
iii. On Reinvestment Scheme Deposits
iv. On Recurring Deposits
v. On Day Deposits / call deposit /
security deposit / other deposits
3. Other Liabilities & Provisions
i. Subsidy Reserve Account / Subsidy
received from Govt. & other agencies
pending payable to the beneficiaries
ii. Sundry Creditors / Suspense
iii. Service Tax / Income Tax deducted at
iv. Margin Money

v. Provision made for expenditure

incurred but not paid
vi. Other liabilities, if any
vii. Others (where payment is involved).
Please specify.
A. Total Outflows

(Rs. Lakh)
Total of Outflows as reported at A above







Add: Amount outstanding in


Current Deposits A/c Individuals


Current Deposits A/c - Societies


Savings Bank Deposits A/c

Savings Bank Deposit A/c


Savings Bank Deposit A/c - Staff


Credit Balance in OD / CC A/c


Matured Fixed Deposit A/c


Unclaimed Deposits A/c


Pay Order / DD / TT / Gift Cheque



Clearing Suspense A/c


Share Suspense A/c




Inter Branch Adjustment A/c




Bills Received for collection as per





B. Total Outflows
Note: The total outflows as at B above should tally with the Trial Balance total.
Additional Information:

Amount (Rs.lakh)

1. Credit Limits sanctioned or Lines of Credit committed to

i. Service Cooperative Societies / Other societies
ii. Traders / individuals / companies / customers
2. Unavailed portion of OD / CC / Demand Loan / other loans
sanctioned to customers
3. Guarantees issued by the branch

Out of the total amount of maturing deposits, Indicate the percentage of deposits
that would be rolled over on the date of maturity.
Out of the total deposits, indicate the percentage of premature closure of deposits.

1. Advances (only Standard

Assets to be shown)
i. ST (SAO) / Crop Loan / KCC
Loans to SCS (kharif & rabi)
II. Short Term Loans to
iii. Gold Loans to individuals
iv. MT Loans for Agricultural
Purposes (Individuals / SCS / IRDP)


Over 5 years

Over 3 years upto 5 years

Over 1 Year upto 3 years

Over 6 months upto 1 year

Over 3 months upto 6 months

29 Days to 3 months


15-28 Days

1-14 Days

Amount Receivable within the next

v. MT loans for housing

vi. MT Loans to SHGs
vii. MT loans for other purposes
(individuals & societies)
viii. LT loans for Agricultural
purposes (individuals & societies)
ix. LT loans for housing
purposes (Residential & Commercial)
x. LT loans for other purposes
(individuals / Fisheries / societies)
xi. Consortium Loans
xii. Loan against Deposits
xiii. Term Loan against DL
xiv. Loans to staff
xv. Bills Purchased and
xvi. Other loans & advances
(please specify)
2. Interest Accrued but not
received on loans and advances
3. Other Assets
i. Suspense / Advances paid
ii. Rent Receivable A/c
iii. Advance Income Tax
iv. Festival Advance to Staff
v. Others (please specify)

A. Total Inflows

Total of inflows as reported at A above




Add: Amount outstanding in


Cash in hand A/c




Current Account with Other



Overdraft A/c Individual


Overdraft A/c Societies


Overdue Interest Receivable A/c


Land A/c




Building A/c




Furniture & Fixtures A/c




Computer A/c




Office Equipment A/c




Vehicle A/c / Machinery A/c




Stock of stationery




Telephone Deposit / Meter

Deposit / Deposit with
Government Departments




Clearing Suspense A/c


Inter Branch Adjustment A/c




Bills sent for collection as per




B. Total Inflows
Note: The total inflows as at B above should tally with the Trial Balance total.

Additional Information:
Classification of NPAs
1. Sub-standard Assets
2. Doubtful Assets D1 category
3. Doubtful Assets D2 category
4. Doubtful Assets D3 category

Amount (Rs.lakh)

5. Loss Assets
6. Recovery percentage of the Branch:


Annexure- II

ABC Bank Ltd., __________________ Branch

Statement of Interest Rate Sensitivity as on __________________________
(Amount Rs. Lakh)

1. Deposits
i. Fixed Deposits - Individuals
ii. Fixed Deposits - Societies
iii. Reinvestment Scheme Deposits



Over 5 years

Over 3 years upto 5 years

Over 1 Year upto 3 years

Over 6 months upto 1 year

Over 3 months upto 6 months

(Interest Rate-wise Maturity Patternwise)

1 3 months


Upto 1 month


iv. Reinvestment Scheme Deposits
v. RIS Special Scheme
vi. Reserve Fund Deposits - Societies
vii. Fixed Deposits - Societies
viii. Recurring Deposits
ix. Day Deposit (including Day Deposit
x. Call Deposit

xi. Temporary Deposit
xii. Family Benefit Scheme
xiii. Perennial Pension Scheme
xiv. Security Deposit Electric
xv. Security Deposit - Staff
xvi. Security Deposit Locker
xvii. Security Deposit - Contractors
xviii. Security Deposit cash handling
xix. Security Deposit Stamp Vendor

xx. Security Deposit DD / Adult
xxi. Security Deposit Civil Supplies
xxii. Other Deposits (other than Current
and Savings Bank Deposits)
A. Total Liabilities
(Rs. Lakh)
Total of Liabilities reported at A above





Add: Amount outstanding in


Current Deposits A/c Individuals




Current Deposits A/c - Societies




S B Deposits A/c Individuals


S B Deposit A/c Societies


Savings Bank Deposit A/c - Staff


Credit Balance in OD / CC A/c




Matured Fixed Deposit A/c




Unclaimed Deposits A/c




Pay Order / DD / TT / Gift Cheque

Subsidy Reserve A/c / Subsidy
received from Government






Sundry Creditors / Suspense A/c




Service Tax / Income Tax deducted

at source




Margin Money




Clearing Suspense A/c





xxviii. Share Suspense A/c



Provision made for expenditure

incurred but not paid




Other liabilities




Inter Branch Adjustment A/c




Bills Received for collection



B. Total Liabilities
Note: The total outflows as at B above should tally with the Trial Balance total.

1. Advances (Net of NPAs)

i. ST (SAO) / Crop Loan / KCC Loans to
SCS (kharif & rabi)
II. Short Term Loans to Individuals
iii. Gold Loans to individuals



Over 5 years

Over 3 years upto 5 years

Over 1 Year upto 3 years

Over 6 months upto 1 year

Over 3 months upto 6 months

1 3 months

(Interest Rate-wise Maturity Patternwise)

Upto 1 month

Interest Rate Sensitivity

iv. Overdraft Individuals
v. Overdraft Societies
vi. MT Loans for Agricultural Purposes
(Individuals / SCS / IRDP)
vii. MT loans for housing purposes
viii. MT Loans to SHGs
ix. MT loans for other purposes
(individuals & societies)

x. LT loans for Agricultural purposes
(individuals & societies)
xi. LT loans for housing purposes
(Residential & Commercial)
xii. LT loans for other purposes
(individuals / Fisheries / societies)
xiii. Consortium Loans
xiv. Loan against Deposits
xv. Term Loan against DL
xvi. Loans to staff

xvii. Bills Purchased and Discounted
xviii. Other loans & advances
(please specify)
A. Total Assets



Total of inflows as reported at A above

Add: Amount outstanding in

Cash in hand A/c




Current Account with Other Banks




Sub-standard Assets




Doubtful and Loss Assets




Interest Accrued but not received




Overdue Interest Receivable A/c




Land A/c




Building A/c




Furniture & Fixtures A/c




Computer A/c




Office Equipment A/c




Vehicle A/c / Machinery A/c




Stock of stationery




Telephone Deposit / Meter Deposit /

Deposit with Government





Suspense / Advances paid




Rent Receivable A/s




Advance Income Tax




Festival Advance to staff




Clearing Suspense A/c




Inter Branch Adjustment A/c




Bills sent for collection as per contra



B. Total Inflows
Note: The total inflows as at B above should tally with the Trial Balance total.


Cooperative banks have to make concerted efforts to improve profitability by
diversifying their businesses and embark on fee based/non fund based activities.

Non fund business activities provide scope to increase the level of profits without
undertaking higher risks. Findings of certain studies have shown that banks can

their non interest income and its share in profits can reach upto

20%.Non-fund business has lot of advantages such as (a) earning good will of
customers; (b) NPA norms are not applicable to non fund business and (c) Less
risk and high returns.
Various fee based activities that are being offered by banks are as under:
Issue of Demand Drafts, Mail transfers etc.: Demand drafts are issued by a
bank on its branches on behalf of a purchaser. Mail transfers are issued by a
bank on its branches for credit of beneficiarys account. Here, the beneficiary
must have a bank account in the same bank.

For rendering these services,

banks charge commission.

Travellers Cheques: Travellers cheques used to be popular amongst those who travel
within the country and abroad before introduction of computerisation in banks. This is
because they are a safe mode of carrying money and can be encashed without any

With an aim to popularise this facility, banks have made reciprocal

arrangements to honour each others travellers cheques. These cheques are also issued
in foreign currency by some banks who have arrangements abroad. In case of loss of
these cheques, banks issue duplicates on execution of an indemnity bond by the
purchaser. The cheques are issued in various denominations. At the time of issue, the
purchaser is asked to sign on the cheque in the space provided for the purpose. While
encashing the cheque, he is required to sign again on the cheque. Payment is made only
if this signature tallies with the original one.
Gift Cheques: Gift cheques are attractively designed cheques put in special folders for
use as gifts on birthdays, wedding etc.

Some banks issue these cheques in fixed

denominations whereas others issues blank gift cheques. The latter type of cheque is
honoured by the bank subject to availability of funds in the drawers account. These
cheques have become very popular in recent times.
Buying and Selling of Securities : Government securities, bonds, units of the Unit Trust
of India, Shares and debentures of Joint Stock companies are brought and sold on behalf
of customers as per their instructions.

Safe Custody: Valuables and securities are allowed to be deposited for safe
custody provided the depositor is a properly introduced customer of the bank.
Acting as an Executor or Trustee: Banks offer their services for managing the
estates of the owner during his life time and/or after his death. In the latter case,
they arrange for payment of court fee, estate duty, etc. A bank can act as an
administrator only when appointed by the court to administer the estate for a
deceased person who has not left a will. Letters of administration give the power
to the bank to administer the estate. Sometimes, banks act as trustees of public
trusts and also as trustees for debenture holders.
Underwriting of Shares, Government Bonds etc.: Banks render these services on
behalf of the Government and public bodies and also financially sound and well reputed

Banks undertake selling of these shares and earn income by way of

Merchant Banking: Merchant banking business previously used to be handled only by
the foreign banks. State Bank of India was the first Indian Bank to render such services.
Merchant Banking business comprises rendering services of a non-banking nature to
industrial and business houses. The various services provided by the merchant banking
division of a bank are:
1) to suggest suitable location for the projects, technical consultants or collaborators,
financing pattern, tax benefits, etc. 2) to prepare economic, technical and financial
feasibility reports for the projects and also marked survey reports 3) to prepare term loan
applications for submission to term lending institutions and also undertake syndication of
loans and underwriting 4) to obtain requisite permission from the statutory bodies for
starting industrial ventures right from the application for letter of intent to the completion of
such projects. 5) to act as managers to the new issues of shares, bonds and debentures
by joint stock companies 6) to help in the appraisal of working capital requirements and
make arrangement for the same.

7) to arrange foreign currency loans and help in

services including advice on relevant Governmental regulations, scope, benefits, etc.

Carrying out Standing Instructions: Banks usually accept clear-cut, written standing
instructions from their customers for making payments on their behalf. These instructions

can be for making periodical payments like LIC premiums, instalments/interest payment
on LIC loan, payment of rent, membership subscriptions to clubs, collections of dividend
warrants, pensions, transfer of funds from one account to another, etc.

Once such

instructions are accepted, banks are liable to make good losses for neglecting such
Collection of Interest and Dividend Warrants: On the mandate of customers, banks
collect dividend warrants, interest on securities and fixed deposits when due.


proceeds of these collections are placed to the credit of the customers account. For
these services the banks are entitled to actual collection charges plus commission.
Furnishing of Credit Reports: It is an established practice among bankers to exchange
confidential reports regarding their customers.

These reports would give information

regarding means, standing, dealings, etc. of the customers. Confidential opinions help
the bankers while granting facilities to customers. Such opinions can also be obtained by
a customer through his banker. These reports must be based on facts and figures. Banks
usually pass on such reports with a disclaimer clause which makes it clear that the
opinion is passed on without risk and responsibility on the part of the bank or its officers.
However, care has to be taken to see that the report is prima facie not a misleading
report. .
Safe Deposit Lockers:

Banks often provide safe deposit locker facilities to their

customers, keeping in mind the demand for lockers, their size and the prospects of their
profitability for the branch. These lockers are used for keeping ornaments, important
documents, securities, etc. They are available on rental basis, the rent depending upon
the size of the lockers.
Guidance to Investors: When investors seek guidance for investments, banks help
them. However, no responsibility is accepted while giving such guidance. Banks help in
buying or selling shares and securities strictly in terms of written instructions given to
them by their customers.
Consultancy Services for Income Tax: Banks also extend guidance to their customers
who may be salaried people, small borrowers or individual fixed deposit account holders
for filing tax returns. These services are popular amongst non residents who are not
aware of our countrys rules and regulations.

Bid Bonds and Performance Guarantee:

Banks render valuable service to their

customers by providing guarantees on their behalf in favour of third parties, especially

Government departments and foreign importers.

These guarantees are called bid-bond

guarantees and performance guarantees. Bid bonds and performance guarantees are
also issued in case of export of capital goods and overseas construction contracts.
Credit Cards:

In the present computer era, the place of paper money followed by

cheques is now being taken by plastic money popularly known as plastic cards and/or
credit cards. This is one of the additional services being extended by banking systems all
over the world. Indian Banks also now provide credit cards to clients on a selective basis.
In this kind of service, certain valued clients are sanctioned a specific limit upto which
they can obtain goods or services on credit from member business establishments
spread all over the country or from the railways and airlines. Depending upon the limit
available to the credit card holder status is given to the credit card. The credit card
service is available for individuals or for other customers like sole proprietorships, firms
and corporate bodies. The advantage of the credit card is that the credit card holder can
avoid the risk of carrying cash on his person while shopping for goods or services. Credit
card holders are also entitled to withdraw in cash from branch banks of the issuing bank.
For such a facility, banks levy nominal service charges.
Bancassurance: Bancassurance means distribution of insurance policies, (life and non
life) by banks as corporate agents, through their branches located at different parts of the
country. Banks are required to obtain prior approval of IRDA (Insurance Regulatory and
Development Authority) for acting as corporate agent or for having referral arrangement
with insurance companies. Banks need not obtain prior approval of RBI to undertake
bancassurance. Bancassurance helps the banks to build synergies between insurance
business and bank branch network to sell insurance products through banking channel.
Cooperative banks are also allowed to undertake bancassurance business.
Letter of credit: A letter of credit is an undertaking given by the issuing bank at the
request of the importer to pay the money under the credit to the beneficiary viz. The
exporter subject to fulfilling the stipulated terms and conditions agreed between them.
Thus, both the parties initially enter into a contract of sale and agree that the settlement
would be by way of documentary credit accompanied by the relevant documents in terms
of the letter of credit.

Real time gross settlement system (RTGS): RTGS is a large value funds transfer
system whereby financial intermediaries can settle interbank transfers for their own
account as well as for their customers. The system effects final settlement of interbank
funds transfers on a continuous transaction-by-transaction basis through out the
processing day. The transfer of money takes place on a real time and on gross basis. The
RTGS is primarily for large value transactions. The minimum amount to be remitted
through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions. RTGS will
eliminate settlement risk in the case of interbank and high value transactions.
Collection of Utility Bills: Banks collect telephone bills, electricity bills etc. from the
customers of these service providers. The concerned electricity or telephone companies
pay a fee to the bank for every bill collected by the bank. The persons making the
payment of bill need not be customers of the bank. Apart from the fee received from the
concerned company, the banks get cost free funds for a brief period.
Selling of forms: Selling of admission forms of various schools/ colleges and forms for
competitive examinations has become a very big business proposition for the banks.
Banks receive commission for every form sold. Banks enter into agreements with the
institutions for selling their forms.

Other services: Banks render other services such as Stamp vending, Maintaining
DEMAT accounts, Port folio Management, etc.
Relevance of fee based products in Cooperative Banks
Cooperative banks have to offer the services to their customers by studying the
present facilities available to them from other agencies and introduce such
services which are suitable to their area of operation and to the customers.
Similarly, they have to work out cost benefit analysis as introduction of some of
the fee based services requires the new technology like computers with
connectivity with all the branches and HO of the bank.



Existence of a well functioning and efficient system of internal checks and control in a
bank is a sine-qua-non for:
reducing instances of frauds,
monitoring and checking of misappropriation
reducing errors of omission and commission by the bank's employees or
A sound internal control system is essential to ensure that the bank's business is
conducted in an orderly, prudent manner in accordance with established policies. The
objectives of a sound internal control system consist of ensuring that:

The systems and procedures are being followed.


The implementation of guidelines is effective.


Sanction and follow up of advances are proper.


Leakage of income, if any, is detected/plugged expeditiously


Proper feedback about health of branches is provided to the top management.


Risk management system is functioning properly in the bank and various risks in
the functioning of the bank are properly identified, quantified and managed.

Internal Controls - Elements

The bank's assets have to be safeguarded against loss arising from waste, fraud,
systemic deficiencies, inefficiency or carelessness and casual attitude to untoward
happenings. It is the responsibility of the Board of Directors and top management to
ensure sound administrative controls in the bank comprising the following elements.

Neatly codified responsibility area for staff


Specific job functions


Proper selection and training of personnel


Loyalty standards


Sound supervision arrangements


Staff accountability


Proper division of supervisory duties


System of periodical double checks


Regular rotation of duties


System of authorization at various levels


Periodical internal auditing and inspections and


Independent examination of systems and procedures

Internal control system in Banks-Scope

The scope of a good internal controls and checks system comprises


Internal/concurrent audit


Internal inspection including computer audit


Risk assessment and control


Accounts controls


Administrative controls


Vigilance cell and monitoring of frauds


Review by Board of Directors


The Reserve Bank of India had constituted a High Level Committee, under the
chairmanship of Shri A. Ghosh, the then Deputy Governor of RBI, to enquire into the
various aspects relating to frauds and malpractices in banks. The Committee made a
number of recommendations and suggested precautions to be taken to avoid incidence of
frauds and malpractices in the banks. Some of the recommendations relevant to the State
and District Central Co-op. banks commended for adoption by them are indicated below:
Internal Audit/inspection Machinery
The banks should introduce a sound system of internal audit. With a view to
strengthening the credibility of the inspection system in detecting cases of
frauds/malpractices, steps need to be taken to gear up the inspection/audit machinery
and to improve the quality of officers of the inspection department. The officers posted to
this department should have sufficient experience and exposure and the department
should be headed by an official of sufficient seniority and proven integrity. In order to
attract competent staff to the department, minimum, continuous experience of three years
in Inspection Department should be made as a prerequisite for promotion to the next
higher grade.
Periodicity of Internal Audit
The periodicity of the internal audit of the branches should be at least once in every 12
months, which should be really of surprise character.

Coverage of Internal Audit

The coverage of such inspections should also be made more comprehensive, interalia, to
include thorough examination of the internal control system obtaining at the branches
including the various periodical control returns submitted to the controlling offices. The

internal inspection report should specifically comment, on the position of irregularities

pointed out in the inspection report of NABARD. The inspection/audit officials should also
critically analyse and make in-depth study of the corruption/fraud prone areas such as
appraisal of credit proposals, balancing of books, reconciliation of inter-branch accounts,
settlement of clearing transactions, suspense accounts, premises and stationery
accounts during the course of inspections leaving no scope for any malpractices/
irregularities remaining undetected.
The internal inspector should scrutinise the suspense account during inspection/visit and
give specific instructions for early reversal of entries. The banks should ensure that the
system evolved for recording the details of off-balance sheet transactions are properly
followed by all branches. These records should be periodically balanced and internal
inspectors should verify the same and offer critical comments.
Proper inventory of dead stock articles, stationary should be maintained and subjected to
surprise check at periodical intervals by the officials of the branch as also internal
Supplementary/Short Inspections
The annual internal inspection should be supplemented by surprise/short inspections at
regular intervals, particularly of large branches, to be carried out by officials at appropriate
higher levels not only to look into the general working of the branches but also to ensure
that no malafide practices are being indulged in to by the branch officials. In addition
wherever so warranted, spot/special inspections or scrutiny should also be carried out on
receiving signals to that effect.
Revenue Audit
Besides internal audit and short inspections, there should be a regular system of revenue
audit of the large branches. The reasons of leakage of income unearthed during such
audit should be examined in-depth and action taken against the officials responsible for
the lapses.
Credit Portfolio Audit
A system of exclusive scrutiny of credit portfolio with focus on larger advances to
individuals and units having high level of exposure at regular intervals may be introduced.
A special scrutiny of high value accounts shifted to the bank from other banks, if any,
should be done. Similarly, the accounts transferred from other branches along with the
officials should be subjected to thorough scrutiny during the internal inspection. The

summary of the important findings may be submitted to the Committee of the Board.
Irregular accounts over a cut off point may be reported to NABARD.
Banks should examine the need for introducing a separate section of internal Inspection
machinery to scrutinise credit portfolio only. It will be necessary to staff this Section with
competent and experienced personnel who will make an in-depth examination of the
credit portfolio. It should be the responsibility of this Section to particularly scrutinise
larger accounts and group exposures. To be effective, apart from competent officials to
man the Section, the Section should be under the charge of a senior personnel reporting
directly to the Chief Executive Officer/Managing Director of the bank. The summary of
important findings should also be put up to the Audit Committee of the Board.
The Head Offices officials should have a squad, which should also make surprise
inspection of the goods pledged/hypothecated to the bank.
Quarterly snap inspections of the branches should be made by the branch level senior
officers or by Head Office / Regional Office officers, to especially verify whether drawing
power/limit, interest rates, etc. are correctly entered.
All the State Cooperative Banks and District Central Cooperative Banks are required to
include the following measures in respect of investment portfolio audit:
The reconciliation of the balances of SGL transfer forms as per banks books
should be periodically checked by the internal audit department.

In view of the possibility of abuse, purchase and sale of Government Securities

etc., should be separately subjected to audit by internal auditors (and in the
absence of internal auditors by Chartered Accountants out of the panel
maintained by the Registrar of Co-operative Societies) and the results of their
audit should be placed before the board of directors once every quarter.

The internal auditors (Chartered Accountants/Statutory Auditors in the absence of

Internal Auditors) who audit the treasury operations should also scrutinise that
adherence to the aggregate upper contract limit for each of the approved brokers
is within a limit of 5% of total transactions (both purchase and sales) entered into
by the bank during a year.
The internal auditor should ensure that disproportionate part of the business is
not transacted through only one or a few brokers and that aggregate contract
limits for each of the approved brokers are not exceeded. The limit should cover
both the business initiated by the bank and the business offered/brought to the

bank by broker. The internal auditors should include this aspect in their report to
the Managing Director/Chief Executive Officer of the bank. Besides, the business
put through any individual broker or brokers in excess of the limit of 5% of total
transactions entered into by the bank during the year with the reasons therefore,
should be covered in the half-yearly review to the Board of Directors; and
The deals have been undertaken in the best interest of the bank.
Compliance with Prudential Norms
Internal auditors should bring out non-compliance with the prudential norms relating to
income recognition, asset classification and provisioning for taking suitable action in the
Cheque Purchase Transactions
The internal inspectors should verify all the cheque purchased/discounted beyond the
sanctioned limit. They should be asked to conduct a sample checking of transactions.
Ghosh Committee had recommended introduction of concurrent audit at large and
exceptionally large branches of banks to serve as administrative support to branches,
help in adherence to prescribed systems and procedures and prevention and timely
detection of lapses/irregularities. Accordingly, all scheduled and other SCB and District
Central Co-op. Banks with deposits over Rs.50 crore were required to introduce the
system of concurrent audit. Subsequently, based on the recommendations of the Joint
Parliamentary Committee (JPC), which enquired into stock market scam and matters
relating thereto, all co-operative banks are required to introduce the system of concurrent
The concurrent audit system is to be regarded as part of a bank's early-warning system to
ensure timely detection of irregularities and lapses, which helps in preventing fraudulent
transactions at branches.
The concurrent auditors shall certify that the investments held by the bank as on the last
reporting Friday of each quarter as reported to NABARD are actually owned /held by it as
evidenced by physical securities or the custodians statement. The certificate should be
submitted to the Regional Office of the Reserve Bank of India, having jurisdiction over the
bank, within thirty days from the end of the relative quarter.

It is basically for the individual banks' managements to decide the details of the
concurrent audit system. However, the broad features of concurrent audit system are
detailed below:
Concurrent Audit is an examination, which is contemporaneous with the occurrence of
transactions or is carried out as near thereto as possible. It attempts to shorten the
interval between a transaction and its examination by an independent person not involved
in its documentation. There is an emphasis in favour of substantive checking in key areas
rather than test checking. This audit is essentially a management process integral to the
establishment of sound internal accounting functions and effective controls and setting
the tone for a vigilance internal audit to preclude the incidence of serious errors and
fraudulent manipulations.
A Concurrent Auditor may not sit in judgment of the decision taken by bank/branch
manager or an authorised official. However, the auditor will necessarily have to see
whether the transactions or decisions are within the policy parameters laid down by the
Head Office/Board of Directors, they do not violate the instructions or policy prescriptions
of the Reserve Bank of India and that they are within the delegated authority and in
compliance with the terms and conditions for exercise of delegated authority.
The suggested coverage may be as under:
The Departments/Divisions at the Head Office dealing with treasury functions viz.
investments, funds management including inter-bank borrowings, bill rediscount,
and foreign exchange business are to be subjected to concurrent audit. In
addition, all branch offices undertaking such business, as also large branches and
dealing rooms have to be subjected to continuous audit.
The problem branches, which are continuously getting poor or very poor rating in
the banks annual inspection/audit and where the house keeping is extremely
poor, may be covered.

Banks may also include additional branches at their discretion on the basis of
need; that is their professional judgement about the overall functioning of the


The main role of the concurrent audit is to supplement the efforts of the bank in carrying
out simultaneous internal check of the transactions and other verifications and
compliance with the procedures laid down. In particular, it should be seen that the
transactions are properly recorded/ documented and vouched.
The concurrent auditors may broadly cover the following items:

Daily cash transactions with particular reference to any abnormal receipts


Proper accounting of inward and outward cash remittances.

Proper accounting of currency chest transactions (if any), its prompt reporting to
Reserve Bank of India

Expenses incurred by cash payment involving sizeable amount.


Ensure that in respect of purchase and sale of securities, the branch has acted
within its delegated power having regard to its Head Office instructions.

Ensure that the securities held in the books of the branch are physically held by it.

Ensure that the branch is complying with the NABARD/RBI/Head Office/Board

guidelines regarding BRs, SGL forms, delivery of scrips, documentation and

Ensure that the sale or purchase transactions are done at rates beneficial to the

Check the transactions about deposits received and repaid.

Percentage check of interest paid on deposits may be made, including
calculation of interest on large deposits

Check new accounts opened. Operations in new Current/SB accounts may be

verified in the initial period itself to see whether there are any unusual operations.

Also examine whether the formalities connected with the opening of new
accounts have been followed as per RBI instructions.


Ensure that loans and advances have been sanctioned properly (i.e. after due
scrutiny and at the appropriate level).

Verify whether the sanctions are in accordance with delegated authority.

Ensure that securities and documents have been received and properly
charged/ registered.

Ensure that post disbursement, supervision and follow-up is proper, such as

receipt of stock statement, installments, renewal of limits, etc.

Verify whether there is any misutilisation of the loans and advances and whether
there are instances indicative of diversion of funds.

Check whether the letters of credit issued by the branch are within the delegated
power and ensure that they are for genuine trade transactions.

Ensure that the branch is complying with the NABARD/RBI/Head Office/Board

guidelines regarding BRs, SGL forms, and delivery of scrips, documentation and

Ensure that the sale or purchase transactions are done at rates beneficial to the

Check the bank guarantees issued, whether they have been properly worded and
recorded in the register of the bank. Whether they have been promptly renewed
on the due dates.

Ensure proper follow-up of overdue bills of exchange.

Verify whether the classification of advances has been done as per RBI

Verify whether the submission of claims to DICGC is in time.

Verify that instances of exceeding delegated powers have been promptly reported
to Controlling/Head Office/Board by the branch and have been got confirmed or
ratified at the required level.

Verify the frequency and genuineness of such exercise of authority beyond the
delegated powers by the concerned officials.

Foreign Exchange transactions.

Check FCNR and other non-resident accounts, whether the debits and credits are
permissible under the rules.

Check whether inward/outward remittances have been properly accounted for.


Ensure that the maintenance and balancing of accounts, Ledgers and registers
including clean cash and general ledger is proper.

Ensure prompt reconciliation of entries outstanding in the inter-branch and interbank accounts, Suspense Accounts, Sundry Deposits Account, Drafts Accounts,

Ensure early adjustment of large value entries.

Carryout a percentage check of calculations of interest, discount, commission

and exchange.

Check whether debits in income account have been permitted by the competent

Check the transactions of staff accounts.

In case of difference in clearing, there is a tendency to book it in an intermediary

suspense account instead of locating the difference. Examine the day book to
verify as to how the differences in clearing have been adjusted. Such instances
should be reported to Head Office/Board of Directors in case the difference

Detection and prevention of revenue leakages through close examination of

income and expenditure accounts/transactions.

Check cheques returned/bills returned register and look into reasons for return of
those instruments.

Checking of inward and outward remittances (DDs. MTs and TTs)

Other items

Ensure that the branch gives proper compliance to the internal inspection/audit

Ensure that customer complaints are dealt with promptly

Verification of statements, HO returns, statutory returns.

The aforesaid list is illustrative and not exhaustive.

In the context of volume of transactions in the large branches it may not be
always possible for the concurrent auditors to do a cent percent check. They may,
therefore, consider adopting the following norms:

In certain areas, such as off balance sheet items (Letters of Credits and Bank







prone/sensitive areas, advances having outstanding balances of more than Rs. 5

lakh, if any unusual feature is observed, the concurrent auditors may conduct
cent percent check.

In the case of areas such as income and expenditure items, inter-bank and interbranch accounting, interest paid and interest received, clearing transactions, and
deposit accounts, the check can be restricted to 10 to 25 per cent of the number
of transactions.

Where any branch has poor performance in certain areas or requires close
monitoring in housekeeping, loans and advances or investments, the concurrent
auditors may carry out intensive checking of such areas.

Concurrent auditors may concentrate on high value transactions having financial

implication for the bank rather than those involving lesser amount, although
number-wise they may be large.

If any adverse remark is required to be given, the concurrent auditors should

give reasons therefore.


Co-operative banks which have partially/fully computerised their operations should
introduce EDP audit system on perpetual basis. In case such banks have an independent
Inspection & Audit Department, an EDP audit cell should be constituted as part of their
Inspection and Audit Department to carry out EDP audit in branches/offices having
computerised operations. However , those co-operative banks, which do not have an
independent Inspection & Audit Department, should create a dedicated group of persons,
who, when required, can perform functions of an EDP Auditor. The overall control and
supervision of these EDP Audit Cells should be vested in the Audit Committees. In this
regard, all co-operative banks having fully/ partially computerised operations should
ensure to comply with the norms stipulated in the succeeding paragraphs.
A team of competent and motivated EDP personnel may be developed. It is beneficial to
have a collective development system consisting of many persons instead of a few, in
order to take care of a possible exodus of key personnel. EDP auditors' technical
knowledge should be augmented on a continuing basis through deputation to
seminars/conferences, supply of technical periodicals and books etc.
Duties of system programmer/designer should not be assigned to persons operating the
system and there should be separate persons dedicated to system programming/design.
System person would only make modifications /improvements to programs and the
operating persons would only use such programs without having the right to make any

Major factors which lead to security violations in computers include inadequate or

incomplete system design, programming errors, weak or inadequate logical access
controls, absent or poorly designed procedural controls, ineffective employee supervision
and management controls.
These loopholes may be plugged by:

strengthening physical, logical and procedural access to system;

introducing standards for quality assurance and periodically testing and checking
them; and

screening employees prior to induction into EDP application areas and keeping a
watch on their behavioral pattern.

There is a need for formal declaration of system development methodology,

programming and documentation standards to be followed by the bank, in the absence of
which quality of system maintenance/improvement might suffer. EDP auditors should
verify compliance in this regard. Contingency plans/procedures in case of failure of
system should be introduced/ tested at periodic intervals. EDP auditor should put such
contingency plan under test during the audit for evaluating the effectiveness of such
plans. Every bank should have a manual of instructions for their inspectors/auditors and it
should be updated periodically to keep in tune with latest developments in its area of
operations and in its policies and procedures.
An appropriate control measure should be devised and documented to protect the
computer system from attacks of unscrupulous elements. Before introducing an EDP
application in place of certain manual procedures, parallel run of both the systems should
be done for a reasonable period to ensure that all aspects of security, reliability and
accessibility of data are ensured in the EDP application.
In order to ensure that the EDP applications have resulted in a consistent and reliable
system for inputting of data, processing and generation of output, various tests to identify
erroneous processing, to assess the quality of data, to identify inconsistent data and to
compare data with physical forms should be introduced.
While engaging outside computer agencies, banks should ensure to incorporate the
"clause of visitorial rights" in the contract, so as to have the right to inspect the process of
application and also ensure the security of the data/inputs given to such outside

Entire domain of EDP activities (from policy to implementation) should be brought under
scrutiny of Inspection and Audit Department. Financial outlay as well as activities to be
performed by EDP department should be reviewed by senior management at periodical
In order to bring about uniformity of software used by various branches/offices there
should be a formal method of incorporating change in standard software and it should be
approved by senior management. Inspection and Audit Department should verify such
changes from the view-point of control and for its implementation in other branches in
order to maintain uniformity.
In order to ensure and enhance the effectiveness of internal audit/inspection as a
management tool, it is considered necessary that an Apex Audit Committee should be set
up at the Board level for overseeing and providing direction to the internal audit/inspection
machinery and other executives of co-operative banks. The Audit Committee of the Board
of Directors (ACB) may consist of three/four Directors, one or more of such Directors
being Chartered Accountants or persons having experience in management, finance,
accountancy and audit system, etc. This also implies that the banks need to constitute,
wherever necessary, their Boards with an adequate number of such professionals.
The Audit Committee of the Board should review the implementation of the guidelines
issued by NABARD and submit a note thereon, to the Board at quarterly intervals. The
other duties/ responsibilities of the Audit Committee of Board (ACB) are as follows:
ACB should provide direction and oversee the operations of the total audit function in the
bank. The total audit function will imply the organization, operationalisation and quality
control of internal audit and inspection within the bank and follow-up on the statutory audit
of the bank and inspection of NABARD.
As regards internal audit, ACB should review the internal inspection/audit function in the
bank - the system, its quality and effectiveness in terms of follow up. It should review the
follow up action on the internal inspection reports, particularly of "unsatisfactory"
branches and branches classified by the bank as extra large branches. It should also
specially focus on the follow up on:
Inter-branch adjustment accounts.
Unreconciled long outstanding entries in inter-branch accounts and
inter-bank accounts

Arrears in balancing of books at various branches.


All other major areas of housekeeping.

Compliance with the Statutory Audit Reports/Concurrent Audit Reports/NABARD

Inspection Reports.

Omission on the part of internal inspecting officials to detect serious irregularities

should be viewed seriously

Periodical review of the accounting policies/systems in the bank with a view to

ensuring greater transparency in the bank's accounts and adequacy of accounting
Risk assessment and control

Banks perform various types of intermediation functions


Pooling of funds from a variety of smaller units and make larger loans


Funding risky borrowers by acquiring funds from saving units through relatively
safe and liquid securities, intermediation implies high financial gearing


Making long-term loans by borrowing short-term funds from depositors of other



Assets and liabilities are fundamentally mismatched

All the above intermediation functions involve various types of risks. Various other
operations such as issuing of draft/guarantees, investments etc. carry varying level of
risks. Risk may be simply defined as probability of loss or damage. The banks are
generally exposed to the following types of risks.

Credit risk


Interest rate risk


Liquidity risk


Capital risk


Market risk


Exposure risk, etc.

The bank should identify the risks, evaluate and monitor them to minimize their effect on
bank's financial health. These aspects are discussed below in detail:

Credit risk

Expressed in simple terms credit risk is failure in repayment of loans by borrowers on due
date. Presently, this is expressed in terms of the extent of NPAs to total loans. Higher this
ratio, higher the risk. Credit management through well laid down credit policies and
monitoring, is necessary to overcome such risks. Inadequate or poor policies, weak

implementation of loan policies, poor credit assessment, inadequate loan monitoring, risk
concentration are some of the reasons resulting in credit risk. The banks may follow the
guidelines issued by NABARD on NPA management for reducing the level of NPA's.
Recoverability of the principal and ability to generate income are necessary for profitable
banking business.

Interest rate risk

Interest risk is defined as changes in the interest income due to changes in the rate of
interest. Further, interest rate changes values of assets such as investments.
III. Liquidity risk
Liquidity is a condition where a bank is not only able to meet its repayment obligation but
also able to expand its business. Therefore, liquidity risk is the potential inability to
generate cash to cope with deposit withdrawals or increase in business. This type of risk
arises due to mismatches in maturity pattern of assets and liabilities. Such mismatches
could be due to failure of assets to mature according to plan, unexpected calls for
repayment of due deposits, requests for premature pattern of assets and liabilities and
take necessary measures to should assess the maturity pattern of assets and liabilities
and take necessary measures to overcome liquidity risk. The bank should prepare cash
flow analysis i. e. outgoing commitments compared with inflow of funds, construction of
maturity ladder identifying net position or mismatch, determine acceptable level of
mismatches, etc.
IV. Capital risk
Maintaining adequate capital on a continuous basis is necessary to ensure that banks
have adequate capital to expand business and to absorb losses due to business risk. It is
also necessary to maintain real or exchangeable value of owned funds at the prescribed
level as per the provisions of BR Act, 1949/ RBI Act, 1934 to maintain the status of bank
as defined under those Acts. Adequate capital demonstrates willingness of shareholders
to put their own funds at risk on a permanent basis and provide resources free to fixed
financial costs.


Market risk

Market risk is the risk to bank's financial condition resulting due to adverse movements in
market prices. The investment value and collaterals offered may get depreciated due to

market forces. It is necessary to anticipate these changes and take action to protect the
value of bank's assets.
VI. Exposure risk
Large exposure to a single party would expose the bank to serious risk, in case the unit
does not function properly, therefore, banks should be very cautious in extending loans to
and in making investments in a single borrowing unit or borrowers of the same group.
Various guidelines prescribed by RBI/NABARD have to be followed in this regard to
ensure that exposure ceilings are adhered to. The objective is to avoid risk concentration
due to exposure to single customers/ economic sector, etc.
Accounts controls
It is the duty of the management of a bank comprising the Board of Directors and senior
management to implement a sound system of accounting control based on a complete
and integrated system of accounting, written manuals, set of forms and documentation,
loan/investment/expenditure sanction standards, controls to verify accuracy of accounting
inputs and outputs as also by operational results.
Apart from the basic accounting system of bank, income and expenditure statements as
also the balance sheet statements, the NPAs and provision, a bank has to have updated
information on crucial aspects of its operations to enable it to prepare its books of
accounts and statutory/ other control returns for NABARD, RBI, RCS. An accounting
manual register and formats for maintenance of accounts, ledgers and others registers
are a must with daily ledger postings, verification of entries from the vouchers, balancing
of ledgers at least on a weekly/ monthly basis and reconciliation of entries in inter branch
and inter bank accounts at least on a quarterly/half yearly basis. Long outstanding entries
in sundry debtors and sundry creditors also have to be settled monthly/quarterly basis. An
important element of the bank's profitability is the funds management strategy with
special emphasis on cash management. This requires a very efficient and accurate
system of control returns on the following.

Resources (including all deposits)


Cash management




Advances including sticky/problem accounts




Suspense and sundry deposits


Purchase and disposal of dead stock


Monthly profit and loss account


Inter bank/branch accounts reconciliation

These control returns need to be analyzed for warning signals by the Head / Area office of
the bank as an off site supervisory system. Abnormal changes and ratios are to be
investigated without delay; many banks treat these control returns as part of information
system and are unable to realize the need for such returns as part of the banks control
system. Balancing of banks ledgers especially deposits, loans and general ledgers are to
be completed at least on a monthly basis.
Administrative controls
Rotation of staff, keeping vigil on the style and expenditure of bank officers, periodical
transfer of staff between branches/bank, are some of the common methods needed for
administrative control. Also, staff members and officials whose integrity is in doubt should
not be posted at sensitive desks. Suspect staff members must be kept under vigilance.
Feedback from anonymous sources, complaints should also be followed up to the extent
Staff Accountability
In view of the social responsibility cast on banks and to keep the incidence of corruption
and malpractice under check, there is a need for fixing staff accountability for irregularities
and malpractices at all levels, at the appropriate time. Inspectors/auditors failure detects
or report serious irregularities should also be viewed seriously. Clear guidelines for
delegation of financial powers to different staff levels, sanction of advances, post-sanction
monitoring etc. should indicate what constitutes abuse of authority, negligence in
compliance to terms of sanction, monitoring etc. should be drawn up so that officer taking
genuine business decisions are not victimized. In the process of fixing staff responsibility,
the possibility of loss of employee morale should be carefully considered and balanced.
The aim of internal controls is basically to strengthen the banks and its operations on
sound lines.
Review by Board of Directors
Follow-up of all audit/inspection reports and monitoring follow up action, need to be
initiated by the Board of Directors as under:

To review follow-up action on audit/inspection reports whether internal/statutory


To ensure compliance on statutory inspection /audit reports


To ensure accountability for unsatisfactory compliance of inspection report, delay

in compliance and non-rectification of deficiencies


To take periodical review of accounting policies/system to ensure greater

transparency in bank accounts and adequacy of accounting controls


To give directions in respect of lacunae observed in performance reports wherever



To review all frauds and vigilance cases with a view to reducing their occurrence


To review progress in inter-branch and inter-bank reconciliation


To monitor process in balancing of books, clearing adjustment amounts,

sundry/suspense items, balance sheet items and other house-keeping items


To review funds management with specific reference to maintenance of CRR/SLR


To review investment policy particularly investments in non-SLR securities like

shares and debentures


To review the compliance with various sections of BR Act/RBI Act/Cooperative

Societies Act/Rules / bye-laws as applicable to the concerned banks

Unless steps are taken immediately to review the internal controls systems in the bank
and initiate measures to promote excellent house keeping, accounting systems and
maintain extensive control over the banks operations, the cooperative banks and RRBs
cannot expand their business levels and complete with outer banks, especially the
computerized commercial banks. Increasing computerization and business consultation
measures also need to be reviewed by bank management, to maintain the competitive
edge of branches, maintain customer services and as a measure of vigilance and control
over operations.
Perspectives: All these norms are to be reviewed seriously for possible implementation
by all Co-operative Banks and RRBs so as to plug all existing operational loopholes,
which aid and abet the increasing number of frauds in the banking industry. While the
Basle Committee standards are useful guidelines, banks may have to evolve their own
inspection/rating formats, control systems, guidelines, etc. so as to discourage frauds and
embezzlements. The guidelines may have to evolve further sc as to encompass microlevel and macro-level developments in the emerging banking scenario.
Fraud-prone areas, Computer-related frauds, preventive action required to be
initiated by banks
There is an urgent need to put in place foolproof systems and procedures, governance
and professional ethics so as to ensure smooth functioning of business entities that are
prone to fraud, particularly banks. In the matter of preventing fraud, internal audit has an
advantage over the external audit in the sense that it has an understanding of how the
system works so as to initiate quick steps. Internal audit would be privy to the dynamics of
decision-making and the process behind them in an organization. A vigilant internal audit

team would be able to bring in the requisite transparency and through this, proper
Window of opportunity for perpetration of fraud
In banking sector, frauds are perpetrated basically by four classes of people: (1)
Employees, (2) Customers, (3) outsiders or strangers and (4) Employees in collusion with
customers/ outsiders. It is a common knowledge that no fraud can take place without a
window of opportunity for the same.
Occurrence of frauds
Some of the large value frauds that occurred in banks revealed that the following led
to the occurrence of frauds:
Banks did not properly identify their customer before allowing large value
transaction/ business. No effort was made to verify the economic/business activity
of the customer or economic purpose before handling significantly large value






entertained without identification to represent the beneficial owner of the

accounts. The collecting bankers were reported to be grossly negligent in
introducing fake/fictitious customers into banking system who perpetrated the
There was laxity in the compliance of internal control system and the controller's
supervision was not effective.
The alleged involvement of staff in perpetration of frauds has increased. The
functional positions at field level were manned by persons who were not 'fit and
proper'. The staff was so allowed to continue at the same desk for long period.
Most of the frauds perpetrated by the staff members were by those who were
considered to be the 'best' performers.
The housekeeping at branches continued to be neglected.
The post-fraud investigations were unduly delayed and lacked fairness and
objectivity. Controllers by and large escaped the accountability for laxity in
The punitive action against those who perpetrated frauds was not initiated timely
and punishment could not be awarded quickly on account of the legal system or
procedural hurdles as also service rules and regulations.
Opening fictitious account for crediting proceeds of forged/unauthorised cheque
for withdrawal immediately.

Allowing frequent overdrawing in the current or operative limits and not reporting
to the higher authorities and not getting it regularised.
Availing loans on the strength of forged documents/title deeds

After availing loans, the proceeds of the asset procured out of the loan not being
deposited back to the bank or being routed through other banks for siphoning the

Release of the securities in an unauthorised manner before ensuring liquidation of

direct or indirect liability of a borrower/guarantor.
Encashment of forged/ stolen instruments such as cheque, demand draft, Credit
Advice, etc.
Entertaining accommodation of Bill of Exchange transactions and wrongful
encashment of loan proceeds through unauthorised withdrawal.
Stipulated audit exercises such as credit audit, legal audit, stock audit, current
asset audit should invariably be completed with different set of people.
Exercise of delegated powers by the functionaries should be subjected to
perusal/scrutiny by the controlling/next higher authority.
Periodical audit and inspection of the computerised systems and application
software with regard to capability of meeting the security standards. Examine the
vulnerable areas of fraud as commented in the Systems Audit Report for regular
compliance, checking, verification and ensuring Mandatory Maker-Checker
concept in one-way or the other for all the transactions, with proper job rotation
and delegation of duties.
Based on the tenet of sub-ordinate to superior, peer-to-peer, supervisor to
Executive, a strong supervisory checking and verification mechanism should be
put in place.
Exceptional transaction statement should be checked and verified by the Branch
Head, on daily basis without fail and corrective action be taken immediately.
Computerised Banking Environment
Some of the frauds and the modus operandi of the same are summarized below:
Significant exposure of the banking activities to the employee of a soft-ware
vendor, while latter is providing the maintenance service.
At the time of half-yearly crediting of interest in the huge operative savings bank
account, substantial amount may be credited by inflating interest paid on deposit
account by erasing genuine debits/fraudulent credits in the relative accounts.

Misappropriation of cash received at Single Window counter due to the absence

of scroll/control mechanism, normally.

Even after years of computerisation, important functions like password secrecy,

maintenance, printing of reports, exceptional reporting, checking of the
output/reports, monitoring system generated entries, etc. are not performed as per
the laid down guidelines.
Alert Signals
Normally certain alert signals are thrown by the system if the environment is fraud-prone,
and it is better to capture and catch them so that at least the impact is minimized, if not
eliminated altogether. Some such signals are detailed herein below:

Scrutinise various reports such as Internal Inspection, Concurrent Audit, Statutory

Audit, Long Form Audit, Branch Audit, Supervisory/Regulatory inspection, etc.,
meant to throw light on the weakness in the system and vulnerable areas and
ensure that the shortcomings are duly attended to/rectified.

Deep probing of any abnormality of movement, transactions, and data

immediately before it becomes too late for any action.

Non-rotation of jobs and some gaining roots into the functioning of certain
business oriented functional departments.

No individual is bigger than the institution and while keeping faith on people
working on the systems there should be no relaxation and compromise on the
systems and procedures.

Fraud preventive measures

It is important to ensure that suitable preventive measures are put in place to avoid or at
least minimize fraud in the computerised environment in banks to which situation only the
banks are moving into. Some of these are listed below:

Proper security in the computer systems can be achieved by exercising series of

regulations such as physical access controls, logical access controls and
environment controls, etc. This is because, perpetration of fraud in computerised
environment happens mainly by breaking any one or more or all of these Access
Control Mechanisms.

Full adherence to all the security and control standards prescribed.

Branches should be careful while issuing chequebooks on the basis of

authorisation letters to avoid fraudulent usage of the same. Proper verification is

Implementation of segregation of duties, roles and responsibilities in the

computerised environment. Job rotation among the staff and availment of leave by
the employees should be ensured.

No one should have complete access to the entire operating cycle of any financial
transactions and it should necessarly pass through more than two or three officials.

Checking and balancing of books should never be entrusted to the same person at
any point of time.

Newly opened accounts needs to be put under close watch for any unusual and
large volume of transactions.

Old borrowal account whether large or small should be closely monitored. The
status of the account and not the length of the relationship of the customer with the
bank should be the main criteria for considering the credit facilities.

Each bank should have a Fraud Risk Management Policy formulated under the
directions of the Board. The policy should encompass the key areas relating to (i)
investigation and disposal of fraud cases, (ii) rotation and leave of staff, (iii)
codification of laid down procedures, (iv) system of surprise inspection of fraudrpone areas by the controllers, (v) prompt scrutiny of control returns, (vi) follow-up
of internal inspection/audit reports, (vii) aspects of controllers' accountability, (viii)
relationship and reporting obligations between line staff and controllers, (x)
building up of institutional memory, (xi) mode of business communication and (xii)
raising red flags on some staff with doubtful integrity.

Non-fund business items like Letters of Credit/Bank Guarantees should not be

considered in isolation but should be allowed along with fund based limits. They
should be issued under the signature of two authorised signatories.

The Management Audit in the banks should focus on compliance of system and
effectiveness of controllers in discharging control functions.

The laid down procedure for the safe custody of bank's critical stationery, its indent,
issue, movement, loss, etc., should be strictly followed.
All the new accounts opened should be closely watched with reference to the
unusual banking transactions.

For reconciliation of outstanding entries in inter-branch or impersonal accounts, high

value entries be segregated for reconciliation on priority basis.

Weekly reconciliation of outstanding entries in clearing adjustment account should be

done by the officers not concerned with the clearing transactions on either side.
Staff should be adequately trained to have sufficient exposure of the fraud-prone
areas of the bank's functioning.

To ensure timely submission of control returns by the branch managers, the second-in
charge of the branch should be made responsible for the same.
Credit monitoring guidelines should clearly outline requirement of field visits by the
controllers and also stock inspection of large borrowal accounts. This would be in
addition to the regular inspection/field visit by the line staff and the controller.
Observations of the visiting officers/stock/credit auditors must necessarily find place
in every review/renewal/ enhancement proposal of the borrower.
Annexure -I
Rating of Branches
Branches are operating arms of the bank, which implement various policies and
procedures prescribed by the bank in conducting banking business. Rating of branches
on the basis of inspection/audit reports is intended to monitor the performance in tune
with the ground rules laid down and takes necessary measures for improving bank
profitability and to ensure adherence to various guidelines issued by RBI / NABARD /
Govt. This would facilitate in identifying weaknesses in branches and measures for
overcoming the same by the management. This would also result in evaluation of
performance of branch managers, which in turn governs career prospects of the officials.
However, to achieve the intended objectives, accurate and objective judgment of branchs
performance by inspecting officials is of paramount importance. Broad parameters for
evaluating branch performance could include the following criteria.

Follow-up and rectification of deficiencies pointed out in previous inspection/audit



Performance of branch with regard to business development, profitability, credit

management and recovery. For the purpose of assessing profitability. It is
necessary that banks introduce a system of assessing branch profitability either
on half-yearly or yearly basis.


Status of non-performing assets and its recovery


Quality of internal control systems in vogue


Safety and quality of assets like cash, premises, etc.


General administration and staff


Security arrangements


Customer service


House keeping including inter-branch, inter- bank reconciliation and periodical

balancing of books

In the light of the above parameters, specific criteria are evolved for rating of branches
and details of the same are indicated in Appendix- A. Under the criteria, grades will be

awarded based on performance in select key parameters. The final grade will be arrived
at by taking into account the sum total of marks awarded to individual parameters/subparameters. Evaluation of branch performance is made on a 4 scale rating as under:


75 & above



65 -74





Unsatisfactory Below


Track record of efficiency ratings earned by branches over the past four / five inspections
should be maintained and updated from time to time and made available to the
inspection / audit staff, Subsequent audit/inspections must lay emphasis on parameters
which were found weak during the last inspection / audit.
There should be a system of preparing summary of inspection report of unsatisfactory
rated branches to attract attention of senior management for initiating remedial measures
to restore the branch to an acceptable level of efficiency in a specific period of time. Such
branches should be targeted for visit by senior officers to ensure that the branch is
progressing in proper direction.
Appendix A

Business Development
Quarterly deposit targets
Aggregate year end targets
Advances (Annual)
Aggregate credit targets
Non-farm sector and other credit targets
Credit Management
Quality of credit appraisal, documentation etc.
Post disbursement supervision and monitoring
Recovery Management
Reduction of NPA level vis--vis year-end targets
Cash recovery under vis--vis recovery year-end targets
Internal Controls
Quality of internal controls (Submission or returns to HO)
Pendency in reconciliation
Balancing of books, housekeeping and control over security items
Profitability and Productivity (No marks to loss making
Customer Service
(with reference to complaints, collection of outstation cheques,


customers opinion, pendency of loan applications, adherence to


time norms, etc.)

General Administration, Staff including security measures and


Compirance on previous inspection findings and rectification

of defects on the spot.



To get excellent rating, a branch should score a minimum of 75% of the marks
(60% for good) allocated for internal controls and compliance on previous
inspection findings.


For a branch to get excellent or good rating


No major fraud should have been detected during the period covered by
inspection having a direct bearing on internal control.


No grave irregularities should have been committed which endangers

banks money.


No suppression of facts or misrepresentation to HO, which are of very

serious nature.


No persisting irregularities and non-tallying of accounts.


Growing volume of business and complexities in operations have made computerization
inevitable for the banking operations. Technology has become one of the most important
factors contributing to the success in the banking business. It is now possible to do
banking without visiting a bank branch. A customer can do any transaction from the
comfort of his home. The risks associated with the dealing of cash can be reduced to a
large extent with the help of electronic banking. Large volume of transactions can be
handled by mechanization of operations. The new generation banks and even the public
sector banks and Regional Rural banks have made substantial progress in
computerization of their operations. Cooperative banks, however, have not been able to
exploit the benefits of computerization. It is, therefore, essential to understand the basics
of computers for the average banker in the cooperative fold.

What is a Computer?: An electronic machine that can be programmed to accept data

(input), process it into useful information (output). It can store data which can be retrieved
for future use. The processing of input into output is directed by the software, but
performed by the hardware. Let us discuss some of the common terms used in the
context of computers.
Hardware (H/w): All machinery & Equipments Computer & Peripherals
Peripherals: Any piece of hardware connected to the PC
Software (S/w): programs- tells the Computer how to perform a task
Systems S/w : For managing internal activities & run applications s/w Interpreter bet
S/w & H/w
Application S/w: S/w to perform a specific task Custom or Packaged
Bits & Bytes : Computers are devices powered by electricity, which has two discrete
states: On or Off. To be processed, all data in a computer system (words, symbols,
pictures, videos, sounds) must be reduced to a string of binary digits. A binary digit 1 or 0
is called a bit. Eight bits grouped together as a unit are called a byte, which provides
enough combinations of 0s and 1s to represent 256 individual characters, including
numbers, upper and lower case alphabet letters, punctuation marks and other characters.






KB (or K) One thousand 1,024

# of Bytes

Exact # of Bytes

Approx. Pages of Text

One character
One-half page

Megabyte MB

One million


500 pages

Gigabyte GB

One billion


500,000 pages


One trillion


500,000,000 pages


Coding Schemes Define the patterns of bytes. Coding schemes, such as ASCII,
EBCDIC, and Unicode, provide the means to interact with a computer. When a letter is
pressed on a keyboard, the electronic signals are converted into binary form and stored
into memory. The computer then processes the data as bytes of information and converts
them to the letters we see on the monitor screen or on a printed page.

Hardware components
Input devices accept data or commands in a form useable by computers. Common input
devices are Keyboards, Pointing Devices (mouse, trackballs, joysticks, touchpads & light
pens) and Source Entry devices (Scanners, Audio input devices, video input devices,
digital cameras).
Output devices display the processed information and include printers, monitors,
speakers and even soft copies stored in starage disks.
Processing devices in system unit and are comprised of circuitry.
Storage devices - Drives read from and write to storage media (the physical material that
can store data and programs).
Communication devices provide connections between computers and communication
networks, allowing for exchange of information and data with other computers via
transmission media such as cables, telephone lines, and satellites.
The Motherboard: The motherboard is the main circuit board of a computer. It contains
the central processing unit (CPU), the Basic Input/Output System (BIOS), memory, mass
storage interfaces, serial and parallel ports, expansion slots, and all the controllers for
standard peripheral devices like the keyboard, disk drive and display screen.The chipset
and other motherboard circuitry are the "smarts" of the motherboard. Their job is to direct
traffic and control the flow of information inside the computer. The chipset is a critical part
of any computer, because it plays a big role in determining what sorts of features the
computer can support.
BIOS: BIOS stands for Basic Input/Output System. It is the lowest-level software in the
computer. It acts as an interface between the hardware (especially the chipset and
processor) and the operating system. The BIOS provides access to the system hardware
and enables the creation of the higher-level operating systems that you use to run your
applications. The BIOS is also responsible for allowing you to control your computer's
hardware settings, for booting up the machine when you turn on the power or hit the reset
button, and various other system functions.

ROM (Read Only Memory): ROM is nonvolatile. ROM chips contain permanently written
data, called firmware (your BIOS lives here). ROM contains the programs that direct the
computer to load the operating system and related files when the computer is powered
on. ROM chips are usually recorded when theyre manufactured. PROM -Programmable
Read Only memory chip cannot be changed to update or revise the program inside.
EPROM Erasable Programmable Read Only memory Data can be erased and chip
can be reused Can be erased by shining high intensity UV light through the window.
EEPROM Electrical Erasable Programmable Read Only memory under high voltage.
FROM -Flash ROM is reprogrammable memory using normal voltage inside the PCYou can upgrade the logic capabilities by simply downloading new software. This saves
the expense of replacing circuit boards and chips.
Cache (Pronounced cash): It is a small, high-speed memory area that is placed
between the processor and the system memory. The value of the cache is that it is much
faster than normal system memory. The most frequently used instructions are kept in
cache memory so that the CPU can look in there first - allows the CPU to run faster
because it doesnt have to take time to swap instructions in and out of main memory.
Large, complex programs such as complex spreadsheets or database management
programs benefit the most from having a cache memory available. Pentium II
processors generally come with at least 512 KB of cache memory.
Random Access Memory (RAM): RAM is Primary Storage, also called internal storage.
It serves as computers workspace, storing all or part of the program that is being
executed, as well as data being used by the program. RAM provides instructions and
data to the CPU. These instructions/data are coded in bytes. Each byte is placed in a
precise location in memory, called an address. To access data or instructions in memory,
the computer refers the addresses containing the bytes. The amount of memory available
is therefore measured in bytes. RAM chips consist of millions of switches that are
sensitive to changes in electric current. RAM chips are typically packaged on small circuit
boards called memory modules, which are inserted into special slots on the motherboard.
RAM is volatile storage: Power goes, data goes! Data/instructions are copied into
memory as needed. Not enough memory or corruption of data/instructions in memory can
cause crash. On booting, operating system files are loaded from a storage device (the
hard disk, usually) into RAM, and they remain there as long as your computer is running.
RAM contents change as programs are executed. The amount of RAM needed depends
on the types of applications you intend to run on the computer. S/w indicate the minimum
amount of RAM required to run. Two basic types of RAM are Dynamic RAM (DRAM), and

Static RAM (SRAM). Most computers today use DRAM, which are also of different types:
SDRAM Synchronous Dynamic RAM runs at the same pace as the system clock
runs, DDR SDRAM DDR stands for Double Data Rate - runs at double the pace the
system clock runs - available in speeds from 266 MHZ upto 600MHZ and DDR2 SDRAM
runs at four times the pace the system clock runs - available in speeds from 400 MHZ
upto 800MHZ
Why is RAM so important?: Apart from the processor, the two most important factors
affecting a PCs performance are RAM and hard disk capacity. Hard disks are typically
huge, so the primary limiting factor is the amount of installed RAM. Without enough RAM,
the operating system must swap out storage space with the hard disk. The OS creates a
Paging File (swap file) to supplement RAM (workspace). This is Virtual Memory. Virtual
memory is inherently slow! RAM speed can typically be 120,000 times FASTER than the
hard diskso the less you rely on virtual memory (swapping files between RAM and hard
disk), the faster your system will perform.
Microprocessor: It is the brain of the PC. One electrical circuit in control of another.
Successive generation of processors include 80286,80386,80486 -32 bit interface,
Pentium family P1, P2, P3, P4 64 bit interface. Dual-core technology is like having
two processors - A dual core processor is a CPU with two separate cores residing on the
same chip
The System Unit: The System Unit houses the central processing unit, memory
modules, expansion slots, and electronic circuitry as well as expansion cards that are all
attached to the motherboard; along with disk drives, a fan or fans to keep it cool, and the
power supply. All other devices (monitor, keyboard, mouse, etc., are linked either directly
or indirectly into the system unit.
Front of the System Unit: Drives are housed in drive bays which are accessed at the
front of the case. Internal drives, such as the hard disk drive, are installed in internal bays
that are not typically as accessible as the external drives pictured here. System Unit
cases come in a huge array of types and styles, depending upon hardware needs.
Ports: Ports are sockets that allow you to plug in device connectors to access the
common electrical bus on the motherboard. Ports are usually found on the back of the
system unit, but newer styles also have some of them conveniently located on the front.
Ports allow specific types of connectors (which partly reflects changing technology as well

as various kinds of technology). Serial ports transmit data one bit at a time, like the
picture on the left illustrates. Parallel ports transmit more than one byte at a time. These
types of port designs are based on whether or not fast data transmission rates are
required by the device or not. Most computers come with basic types of ports (serial,
parallel, keyboard, mouse, and USB); and expansion cards allow you to expand the
available types needed by specific devices.
Different Types of Connectors: Understanding the differences among connector types
is useful and important, as the cable required to attach a device to your computer is
specific to its connector, not to mention the port on the computer.
Non-Volatile Storage Devices: The storage devices may be internal or external. Hard
disks are internal to the computer. Removable storage devices include Floppy disks (1.4
MB), CD-ROM (700MB), DVD-ROM (~5GB/side), Memory Stick, MultiMediaCard,
Compact Flash, and Smart Media etc.
Expansion Slots and Cards: Expansion slots are sockets to provide direct connections to
the common electrical bus, allowing you to insert a circuit board into the motherboard.
Typical Expansion Cards include Video Cards, Sound Cards, Modem Cards, Network
Interface Cards (NIC) etc.
Software is a set of instruction written to interface between man and machine.
Programmers writes these instructions. They use computer languages to write software
applications. Software can be divided into three main categories:Languages, Applications
and Operating Systems (OS)
Language: It is one of the software type, used to write extensive applications and
operating systems. It did not have any limitations in programming. By using the
languages you can write any thing for a computer. Just imagine a piece of cloth with
which you want to make a shirt or paint curtain for windows or door- you can make any of
these things from the cloth. Cloth is like Computer Language, tailor is Computer
programmer and Shirt/Paint is Computer application. Examples of languages are: C, C++,
Fortran, Cobol, Pascal, Perl, Java etc.
Application: Software applications are user friendly and most of the time they are
custom made for the end-user. Because they serve a specific purpose, they have their

own limits and bounds. An application will not work beyond its boundary, for example, if
you want to design picture in a word editor you may not be able to get the result
according to your desire. Different categories of applications include Database
Applications, Front End Applications, Reports Applications, Word Editors, Spread Sheets
Editors, Application for presentation, Graphics Designing Application, CAD designing
Application, Computer Games etc. Some of the popular Applications are Oracle, MSoffice
(Word,Excel,Access,PowerPoint,Outlook, etc.), VB, VC++ and Autocad
Operating System: This is the interface between user and computer or man and
machine. This is the main and mandatory software in computer. Without Operating
System (OS) computer will never start. It is the mediator between you as an user and
computer. If you want to talk to a person who does not understand your language, what
you will do? Of course you will take the help of person who knows both yours and the
other person's language. That is what the computer Operating System does. In other
words all languages and applications require a platform which is nothing but OS. Example
of some of the Operating Systems are Windows, Unix, Ban, VMS, RS, OS2, IRIX, AIX,
HP-UX etc.
Information System Security and Data Security
Use of computers makes life a little easier and of course more efficient. But nothing
comes free of cost. Computerisation comes with hosts of risks and security threats.
Security generally means protection of valuable assets against Loss, Misuse, Disclosure
or Damage. In a computerized environment, information is the most valuable asset. In
this context, security refers to protecting the information recorded on, processed by,
stored in, shared by, transmitted or retrieved from an electronic medium. Information
system security, therefore, covers protection of hardware, software, data, procedures and
people against unauthorized use or natural disasters.
Within the overall framework of information system security, data security is concerned
with protection of data from modification, deletion, destruction or disclosure by
unauthorized persons.
Objective of Information Security: The objective of information security is to protect the
interests of those relying on information, and the systems and communications that
deliver the information, from harm resulting from failures of availability, confidentiality,
integrity, and authenticity. Thus, the security objective of a bank is met when:

Information is available and usable when required, and the systems that provide it
can appropriately resist attacks and recover from failures (availability)

Information is observed by or disclosed to only those who have a right to know


Information is protected against unauthorised modification (integrity)

Business transactions as well as information exchanges between enterprise
locations or with partners can be trusted (authenticity and non-repudiation)
According to the International Guidelines for Managing Risk of Information and
Communications Statement #1: Managing Security of Information, issued by the
International Federation of Accountants, the six major activities involved in information
security are as follows:

Policy Development: Developing a suitable security policy to meet the security

objectives listed above.

Roles and Responsibilities: Ensuring that individual roles, responsibilities and

authority are clearly communicated and understood by all the officers and staff of
the bank.

Design: Developing a security and control framework that consists of standards,

measures, practices and procedures

Implementation: Implementing the security policy on a timely basis.

Monitoring: Establishing monitoring measures to detect and ensure correction of

security breaches, such that all actual and suspected breaches are promptly
identified, investigated and acted upon, and to ensure ongoing compliance with
policy, standards and minimum acceptable security practices

Awareness, Training and Education: Creating awareness of the need to protect

information, providing training in the skills needed to operate information systems
securely, and offering education in security measures and practices

Threats to Computers and Computer networks: One must be aware of the threats an
information system faces. Most of the threats faced by an information system can be
categorized as follows:
a) Errors and accidents
b) Natural and other hazards
c) Crimes against computers
d) Crimes using computers
e) Worms and viruses, and
Errors and Accidents: One of the most common occurrences in a computerized
environment is what we normally call computer error. If the printer does not print the
pass book correctly, we say there is a computer error. If the account statement is not
reflecting correct balance, we say it is a computer error. But most often, the computer
error is not the fault of the computer but is a result of human indifference or bad
management. In general, errors and accidents in computer systems may be classified as
human errors, procedural errors, software errors, electromechanical problems and the
most important - the dirty data problem, that is incorrect data entry.
Natural and Other Hazards: Natural disasters like fire, flood, storms, earth quakes etc
may cause extensive damage to IT infrastructure and data. Adequate measure should be
taken to protect data against such natural hazards. The data should also be protected in
the event of civil strife or terrorist attacks.
Crimes against Computers: Crimes against computers are the acts which involve theft,
misuse or destruction of computer resources. These acts include theft, misuse or
destruction of hardware, software, data or communication media. The theft of computer
time is also one of the most serious crimes against computers.
Crimes using Computers: These are the crimes which are conducted using the
computers. For example, an employee can use the banks computer and internet
connection to commit an internet fraud. A common occurrence is using office computer to
send unsolicited emails or spreading spam.
Worms and Viruses: A worm is a program that copies itself repeatedly into memory or
onto a disk drive until no more space is left. A virus is a deviant program that attaches
itself to computer systems and destroys or corrupts data. The viruses spread either

through use of infected diskettes or through the network. The management of an RRB or
Cooperative Bank must put in place sufficient checks to ensure that computers being
used for banking operations are isolated from infection from used of unreliable diskettes,
CDs or network resources.
Security Measures: We have seen how information security can be compromised. The
following are the main components of the measures to deal with security threats:
a) Physical Security
b) Identification of Users
c) Encryption
d) Audit Control
e) Disaster Recovery Planning
Physical Security: Physical security refers to the steps taken to safeguard information
system against physical damage or destruction. The physical environment of the
computer, network components and data library are the most critical areas which must be
protected against the following threats:
Destruction of hardware
Loss of documentation
Damage to database
Power failure
The following preventive measures can be taken up to deal with the above threats:
The entry and exist to server/computer room and data library should be restricted
and properly monitored.
The hardware, software and adapt must be protected against theft by installing
locked doors, burglar alarms etc.
Sensors for early detection of fire, fireproof vaults and wall-mounted fireextinguishing systems must be installed in the entire office building.
Water pipes should be located away from server room and communication lines.

Ceilings and walls should be properly sealed against water seepage.

External storage devices having backups of data and software should be stored
away from computer room either in the same building or in a separate building.
Identification of Users: The most important control mechanism for ensuring security is
identification and verification of every authorized user. There are three ways a computer
system can verify whether the user has a legitimate right of access. We must devise a
security system using an appropriate mix of these techniques. These three techniques
are based on:
What the user has
What the user knows and
Who the user is.
What the User Has - Cards, Keys, Signatures, and Identity Cards: These methods can
be traditional non technological methods or highly technology oriented access control
mechanisms. The examples of non-technical methods are plain old lock and key or
identity card verification by a security guard. The examples of technological controls are
access cards used to verify the identity of the users. Swiping the access card gives the
physical/logical access of the system to the user. One of the most common examples of
such an access based on a card is an ATM.
What the User Knows - PINs, Passwords, and Digital Signatures: A PIN, or personal
identification number, is the security number known only to the user. Unless the user
inputs his PIN in the system, when prompted, the system does not provide access to that
user. A very common example is the PINs issued to ATM card users.
A password is a group of characters that is required to access the computer system. A
password is the most commonly used method for verifying the identity of user. Passwords
are one of the weakest security links. Passwords can be guessed, forgotten, or stolen.
One should never use a real word fro password. One should also avoid using the names
of spouses or relatives and numbers of their telephones or vehicles etc to avoid the
strangers to guess the passwords. In fact, ones should mix letters, numbers and
punctuations and should use minimum 8 characters so as to make the guessing difficult.
The password in the bank should be regularly changed.
A digital signature is a more advanced form of protection. It is used in ensuring the
security of communications over computer networks. It is a string of characters that a

user signs to an electronic document being sent by his or her computer. The receiving
computer verifies using a public-private key system.
Who the user is - Physical traits: With the latest technology, biometrics is being used for
identifying the user. Biometrics is the science of measuring individual body
characteristics. Thus, traits like finger prints, voice, and blood vessels in the back of eye
balls, lips and even ones entire face can be used for identifying.
Encryption: Encryption is used to secure data. Encryption means encoding the data by
converting the standard code into a proprietary code. The authorized user of this data can
decrypt this code and then use the data.
Audit Controls: While all the above measure can minimize security risk, there are still
chances of security breach. The built in audit controls in software and auditability of data
are, therefore, of paramount importance. Audit trails are the logs which contain details of
all transactions which help the auditors trace the breach of security.
Disaster Recovery Planning: In spite of all security measures, organizations are always
vulnerable to disaster. Disaster recovery refers to the contingency measures that an
organization must take to recover the data in case it is damaged or lost due to security
breaches. Backups is the most crucial component of disaster recovery planning.


CRM- Concept and importance: In recent competitive markets, CRM has emerged as
one of the most widely prescribed solutions for diminishing market share particularly in
Banking and Financial sectors. The main motto of CRM is to create and keep customers
with the organization. CRM can be described as the establishment, development,
maintenance and optimization of long term, mutually valuable relationship between the
customer and organization.
Banking being a service industry, CRM is the most important area considered by banks.
After liberalization process, banks became customer- centric because of the competitive
environment and expected business growth is not possible without clear cut CRM
strategy in the banks.

As all of us know, the strong CRM results into an organization on the basis of following

It identifies the needs of customers

That creates the new or modified products

Cross selling increases

Keeps customers with Bank

Fulfils the customer delight that is more important

Factors affecting customers relationship : Well designed customer services along

with good delivery satisfies customers. Factors affecting this are :

Need based products

Attitude Human intensive

Politeness Gives immense satisfaction to customers

Listening To understand the customers view point in the proper perspective

Promptness- To avoid frustrations of customers

To make relationship sustainable, Bank should focus on delivery end. The five elements
of good delivery are speed, timeliness, accuracy, courtesy and concern. If all these
items are satisfied, customer relationship will result in a positive manner to the banks.
CRM as strategy and tool for Business growth: Although the specific solution for
each Bank could be unique, a true CRM strategy starts at the most rudimentary level of
understanding their customers. In reality, not many banks have the idea of how many
customers they have, let alone knowing what the customers desire. A well defined
strategy will therefore start with a business vision and apply to the customer base by
asking questions like:

Who is the best customer to offer the products

What is the best (most profitable) product to offer

What is the best time to offer the product to customer

To make CRM strategy more effective, banks should consider three elements namely
People, Technology and Process.
People: Successful CRM Strategy will touch every employee in the organization in a
fundamental way. Employee should know their role and rationale for change.
Technology: A fully developed CRM strategy would require highly efficient technology.

Process: The realization that customer relationship management is a journey and not a
one shot event is probably the most critical ingredient for the successful
implementation of CRM.
Retention of customers and value of lost customer: Retention of customers in
Cooperative Banks is nowadays big concern. Retention of customer is not a single
process but it is a comprehensive approach to think. An organization to retain customers
should adopt a realistic marketing approach. Marketing is basically a study of strategy
and that would help to retain the customers. The following approach may be helpful in
retention of customers

Identifying the needs through powerful Research and Development activities in



Product innovation- with the changing needs product should be changed. In

Cooperative Banks, product Innovation is a neglected area and banks continue
with traditional Banking products. For product innovations, banks have to earmark
certain amount out of its profits to study and introduce new products .

Technology adaptation: ATM, CBS, RTGS and full computerization should be

adopted for speedy delivery of services and products.

To understand the target group and the delivery of services and products As
DCCBs are mainly meeting the short term loans of farmers, the banks should not
forget the core business while formulating CRM strategy.

At the delivery end, banks behaviour and attitude should be customer oriented.

Customers have more than one option to choose their bank It is not enough for banks
to acquire new customers alone for sustainable growth, but retaining the existing
customer is very essential. Gradual loss of customers will result in decrease in customer
base, which can be measured in terms of percentage. Thus in a year, if banks add five
hundred new customers but loose hundred, there is 20% leakage in customers base.
Value of lost customers: In an organization leaving of customer is certainly a cause for
the management. Organizations should introspect regarding its CRM policy and view
the policy where it is not fulfilling the customers delight and change accordingly. Value of
lost customer is attributed with the following factors :

Customers going from a Bank is not one individual leaving from the hold of
bank, but it takes away the amount of business share. Example : If a customer

has a Rs.1.00 lakh as loan from a bank and by his shifting to a new bank, the
amount reduces from the banks working fund.

Profit reduction- In the above example, if the bank earns Rs10000/- as interest
income during the first year and amount of interest earned in subsequent
years, the profits of the bank reduces to that extent.

A Dissatisfied customer can keep away the many potential customers from the
Bank. That would negatively effect the business growth.

Therefore, banks have to review the CRM policy from time to time and correct it as per
the need of the customers.
Know Your Customer norms and Anti-Money Laundering act
'Know Your Customer' Standards
The objective of KYC guidelines is to prevent banks from being used, intentionally or
unintentionally, by criminal elements for money laundering activities. KYC procedures
also enable banks to know/understand their customers and their financial dealings
better which in turn help them manage their risks prudently. Banks should frame their
KYC policies incorporating the following four key elements:

Customer Acceptance Policy;

Customer Identification Procedures;

Monitoring of Transactions; and

Risk management.

For the purpose of KYC policy, a Customer may be defined as:

a person or entity that maintains an account and/or has a business relationship with the

one on whose behalf the account is maintained (i.e. the beneficial owner);

beneficiaries of transactions conducted by professional intermediaries, such as

Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the
law; and

any person or entity connected with a financial transaction which can pose
significant reputational or other risks to the bank, say, a wire transfer or issue of
a high value demand draft as a single transaction.

Customer Acceptance Policy ( CAP )

Banks should develop a clear Customer Acceptance Policy laying down explicit criteria
for acceptance of customers.

The Customer Acceptance Policy must ensure that

explicit guidelines are in place on the following aspects of customer relationship in the

No account is opened in anonymous or fictitious/ benami name(s);


Parameters of risk perception are clearly defined in terms of the nature of

business activity, location of customer and his clients, mode of payments, volume
of turnover, social and financial status etc. to enable categorization of customers
into low, medium and high risk (banks may choose any suitable nomenclature

level I, level II and level III ); customers requiring very high level of

monitoring, e.g. Politically Exposed Persons (PEPs)

may, if considered

necessary, be categorised even higher;


Documentation requirements and other information to be collected in respect of

different categories of customers depending on perceived risk and keeping in
mind the requirements of PML Act, 2002 and guidelines issued by Reserve
Bank from time to time;


Not to open an account or close an existing account where the bank is unable to
apply appropriate customer due diligence measures i.e. bank is unable to verify
the identity and /or obtain documents required as per the risk categorisation due
to non cooperation of the customer or non reliability of the data/information
furnished to the bank. It may, however, be necessary to have suitable built in
safeguards to avoid harassment of the customer. For example, decision to close
an account may be taken at a reasonably high level after giving due notice to the
customer explaining the reasons for such a decision;


Circumstances, in which a customer is permitted to act on behalf of another

person/entity, should be clearly spelt out in conformity with the established law
and practice of banking as there could be

occasions when an account is

operated by a mandate holder or where an account may be opened by an

intermediary in the fiduciary capacity and

Necessary checks before opening a new account so as to ensure that the

identity of the customer does not match with any person with known criminal
background or with banned entities such as individual terrorists or terrorist
organizations etc.

Banks may prepare a profile for each new customer based on

risk categorisation. The

customer profile may contain information relating to customers identity, social/financial

status, nature of business activity, information about his clients business and their
location etc. The nature and extent of due diligence will depend on the risk perceived by
the bank. However, while preparing customer profile banks should take care to seek

only such information from the customer which is relevant to the risk category and is not
intrusive. The customer profile will be a confidential document and details contained
therein shall not be divulged for cross selling or any other purposes.
For the purpose of risk categorisation,

individuals ( other than High Net Worth) and

entities whose identities and sources of wealth can be easily identified and transactions
in whose accounts by and large conform to the known profile, may be categorised as
low risk. Illustrative examples of low risk customers could be

salaried employees

whose salary structures are well defined, people belonging to lower economic strata of
the society whose accounts show small balances and low turnover, Government
departments & Government owned companies, regulators and statutory bodies etc. In
such cases, the policy may require that only the basic requirements of verifying the
identity and location of the customer are to be met. Customers that are likely to pose a
higher than average risk to the bank may be categorized as medium or high risk
depending on customer's background, nature and location of activity, country of origin,
sources of funds and his client profile etc. Banks may apply enhanced due diligence
measures based on the risk assessment, thereby requiring intensive due diligence for
higher risk customers, especially those for whom the sources of funds are not clear.
Examples of customers requiring higher due diligence may include (a) non-resident
customers, (b) high net worth individuals, (c) trusts, charities, NGOs and organizations
receiving donations, (d) companies having close family shareholding or beneficial
ownership, (e) firms with 'sleeping partners', (f) politically exposed persons (PEPs) of
foreign origin, (g) non-face to face customers, and (h) those with dubious reputation as
per public information available, etc.
It is important to bear in mind that the adoption of customer acceptance policy and its
implementation should not become too restrictive and must not result in denial of
banking services to general public, especially to those, who are financially or socially
Customer Identification Procedure ( CIP )
The policy approved by the Board of banks should clearly spell out the Customer
Identification Procedure to be carried out at different stages i.e. while establishing a
banking relationship; carrying out a financial transaction or when the bank has a doubt
about the authenticity/veracity or the adequacy of the previously obtained customer
identification data. Customer identification means identifying the customer and verifying
his/ her identity by using reliable, independent source documents, data or information.
Banks need to obtain sufficient information necessary to establish, to their satisfaction,

the identity of each new customer, whether regular or occasional, and the purpose of
the intended nature of banking relationship. Being satisfied means that the bank must
be able to satisfy the competent authorities that due diligence was observed based on
the risk profile of the customer in compliance with the extant guidelines in place. Such
risk based approach is considered necessary to avoid disproportionate cost to banks
and a burdensome regime for the customers. Besides risk perception, the nature of
information/documents required would also depend on the type of customer (individual,
corporate etc.).

For customers that are natural persons, the banks should obtain

sufficient identification data to verify the identity of the customer, his address/location,
and also his recent photograph. For customers that are legal persons or entities, the
bank should (i) verify the legal status of the legal person/ entity through proper and
relevant documents (ii) verify that any person purporting to act on behalf of the legal
person/entity is so authorized and identify and verify the identity of that person, (iii)
understand the ownership and control structure of the customer and determine who are
the natural persons who ultimately control the legal person. Banks may, however, frame
their own internal guidelines based on their experience of dealing with such
persons/entities, normal bankers prudence and the legal requirements as per
established practices. If the bank decides to accept such accounts in terms of the
Customer Acceptance Policy, the bank should take reasonable measures to identify the
beneficial owner(s) and verify his/her/their identity in a manner so that it is satisfied that
it knows who the beneficial owner(s) is/are.
Monitoring of Transactions
Ongoing monitoring is an essential element of effective KYC procedures. Banks can
effectively control and reduce their risk only if they have an understanding of the normal
and reasonable activity of the customer so that they have the means of identifying
transactions that fall outside the regular pattern of activity.

However, the extent of

monitoring will depend on the risk sensitivity of the account. Banks should pay special
attention to all complex, unusually large transactions and all unusual patterns which
have no apparent economic or visible lawful purpose. The bank may prescribe
threshold limits for a particular category of accounts and pay particular attention to the
transactions which exceed these limits. Transactions that involve large amounts of cash
inconsistent with the normal and expected activity of the customer should particularly
attract the attention of the bank. Very high account turnover inconsistent with the size of
the balance maintained may indicate that funds are being 'washed' through the account.
High-risk accounts have to be subjected to intensified monitoring. Every bank should set
key indicators for such accounts, taking note of the background of the customer, such

as the country of origin, sources of funds, the type of transactions involved and other
risk factors.

Banks should put in place a system of periodical review of risk

categorization of accounts

and the need for applying enhanced due diligence

Banks should ensure that a record of transactions in the accounts is

preserved and maintained as required in terms of section 12 of the PML Act, 2002. It
may also be ensured that transactions of suspicious nature and/ or any other type of
transaction notified under section 12 of the PML Act, 2002, is reported to the appropriate
law enforcement authority.
Banks should ensure that its branches continue to maintain proper record of all cash
transactions (deposits and withdrawals) of Rs.10 lakh and above. The internal
monitoring system should have an inbuilt procedure for reporting of such transactions
and those of suspicious nature to controlling/ head office on a fortnightly basis.
Risk Management
The Board of Directors of the bank should ensure that an effective KYC programme is
put in place by establishing appropriate procedures and ensuring their effective
implementation. It should cover proper management oversight, systems and controls,
segregation of duties, training and other related matters.

Responsibility should be

explicitly allocated within the bank for ensuring that the banks policies and procedures
are implemented effectively. Banks may, in consultation with their boards, devise
procedures for creating Risk Profiles of their existing and new customers and apply
various Anti Money Laundering measures keeping in view the risks involved in a
transaction, account or banking/business relationship.
Banks internal audit and compliance functions have an important role in evaluating and
ensuring adherence to the KYC policies and procedures.

As a general rule, the

compliance function should provide an independent evaluation of the banks own

policies and procedures, including legal and regulatory requirements. Banks should
ensure that their audit machinery is staffed adequately with individuals who are wellversed in such policies and procedures.

Concurrent/ Internal Auditors should

specifically check and verify the application of KYC procedures at the branches and
comment on the lapses observed in this regard. The compliance in this regard may be
put up before the Audit Committee of the Board on quarterly intervals. Banks must have an ongoing employee training programme so that the
members of the staff are adequately trained in KYC procedures. Training requirements
should have different focuses for frontline staff, compliance staff and staff dealing with

new customers. It is crucial that all those concerned fully understand the rationale
behind the KYC policies and implement them consistently.
Customer Education
Implementation of KYC procedures requires banks to demand certain information from
a customer which may be of personal nature or which has hitherto never been called for.
This can sometimes lead to a lot of questioning by the customer as to the motive and
purpose of collecting such information. There is, therefore, a need for banks to prepare
specific literature/ pamphlets etc. so as to educate the customer of the objectives of the
KYC programme. The front desk staff needs to be specially trained to handle such
situations while dealing with customers.
Introduction of New Technologies Credit /debit /smart /gift cards
Banks should pay special attention to any money laundering threats that may arise from
new or developing technologies including internet banking that might favour anonymity,
and take measures, if needed, to prevent their use in money laundering schemes.
Many banks are engaged in the business of issuing a variety of Electronic Cards that
are used by customers for buying goods and services, drawing cash from ATMs, and
can be used for electronic transfer of funds.

Further, marketing of these cards is

generally done through the services of agents. Banks should ensure that appropriate
KYC procedures are duly applied before issuing the cards to the customers. It is also
desirable that agents are also subjected to KYC measures.
KYC for the Existing Accounts
Banks were advised to apply the KYC norms to all the existing customers in a time
bound manner. While the revised guidelines will apply to all new customers, banks
should apply the same to the existing customers on the basis of materiality and risk.
However, transactions in existing accounts should be continuously monitored and any
unusual pattern in the operation of the account should trigger a review of the CDD
measures. Banks may consider applying monetary limits to such accounts based on the
nature and type of the account. It may, however, be ensured that all the existing
accounts of companies, firms, trusts, charities, religious organizations and other
institutions are subjected to minimum KYC standards which would establish the identity
of the natural/legal person and those of the 'beneficial owners'. Banks may also ensure
that term/ recurring deposit accounts or accounts of similar nature are treated as new
accounts at the time of renewal and subjected to revised KYC procedures.

Where the bank is unable to apply appropriate KYC measures due to non-furnishing of
information and /or non-cooperation by the customer, the bank may consider closing
the account or terminating the banking/business relationship after issuing due notice to
the customer explaining the reasons for taking such a decision. Such decisions need to
be taken at a reasonably senior level.
Appointment of Principal Officer
Banks may appoint a senior management officer to be designated as Principal Officer.
Principal Officer shall be located at the head/corporate office of the bank and shall be
responsible for monitoring and reporting of all transactions and sharing of information as
required under the law. He will maintain close liaison with enforcement agencies, banks
and any other institution which are involved in the fight against money laundering and
combating financing of terrorism.
Prevention of Money Laundering Act, 2002
Prevention of Money Laundering Act, 2002 (PMLA) forms the core of the legal
framework put in place by India to combat money laundering. PMLA and the Rules
notified there under came into force with effect from July 1, 2005 . Director, FIU-IND and
Director (Enforcement) have been conferred with exclusive and concurrent powers
under relevant sections of the Act to implement the provisions of the Act.
The PMLA and rules notified thereunder impose obligation on banking companies,
financial institutions and intermediaries to verify identity of clients, maintain records and
furnish information to FIU-IND. PMLA defines money laundering offence and provides











Amendments to the above act have been made in 2009 and banks / financial
institutions are also required to :

Maintain proper record of all transactions involving receipts by non- profit

organizations of value more than rupees ten lakh or its equivalent in foreign
currency and to forward a report to FIU-IND of all such transactions in the
prescribed format every month by the 15th of the succeeding month.

In case of transactions carried out by a non-account based customer, that is a

walk-in customer, where the amount of transaction is equal to or exceeds rupees
fifty thousand, whether conducted as a single transaction or several transactions
that appear to be connected, the customer's identity and address should be
verified. Further, if a bank has reason to believe that a customer is intentionally

structuring a transaction into a series of transactions below the threshold of

Rs.50,000/- the bank should verify identity and address of the customer and also
consider filing a suspicious transaction report (STR) to FIU-IND.
The consumer protection act 1986
Consumer is the most powerful motivating force for production of goods and yet at the
same time consumer is equally vulnerable segment of the whole marketing system. To
safe guard the interest of the consumers ,

Government of India has enacted a

comprehensive legislation-Consumer Protection Act in the year 1986. The Consumer

Protection Act, 1986, applies to all goods and services, excluding goods for resale or for
commercial purpose and services rendered free of charge and under a contract for
personal service. The provisions of the Act are compensatory in nature. It covers public,
private, joint and cooperative sectors.
The Act enshrines the rights of the consumer such as right to safety, right to be
informed, right to be heard, and right to choose, right to seek redressal and right to
consumer education.
Consumer: A consumer is any person who buys any goods for a consideration and
user of such goods where the use is with the approval of buyer, any person who
hires/avails of any service for a consideration and any beneficiary of such services,
where such services are availed of with the approval of the person hiring the service.
The consumer need not have made full payment.
Goods: Goods mean any movable property and also include shares, but do not include
any auctionable claims.
Service: Service of any description such as banking, insurance, transport, processing,
housing construction, supply of electrical energy, entertainment, board or lodging.
Nature of complaint:
Any unfair trade practice or restrictive trade practice adopted by the trader
a) Defective goods
b) Deficiency in service
c) Excess price charged by the trader
d) Unlawful goods sale, which is hazardous to life and safety when used
Consumer Courts: A three-tier-system


National Consumer Dispute Redressal Commission: claims above Rs. 20

(b) Consumer Dispute Redressal Commission or State Commission: Claims from
Rs 5 to 20 lakh.

Consumer Dispute Redressal Forum or District Forum: Claims upto Rs 5 Lakh

Complaint: A complaint, hand written or typed, can be filed by a consumer, a registered

consumer organisation, central or state Government and one or more consumers,
where there are numerous consumers having the same interest.
No stamp or court fee is needed. The nature of complaint must be clearly mentioned as
well as the relief sought by the consumer. It must be in quadruplicate in district forum or
state commission. Else, additional copies are required to be filed.
Grant of relief:

Repair of defective goods

(b) Replacement of defective goods


Refund of the price paid for the defective goods or service

(d) Removal of deficiency in service


Refund of extra money charged


Withdrawal of goods hazardous to life and safety


Compensation for the loss or injury suffered by the consumer due to negligence of

the opposite party


Adequate cost of filing and pursuing the complaint

Normally, complaints should be decided within 90 days from the date of notice issued to
the opposite party. Where a sample of any goods is required to be tested, a complaint is
required to be disposed of within 150 days; it may take more time due to practical
Consumer Protection Councils: Councils have been setup in all states and at the
center to promote and protect the rights and interest of consumers. These councils are
advisory in nature and can play important role in recommending consumer oriented
policies to the state and central Government.


Management Information System is a tool for effective internal and external control
through generation of appropriate information / data. It is a system which is designed to
provide information to management to assist in decision making. It facilitates and
supports the basic managerial functions of planning, organizing and control so that the
organizational goals may be achieved efficiently, effectively and economically.
Need for MIS
Post reforms, DCCBs are expected to function as self controlled financial intermediaries
that establish their own business policies to meet the challenges of a dynamic &
Competitive economic environment and businessmodels. To help decision making at
DCCBs and at other levels including those of higher financing agencies, regulators and
other agencies, there is an urgent need to have a sound and standardized MIS at

An effective Management Information System (MIS) is required to evaluate the

performance of DCCBs on an on-going basis and take timely, corrective remedial action.
Information system has to be purposeful and focused to enable decision making process.
It is essential for planning, developmental initiatives and internal control. Any organization
comprises of the three following sub-systems :
1. Management sub-system comprising of planning, control and review.
2. Operations sub-system various segments of operations
3. Information sub-system inputs, processing of information and outputs
The information sub-system is concerned with the work of collection and processing of
data in a manner that will satisfy the information needs of the management and also
external authorities. It achieves this by systematizing data capture, receipt thereof,
storage, processing and retrieval, recycling it as many times as is necessary. Hence there
is an imperative need to revise/refine the structure statements/returns to suit the
information needs of DCCBs etc. Such an information system must be largely based on
the Accounting System being implemented.
An effective MIS must provide required information to the management at the right time,
in the right form for decision making. In the absence of MIS, the information will have to
be obtained from one or the other sources on an as and when required basis which may
delay the provision of information to the management. Further, such hastily collected
information may not be reliable. The information once acquired may have to be reused in
different formats depending upon the purpose. The infructuous work involved is to be
minimised. This calls for a rational approach to systematically collect, organize, store and
supply reliable, precise and timely data.
Characteristics of a sound MIS:

MIS should be comprehensive and should cover all operations of DCCBs.

It should be selective and should not be over burdened with less important or
incidental information.

It should be transparent and should establish relationship between input and


It should speak about success as well as failures so that corrective action can be

It should also bring out the causes of success and failure.

The statements/returns should be in fixed periodicity so that there is systematic

analysis and sustained monitoring over a period of time.

MIS A tool for Business Development

Information has become an important resource in all walks of life today in particular the
business operations of any organisation. The managerial decisions are taken with full
awareness of general conditions, competitions, public policies & other relevant factors/
information provided to the management through MIS. It is said , To Manage business
well is to manage its future; and to manage the future is to manage the information. Thus
MIS is a tool for business development.
MIS for purpose oriented analysis:
The MIS in vogue in DCCBs should enable purpose / activity-wise analysis to draw
inferences on the performance of DCCBs and initiation of corrective / timely action. Credit
activities of DCCBs include crop loans, MT loans etc and the non-credit business consists
of providing other facilities like lockers etc. The MIS generated should fully reflect the
performance of the DCCBs under all these activities.
MIS as a tool for analysis of financial performance :
As was mentioned earlier, MIS serves as an important tool for analysis of financial
performance of DCCBs. The financial statements depict the health of the DCCBs. The
profitability of credit and non-credit activities may be ascertained by preparation of
financial statements separately for such activities. Analysis of Trading A/c, P & L A/c,
Balance Sheet and Cash Flow Statement throws light on the profitability of business
operations and financial health of the DCCBs. Comparative financial statements will help
in studying the trends in the business of the DCCBs and in taking decisions to suit the
MIS for review by External Authorities:
DCCBS enjoy credit limits from the concerned SCB / NABARD for short term loans etc. It
receives support and hand holding guidance from the SCB / NABARD in other sphere of
activities also. As a lender, SCB / NABARD may be interested to know the prospects of
the DCCB and the safety of their money. Similarly, the regulator / Registrar may be
interested in knowing whether the affairs of the bank are conducted as per the provisions
of the byelaws etc. There are certain statements/returns to be prepared for the purpose of
review by external authorities.Under MIS, DCCBs are required to prepare and submit
certain Statements periodically to various agencies. These statements are also required

for the management / Board of Directors of DCCBs to exercise control and take
management decision. It broadly covers the Evaluation of financial performance ,
Recovery position and action taken against defaulters, Lending operations, Resource
Mobilisation, Noncredit activities , House keeping and others etc.
Submission Of Returns to controlling Office / Other Agencies
Presently, most of the DCCBs have prescribed a number of returns, to be submitted by
the branches to Head Office, for preparation & submission of Returns to the controlling
offices / other agencies, some of which are furnished in Table given below;
Table Details of Returns

Name of the Return


Daily Cash Position


Weekly Trial Balance


Weekly R & D


Monthly R & D




LBR - 2 and U2


Certificate of Balancing of
Books of Account


Head Office A/c


KYC Cash Transaction




DCB Statement






OD Balance Statement



LBR 1 (Annual Credit Plan)


Subject / Contents
Cash in hand & Balances
with other banks
Total receipts & payments
during the week
Total receipts & payments
during the month
mobilized, loans issued,
share capital collection
and outstanding balances
Loan disbursed during the
Branch A/c
Anti Money Laundering
Information on Recovery
of dues against demand
Balance in OD accounts
Targets under various

Return on daily cash balance is used for cash management, CRR & SLR maintenance by
assessing the liquidity position at the branch level. Returns like weekly trial balance,
monthly R &D etc., are used for preparation and submission of statutory returns to RBI /
NABARD. However, most of the Banks are not using a very important return like MIS

which provides an insight into the functioning of the branches. The data furnished in this
return could be used for assessing the achievement of the branches in the areas of
deposit mobilization, loan issues, SHG lending, collection of share capital etc. This return
would help the Head Office in toning up the functioning of the branches. It is
recommended that the Computer Cell of the Bank may prepare a programme for collation
of the returns received from the branches and analysis of the data for monitoring of the
branches by the concerned Departments of HO & by Top Management.
Other Important Returns
In addition, the above it is recommended that DCCBs may introduce of the following
returns, if not already prescribe, for better monitoring & Control.
Monthly Return on the Status of High Value Loans
The portfolio

of DCCBs

is increasing under high value loans but they have not

prescribed any return for monitoring the status of high value loans at branch level. On a
scrutiny of some of the OSS Returns submitted to the Regional Office of NABARD, it was
observed that the Banks have not furnished information about high value loans. This is
because the Bank was not collecting information about the high value loans. A monthly
return on the Status of High Value Loans would help the Head Office of the Bank to
monitor these loans and take timely action to avoid the loans becoming NPAs.
Monthly Return on Loan Accounts likely to become NPAs
One of the reasons for increase in NPAs in some of the banks is that there is no system
of monitoring the loans on a regular basis. Only when the loan becomes NPA, the
Recovery Cell of Head Office initiates action like borrower contact, legal action,
attachment of assets etc. The staff of branch which has disbursed the loan are not
contacting the borrowers on a regular basis. They feel that recovery of loans is the
responsibility of Recovery Cell of Head Office.
Further, the HO has not prescribed any return to identify the loan accounts which are
likely to become NPAs, accounts which is likely to migrate to lower grade of classification
of assets (i.e. from sub-standard to D1 category and so on). Hence DCCBs may
introduce a new monthly return Loan Accounts which are likely to become NPAs and
which are likely to migrate to lower grades. On receipt of this return, the informations
have to be analysed by the Recovery Cell of HO, concentrate on those accounts which
can be arrested from falling into NPA category or lower category. The Recovery Cell has

to contact the concerned branches, tone up the recovery mechanism and assist them in
collecting the dues from the borrowers.

Statement of Loans Sanctioned by Branch Manager using his delegation of powers

To ensure that the Branch Managers powers are not misused, the Head Office of the
Bank may prescribe a monthly return on Loans sanctioned by Branch Manager using
his / her discretionary powers.
Control of Expenditures at Branch Level
To have a control over the expenditures incurred at Branch level, the Head Office of the
Bank may consider introducing a monthly return on Expenditures incurred during the
Return for Monitoring of Time Barred Documents
It is observed in some banks that there were time barred documents in many of their
branches. Despite repeatedly pointed out in the Audit Report, the deficiency continues.
Since time barred documents would result in legal risk, it is suggested that the HO may
introduce a monthly return for monitoring time barred documents.
Asset Liability Management
In terms of instructions contained in circular letter No.NB.DoS.UO.POL/ 1325 / P
108/2008-09 dated30 June 2008, issued by NABARD, DoS, Head Office, Mumbai, Asset
Liability Management has been introduced in all State Cooperative Banks with effect from
01 August 2008. As a prelude to introduction of this concept, the Banks have prepared
ALM policy. It is required that the policy needs implemented & monitored scrupulously for
tolerance levels, prudential limits etc.
Return for collection of Data for Interest Rate Risk Management
For Asset Liability Management, the Head Office of the Bank requires data on maturity
profile of assets and liabilities and information about Rate Sensitivity Assets and Rate
Sensitivity Liabilities from the branches. Hence, the banks are required to introduce the
following fortnightly returns for branches

Fortnightly Return on Maturity Profile of Assets and Liabilities


Fortnightly Statement of Interest Rate Sensitivity

Computer Audit

In most of the DCCBs,

branches have been computerized and work relating to

computerization of the remaining branches is in progress. In this context, it is prudent that

the Bank may introduce a system of Computer Audit. To start with, the Computer Audit
may be undertaken by the Staff of EDP Cell once in a year. Once the system gets
stabilized, the Computer Audit may be undertaken half-yearly.


Interpersonal skills include the habits, attitudes, manners, appearance, and behaviors we
use around other people which affect how we get along with other people. We sometimes
do not understand how important interpersonal skills really are. It's easy to laugh and
make jokes about people who obviously lack interpersonal skills, but sometimes we need
to examine our own impressions on others to better prepare for success in life as well as
for a productive career.
The development of interpersonal skills begins early in life and is influenced by family,
friends, and our observations of the world around us. Television and movies also
influence this area, but most of these characteristics are passed along to us by our
parents or guardians. Some aspects of interpersonal skills are even inherited.
Appearance and some personality traits are largely influenced by our genes.
For us to improve our interpersonal skills, we must first be aware of what we are like from
the perspective of other people who interact with us. Habits we are unaware of, actions
we think go unnoticed, and other things about us that might affect other people are

impossible for us to change if we are not aware of them. One of the things that teachers
try to do, starting in the early grades, is to help students correct bad habits and to develop
good interpersonal skills.
As we become adults, it increasingly becomes our own responsibility to initiate changes
in interpersonal skills that might be needed. They are more important than ever and they
greatly influence both opportunities and success. Rather than trying to change
interpersonal skills, as is the case when we are children, adults tend to make judgments
about one another based on interpersonal skills.
Interpersonal skills enable us to work efficiently with others without any personality
conflict. These skills help us build good working relationships with our clients, employees
and business associates. Working well with others involves understanding and
appreciating individual differences. Therefore, interpersonal skills play an important role in
determining how well we manage our interactions with customers and employees. How
we behave with them can determine our success or failure.
To run a successful business as well for enjoying a fulfilling personal life, it is necessary to
establish a good, comfortable relationship with:
Customers - nothing puts off a prospective client more than an uncooperative and
unhelpful attitude.
Employees - to retain good employees, one has to be seen as a positive, cheerful boss.
Business associates - networking is one of the keys to good business. By being known as
a caring, cheerful person, we are likely to make more friends in the business circle.
The following tips may be useful in improving interpersonal skills:

No one wants to be around someone who is always morose and frowning.

Maintain a positive, cheerful attitude about work and life. Practice smiling often.

Be generous with praise and words of encouragement. If you let others know that
they are appreciated, they'll want to give you their best. If you have to criticize, do
it gently and give suggestions for improvement.

Pay attention to people. Make eye contact and address people by their first
names. Ask them for their opinions and suggestions. Really listen to what they
have to say.

Keep your promises. If you tell your customer that you will have the item in stock
by the end of the week, make sure it is there. But make promises sparingly and do
not commit to doing something that you cannot accomplish.

Treat everyone fairly and do not play favorites. Avoid talking and discussing others
behind their backs.

Keep an open mind. Remember there is always room for discussion and

Learn how to be an effective mediator and help sort out differences. By taking on
such a leadership role, you will garner respect and admiration from those around

Pay close attention to both what you say and how you say it. Your body language
and tone of voice will give you away. Think before you speak and avoid
misunderstandings or hurt feelings.

Most people are drawn to a person who can make them laugh. Use your sense of
humor as an effective tool to enhance your interpersonal skills.

Try to see things from another person's perspective. Empathy is about being able
to put yourself in someone else's shoes and understanding how they feel.

There is nothing worse than a chronic complainer or whiner. Do not talk about
your problems, instead focus on the other person's problem and try to help out.

Self awareness and interpersonal relations

Self awareness and understanding of others are very crucial in developing ones own
personality and healthy existence with others in her/his social settings. Self discovery is
the first and foremost step in the process of Self Empowerment. But this triggers a big
question do we know our self and if yes how can we know ourself?
The Johari Window: A Graphic Model of Awareness in Inter-Personal Relations
The Johari Window model was developed by American psychologists Joseph Luft and
Harry Ingham in the 1950's, while researching group dynamics. Johari window has gained
tremendous importance in todays world where skills such as personal effectiveness,
inter-personal relations, emotional intelligence are being given greater emphasis.
Johari Window Quadrants.
The four Johari Window perspectives are called 'regions' or 'areas' or 'quadrants' as

Quadrant I

Open Area: It refers to free behaviour and motivation known to self as well

as to others. This includes the information about the person - behaviour, attitude, feelings,
emotion, knowledge, experience, skills, views, etc - known by the person ('the self') and
known by the group ('others'). The open free area, or 'the arena', can be treated as the
space where good communications and cooperation occur, free from distractions,
mistrust, confusion, conflict and misunderstanding.
Quadrant II

Blind Area: Our behaviour, known to others of what we are unaware of.

This blind area is not an effective or productive space for individuals or groups. A person
having bigger blind area may face problems related to misunderstanding, mistrust,
conflicts and inter-personal relations. For example a person may not believe that his way
of talking offends people because he talks loudly and rudely.
Quadrant III

Hidden Area: This area represents things in ourselves we know but do

not reveal to others (e.g. a hidden agenda or matters about which we have sensitive
feelings). For example an individual may be annoyed at the demanding nature of his
friend but does not let him know about his feelings. The friend may think that this person
does not mind his demands and feels comfortable with his behaviour.
Quadrant IV

Unknown Area: Area of unknown activity. Neither the individual nor

others are aware of certain behaviours or motives. We can assume their existence
because eventually some of the things become known and it is then realized that these
unknown behaviours and motives were influencing relationships all along. Self or mutual
discovery or observation by others, are some of the ways through which this area can be
The Structure of Self
The four areas mentioned above under the concept of Johari Window are not rigid or
structured. Therefore it can be changed. The Johari Window model diagram is an
example of increasing the open area, by reduction of the blind area, which would normally
be achieved through the process of feedback. Feedback develops the open area by
reducing the blind area. The open area can also be developed through the process of
disclosure, which reduces the hidden area. The unknown area can be reduced in different
ways: by others' observation (which increases the blind area); by self-discovery (which
increases the hidden area), or by mutual enlightenment - typically via group experiences
and discussion - which increases the open area as the unknown area reduces.

Art of Feedback
Feedback plays very important role in the process of self development. Feedback is
shared through many ways by people such as gestures, postures and other non verbal
modes, behaviours and attitudes etc. Feedback is an art and if developed helps
tremendously in self development and effective interpersonal relations.
Following are a few guidelines for giving and receiving feedback:
Giving Feedback

Focus on behaviour of the person or the group and not on the personality and

Make it specific i.e. what, why, when etc.

Describe persons behaviour and do not judge it.

Direct it at behaviour that can be changed not at permanent characteristics of an


Make it timely, either at the moment the bahaviour is occurring or as soon

afterward as possible.

Remember that people are uncomfortable receiving feedback, even if you are
handling it the best way possible.

Whether the person agrees to continue (positive feedback) or to change (negative

feedback), express your appreciation for listening to your concern.
Receiving Feedback

Actively listen to the persons description of your behaviour and recommendations

to continue what you are doing or suggested changes that would be helpful.

Dont get defensive; trust the intent of the feedback is to help, not hurt you.

Paraphrase or summarize the feedback to make sure you have heard it correctly.

Give the feedback serious consideration. Do not dismiss it as irrelevant or


Communicate to the person changes in his/her behaviour that may be needed to

help you change

Whether or not you use the feedback, express appreciation to the other person for
caring enough about the relationship to give you the feedback and request that
he/she continue to do so.

Good Communication Skills are essential

Communication is the process of conveying the wishes, ideas and feelings and having
them received in the way meant. Being an effective communicator takes real skill.
Communication skills have to be developed, honed and added to on an on-going basis.
They are the heart of interpersonal skills and the greater your awareness of how it works,
the more effective your communication will be.
To be effective in business, you have to communicate well. To be a good manager, you
have to communicate exceptionally well. Let us take a look at basic communication
dynamics, learning skills to improve communication, using effective communication to
improve and promote interpersonal relationships and creating an effective communication

Communication is individual
We're not all the same: Everyone communicates differently and sees the world
differently. The greatest skill you can have in order to instantly and significantly
improve you communications skills is to understand the other person's point view
and how they see the world. Then you can adjust your own communication to take
that into account.
Change yourself to change others: The only person you can be sure of changing in
any communication is you. Therefore, the most effective way to be in charge of
what happens in any communication dynamic is changing what you do. When you
can do this you are well on the way to promoting better relationships.
How Communication Happens
Verbal and non-verbal communication: If you aren't clear about what you mean and
what your intention is, the other person (or people) could easily (and sometimes
deliberately), misinterpret what you mean. What you do matters as much as what you
say. It's now accepted that the words account for only 7% of a communication. Research
has established that 55% of our communication is through body language and 38%
through the tone we use to express ourselves. Our unconscious behaviour can be read
by other people. Language is one of the most powerful reflections of how we think and
feel about ourselves and others. We can make a big impact simply by changing some of
our language and developing our verbal skills. However, our body language and tone are
much more important than the verbal skills.
Communication cycle: There is a neat communication cycle that can help you
understand how to make communication work better. It means that you can take
responsibility for every stage on the Communication Cycle:
Spoken - Heard - Understood - Agreed to - Acted on - Implemented.
What we intend to say, what we actually say and what is heard and understood by others
can all be different. Ensure that the other person has understood you the way you want
him to understand. Similarly seek confirmation from the other person as to what is
actually meant by him or her. This is possible through the mechanism of seeking and
giving feedback.

Some Common Barriers to Effective Communication

We all make too many assumptions: Be aware of the assumptions you make,
especially making something up and then acting as though what you made up was
true. Notice if you alter your behaviour with certain people because of the
assumptions you make about them. Also be aware of the assumptions you think
other people make about you. Assumptions aren't necessarily 'bad'. Sometimes it's
important to let people keep their assumptions (or some of them at least!) about
you. One effective way to deal with assumptions is to say to the other person, 'I've
assumed such and such. 'Is that true?' or 'I'm making an assumption here about...
Do you agree?' Good communication in the workplace is often sabotaged by too
many unconfirmed assumptions.
Needing to be right: This is one area we all know about - the need to be right and in turn
for the other person to be wrong. One skill that does need practice is to let go of
needing to be right. Think of it as presenting information or a point of view rather
than having to burden someone else with your arguments
Improving Communication Skills
Attitude: You can change the direction of a communication if you change your attitude.
There is no one attitude that's the 'right' one to have, though being direct and clear
certainly helps.
Hear what people are really saying: Listening is one of the most important skills you
can have. How well you listen has a major impact on your job effectiveness, and on the
quality of your relationships with others.
We listen to obtain information.
We listen to understand.
We listen for enjoyment.
We listen to learn.
Given all this listening we do, you would think wed be good at it! In fact were not.
Depending on the study being quoted, we remember a dismal 20% of what we hear. That
means that when you talk to your boss, colleagues, customers or spouse for 10 minutes,
they only really hear 2 minutes of the conversation. Similarly when you are receiving
directions or being presented with information, you arent hearing the whole message

either. You hope the important parts are captured in your 20%, but what if theyre not?
Clearly, listening is a skill that we can all benefit from improving. By becoming a better
listener, you will improve your productivity, as well as your ability to influence, persuade
negotiate. You will avoid conflict and misunderstandings all necessary for workplace
The way to become a better listener is to practice active listening. This is where you
make a conscious effort to hear not only the words that another person is saying but,
more importantly, to try and understand the total message being sent. In order to do this
you must pay attention to the other person very carefully.
You cannot allow yourself to become distracted by what else may be going on around
you, or by forming counter arguments that youll make when the other person stops
speaking. Nor can you allow yourself to lose focus on what the other person is saying. All
of these barriers contribute to a lack of listening and understanding.
To enhance your listening skills, you need to let the other person know that you are
listening to what he or she is saying. To understand the importance of this, ask yourself if
youve ever been engaged in a conversation when you wondered if the other person was
listening to what you were saying. You wonder if your message is getting across, or if its
even worthwhile to continue speaking. It feels like talking to a wall and its something you
want to avoid.
Acknowledgement can be something as simple as a nod of the head or a simple hmm
hmm. You arent necessarily agreeing with the person, you are simply indicating that you
are listening. Using body language and other signs to acknowledge you are listening also
reminds you to pay attention and not let your mind wander.
You should also try to respond to the speaker in a way that will both encourage him or her
to continue speaking, so that you can get the information if you need. While nodding and
making some affirmative noise says youre interested. An occasional question or
comment to recap what has been said communicates that you understand the message
as well.

Be an active listener: There are five key elements of active listening. They all help you
ensure that you hear the other person, and that the other person knows you are
hearing what they are saying.

Pay attention: Give the speaker your undivided attention and acknowledge the
message. Recognize that what is not said also speaks loudly.

Look at the speaker directly.

Put aside distracting thoughts. Dont mentally prepare a rebuttal!

Avoid being distracted by environmental factors.

Listen to the speakers body language.

Refrain from side conversations when listening in a group setting.

Show that you are listening: Use your own body language and gestures to
convey your attention.

Nod occasionally.

Smile and use other facial expressions.

Note your posture and make sure it is open and inviting.

Encourage the speaker to continue with small verbal comments like yes,
and hmm.

Provide feedback: Our personal filters, assumptions, judgments, and beliefs can
distort what we hear. As a listener, your role is to understand what is being said.
This may require you to reflect what is being said and ask questions.

Reflect what has been said by paraphrasing. What Im hearing is and

Sounds like you are saying are great ways to reflect back.

Ask questions to clarify certain points. What do you mean when you
say Is this what you mean?

Summarize the speakers comments periodically.

Defer judgment: Interrupting is a waste of time. It frustrates the speaker and

limits full understanding of the message.

Allow the speaker to finish.

Dont interrupt with counter-arguments.

Respond Appropriately:

Active listening is a model for respect and

understanding. You are gaining information and perspective. You add nothing by
attacking the speaker or otherwise putting him or her down.

Be candid, open, and honest in your response.

Assert your opinions respectfully.

Treat the other person as he or she would want to be treated.

Be positive: Use affirmation and encouragement to get the best out of people. Notice
when others do things well (even if it's part of their daily routine). This shows you're
being attentive; most people respond well when they know that others are aware of
what they do. Quite simply, the workplace can be a far better place to be if you
consciously sprinkle your communication with positive feedback.
Ambiguity avoidance: As a manager (concerned with getting things done) your view of
words should be pragmatic rather than philosophical. Thus, words mean not what the
dictionary says they do but rather what the speaker intended. The greatest source of
difficulty is that words often have different meanings depending upon context and/or
culture. If you recognize that there is a potential misunderstanding, you must stop the
conversation and ask for the valid interpretation. A second problem is that some people
simply make mistakes. Your job is not simply to spot ambiguities but also to counter
inconsistencies. Finally, of course, you may simply mishear. The omission of a simple
word could be devastating.
Plan Communication
As with all effective communication, you should decide (in advance) on the purpose of the
conversation and the plan for achieving the purpose. There is no alternative to this. Some
people are proficient at "thinking on their feet" - but this is generally because they already
have clear understanding of the context and their own goals. The following are a few
techniques to help the conversation along.
Assertiveness: The definition of to assert is: "to declare; state clearly". This is your aim.
If someone argues against you, even loses temper, you should be quietly assertive.

Acknowledge what is being said by showing an understanding of the position, or

by simply replaying it

State your own point of view clearly and concisely with perhaps a little supporting

State what you want to happen next (move it forward)

Thus we have something like: yes, I see why you need the report by tomorrow; however, I
have no time today to prepare the document because I am in a meeting with a customer
this afternoon; either I could give you the raw data and you could work on it yourself, or
you could make do with the interim report from last week. You must agree to abide by the
decision of the senior manager but you should make your objection (and reasons) clearly

known. For yourself, always be aware that your subordinates might be right when they
disagree with you and if events prove them so, acknowledge that fact gracefully.
Confrontations: When you have a difficult encounter, be professional, do not lose your
self-control because, simply, it is of no use. Some managers believe that it is useful for
"discipline" to keep staff a little nervous. Thus, these managers are slightly volatile and
will be willing "to let them have it" when the situation demands. If you do this, you must be
consistent and fair so that you staff know where they stand. If you deliberately lose your
temper for effect, then that is your decision - however, you must never lose control.
Insults are ineffective. If you call people names, then they are unlikely to actually listen to
what you have to say. What you consider fair comment may be insulting to another - and
the same problem emerges. Before you say anything, stop, establish what you want as
the outcome, plan how to achieve this, and then speak. If you are going to criticise or
discipline someone, always assume that you have misunderstood the situation and ask
questions first which check the facts. This simple courtesy will save you from much
Seeking Information: There are two ways of phrasing any question: one way (the closed
question) is likely to lead to a simple grunt in reply (yes, no, maybe), the second way (the
open question) will hand over the speaking role to someone else and force them to say
something a little more informative. Suppose you conduct a review of a recently finished
(?) project and it goes something like this:

"Have you finished project?"


"Whether everything has been taken care of?"


"So there is report writing left to do be done?"


"Will it take you long?"

"No, not long"

Observe that your questions are not actually helping the flow of information. The same
flow of questions in an open format would be: what is left to do be done in the project,
what about the report writing, when will that be completely finished? Try answering Yes or
No to those questions. Open questions are extremely easy to formulate. You establish in
your own mind the topic/aim of the question and then you start the sentence with the


Let others speak: There is more to a conversation (managed or otherwise) than the flow
of information. You may also have to win that information by winning the attention and
confidence of the other person. There are many forms of flattery - the most effective is to
give people your interest. While talking to the subordinates ask for their views and ideas
on the subject. Silence is effective - and much under-used. People are nervous of silence
and try to fill it. You can use this if you are seeking information. You ask the question, you
lean back, the person answers, you nod and smile, you keep quiet, and the person
continues with more detail simply to fill your silence.
To finish: At the end of a conversation, you have to give people a clear understanding of
the outcome. For instance, if there has been a decision, restate it clearly (just to be sure)
in terms of what should happen and by when; if you have been asking questions,
summarize the significant (for you) aspects of what you have learnt.
Ten Commandments of good communication

Seek to clarify ideas before communicating

Examine true purpose of each communication

Consider physical and human setting

Consult others, if necessary in planning communication

Be mindful of overtones and also content of message

Ensure to convey something of value or help to receiver

Follow up communication, have feedback

Communicate for tomorrow as well as today

Be sure the actions support the communication

Seek to understand, be a listener

Meaning of House Keeping
The proper maintenance of all books of account, daily recording of transactions,
independent and intelligent checking of daily postings, periodical balancing of books, etc.
are some of the essential ingredients of a sound system of internal check and control in
any banking institution. It is, therefore, the duty of the bank to prescribe suitable systems
and procedures to ensure a sound system of house keeping. Sound system of house
keeping means

(a) daily recording of transactions, (b) independent and intelligent

checking of posting, (c) periodical balancing of books, (d) periodical reconciliation of

head office accounts and bank accounts, (e) timely preparation/publication of financial
statements, (f) proper maintenance of assets, (g) adequate arrangements for safe
custody of documents/valuables, (h) proper security arrangements, etc.
Maintenance of Books and Registers
Book keeping essentially involves recording of day-to-day business transactions in a set
of books called Books of Account in a systematic manner. The set of

books to be

maintained by CCBs can be classified into two categories viz., (i) Books of original entry
or primary entry, viz., Cash / Bank Book and Day Book and (ii) Books of Secondary or
derived entry called General Ledger. In addition to Cash Book, Bank Book, Day Book and
General Ledger, some more books and registers are also to be maintained by the banks.
They are Subsidiary Ledgers and Registers. Subsidiary ledger is a detailed version of
General Ledger Account. Registers are for exercising control over certain items of
transactions. All the ledgers and some registers form the base books from which CCBs
prepare financial statements like Trial Balance, P & L Account, and Balance Sheet. Other

registers are control registers containing supplementary information. Banks can use them
to generate various statistical returns as and when required. All the registers/ledgers
prescribed by the Registrar of Cooperative Societies, NABARD and the Reserve Bank
should be maintained.
Preparation of voucher
The first step in maintenance of books is preparation of vouchers. Each bank should
maintain its books of account in double entry system of accounting, i.e. for every debit
there should be a corresponding and equal credit and vice versa. In each debit voucher,
the contra credit account(s) may be indicated on the reverse of the debit voucher. There
should be proper vouching system for every transaction which should be supported by a
voucher containing accounting details and the nature of the transaction. The transactions
as recorded on each voucher should be duly authorized and authenticated by two
responsible officials of the bank and when it is a cash transaction, the cashier should also
invariably initial the voucher. This system of vouching makes it difficult for unauthorised
transactions being put through in the bank's books.
Vouchers entry in books
All the vouchers, after they are entered in the respective accounts of the depositors/
borrowers and various other registers, scrolls, etc. should be released for writing the
Main Day Book or Clean Cash Book. If the volume of transactions in any particular
account is large, the bank should maintain subsidiary or supplementary day books.
Normally, the transactions under Savings Bank deposits, Current accounts, Head Office
account, Bills for collection, Overdrafts, Loans, etc. are more. As such, the bank may
open subsidiary or supplementary day books wherein all the vouchers concerning these
accounts may be posted and the consolidated totals of debits and credits alone be taken
to the Main Day Book/Clean Cash Book. The Main Day Book should contain three
columns viz., cash, transfer and total on both the sides i.e. debit and credit (for debit as
well as credit transactions), the clearing items being treated as a part of transfers. The
supplementary/subsidiary day books should also contain similar three columns. All the
cash vouchers representing cash transactions should be entered in cash column, transfer
and clearing transactions in transfer column and the totals in the third column. After
taking the totals of debits and credits of all the subsidiary/supplementary day books into
the Main Day Book, all the other vouchers which have not been passed through such
supplementary day books may be recorded in the Main Day Book under the respective
account heads.

Both the debit side total and credit side totals under transfer column (which includes
clearing) should tally with each other. The sub-totals of all the entries in the Main Day
Book under different columns, viz. cash and transfer and the grand totals of debits and
credits under the 'total' column on both the sides should be taken. The day's opening
cash balance may thereafter be added to the debit total and the closing cash balance to
the credit total of the Main Day Book. When the grand totals tally, the books are said to
have been balanced and that all the transactions as recorded have been brought in the
books of the bank. The total of the Main Day Book/Clean Cash Book so tallied should be
again compared with the totals of cash and transfer (including clearing) scrolls.
Whenever there is any difference, all efforts should be made to locate it and adjust the
difference on the same day.
As far as possible, the Main Day Book should be written on the same day on which the
transactions take place and, in any case, not later than the next day, before commencing
the business. When the Main Day Book is tallied, the person writing the Day Book should
initial it and the Accountant and Manager should sign in full, in token of having checked
the entries therein.
When the books are tallied, the day's vouchers should be counted, tallied, stitched and
sealed. The Accountant and Manager should sign a slip which should be attached with
the day's vouchers. In this slip the total number of debit and credit vouchers should be
indicated and should be initialled. The vouchers should be preserved date wise.
Subsidiary Ledger posting
Subsidiary ledgers are prescribed for posting details of similar kind of transactions in one
place. All the daily transactions should be posted in the relative subsidiary ledger on the
same day or the next day. The postings should not be allowed to fall into arrears. The
postings should be authenticated by the Manager/ Accountant. The balances should be
struck at weekly or monthly intervals.
General Ledger posting
After completion of writing of the Main Day Book, the debit and credit totals under each
head of account should be posted on a daily basis in the General ledger under the
respective heads of account. The General ledger should be complete, in which all the
heads of account including cash account should find a place. It is from this book that the
bank's Trial Balance is prepared, and, as such, no account should be left out. In respect
of 'cash account' in the General ledger, either the totals of cash receipts and payments

may be debited or credited to the cash account or the cash account debited with the
grand total of credits (including cash, transfer and clearing) as shown by the clean cash
book and debited with the grand total of credit transactions. The balance in each account
should be struck daily and recorded in ink. For writing the debit balance, red ink should be
used while for writing credit balance blue/black ink should be used. The balance should
invariably be supported by initial The entries in the General ledger should be checked and
initialled by the Accountant/Manager daily.
Under no circumstances, writing of the Main Day Book and the postings in the General
Ledger should be allowed to fall into arrears. The books must not be kept open or left
Tial Balance
A trial balance should be prepared at the end of each week to see whether the postings in
the General Ledger have been properly and correctly made. Therefore, Trial balance is a
statement which contains all debit balances of General Ledger accounts on one side and
credit balances on other side and the totals of each side being equal.
In all the books of account, there should be no unauthenticated cancellations, alteration,
overwriting or erasing in the entries of debit and credit transactions.

The wrong

words/figures should be struck off neatly in such a way that they are still visible and the
correct words/figures should be written near thereto under authentication.

Even if a

single digit is wrong in the amount, all the words/figures of the amount should be struck
and the correct amount should be written in full afresh. However, if the amount in the
'balance' column of any account is wrong, it should not be struck off. A cross (X)
should be put by the side of the wrong amount. The correct amount should be written
below the wrong amount prefixing the abbreviation 'CB' (Correct Balance).


balance should also be corrected at the end of each folio of the account, and at the end of
the account in a similar manner.
If an entry is posted wrongly or posted in an unrelated account, the entry should be struck
off neatly, the balance amount corrected as above and posted correctly in the account or
in the related account. The consequential corrections, if any should be carried out at
appropriate places on account of the correction made at one place. All corrections should
be authenticated by an officer by affixing his/her initial/ signature. As far as possible the
errors should be rectified by the same staff member/s who committed the mistakes.
All the entries in the books of account should be independently checked next day morning
by persons other than those who have written them. The fact of having checked the entry
should be indicated by initialing against it. The various particulars noted in the ledger

folios, such as, name of depositor/borrower, cheque series issued, operative instructions,
rate of interest, margin to be maintained, etc. should be authenticated by a responsible
official and such instructions should be carried forward from page to page.
Balancing of books
Balancing of books of account means ascertaining accuracy of maintenance of books.
Balancing of the books of account is essential not only to know the true and correct
picture of the liabilities and assets of the bank but also to safeguard the interest of the
bank and of the customers. The process of balancing of books of account is a very
powerful instrument of internal check and ensures the accuracy of the individual accounts
of the customers to a great extent besides preventing perpetration of frauds. The books
of account of the bank should be balanced at periodical intervals, usually on a monthly
basis. The bank should, for this purpose, maintain subsidiary balancing registers and the
balance of each individual account should be recorded therein.

The entries in the

balancing register should be checked by a responsible official of the bank. If the General
Ledger balance tallies with the total of the balancing register, the checking official should
make a remark that the book has been tallied.

However, if the total does not tally,

immediate steps should be taken to locate the difference and reconcile the same. The
balancing should be done on a fixed day every month. Occasionally, the Manager may
fix a date by surprise and ask the staff to balance the books. Where a number of ledgers
are maintained for the heads of accounts like Current account, SB Account, Bills Payable,
Drafts, etc. separate balancing register should be used for each such ledger. After the
ledger is balanced, the total of the balancing register should be written in words and the
person who had attended to balancing work and the concerned officer should sign in the
register and the Manager should countersign the same. The balancing register should be
preserved under the custody of the authorised official. All the books should be balanced
at least once in a month depending upon the volume of transactions involved in each
account. The current, overdraft and cash credit accounts should be balanced every week
whereas all other accounts may be balanced every month.
Reconciliation of Head Office Account
Transactions in between branches and between head office and branches is a natural
consequence due to varying nature of business needs. Such transactions are called inter
branch transactions, and account in which these transactions are reflected is called Inter
Branch Account

or Head Office Account

or Branch Adjustment Account. All the

transactions between the branches are generally routed through the Head Office Account.
This account is very sensitive for committing frauds. The frauds in respect of these

transactions would mostly be of two types viz., (i) sending of a credit advice to another
branch without actually receiving funds therefor or sending an advice for an amount larger
than what is actually received, (ii) raising irregular debit entries in the Head Office account
for giving credit of equivalent amount to some other account with fraudulent intention of
withdrawing such amount from the latter account subsequently. This type of frauds are
more likely to be perpetrated by the bank employees or by outsiders in collusion with the
employees. Therefore, the following safeguards need to be followed:

giving printed serial number to advices and keeping them in proper custody;


Verifying the signatures on advices received from other branch/es;


Careful checking of the daily statements to be sent to HO by an officer;


HO undertaking reconciliation without any delay and at short intervals


HO taking special control measures in respect of the entries involving original

debits and reversal of earlier entries;


HO following up the outstanding entries particularly the debit entries.


Allowing no entry to remain unadjusted for unduly longer period of time.

Since the inter branch account is a highly fraud prone area, reconciliation of outstanding
entries at regular intervals must be given high priority. No entry in this account should be
allowed to remain outstanding for more than 6 months. As the cooperative banks
generally follow the centralised accounting system wherein the transactions between
different branches are routed exclusively through HO General Account, HO is in a
position to know about every transaction taking place amongst its branches and keep a
watch on the unmatched/unadjusted

entries so as to initiate timely action for early

adjustment of such outstanding entry. While reconciliation at periodical interval at HO

level speaks of a sound system, it is more important how urgently follow up actions are
initiated to adjust the outstanding entries, particularly long outstanding debit entries at the
Every year full particulars of all pending items including the dates of original entries
should invariably be brought forward to a new register. All the outstanding items should
be reviewed and necessary steps should be taken to get these items adjusted early.
Head Office should provide timely guidance to branches in this regard.
All CCBs, therefore, have to accord top priority and gear up their machinery to attend to
the task of reconciliation of all pending/outstanding entries in Branch Adjustments/ HO
General Account and adjust the same in the quickest possible time on an ongoing basis.
Reconciliation of Bank Account/s

For the purpose of convenience of business, CCBs are required to maintain accounts
with other banks with the approval of the Board of Directors.

The bank authorises

specific officials to operate upon such accounts. The bank account should invariably be
jointly operated by two responsible officials of the bank. Cheque books relating to bank
accounts should be held in the custody of one of the authorised officials. It should be
ensured that blank cheques are not signed by anyone of the authorised signatories.
The bank should insist on its bankers to submit a fortnightly/monthly statement of the
accounts. Whenever such statements are received, they should be tallied with its books
and differences, if any, should be reconciled.

Thus, the bank accounts should be

reconciled at least once in a month, preferably on the last day of every month. For the
purpose of reconciliation, a separate register should be maintained and entries made
therein should be checked and signed by a responsible official of the bank. In case any
irregularities are found in these statements/pass books, the attention of the concerned
bank should be drawn to it in writing and the mistake got rectified by them without loss of
time. Steps should be taken for timely adjustment of the outstanding entries. At the end
of every six months the bank should obtain a certificate from its bankers regarding the
balances held in its account with them and keep the same duly filed for verification by

All statements received from time to time and confirmation of

balances should be kept in separate files to be maintained, bank-wise. A close watch

should be kept on such bank accounts to see that only minimum required balances are
maintained in these accounts and surpluses are gainfully deployed.
The frauds under this portfolio generally takes place when the "Bankers' Account" is
debited in respect of transactions which are not genuine. A fraud may also result from not
responding to a debit advice received from the bank with whom an account is maintained.
For example, when a debit is raised in bankers' account in respect of a returned cheque
for which a credit has been afforded earlier, the branch concerned should immediately
respond to the entry by debiting the account of the party concerned. If, instead, the debit
advice is deliberately destroyed or misplaced, a fraud results. It is, therefore, suggested
that the balances in the Bankers' Account should be periodically reconciled with the
balances shown in the statement of accounts received from the concerned banks. The
following safeguards are further suggested to avoid occurrence of frauds in these

The cheques drawn on such accounts should be signed by two officers and the
relative cheque-book should be kept in the custody of one of the two officials
authorised to operate the account,


The vouchers pertaining to the transactions in the Bankers' Account should be

signed by one of the authorised officials while the relative entries in the Bankers'
ledger should be checked by another officer,


Branches/Offices maintaining accounts with other banks should be required to

send to the Head Office a statement containing the particulars of the
reconciliations at regular periodical intervals.

To summarise, maintenance of books means :

1. Double entry system to be followed
2. Proper system of vouching - indicating contra account on the reverse of voucher,
vouchers signed by two officials, in case of cash voucher by cashier - to prevent
unauthorised transactions.
3. All vouchers to be entered into respective accounts of depositors/borrowers, other
registers, scrolls etc.. Before being entered in the main day book (clean cash).
4. Both debit side total and credit side total under transfer column of day book should
5. Opening cash balance and closing cash balance to be added to Debit total and
Credit total respectively and grand totals tallied - books are said to be balanced.
6. Total of main day book to be compared with totals of cash and transfer scrolls and
if differences are found, it must be located and adjusted on the same day.
7. Main day book to be written on the same day or latest by next day i.e. before
commencement of business.
8. The books/registers, etc. may be kept under proper custody overnight. A list of
various books maintained by the bank should be prepared and it should be kept
9. Person writing the day book should initial, Accountant and Manager should check
and sign in full. It is mandatory.
Safe Custody of valuables/security items
The need for ensuring that no unauthorised person has access to security items like
blank cheque/draft/fixed deposit receipt/pay order books, as also account opening forms,
specimen signature cards, loose ledger sheets, etc. cannot be over emphasised and,
therefore, no laxity in this regard at any branch or office should be permitted. Similarly,
the ledgers and other books of account, voucher bundles and other items of stationery
should not remain scattered around the branch premises and one or more officials should
be entrusted with the responsibility for ensuring that at the end of each working day they
are stored in locked almirahs or drawers.

Blank check books/drafts/FDRs should be under the custody of authorised officials.

Account opening forms, specimen signature cards, loose ledger sheets, etc. should

also be kept under proper custody.

Maintenance of document register and proper custody of documents.
Verification of documents periodically by officials unconnected with the custody

Proper custody of investment scrips and investment register
The bills/cheques/drafts received for collection together with the documents should

be kept with a responsible official during office hours and in the bank's safe/strong
room after office hours.
Items received for safe custody should be placed in the iron safe/double lock cabinet

by the joint custodians.

Methodical storing is as important as a clean system of recording.
All the items held under safe custody should be arranged in serial order so that the

required item could be taken out easily.

Custody of cash
Cash and other valuables of the bank should remain in the effective joint custody of the
cashier and the Accountant/Manager. Cash should be kept in a safe/steel receptacle in a
strong room. In case strong room is not provided, cash may be kept in a fire and burglary
proof safe embedded to the ground/into the wall in a secure place inside the bank's
premises. The strong room/safe should have double lock system and the joint custodians
should hold the keys.

The principle behind the double lock procedure is that the

responsibility for the cash and securities should be equally shared by the
Accountant/Manager and the Cashier. The safe (or the strong room) is to be opened and
closed and cash and securities taken out and placed back only by the Cashier under the
direct supervision of the Accountant/Manager.

In no circumstances, one of the joint

custodians should hand over the keys to the other when he is busy with some other work
The strong room should withstand fire and dampness and should be provided with
emergency lighting arrangements to take care of power failures.
Custody of keys
The bank's officials who hold the keys of the safe or strong room should not take their
keys with them when they leave the station. At such times, the keys may be handed over
to another authorised member of the staff after obtaining signature or record to the effect
that he has received the keys and that he has taken charge of the cash and valuables.

Whenever the Manager and/or Cashier hands over charge, the person taking over charge
should check the contents of the safe thoroughly. A handing over/taking over charge
report should be drawn up and sent to Head Office duly signed by the concerned official.
A Key Register should be maintained to record movement of keys among authorised
officials. Unauthorised persons should never be allowed to have access to the keys of
the safe or the strong room.

Duplicate keys of the safe

The safe or the strong room should have a duplicate set of keys which should be kept in a
sealed packet bearing the bank's seal. This packet with a superscription that it contains
duplicate set of keys of the bank's safe/strong room should be lodged with the Head
Office of the bank or the nearest branch of the State Bank of India/notified banks/central
cooperative bank/apex bank for safe custody. The duplicate keys of the safe/strong room
should be made withdrawable on the discharge of the receipt by the authorised officials of
the bank. The particulars of the receipt should be entered in the documents register and
kept in the custody of a responsible official of the bank. It should not be kept in the
safe/strong room. Both the sets of keys may be rotated once a year to prevent wear and
tear. In the case of a branch office, the fact of withdrawal as also re-depositing of the
keys should be intimated to the Head Office.
Loss of keys
If the keys of the safe/strong room are lost by any one of the joint custodians, the
duplicate keys should be withdrawn and the safe opened. The fact of loss and the
explanation of the concerned person should be intimated to the Head Office immediately.
If the bank/branch has an additional safe, all the valuables should be removed and kept in
a new safe or otherwise it may arrange for an additional lock for securing the safe. The
makers of the safe should be informed and the locking system got replaced.
Tokens Register
A Token Register shall be maintained by branches for recording issue of tokens to
different desks in the branch during the day. At the end of the day the tokens should be
tallied with the total number held by the branch and kept in the strong room. If a token is
found missing, it should be brought to the notice of the Manager immediately. Thorough
enquiry should be made by him as to the circumstances of the loss and the matter
reported to Head Office. The number of the missing token and the circumstances under

which it was missing will be recorded in the Token Register. Once in a month the tokens
may be verified by an officer unconnected with their custody.
Counterfeit Notes
Branches are expected to note down all possible details of persons/institutions which had
remitted counterfeit notes to them and report the matter to the police. Branches should
not issue counterfeit notes back into circulation. It is advisable for branches to keep
copies of descriptions of such notes issued by RBI from time to time.

Importance of security arrangements
The question of security in banking circles has, of late, come into greater focus because
of the number of bank robberies that have come to light in many branches of the banks.
The cases of frauds and dacoities/robberies are on the increase.

It is, therefore,

needless to emphasize that all-out efforts should be made to bring about a radical
improvement in the security arrangement for banks.
The model guidelines suggested for implementation by banks are given in the following
paragraphs to serve as a ready reckoner for SCBs/CCBs.

Branch location


If a branch is located in a market area, the branch should remain closed

preferably on the same day on which the market is closed.


In designing and constructing the building, the strength of the material used for
construction as well as other static safeguards should be borne in mind.


It should be ensured that the building is structurally safe from hazards of fire and


The premises selected should have high compound walls and there should be at
least two entrances.


It should be ensured that there is an exclusive and independent entrance to the



It is necessary that the outer door has collapsible shutters in addition to the
normal door. Similarly, the windows and ventilators on the outer walls should be
provided with grills.


It would be preferable to have the Branch Manager's residence in the same



Branch layout


Each bank must prescribe its own standard layout for different classes of
branches depending upon the size of the bank, the volume of business, etc. The
layout of the branch should ensure functional efficiency as well as security


As far as possible all the departments should be on one floor only.


The cash counters should be located as far away from main entrance and as near
the strong room/cash safe as possible.


The cash counter should be constructed keeping in view the security



The, layout should ensure regulating customer traffic. Customer aisles, should not
pass through work areas, especially where cash is handled.


In larger metropolitan or urban branches at least one work station having an

overview of both the branch manager's cabin and the cash counters and, if
possible the entrance to the strong room also, should be constructed.


Cash cabins must be enclosed by see-through partition walls. Thick plate glass or
wire-netting of 2.5 cm. square, may be used for the purpose. It must be ensured
that registers and other books/records are not piled against the partition, thereby
obstructing the view.


The doors to the cash counters must be fitted with night latches, so that once shut
from within, they cannot be opened from outside without operating the key.


The cashier's cabin should have a small window at the rear, so that cheques,
registers, etc. can be passed through it without opening the door.


The windows of all cash counters should be provided with sliding flaps which
cannot be opened from outside.


The height of the cash cage should be adequate to prevent a person standing
outside from reaching the counter level.


The breadth of the work-table on the cashier's side of the counter, should likewise
be such that, a person standing outside cannot reach the cash drawer level.


The cash counter should have work tables at two levels one of the same level as
the counter on the customer's side and the second at a lower level where drawers
for keeping cash will be fitted.


The cash drawers should have appropriate locking arrangements.


The cash window should provide space just enough for a hand to pass through.


It should be ensured that there is adequate illumination during banking hours as

also at night.


Emergency light should be provided at all necessary points.


Strong rooms

The strong room must be constructed strictly in accordance with the specifications
prescribed by the Reserve Bank of India.

The police authorities should be consulted before a strong room is constructed

and their comments considered.


The strong room should preferably be in the bank's own building.


The strong room should be constructed in the basement floor, with the branch
functioning on the ground floor, covering the entire roof area of the strong room in
the basement. However, in areas where there is danger of flood, chests/strong
rooms should not be in the basement.


Where a basement construction is not possible, it must be ensured that the floor
both above and below the strong room, if any, is not only in the possession of the
bank but also in its use.


Construction of the strong room above the ground floor level should be avoided.
If, however, this is unavoidable the architects should be consulted to ascertain
whether the strong room floor, the beams and pillars supporting the floor are
strong enough to bear the heavy weight of the strong room doors, etc.


If a strong room is constructed on an upper floor, it should be ensured that the

staircase leading to the strong room has its entrance from within the main banking


There should be only one entrance to the currency chest/strong room.


entrance should be fitted with a grilled door in addition to the normal Godrej type

There should be a separate ante room of adequate proportion in front of the

strong room, for counting and sorting out cash. This should be fully enclosed from
floor to ceiling. This room should have only one entrance which should remain
closed and locked from inside, having an automatic locking system. The room
should be sufficiently illuminated and all entry to and exit from the room should be
regulated. An armed guard should initially be stationed outside this door. He
should guard the door as long as the cash is being counted or sorted out, inside
the room. He may leave only when relieved by another armed guard.


The strong room should be so located that it is not visible to the customers/


Ventilation, if any, inside the strong room should be properly protected.


A push button/switch of the alarm system fixed in the branch should be provided
inside the strong room.


In the branches where safe deposit vault is provided, the entrance to the vault and
strong room having the cash safe, must be separate.


The cash safe should be fire and burglar proof and should have built-in, secret


As a safety measure against fire and burglary risk, the electric power inside the
strong room should be entirely cut off by removing the supply connection before
closing the strong room door.


The electric supply inside the strong room can be cut off either by providing two
switch boards - one inside and the other outside the strong room - which can be
connected by flexible wire or by automatic light control device, which cuts off the
electric supply automatically, once the strong - room is closed.


The keys of the strong room door and grill gate should be under joint custody.


The duplicate keys of the strong room and cash safe should be lodged in a sealed
packet for safe custody with another bank operating in the area.


When the strong room is opened for taking out cash/keeping cash inside, the main
door of the branch should be closed.










removing/keeping the cash from/in the strong room. The armed guard/watchman
should not be asked to carry the cash boxes or to attend to any other work while
the cash is being carried inside the strong room or taken out of the strong room.

When the strong room is open, the grill door must be locked from inside to prevent
any intrusion.


Opening of strong room during the banking hours should be kept to the minimum
if it cannot be avoided altogether.


Cash should not be stored in the cupboards but kept inside the strong room. It
should invariably be kept in the cash safe.


Safe custody articles should be kept in fire proof cupboards with dual control and
not inside the cash safe.


Cashier's cabin

The cashier should be provided with a cabin which should be fully protected and covered
with strong wire mesh with locking arrangements from inside, preferably with a latch so

that the cash packets lying on the table of the cashier is not easily accessible to an
outsider. The cashier should keep the cabin locked from inside while working inside and
should not leave the door open while leaving the cabin. No unauthorised person should
be allowed to enter into the cabin/cash department. The cash box at the cashier's cabin
should be kept chained to the base of the counter.

Cash-at-counters and movement of cash

from strong room to counter and vice-versa


It must be ensured that the amount of cash at the counter, does not exceed the
amount required and prescribed.


Dual control must be exercised at all times. If on any occasion, one of the joint
holders has, for some reasons, to be away from the branch during banking hours,
appropriate arrangements should be made for the continuance of the dual control.


All withdrawals and lodgements of cash from/into the cash safe/strong room must
be undertaken under dual control. Every entry in the cash-safe-in and the cashsafe-out register must be authenticated by both the joint holders. Cash must be
taken out of the strong room on a minimum number of occasions.


The main door of the branch should be closed and bolted from inside when the
cash is taken out of the strong room to the counters in the cash department and
similarly when the cash is brought back from the counters to the strong room.
Where an armed guard is posted, he should escort such cash in transit.


No person, whether a member of the staff or the public should be allowed access
to the cash department without the permission of the Head Cashier/Cashier incharge of the cash department and without adequate reasons.


Alarm Systems

In addition to structural safeguards and protective measures at a branch, alarm systems

should be provided on a selective basis. Alarms are useful to (a) scare and frighten the
dacoits/robbers, (b) draw the attention of the public to a panic situation and (c) alert the
police. Since there are different types of alarms and they can be either silent or audible,
the choice of a particular system may be left to the security organisation, but it should be
made keeping in mind various features such as location of the branch, its proximity to the
police station, the neighbourhood, etc. A device best suited to the branch must be
judiciously selected.

Closed circuit Television

A closed circuit TV is useful in bigger metropolitan branches. It may be installed at all

currency chest branches having a cash holding of Rs.50 crore and above and at all
bigger branches where cash holdings are high.

Security Cameras

These cameras can be activated at a predetermined time when the risk is high. They can
be installed at important and strategic points and can be linked with an automatic control
system. It there is a robbery or dacoity, the cameras get activated automatically. Such
cameras may be installed at all currency chest branches having a cash holding of Rs.50
crore and above and at all bigger metropolitan branches.

Training of Bank Employees

No security programme can, however, succeed without the active involvement of the
bank's employees. The relevance, therefore, of an adequate security training programme
for the bank's personnel needs no reiteration.

A continuous and effective training

programme provides the necessary awareness as to what constitutes an effective

security system. The following guidelines for an appropriate training programme are

Banks should immediately include 'security measures' in the curricula of all

Induction Training Programmes for all classes of employees. Similarly in their
other training programmes also, there should be adequate emphasis on 'security
measures' by earmarking one session for security alone so as to inculcate a high
degree of security consciousness.


The training programme should cover subjects such as how and in what manner
help should be summoned, how to delay the hold-up to gain time, to what extent
and how to comply with the dacoit's instructions, how and in what circumstances
the alarm should be activated, how and when to obtain outside help, adoption of a
low temperament profile, identification and description of culprits, etc.


Specific guidelines containing a list of do's and don'ts in the event of hold-up,
robbery, burglary, fire, industrial agitation, etc. should be prepared and made
available to all employees undergoing training.


Posters, leaflets, placards and films on security should be used for training. As
often as possible, experts from the Police, CBI and other security organisations,
should be invited to address seminars and workshops.


Mock exercises should be conducted, so that the employees are familiar with the
minutest details and know what to do under different circumstances.


Police assistance, contact numbers and the various measures to be taken in the
event of a dacoity should be made known to all employees.


The staff should be attuned to recognise suspicious/irregular features and to be

wary of hangers-on or people coming to the branch without valid reason.


The employees must be made aware of the importance of directive security and
must be trained to look for signs that will help in detection of the culprits.
Adequately designed forms must be used to record observations.