OBJECTIVES OF THE STUDY

To study broad outline of management of credit, market and operational risks associated with banking sector. To understand the importance of banking sector. To study the Indian bank scenario and its problem. Long Term and Short Term Finances. To study the role of bank in Indian Market. Different types of services provided by the banks. To study various bank, Corporate and Commercial. To study the Indian bank scenario and its problem. Though the Indian Banking System is very wide and elaborated, still the project covers whole subject in concise manner. The study aims at learning the techniques involved to manage the various types of Banks, various methodologies undertaken. To offer suggestions based upon the findings.

SCOPE OF THE STUDY

A healthy banking system is essential for any economy striving to achieve good growth and yet remain stable in an increasingly global business environment. The Indian banking system, with one of the largest banking networks in the world, has witnessed a series of reforms over the past few years like the deregulation of interest rates, dilution of the government stake in public sector banks (PSBs), and the increased participation of private sector banks. The growth of the retail financial services sector has been a key development on the market front. Indian banks (both public and private) have not only been keen to tap the domestic market but also to compete in the global market place. Studying the increasing business scope of the bank. Market segmentation to find the potential customers for the bank. Customers perception on the various products of the bank. The corporate sector has stepped up its demand for credit to fund its expansion plans; there has also been a growth in retail banking. The report seeks to present a comprehensive picture of the various types of bank. The banks can be broadly classified into two categories: Nationalise Bank Private Bank Within each of these broad groups, an attempt has been made to cover as comprehensively as possible, under the various sub-groups.

LIMITATION OF THE STUDY

Every work has its own limitation. Limitations are extent to which the process should not exceed. Limitations of this project are: The project was constrained by time limit of two months. The major limitation of this study shall be data availability as the data is proprietary and not readily shared for dissemination. Due to the ongoing process of globalization and increasing competition, no one model or method will suffice over a long period of time and constant up gradation will be required. As such the project can be considered as an overview of the various banks prevailing in Punjab National Bank and in the Banking Industry. Each bank, in conforming to the RBI guidelines, may develop its own methods for measuring and managing risk. The project study is restricted to banking sector used in India only. The conclusion made is based on a sample study and does not apply to all the Individuals. In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. All banks are not included.

PROBLEMS: -The corporate sector has stepped up its demand for credit to fund its expansion plans, there has also been a growth in retail banking. However, even as the opportunities increase, there are some issues and challenges that Indian banks will have to contend with if they are to emerge successful in the medium to long term.

RESEARCH METHODOLOGY:The first stage included the introduction of Indian Banks and how they work in India. I choose five criteria Growth, Credit quality, Strength, Profitability, Efficiency /Profitability. The next stage involved determining the objectives of the study, drafting questionnaire will be designed keeping in mind the target audience and objectives of the study. It will non-disguised in nature and will include a few open-ended questions.

DATA COLLECTIONS
The data from such organization has also been collected.

Primary Data
The primary data will be collected through the questionnaire designed. In the process of data collection we went to the respective bank to get the questionnaire filled. The preparation of the project report required me to visit the various other companies like Punjab National Bank, ICICI bank, and State Bank of India, Central Bank, IDBI bank etc. in order to collect data.

Secondary Data
The Preparation of the project report also required data from various journals, newspapers ( like The Economic Times, Times of India etc.) books ( like Working Capital Management written by Sarbesh Mishra and Financial Service written by M Y Khan etc.)

SCOPE OF BANKING SECTOR

Banking business has a history of over 200 years. From the times of the Bank of Bengal (1806) the sector has been witnessing qualitative and quantitative changes. Main players during the pre-independence period were Credit Lyonnais, Allahabad Bank, Punjab National Bank and Bank of India. With 1935 regulation the Reserve Bank of India was proclaimed the Central Bank of India and was vested with controlling powers over the commercial banks. The drastic development taken place during the first 25 years since independence was Nationalization of many private banks. With this, the central government became major policy maker for these nationalized banks. With economic liberalization measures many private and foreign banking companies were allowed to operate in the country. Favorable economic climate and variety of other factors such as demand for wide range of financial products from various sections of the society led to mutually beneficial growth to the banking sector and economic growth process. This was coincided by technology development in the banking operations. Today most of the Indian cities have networked banking facility as well as Internet banking facility. A customer is empowered to operate his account from any part of the country. UTI Bank, ICICI, HDFC Bank and Bank of Punjab are the main winners of the race.

BANKING IN INDIA
Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935.After India's independence in 1947; the Reserve Bank was nationalized and given broader powers.

RESERVE BANK OF INDIA

Central Bank & Supreme Monetary Authority
Scheduled Banks

Commercial Banks

Co-operative Banks

Foreign Banks (40)

Regional Rural Bank (196)

Urban CoOperatives

State Cooperatives (16)

(52)

Public Sector Banks

Private Sector Banks

(27)

(30)

Old (22)

New (8)

State Bank of India & Associate Banks (8)

Other Nationalised Banks

(19)

INTRODUCTION
Definition of the Bank: - Financial institution whose primary
activity is to act as a payment agent for customers and to borrow and lend money. Banks are important players of the market and offer services as loans and funds. Banking was originated in 18th century. First bank were General Bank of India and Bank of Hindustan, now defunct. Punjab National Bank and Bank of India was the only private bank in 1906. Allahabad bank first fully India owned bank in 1865. Bank of Bengal

Bank of Bombay

Imperial Bank of India

State Bank of India

Bank of Madras

Types of banking
Commercial bank has two meanings:
Commercial bank is the term used for a normal bank to distinguish it from an investment bank. (After the great depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital markets activities. This separation are no longer mandatory.) Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking). It is the most successful department of banking.
Community

development bank are regulated banks that provide financial

services and credit to underserved markets or populations.

Private

banks manage the assets of high net worth individuals. banks are banks located in jurisdictions with low taxation and

Offshore Savings Postal

regulation. Many offshore banks are essentially private banks.

banks accept savings deposits.

savings banks are savings banks associated with national postal

systems. There are some examples of banks in India: Private

sector bank

HDFC, ICICI, Axis bank, Yes bank, Kodak Mahindra bank, Bank of Rajasthan

Rural bank
United bank of India, Syndicate bank, National bank for agriculture and rural development (NABARD)

Commercial

bank

State Bank, Central Bank, Punjab National Bank, HSBC, ICICI, HDFC etc.

Services provided by the bank

Banks provide two types of services 1. Fund Based 2. Non-Fund Based

Banking Services

Fund Based Services

Non Fund Based Services

FUND BASED AND NON-FUND BASED FUNCTIONS

The difference between fund-based and non-fund based credit assistance lies mainly in the cash outflow. While the former involves all immediate cash outflow, the latter may or may not involve cash outflow from a banker. In other words, a fund based credit facility to a borrower would result in depletion of actual liquidity of a banker immediately whereas grant of non-fund based credit facilities to a borrower may or may not affect the bankers liquidity.

FUND BASED SERVICES

Fund Based Services

Loans & Advances

Leasing & Hire Purchase

Investment

Commercial Loans

Personal Loans

Capital Market Investment

Debt Market Investment

FUND BASED FACILITY

Fund based functions of a bank are those in which banks make deployment of their funds either by granting advances or by making investments for meeting gaps in funds requirements of their customers/ borrowers. Fund-based functions of a bank may be classified into two parts: Granting of Loans and Advances Making Investments in shares/ debentures/ bonds.

FUND BASED SREVICES

I. LOANS AND ADVANCES
1. Commercial Loans Segment A. Working Capital: - Working Capital is Current assets minus
current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth, also called net current assets or current capital. A loan whose purpose is to finance everyday operation of a company. A working capital loan is not used to buy long term assets or investments. Instead it's used to clear up accounts payable, wages, etc. I. Cash Credit: - This facility is given by the banker to the customer by way of a certain amount of credit facility. Its limit is fixed on the basis of security of the company`s current assets. II. Overdraft: - Banks allow selected customers to write cheques in excess of the balance in their current account, ie, to overdraw. Overdrafts are arranged up to limits which depend on the customer's credit standing and the bank manager's humor. The arrangements allow flexibility in the amount spent and, equally, allow flexibility in repayments (although technically a bank can demand repayment of an overdraft within 24 hours). In that respect overdrafts are unlike personal loans, which are structured with regular repayments. Interest on overdrafts is charged on the fluctuating daily balance.

III. Bills Finance IV. Bills Purchase

V. Bills Discounting:-This is the most important form in which a bank lends

without any collateral security. The seller draws bills of exchange on the buyer of goods on credit. Such a bill may either be a clean bill or documentary bill which is accompanied by documents of title to goods, viz railway receipts. The bank purchase bills payable on demand and credit the customer`s account with the amount of bills less the discount. On maturity of the bills, the bank presents them to its acceptor for payment. In case the discounted bill is dishonored by the nonpayment, the bank can recover the full amount from the customer along with the expense in that connection.

B. Tem Loans:

- A bank loan to a company, with a fixed maturity and often featuring amortization of principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon after they become available. Bank term loans are very a common kind of lending. I. Capital Expenditure: - Money spent to acquire or upgrade physical assets such as buildings and machinery, also called capital spending or capital expense.

II. Fixed Assets Finance III. Project Finance: - Financing arrangements where the funds are made
available for a specific purpose (the project), with the loan repayments geared to the project's cash flow. Project finance is used in connection with raising large amounts of money for big-ticket, energy-related facilities. The term has come to be loosely applied to various forms of financing. 'A financing of a particular economic unit in which a lender is satisfied to look initially to the cash flows and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan.'

IV. Consumer Loans Advance against Shares V. Housing Loans VI. Education Loans

3. Personal Loans Segment: - Loan granted for personal, family, or

household use, as distinguished from a loan financing a business. Though in some situations the lender may require a co-signer or guarantor. If unsecured, the loan is made on the basis of the borrower's integrity and ability to Pay. Generally, these loans are used for debt consolidation, or to pay for vacations, education expenses, or medical bills, and are amortized over a fixed term with regular payments of principal and interest.

Non-Fund based services

It is generally perceived that the non-fund based business is very remunerative to bank and the borrowers. The banks, besides getting handsome commission or fee and some other service charges, also get the low cost deposits in the shape of margin and ancillary business. The funds of the borrower are not blocked in the advances to be given to the suppliers or beneficiaries and this keeps his liquidity position comfortable, production smooth and costs low. Non-Fund Based Services

Funds remittance /Transfer Facilities

Letter Of Credit/Bank Guarantee

Agency Functions

Merchant Banking Functions

PURPOSE FOR NON-FUND BASED FACILITIES:-

The borrowers need such facilities not only for purchases of current assets or financing there of or take benefit of certain services with the help of non-fund based facilities. They also need the facilities for acquisition of fixed assets including their financing.

RBI NORMS:
Prudential exposure norms as per extant guidelines of Reserve Bank of India provides that the maximum exposure of a bank for all its Fund based and Nonfund based credit facilities, investments, underwriting, investments in Bonds and commercial paper and any other commitment should not exceed 25 percent of its (bank's) net worth to an individual borrower and 50 percent of its, net worth to a 'group'. It may however, be rioted that while calculating exposure, the Non-fund based facilities are to be taken at 50 percent of the sanctioned limit. To illustrate the point let us consider the following example:-

Example 1.
Particulars Net worth of the bank Rs.
Rs in
Crores

700

Maximum exposure permitted for an individual borrower (25% of net worth of the bank) Working Capital Control and Banking Policy

175

Maximum exposure permitted for all borrowers under the same group (50% of net worth of the Bank) 350

657

FUNDS REMITTANCE/ TRANSFER FACILITIES

 Issue of demand draft Collection of bills and cheques.

ESTABLISHMENT OF LC/ BG Letter of credit:- A Letter of Credit (L/C) is a written document issued by
the Buys Banker (BBK), at a request of the Buyer (B), in favour of the Seller(S), whereby the Buyer's Banker (BBK) gives an undertaking to the Seller(S) that, in the event of the Seller tendering the bill of exchange to the Seller's Banker (SBK), along with all the Required documents, in strict compliance of all the terms and conditions stipulated In The L/C, the entire amount of the bill will be paid to the Seller (S) by the Seller's Bank (SBK), on behalf of the Buyer's Banker (BBK) immediately, as has been, in turn, Undertaken by the buyer to his own Banker (Bib).

Bank guarantee: - It is customary for the Bank, in normal course of

business, to issue and execute guarantees in favor of third parties on behalf of the customers. The Bank Guarantees are governed by various provisions as contained in the Indian Contract Act, 1872. The commercial transactions, banks customers are sometimes required to give third party who seeks the guarantee; not being aware of the customers financial Standing prefers a bank guarantee. In turn the Bank, which very well understands the Financial standing of the customer, undertakes the guarantee of the customers financial Commitments or performance of contracts by him. The bank charges commission for this service, which depends on the security available and the financial stability of the customer.

AGENCY FUNCTION
Collecting of B/E, P-notes, cheques & securities Selling of products of insurance co./ MF Granting & issuing LC, traveler's cheque Agent for any govt., local authority, etc.

MERCHANT BANKING
Syndication of loans Venture capital finance Public issue management Corporate counseling Mergers & acquisitions Portfolio management services Investment counseling

E-BANKING
Electronic payment system ATM Tele-banking Credit card and debit card Online banking

MOBILE BANKING
Account services Credit card services DEMAT account Loan account services Bill services Other services

DEPOSIT SCHEMES FOR NRI's

Foreign Currency Nonresident (FCNR-B) Deposits: Tax Exemption Choice of Currency Remit in any Currency Minimum & Maximum Amount

 Joint account Power of Attorney (P/A) Nomination

Resident Foreign Currency (RFC):- Deposits Returning Indians for

permanent Settlement, after staying abroad for not less than one year, can-

Retain their savings in foreign currency in a RFC account. Get the proceeds of FCNR (B)/NRE Deposits credited to this account

Non Resident Ordinary (NRO) Deposits:-WhereanIndian

citizen having a resident account leaves India and becomes non-resident; his resident account should be Designated as NRO account. Where non-resident Indian receives income in India, he can open a NRO a/c with such Funds.

Reserve Banks of India:Establishment

The Reserve Bank of India was established on April 1, 1935 in accordance with the Provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

Guidelines on Ownership and Governance in Private

Sector Banks Banks are "special" as they not only accept and deploy large amount of uncollateralized public funds in fiduciary capacity, but they also leverage such

funds through credit creation. The banks are also important for smooth functioning of the payment system. In view of the above, legal prescriptions for ownership and governance of banks laid down in Banking Regulation Act, 1949 have been supplemented by regulatory prescriptions issued by RBI from time to time. The existing legal framework and significant current practices in particular cover the following aspects: The composition of Board of Directors comprising members with demonstrable professional and other experience in specific sectors like agriculture, rural economy, co-operation, SSI, law, etc., approval of Reserve Bank of India for appointment of CEO as well as terms and conditions thereof, and powers for removal of managerial personnel, CEO and directors, etc. in the interest of depositors are governed by various sections of the B.R. Act, 1949. Guidelines on corporate governance covering criteria for appointment of directors, role and responsibilities of directors and the Board, signing of declaration and undertaking by directors, etc., were issued by RBI on June 20, 2002 and June 25, 2004, based on the recommendations of Ganguly Committee and a review by the BFS. Guidelines for acknowledgement of transfer/allotment of shares in private sector banks were issued in the interest of transparency by RBI on February 3, 2004. Foreign investment in the banking sector is governed by Press Note dated March 5, 2004 issued by the Government of India, Ministry of Commerce and Industries. The earlier practice of RBI nominating directors on the Boards of all private sector banks has yielded place to such nomination in select private sector banks. Against this background, it is considered necessary to lay down a comprehensive framework of policy in a transparent manner relating to ownership and governance in the Indian private sector banks as described below. The broad principles underlying the framework of policy relating to ownership and governance of private sector banks would have to ensure that

 The ultimate ownership and control of private sector banks is well diversified. While diversified ownership minimizes the risk of misuse or imprudent use of leveraged funds, it is no substitute for effective regulation. Further, the fit and proper criterion, on a continuing basis, has to be the over-riding consideration in the path of ensuring adequate investments, appropriate restructuring and consolidation in the banking sector. The pursuit of the goal of diversified ownership will take account of these basic objectives, in a systematic manner and the process will be spread over time as appropriate. Important Shareholders (i.e., shareholding of 5 per cent and above) are fit and proper, as laid down in the guidelines dated February 3, 2004 on acknowledgement for allotment and transfer of shares. The directors and the CEO who manage the affairs of the bank are fit and proper as indicated in circular dated June 25, 2004 and observe sound corporate governance principles. Private sector banks have minimum capital/net worth for optimal operations and systemic stability. The policy and the processes are transparent and fair.

4. Minimum capital
The capital requirement of existing private sector banks should be on par with the entry capital requirement for new private sector banks prescribed in RBI guidelines of January 3, 2001, which is initially Rs.200 crore, with a commitment to increase to Rs.300 crore within three years. In order to meet with this requirement, all banks in private sector should have a net worth of Rs.300 crore at all times. The banks which are yet to achieve the required level of net worth will have to submit a time bound programme for capital augmentation to RBI. Where the net worth declines to a level below Rs.300 crore, it should be restored to Rs. 300 crore within a reasonable time.

5. Shareholding
The RBI guidelines on acknowledgement for acquisition or transfer of shares issued on February 3, 2004 will be applicable for any acquisition of shares of 5 per cent and above of the paid up capital of the private sector bank.

 In the interest of diversified ownership of banks, the objective will be to ensure that no single entity or group of related entities has shareholding or control, directly or indirectly, in any bank in excess of 10 per cent of the paid up capital of the private sector bank. Any higher level of acquisition will be with the prior approval of RBI and in accordance with the guidelines of February 3, 2004 for grant of acknowledgement for acquisition of shares. Where ownership is that of a corporate entity, the objective will be to ensure that no single individual/entity has ownership and control in excess of 10 per cent of that entity. Where the ownership is that of a financial entity the objective will be to ensure that it is a well established regulated entity, widely held, publicly listed and enjoys good standing in the financial community. Banks (including foreign banks having branch presence in India)/FIs should not acquire any fresh stake in a banks equity shares, if by such acquisition, the investing banks/FIs holding exceeds 5 per cent of the investee banks equity capital as indicated in RBI circular dated July 6, 2004. As per existing policy, large industrial houses will be allowed to acquire, by way of strategic investment, shares not exceeding 10 per cent of the paid up capital of the bank subject to RBIs prior approval. Furthermore, such a limitation will also be considered if appropriate, in regard to important shareholders with other commercial affiliations. In case of restructuring of problem/weak banks or in the interest of consolidation in the banking sector, RBI may permit a higher level of shareholding, including by a bank.

6. Directors and Corporate Governance

The recommendations of the Ganguly Committee on corporate governance in banks have highlighted the role envisaged for the Board of Directors. The Board of Directors should ensure that the responsibilities of directors are well defined and the banks should arrange need-based training for the directors in this regard. While the respective entities should perform the roles envisaged for them, private sector banks will be required to ensure that the directors on their Boards representing specific sectors as provided under the B.R. Act, are indeed representatives of those sectors in a demonstrable fashion, they fulfill the criteria under corporate governance norms provided

by the Ganguly Committee and they also fulfill the criteria applicable for determining fit and proper status of Important Shareholders (i.e., shareholding of 5 per cent and above) as laid down in RBI Circular dated June 25, 2004. As a matter of desirable practice, not more than one member of a family or a close relative (as defined under Section 6 of the Companies Act, 1956) or an associate (partner, employee, director, etc.) should be on the Board of a bank. Guidelines have been provided in respect of 'Fit and Proper' criteria for directors of banks by RBI circular dated June 25, 2004 in accordance with the recommendations of the Ganguly Committee on Corporate Governance. For this purpose a declaration and undertaking is required to be obtained from the proposed / existing directors Being a Director, the CEO should satisfy the requirements of the fit and proper criteria applicable for directors. In addition, RBI may apply any additional requirements for the Chairman and CEO. The banks will be required to provide all information that may be required while making an application to RBI for approval of appointment of Chairman/CEO.

7. Foreign investment in private sector banks

In terms of the Government of India press note the aggregate foreign investment in private banks from all sources (FDI, FII, and NRI) cannot exceed 74 per cent. At all times, at least 26 per cent of the paid up capital of the private sector banks will have to be held by resident Indians. 7.1 Foreign Direct Investment (FDI) (other than by foreign banks or foreign bank group) The policy already articulated in guidelines for determining fit and proper status of shareholding of 5 per cent and above will be equally applicable for FDI. Hence any FDI in private banks where shareholding reaches and exceeds 5 per cent either individually or as a group will have to comply with the criteria indicated in the aforesaid guidelines and get RBI acknowledgement for transfer of shares. To enable assessment of fit and proper the information on ownership/beneficial ownership as well as other relevant aspects will be extensive.

7.2 Foreign Institutional Investors (FIIs) Currently there is a limit of 10 per cent for individual FII investment with the aggregate limit for all FIIs restricted to 24 per cent which can be raised to 49 per cent with the approval of Board/General Body. This dispensation will continue. The present policy requires RBIs acknowledgement for acquisition/transfer of shares of 5 per cent and more of a private sector bank by FIIs based upon the policy guidelines on acknowledgement of acquisition/transfer of shares issued. For this purpose RBI may seek certification from the concerned FII of all beneficial interest. 7.3 Non-Resident Indians (NRIs) Currently there is a limit of 5 per cent for individual NRI portfolio investment with the aggregate limit for all NRIs restricted to 10 per cent which can be raised to 24 per cent with the approval of Board/General Body. Further, the policy guidelines on acknowledgement for acquisition/transfer will be applied.

8. Due diligence process

The process of due diligence in all cases of shareholders and directors as above, will involve reference to the relevant regulator, revenue authorities, investigation agencies and independent credit reference agencies as considered appropriate.

9. Transition arrangements
The current minimum capital requirements for entry of new banks is Rs.200 crore to be increased to Rs.300 crore within three years of commencement of business. A few private sector banks which have been in existence before these capital requirements were prescribed have less than Rs.200 crore net worth. In the interest of having sufficient minimum size for financial stability, all the existing private banks should also be able to fulfill the minimum net worth requirement of Rs.300 crore required for a new entry. Hence any bank with net worth below this level will be required to submit a time bound programme for capital augmentation to RBI for approval. Where any existing shareholding of any individual entity/group of entities is 5 per cent and above, due diligence outlined in the guidelines will be undertaken to ensure fulfillment of fit and proper criteria.

 Where any existing shareholding by any individual entity/group of related entities is in excess of 10 per cent, the bank will be required to indicate a time table for reduction of holding to the permissible level. While considering such cases, RBI will also take into account the terms and conditions of the banking licenses. Any bank having shareholding in excess of 5 per cent in any other bank in India will be required to indicate a time bound plan for reduction in such investments to the permissible limit. The parent of any foreign bank having presence in India, having shareholding directly or indirectly through any other entity in the banking group in excess of 5 per cent in any other bank in India will be similarly required to indicate a time bound plan for reduction of such holding to 5 per cent. Banks will be required to undertake due diligence before appointment of directors and Chairman/CEO on the basis of criteria that will be separately indicated and provide all the necessary certifications/information to RBI. Banks having more than one member of a family, or close relatives or associates on the Board will be required to ensure compliance with these requirements at the time of considering any induction or renewal of terms of such directors. Action plans submitted by private sector banks outlining the milestones for compliance with the various requirements for ownership and governance will be examined by RBI for consideration and approval.

10. Continuous monitoring arrangements

Where RBI acknowledgement has already been obtained for transfer of shares of 5 per cent and above, it will be the banks responsibility to ensure continuing compliance of the fit and proper criteria and provide an annual certificate to the RBI of having undertaken such continuing due diligence. Similar continuing due diligence on compliance with the fit and proper criteria for directors/CEO of the bank will have to be undertaken by the bank and certified to RBI annually. RBI may, when considered necessary, undertake independent verification of fit and proper test conducted by banks through a process of due diligence as described in paragraph 8.

11. On the basis of such continuous monitoring, RBI will consider appropriate measures to enforce compliance.

Guidelines on Fair Practices Code

Loan application forms shall be comprehensive to include information about rate of interest (fixed/floating) and manner of charging (monthly/quarterly/half yearly/ rest), process fees and other charges, penal interest rates, pre-payment options and any other matter which affects the interest of the borrower, so that a meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower. Banks and Financial Institution should devise a system of giving acknowledgement for receipt of all loans application. Banks/ Financial Institutions should verify the loan application within a reasonable period of time. If additional details / documents are required, they should intimate the borrowers immediately. If all the requirements are complied with the borrowers, banks/ Financial Institution should acknowledge for the same and state the specific time period from the date of acknowledgement within which a decision on the specific loan request will be conveyed to the borrowers. Acknowledgement should also state the amount of process fees paid or to be paid and the extent to which such fees shall be refunded in the event of rejection of any application for loan. In the case of rejection of any loan application, lenders should convey in writing the specific reasons thereof. Lenders should ensure that there is proper assessment of credit requirement of borrowers. The credit limit, which may be sanctioned, should be mutually settled. Terms and conditions and other caveats governing credit facilities given by banks / Financial Institution arrived at after negotiation by the lending institution and the borrower should be reduced in writing duly witnessed and certified by the authorized sanctioning authority; in respect of advances sanctioned by the Board of Directors or its committee the documents of

understanding should be certified by the authorized signatory preferably at company secretary level. A copy of such agreement should be made available to the borrowers for their record. Lenders should ensure timely disbursement of loans sanctioned. Stipulation of margin and security should be based on due diligence and credit worthiness of borrowers. Lenders should keep the borrowers apprised of the state of their accounts from time to time and shall give notice of any change in the terms and conditions including interest rates and charges are affected only prospectively. To ensure the above, Banks / Financial Institution should create appropriate information dissemination mechanism. The loan agreement should clearly specify the liability of lenders to borrowers in regard to allowing drawings beyond the sanctioned limits, honoring the cheques issued for the purpose other than agreed, disallowing large cash withdrawals and obligation to meet further requirements of the borrowers on account of growth in business etc. without proper revision and sanction in credit limits, and disallowing drawings on a borrower account on its classification as a nonperforming assets or on account of non-compliance with the terms of sanction. Lenders should give reasonable notice to borrowers before taking decision to recall / accelerate payment or performance under the agreement or seeking additional securities. Lenders should release all securities on receiving payment of loan or realization of loan subject to any legitimate right of lien for any other claim lenders may have against borrowers. If such right of set off is to be exercised, borrowers shall be given notice about the same with full particulars about the remaining claims and the documents under which lenders are entitled to retain the securities till the relevant claims are settled / paid.