RESEARCH PROJECT

ON

STRATEGIES FOR IMPROVING NON FUND BASED

BANKING BUSINESS FROM SECTOR

INTRODUCTION

Abstract

The fact that high level industrialization involved Merchant

banking services strengthen the economic development of a

country as they acts as sources of funds and information for

corporations. Considering the way the Indian economy is

growing, the role of merchant banking services in India is

indispensable. These financial institutes also act as

corporate advisory bodies to help corporations rightly get in

various financial activities. The need of merchant banking

services in India arises from is taking place in the country.

Some of the PSBs have formed their fully owned subsidiaries

for

this purpose. Analysis of merchant banking business of some

PSBs clearly indicates that the merchant banking activities of

the banks are showing declining trend especially after 1993-

94 due to depressed capital market conditions and subdued

activity in primary market.

Introduction

sector banks include loan syndication, consultancy and

advisory services, capital issue management etc. The public

sector banks have been marketing all the non fund based

financial services either directly by starting merchant

banking division or by indirectly floating their subsidiary

companies or both. This paper emphasis on the analysis of

non fund based financial services of public sector banks in

India.

EXECUTIVE SUMMARY

Banking in India originated in the first decade of 18

century with The General Bank of India coming into

existence in1786. 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.The Reserve Bank o f Ind ia fo r ma l ly took

on the respons ib i l i t y o f regu la t ing the Ind ian

bank ing sec to r   from1935. After India's independence

1947, the Reserve Bank was nationalized and given broader

powers. Currently (2007), banking in India is generally fairly

mature in terms of supply, product range and reach-even

though reach in rural India still remains a challenge for the

private sector and foreign banks. In terms of quality of

assets and capital adequacy, Indian banks are considered to

have clean, strong and transparent balance sheets relative

to other banks in comparable economies in its region.

The Reserve Bank of India is an autonomous body,

with minimal pressure from the government. The

stated policy of the Bank on the Indian Rupee is to

manage volatility but without any fixed exchange rate-and

this has mostly been true. The Modern Banking Functions

are Fund based and Non-Fund based functions. These

functions of a bank are those in which banks extend

various services to their customers or add their

commitments to certain transactions under taken by

the i r c l i en ts and charge the i r fees / commiss ions

fo r the serv ices rendered by them /

the i r   commitments added to the transactions undertaken

by the clients. The activities popularly known as ‘Non-fund

facilities’ provided by Banks. The major non-fund based

facilities that are considered as a part of regular credit

facilities are Letter of Credit and Bank Guarantee . As

a par t o f the i r Non- fund based funct ions banks

a l l ow Let te r o f C red i t and Bank  Guarantee facilities

for their customers to meet their requirements. Thus, we

conclude that the Letter of credit and Bank guarantee

comes in a plethora of confusing forms NDGUISES. It is

understood in different ways in different parts of the world.

But, once the basics are understood, it is wonderfully

adaptable and uniquely user friendly tool

. DESIGN OF STUDY

  Objective Of Study

1. To understand the importance of banking sector.

2. To perceive the meaning of Non-fund based facility.

3. To visualize the significance of Letter of Credit and Bank

Guarantee.

4. To link the role of letter of credit and Bank guarantee with

development of the banks.

5. Readers can see the case study of Dena bank playing role

of LC and BG.

Scope Of The Study

1. The readers can come to know the various types of

Non-Fund based facilities by Banks.

2 . To gu ide the impor te rs and expor te r wh i le

remov ing LC and BG.

3. One can come to know about types of LC and BG.

4. The readers can come to across the sample letter of credit

and bank guarantee.

5. They can come to know the procedures of LC and BG.

Limitations Of The Study

1. The project study is restricted to banking sector used in

India only.2. The conclusion made is based on a sample

study and does not apply to all the individuals.3. All banks

are not included.

Methodology

1. Primary data is collected from a sample size of 30

individuals.

2. Secondary data is collected by referring books

relating to banking and basics of banking.

Also referred to Dena Bank, magazines and internet.

Merchant Banking

Non-fund based financial services of the public sector banks

are covered under merchant banking activities. Merchant

banking services has been statutorily brought under the

regulatory frame work of the Securities and Exchange Board

of India (SEBI) under the SEBI Act 1992. No person can act as

a merchant banker without obtaining a Certificate Financial

Liberalization has highlighted competition among banks and

other financial institutions. As a result, public sector banks

have not only diversified their fund based financial services,

e.g. mutual funds, factoring, forfeiting etc. but

also their non fund based financial services. This would help

them to increase their help to spread their risk over variety

of activities. The non fund based revenue while optimizing

the use of funds and would financial services of the public of

Registration from SEBI. According to SEBI, a merchant

banker is a person who is engaged in the business of issue

management either by making arrangement regarding

selling, buying or subscribing to securities as a manager,

consultant, advisor or rendering corporate advisory services

in relation to such issue management. Considering the

approach the Indian manage to buy is growing, the role of

merchant banking services in India is indispensable. These

financial institutes additionally act as corporate advisory

bodies to great corporations righteously get endangered in

assorted financial activities.

The need of merchant banking services in India arises from

the tall turn automation that is receiving place in the

country. Hence there is need for learned professionals who

can take caring of assorted finance-related needs of the

modernized industrial sectors. These dilettante services have

been additionally of great significance for the tiny as good as

to middle sized enterprises to great them work smoothly.

Most of the farming areas

still miss industrial enrichment as good as the categorical

reasons for this embody miss of supports as good as

information. The merchant banking services great the

entrepreneurs to come up with industrial setups in these

areas. Besides, the businessman banks great the

entrepreneurs to try opportunities in the unfamiliar markets.

The upon tip of contention highlights the ways businessman

banks have been compelling industrial growth in India. The

supervision in the nation plays the poignant role by arising

manners as good as regulations for businessman banks so

that entrepreneurs can have most out of these services.

Evolution of Merchant Banking

The origin of merchant banking traced to Italy in the mid

fifteenth and France during the seventeenth and eighteenth

centuries. Cosimo De Medier, an Italian Merchant Bbanker

established net work of operations beyond Italy with offices

in London, Belgium and France. The Italian merchant banker

introduced into England all the institutions and techniques

connected with an organized money market. In France a

merchant banker added banking business to his merchant

activities. In the United Kingdom merchant banks came into

existence in the late eighteenth century.

Merchant banks initially included acceptance houses,

discount houses and issue houses. They used to finance

sovereign government through grant of long term loan.

Since the end of Second World War, commercial banks in

Western Europe have been offering multiple services

including merchant banking services. After the great crash of

1929 and depression, the investment banking was separated

from commercial banking under the Glass-Steagall Banking

Act-1933. Investment trusts were covered by Investment

Company Act 1940.

Growth of Merchant Banking in India

Merchant Banking as a commercial activity took place in

India through the management of Public Issues of Capital

and Loan Syndication. It was originated in 1969 with the

setting up of the Merchant Banking Division of ANZ Grind

lays Bank. The main service offered at that time to the

corporate enterprises by the merchant banks included the

management of public issues and some aspects of financial

consultancy. The early and mid seventies witnessed a boom

in the growth of merchant banking organizations in the

country with various commercial banks, financial institutions,

broker’s firms entering into the field of merchant banking. In

1970 Citi bank set up its merchant banking division with the

objectives of assisting new entrepreneurs and existing units

in the evaluation of new projects and raising funds through

borrowing and issue of equity. In pursuance to the

recommendation of the Banking Commission-1972, Indian

bank started merchant banking services. State Bank of India

started the merchant banking division in 1972. The Foreign

Exchange Regulation Act-1973 necessitated dilution of

foreign equity of large number of foreign companies

operating in India. As a result, large number of investors was

created in capital market and merchant banking become

attractive to banks and the firms of consultants In 1974 ICICI

also initiated the merchant banking services The commercial

banks that followed SBI were: Central Bank of India; Bank of

India and Syndicate Bank in 1977; Bank of Baroda, Standard

Chartered Bank and Mercantile Bank in 1978; United Bank of

India, United Commercial Bank, Punjab National Bank,

Canara Bank and Indian Overseas Bank in late 70’s and early

80’s. The financial institutions that followed ICICI in starting

merchant banking activities are: IFCI (1986) and IDBI (1991).

After mid seventies, there was a boom in the growth of

merchant banking organization in the country. SBI, Canara

Bank, Bank of Baroda and Punjab National Bank have floated

wholly owned subsidiaries, namely, SBI Capital market Ltd;

(SBICAP); Canbank Financial Services ltd.(CANFINA); Bank of

Baroda Fiscal Services Ltd.(BOB Fiscal) and PNB Capital

Services Ltd. Financial and technical Consultants and

professionals also entered in merchant banking business.

Currently, most of the foreign banks are offering these

services. They have been active in the area of arranging and

syndicating foreign currency loans and in attracting foreign

investment in India. They have also been providing advisory

services and other type of assistance to foreign companies

desiring to set up joint ventures in India.

2. Regulating Framework of Merchant Banking:

Merchant banking activities were regulated by

SEBI, Ministry of Finance Guidelines

Companies Act 1956

Stock Exchange Guidelines

Securities Contact (regulation) Act 1956

Now merchant banking has been statutorily brought under

the regulatory framework of the Securities and Exchange

Board of India (SEBI) Act 1952. No person can act as a

merchant banker without the obtaining a Certificate of

Registration from SEBI. Merchant banking activities are

being organized and undertaken in several forms.

Commercial banks both Indian and foreign and Development

Finance Institutions(DFIs) have organized them through

formation of Divisions; nationalized banks through forming

subsidiary companies and share brokers and consultancies

constituted themselves into public limited companies or

registered themselves as a private limited companies or

firms, partnership or proprietary concerns. Merchant

bankers, irrespective of the form in which they are organized

are governed by the Merchant Bankers Rules issued by the

Ministry of Finance and Merchant Banking Regulation.

The authorized activities of the merchant bankers

included a) issue of management which consist of

preparation of prospectus and other information relating to

the issue, determining financing structure, tie up of financers

and final allotment and/or refund of subscription;

(b) corporate adviser services relating to the issue;

(c) underwriting;

(d) portfolio management services, and

e) managers consultants or advisors in the issues.

All merchant bankers are expected to perform with high

standards of integrity and fairness in all their dealings. A

Code of Conduct has been prescribed for merchant bankers

by SEBI. Within this context the criteria for a Certificate of

Registration take into account;

Professional competence

personnel, their adequacy and quality and other

infrastructure

Capital adequacy; and

Past track record experience, general reputation and

fairness in all their transactions.

Up to August 1997, the regulation of the SEBI Act provided

for registration under four categories of merchant bankers:

Category-I can act as an issue manager, advisor consultant,

under writer and portfolio manager with minimum resources

up to Rs five crores

Category-II can act as an advisor, consultant, co-manager

underwriter and portfolio manager with minimum resources

up to Rs fifty lakhs

Category-III can act as underwriter and portfolio manager

with minimum resources up to Rs twenty five lakhs

Category-IV can act only as an advisor or consultant to an

issue with no minimum resources.

All issues should be managed by at least by one authorized

merchant bankers, functioning as the sole manager or lead

manager. Every merchant banker is required under the

regulation to abide by the code of conduct. Accordingly

every merchant banker is required to act in an ethical

manner, render high standard of service and exercise due

diligence, not

to indulge in unfair practices, not to divulge confidential

information about the client, endeavour to ensure that true

and adequate information is provided to investors. Merchant

banker is required to maintain and keep a copy of the

balance sheet, a copy of auditor’s report and a statement of

financial position and to furnish annually the final accounts

and such

other documents to SEBI as well as half yearly working

results. Merchant banker is required to enter into agreement

with a corporate body setting out their mutual rights,

liabilities and obligations relating to such issue.

A lead manager should furnish to SEBI a statement

specifying disclosed responsibilities relating to issue. It is the

duty of lead manager to verify the contents of a prospectus

or letter of offer in respect of an issue and to submit to SEBI

a due diligence certificate confirming that disclosures made

in the draft prospectus are true, fair and adequate to enable

the

investor to make a well informed decision. The lead manager

will continue to be associated with the issue till the

subscribers have received the share or excess application

money. Merchant banker either directly or indirectly

prohibited from entering into any transaction in securities on

the basis of

unpublished price sensitive information. Merchant banker is

required to inform SEBI within 15 days from the date of

entering such transactions. SEBI may ask merchant banker

any time to disclose his

Responsibilities of management of the issue

Change in the information furnished

Name of the companies whose issue he has managed

Breach of capital adequacy, and

His activities as a manger; consultant, underwrite to an

issue.

SEBI may inspect books of account, documents and records

of merchant banker either by giving reasonable notice or

without notice in the interest of investors. SEBI is

empowered to suspend a registration of a merchant banker

in case he furnishes wrong or false information; fails to

resolve the complaints of investors etc. In case of deliberate

manipulation of price rigging or concerning activities or

deterioration in the financial position, the board may also

cancel registration of the merchant banker.

In the month of September 1997, SEBI abolished all

categories of merchant bankers except Category-I. Category

II, III and IV was allowed to continue till the end of their

present term and after that they will have to apply for the

category I license or status or take up some other activity.

For example, they can register themselves for under taking

activities like portfolio managers or under writes. Those

merchant bankers who are undertaking activities like issue

management, underwriting and portfolio management will

be required to get registered as portfolio managers while

underwriting could be done without any additional

registration. As a result of such scheme number of merchant

bankers declined.

Earlier there was no difference between merchant bankers

and NBFC’s. Both were permitted to undertake fund based

and non-fund based activities. Merchant bankers are being

supervised by the SEBI and the NBFCs are being supervised

by RBI. As a result the role of merchant bankers and NBFCs

got differentiated. Merchant bankers are supposed to

undertake as per SEBI directives only non fund based

activities and NBFCs are supposed to undertake only fund

based activities. Merchant bankers no longer accept

demands, do lending and bill discounting or carry out fund

based activities other than those related exclusively to the

capital market.

The non fund activities which the merchant banker is

supposed to undertake are:

Issue Management

Portfolio Management

Corporate counseling

Project Counseling

Loan/lease Syndication

Arranging foreign collaboration

Arranging on acquisition and mergers

Helping in placement activities

Advising on capital structuring

Merchant Banking Services in India

ICICI Merchant Services

ICICI Bank- India's largest private sector bank, and First

Data, a global leader in electronic commerce and payment

services, have formed a merchant acquiring alliance named

ICICI Merchant Services which has acquired ICICI Bank's

merchant acquiring portfolio. The venture brings together

one of India's largest merchant portfolios, representing

approximately 30 per cent of the current Indian acquiring

market, and a leading acquirer and payment services

provider with global expertise. Over time ICICI Merchant

Services expects to deliver an enhanced suite of card

acquiring services to existing and to new merchants. ICICI

Bank is India's second largest bank with over 2,000 branches

across the country. First Data, a KKR company, provides

payment processing services for 5.3 million merchant

locations globally and serves customers in 36 countries

around the world. First Data's services include offering

merchants the ability to view and interrogate their payment

transactions securely via the internet while benefiting from

loyalty, prepaid and market-leading e-commerce solutions

based upon advanced processing technologies.

About ICICI Bank

ICICI Bank Ltd (NYSE:IBN) is India's largest private sector

bank and the second largest bank in the country with

consolidated total assets of about US$ 102 billion as of

September 30, 2009. The ICICI Group has leadership

positions across the financial services sector, including

insurance, securities brokerage, asset management and

private equity.

About First Data

First Data, a KKR company, powers the global economy by

making it easy, fast and secure for people and businesses to

buy goods and services using virtually any form of electronic

payment. Whether the choice of payment is a gift card, a

credit or debit card or a check, First Data securely processes

the transaction and harnesses the power of the data to

deliver intelligence and insight for millions of merchant

locations and thousands of card issuers in 36 countries.

PNB Merchant Banking

Punjab National Bank-India’s one of the Leading Nationalized

Bank established in 1895 serving over 3.5 crores customers

through 4520 branches and 439 extension counters, is the

largest amongst Nationalized Banks. The Bank has recently

been ranked 21st among top 500 companies and 9th among

top 50 brands by The Economic Times. All the Branches of

the Bank have been computerized. The Bank has adopted a

concept of "Any Time, Any Where Banking" through the

introduction of Centralized Banking Solution (CBS) and over

2511 offices have already been brought under its ambit.

The Bank is registered with SEBI as Category – I Merchant

Banker for providing all the major Merchant Banking

services. Its gamut of Merchant Banking services

includes:

Issue Management Services – to act as Book Running Lead

Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt

issues

Project appraisal

Corporate Advisory Services

Underwriting of equity issues

Banker to the Issue/Paying Banker

Refund Banker

Monitoring Agency

Debenture Trustee

Marketing of the issue through a strong network of

QIBs/HNIEs/Corporates and Retail investor. The Bank itself is

one of the major investor in the market having a treasury of

45000 crores. Its Software for handling the Refund Banker is

one of the best systems in the industry. Its unique features

provides online payment of the instrument by our 2470

branches in 733 centers, online status of paid instruments,

cent per cent

reconciliation at any point of time etc. The Bank has an

exclusive and specialized Capital Market Service Branch at

New Delhi for providing Merchant Banking Services to the

Corporate.

Depository Services

Bank offers Depository Services to its clients and has

designated large network of branches to cater to their demit

requirements through Depository Participant of NSDL and

CDSL depositories. Bank also provides the Speed –e facility

to demat account holders to submit their delivery

instructions through Internet. The Bank has recently

launched “online securities trading facility” in strategic

alliance with IDBI Capital Market Services Ltd.

OBC Merchant Banking Division

Oriental Bank of Commerce is registered with Securities and

Exchange Board of India, as Category - 1 Merchant Banker

since March 1, 1993. The Merchant Banking Activities are

undertaken by its Merchant Banking Division housed in a

separate premise at F-14, 4th Floor, Competent House,

Connaught Place, New Delhi.

The Merchant Banking

Division is headed by a top Executive of the rank of General

Manager with a dedicated team of officials having sufficient

exposure and experience in this line. The Bank offers

complete range of activities of category - 1 Merchant

Banker as under:

Managing of Public Issue of equity and debt.

Handling Dividend/ Interest warrant issues of Corporate.

Acting as Escrow Collecting Bank of Public Issues.

Monitoring Agency work as per SEBI Guidelines.

Advisory services for projects.

Private placement of securities.

Syndication of Rupee Term Loan.

Corporate Advisory Services relating to Securities Market

e.g. Takeovers, Acquisitions, Disinvestments.

The Bank had made Initial Public Offer of 60 Million equity

shares of Rs. 10/- each for cash at a premium of Rs. 50/- per

share in October 1994. Further, the Bank had made Follow-

on Public Offer of 58 Million Equity Shares of Rs. 10/- each for

cash at a premium of Rs. 240/- per share aggregating Rs.

14500 Million in April 2005. As a result, the paid up

equity share capital has gone up to Rs. 2505.397 Million and

the Government of India’s stake in the share capital of the

Bank has come down to 51.09 per cent from 66.48 per cent.

The equity shares of the Bank are under compulsory

dematerialization and 246.18 Million shares have been

dematerialized as on 31st March 2010. The Bank has a large

investor base of 1, 11,132 shareholders as on 31st March

2010. The broad shareholding pattern of the Bank as on 31st

march 2010 is: Government of India at 51.09 per cent;

LIC, GIC and subsidiaries at 20.83 per cent; Domestic FIs,

MFs and banks at 5.38 per cent; FIIs and NRIs at 15.19 per

cent and Indian public and corporate at 7.51 per cent.

The Merchant Banking Division deals with all types of

shareholders complaints and grievances as well as other

related enquiries in connection with transfer of shares issued

by the Bank. M/s.MCS Limited, Delhi has been appointed the

Share Transfer Agent of the Bank for the purpose of dealing

with the Shareholders in various matters viz., updation of

change of address, non-receipt of dividend warrant, share

certificate etc. The shareholders may approach directly

either this Division or the Share Transfer Agent for all types

of services relating to equity shares of the Bank.

CANARA Bank Merchant Division

Canara Bank is also one of the leading Merchant Bankers in

India, offering specialized services to Banks, PSUs, State

owned Corporations, Local Statutory bodies and Corporate

sector. It was SEBI registered Category I Merchant Banker to

render Issue Management (Public / Rights / Private

Placement Issues), Underwriting, Consultancy and Corporate

Research in World Economy. Advisory Services etc. It also

hold SEBI registration Certificate to act as "Bankers to an

Issue" with network of

exclusive Capital Market Service Branches and over 100

designated CBS Branches to handle collecting / Refund /

Paying Banker assignments. It does undertake "project

appraisals" with linkage to resource raising plans from

Capital Market / Debt Markets and facilitate tie-ups with

Banks / Financial Institutions and Potential Investors. Its

uniqueness is extending services under single window

concept covering the following areas:

Merchant Banking

Commercial Banking

Investments

Bankers to Issue - Escrow Bankers

Underwriting

Loan Syndication

As leading Merchant Bankers in India, it has associated with

issues ranging from Rs.1 crores to Rs.1500 crores, involving

various types of industries, banks, statutory bodies etc. and

has an edge in handling Private Placement issues – both

retail and HNIs.

3.4.1Spectrum of Services

Equity Issue (Public/Rights) Management

Debt Issue Management

Private Placements

Project Appraisals

Monitoring Agency Assignments

IPO Funding

Security Trustee Services

Agriculture Consultancy Services

Corporate Advisory Services

Mergers and Acquisitions

Buy Back Assignments

Share Valuations

Syndication

ESOS Certification

4.3.2Issue Management Services

Project Appraisal

Capital structuring

Preparation of offer document

Tie Ups (placement)

Formalities with SEBI / Stock Exchange / ROC, etc.

Underwriting

Promotion /Marketing of Issues

Collecting Banker / Banker to an issue

Post Issue Management

Refund Bankers

Debenture Trusteeship

Registrar & Transfer Agency (our Subsidiary)

Bank constantly update the list of Potential Investors -

Institutions, Provident, Pension and Gratuity Funds, High Net

worth Individuals and others and continuously assess their

investment appetites and help issuers in effective marketing

of the products.

3.5 ASBA Facility

An application supported by blocked amount (ASBA) is an

initiative by SEBI to make the process of Subscription to

Capital Issues (Primary) more efficient. Under this system,

the application money will remain in the account of the

customer, till the allotment of shares. This facility has been

provided to Savings Bank and Current Account holders who

are eligible to apply as per SEBI guidelines, intending to

invest in Capital issues (both Public and Rights issues). A

Hold is created in the account of the customer to the extent

of shares applied for and the same is released after the

Allotment. The blocked amount is transferred to the issuer

company to match the quantum of shares allotted. The

following are the requirements for applying through the

ASBA process by our Bank’s Account holder:

Account holder/ Investor should be from the approved

category eligible to apply as per SEBI guidelines.

Should have a Savings or Current account with us.

Should have a Demat account with a Depository

Participant

Should have a Permanent Account Number ( PAN )

Availability of sufficient balance in the account for creating

a hold in the account to the extent of application money

required/mentioned in the ASBA application.

The following options are available to the ASBA investor:

A maximum of 5 applications can be submitted from a

single account.

ASBA Application can be submitted at any of our six

designated branches at present.

Option available to the investor to revise the bid/cancel

the bid within the bidding period. Amount will be released

only after clearance from the Registrar/Stock Exchanges.

SBI’S Merchant Banking

SBI’s Merchant Banking Group is strongly positioned to offer

perfect financial solutions to your business. SBI specialize in

the arrangement of various forms of Foreign Currency

Credits for Corporates and provide the resources,

convenience and services to meet your needs by arranging

through Foreign Currency credits:

Commercial loans

Syndicated loans

Lines of Credit from Foreign Banks and Financial

Institutions

FCNR loans

Loans from Export Credit Agencies

Financing of Imports.

SBI is internationally the most Preferred Bank by Export

Credit Agencies for Guarantees in case of the Indian Clients

or Projects. SBI being an Indian entity has no India exposure

ceiling. Its primary focus is on Indian Clients. SBI’s seasoned

Team of professionals provides Insightful credit Information

and helps Maximize the Value from the transaction.

Products and Services:

Arranging External Commercial Borrowings (ECB)

Arranging and participating in international loan

syndication

Loans backed by Export Credit Agencies

Foreign currency loans under the FCNR (B) scheme

Import Finance for Indian Corporates

On 1st July State Bank of India was constituted under the

State Bank of India Act 1955, for the purpose of taking over

the undertaking and business of the Imperial Bank of India.

The Imperial Bank of India was founded in 1921 under the

Imperial Bank of India Act 1920. The Bank transacts general

banking business of every description including, foreign

exchange, merchant banking and mutual funds. On

September State Bank of India (Subsidiary Bank) Act was

passed.

On October State Bank of Hyderabad become the first

subsidiary of SBI.

During this period, State Bank of Jaipur, State Bank of

Bikaner, State Bank of Indore, State Bank of Travancore,

State

Bank of Mysore, State Bank Patiala and State Bank of

Saurashtra became subsidiaries of the bank.

The Bhor State Bank Ltd was Amalgamated with the Bank

bring the total number of minor State associated banks so

amalgamated to five. A

scheme for amalgamation of the Bank of Aundh Ltd., was

also approved. On 20th August, the Unit Bank Ltd. Chennai

was taken over by the Bank. In October Branch in London

become bankers to the Indian High Commission,

therebytaking over a function till then performed by the

office of RBI. Of the other business transacted by the Branch,

an important aspect was medium term loans mostly to

Indian shipping companies. On November 8th the Bank of

Behar Ltd was amalgamated. In 1972 A merchant banking

division was set up in the central office to cater to

promotional needs of

the corporate sector. During the year, company set up a

data bank of sick units available for taken over by healthy

units. With effect from

26th August, 1985 the Bank of Cochin Ltd with 108 branches

was also amalgamated with the Bank.

(i) All shares in the Capital of the Imperial Bank of India were

vested in the RBI. The SBI was registered with an Authorized

capital of Rs.20 crores, and an issued and paid up capital of

Rs.562, 50,000 divided into 562,500 shares of Rs.100 each.

(ii) Every person who on the 30th June, 1955, was registered

as a holder of shares in the Imperial Bank of India

was paid by the Reserve Bank of India.

On 1st August a new subsidiary named SBI Capital Market

was functioning independently, took up leasing business and

certain other new services. 100, 00, 00 No. of shares issued

at a prem. of Rs 160 per share. SBICAP, in their capacity as

Trustee and Manager of Mutual Fund, launched two scheme

viz., Mangnum Monthly Income Scheme 1989 and

Magnum Tax Service Scheme 1990. During the same period

SBI in association with Morgan Stanley Asset Management

Inc. of USA, launched the India Magnum Fund. In a significant

move in 2001 the State Bank of India decided todistance

itself from its subsidiaries - SBI Capital Markets, SBI Gilts, SBI

AMC and State Bank of Credit and Commerce International.

They will have the autonomy, independent chairmen and

external executives at the senior managementlevel at

market-related salaries.

Banker’s Views on PSBs Merchant Banking

Following results were derived from the administration of the

questionnaire on 150 bankers regarding merchant banking

business of PSBs. Majority of the PSBs are rendering

merchant banking services relating to management of

capital issue. Some leading banks are also taking the

assignment of merger and acquisition of undertaking. In

response to the first question reported in Table1,

administrative staff of PSBs of the sample was in favour of

more offensive marketing strategies for merchant banking

business in order to compete with other merchant banking

organizations.

The most of the innovative financial services of PSBs were

started during the current decade, hence at nascent stage.

World Bank also feels that the Indian Banking system still

remain a massively inefficient, state controlled system

andnot competitive. Some questions were framed in the

questionnaire to know the views of the administrative staff of

PSBs regarding improvement of in the financial services of

PSBs. The outcomes of the questions relating to the

improvement of financial services of PSBs administered on

150 officials of various PSBs officers including office and

head office of PNB has been discussed as the following

paras.

Second question reported in Table 1 is based on the

suggestion of the World Bank to reduce the government

stake to 33 per cent in PSBs. In response to the question 86

per cent of the respondents expressed their view in positive

as they believe that it will automatically reduce the degree

of unfair political interference in the functioning of PSBs

whereas 10 per cent of the respondents gave their response

in negative. Responses to third question regarding merger of

PSBs revealed that 92 per cent of the PSBs officials of the

sample strongly favoured the view of merger in order to

grow quickly and reduce cost of operations etc. Only 8 per

cent were not in favour of the merger. In response to the

fourth question given in Table cent per cent of the PSBs

officials covered by the sample were unanimously of the

view that existing legal system is insufficient for tackling the

financial services

of PSBs and favoured for reform in the legal system of

financial services of PSBs. In response to question regarding

frequent changes in the guidelines of regulatory authority,

56 per cent of the bankers covered in the sample responded

in ‘Yes’ as they believe that frequent changes in the

guidelines create confusion and restrict growths of financial

services of PSBs. On the other hand, 36 per cent of the

samples were in favour of frequent changes giving the

reason that financial services particularly innovative financial

services are at the nascent stage for which such changes are

necessary according to the requirements of time and

circumstances. In response to question regarding multi

regulatory authorities, 35 per cent of the administrative staff

covered in the sample was of the view that present multi

regulatory authorities system for various financial services of

PSBs is

appropriate where as 40 per cent of the officials against the

multi regulatory authority.

Acquiring retaining and developing a competent staff is one

of the impotent factors behind the success of any

organization. At present the personal of the PSBs is recruited

and selected by the Banking Services recruitment board

and promotion of the staff is based upon seniority cum

performance. 92 per cent of the respondent was in favour of

promotion based on performance by PSBs itself; 86 per cent

of the respondents were in favour of promotion based upon

performance rather on seniority for efficient functioning of

PSBs. On the other hand 14 per cent of the respondent

favoured the existing promotion policy based on seniority

cum performance as this does not leads to frustration of

senior staff.

Generally it has been found that the senior officials handling

traditional financial services of PSBs is assigned the task of

managing and marketing of innovative financial services of

PSBs. The third question of the table is concerned with the

practice. 78 per cent of respondent answered in ‘Yes’ to the

question. They believe that it is a matter of aptitude. A

person doing well one work will also perform the other work

well. Whereas 22 per cent of the respondents respond

against the practice of giving reason that each service

especially innovative financial services requires special skill,

knowledge and experience and only attitude is not sufficient

for marketing of innovative financial services. Furthermore,

80 per cent of the bankers expressed their view that each

PSBs should enter into innovative financial services business

but in the beginning starting may be done with one or two

financial services. 16 per cent of the respondents were of the

view that PSBs should venture into innovative financial

services according to their weakness, strength and

prevailing economic conditions. In response to the question

regarding focus of marketing of financial

services in rural and semi urban areas 82 per cent of the bankers were of the

view that these areas should be covered with more emphases while

marketing of innovative financial services as these areas are not covered by

the private and foreign banks.

DESIGN OF THE STUDY

NON-FUND BASED FACILITIES

The credit facilities given by the banks where actual bank funds are

not involved are termed as 'non-fund based facilities'. These facilities

are divided in three broad categories as under:

 

       Letters of credit

       Guarantees

       Co-acceptance of-bills/deferred payment guarantees.

 

Units for the above facilities are also simultaneously sanctioned by

banks while sanctioning other fund based credit limits.

 

Facilities for co-acceptance of bills/deferred payment guarantees are

generally required for acquiring plant and machinery and may,

technically be taken as a substitute for term loan which would require

detailed appraisal of the borrower's needs and financial position in the

same manner as in case of any other term loan proposal. The

co-acceptance limits may also be sanctioned under IDBI's Bill

Rediscounting Scheme which has been discussed in detail.

RBI GUIDEUNES ON NON-FUND BASED FACIUTIES

 

Reserve Bank of India has also issued detailed guidelines to

commercial banks in respect of non-fund based credit facilities. Some

of the important points to be kept in view in this regard are discussed

below:

 

Letters of Credit

 

       Bank should normally open letters of credit for their own

customers who enjoy credit facilities with them Customers

maintaining current account only and not enjoying any credit limits

should not be granted L/C facilities except in cases where no other

credit facility is needed by the customer.

       The request of such customer for sanctioning and opening of

letter of credit should be properly scrutinised to establish the genuine

need of the customer. The customer may be, required to submit a

complete loan proposal Including financial statements to satisfy the

bank about his, needs and also his financial resources, to mire the bills

drawn under

       Where a customer enjoys credit facilities with some other bank,

the reasons for his approaching the bank for sanctioning L/C limits

have to be clearly stated. The bank opening L/C on behalf of such

customer should invariably make a reference to the, existing banker of

the customer.

       In all cases of opening of letters of credit, the bank has to

ensure that the customer is able to retire the bills drawn under L/C as

per the financial arrangement already finalised.

 

Guarantees

 

       The conditions relating to obligant being a customer of the

bank enjoying credit facilities as discussed in case of letters of credit

are equally applicable for guarantees also. In fact, guarantee facilities

also cannot be sanctioned in isolation.

       Financial guarantees will be issued by the banks only if they are

satisfied that the customer will be in a position to reimburse the bank

in case the guarantee is invoked and the bank is required to make the

payment in terms of guarantee.

       Performance guarantee will be issued by the banks only on

behalf of those customers with whom the bank has sufficient

experience and is satisfied that the customer has the necessary

experience and means to perform the obligations under the contract

and is not likely to commit any default.

       As a rule, banks will guarantee shorter maturities and leave

longer maturities to be guaranteed by other institutions. Accordingly,

no bank guarantee will normally have a maturity of more than 10

years.

       Banks should not normally issue guarantees on behalf of those

customer's who enjoy credit facilities with other banks.

 

Co-acceptance of Bills

 

1. Limits for co-acceptance of bills will be sanctioned by the

banks after detailed appraisal of customer's requirement is

completed and the bank is fully satisfied about the genuineness

of the need of the customer. Further customers who enjoy other

limits with the bank should be extended such limits.

2. Only genuine trade bills shall be co-accepted and the banks

should ensure that the goods covered by bills co-accepted are

actually received in the stock accounts of the borrowers. The

valuation of goods as mentioned in the accompanying invoice

should be verified to see that there is no overvaluation of

stocks.

3. The banks shall not extend their co-acceptance to house bills/

accommodation bills drawn by group concerns on one another.

4. Before discounting/purchasing bills co-accepted by other banks

for Rs.2 lakh and above from a single party, the bank should

obtain written confirmation of the concerned controlling office

of the accepting bank.

5. When the value of total bills discounted/purchased (which have

been co-accpeted by other banks) exceed Rs.20 lakh for a single

borrower/ group of borrowers prior approval of the Head Office

of the co-accepting bank shall be obtained by the discounting

bank in writing.

6. Banks are precluded from co-accepting bills drawn under

Buyer's Line of Credit schemes of financial institutions like

IDBI, SIDBI, PFC etc. Similarly banks should not co-accept

bills drawn by NBFCs. Further, banks should not extend

co-acceptance on behalf of their buyers/constituents under the

SIDBI scheme.

7. However, banks may co-accept bills drawn, under Seller's Line

of Credit schemes for Bill Discounting operated by the financial

institutions like IDBI, SIDBI, PFC etc. without any limit

subject to buyer's capacity to pay and the compliance with

exposure norms applicable to the borrower.

8. Where banks open L/C and also co-accept bills drawn under

such L/C, the discounting banks, before discounting such

co-accepted bills, must ascertain the reason for co-acceptance

of bills and satisfy themselves about the genuineness of the

transaction.

9. Co-acceptance facilities will normally not be sanctioned to

customers enjoying credit limit with other banks.

 

Operational aspects of IDBI bills rediscounting scheme have already

been discussed and similar procedure shall be adopted while allowing

co acceptance facilities which are not covered under the scheme.

Important operational aspects in respect of letter of credit facilities

and issuance of guarantees will be discussed in this chapter.

 

LETTER OF CREDIT

 

Letter of credit is, a method of settlement of payment of a trade

transaction and is widely used to finance purchase of machinery and

raw material etc. It contains a written undertaking given by the bank

on behalf of the purchaser to the seller to make payment of a stated

amount on presentation of stipulated documents and fulfilment of all

the terms and conditions incorporated therein. All letters of credit in

India relating to the foreign trade i.e., export and import letters of

credit are subject to provisions of 'Uniform Customs & Practice for

Documentary Credits' (UCPDC). The latest revision of these

provisions effective from 1st January, 1994 has been issued by

International Chamber of Commerce as its publication No. 500 of

1994. These provisions neither have the status of law or automatic

application but parties to a letter of credit bind themselves to these

provisions by specifically agreeing to do so. These provisions have

almost universal application and help to arrive at unambiguous

interpretation of various terms used in letters of credit and also set the

obligations, responsibilities and rights of various parties to a letter of

credit.

 

Inland letters of credit may also be issued subject to the provisions of

UCPDC and it is, therefore, important that customers should be fully

aware of these provisions and shall also understand complete L/C

mechanism as these transactions will find increasing use in the

coming days. Complete text of UCPDC is not being reproduced.

However, important articles have been given as extracts wherever

necessary. An attempt has been made to explain the L/C mechanism

in full as there are some inherent risks and wrong notions while

dealing with these transactions.

 

Definition of a Letter of Credit

 

Article 2 of UCPDC defines a letter of credit as under:

The expressions "documentary credit(s) and standby letter(s) of credit

used herein (hereinafter referred to as "credit(s)" means any

arrangement, however, named or described whereby a bank (the

issuing bank), acting at the request and on the instructions of a

customer (the applicant of the credit) or on its own behalf.

(i) is to make a payment to or to the order of a third party (the

"beneficiary"), or is to accept and pay bills of exchange

(Draft(s)) drawn by the beneficiary,

or

(ii) authorises another bank to effect such payment, or to accept and

pay such bills of exchange (Draft(s)),

or

(iii) authorises another bank to negotiate against stipulated

document(s), provided that the terms and conditions of the

credit are complied with.

 

For the above purpose the branches of a bank in different countries are

considered another bank.

 

Letter of credit is a written undertaking by a bank (issuing bank) given

to the seller (beneficiary) at the request and in accordance with the

instructions of buyer (applicant) to effect payment of a stated amount

within a prescribed time limit and against stipulated documents

provided all the terms and conditions of the credit are complied with".

 

Letters of credit thus offers both parties to a trade transaction a degree

of security. The seller can look forward to the issuing bank for

payment instead of relying on the ability and willingness of the buyer

to pay. He is further assured of payment being received on due date

enabling him to have proper financial planning. The only condition

being attached is submission of stipulated documents and compliance

with the terms and conditions of credit. The buyer on the other hand

will be obliged to pay only after receipt of documents of title to goods

to his satisfaction.

 

Letter of credit is an independent document in itself as provided vide

article 3 of UCPDC which states that: "Credits, by their nature, are

separate transactions from the sales or other contract(s) on which they

may be based and banks are in no way concerned with or bound by

such contract(s), even if any reference whatsoever to such contract(s)

is included in the credit." This article is very important and has a

direct bearing on the relationship of the opener with bank. Many

disputes have arisen due to the reference of sale contract in the letter

of credit. The letter of credit is issued in accordance with the

instructions of the applicant who should provide complete and precise

instructions to the bank to avoid any dispute later. The undertaking of

a bank to pay, accept and pay drafts or negotiate and/or to fulfil any

other obligations under the credit is not subject to claims or defences

by the Applicant resulting from his relationship with the issuing Bank

or the Beneficiary.

 Another very important provision which is very vital to letter of credit

operations is regarding disputes emanating from the quality/quantity of

goods covered under a letter of credit. Article 4 of UCPDC states:

 "In credit operations all parties concerned deal with documents, and

not with cods, services and/or other performances to which the

documents may relate.

 An important point which emerges from the above article is that any

dispute regarding the quality/quantity of the goods may have to be

settled outside the terms of letter of credit. Letter of credit thus

provides no protection on this account and the applicant must specify

submission of necessary weight certificate/quality analysis certificates

etc. as considered necessary to satisfy himself regarding the goods on

the basis of these documents alone.

 

Parties to a Letter of Credit

 

1. Applicant/Opener. It is generally the buyer of the goods who

gets the letter of credit issued by his banker in favour of the

seller. The person on whose behalf and under whose

instructions the letter of credit is issued is known as applicant/

opener of the credit.

2. Opening bank/issuing bank. The bank issuing the letter of

credit.

3. Beneficiary. The seller of goods in whose favour the letter of

credit is issued.

4. Advising Bank. Notification regarding issuing of letter of credit

may be directly sent to the beneficiary by the opening bank. It

is, however, customary to advise the letter of credit through

sane other bank operating at the place/country of seller. The

bank which advises the letter of credit to the beneficiary is

known as advising bank.

5. Confirming Bank. A letter of credit substitutes the credit

worthiness of the buyer with that of the issuing bank. It may

sometimes happen especially in import trade that the issuing

bank itself is not widely known in the exporter's country and

exporter is not prepared to rely on the L/C opened by that bank.

In such cases the opening bank may request other bank usually

in the country of exporter to add its confirmation which

amounts to an additional undertaking being given by that bank

to the beneficiary. The bank adding its confirmation is known

as confirming bank. The confirming bank has the same

liabilities towards the beneficiary as that of opening bank.

6. Negotiating Bank. The bank who negotiates the documents

drawn under letter of credit and makes payment to beneficiary.

The function of advising bank, confirming bank and negotiating bank

may be undertaken by a single bank only.

 Letter of Credit Mechanism

 Any business/industrial venture will involve purchase transactions

relating to machine/other capital goods and raw material etc., and also

sale transactions relating to its products. The customer may, therefore,

find himself on either side of a L/C transaction at different times

depending upon his position at that particular moment. He may be an

applicant for a letter of credit for his purchases while be the

beneficiary under other letter of credit for his sale transaction. It is,

therefore, necessary that complete L/C mechanism covering the

liabilities and rights & both the applicant and the beneficiary are

understood for maximum advantage.

 The complete mechanism of a letter of credit may be divided in three parts

as under:

 1. Issuing of Credit. Letter of credit is always issued by the buyer's

bank (issuing bank) at the request and on behalf and in accordance

with the instructions of the applicant. The letter of credit may either

be advised directly or through some other bank. The advising bank is

responsible for transmission of credit and verifying the authenticity of

signature of issuing bank and is under no commitment to pay the

seller.

The advising bank may also be required to add confirmation and in

that case will assume all the liabilities of issuing bank in relation to

the beneficiary as stated already. Refer to diagram given below for

complete process of issuance of credit.

 Sale contract

 

(1)

  

(2)

(4)

 

BuyerApplicant

SellerBeneficiary 

Buyer’s Bank

Advising Bank

Issuance of Letter of credit

 

(3)

 

  

2. Negotiation of Documents by beneficiary. On receipt of letter of

credit, the beneficiary shall arrange to supply the goods as per the

terms of L/C and draw necessary documents as required under L/C.

The documents will then be presented to the negotiating bank for

payment/acceptance as the case may be. The negotiating bank will

make the payment to the beneficiary and obtain reimbursement from

the opening bank in terms of credit. The entire process of negotiation

is diagrammatically represented as under:

 

Supply of goods

(5)

 

 

 

 

 

 

 

 

(2)

(4) 

 

IssuingBank

ConfirmingBank

Buyer

Applicant

Seller

Beneficiary

Buyers Bank Advising/Confirming

Documents (8)

 

  

(3)

 

Reimbursement (9)

 

3. Settlement of Bills Drawn under Letter of Credit by the opener.

The last step involved in letter of credit mechanism is retirement of

documents received under L/C by the opener,

On receipt of documents drawn under L/C, the opening bank is

required to closely examine the documents to ensure compliance of

the terms and conditions of credit and present the same to the opener

for his scrutiny. The opener should then make payment to the opening

bank and take delivery of documents so that delivery of goods can be

obtained by him. This aspect of L/C transaction is represented as

under:

 

Issuing Bank

Negotiating

Delivery of Goods Goods

(12)

Buyer

Applicant

Seller

Beneficiary

(5)

(1)

 

 

 

 

(11) (2) (10) (7) (4)(6)

Payment

 

Buyers Bank

Advising/Confirming

(8)

 

 

(3)

(9)

 

 

 

Issuing Bank

Negotiating Bank

Types of Letters of Credit  

The 'Letters of Credit' may be divided in two broad categories as

under:

      Revocable letter of credit. This may be amended or cancelled

without prior warning or notification to the beneficiary. Such letter

of credit will not offer any protection and should not be accepted

as beneficiary of credit.

 

     Irrevocable letter of credit. This cannot be amended or

cancelled without the agreement of all parties thereto. This type of

letter of credit is mainly in use and offers complete protection to

the seller against subsequent development against his interest.

 

It may, however, be mentioned here that every letter of credit must

clearly indicate whether it is revocable or irrevocable. In the absence

of such indication the credit shall be deemed to be irrevocable. The

beneficiary, on receipt of credit, must therefore, examine that the

letter of credit is not indicated as revocable.

 

The letter of credit may provide drawing of documents either on D.P.

basis in which case the documents will be delivered against payment

or on D.A. basis in which case the documents will be delivered

against acceptance. The letter of credit may also call either for

demand documents which are required to be paid on presentation or

usance documents the payment of which will be required to be made

after an agreed period of usance. All these will be required to be

settled at the time of finalising the sale contract and clear instructions

to the bank in this regard will have to be given at the time of opening

of the letter of credit.

 There are a few special types of credits in vogue offering a degree of'

convenience in operations. Brief details of these credits are given

below:

 

Revolving Letter of Credit. The concept of revolving letter of

credit is best illustrated by the following example:

Let us presume that goods of the total value of Rs.60 lacs are

required to be purchased over a period of one year and requirement

of those goods at a time is proximately Rs.10 lacs. If the terms of

payment are under L/C the buyer may have two options as under:

(i) To open an L/C for Rs.60 lacs valid for 1 year and permit part

shipment, or

(ii)To open letters of credit for Rs.10 lacs each on six different

occasions.

 

Option (i) not only requires very high limits from the bank but will

result in high cost of operations by way of commission charges.

Option (ii) involves a lot inconvenience as the L/C will be required to

be opened six times.

 

To obviate such difficulties, a revolving L/C can be opened under

which the amount of L/C is renewed/reinstated after the original L/C

amount has been utilised. Thus a revolving L/C for Rs.10 lacs valid

for one year may be opened the above example. After negotiation and

settlement of bills drawn under this C, the L/C amount may again be

reinstated by the bank. The amount reinstated such a manner will

again become available for negotiation.

 

  Transferable Letter of Credit. A transferable letter of credit is one

that a be transferred by the original (first) beneficiary to one or more

second benefiaries. It is normally used when the first beneficiary does

not supply the merchandise himself but is a middleman and thus

wishes to transfer part or all of his rights and obligations to actual

suppliers as second beneficiaries.

 

The letter of credit is transferable only if it is specifically stated as

transferable'. In case the credit is silent about it, the L/C will be

deemed to be transferable. Further the L/C can be transferred only

once which in other words means that 2nd beneficiary cannot transfer

it to any other person. Under a transferable letter of credit the second

beneficiary assumes the same rights and obligations as that of the

original beneficiary.

 

The transfer of credit is, however, not to be confused with the right of

assignment of benefits to which the beneficiary may become entitled

under a letter of credit. The beneficiary is having right to assign the

proceeds to which may be or may become entitled under the

provisions of applicable law even case of non-transferable credits.

 

These transferable credits are very much in vogue in export trade. The

important points to be noted while dealing with transferable credits

are stated low:

 

(i) The L/C should clearly indicate that it is transferable. In the

absence of such indication the L/C would be deemed to be not

transferable.

(ii) The Ist beneficiary under a transferable L/C has a right to

transfer in part or whole to other parties (2nd beneficiaries). For

this purpose he has to request the advising bank to issue an

advice of transfer to the 2nd beneficiary(ies). The charges of the

bank for effecting transfer are payable by the first beneficiary

unless otherwise stated.

(iii) The advice of transfer issued by the bank along with copy of

the original credit will be taken as a complete letter of credit for

almost all practical purposes.

 

   Back to Back letter of Credit. A letter of credit which is backed

by other letter of credit is termed as 'back to back' credit and is also

used when middleman is involved in a sale transaction. Such

transaction offers additional security of the letter of credit to the

bank issuing back to back L/C. However, for successful

completion of the entire transaction it must be ensured that back to

back L/C is opened on the worse terms as compared to the terms

under; the original letter of credit.

 

Red Clause Letter of Credit. All letters of credit as discussed

above provide a sort of guarantee of payment against documents

which are drawn strictly in terms of subject letter of credit. In other

words the benefit of L/C accrues only when shipment of goods is

completed. Red Clause Letter of Credit goes a step further and

authorises the advising bank to grant an advance to the beneficiary

at the pre-shipment stage itself. The advance by the advising bank

shall be recovered at the time of negotiation of documents under

that L/C. In case, however, no shipment is effected by the

beneficiary and he fails to present documents under L/C, the bank

making advance under red-clause letter of credit will claim

reimbursement of advance made from the issuing bank.

 

PRECAUTION

 

Important points/precautions which must be noted by the

openers/beneficiaries at various stages of operations under a letter of

credit are now discussed hereunder:

 

At the Time of Opening of a Letter of Credit

 

       Letter of credit offers almost complete protection to the

seller but the buyer is put to many disadvantages and has to make

payments against documents only. Before agreeing to open a letter

of credit in favour of the seller, the opener must be satisfied with

the creditworthiness and general reputation of the seller. Entire

success of an L/C transaction depends on proper conduct of the

seller. Confidential report on the seller must be obtained at the time

of first transaction with him.

       Letter of credit also does not offer any protection for the

quality/ quantity of goods supplied under the L/C. It would,

therefore, be necessary to know the nature of goods and specify

submission of quality reports/inspection reports from an

independent agency to ensure receipt of goods of proper quality

This is particularly important in case of import of chemicals and

such other goods.

       The opener has to submit an L/C application to the opening

bank. The instructions contained in the L/C application is the

mandate for the issuing bank and letter of credit will be issued in

accordance with this application. It is, therefore, necessary that

complete and precise information must be given in the L/C

application form specifying therein the description, unlit rate and

quantity of the goods covered under IX and details of documents

required in absolute clear and unambiguous terms. The reference to

underlying sale contract must be avoided as far as possible. The

L/C application must nevertheless contain all the

required/information based on which L/C could be opened by the

bank.

       After the L/C has been issued by the bank, a copy thereof

must be obtained immediately. The L/C must be scrutinised to

ensure that it has been properly issued and is in conformity with

L/C application. Discrepancy, if any, must be brought to the notice

of opening bank immediately.

 

At the time of Receipt of L/C and Negotiation of Documents

 

       On receipt of L/C from the opening/advising bank, the

beneficiary must ensure that the letter of credit is advised without

any superimposed clause. Sometimes an unauthenticated message

may be received and advised by the bank which may not be acted

upon unless authenticity of the message (L/C) is confirmed by the

advising bank.

       The L/C must state on the face of if that it is irrevocable and

must have been issued by a bank of repute. If the issuing bank is

not widely known, confirmation from a local bank may be insisted

upon before acting on such a Credit.

       The L/C must be scrutinised to ensure that the terms

indicated are in conformity with the underlying sale contract. It

does not contain any ambiguous clauses and documents required

therein can be completed. If it has some conditions which cannot

be compiled with, the matter should immediately be taken up with

opener for amendment of L/C. Shipment of goods before ensuring

that all the terms and conditions can be complied with may be

risky as no protection will be offered under L/C.

       Necessary arrangement for shipment/despatch of goods shall

be made after acceptance of L/C. The shipment and despatch must

be made as per the terms of L/C and well within the period

prescribed under L/C.

       After shipment of goods necessary documents must he

prepared. Extreme care must be taken to prepare the documents as

the payment will be dependent upon the acceptance of those

documents under the L/C. Even a minor mistake in spelling or

punctuation may prove to be enough ground for rejecting the

documents. It is necessary that complete knowledge of all the

Articles of UCPDC relating to documents must be obtained at the

time of preparation of documents.

       The documents, complete in all respects, should then be presented to

the bank for negotiation. The negotiating bank must be requested to closely

examine the documents and indicate the discrepancies, if any. Efforts should

then be made to remove those discrepancies and documents free of all

discrepancies only must be negotiated.

       There may sometimes be some discrepancies which cannot be

rectified and two options are now available as under:

 

(a) (a)                Get confirmation/authority of opening

bank to negotiate discrepant documents, or

(b) (b)                Get the documents negotiated under

reserve after giving suitable indemnity bond to the

negotiating bank.

 

       The option (a) is more advantageous as it will ensure final

payment at the, time of negotiation itself. The option (b) may be

exercised only in exceptional circumstances as 'negotiation under

reserve' does not offer any guarantee as to acceptance of

documents under L/C.

       The final authority of acceptance of documents lies with the

opening bank only who has to be given reasonable time for

scrutinising the documents. Documents under L/C are negotiated

by banks in India with recourse and if the documents are

subsequently rejected by opening bank due to any reasons the

negotiating bank will recover the amount of the beneficiary. It is,

therefore, necessary that documents are always drawn strictly in

conformity with the terms of L/C.

 

On receipt of advice of rejection of documents the negotiating bank

must be instructed to initiate necessary steps to safeguard the interest

of the beneficiary in light of various provisions of UCPDC.

 

On Receipt of Documents under L/C

 

The negotiating bank will transmit the documents to the opening bank

after negotiation and obtain reimbursement in terms of the L/C. The

opening bank will be given a reasonable time to scrutinise the

documents and decide whether the documents are drawn in

accordance with the terms of credit and are acceptable or to reject the

documents. Reasonable time has since been specified by Article 13(b)

of UCPDC and it is not to exceed seven banking days following the

day of receipt of the documents. In case documents are rejected by the

opening bank, it must give due notice of such rejection to the

negotiating bank by fastest means and also place the documents at the

disposal of the negotiating bank. The receipt of documents will also

be advised by the opening bank to the applicant.

 

       Applicant must independently scrutinise the documents

received under L/C and ensure that the documents can be accepted.

In case any discrepancy is noted in the documents which is not

acceptable, the documents must be rejected and an immediate

notice should be given to the opening bank for such rejection. The

opening bank may be instructed to take up the matter with

negotiating bank suitably. Notice of rejection must invariably be

given to the opening bank in writing.

       The documents if acceptable, must be taken upon due date

for which necessary financial arrangement shall be made in

advance.

 GUARANTEES

 A contract of guarantee can be defined as a contract to perform the

promise, or discharge the liability of a third person in case of his

default. The contract of guarantee has three principal parties as under:

 (1)Principal debtor -the person who has to perform or discharge

the liability and for

whose default the

guarantee is given.

(2) Principal creditor - the person to

whom the guarantee is given

for due fulfilment

of contract by principal

debtor. Principal

creditor is also sometimes

referred to as

beneficiary.

(3) Guarantor or Surety - the person

who gives the guarantee.

 

Bank provides guarantee facilities to its customers who may require

these facilities for various purpose. The guarantees may broadly be

divided in two categories as under :

       Financial guarantees - Guarantees

to discharge financial

obligations to the

customers.

       Performance guarantees -

Guarantees for due performance of a

contract by

customers.

 

The RBI guidelines for sanctioning guarantee facilities have already

been discussed earlier in this chapter. Reserve Bank lays a great

emphasis on banks to make prompt payment to the beneficiaries in

terms of guarantees issued by them as and when such guarantees are

invoked. Other important points/ precautions in respect of availing of

these facilities from banks are discussed hereunder:

 

   As a rule, banks should avoid giving unsecured guarantees in

large amounts and for medium and long term period. They should

avoid undue concentration of such unsecured guarantee commitments

to particular groups of customer and/or trades.

    Unsecured guarantees on account of any individual constituent

should be limited to a reasonable proportion of the bank's total unsecured

guarantees. Guarantees on behalf of individual should also bear a reasonable

proportion to constituent's equity.

    In exceptional cases, banks may give deferred payment guarantees

on an unsecured basis for modest amounts to first class customers who have

entered into deferred payment arrangements in consonance with

Government policy. But such unsecured guarantees should be

accommodated within the limits indicated above.

    Guarantees executed on behalf of any individual constituent, or a

group of constituents, should be subject to prescribed exposure norms.

    When any bank reaches a stage where it is likely to exceed the

norm, it should not undertake any further commitment on account of

guarantees.

     Suitable arrangements may be made to keep a watch from time to

time about the outstanding guarantees of the bank so as to ensure that it does

not exceed the norm.

 

It is essential to realise that guarantees contain inherent risks and that

it would not be in the bank's interest or in the public interest generally

to encourage parties to over-extend their commitments and embark

upon enterprises solely relying on the easy availability of guarantee

facilities.

 

    The guarantees are issued by the banks against counter

guarantees given to the banks by the customer. The banks may also

require a cash margin and/or other securities as per sanction.

     Indian Banks Association has prescribed a standard

guarantee form which is generally issued by the banks.

Guarantees may be issued in serially numbered security forms.

     Where guarantees are issued in favour of Government

Departments banks may adopt Model Form of Bank Guarantee Bond (as per

Annexure 2 of Circular No. DBOD.DIR. BC. 16/13.03.00/2003-2004 dt.22

8.2003). Further, as advised by the Government of India, any

alterations/additions to the clauses of this bond, if considered necessary.

Shall not be one-sided but shall be made in agreement with the guaranteeing

bank.

       After the period of guarantee has expired efforts should

be made to arrange return of the guarantee by the beneficiary to

the bank.

       Banks are not allowed to execute guarantes covering

inter-company deposits/ loans accepted by NBFC/firms from

other. NBFC/firms.

       Banks may issue guarantees favouring the financial

institutions or other banks or lending agencies for the loans

extended by the latter, on fulfilment of prescribed conditions.

      However, in regard to rehabilitation of sick/weak

industrial units, in exceptional cases, where banks are unable to

participate in rehabilitation packages due to temporary liquidity

constraints, such banks may extend guarantees in favour of the

banks which take up their additional share. These guarantees

will remain in existence till such time the banks providing

additional finance against guarantees are re-compensated.

    Guarantees can be issued favouring HUDCO/ State

Housing Boards and similar bodies/organisations for the loans

granted to private borrowers who are unable to offer clear and

marketable title to property. However, banks must satisfy

themselves regarding the capacity of the borrowers to

adequately service such loans.

       Banks may issue guarantees on behalf of their clients in

favour of Development Agencies/Boards (like IREDA, NHB

etc.) for obtaining soft loans/other forms of development

assistance.

      Banks have discretion to issue guarantees favouring other

lending agencies, in respect of infrastructure projects alone

provided the guarantor bank also takes a funding share in the

project to the extent of at least 5% of the project cost and

undertakes normal credit appraisal, monitoring and follow-up

of the project.

 

Working Capital

What Does Working Capital Mean?

A measure of both a company's efficiency and its short-term financial

health. The working capital ratio is calculated as:

 

Positive working capital means that the company is able to pay off its

short-term liabilities. Negative working capital means that a company

currently is unable to meet its short-term liabilities with its current

assets (cash, accounts receivable and inventory).

Also known as "net working capital", or the "working capital ratio".

Investopedia explains Working Capital

If a company's current assets do not exceed its current liabilities, then

it may run into trouble paying back creditors in the short term. The

worst-case scenario is bankruptcy. A declining working capital ratio

over a longer time period could also be a red flag that warrants

further analysis. For example, it could be that the company's sales

volumes are decreasing and, as a result, its accounts receivables

number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's

underlying operational efficiency. Money that is tied up in inventory or

money that customers still owe to the company cannot be used to

pay off any of the company's obligations. So, if a company is not

operating in the most efficient manner (slow collection), it will show up

as an increase in the working capital. This can be seen by comparing

the working capital from one period to another; slow collection

may signal an underlying problem in the company's operations.

FUNDING OPTIONS

This section provides broad description about different

funding facilities provided from different banks with a list of

Nationalize and Private Banks. For the specific requirement

details, it is suggested to go to the site of each bank.

Fund based Bank Facilities

Term Loans: Term loan is an installment credit repayable

over a period of time in monthly/quarterly/half yearly/yearly

installments. Term loan is generally granted for creation of

fixed assets required for long-term use by the unit. Term

loans are further classified in three categories depending

upon the period of repayment as under:

Short term repayable in less than 3 years.

Medium term loans repayable in a period ranging from

3 years to 7 years.

Long term loans repayable in a period over 7 years.

Cash Credit Facility: a major part of working capital

requirement of any unit would consist of maintenance of

inventory of raw materials, semi finished goods, finished

goods, stores and spares etc. In trading concern the

requirement of funds will be to maintain adequate stocks in

trade. Finance against such inventories by banks is generally

granted in the shape of cash credit facility where drawings

will be permitted against stocks of goods. It is a running

account facility where deposits and withdrawals are

permitted. Cash credit facility is of two types (depending

upon the type of charge on goods taken as security by

bank).

(i) Cash credit - pledge: when the possession of the goods is

with the bank and drawings in the account are linked with

actual movement of goods from/to the possession of the

bank. The physical control of the goods is exercised by the

bank.

(ii) cash credit- hypothecation: when the possession of the

goods remains with the borrower and a floating charge over

the stocks is created in favors of the bank. The borrower has

complete control over the goods and the drawings in the

account are permitted on the basis of stock statements

submitted by the borrower.

2. Post shipment credit the bills purchase/discount facility granted to

exporters is grouped as post shipment advance.

Non-Fund based Bank Facilities

Credit facilities, which do not involve actual deployment of

funds by banks but help the obligations to obtain certain

facilities from third parties, are termed as non-fund based

facilities Overdraft Facility: Overdrawing permitted by the

bank in current account is termed as an overdraft facility.

Overdraft may be permitted without any security as 'clean

overdraft' for temporary periods to enable the borrower to

tide over some emergent financial difficulty. 'Secured

overdraft' facility is against fixed deposits, NSC, and other

securities.

Bills Finance: This facility is against bills of sales raised or

book debts.

Export Finance: Banks grant export credit on very liberal

terms to meet all the financial requirements of exporters.

The bank credit for exports can broadly be divided in two

groups as under:

1. Pre Shipment advances/packing credit advances: Financial

assistance sanctioned to exporters to enable them to

manufacture/procure goods meant for exports and arrange

for their eventual shipment to foreign countries is termed as

pre shipment credit.

. These facilities include issuance of letter of credit, issuance

of guarantees, which can be performance

guarantee/financial guarantee.

National Level Financial Institutions

State Financial Corporations Offering Specialized SSI

Schemes

Venture Capital Organizations

Other Banks Offering Financial Assistance

5. Problems and Prospects of PSBs

Depression in merchant banking services of PSBs. In PSBs

largely the officials handling the traditional financial services

have been engaged in the merchant banking activities

whereas banking services requires expert Analysis of

merchant banking business of some PSBs including PNB and

its subsidiary PNB CAP reveals that there is decline in the

volume of PSBs merchant banking business. During early

nineties there was a boom in the merchant banking business

of PSBs but the boom could not survive for longer period and

it converted into depression. It has been largely due to

subdued capital market conditions as merchant banking

activities has direct positive correlation with stock exchange

index. Frequent changes in the guidelines also have been

affecting the growth of PSBs merchant

banking business. Limited range of merchant banking

activities handed by PSBs and inferior quality of the services

in compassion to lending private sector merchant bankers

and foreign merchant bankers is also responsible for the

services requiring specially skill, knowledge and training.

Reforms are a continuous process; the progress made so far

provides a good basis for merchant banking services. SEBI

has formulated comprehensive guidelines for the growth of

merchant banking activities. Many new entrepreneurs have

been emerging which need assistance and expert advice of

merchant

bankers. PSBs have to develop the necessary skill and equip

themselves to compete in the area of merchant banking.

Product development is one of the weak areas of the PSBs.

No attempt has been made to introduce non fund based

products. This has to be tackled if the banks are to survive in

a competitive environment.

finance-related needs of the advanced industrial sectors.

These specialist services are also of great importance for the

small and medium sized enterprises to help them operate

smoothly. Most of the rural areas still lack industrial

advancement and the main reasons for this include lack of

funds and information. The merchant banking services help

the entrepreneurs to come up with industrial setups in these

areas. Besides, the merchant banks help the entrepreneurs

to explore the joint venture opportunities in the foreign

markets. Competition due to financial liberalization has

compelled

PSBs to diversify their non fund based activities e.g. lead

managing co managing, underwriting advising loan

syndicating capital issue management trusteeship etc. Non

funded based financial services marketed by PSBs comes

under purview of merchant banking which is governed by

Merchant Bankers Regulation issued by SEBI of December

22, 1992. The regulation of the SEBI Act provided for

registration of merchant bankers with SEBI for doing

merchant banking.

Most of the PSBs including PNB have been doing merchant

banking business. Some of the PSBs have formed their fully

owned subsidiaries for this purpose. The activities being

undertaken by most of the banks are lead managing co-

managing, underwriting as a banker to issue etc. PNB was

actively involved in merchant baking business such as

underwriting, banker to issues, and payment of

dividend/interest refund as and agent and trustee of

debenture holders. PNB incorporated PNB capital Service Ltd

as its wholly owned subsidiary. The company is registered

with SEBI as merchant banker of category I and debenture

trustee. Analysis of merchant banking business of some PSBs

clearly indicates that the merchant banking activities of the

banks are showing declining trend especially after 1993-94

due to

depressed capital market conditions and subdued activity in

primary market.

Fund Based) Services (FB

Working Capital Finance

We offer pre-shipment as well as post-shipment). Fee based

facilities include letters of credit and bank guarantees.

 

Working Capital facilities are provided to finance the day-to-day

business requirements. Funding requirements are structured to

finance procurement of raw materials/stores and payment

towards manufacturing costs and other overheads. Sales are

financed against sundry debtors/ receivables. 

The Bank offers a combination of operative cash credit and

working capital demand loan to meet the domestic working

capital requirements of our clients.

Short Term Finance working capital facilities - both fund-based

and fee-based. Fund-based working capital products include

cash credit, overdraft, bill discounting, short-term loans, export

financing (

The Bank offers short-term loans for a period ranging from 3

months to 12 months to sound corporate for meeting their

specific short-term working capital requirements. The funds are

provided with interest rates either linked to our BPLR or at a

fixed rate with varying repayment patterns.

Bill Discounting

This product enables corporate to fund their operating cycle

right from the stage of procurement to sale. Bill Financing is

extended by IndusInd Bank to its clients at competitive rates.

Letter of credit backed bill discounting and clean bill discounting

are the convenient mode of financing for domestic trade

transactions.

BOE could be broadly classified into Demand and Usance bills

and are further classified into clean and documentary bills

Export Finance

As an important incentive to the exporters community for

boosting exports, financial assistance in Rupees is extended to

exporters on priority basis on relatively liberal terms. Such

finance is provided both at pre-shipment stage (as working

capital finance) and at post-shipment stage (to bridge the time

lag between the shipment of goods and the realisation of

proceeds). Interest charged on export credit is exempted from

the purview of interest tax.

Term Lending

We offer term loans to both Industrial as well as Infrastructure sectors

promoted by strong business houses. These loans are for a period of 3-5

years with a moratorium period. Interest rates could be fixed or floating

linked to the bank's BPLR.

Buyer’s Credit / Supplier’s Credit

This facility provides total flexibility to corporates to utilise the

line (sanctioned limit) of credit. The terms of the line of credit

are either predetermined or negotiated at the time of availment.

This facility is used as and when the client has a requirement

Advertised on 9-5-11. Application deadline on 8-7-11.

HDFC Bank Ltd was promoted in the year 1994 by the

premier housing finance company of the country, HDFC Ltd.

The Bank commenced operations as a Scheduled

Commercial Bank in January 1995.

Today the Bank has a nationwide network of over 1725

branches and 4232 ATMs spread over 779 towns and cities

across India

The Bank's American Depository Shares (ADS) are listed on

the New York Stock Exchange (NYSE) and the Global

Depository Receipts (GDRs) are listed on Luxembourg Stock

Exchange. The Bank has been bestowed with numerous

awards and accolades from top national and international

agencies & magazines.

HDFC Bank comprises of a dynamic and enthusiastic team

determined to accomplish the vision of becoming a World-

class Indian bank.

Our business philosophy is based on our four core values -

Customer Focus, Operational Excellence, Product Leadership

and People. We believe that the ultimate identity and

success of our bank will reside in the exceptional quality of

our people and their extraordinary efforts. We are committed

to hiring, developing, motivating and retaining the best

people in the industry The Bank’s objective is to build sound

business franchises across distinct businesses so as to be a

preferred provider of banking services for target retail and

wholesale customer segments. We are committed to healthy

growth in profitability while ensuring the highest levels of

ethical standards, professional integrity, corporate

governance and regulatory compliance.

Relationship Manager - Corporate Banking

Responsibilities:

The candidate would require to handle a set of large

corporate both existing and targets for business (fund

based, non fund based, trade flows, payments and

collections and retail cross sell products). This shall

carry both income as well as volume targets.

He/She shall be responsible for preparation of credit

reports and quarterly review for all relationships where

limits are being sanctioned. Shall co ordinate with

internal Credit team for approval.

Shall be responsible for handling and getting pre and

post sanction documentation and statements for

internal housekeeping and ensuring KYC, end use

monitoring and other regulatory requirements.

Shall be the one point of contact for the company

(across various departments) and shall liase with other

divisions of the Bank for achieving the above

objectives.

Requirements:

Candidate must possess at least a Master in Business

Admin/Post Graduate Diploma in Business

Administration/Post Graduate Program in Management

in Finance/Accountancy/Banking, Marketing or

equivalent.

Required skill(s): fund based, non fund based, trade

flows.

At least 2 year(s) of working experience in the related

field is required for this position.

Preferably Managers specializing in Banking/Financial

Services or equivalent. Job role in Corporate Banking or

equivalent.

2 Full-Time positions available.

Preferably having a qualification of CA / MBA / CFA

Candidates working with other private sector banks /

foreign banks.

Minimum 3-4 years of banking experience of which 2

years should be preferably in Corporate Banking

division.

Analysis of Non-Fund Based Financial Services: Some Insights From India

Merchant banking services strengthen the economic

development of a country as they acts as sources of funds

and information for corporations. Considering the way the

Indian economy is growing, the role of merchant banking

services in India is indispensable. These financial institutes

also act as corporate advisory bodies to help corporations

rightly get involved in various financial activities. The need

of merchant banking services in India arises from the fact

that high level industrialization is taking place in the

country. Some of the PSBs have formed their fully owned

subsidiaries for this purpose. Analysis of merchant banking

business of some PSBs clearly indicates that the merchant

banking activities of the banks are showing declining trend

especially after 1993-94 due to depressed capital market

conditions and subdued activity in primary market.

Types of Deposit Schemes

(Non-Resident Ordinary Account

(NRO A/c)Particulars

(Foreign Currency Non-Resident Account(FCNR A/c)

Who can open an account Non-Resident External Rupee Account(NRE A/c)

NRIs or OCBs

(Individuals/entities of Bangadesh/ Pakistan nationality /ownership require approval of RBI)

NRIs or OCBs

(Individuals/entities of Bangadesh/ Pakistan nationality /ownership require approval of RBI)

Any person resident outside India

(Individuals/entities of Bangadesh/ Pakistan nationality /ownership require approval of RBI)

Joint account In the names of two or more non-resident individuals

In the names of two or more non-resident individuals

May be held jointly with residents

Nomination Permitted Permitted Permitted

Currency in which account denominated

Pound Sterling, US Dollar,Jap. Yen, or Euro.

Indian Rupees Indian Rupees

Repatriability Repatriable RepatriableNot repatriable except for the following in the account:-

1. Current income and interest

2. Upto US$ 1 million per calendar year for any bonafide purposes out of NRO balances/ sales proceeds of assets

Type of Account Term Deposits only Savings, Current, Recurring, Fixed Deposit

Savings, Current, Recurring, Fixed Deposit

Period for fixed deposits For terms not less than 1 year and more than 3 years

No restriction No restriction

Rate of InterestSubject to cap:

LIBOR - 250 basis points

Subject to cap:

LIBOR/SWAP+ 100 basis points

Banks are free to determine interest rates.

LOANS & OVERDRAFTS

a. IN INDIA

Permitted(i) to the Account holder

Permitted

(ii) to third partiesPermitted Permitted Permitted Permitted

b) OUTSIDE INDIA     

(i) to the Account holder Permitted Permitted Not Permitted

(ii) to third parties Permitted Permitted Not Permitted

b. FOREIGN CURRENCY LOANS IN INDIA

Not Permitted(i) to the Account holder

Permitted

(ii) to third partiesNot Permitted

Not Permitted Not Permitted Not Permitted

PURPOSE OF LOAN

a. IN INDIA

Personal requirement and /or business purpose. *(i) to the Account holder

i)Personal purposes or for carrying on business activities. *ii) Direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms/ companiesiii) Acquisition of flat/ house in India for his own residential use

In India(ii) to third partyi)Personal purposes or for carrying on business activities ii) Direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms/ companiesiii) Acquisition of flat/ house in India for his own residential use

Fund based and/or non-fund based facilities for personal purposes or for carrying on business activities . *

Fund based and/or non-fund based facilities for personal purposes or for carrying on business activities . *

Personal requirement and / or business purpose*

b) OUTSIDE INDIA

Not permittedTo the Account holder and to third party

Fund based and/or non-fund based facilities for bonafide purposes.

Fund based and/or non-fund based facilities for bonafide purposes.

* The loans cannot be utilized for the purpose of relending, or carrying on agriculture or plantation activities or for investment in real estate business.

Features of various foreign currency deposit schemes available to Resident Indians

Particulars Resident Foreign Currency Account (RFC

Account)

Resident Foreign Currency (Domestic )

Account (RFC(D) Account)

Exchange Earner’s Foreign Currency

Account(EEFC Account)

Who can open an account

Any person resident in India.

Resident Individuals Any person resident in India

Sources of Funds1. Foreign exchange

received as pension/ superannuation /other benefits from employer abroad

2. Reaslisation of assets held abroad

3. Foreign exchange acquired as gift or inheritance from person who was NRI

Foreign exchange acquired :

1. while on a visit abroad

2. from any person on visit to India or honorarium or gift or for services or settlement of any lawful obligation

3. by way of honorarium or gift while on a visit abroad

4. representing unspent foreign exchange acquired during travel

A 100% Export Oriented Unit or a unit in (a) Export processing zone or (b) Sortware technology park or (c)Electronic hardware technology park may credit upto 100% and any other person resident may credit upto 50% of their foreign exchange earnings.

(d) Professional like scientists, professors of Indian Universities, economists, lawyers, doctors, artists, architects, engineers, consultants, Cost/ Chartered Accountants, Directors of

abroad 5. as gift from a

close relative 6. by way of earning

through export of goods/services or as royalty honorarium or by any other lawful means.

7. representing the disinvestment proceeds received by the resident a/c holder on conversion of shares held by him to ADRs/GDRs under the sponsored ADR/GDR scheme approved by the FIPB of Govt. of India.

Boards of overseas companies etc. who render services in their individual capacities outside India, may credit upto 100% of their earnings.

Joint account of two or more residents

Not permitted Not permitted Not permitted

Joint account with NRI Not permitted Not permitted Not permitted

Types of account SavingsCurrent Fixed Deposit

Current Account Current Account

Period for fixed deposits Like any resident accounts banks may fix the period

N.A. N.A.

Rate of interest The banks are free to determine interest rates.

No interest is payable No interest is payable.

End Use No restrictions, including investments overseas

For permissible current and capital account transactions

For bonafide purposes as per Notification No. FEMA 10/2000-RB dt. 3.5.2000

LOANS & OVERDRAFTS In India

Foreign currency loans permitted

Not permitted Not permitted

 

RBI moots non-fund-based activities to boost profitability

Banks need to make concerted efforts to improve

profitability by diversifying their businesses, especially into

non-fund-based activities," the RBI report said.

MUMBAI, March 31

THE Reserve Bank of India has advised commercial banks to

undertake more non-fund-based activities to improve their

profitability.

According to the central bank, profitability of banks in India

is still low as compared to several developing

countries.”Banks need to make concerted efforts to improve

their profitability by diversifying their businesses, especially

into non-fund-based activities," the RBI said in its Report on

Currency and Finance 2001-02 released on Monday.

The RBI has expressed concern about the large amount of

"loss assets" which ideally should be written off, still

constitutes 10 per cent of the gross NPAs, mainly because

these assets are under litigation.

Though there is improvement in the banks' asset quality, the

level of NPAs still appears high by international standards.

Therefore, a major challenge for banks is to bring down the

NPAs, the report said.

Asset impairment (ratio of gross NPAs to gross advances) in

respect of 100 per cent government-owned banks was much

higher in comparison with PSBs that divested their equity

and old private sector banks. The net NPAs of partially

government-owned PSBs as at end-March 2002 stood lower

than those of old private sector banks.

New pvt banks outperform others: According to the RBI

report, new private sector banks have outperformed their

public sector and old private sector contemporaries when

compared on a set of financial parameters for the period

1995-96 to 2001. However, for 2001-02, the data relating to

new private sector banks reflect the impact of mergers and

are therefore, not strictly comparable with those of the

earlier years.

Based on an examination of the relationship between

ownership and efficiency in banks (public and private), the

report reveals that old private sector banks performed better

than partially government-owned PSBs, which in turn

performed better than the wholly owned government PSBs

during the period 1995-96 to 2001-02.

The profitability of public sector banks (PSBs), which

divested their holding early in the reform process, and old

private sector banks, was higher than those of fully

government-owned PSBs, during the period 1995-96 to

2001-02.

According to the report, the profitability on an average of

both old private sector banks and the government-owned

banks, which divested their equity, was more or less at the

same level during this period.

The sharp rise in profits across most bank groups during

2001-02 was on account of capital gains on government

securities resulting from softening of interest rates and the

containment in operating expenses.

Hundred per cent government-owned banks had higher ratio

of operating expenses to total assets in comparison with

those of public sector banks (PSBs), which have divested

their equity as well as old private sector banks. While the

ratio for 100 per cent government-owned PSBs was higher

than the industry level, the ratio in respect of both old

private sector banks and those banks that divested their

equity was lower than the industry.

CONCLUSION

Capital adequacy ratio (CAR), on an average, was lower in fully government

owned PSBs than those PSBs that divested their equity as well as old private

sector banks. However, the report points out, that the CAR of fully

government owned banks, which on an average, was roughly half as

compared with old private banks and PSBs with reduced government

ownership, improved significantly over the last few years.

Merchant banking services strengthen the economic

development of a country as they acts as sources of funds

and information for corporations. Considering the way the

Indian economy is growing, the role of merchant banking

services in India is indispensable. These financial institutes

also act as corporate advisory bodies to help corporations

rightly get involved in various financial activities. The need

of merchant banking services in India arises from the fact

that high level industrialization is taking place in the country.

There is need for skilled professionals who can take care of

various

finance-related needs of the advanced industrial sectors.

These specialist services are also of great importance for the

small and medium sized enterprises to help them operate

smoothly. Most of the rural areas still lack industrial

advancement and the main reasons for this include lack of

funds and information. The merchant banking services help

the entrepreneurs to come up with industrial setups in these

areas. Besides, the merchant banks help the entrepreneurs

to explore the joint venture opportunities in the foreign

markets. Competition due to financial liberalization has

compelled

PSBs to diversify their non fund based activities e.g. lead

managing co managing, underwriting advising loan

syndicating capital issue management trusteeship etc. Non

funded based financial services marketed by PSBs comes

under purview of merchant banking which is governed by

Merchant Bankers Regulation issued by SEBI of December

22, 1992. The regulation of the SEBI Act provided for

registration of merchant bankers with SEBI for doing

merchant banking.

Most of the PSBs including PNB have been doing merchant

banking business. Some of the PSBs have formed their fully

owned subsidiaries for this purpose. The activities being

undertaken by most of the banks are lead managing co-

managing, underwriting as a banker to issue etc. PNB was

actively involved in merchant baking business such as

underwriting, banker to issues, and payment of

dividend/interest refund as and agent and trustee of

debenture holders. PNB incorporated PNB capital Service Ltd

as its wholly owned subsidiary. The company is registered

with SEBI as merchant banker of category I and debenture

trustee. Analysis of merchant banking business of some PSBs

clearly indicates that the merchant banking activities of the

banks are showing declining trend especially after 1993-94

due to

depressed capital market conditions and subdued activity in

primary market.