BANKING SECTOR

1

August 2018

© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

Disclaimer

Due care has been taken to avoid errors or omissions in this publication. In spite of this, er ors may

still persist. Any mistake, er or or discrepancy if noted, may be brought to the notice of the Institute,

which shal be taken care of in next edition.

The Institute shall not be responsible for any loss or damage resulting from any action taken on the

basis of the contents of this publication. To avoid any doubt, it is suggested that the reader should

cross-check the contents of this publication with original Government notifications.

This industry specific research report is for wide circulation among experts to receive valuable

suggestions and necessary supports for further improving the manuscript. Experts are encouraged to

email their suggestions and contribute any material which they think could value add the manuscript

to research@icsi.edu.

The Section 3, “Legal Framework” is indicative only.

Published by :

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Printed at: Indian Offset Press/August 2018

ii

PREFACE

In the liberalized economic policy regime, the corporate sector has been assigned a major

role as the driver of growth and development of the Indian economy. This has resulted

in a number of changes, especially in the regulatory framework applicable to specific

industry sectors. As an economy is consist of different industries like agriculture, service,

engineering, manufacturing etc., it provides impetus to the economy i.e. employment

generation, production of goods and services, income distribution in the whole economy.

With the intent to further enhance the competitiveness of India’s services sector and

to boost productivity with the creation of new employment opportunities, the Central

Government has focused attention on 12 sectors in the economy as ‘Champion Sectors’

i.e., IT & ITeS, Tourism and Hospitality, Financial, Accounting and Finance, Transport and

Logistics, Construction and Related Engineering, Communication, Education, Medical

Value Travel, Audio Visual, Legal and Environmental.

As part of its support to government’s policy initiatives, the Institute has started an initiative by

projecting Company Secretary as ‘Corporate Saviour’- a person who can be relied upon

by stakeholders i.e., Corporates, Promoters, Shareholders, Government and Regulators.

With this basic objective, the institute has initiated the process of developing industry

specific knowledge through research, creating awareness among the members about

the contribution the Company Secretary can make in specific industry, capacity building

of members in the specific industry, securing recognitions for members in specific industry

sector, and sensitisation of regulatory authorities about the contribution the Company

Secretaries can make in specific industry.

For conducting the detailed analysis in a structured manner, a format is designed with

four sections, Section-I covering the industry profile, Section-II Business Scenario, Section-III

legal framework and Section-IV Contribution of Company Secretary in employment and

in practice. The research publications in all the industry sector are based on exploratory

research.

I wish to express my sincere thanks and gratitude to CS Ahalada Rao V, Vice-President, the

ICSI for his efforts in guiding and finalizing industry specific publications.

I also appreciate Dr. Prasant Sarangi, Director (Research), and CS Sharad Jhunjhunwala-

Assistant Director, the ICSI-Research Cell for doing in-depth study of Banking Sector and

bringing out this research publication, under the guidance of CS Sonia Baijal, Director,

iii

Professional Development, Prospective Planning and Studies and Dr. S.K. Dixit, Mentor, Research Cel .

I am sure this research publication will prove to be of immense value to professionals,

corporates and researchers. The research is an ongoing process, and I welcome the

readers to give suggestions to make this research publication more comprehensive.

I wish all the readers a happy reading

New Delhi

CS Makarand Lele

Date: August 23, 2018

President

The Institute of Company Secretaries of India

iv

TABLE OF CONTENTS

Section No.

Title of the Section / Sub Topics

Page

Number

1

Introduction

1

1.1 Introduction

1

1.2 Category of Banks

1

2

Business Scenario

8

2.1 History

8

2.2 The Structure of Indian Banking Sector

9

2.3 Market Size

14

2.4 Investments/developments

15

2.5 Government Initiatives

18

2.6 Road Ahead

18

2.7 Payment and settlement Systems in India- Vision 2018

19

2.8 SHG-Bank Credit Linkage

20

2.9 Retail Banking in India

21

2.10 Corporate Governance in Banking Sector

22

2.11 Compliance Officer

23

2.12 Governance Reforms

24

2.13 Documentary Transactions

25

2.14 Conceptual Framework of an Information Utility

25

2.15 International Banking

26

3.

Legal Framework

27

3.1 Industry Type (Constitution)

27

3.2 Applicable Laws

27

3.3 Public Sector Banks’ Revamp Plan

30

v

3.4 Emerging Regulatory and Supervisory Issues in India

37

4.

Contribution of Company Secretary

40

4.1 Introduction

40

4.2 New Areas of Professional Support

40

4.3 Development of Good Governance Practices

42

4.4 Functions of CS in Employment

43

4.5 Functions of CS in Practice

45

Bibliography

62

vi

SECTION 1

INTRODUCTION

1.1 INTRODUCTION

Indian Banking System has seen many developments during the last two centuries. An

indigenous banking system was being carried out by the businessmen cal ed Sharoffs,

Seths, Sahukars, Mahajans, Chettis, etc., since the ancient times. They performed the usual

functions of lending money to traders and craftsmen, and sometimes even placed funds

at the disposal of kings for financing wars. The indigenous bankers could not, however,

develop, to any considerable extent, the system of obtaining deposits from the public,

which today is an important function of a bank.

Modern banking in India originated in the last decades of the 18th century. The first banks

were The General Bank of India (which started in 1786), and the Bank of Hindustan. Thereafter,

three presidency banks, namely the Bank of Bengal (this bank was original y started in the year

1806 as Bank of Calcutta which in the year 1809 became the Bank of Bengal) , the Bank of

Bombay and the Bank of Madras, were set up. For many years the Presidency banks acted

as quasi-central banks. The three banks merged in 1925 to form the Imperial Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a

consequence of the economic crisis of 1848-49. Bank of Upper India was established in

1863 which failed in 1913. The Allahabad Bank established in 1865 is the oldest survived Joint

Stock bank in India. Oudh Commercial Bank, established in 1881 in Faizabad, failed in 1958.

The next was the Punjab National Bank, established in Lahore in 1895, which is now one of

the largest banks in India. The Swadeshi movement inspired local businessmen and political

figures to established banks for the Indian community during 1906 to 1911. A number of

banks established then have survived to the present days such as Bank of India, Corporation

Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. A major landmark

in Indian banking history took place in 1934 when a decision was taken to establish ‘Reserve

Bank of India’ which started functioning in 1935. Since then, RBI, as a central bank of the

country, has been regulating banking system.

1.2 CATEGORY OF BANKS:

The constituents of the Indian Banking System can be broadly listed as under:

1

2

BANKING SECTOR

(a) Commercial Banks:

(i) Public Sector Banks

(ii) Private Sector Banks

(iii) Foreign Banks

(b) Cooperative Banks:

(i) Short-term agricultural institutions

(ii) Long-term agricultural credit institutions

(iii) Non-agricultural credit institutions

(c) Development Banks:

(i) National Bank for Agriculture and Rural Development (NABARD)

(ii) Small Industries Development Bank of India (SIDBI)

(iii) EXIM Bank

(iv) National Housing Bank

SECTION 1 – INTRODUCTION

3

COMMERCIAL BANKS

1. Public Sector Banks

The term ‘public sector banks’ in itself connotes a situation where the major/ful stakes

of the banks are held by Government. Till July1969, there were only 8 Public Sector

Banks (SBI & its 7 associate banks). When 14 commercial banks (total 20 banks) were

nationalized in 1969, 100% ownership of these banks was held by the Government of

India. Subsequently, six more private banks were nationalized in 1980. However, with

the changing in time and environment, these banks were al owed to raise capital

through IPOs and thereby the shareholding pattern changed. By default the minimum

51% shares would be kept by the Government of India, and the management control

of these nationalized banks is only with Central Government. Since all these banks

have ownership of Central Government, they can be classified as public sector banks.

Apart from the nationalized banks, State Bank of India, and its associate banks, IDBI

Bank and Regional Rural Banks are also included in the category of Public Sector

banks. The total numbers of public sector banks as on March, 2013 were 82 as per the

fol owing categorization:

Figure-1 Numbers of Public Sector Banks

4

BANKING SECTOR

2. Private Sector Banks

The major stakeholders in the private sector banks are individuals and corporates. When

banks were nationalized under two tranches (in 1969 and in 1980), all banks were not

included. Those non-nationalized banks which continue operations even today are

classified as Old Generation Private Sector Banks, like The Jammu & Kashmir Bank Ltd, The

Federal Bank, The Laxmi Vilas Bank etc. In July 1993 on account of banking sector reforms

the Reserve Bank of India allowed many new banks to start banking operations. Some of

the leading banks which were given licenses are: UTI bank (presently called Axis Bank) ICICI

Bank, HDFC Bank, Kotak bank.

Mahindra Bank, Yes Bank etc., these banks are recognized as New Generation Private

Sector Banks. Ten banks were licensed on the basis of guidelines issued in January 1993.

The guidelines were revised in January 2001 based on the experience gained from the

functioning of these banks, and fresh applications were invited.

Of the 10 licences issued in 1993, four banks merged with other lenders over a period of

time. Times Bank merged with HDFC Bank, while Global Trust Bank was amalgamated with

the state-owned Oriental Bank of Commerce. Centurion Bank took over Bank of Punjab to

become Centurion Bank of Punjab, which merged with HDFC Bank in 2008. On account

of these new generation private sector banks, a new competitive environment was

created in the Indian Banking System. These banks were having competitive advantages

over their counterparts (of the existing old private banks, public sector banks) in their IT

support system, innovative products, and pricing of their products. Private sector banks

have been rapidly increasing their presence in the recent times and offering a variety

of newer services to the customers and posing a stiff competition to the group of public

sector banks. Total private sector banks as on 31st March 2013 were 22. Besides these,

four Local Area Banks are also categorized as private banks.

3. Foreign Banks

The other important segment of the commercial banking is that of foreign banks. Foreign

banks have their registered offices outside India, and through their branches they operate

in India. Foreign banks are allowed on reciprocal basis. They are allowed to operate

through branches or whol y owned subsidiaries. These foreign banks are very active in

Treasury (forex) and Trade Finance and Corporate Banking activities. These banks assist

their clients in raising External Commercial Borrowings through their branches outside India

or foreign correspondents. They are active in loan syndication as wel . Foreign banks have

to adhere to all local laws as well as guidelines and directives of Indian Regulators such

as Reserve Bank of India, Insurance and Regulatory Development Authority, Securities

Exchange Board of India. The foreign banks have to comply with the requirements of the

Reserve Bank of India in respect to Priority Sector lending, and Capital Adequacy ratio and

other norms. Total foreign banks as on 31st March 2013 were 43 having 331 branches.

Besides these, 46 foreign banks have their representative offices in India as on 31st March

2013.

SECTION 1 – INTRODUCTION

5

COOPERATIVE BANKING SYSTEM

Cooperative banks play an important role in the Indian Financial System, especially at

the village level. The growth of Cooperative Movement commenced with the passing of

the Act of 1904. A cooperative bank is a cooperative society registered or deemed to

have been registered under any State or Central Act. If a cooperative bank is operating

in more than one State, the Central Cooperative Societies Act is applicable. In other

cases the State laws are applicable. Apart from various other laws like the Banking Laws

(Application to Co-operative Societies) Act, 1965 and Banking Regulation (Amendment)

and Miscellaneous Provisions Act, 2004, the provisions of the RBI Act, 1934 and the BR Act,

1949 would also be applicable for governing the banking activities.

These cooperative banks cater to the needs of agriculture, retail trade, small and medium

industry and self-employed businessmen usually in urban, semi-urban and rural areas.

In case of cooperative banks, the shareholders should be members of the cooperative

banks. The share linkage to borrowing is a distinctive feature of a cooperative bank. Rural

cooperative sector in India plays a vital role in fulfilling the credit requirements of rural

agricultural sector of India. At recent times, the rural credit flow through rural cooperative

sector has risen substantially in order to keep pace with the growing demand for credit in

the rural parts of India. The Cooperative rural Credit Structure in our country are of following

types:

1. Short-Term Agricultural Credit institutions

The short-term credit structure consists of the Primary Agricultural Credit Societies at the

base level, which are affiliated at the district level into the District Central Cooperative Bank

and further into the State Cooperative Bank at the State level. Being federal structures, the

membership of the DCCB comprises all the affiliated PACS and other functional societies

and for the SCB, the members are the affiliated DCCBs. The DCCB being the middle tier

of the Cooperative Credit Structure, is functional y positioned to deal with the concerns of

both the upper and lower tiers. This very often puts the DCCB in a position of balancing

competing concerns. While the SCB may managing District Central Cooperative wish the

DCCB to prioritize its task in a particular manner, the PACs may have their own demands

on the DCCB. Balancing these competing concerns could often be a dilemma for the

DCCBs.

There are 30 State Cooperative Banks. These banks support and guide 372 District Central

Cooperative Banks (DCCBs) in India which have 13478 branches as on March, 2013. These

DCCBs are providing finance to more than 35 lakhs farmers through about 1.15 lacs Primary

Agricultural Cooperative Societies (PACS).

2. Long Term Agricultural Credit Institutions

The long-term cooperative credit structure consists of the State Cooperative Agriculture

& Rural Development Banks (SCARDBs) and Primary Cooperative Agriculture & Rural

6

BANKING SECTOR

Development Banks (PCARDBs) which are affiliated to the SCARDBs. The total No. of

SCARDB’s are 19; of which 10 have Federal Structure, 7 have Unitary Structure and 2 have

Mixed Structure (i.e. operating through PCARDBs as wel as its own branches).Loans are

given to members on the mortgages of their land usual y up to 50% of their value in some

states or up to 30 times the land revenue payable in other states, duly taking into account

their need and repayment capacity. The performance of these banks as on 31st March

2012 has been as under:

Figure-2: Performance of Long-Tern agricultural Credit Institutions

3. Urban Cooperative Banks

The term Urban Cooperative Banks (UCBs), although not formally defined, refers to the

primary cooperative banks located in urban and semi-urban areas. These banks, until

1996, were allowed to lend money only to non-agricultural purposes. This distinction remains

today. These banks have traditionally been around communities, localities working out in

essence, loans to small borrowers and businesses. Today their scope of operation has

expanded considerably. The urban cooperative banks can spread operations to other

States and such banks are called as multi state cooperative banks. They are governed by

the Banking Regulations Act, 1949 and Banking Laws (Cooperative Societies) Act, 1965.

The total number of UCBs stood at 1,618 as on 31st March 2012. Scheduled UCBs are

SECTION 1 – INTRODUCTION

7

banks included in the Second Schedule of the RBI Act, 1934 and include banks that have

paid-up capital and reserves of not less than 5 lakhs and carry out their business in the

interest of depositors to the satisfaction of the Reserve Bank.

DEVELOPMENT BANKS

History of development banking in India can be traced to the establishment of the

Industrial Finance Corporation of India in 1948. Subsequently, with the passing of State

Financial Corporation Act, 1951 and several SFCs came into being. With the introduction

of financial sector reforms, many changes have been witnessed in the domain of

development banking. There are more than 60 Development Banking Institutions at the

both Central and State level.

Figure- Derived below are the glimpses of the picture of development banks in India

SECTION 2

BUSINESS SCENARIO

2.1 HISTORY

Banking in India is more than 200 years old. It was was developed during the British era. British

East India Company established three banks during 1800’s. First bank in India i.e., Bank of

Bengal was established in the year 1809 fol owed by Bank of Bombay in the year 1840 and

Bank of Madras in the year 1843. These three banks were later amalgamated and cal ed

Imperial Bank, which was taken over by SBI in 1955. The Reserve Bank of India was established

in 1935, fol owed by the Punjab National Bank, Bank of India, Canara Bank and Indian Bank.

They have been the pal bearers in the History of Banking in India. The development of banking

practices in India could be well understood from the figure derived below.

Figure 3 - Development of Indian Banking System

8

SECTION 2 – BUSINESS SCENARIO

9

In 1969, 14 major banks were nationalized and in 1980, 6 major private sector banks were

taken over by the government.

Indian banking system, over the years, has gone through various phases. For an easy

understanding, a broad category could be done to understand the phases through

which the Indian banking sector has evolved.

Early Phase : During the first phase, the growth was very slow and banks experienced

periodic failures during the Early Phase between. There were approximately 1100 banks,

mostly small which failed in the early phase.

· Pre Nationalization Phase : Reserve Bank of India (RBI) was created with the central

task of maintaining monetary stability in India. This phase of Indian banking was

eventful and was a phase of restructuring, regulation. However, despite these

provisions, control and regulations, banks in India except the State Bank of India,

continued to be owned and operated by private persons.

· Post Nationalization Phase : This phase of Indian banking was not so happening by

for the entry of new banks. Undoubtedly, it was a phase of expansion, consolidation

and increment in many ways. The banking sector grew at a phenomenal rate,

fruits of nationalization were evident, and the common man was now banking

with great trust.

· Modern Phase : This is the phase of “New Generation” tech-savvy banks. This

phase can be cal ed as ‘The Reforms Phase’.

2.2 THE STRUCTURE OF INDIAN BANKING SECTOR

The banking system has three tiers. These are the scheduled commercial banks; the

regional rural banks which operate in rural areas not covered by the scheduled banks;

and the cooperative and special purpose rural banks. There are approximately 80

scheduled commercial banks, Indian and foreign; almost 200 regional rural banks; more

than 350 central cooperative banks, 20 land development banks; and a number of

primary agricultural credit societies. The Reserve Bank of India is India’s Central Bank. The

banking industry is currently dominated by the public sector banks. Eight new private

sector banks are currently in operation. Domestic banks accounts for 92% of total banking

assets in India.

The structure of Indian banking sector could be well understand from the figure derived

below:

10

BANKING SECTOR

Figure-4

Figure-5 (a) derived below shows numbers of scheduled commercial banks in India by

the year 2017.

Figure-5 (a) Scheduled Commercial Banks

SECTION 2 – BUSINESS SCENARIO

11

Whereas figure-5 (b) shows total numbers of urban cooperative banks and rural cooperative

institutions that are operating in India since the 2014.

Figure-5 (b) Scheduled Commercial Banks

Table 1: derived below shows the overall performances of Indian banking Sector

Table : Indian Banking Sector

(Amount in Billion)

Amount

Percentage

Outstanding

Sr.

Variation

Items

(As at end-March)

No

2015-

2016-

2016

2017*

16

17*

1

Balance Sheet Operations

1.1

Total liabilities/assets

131,293 141,586

9.1

7.8

1.2

Deposits

100,927 111,139

7.0

10.1

1.3

Borrowings

14,488

12,807

26

-11.6

1.4

Loans and advances

78,965

81,162

6.9

2.8

1.5

Investments

33,278

36,522

11.8

9.7

Off-balance sheet exposure (as percentage of

1.6

111

107

-

-

on-balance sheet liabilities)

1.7

Total consolidated international claims

5,774

7,168

42.5

24.2

12

BANKING SECTOR

2

Profitability

2.1

Net profit

341

439

-61.7

28.6

2.2

Return on Asset (RoA) (Per cent)

0.4

0.35

-

-

2.3

Return on Equity (RoE) (Per cent)

3.58

4.16

-

-

2.4

Net Interest Margin (NIM) (Per cent)

2.6

2.5

-

-

3

Capital Adequacy

3.1

Capital to risk weighted assets ratio (CRAR) @

13.3

13.6

-

-

3.2

Tier I capital (as percentage of total capital) @

81.2

82.1

-

-

3.3

CRAR (tier I) (Per cent) @

10.8

11.2

-

-

4

Asset Quality

4.1

Gross NPAs

6,119

7,918

89.3

29.4

4.2

Net NPAs

3,498

4,331

98.9

23.8

Gross NPA ratio (Gross NPAs as percentage of

4.3

7.5

9.3

-

-

gross advances)

Net NPA ratio (Net NPAs as percentage of net

4.4

4.4

5.3

-

-

advances)

4.5

Provision Coverage Ratio (Per cent)**

41.9

43.5

-

-

4.6

Slippage ratio (Per cent)

6.3

5.7

-

-

5

Sectoral Deployment of Bank Credit

5.1

Gross bank credit

66,500

71,347

9.0

7.3

5.2

Agriculture

8,829

9,924

15.3

12.4

5.3

Industry

27,307

26,800

2.7

-1.9

5.4

Services

15,411

18,022

9.1

16.9

5.5

Personal loans

13,922

16,200

19.4

16.4

6

Technological Development

6.1

Total number of credit cards (in mil ion)

25

30

16.1

21.8

6.2

Total number of debit cards (in million)

662

772

19.6

16.6

6.3

Number of ATMs

198,952 208,354

12

4.9

7

Customer Services

Total number of complaints received during the

7.1

102,894 130,987

20.9

27.3

year

7.2

Total number of complaints addressed

101,153 125,345

19.5

23.9

7.3

Percentage of complaints addressed

94.8

92

-

-

SECTION 2 – BUSINESS SCENARIO

13

8

Financial Inclusion

8.1

Credit-deposit ratio (Per cent)

78.2

73.03

-

-

8.2

Number of new bank branches opened

6,986

4,830

-20.0

-30.9

8.3

Number of banking outlets in villages (Total)

586,307 598,093

5.9

2.0

*: Provisional **: Based on off-site returns and without write-off adjusted. @: Figures are as per the

Basel III framework.

Notes:

1. Percentage variation could be slightly different as figures have been rounded off to million/

billion.

2. Data on sectoral deployment of bank credit pertains to last reporting Friday of March.

Source: https://www.rbi.org.in/scripts/PublicationsView.aspx?id=18064

The sector-wise development of gross bank credit by April 2018 is derived in the table

below.

Table 2 : Deployment of Gross Bank Credit By Major Sectors

Sector

Apr. 2018

Gross Bank Credit (I + III)

76130

Food Credit

326

Non-food Credit (1 to 4)

75804

Agriculture & Allied Activities

10269

Industry (Micro & Smal , Medium and Large )

26511

Micro & Small

3629

Medium

1027

Large

21854

Services

19813

Transport Operators

1214

Computer Software

179

Tourism, Hotels & Restaurants

371

Shipping

65

Professional Services

1532

Trade

4605

Wholesale Trade (other than food procurement)

1985

Retail Trade

2621

14

BANKING SECTOR

Commercial Real Estate

1849

Non-Banking Financial Companies (NBFCs)

4524

Other Services

5472

Personal Loans

19211

Consumer Durables

201

Housing (Including Priority Sector Housing)

9855

Advances against Fixed Deposits (Including FCNR (B), NRNR Deposits etc.)

710

Advances to Individuals against share, bonds, etc.

54

Credit Card Outstanding

732

Education

691

Vehicle Loans

1904

Other Personal Loans

5065

Priority Sector

24928

Agriculture & Allied Activities

10240

Micro & Smal Enterprises

9526

Manufacturing

3629

Services

5897

Housing

3667

Micro-Credit

255

Education Loans

593

State-Sponsored Orgs. for SC/ST

3

Weaker Sections

5781

Export Credit

201

Source: https://rbi.org.in/SCRIPTS/BS_PressReleaseDisplay.aspx?prid=44074

2.3 MARKET SIZE

In August 2017, Global rating agency Moody’s announced that its outlook for the Indian

banking system was stable. In November 2017, Global rating agency Moody’s upgraded

four Indian banks from Baa3 to Baa2.

· The Indian banking system consists of 27 public sector banks, 26 private sector

banks, 46 foreign banks, 56 regional rural banks, 1,574 urban cooperative banks

and 93,913 rural cooperative banks, in addition to cooperative credit institutions.

Public-sector banks control more than 70 per cent of the banking system assets,

SECTION 2 – BUSINESS SCENARIO

15

thereby leaving a comparatively smaller share for its private peers. Banks are also

encouraging their customers to manage their finances using mobile phones.

· As the Reserve Bank of India (RBI) allows more features, such as unlimited fund

transfers between wal ets and bank accounts, mobile wallets are expected to

become strong players in the financial ecosystem.

· The unorganized retail sector in India has huge untapped potential for adopting

digital mode of payments, as 63 per cent of the retailers are interested in using

digital payments like mobile and card payments, as per a report by Centre

for Digital Financial Inclusion (CDFI). ICRA estimates that credit growth in India’s

banking sector would be at 7-8 per cent in FY 2017-18.

2.4 INVESTMENTS/DEVELOPMENTS

Key investments and developments in India’s banking industry include:

· The bank recapitalization plan by Government of India is expected to push credit

growth in the country to 15 per cent and as a result help the GDP grow by 7 per

cent in FY2019.

· Public sector banks are lining up to raise funds via qualified institutional placements

(QIP), backed by better investor sentiment after the Government of India’s bank

recapitalization plan and an upgrade in India’s sovereign rating by Moody’s

Investor Service.

· The RBI amends statutes thereby allowing lenders to invest in real estate investment

trusts (REITs) and infrastructure investment trusts (InvITs) not exceeding 10 per cent

of the unit capital of such instruments.

Table 3 : Listed Public Company

Company Name (Private sector)

Company Name (Public sector)

HDFC Bank

SBI

ICICI Bank

PNB

Axis Bank

Bank of Baroda

Yes Bank

Bank of India

Kotak Mahindra

Canara Bank

IndusInd Bank

Union Bank

Federal Bank

IDBI Bank

IDFC Bank

Syndicate Bank

JK Bank

Central Bank

South Ind Bk

Oriental Bank

Karnataka Bank

IOB

16

BANKING SECTOR

Karur Vysya

Allahabad Bank

RBL Bank

Corporation Bk

Lakshmi Vilas

Indian Bank

City Union Bank

Andhra Bank

DCB Bank

UCO Bank

Dhanlaxmi Bank

Vijaya Bank

Bank of Mah

United Bank

Dena Bank

Punjab & Sind

Source:http://www.moneycontrol.com/stocks/marketinfo/totassets/bse/banks-private-

sector.html

Table shows list of Asset Reconstruction Companies (ARCs) registered with the Bank (As on

November 30, 2017)

Table 4: List of ARCs

Sr.

Name of Registered ARC

Address

No.

1

Asset Reconstruction

The Ruby,10th Floor, 29,Senapati Bapat Marg,

Company (India) Limited

Dadar (West), Mumbai-400028

2

Assets Care & Reconstruction 2 nd Floor, Mohan Dev Building 13, Tolstoy Marg,

Enterprise Ltd

New Delhi – 110001

3

ASREC (India) Limited

Solitaire Corporate Park ,Bldg No.2, Unit No.201-

202A & 200-202 B Gr.Floor, Andheri Ghatkopar

Link Rd, Chakala Andheri (E), Mumbai-400093

4

Pegasus Assets Reconstruction 55-56,5th Floor, Free Press House, Nariman Point,

Pvt Ltd

Mumbai-400021

5

Alchemist Asset

D-54,1st Floor, Defence Colony New Delhi-110024

Reconstruction Company

Limited

6

International Asset

709,7th Floor, Ansal Bhawan, 16, Kasturba Gandhi

Reconstruction Company Pvt Marg, New Delhi - 110 001

Ltd

7

Reliance Asset Reconstruction Reliance Centre, 19 Walchand Hirachand Marg,

Company Limited

Ballard Estate, Mumbai – 400 001

SECTION 2 – BUSINESS SCENARIO

17

8

Pridhvi Asset Reconstruction

D No.1-55, Raja Praasadamu, 4 th Floor,

And Securitisation Company

Wing-I,

Masjid

Banda

Road

Kondapur,

Ltd

Hyderabad-500084

9

Phoenix ARC Private Limited

5th Floor,Dani Corporate Park 158, CST Road,

Kalina, Santacruz (East) Mumbai-400098

10

Invent Assets Securitisation &

107,Jol y Maker Chambers No.2 225,Nariman

Reconstruction Pvt Ltd

Point Mumbai-400021

11

JM Financial Asset

7th Floor, Cnergy Appasaheb Marathe Marg

Reconstruction Company

Prabhadevi Mumbai-400025

Private Limited

12

India SME Asset Reconstruction 1004, 10th Floor, Naman Centre, Plot No. C-31,

Company Limited

G-Block, Bandra - Kurla Complex, Bandra (E),

Mumbai400051

13

Edelweiss Asset Reconstruction Edelweiss House, Off CST Road, Kalina,

Company Limited

Mumbai-400098

14

UV Asset Reconstruction

704, Deepali Building, 92, Nehru Place, New

Company Limited

Delhi-110019

15

Meliora Asset Reconstruction

106, Bharat Towers, 5 th Lane, Dwaraka Nagar,

Company Limited

Visakhapatnam Andhra Pradesh -530016

16

Omkara Assets Reconstruction 9, M.P. Nagar First Street, Kongu Nagar Extension,

Private Limited

Tirupur, Tamil Nadu 641 607

17

Prudent Asset Reconstruction

611, Sixth Floor, D Mal , Plot No. A-1, Netaji

Company Ltd

Subhash Place, Pitampura, New Delhi – 110 034

18

MAXIMUS ARC Limited

59A-18/1-5A, Sri Plaza Teachers Colony,

Patamata, Vijaywada, Andhra Pradesh -520 008

19

CFM Asset Reconstruction

A/3, Safal Profitaire, 5th Floor, Near Prahlad Nagar

Private Limited

Garden, Ahmedabad363610, Gujarat

20

Encore Assets Reconstruction

15th Floor, Eros Corporate Tower, Nehru Place,

Company Private Limited

New Delhi - 110019

21

Rare Asset Reconstruction Pvt. 203, Gala Argos, Nr. Harikrupa Tower, Ellisbridge

Ltd

Gymkhana, Gujarat College Road, Ahmedabad

- 380006

22

Suraksha Asset Reconstruction 20th Floor, A - Wing, Naman Midtown, Elphinstone

Private Limited

Road, Mumbai - 400013

23

Ambit Flowers Asset

Ambit House, 449, Senapati Bapat Marg, Lower

Reconstruction Private Limited Parel, Mumbai - 400013

18

BANKING SECTOR

24

Indiabul s Asset Reconstruction M-62 & 63, First Floor, Connaught Place, New

Private Limited

Delhi- 110 001

Source: https://rbidocs.rbi.org.in/rdocs/content/pdfs/LSCRCRBI07092016.pdf

2.5 GOVERNMENT INITIATIVES

· The Government of India is planning to introduce a two percentage point discount

in the Goods and Services Tax (GST) on business-to-consumer (B2C) transactions

made via digital payments.

· A new portal named ‘Udyami Mitra’ has been launched by the Small Industries

Development Bank of India (SIDBI) with the aim to improve credit availability to

Micro, Small and Medium Enterprises’ (MSMEs) in the country.

· Mr Arun Jaitley, Minister of Finance, Government of India, introduced ‘The Banking

Regulation (Amendment) Bill,2017’, which will replace the Banking Regulation

(Amendment) Ordinance, 2017, to allow the Reserve Bank of India (RBI) to guide

banks to resolve the problems of stressed assets.

· Under the Union Budget 2018-19, the Government has allocated Rs 3 trillion (US$

46.34 billion) towards the Mudra Scheme and Rs 3,794 crore (US$ 586.04 million)

towards credit support, capital and interest subsidy to MSMEs.

The Government and the regulator have undertaken several measures to

strengthen the Indian banking sector.

· A two-year plan to strengthen the public sector banks through reforms and

capital infusion of Rs 2.11 lakh crore (US$ 32.5 billion), has been unveiled by the

Government of India that will enable these banks to play a much larger role in

the financial system and give a boost to the MSME sector. In this regard, the Lok

Sabha has approved recapitalisation bonds worth Rs 80,000 crore (US$ 12.62

billion) for public sector banks, which will be accompanied by a series of reforms,

according to Mr Arun Jaitley, Minister of Finance, Government of India.

· The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill has

been passed by Rajya Sabha and is expected to strengthen the banking sector.

2.6 ROAD AHEAD

Enhanced spending on infrastructure, speedy implementation of projects and continuation

of reforms are expected to provide further impetus to growth. All these factors suggest

that India’s banking sector is also poised for robust growth as the rapidly growing business

would turn to banks for their credit needs.

SECTION 2 – BUSINESS SCENARIO

19

Also, the advancements in technology have brought the mobile and internet banking

services to the fore. The banking sector is laying greater emphasis on providing improved

services to their clients and also upgrading their technology infrastructure, in order to

enhance the customer’s overall experience as well as give banks a competitive edge.

Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-less

credit and debit cards in the market shortly. The cards, which use near field communication

(NFC) mechanism, will allow customers to transact without having to insert or swipe.

2.7 Payment and settlement Systems in India- Vision 20181

The broad contours of Vision-2018 revolve around the 5 Cs:

1. Coverage – by enabling wider access to a variety of electronic payment services

2. Convenience – by enhancing user experience through ease of use and of

products and processes

3. Confidence – by promoting integrity of systems, security of operations and

customer protection

4. Convergence – by ensuring interoperability across service providers

5. Cost – by making services cost effective for users as well as service providers

Vision-2018 focuses on four strategic initiatives viz., responsive regulation, robust

infrastructure, effective supervision and customer centricity.

· Firstly, RBI, in consultation with all the stakeholders, will continue its efforts to create

a regulatory framework to promote twin objectives of enhanced coverage with

interoperability of the payments system and convenience with security for the

end-users in sync with emerging developments and innovations.

· Secondly, building a robust payments infrastructure in the country to increase the

accessibility, availability, interoperability and security of the payment systems will

continue to remain a key objective.

· Thirdly, Vision-2018 will focus on effectiveness of supervisory mechanisms to

strengthen the resilience of the Financial Market Infrastructures (FMIs) and

System Wide Important Payment Systems (SWIPS) in the country besides setting

up appropriate oversight framework for new systems, and augmenting the data

reporting and fraud monitoring systems.

1. Payment and settlement systems in India, Vision 2018, Department of Payment and Settlement Systems, RBI

(https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/VISION20181A8972F5582F4B2B8B46C5B669CE396A.

PDF)

20

BANKING SECTOR

· Finally, Vision-2018 will adopt a customer centric approach to streamline the

customer grievance redressal mechanism, focus on building customer awareness

and education, and initiate customer protection measures.

Vision 2018 is expected to result in:

i. Continued decrease in the share of paper-based clearing instruments;

i . Consistent growth in individual segments of retail electronic payment systems viz.

NEFT, IMPS, Card transactions, mobile banking, etc.;

iii. Increase in registered customer base for mobile banking;

iv. Significant growth in acceptance infrastructure; and

v. Accelerated use of Aadhaar in payment systems

2.8 SHG-BANK CREDIT LINKAGE1

A major effort to provide banking services to the weaker and unorganised sector was

the Bank Self Help Group Linkage Programme that was launched in early 1990s. The

programme was started at the initiative of NABARD in 1992 to link the unorganised sector

with the formal banking sector.

Under this programme, banks were allowed to open savings accounts for Self-Help Groups

(SHGs). SHGs are registered/unregistered entities which usually has a membership of 15

to 20 members from very low income families, usually women. They mobilize savings

from members and uses the pooled funds to give loans to the needy members. Under

this programme, banks provide loans to the SHGs against group guarantee and the

quantum of loan could be several times the deposits placed by such SHGs with the

banks. Banks should consider entire credit requirements of SHG members, namely, (a)

income generation activities, (b) social needs like housing, education, marriage, etc. and

(c) debt swapping”.

Lending to SHGs should be included by the banks as part of their lending to the weaker

sections. As per the RBI’s latest (May 2016) Priority Sector Lending norms, bank credit to

members of SHGs is eligible for priority sector advance under respective categories viz.,

Agriculture, Micro, Small and Medium Enterprises, Social Infrastructure and Others.

The recovery rates of loans are good and banks have found that the transaction cost of

reaching the poor through SHGs is considerably lower rather than direct lending by the

bank.

According to NABARD as on 31 March 2014, there were around 74.30 lakh savings-linked

1. https://www.indianeconomy.net/splclassroom/what-is-self-help-group-shg-bank-linkage-programme/

SECTION 2 – BUSINESS SCENARIO

21

SHGs, covering over 9.7 crore poor households. The total savings of these SHGs with banks

amounted to Rs. 9897 crore. The number of credit-linked SHGs under the programme was

around 42 lakhs.

The initial phase of SHG movement saw concentration of SHGs in the southern parts of

the country, but now the SHGs have spread more to the eastern and northeastern regions

where the extent of financial exclusion is greater. The Government of India has also

been using the SHGs for subsidy-linked credit schemes for the poor. NABARD offers grant

assistance to NGOs that promote SHGs and link them to banks.

SBI has actively participated in SHG-Bank Credit Linkage programme since its inception

in 1992 as a pilot project of NABARD. Since then, the Bank has made a steady progress

in financing SHGs. Our market share in SHG credit linkage is 17.93% (March 2017). As on

31st March 2017, Bank’s lending to SHGs is Rs.6,139 crore to 3.57 lac SHGs, of which 91%

are women SHGs

Table 5: Products available at Retail Banking/ Personal Banking at SBI

SBI Term Deposits

SBI Loan For Pensioners

SBI Recurring Deposits

Loan Against Mortgage Of Property

SBI Housing Loan

Loan Against Shares & Debentures

SBI Car Loan

Rent Plus Scheme

SBI Educational Loan

Medi-Plus Scheme

SBI Personal Loan

Interest Rates

e-Invest (ASBA) - IPO

2.9 RETAIL BANKING IN INDIA1

Retail banking is, however, quite broad in nature - it refers to the dealing of commercial

banks with individual customers, both on liabilities and assets sides of the balance sheet.

Fixed, current / savings accounts on the liabilities side; and mortgages, loans (e.g.,

personal, housing, auto, and educational) on the assets side, are the more important of the

products offered by banks. Related ancillary services include credit cards, or depository

services. Today’s retail banking sector is characterized by three basic characteristics:

· multiple products (deposits, credit cards, insurance, investments and securities);

· multiple channels of distribution (call centre, branch, Internet and kiosk); and

· multiple customer groups (consumer, small business, and corporate).

What is the nature of retail banking? In a recent book, retail banking has been described

1. https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=6698

22

BANKING SECTOR

as “hotter than vindaloo”. Considering the fact that vindaloo, the Indian-English innovative

curry available in umpteen numbers of restaurants of London, is indeed very hot and spicy,

it seems that retail banking is perceived to be the in-thing in today’s world of banking.

2.10 CORPORATE GOVERNANCE IN BANKING SECTOR

It is evident that banking and financial institutions are the strong backbone of any

economy. This results in healthy economic condition of a country, which positively

correlates with sound functioning of its banking sector. Functioning of banking and

financial institutions differs with other corporate entities in many ways that makes

corporate governance of banks very different and critical too. So, if a corporate fails

to do proper governance, the fall outs can be restricted to the stakeholders, but

on the other hand, if a banking or financial institution fails, the impact can spread

rapidly through other banks and financial institutions, which ultimately have serious

implicationon financial system at large. Thus, corporate governance has equal

importance in case of banks and financial institutions as wel . In Indian market, the

concept of corporate governance is emphasized considering the liberalization,

privatization and globalization phase, whereby institutionalization of financial markets,

foreign institutional investors (FIIs) became dominant players in the stock markets.

This phase also left private sector companies with a realization that ‘investors keep

invested in those corporate, which create values for their investors’. Thus, in this way,

corporate essential y requires to adhere with the honest, fair and transparent corporate

procedures and practices.

Banks play an important role in the economic development of a nation. As intermediaries

in the Financial Sector, banks also act as trustees of the funds of the depositors. For an

appropriate functioning banks an effective Corporate Governance practices should

become an integral part of bank management. Banks should have good Corporate

Governance which should be much more than complying with legal and regulatory

requirements. Good governance facilitates effective management and control of

business, enabling it to maintain a high level of business ethics and to provide value

additions to all their stakeholders. The objectives of corporate governance would be :

1. To protect and enhance shareholders value

2. To protect the interest of al other stakeholders such as customers, employees and

society at large

3. To ensure transparency and integrity in communication and to make available

ful , accurate and clear information to all concerned

4. To ensure accountability for performance and customer service and to achieve

excellence at all levels

SECTION 2 – BUSINESS SCENARIO

23

Role of the Board of Directors

(i) The Bank’s Board of Directors should meet regularly and to provide effective

leadership and insights in business and functional areas. They also should monitor

Bank’s performance.

(ii) Setting up of a framework of strategic control and continuously reviewing its

efficacy.

(iii) Implementation, review and monitoring the integrity of its business and control

mechanisms

(iv) Overseeing the risk profile of the Bank.

(v) Ensuring expert management and decision-making, internal control and reporting

requirements.

(vi) Maximizing the interests of its stakeholders.

2.11 COMPLIANCE OFFICER

A senior executive is made responsible in respect of compliance issues with al applicable

statutes, regulations and other procedures, policies as laid down by the GOI/RBI and other

regulators and the Board, and reports deviations, if any.

Audit Committee (AC)

The Audit committee functions as per RBI guidelines and complies with the provisions of

Clause 49 of the Listing Agreement to the extent that they do not violate the directives/

guidelines issued by RBI. Functions of Audit Committee:

(a) Audit Committee provides direction and also oversees the operation of the total

audit function in the Bank.

(b) Audit Committee also appoints Statutory Auditors of the Bank and reviews their

performance from time to time.

(c) Ensures transparency by reviewing bank’s financials, Risk Management, IS Audit

Policies and Accounting policies, systems and procedures.

(d) Audit Committee also reviews the internal inspection/audit plan and functions in

the Bank – the system, its quality and effectiveness in terms of follow-up.

(e) Audit Committee focuses on the follow up of implementation: – KYC-AML

Guidelines; – Major areas of housekeeping; – Compliance of Clause 49 and

other guidelines issued by SEBI from time to time;

24

BANKING SECTOR

(f) Audit Committee fol ows up on all the issues raised in RBI’s Annual Financial

Inspection Reports under Section 35 of Banking Regulation Act, 1949 and Long

Form Audit Reports of the Statutory

2.12 GOVERNANCE REFORMS1

The process of governance reforms started with “Gyan Sangam” - a conclave of PSBs

and FIs organized at the beginning of 2015 in Pune which was attended by all stake-

holders including Prime Minister, Finance Minister, MoS (Finance), Governor, RBI and

CMDs of al PSBs and FIs. There was focus group discussion on six different topics which

resulted in specific decisions on optimizing capital, digitizing processes, strengthening risk

management, improving managerial performance and financial inclusion. The decision

to set up a Bank Board Bureau which was subsequently announced in the Budget Speech

of Hon’ble Finance Minister, came out of the recommendations of Gyan Sangam. Also,

at this conclave, Hon’ble Prime Minister made a significant promise to the bankers that

there would be no interference from any Government functionary in the matter of their

commercial decisions.

This promise of Hon’ble Prime Minister was immediately translated into a circular issued to

al banks assuring them of “no interference policy”, but at the same time asking them to

have robust grievance redressal mechanism for borrowers, depositors as wel as staff. The

Gyan Sangam recommendations included strengthening of risk management practices.

Each bank agreed to nominate a senior officer as Chief Risk Officer of the bank. A special

training programme for Chief Risk Officers was recently organized by Centre for Advanced

Financial Research and Learning (CAFRAL).

The Government has been constantly engaging with the Banks through review meeting

and sessions for strategic reviews etc. The focus is on improving HR management practices

and removing barriers so that the Banks can share and work together on common

resources. Various steps have been taken to empower Bank’s Boards.

Policies framed by SBI under Corporate Governance Initiative2

· Policy for Determination of Materiality and Disclosure of Events/Information.

· Policy for Determining Material Subsidiaries and Corporate Governance

Requirements with respect to Subsidiaries

· Policy on Materiality of Related Party Transactions and on dealing with Related

Party Transactions.

· Archival Policy

1 http://financialservices.gov.in/sites/default/files/PressnoteIndardhanush_1.pdf

2. https://www.sbi.co.in/portal/web/corporate-governance/policies

SECTION 2 – BUSINESS SCENARIO

25

· Dividend Distribution Policy

· Policy SBI Compensation -2018

· Sustainability and Business Responsibility Policy

· FEDAI & FIMMDA Code

· Clouds over Corporate Governance in Banks

2.13 DOCUMENTARY TRANSACTIONS

Information Utility is going to change the documentary transactions landscape as:

· An Information Utility is a professional organization (which is registered with IBBI

under Section 210 of IBC, 2016 as per the eligibility criteria prescribed) that

will collect financial information, get the same authenticated by other parties

connected to the debt & store the same and provide access to the Resolution

Professionals, Creditors and other stake holders in the Insolvency Resolution

Process, so that all stake holders can make decisions based on the same

information.

· The New Law IBC,2016 consolidates the existing framework and creates a new

institutional structure, by setting up of Information Utility Companies, which will

store all the credit information of Corporates/entities/persons; The Certificate &

data furnished by IUs are accepted by NCLT/DRTs as legal evidence.

· This IU set-up is expected to contribute significantly for reduction of NPAs in banking

sector, as the code aims to resolve the insolvencies in a time bound manner.

· The information utilities shall act as a regulated information agency which shall

accept, electronically record, get authentication, maintain and provide access to

financial information to the persons as may be specified in the Act, e.g., creditors,

Adjudicating Authority and other persons having interest in the information.

2.14 CONCEPTUAL FRAMEWORK OF AN INFORMATION UTILITY

IBC sets the objectives for this key economic reform of addressing insolvency and to

improve the ease of doing business. The highlights are:

· Low time to resolution

· Low loss in recovery

· Higher levels of debt financing across more debt instruments

26

BANKING SECTOR

· To promote entrepreneurship

· Consolidate and amend the laws relating to restructuring and

insolvency resolution of corporates, partnership firms and individuals

Information utility is designed as an institution for enforcement of contracts

and is a pioneering effort:

To provide undisputed information for initiation of insolvency process

· IU to act like a Credit Repository

· Accept financial information from financial creditors and operational

creditors

· Financial information will get authenticated by all the parties of the

debt and store to be used as evidence in the legal process

· Provides a platform for the creditors and debtors-submission and

authentication

· IU is a Cost effective tool for

· Proof of Borrower;

· Proof of borrowing;

· Proof of Security interest; and

· Proof of Default

2.15 INTERNATIONAL BANKING

“International Banking” can be defined as a sub-set of commercial banking

transactions and activity having a cross-border and/or cross currency element.

Multinational banking refers to the location and ownership of banking facilities

in a large number of countries and geographic regions. International banking

comprises a range of transactions that can be distinguished from purely

domestic operations by (a) the currency of denomination of the transaction,

(b) the residence of the bank customer and (c) the location of the booking

office.

SECTION 3

LEGAL FRAMEWORK

3.1 INDUSTRY TYPE (CONSTITUTION)

· Listed Private Sector Banks incorporated as Companies

· Listed Public Sector Banks constituted under Banking Companies (Acquisition and

Transfer of Undertaking) Act, 1970 and 1980.

· Unlisted Public Sector Banks

· Cooperative banks

3.2 APPLICABLE LAWS

Insolvency Specific Laws

· Companies Act, 2013

· Banking Companies (Acquisition and Transfer of Undertaking Act, 1970 and 1980

and Regulations made thereunder

· Insolvency and Bankruptcy Code, 2016

· The Securitisation And Reconstruction Of Financial Assets And Enforcement Of

Security Interest Act, 2002

· The Recovery Of Debts Due To Banks And Financial Institutions Act, 1993

· Banking Regulation Act, 1949

· State wise Registrars of Cooperative Societies, Act

· Circulars issued by RBI

· Consumer Protection Act

· Payment and Settlement Systems Act, 2007

27

28

BANKING SECTOR

Concerned Tribunals

· RBI

· Debt Recovery Tribunal

· NCLT and NCLAT

· Banking Ombudsman

· The Banking Codes and Standards Board of India

Relevant Regulations

In India, there are various types of banks and they were set up under different Acts passed

by the Central and State Governments as under:

Table 6a: Category wise Legal Framework

Banks - category

Legal Frame Work

State Bank of India

State Bank of India Act,1955

SBI Associate Banks

State Bank (Subsidiary Banks) Act,1959

Nationalised Banks - 1969

Banking Companies (Acquisition and Transfer

of Undertakings) Act,1970

Nationalised Banks - 1980

Banking Companies (Acquisition and Transfer

of Undertakings) Act, 1980

Regional Rural Banks

Regional Rural Banks Act,1976

Private Sector Banks

Indian Companies Act,1986

Co-operative Banks

Co-operative Societies Acts (State/Central)

and Banking Laws (Applicable to Cooperative

Societies) Act,1965

Banking Laws (Application to Co-operative

Societies Act,1965

Reserve Bank of India Act, 1934

Table 6b: Category wise Legal Framework (Development Banks)

Industrial Finance Bank of India

Industrial Finance Corporation Act of 1948

Small Industries Development Bank of The Small Industries Development Bank of

India

India Act, 1989

SECTION 3 – LEGAL FRAMEWORK

29

National Bank for Agriculture and Rural The National Bank For Agriculture And Rural

Development

Development Act, 1981

Export-Import Bank of India

Export-import Bank of India Act, 1981

The National Housing Bank

National Housing Bank Act, 1987

Table 6c : International Banking

FOREIGN EXCHANGE MANAGEMENT ACT 1999

To conserve foreign exchange and to it to facilitate external trade and payments

and also to misuse develop foreign exchange markets in India Violation of FERA was

a criminal offence Violation of FEMA is a civil offence Offences under FERA were not

compoundable Offences under FEMA are compoundable While many restrictions were

part of FERA in respect Almost all current account transactions are free except of transfer

of funds a few FERA was draconian criminal law FEMA is a civil law.

Other Laws

· Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002

· The Bankers’ Books Evidence Act, 1891

· Recovery of Debts due to Banks & Financial Institution Act, 1993

· Credit Information Companies (Regulation) Act, 2005

· Prevention of Money Laundering Act, 2002

· The Deposit Insurance and Credit Guarantee Corporation Act, 1961

· Industrial Disputes (Banking and Insurance Companies) Act, 1949

· Information Technology Act, 2000

· Credit Information Companies (Regulation) Act (CICRA), 2005

Concerned Ministries

Ministry of Finance, Department of Financial Services

The mandate of the Department of Financial Services covers the functioning of Banks,

Financial Institutions, Insurance Companies and the National Pension System. The

Department is headed by the Secretary, (Financial Services) who is assisted by two

Additional Secretary (AS), six Joint Secretaries(JS), two Economic Advisers(EA) and a Deputy

Director General(DDG).

30

BANKING SECTOR

3.3 PUBLIC SECTOR BANKS’ REVAMP PLAN1

The Public Sector Banks (PSBs) play a vital role in India’s economy. In the past few years,

because of a variety of legacy issues including the delay caused in various approvals as well

as land acquisition etc., and also because of low global and domestic demand, many large

projects have stal ed. Public Sector Banks which have got predominant share of infrastructure

financing have been sorely affected. It has resulted in lower profitability for PSBs, mainly due

to provisioning for the restructured projects as wel as for gross NPAs. The present Government

has put in place a comprehensive framework for improving PSBs. Most recently, we have

made the announcement of capital al ocation by Government for PSBs in the next four

years. Announcement of capital plans for the PSBs is only one of the many steps taken by the

Government. The other steps taken by Government are as fol ows:-

A) Appointments

The Government decided to separate the post of Chairman and Managing Director by

prescribing that in the subsequent vacancies to be filled up the CEO wil get the designation

of MD & CEO and there would be another person who would be appointed as non-

Executive Chairman of PSBs. This approach is based on global best practices and as per the

guidelines in the Companies Act to ensure appropriate checks and balances. The selection

process for both these positions has been transparent and meritocratic. The entire process

of selection for MD & CEO was revamped. Private sector candidates were also al owed to

apply for the position of MD & CEO of the five top banks i.e. Punjab National Bank, Bank of

Baroda, Bank of India, IDBI Bank and Canara Bank. Three stage screening was done for the

MD’s position culminating into final interview by three different panels.

B) Bank Board Bureau

The announcement of the Bank Board Bureau (BBB) was made by Hon’ble Finance Minister in

his Budget Speech for the year 2015-16. The BBB wil be a body of eminent professionals and

officials, which wil replace the Appointments Board for appointment of Whole-time Directors

as wel as non-Executive Chairman of PSBs. They will also constantly engage with the Board of

Directors of all the PSBs to formulate appropriate strategies for their growth and development.

The structure of the BBB is going to be as fol ows; the BBB wil comprise of a Chairman and

six more members of which three wil be officials and three experts (of which two would

necessarily be from the banking sector). The Search Committee for members of the BBB

would comprise of the Governor, RBI and Secretary (FS) and Secretary (DoPT) as members. The

BBB would broadly fol ow the selection methodology as approved in relevant ACC guidelines.

Banking Regulatory Powers Should Be Ownership Neutral.2

1. http://financialservices.gov.in/sites/default/files/PressnoteIndardhanush_1.pdf

2. Urjit R. Patel, Governor, Reserve Bank of India – March 14, 2018 – Inaugural Lecture : Centre for Law

& Economics, Centre for Banking & Financial Laws Gujarat National Law University, Gandhinagar (https://

www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1054)

SECTION 3 – LEGAL FRAMEWORK

31

C) Capitalization

As of now, the PSBs are adequately capitalized and meeting all the Basel III and RBI norms.

However, the Government of India wants to adequately capitalize all the banks to keep

a safe buffer over and above the minimum norms of Basel III. It has, therefore been,

estimated how much capital will be required this year and in the next three years till FY

2019. If the internal profit generation which is going to be available to PSBs (based on the

estimate of average profit of the last three years), the capital requirement of extra capital

for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore. This estimate is

based on credit growth rate of 12% for the current year and 12 to 15% for the next three

years depending on the size of the bank and their growth ability. We are also presuming

that the emphasis on PSBs financing will reduce over the years by development of vibrant

corporate debt market and by greater participation of Private Sector Banks.

D) (a) De-stressing PSBs

The infrastructure sector and core sector have been the major recipient of PSBs’ funding

during the past decades. But due to several factors, projects are increasingly stalled/

stressed thus leading to NPA burden on banks. In a recent review, problems causing stress

in the power, steel and road sectors were examined. It was observed that the major

reasons affecting these projects were delay in obtaining permits / approvals from various

governmental and regulatory agencies, and land acquisition, delaying Commercial

Operation Date (COD); lack of availability of fuel, both coal and gas; cancellation of coal

blocks; closure of Iron Ore mines affecting project viability; lack of transmission capacity;

limited off-take of power by Discoms given their reducing purchasing capacity; funding

gap faced by limited capacity of promoters to raise additional equity and reluctance on

part of banks to increase their exposure given the high leverage ratio; inability of banks to

restructure projects even when found viable due to regulatory constraints. In case of steel

sector the prevailing market conditions, viz. global over-capacity coupled with reduction

in demand led to substantial reduction in global prices, and softening in domestic prices

added to the woes.

A meeting was held on 28th April, 2015 at Mumbai first with all the banks and concerned

Ministries to understand the problems for each sector. Subsequently, meetings were held

with project promoters of steel, power and road sectors at various levels to understand

further the pain points of each and every sector. Some of the actions proposed / undertaken

after these meetings are as follows:- (i) Project Monitoring Group (Cab. Sectt.) / Respective

Ministries will pursue with concerned agencies to facilitate issue of pending approval/

permits expeditiously. (ii) Pending policy decisions to facilitate project implementation/

operation would be taken up by respective Ministries/Departments. (iii)Ministry of Coal/PNG

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BANKING SECTOR

will evolve policies to address long-term availability of fuel for these projects. (iv) Respective

Discoms will be provided hand-holding towards enabling early reforms. (v) Promoters will

be asked to bring in additional equity in an attempt to address the worsening leverage

ratio of these projects. Wherever the promoters are unable to meet this requirement, the

Banks would consider viable options for substitution or taking over management control.

(vi) The possibility of changing the extant duty regime without adversely impacting the

downstream user industry would be considered by the Government. The decision to

increase import duty on steel has already been taken. (vii) RBI has been requested to

consider the proposal of the Banks for granting further flexibility in restructuring of existing

loans wherever the Banks find viability.

D) (b) Strengthening Risk Control measures and NPA Disclosures

Besides the recovery efforts under the DRT & SARFASI mechanism the fol owing additional

steps have been taken to address the issue of NPAs:

i. RBI has released guidelines dated 30 January, 2014 for “Early Recognition of

Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders:

Framework for Revitalizing Distressed Assets in the Economy” suggesting various

steps for quicker recognition and resolution of stressed assets:

Ø Creation of a Central Repository of Information on Large Credits (CRILC)

by RBI to collect, store, and disseminate credit data to banks on credit

exposures of Rs. 5 crore and above,

Ø Formation of Joint Lenders Forum (JLF), Corrective Action Plan (CAP), and

sale of assets – The Framework outlines formation of JLF and corrective

action plan that will incentivise early identification of problem cases, timely

restructuring of accounts which are considered to be viable, and taking

prompt steps by banks for recovery or sale of unviable accounts

ii.

Flexible Structuring of Loan-Term Project Loans to Infrastructure and Core

Industries – RBI issued guidelines on July 15, 2014 and December 15, 2014:

Long-term financing for infrastructure has been a major constraint in encouraging

larger private sector participation in this sector. On the asset side, banks will

be encouraged to extend long term loans to infrastructure sector with flexible

structuring to absorb potential adverse contingencies, (also known as the 5/25

structure).

ii . Wilful Default/Non-Cooperative Borrowers:

Ø RBI has now came out with new category of borrower cal ed Non-

Cooperative borrower. A non-cooperative borrower is a borrower who does

SECTION 3 – LEGAL FRAMEWORK

33

not provide information on its finances to the banks. Banks will have to do

higher provisioning if they give fresh loan to such a borrower.

Ø Fresh exposure to a borrower reported as non-cooperative will necessitate

higher provisioning. Banks/FIs are required to make higher provisioning as

applicable to substandard assets in respect of new loans sanctioned to

such borrowers as also new loans sanctioned to any other company that

has on its board of directors any of the whole time directors/promoters of

a non-cooperative borrowing company or any firm in which such a non-

cooperative borrower is in charge of management of the affairs.

iv. Asset Reconstruction Companies:

Taking further steps in the area, RBI has tightened the norms for Asset Reconstruction

Companies (ARCs), vide guidelines dated August 5, 2014, where the minimum

investment in Security Receipts should be 15% which was earlier 5%. This step

will increase the cash stake of ARCs in the assets purchased by them. Further,

by having more cash up front, the banks will have better incentive to clean their

balance sheet.

v. Establishment of six New DRTs:

Government has decided to establish six new Debt Recovery Tribunals (DRT) (at

Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri, Hyderabad) to speed up

the recovery of bad loans of the banking sector

E) Empowerment:

The Government has issued a circular that there will be no interference from the

Government, hence the Banks are encouraged to take their decision independently

keeping the commercial interest of the organization in mind. A cleaner distinction between

interference and intervention has been made. With autonomy comes accountability,

accordingly Banks have been asked to build robust Grievances Redressal Mechanism

for customers as well as staff so that concerns of the affected are addressed effectively

in time bound manner. The Government intends to provide greater flexibility in hiring

manpower to Banks. The Government is committed to provide required professionals as

NoDs to the Board so that well-informed and well-discussed decisions are taken.

F) Framework of Accountability:

The present system for the measurement of bank’s performance was a system called

SoI- Statement of Intent. Based on certain criteria decided by Ministry of Finance, the

banks used to come up with their annual target figures which was discussed between

the Ministry and banks and finalized. The entire exercise took very long and sometimes

34

BANKING SECTOR

the targets for banks used to be finalized only towards the end of the year which is not a

desirable thing to do. There are two changes we are making in this:

· A new framework of Key Performance Indicators (KPIs) to be measured for

performance of PSBs is being announced. It is divided into four sections totaling

up to 100 marks. 25 marks each are al otted to indicators relating to efficiency

of capital use and diversification of business/processes and 15 marks each are

al otted for specific indicators under the category of NPA management and

financial inclusion. The total marks to be allotted for quantifiable, measurable

criteria is 80.

· The remaining 20 marks are reserved for measurement of qualitative criteria

which includes strategic initiatives taken to improve asset quality, efforts made

to conserve capital, HR initiatives and improvement in external credit rating.

The qualitative performance would be assessed based on a presentation to be

made by banks to a committee chaired by Secretary, Department of Financial

Services.

The new framework for KPIs is in the docket

Operating performance evaluated through the KPI framework will be linked to the

performance bonus to be paid to the MD & CEOs of banks by the Government.

(a) The quantum of performance bonus is also proposed to be revised shortly to

make it more attractive.

(b) DFS has issued a circular to PSBs laying down strict timelines for filing of complaints

of fraud cases with CBI as well as for monitoring each and every case almost on

a day-to-day basis.

(c) Streamlining vigilance process for quick action for major frauds including

connivance of staff. RBI has issued guidelines in May, 2015 to streamline the

framework for dealing with the loan frauds. Under the new guidelines, a timeframe

of six months, red flagging of accounts, constitution of a Risk Management

Group (RMG) in banks to monitor pre-sanction and disbursement, nodal officer

for filing complaints with CBI, provisioning in four quarters and creation of Central

Fraud Registry have been laid down. Department of Financial Services (DFS) has

directed PSBs to make CVO as the nodal officer for fraud exceeding Rs 50 crore,

in consortium lending the lead bank will file the FIR for al banks and CBI has

designated one officer for reviewing and monitoring progress of bank’s fraud

cases.

All commercial banks in India are regulated by the RBI under the Banking Regulation (BR)

SECTION 3 – LEGAL FRAMEWORK

35

Act of 1949. Additionally, all public sector banks are regulated by the Government of

India (GoI) under the Banking Companies (Acquisition and Transfer of Undertakings) Act,

1970; the Bank Nationalisation Act, 1980; and the State Bank of India Act, 1955. Section

51 of the amended BR Act explicitly states which portions of the BR Act apply to the PSBs,

most common thread across the omissions being complete removal or emaciation of RBI

powers on corporate governance at PSBs:

1. RBI cannot remove directors and management at PSBs as Section 36AA(1) of the

BR Act is not applicable to the PSBs.

2. Section 36ACA(1) of the BR Act that provides for supersession of a Bank Board is

also not applicable in the case of PSBs (and regional rural banks or RRBs) as they

are not banking companies registered under the Companies Act.

3. Section 10B(6) of the BR Act that provides for removal of the Chairman and

Managing Director (MD) of a banking company is also not applicable in the case

of PSBs.2

4. RBI cannot force a merger in the case of PSBs as per Section 45 of the BR Act.

5. PSB’s banking activity does not require license from RBI under Section 21 of the BR

Act; hence, RBI cannot revoke a license under Section 22(4) of the BR Act as it can

in the case of private sector banks.

6. RBI cannot trigger liquidation of PSBs as per Section 39 of the BR Act.

7. Furthermore, in a remarkable exception of sorts, in some cases there is duality of

Managing Director and the Chairman – they are the same – implying the MD is

primarily answerable only to himself or herself.

This legislative reality has in effect led to a deep fissure in the landscape of banking

regulatory terrain: a system of dual regulation, by the Finance Ministry in addition to RBI.3

I will now take a few minutes to explain why this fissure or the fault line is bound to lead to

tremors such as the most recent fraud.

Temptation to engage in fraud at the level of employee or employees is always present,

in banks (or in corporations), be it in public sector or private sector. The question then

is whether there is adequate deterrence faced by employees from undertaking frauds

and enough incentives for management to put in place preventive measures to pre-

empt frauds. In the case of banks, three potentially powerful mechanisms could induce

discipline against frauds:

· Investigative/vigilance/legal deterrence : Criminal investigation of frauds and

attach penalties can serve as an effective deterrence if reporting and investigation

36

BANKING SECTOR

are expedient and penalties are adequately severe relative to the gains from

fraudulent activity.

· Market discipline : Fraudulent activity can be a net loss to the bottom-line; in this

case, bank investors would impose deterrence, e.g., uninsured creditors might “run”

on the bank inducing liquidity problems, or shareholders might “exit”, effectively

raising the cost of capital and inducing solvency questions. In anticipation of such

disruptive outcomes that might cause loss of control, management and board

members may put in place governance mechanisms to prevent or reduce the

incidence of fraud and/or hold larger buffers in the capital structure to bear losses

when fraud materializes.

· Regulatory discipline : Banks in most parts of the world, however, have a

significant portion of deposit funding that is insured, and since banks serve critical

payments and settlements function, they are often too big and two many to fail.

Hence, a part of the market discipline is weakened as a trade off with financial

stability and is substituted by delegation of supervisory and regulatory powers to

a banking regulator. Detection and punishment by the regulator then need to be

effective to discipline fraud.

How do these mechanisms work in case of private and public sector banks in India?

Investigative and formal enforcement process takes in our country, perhaps for the right

reasons, a fair bit of time. Indeed, RBI data on banking frauds suggests that only a handful

of cases over the past five years have had closure, and cases of substantive economic

significance remain open. As a result, the overall enforcement mechanism – at least until

now – is not perceived to be a major deterrent to frauds relative to economic gains from

fraud.

It is fair to say that in case of private sector banks, the real deterrence arises from

market and regulatory discipline, and their confluence. A private bank CEO’s primary

concern is whether s/he will be able to raise capital when the need arises or even

whether she/he wil stil be running the bank the next day. The point is that they could

be readily cautioned through their Boards and even replaced by the RBI in case of

large or persistent irregularities. Further, a private bank failing to meet bank solvency

standards and under RBI’s “prompt corrective action” (PCA) would find it hard to raise

capital, whereby it would need to put the house in order at swift notice so it can raise

funding from markets and get back to the growth path. In turn, there are incentives to

invest in governance, so as to limit frauds and regulatory violations, and to respond

with alacrity when such incidents do arise.

In contrast, the market discipline mechanism for public sector banks is appreciably weaker

SECTION 3 – LEGAL FRAMEWORK

37

compared to that at private banks. There is implicitly a stronger perceived sovereign

guarantee for all creditors of PSBs, and the principal shareholder – the Government –

has not so far been interested in fundamentally modifying the ownership structure.

From an economic standpoint, this weakened market discipline should imply that the

Government would prefer stronger regulatory discipline of these banks, not weaker.

However, as I explained above at length, and perhaps since the original idea behind

bank nationalization was complete Government control over credit allocation to the

economy, the situation in India is exactly the reverse: RBI’s regulatory powers over PSBs are

weaker than those over the private sector banks.

The BR Act exemptions for PSBs mean that the one agency – the regulatory – that can

respond relatively quickly against banking frauds or irregularities cannot take effective

action. Hence, for example, MDs at PSBs find it comfortable to tell media that business will

be as usual for them under RBI’s Prompt Corrective Action framework as even if they do

not meet the stipulated restrictions of the framework, the ultimate authority to give them

for is with the Government and not with the RBI.

It is not entirely surprising that there has been a recurring theme in report after report on

financial sector reforms in the country that has suggested strengthening of PSB governance

through improvement in top management and Board Members appointments; or,

ownership neutrality in banking regulatory powers; or improving market discipline by

considering a variety of diverse ownership structures.

Will we let another opportunity to catalyse fundamental reform at PSBs pass by?

It is fully transparent what needs to be done. From the RBI’s standpoint, legislative changes

to the BR Act that make our banking regulatory powers ful y ownership neutral – not

piecemeal, but fully – is a minimum requirement. It might also be the most readily feasible

of these options.

3.4 EMERGING REGULATORY AND SUPERVISORY ISSUES IN INDIA

FinTech has significant implications for the entire financial system in India. The multiplicity of

firms and a mosaic of business models complicate the classification of the various types

of activities, products and transactions covered under the FinTech spectrum. Though the

western world has been using the term ‘FinTech’ for some time, it has only recently become

a buzzword in India. Notwithstanding this, FinTech has, since quite some time, gathered

momentum in the country. However, as of now, the FinTech risks are being looked at

more in terms of what is associated with the traditional IT systems, such as cyber security

risks. While the IT related risks are no doubt multiplying manifold under FinTech, the whole

gamut of issues under the FinTech umbrella, particularly those of regulatory concern,

have to be responded to on priority. It is, therefore, necessary to examine these issues and

38

BANKING SECTOR

outline the contours of an appropriate regulatory strategy. However, FinTech treads across

several activities that are within the scope of different financial sector regulators.

RBI issued a consultation paper on P2P lending in April 2016. Some of the issues raised in

the consultation paper are as under:

• Regulations may also be perceived as too stringent, thus stifling the growth of an

innovative, efficient and accessible avenue for borrowers who either do not have

access to formal financial channels or are denied loans by them.

• The market for P2P lending is currently in a nascent stage and they neither pose

an immediate systemic risk nor any significant impact on monetary policy

transmission mechanism.

• In its nascent stage, this industry has the potential to disrupt the financial sector

and throw surprises. A sound regulatory framework will prevent such surprises.

• P2P lending promotes alternative forms of finance, where formal finance is unable

to reach and also has the potential to soften the lending rates as a P2P Lending

result of lower operational costs and enhanced competition with the traditional

lending channels.

• If the sector is left unregulated altogether, there is the risk of unhealthy

practices being adopted by one or more players, which may have deleterious

consequences.

It has been proposed in the consultation paper to bring the P2P lending platforms under

the purview of Reserve Bank’s regulation by notifying P2P platforms as NBFCs.

Reg Tech

Reg Tech is a sub-set of FinTech that focuses on technologies that facilitate the delivery of

regulatory requirements more efficiently and effectively than existing capabilities. In July

2015 the FCA issued a call for input entitled “Supporting the development and adoption

of Reg Tech”. Some of the key Reg Tech processes and their benefits are as under:

· Alternative reporting methods : Technology that al ows data to be provided (or

taken) in a different way.

· Shared utilities : Technology that allows firms to share services via the cloud and/

or online platforms.

· Semantic tech and data point models : Technology that converts regulatory text

into a programming language.

SECTION 3 – LEGAL FRAMEWORK

39

· Shared data ontology : A formal naming and definition of the types, properties,

and interrelationships of entities.

· Robo-Handbook : Interactive echnology that allows firms to understand the

impact of regulations on their systems and processes.

· Big data analytics : Advanced analytics solutions that can interpret vast amounts

of structured and unstructured data that could be stored in ‘data lakes’ (storage

repositories).

· Risk and compliance monitoring : Technology that allows an always-on, non-

invasive surveillance of transactions, behaviour and communications.

· Inbuilt compliance : Regulatory requirements can be coded into automated

rules which are applied when relevant.

· System monitoring and visualization : Technology that captures and traces all

messages created by systems and their interactions.

SECTION 4

CONTRIBUTION OF COMPANY SECRETARY

4.1 INTRODUCTION

.During the last decade rapid innovations in financial markets, globalization & deregulation

have not only changed the functioning of the banks beyond recognition but in the process

banks are now exposed to various types of risks and their activities have become more

complex. It is not always possible for the banks to meet the demands of the new chal enges

from their internal managerial resources. Due to the specialized legal and technical nature of

the requirements, the banks are seeking assistance from many outside areas for professional

services. The Company Secretaries (CS) having first hand experience in handling legal,

regulatory and accounting matters can play a vital role in assisting the banks in managing

their affairs more effectively, and providing results in an efficient manner.

Company Secretary in Practice with their legal orientation can lend their professional

assistance in legal and also in Investor Management, Stock Exchange and other

Secretarial Compliances. All banks and financial institutions should therefore consider

appointing qualified Company Secretary as the (i) Secretary to the Board and (ii) As a

Compliance Officer for monitoring and reporting compliance with various regulatory /

accounting requirements.

4.2 NEW AREAS OF PROFESSIONAL SUPPORT

Under the Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 a Practicing Company Secretaries can lend various services as:

Ø Incorporation and monitoring secretarial compliances of Securitization and

Reconstruction Companies of the Banks and Financial Institutions.

Ø Compliances of various R.B.I. formalities for such Securitisation and Reconstruction

Companies.

Ø Can assist in debt recovery and enforcement of security interest by representing

the Banks and Financial Institutions before the Debt Recovery Tribunal and its

Appellate tribunal.

40

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

41

Ø Can be appointed to manage secured assets as third party intermediaries and

act on behalf of Securitisation and Reconstruction Companies.

Ø To act as a authorized representative before the Central Registry proposed to

be set up under the new securatization Act for the purpose of registration of

transaction of Securatization & Reconstruction of financial assets & creation of

security interest.

Ø Legal & Secretarial Compliance Report of assisted Companies of various laws

applicable to them. This is most suitable in cases where banks & Financial Institution

have appointed their nominee Director on the board of assisted Companies

Ø Spot Audit conducted generally in case of large advances for verifying

implementation on part of Borrower of compliance of terms & conditions of

availing Loan facility.

Ø Certification with respect to insurance of secured assets.

Ø Assistance in project financing, Merchant banking activities & raising of funds

through public deposits & from Capital & Money market and related activities like

listing & delisting of securities of these institutions.

Ø In Management & Monitoring of Risk of exposures both in credit & investment

by the banks with special reference to managing Investment Portfolio in Banks &

Financial Institutions, review of internal control systems and the adequacy of the

risk management process and upgradation thereof and ensuring compliance

with the statutory/ regulatory framework.

Ø Assistance in consortium/ Institutional lending; Venture Capital funding; In Loan

Syndication services and also managing and giving advisory services in mandates

issued to Banks & Financial Institutions.

Ø Assisting Banks & Financial Institutions in their Corporate Restructuring.

Ø Assist in Depository activities of Banks & Financial Institutions.

Ø Appearance as an authorized representative before Regulatory Authorities like

Central Government, Company Law Board, proposed National Company Law

Tribunal & Appellate Tribunal, MRTP Commission, Consumer Forums, Securities

Appellate Tribunal, BIFR & DRT on behalf of the banks and financial institutions.

Ø In Management, control & elimination of Non Performing Assets (NPA’s). The large

portion of NPA’s is largely accounted from the corporate sector.

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BANKING SECTOR

4.3 DEVELOPMENT OF GOOD GOVERNANCE PRACTICES

As transparency and openness is the essence of corporate governance and reporting/

disclosures to the board, public and shareholders has a significant place. Banks have to

comply with the directions given to it in writing under sections relating to banking policy

and should not be managed in a manner detrimental to the interests of its depositors.

Thus Company Secretaries have a major role to play in this regard in assisting the Board

not only in the agenda items but also guiding them regarding various provisions of the

Companies Act, 2013, obligations/liabilities of directors under various Acts and assisting

them in normal course of board meetings. Secretary to the Board is also an important

functionary and more important for Corporate Governance. The Consultative Group of

Directors of Banks/financial institutions set up by the RBI under the chairmanship of Dr. A.

S. Ganguly has also recognised the critical role the CS can play in implementing good

governance in banks. Thus Company Secretaries can play a major role in the following

areas in the banking sector:

· Compliance of banking laws

· Ensuring Corporate Governance Practices

· Suspension of Business And Winding up of Banking Companies

· Act as a liquidators

· Procedure for amalgamation of banking companies.

· Compromise arrangement between banking company and creditors.

· Prepare scheme of reconstitution or amalgamation

· Public examination of directors and auditors.

· Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act (SARFAESI Act )

· Risk Management

· Securities Market

· Documentation Audit

· Stock Audit

· Concurrent Audit

· Internal Audit

Ø Bank Investment

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

43

Ø Reconciliation of Inter Branch Accounts

Ø Borrowings from Other Banks

Ø Fees and Travelling Expenses of Employees

Ø Renewal of Credit Limit

· Revenue Audit

Ø Interest Charge on Advances

Ø Cash Credit/Over Draft

Ø Interest Paid on Deposits

Ø Bil s Purchased

Ø Expenses

Ø Income From Investment

CS is well recognised as Governance Professionals and are most apt to certify regarding

governance standards being followed at the company. The Company Secretary are

widely recognized as compliance officers and have a reputation of acting as watchdog

to ensure compliance of various laws.

The banks are already recruiting Chartered Accountants, Engineers, and various other

professionals. These professionals are being utilized not just for internal bank related

functions, but also to ensure that al is well with the banks customers and that the public

money is safe in the hands of borrowers. With the greater recognition about importance of

Governance, the bank should seriously contemplate about recruiting Company Secretary

which will help the bank ensure that best governance standards are being followed at the

end of its corporate clients and as a result not only benefit the bank but will also benefit

the economy as whole.

It is also high time that the Bank considers establishing a specialized cadre and starts

recruiting a Company Secretary and assigning them specialised work to ensure that the

Governance standards of its Corporate Clients along with those of the bank complying

with the various laws applicable on them.

4.4 FUNCTIONS OF CS IN EMPLOYMENT

As per SBI ADVERTISEMENT NO. CRPD/CON/VPCS/2015-16/08, regarding recruitment of vice

president - compliance (Company Secretary)

Roles and Responsibilities for Vice President – Compliance (Company Secretary)

44

BANKING SECTOR

· Ensuring compliance of various Regulations of SEBI Listing Regulations, and related

RBI/GOI provisions/Regulations and SBI Act/ Regulations.

· Ensuring conformity with the regulatory provisions applicable to SBI in letter and

spirit.

· Coordination with and reporting to the SEBI, recognized stock exchange(s) and

depositories and compliance with rules, regulations and other directives of these

authorities.

· Ensuring that the correct procedures have been fol owed that would result in the

correctness, authenticity and comprehensiveness of the information, statements

and reports filed by SBI under SEBI Listing Regulations. Periodical back testing of

information.

· Monitoring emails of grievance redressal division as designated by SBI for the

purpose of registering complaints by investors.

· Submission of periodical returns/ information to Stock Exchanges as per statutory/

regulatory requirement.

· Submission of necessary disclosures to Stock Exchanges in terms of Bank’s Fair

Disclosure Policy.

· Capital raising exercise i.e. Preferential Issue, QIP, and Rights issue, FPO, Bonds /

Debt Capital etc.

· Ensuring compliance under Code of Conduct, Insider Trading Regulations and

necessary reporting to Stock Exchanges.

· Compliance related to conduct of Annual General Meeting (AGM) of shareholders

of the bank.

· Preparation of probable questions & answers booklet for the AGM.

· Reply to the queries raised by shareholders during the proceedings of the AGM.

· Compliance related to conduct of General Meeting for election of Shareholder

Directors.

· Compliance related to conduct of General Meetings for capital-raising, share-

split or any other related activity.

· Maintain minutes/proceedings of all General Meetings.

· Intimation to Stock Exchanges on various developments, received from other

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

45

departments of the bank, which are required to be reported to Stock Exchanges,

ensuring compliance with bank’s internal resources.

· Announcement of quarterly results to Stock Exchanges through laid down

procedure.

· Advise/consult in preparation/drafting of Corporate Governance and other

relevant sections of the Annual Report.

· Reconciliation of Share Capital Audit (Secretarial Audit) — reporting to Stock

Exchanges and putting up to the Chairman & ECCB.

· Payment of quarterly (RNS) charges to London Stock Exchange and Singapore

Stock Exchange, etc.

· Payment of Annual Listing Fee to all Stock Exchanges including London Stock

Exchange.

· Payment of Annual Custodial Fee to NSDL/ CDSL.

· Compliance of Corporate Governance Certificate after obtaining report from

various departments and reporting the same to Stock Exchanges.

· Submission of quarterly shareholding pattern to Stock Exchanges.

· Submission of other regulatory returns on quarterly basis.

· To obtain Corporate Governance Certificate from the Statutory Auditors.

· Reengineering of Compliance Function in SBI.

· Providing compliance support and clarifications to all departments in SBI, and to

other entities in group wherever required.

· Any other matter, as may be entrusted by the Bank from time to time.

4.5 FUNCTIONS OF CS IN PRACTICE

The Practicing Company Secretaries are already providing the following services to the

banks

Diligence report

Reserve Bank of India, looking to the needs of the industry has liberalized rules for

consortium lending a little more than a decade back. Multiple banking as a concept

had also started gaining ground at that time and many corporates opted for the multiple

banking route presumably due to the perceived rigidity of the consortium arrangement.

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BANKING SECTOR

Sadly, exchange of information between banks was minimal and resultantly unethical

borrowers were able to take advantage of the information asymmetry that prevailed.

The Central Vigilance Commission concerned at this development had attributed this

phenomena to lack of effective sharing of information among banks. A felt need, all

along has also been the requirement to have certification of statutory compliance by a

Company through a professional such as a Company Secretary/ Chartered Accountant/

Cost Accountant so that the lending banker gets the desired comfort.

The Reserve Bank of India vide its Circular No. DBOD NO. BP. BC. 46/ 08.12.001/2008-09

dated September 19, 2008 advised all the scheduled commercial Banks (excluding RRBs

and LABs) to obtain regular certification (DILIGENCE REPORT) by a professional, preferably

a Company Secretary, regarding compliance of various statutory prescriptions that are

in vogue, as per specimen given in the aforesaid notification. Further RBI vide its Circular

dated January 21, 2009 also advised all Primary Urban Co-operative Banks to obtain

Diligence Report. Subsequently the RBI vide its Circulars dated December 08, 2008 and

February 10, 2009 revised the format of Diligence Report for Scheduled Commercial

Banks and also for Primary Urban Co-operative Banks vide its Circular dated February 12,

2009.

Prior to disbursement of loan or giving of any financial facility

1. Due Diligence exercise comprising verification of documents like MOA; pre-

clearance exercise like search of ROC records after examination of company’s

statutory documents like minutes, books of account, tallying of internal & external

information and signature on public documents.

2. Assessment of Financial position of Company & their project & making of Due

Diligence/ Comfort Certificate for project appraisal/ financing.

3. Making search & preparation of Search report on charges on the assets of Company

& assessing & preparing certificate on borrowing powers of the Company & on

borrowing limits of the board of Directors of the borrowing company.

4. Assistance in drafting the Loan Documentations.

5. Certification of shares/ securities as pledged to bank as primary or collateral

security.

6. Certification of due incorporation of Company, present directors, shareholding

pattern, capital structures, duly maintenance of statutory records, scope of

business etc.

7. Reporting on the present activities and future plans of the borrower Company.

8. Filing & processing of documents for charge creation with Registrar of Companies.

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

47

9. Filing and processing of petitions under section 141 with the Company Law Board.

Documentation

It is one of the important aspects of credit management by Lending Institutions. It forms

the primary evidence of the nature of transaction between both the parties. It determines

the relationship between lending Institution and borrower Company. Properly executed

documents determine the extent of claims, which can be enforced by lending Institution

before Debt Recovery Tribunal & Appel ate Tribunal at time of enforcement of claims. Bank

& Financial Institution officials who are enjoined with this responsibility, besides being ful y conversant of facts also need to know the rules & regulations by which borrower Company is

governed, the law regarding execution of documents and other related aspects. However,

due to pressure of work, the process of documentations is treated in a routine manner and

the gaps or inadequacies in documentations come to light when the bank is required to file a

case against the bor ower. It is too late to rectify the position. Some important considerations

inter-alia while preparing & col ecting documents are:

· Status of the company

· Type of activities carried on by the borrower in the regulatory framework by which

it is governed.

· Constitution of management of the borrower company

· Nature, type of securities being charged, liability of guarantors & legal nature of

charges.

· Company Secretary in practice with their legal orientation and impetus can lend

their professional assistance in this area.

· NPA Management Proactively after disbursement of Loans:

Banks in India are presently bogged down with large volumes of Non Performing Assets

(NPAs) which is reportedly 10% of the aggregate loans. These NPAs have emerged over a

period of time and are weakening the capital structures of the banks. Management and

reduction of NPAs has to be attended on an urgent basis. With the Securitisation Act in

place, it will assist the banks for faster recovery of the existing NPAs. It is equally, if not more

important, to introduce proper systems and procedures for ensuring that future growth of

NPAs is restricted. As a corollary to this the banks would need to tighten their Credit Risks

Management systems which lies at the heart of NPA Management.

While there are various components of credit risks, one important aspect is fol ow up of the

loans after disbursement. After disbursement of loans, the following areas need attention

on an ongoing basis, and the same can be very ably taken care of by a Practicing

Company secretary.

48

BANKING SECTOR

1. Post Documentation Inspection/ Audit.

2. Ensuring compliance of covenants of loan agreement by the borrower by

periodical review.

3. Preparation & Review of legal/ secretarial compliance report by assisted Company

on periodical basis.

4. Compliance reporting for selected legal obligations like borrowing powers, fixed

deposit repayments, inter-corporate deposits/ borrowings/ unsecured loans/

deposits.

5. To verify & report compliance made by Company under Companies Act, 2013,

Rules & Regulations made thereunder and compliance of conditions imposed by

the bank while granting the loan facilities.

6. Provide opinions on various corporate events occurred at the borrower company,

like change of name, conversion, takeover, merger, etc.

In all these areas the CSP can provide professional assistance to the banks.

Scope of CS to work as Credit Counsel ors and Audit/certifying the working of Certified

Credit Counsellor (CCC) and Credit Counselling Institution (CCI)

Strategic Role of Credit Counsellors

Several National Missions like Start Up India, MUDRA, Stand Up India, Make in India, Clean

India and Digital India are aimed at evolving entrepreneurial India. Access to financial

and non financial services is to be made more effective and digital platforms have

potential to resolve these challenges. Digital lending is a gap which needs to be filled up.

SIDBI’s digital lending solutions comprising sidbi startup mitra (for developing startup eco

system), small B (knowledge hub), standup mitra (launched by Hon’ble PM for Stand-up

India loans to new entrepreneurs in SC/ST/Woman segment enabling setting up of 2.5 lakh

new enterprises between `10 lakh tò1 crore) & udyamimitra (access all enterprise loans;

MUDRA - uptò10 lakh, MSME loans- presently uptò2 crore) have potential to change

the lending landscape. However, a need has been felt to have a mechanism to link

potential entrepreneurs with these initiatives and provide handholding especially in the

field of credit and later on in related areas like skill, technology, marketing, etc.

Deepak Mohanty Committee, a committee constituted to study on medium term path

on financial inclusion, in its report of December 2015, had recommended as under:

“The Committee recommends exploring a system of professional credit intermediaries /

advisors for MSMEs, which could help bridge the information gap and thereby help banks

to make better credit decisions. The credit intermediaries / advisors could function in a

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

49

transparent manner for a fee and be regulated by the Reserve Bank”

Following the above recommendation, in the first Bi-Monthly Monetary Policy Statement

for FY 2016-17 on April 05, 2016 an announcement was made by Dr. Raghuram G. Rajan,

the then Governor as follows: “ The Reserve Bank will lay down a framework by September

2016 for accreditation of credit counsellors who can act as facilitators for entrepreneurs

to access the formal financial system with greater ease and flexibility. Credit counsellors

will also assist MSMEs in preparing project reports in a professional manner which would, in

turn, help banks make more informed credit decisions.”

Information asymmetry and the perception of high risk are two major constraints

on the flow of credit to the MSME sector. This can be addressed by permitting credit

intermediaries to act as facilitators and enablers to micro and small entrepreneurs, so that

they can access the formal financial system channel with greater ease and flexibility. The

credit intermediaries can assign part of this role, with adequate checks and balances,

to Small Business Advisors who may advise the entrepreneurs by (a) offering help in

preparing business proposals; (b) helping to prepare financial documents and financial

statements; (c) sharing information on suitable credit instruments available in the market

and (d) supporting with non–financial or semifinancial business decisions such as business

expansion plans.

They can also (i) recommend to the banks the business proposals of entrepreneurs; (i ) perform

preliminary credit appraisal on behalf of the banks and (i i) col ate additional supporting

information required by the banks/ credit institutions.

Table- 7: Envisaged Role of Credit Intermediaries

Area

Value addition

For borrowers

For lenders

Economies of

Collecting documents, Filing credit Collecting

documents,

scale

applications, Other administrative Formalising contracts, Other

tasks

administrative tasks

Lowering search

Searching products for borrowers, Establishing Links with clients.

and matching

Providing customers with price Distributing credit products,

costs

quotation

Promoting and advertising

lenders’ product

50

BANKING SECTOR

Alleviating

Suggesting suitable products, Direct

assessment

of

asymmetric

Cautioning about the risk involved creditworthiness,

Confirming

information

in specific products, Explaining whether

customers

meet

problems

contract term

credit-worthiness requirements

set by the lender

Alleviating moral

Monitoring lenders’ compliance Monitoring borrowers’ post

hazard concerns

with contract terms Assisting contractual

performance,

borrowers in filing consumer Collecting

borrowers’

complaints

repayments Recovering credit

from defaulting consumers

Source: Study on Credit Intermediaries in the Internal Market by Europe Economics, 2009

(and illustrated in Deepak Mohanty Committee Report).

Setting up Enterprises

At this stage, an aspirant looks forward to handholding services for shaping business

plans, project reports, work shed, subsidy information, build financial & enterprise

oriented skil s, applying for credit and establishing the enterprise. When he approaches

Financial Institutions or Bankers, he is sometimes unable to put across his thoughts.

Bankers, in turn, feel that they are unable to get a viable project in line with lending

parameters. Aspirants also face problems in obtaining application forms, adequate

loan, availability of handholding support for services (like preparation of detailed

project report, help in loan application filling, entrepreneurship development program,

financial training, mentoring, skill development, etc.). If they lodge loan requests

they expect timely response. They have resource scarcity (including time to invest by

running around) and look for a seamless experience in setting up an entrepreneurial

venture. Here an expert handholding and guidance shall enable it to approach Small

Finance Banks (SFBs), Non-Banking Financial Companies (NBFCs), Regional Rural Banks

(RRBs) and Banks for credit as also credit enhancement institutions such as rating and

guarantee companies.

Running operations and achieving Competitive Advantage

In this stage enterprise has to make decisive cal ing on expanding operations, nurturing

its employees/promoters skills, acquire state-of-art technologies and expand market

(local, regional, national or global). He has to orient the enterprise to sustainable agenda

where environment and social risk aspects are attended. All these endeavours lead to

investments and thus CCCs role comes into picture.

Consolidate and scale up

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

51

The entrepreneur needs to align its endeavours as per market expectations. They have to

take a call on scale up investments including diversification, modernizations, upgrading

its governance standards including HR, acquire/dispose technology and sometime

exit a sector and enter an evolving one. Here entrepreneur approaches banks, ARCs,

technology matchmaking companies and so on. Here role of industry associations also

emerge important. Initiatives like green financing, quality and technology upgradation,

handholding for growth & exit plans would continue to require the support of CCCs and

other handholding and/ or business service providers.

Roles and Responsibilities

The broad roles and responsibilities of CCC/CCI stakeholders are as under:-

· CCCs empanelled on portal shall undertake enterprise-level advisory services

(bankable proposals, bank linkages, post disbursement support) credit counselling;

link the potential entrepreneurs to lending institutions & subsidy disbursing agencies.

· CCC shall guide the aspirants for maintaining financial discipline, governance

standards and emerging tools/ areas of growth.

· CCCs shall endeavour to connect these entities to strategic service providers

such as marketing, HR, technology access and e-commerce, etc.

· CCCs shall abide by the guidelines, procedures, code of conduct and other

relevant documents hosted on the portal from time to time.

· Anyone involved in malpractices/ misappropriation, misconduct, misuse of CCC

status shall be liable for disqualification.

Duties and Responsibilities of CCC

1. General Responsibilities

· A Credit Counsel or shal act independently or as a representative of a Credit

Counselling Institution (CCI). Credit Counsellor shall assist the MSMEs in preparing

documentation etc of the project reports in a professional manner which would,

in turn, help banks make more informed credit decisions.

· A Credit Counsellor shall act in a fiduciary capacity towards its clients. He should

advise without any consideration for future work; in providing advice should avoid

conflicts with other assignments and he shall disclose conflicts of interests as and

when they arise and how he intends and plan to avoid it.

· A Credit Counsel or shall not receive any consideration by way of remuneration or

52

BANKING SECTOR

compensation or in any other form from any person other than the client being

advised; and except as is provided in the contract or as per agreed terms, in

respect of the underlying banking products or services for which advice is being

provided.

· A Credit Counsellor shal maintain an arm’s length relationship between its credit

counselling activity and other activities. Further, if they are also engaged in activities

other than Credit Counselling, it should be ensured that its Credit Counselling

services are clearly segregated from all its other activities to avoid any conflict of

interest.

· A Credit Counsellor shall not divulge any confidential information about its client,

which has come to its knowledge, without taking prior written consent of the client,

except where such disclosures are required to be made in compliance with any

law for the time being in force.

· The credit counsellor shal furnish to IRA the information and reports as may

be specified by IRA from time to time. It shall be the responsibility of the Credit

Counsellor to ensure that they comply with the certification and qualification

requirements as specified by the IRA at al times.

· The credit counsellor shal not assure to provide credit, as credit would be purely

a ‘commercial’ decision of the banks / financial institution concerned.

· The credit counsel ors have to protect the privacy of their clients. Therefore, in

case they share / disclose information about their clients to third parties without

the written consent of the borrowers then they would be liable for the legal

consequences thereof and / or disciplinary action by IRA as per the rules framed

by them in this regard.

· The credit counsel ors registered on portal shall provide their services to the

borrower irrespective of mode of submission of their loan application [i.e. on-line,

web-based, off-line (direct to bank branches in physical forms), etc.]

· If required, a Credit Counsellor shall maintain a record of the copies of project

reports and other documents that were assisted while helping the clients obtain

credit.

· The credit counsel ors shall also maintain a register or record containing the list of

MSME clients advised, the date of advice, nature of the advice, the products /

services for which advice was rendered and fee, if any, charged for such advice.

All records shall be maintained either in physical or electronic form and preserved

for a minimum period of five years from the date of submission.

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

53

2. Pre-disbursement

· Assist the borrower in completion of documentation (including KYC-related) and

filling up of the application form.

· Suggest the most appropriate loan products from banks and financial institutions

and other banking services. Explain the terms and conditions involved in availing

these facilities.

· Assist the MSMEs in preparing project reports and business proposals in a

professional manner.

· Assist in preparing and completing the required documentation and financial

statements for availing loans from banks and financial institutions.

· Explain the meaning and importance of a credit score. Emphasize the importance

of being a responsible borrower and repaying loans in full and on time to maintain

a good credit history and instill confidence in banks and financial institutions.

· Create awareness about the costs of misusing a credit, help in its proper utilisation.

· Advise the entrepreneur on the optimum quantum of credit to be availed

considering the overall repaying capacity and projected cash flows. Extend

professional advice in order to avoid the borrower from seeking under / over credit

from the banking system.

3. Post-disbursement

· Advice on preparation of financial statements, maintaining proper books of

accounts, cash flow management and further borrowing as business scales up.

· Assist through debt counsel ing and extend help for preparing a Debt Management

Plan (DMP) to address the problems in repayment and to prevent default and

foreclosure.

· Assist in and cooperatve with the Grievance Redressal.

4. Others

· The CCCs are to carry out their assigned jobs with utmost care, devotion,

prudence, diligence and with the highest degree of integrity.

· Shall identify aspirant entrepreneurs for loan assistance. The selection by the

CCCs shall be based on aspirant’s credentials & credit needs for their genuine

requirements.

· Persuade aspirants to register online on the portal. If they are in areas which are

having E access issues, offline process can be followed.

54

BANKING SECTOR

· Make them ready through sensitisation as how to approach banks and render

handholding.

· CCCs shall undertake risk profiling of an entrepreneur and enterprise as also

techno economic mapping for the proposed venture. (vi) Help prepare/collect

backup documents to enable the applicant to submit loan application online/

offline. Shal peruse and validate the proposal before it is lodged.

· The CCCs shall help the customers in furnishing information (including additional

information) in such form as required by the Bank considering the loan support.

· Shall create awareness about the products and services being offered by banks

and FIs and educate and advise the customers on debt discipline.

· All MSME clients served by CCCs has to be updated on the portal for performance

evaluation.

Grievance Redressal

· Endeavour would be made to make the grievance redressal machinery

automated through portal by (i) Any grievances pertaining to services rendered

need to be resolved first between the CCC and loan aspirant. (ii) If the same is

not resolved then complaints can be scaled up to identified Grievance Redressal

Officer (GRO). (iii) If the same is not resolved at GRO level, it is to be referred to

the inter institutional group or committee or any other identified authority/agency

prescribed.

· The name and contact number of designated Grievance Redressal Officer would

be made known and widely publicized. The designated officer should ensure that

genuine grievances are redressed promptly. The grievance redressal procedure

and the time frame fixed for responding to the complaints would be placed on

the portal.

Monitoring and Evaluation

· CCC services shall be monitored online through the portal. Even if a service is

rendered for offline proposal, the particulars shall have to be fed by CCC on the

portal and a system of competition/ confirmation/ grading of services shall be

introduced.

· In order to incentivise those who are efficient/responsive, portal shall have

colouring system (Green for excellent CCCs, Orange for Moderate and Red for

not satisfactory). These colours shall be awarded based on already existing rating

system on the portal which grades on five counts (excel ent, very good, good,

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

55

satisfactory and unsatisfactory).

· There can be three levels

Ø Green – Serving more than 50 customers (for loans above Rs 5 lakh) and

getting more than 70% rating for good and above in a panel year.

Ø Orange - Serving more than 25 customers (for loans above Rs 5 lakh) and

getting more than 50% rating for satisfactory and above.

Ø Red- More than 60% awarding rating as unsatisfactory for the services

rendered.

Performance evaluation

Ø The evaluation exercise shall be conducted periodically, generally once in

a year.

Ø Those CCC rendering less than 25 customers or as decided/advised by IRA

and or getting 60% or more unsatisfactory status shall be considered for

delisting as CCC.

Ø The performance shal be tapped through the portal in terms of: o

Performance and tagging of satisfaction by recipient of service. o Complaints

received in a year.

NOTES

Extracts from RBI annual report 2016-17 (page 81)

Framework for rolling out Certifi ed Credit Counsellors (CCC) through SIDBI

Following the recommendation of the Committee on Medium-term Path on Financial

Inclusion to explore a system of professional credit intermediaries/advisors for MSMEs, the

Reserve Bank had announced in its fi rst bi-monthly monetary policy statement for 2016-

17 that a framework for accreditation of credit counsellors who can act as facilitators

for entrepreneurs to access the formal fi nancial system with greater ease and fl exibility

would be drawn up. Credit counsel ors were to also assist MSMEs in preparing project

reports in a professional manner which would, in turn, help banks make more informed

credit decisions. Accordingly, the Reserve Bank fi nalised a framework for accreditation

of credit counsellors and the same was provided to Small Industries Development Bank

of India (SIDBI) for rolling out the certifi ed credit counsellors scheme by acting as their

registering authority. SIDBI, after fi nalising the board-approved operational guidelines,

launched the scheme in July 2017.

Extracts from SIDBI annual report 2016-17 (page 12)

56

BANKING SECTOR

RBI has designated your Bank to be the registering authority for implementation of the

Certified Credit Counsellors (CCC) Scheme. As per the CCC Scheme launched on July 11,

2017, credit counsel ors will be appointed for the MSME ecosystem under a governance

framework. This is expected to ease access to credit, especially to micro enterprises. Your

Bank has roped in Indian Institute of Banking and Finance (I BF) for certification of the CCC

and Indian Banks’ Association (IBA) for coordination.

BFSI Sector Skill Council of India1

The BFSI Sector Skil Council of India is set up to bring leading organizations of the BFSI

industry together to create strategies and operational plans that will create standardized

skill requirements for the various job roles in the industry. The skil council will also accredit

wel equipped service providers who will partner to disseminate the training. The skill council

is seen by its stakeholders and partners as a nation-building activity with far reaching

implications for social development and empowerment through financial inclusion. Great

care is being taken to appropriately address the needs of the various industry verticals as

wel as the geographical regions of the country.

The Prime Minister’s Office has issued a mandate that by the year 2022, India should have

500 million skilled employees across various sectors. The Ministry of Finance has been

charged with overseeing this mandate and has established the National Skill Development

Corporation (NSDC) for this purpose. NSDC has been working with leading organizations

and associations from several sectors on setting up Sector Skill Councils to address the

need for skill development.

The BFSI Sector Skil Council of India is set up to bring leading organizations of the BFSI

industry together to create strategies and operational plans that will create standardized

skill requirements for the various job roles in the industry. The skil council will also accredit

wel -equipped service providers who will partner to disseminate the training. The skill council

is seen by its stakeholders and partners as a nation-building activity with far reaching

implications for social development and empowerment through financial inclusion. Great

care is being taken to appropriately address the needs of the various industry verticals as

wel as the geographical regions of the country.

NSDC has been in close contact with the BFSI Sector Skill Council as we partner to address

skill development needs in a large, highly segmented industry which is characterized

by accelerated growth. The progress of the BFSI industry has significant impact on the

progress of our nation and the issue of skill development is one that the industry holds as

being of great importance.

The BSE Institute Ltd. is a whol y owned subsidiary of BSE Limited and has been a pioneer

1. http://www.bfsissc.com/

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

57

in the field of Financial Education for the last twenty three years. The BSE Institute Ltd. has

taken the lead in setting up the BFSI Sector Skill Council of India with the active support of

the Confederation of Indian Industry (CI ).

· The BFSI Sector Skill Council of India has been set up with the aim of enhancing

skill development across the BFSI sector leading to greater efficiency, productivity

and sustained growth.

· It addresses the shortages in skill development, known as ‘skill gaps’; targets skill

development strategies accordingly and thereby helps in enhancement of skill

level of employees.

· The approach to this is by defining the standards for skill development for the

various job roles of the industry using a competency based framework.

The Indian economy has quite evidently been on a relatively high growth trajectory. It has

experienced an average growth rate of over 9% annually for the last three years. There

is no question that this surge has favorably impacted the Banking, Financial Services and

Insurance (BFSI) sector.

BFSI companies are now able to expand by introducing new products, leveraging

technology, deploying innovative strategies and ramping up distribution networks.

Greater levels of consumer awareness about various investment options have enlarged

the potential of this sector for catering to the various strata of society. Deregulation has

induced the banking sector in particular to explore new business avenues. A strong

regulatory and compliance framework in creating an investment friendly environment is

showing positive signs for the sector too.

The projected manpower requirement of the BFSI labor force by 2022 is 8.5 million - which is

an increase of about 4 - 4.5 million from where we stand today. Many leaders in the industry

agree that skill development is an issue that needs attention as we seek to grow as an industry

and forge ahead as critical part of the Indian economy. We are confident that with the

support of the industry and other service providers, we can collaborate successful y for this

nation-building endeavor and create significant progress in the area of skill development.

By partnering with the leaders of this industry, industry association bodies and various

service providers, the skill council is looking forward to working hard to take our industry

and therefore, our nation forward.

Data Protection Officer

The European Union General Data Protection Regulation (GDPR) has been made

applicable with effect from 25 May 2018. They will bring several improvements to deal

with data protection violations in the future.

58

BANKING SECTOR

Stronger rules on data protection mean

· people have more control over their personal data

· businesses benefit from a level playing field

The General Data Protection Regulation rules applicable from 25 May 2018, has brought

several improvements to deal with data protection violations in the future:

1) Clear Language- Privacy policies will have to be written in a clear, straightforward

language

2) Consent from User- The user will need to give an affirmative consent before his/her

data can be used by a business. Silence is no consent

3) More Transparency- Businesses will need to clearly inform when his/her data is

transferred outside the EU. Businesses will be able to col ect and process data only

for a well-defined purpose. They will have to inform the user about new purposes

for processing. Businesses will have to inform the user whether the decision is

automated and give him/her a possibility to contest it.

4) Stronger Rights- Businesses will have to inform users without delay in case of harmful

data breach. The user will be able to move his/her data, for instance to another

social media platform. The user will have the right to access and get a copy of

his/her data, a business has on him/her. Users will have a clearly defined “right to

be forgotten” (right to erasure), with clear safeguards.

5) Stronger Enforcement- The European Data Protection Board grouping all 28 data

protection authorities, will have the powers to provide guidance and interpretation

and adopt binding decisions in case several EU countries are concerned by the

same case. The 28 data protection authorities will have harmonised powers

and will be able to impose fines to businesses up to 20 million EUR or 4% of a

company’s worldwide turnover.

Article 37 of GDPR provides for appointment of Data Protection officer to ensure the

compliance of data protection laws and practices in the organisation. The text of Article

37 is reproduced below:

“The control er and the processor shall designate a data protection officer in any case

where:

· The processing is carried out by a public authority or body, except for courts

acting in their judicial capacity;

· The core activities of the controller or the processor consist of processing operations

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

59

which, by virtue of their nature, their scope and/or their purposes, require regular

and systematic monitoring of data subjects on a large scale; or

· The core activities of the controller or the processor consist of processing on a

large scale of special categories of data pursuant to Article 9 or personal data

relating to criminal convictions and offences referred to in Article 10.

· A group of undertakings may appoint a single data protection officer provided

that a data protection officer is easily accessible from each establishment.

· Where the controller or the processor is a public authority or body, a single data

protection officer may be designated for several such authorities or bodies, taking

account of their organisational structure and size.

· 1In cases other than those referred to in paragraph 1, the controller or processor or

associations and other bodies representing categories of controllers or processors

may or, where required by Union or Member State law shal , designate a data

protection officer. 2The data protection officer may act for such associations and

other bodies representing controllers or processors.

· The data protection officer shall be designated on the basis of professional

qualities and, in particular, expert knowledge of data protection law and practices

and the ability to fulfil the tasks referred to in Article 39.

· The data protection officer may be a staff member of the controller or processor,

or fulfil the tasks on the basis of a service contract.

· The controller or the processor shall publish the contact details of the data

protection officer and communicate them to the supervisory authority.”

Proactive NPA Management after disbursement of Loans

Banks in India are presently saddled with large volumes of Non Performing Assets (NPAs).

These NPAs have resulted over a period of time and reduction of NPAs has emerged as

the top priority for banks. With the Securitization Act in place, it wil assist the banks for

faster recovery of the existing NPAs. It is equally, if not more important, to introduce proper

systems and procedures for ensuring that future growth of NPAs is restricted. As a corol ary

to this the banks would need to tighten their Credit Risks Management systems which

lies at the heart of NPA Management. While there are various components of credit risks,

one important aspect is follow up of the loans after disbursement. After disbursement of

loans, the following areas need attention on an ongoing basis. 1. Post Documentation

Inspection/ Audit. 2. Ensuring compliance of covenants of loan agreement by the

borrower by periodical review. 3. Preparation & Review of legal/ secretarial compliance

report by the assisted Company on periodical basis. 4. Compliance reporting for select

legal obligations like borrowing powers, fixed deposit repayments, inter-corporate deposits/

60

BANKING SECTOR

borrowings/ unsecured loans/deposits. 5. Provide opinions on various corporate events of

the borrowing Company.

In all these areas the PCS can provide professional assistance to the banks.

Governance

As mentioned earlier, deregulation and volatility of financial markets have increased

competition among banks who are also exposed to number of risks and challenges.

The increasing market related approach require that banks follow good governance

processes from the Board level downwards. The company secretary both in employment

and in practice can assist the Boards and top management of the banks in establishing

good governance and ethical practices both in business development and administrative

matters. The Company Secretary can also play an effective role as two-way communicator

between the Board and senior executives of the banks. He can also assist the Audit

Committee of the Board in introducing proactive measures. The Consultative Group of

Directors of Banks/financial institutions set up by the RBI under the chairmanship of Dr

A S Ganguly has also recognized the critical role, the Company Secretary can play in

implementing good governance in banks.

Over a period of time with adequate support and sponsorship from industry organization

like IBA (Indian Bank Association) the following services may be possible to be rendered

by a PCS :

• Due Diligence exercise of the corporate customer/loanee to ensure secretarial/

legal compliance at regular intervals.

• Assessment of Financial position of Company/ project & making of Due Diligence/

Comfort Certificate for project appraisal/ financing.

• Making search at ROC & preparation of Search report on charges created on the

assets of Company issuing certificate on borrowing powers/limits of the Company.

O Assistance if any in the Loan Documentations.

• Certification of shares/ securities pledged to bank as primary or collateral security.

• Certifications of relevant net-worth and other relevant data of the borrowing

Company.

• Filing & processing of documents for charge creation with Registrar of Companies.

• Filing and processing of petitions under Section 141 of the Companies Act, 1956

with the Company Law Board / Central Government.

• Under the new Securitisation and Reconstruction of Financial Assets and

Enforcement of security interest Act, 2002 a Practicing Company Secretaries can

lend various services as:

SECTION 4 – CONTRIBUTION OF COMPANY SECRETARY

61

• Incorporation and monitoring secretarial compliances of Securitisation and

Reconstruction Companies of the Banks and Financial Institutions.

• Compliances of various RBI formalities for such Securitisation and

Reconstruction Companies.

• Can assist in debt recovery and enforcement of security interest by

representing the Banks and Financial Institutions before the Debt Recovery

Tribunal and its Appellate tribunal.

New Areas of Professional Support

CS Can be appointed to manage secured assets as third party intermediaries and act

on behalf of Securitisation and Reconstruction Companies. O To act as a authorised

representative before the Central Registry proposed to be set up under the new securitisation

Act for the purpose of registration of transaction of Securitisation & Reconstruction of

financial assets & creation of security interest.

Legal & Secretarial Compliance Report of assisted companies of various laws applicable to

them. This is most suitable in cases where Banks & Financial Institution have appointed their

nominee Director on the board of assisted companies. 2. Spot Audit conducted general y in

case of large advances for verifying implementation on part of Borrower of compliance of

terms & conditions of availing loan facility. 3. Certification with respect to insurance of secured

assets. 4. Assistance in compliance with regulations in respect of raising of funds, Capital and

Money market instruments and in listing/ delisting of securities. 5. Assistance in consortium/

Institutional lending; Venture Capital funding; Loan Syndication services and also managing

and giving advisory services in mandates issued to Banks & Financial Institutions. 6. Assisting

Banks & Financial Institutions in their Corporate Restructuring. 7. Assistance in Depository

activities of Banks & Financial Institutions. 8. Appearance as an authorised representative

before Regulatory Authorities like Central Government, Company Law Board, proposed

National Company Law Tribunal & Appel ate Tribunal, Competition Commission, Consumer

Forums, Securities Appel ate Tribunal, BIFR & DRT on behalf of the banks and financial institutions.

All these developments are bound to create a huge demand for professional data

protection officers. The Company Secretaries being a professional well versed in legal

and compliance domain, are most competent to cater this demand specially in banking

sector.

62

BANKING SECTOR

BIBLIOGRAPHY

References : Media Reports, Press releases, Reserve Bank of India, Press Information

Bureau, www.pmjdy.gov.in, Union Budget 2017-18

https://www.indianeconomy.net/splclassroom/what-is-self-help-group-shg-bank-linkage-

programme/

Document Outline

Contents

Banking Indusrty