Other important concepts

Base Rate: Banks are not allowed to lend below Base Rate w.e.f. 01.07.2010 except certain categories such as Differential Rate of Interest (DRI) advances, Loans to bank’s own employees, Loans to bank’s depositors against their own deposits, loans to tribals/physically challenged persons, Interest Subvention Schemes viz., Crop loans, Export credit and Restructured loans. The final lending rates include the Base Rate plus variable or product specific operating expenses, credit risk premium and tenor premium. However, Banks may charge interest at the rates prescribed under SHG schemes, National Schedule Tribes Finance and Development Corporation (NSTFDC) and National Handicapped Finance and Development Corporation (NHFDC) to the extent refinance is available. Banks are required to fix Base Rate duly taking Cost of Deposits / Funds, Negative carry in respect of CRR and SLR, Unallocated Overhead Costs and Average Return on Net Worth in to consideration.

Deregulation of SB Interest Rates: As per RBI guidelines banks are free to determine their savings bank deposit interest rate w.e.f 25.10.2011 subject to the following two conditions viz., First, each bank will have to offer a uniform interest rate on savings bank deposits up to Rs.1 lakh, irrespective of the amount in the account within this limit. Second, for savings bank deposits over 1 lakh, a bank may provide differential rates of interest, if it so chooses. However, there should not be any discrimination from customer to customer on interest rates for similar amount of deposit. Further, banks are free to determine their interest rates on NRE/NRO deposits w.e.f. 16.12.11. However, interest rates offered by banks on the said deposits should not be higher than those offered by them on comparable domestic rupee deposits. Banks are paying interest on SB accounts on Daily Products on half-yearly basis viz., September & March of every year. Though, the deregulation of interest is in vogue, at present all most all Public Sector Banks are paying 4% interest where as few Private Sector Banks are extending interest beyond 4% p.a. RBI has given discretion to the banks with regard to frequency of payment of SB interest. However, at present many banks are adopting interest credit to the depositor accounts once in half-year i.e. April & October.

Dynamic Provisioning: At present, banks generally make two types of provisions viz., general provisions on standard assets and specific provisions on non-performing assets (NPAs). The present provisioning framework does not have countercyclical or cycle smoothening elements. Though the RBI has been following a policy of countercyclical variation of standard asset provisioning rates, the methodology has been largely based on current available data and judgment, rather than on an analysis of credit cycles and loss history. Since the level of NPAs varies through the economic cycle, the resultant level of specific provisions also behaves cyclically. Consequently, lower provisioning during upturns, and higher provisioning during downturns have pro-cyclical effect on the real economy. However, few banks have started making floating provisions without any predetermined rules; many banks are away from the concept which has become difficult for inter-bank comparison. In the above backdrop, RBI propose to introduce dynamic provisioning framework for banks in India to address pro-cyclicality of capital and provisioning, after the financial crisis, efforts at international level are being made to introduce countercyclical capital and provisioning buffers.

Forensic Audit is defined as the application of accounting methods to the tracking and collection of forensic evidence, usually for investigation and prosecution of criminal acts such as embezzlement or fraud. It involves examination of legalities by blending the techniques of propriety, regularity and investigative and financial audits. The objective is to find out whether or not true business value has been reflected in the financial statements and in the course of examination to find whether any fraud has taken place. Forensic Auditors has a unique job because the responsibility involves the integration of accounting, auditing, and investigation skills. It involves thinking beyond the numbers and out of the box. It essentially presumes the existence of fake transactions. It requires a more proactive, skeptical approach in examining the books of accounts.

Branch Authorization Policy: The opening of branches by domestic scheduled commercial banks (other than RRBs) in Tier-1 centres (population of one lakh & above as per Census 2001) will continue to require prior permission of the Reserve Bank. While issuing such authorization, the Reserve Bank will continue to factor in, among others, whether at least 25 per cent of the total number of branches to be opened during a year is proposed to be opened in unbanked rural centres. However, domestic scheduled commercial banks are permitted to open branches at all centres other than Tier-1 without permission from RBI, subject to reporting. Government desires to have bank branches at all villags where the population is 10000 & above and also in the villages having population is 5000 & above and where there is no bank branch within a radial distance of 5 KMs by September 2012.

Rajiv Gandhi Equity Savings Scheme (RGESS) is a tax saving scheme announced in the Union Budget 2012-13 and the scheme is designed exclusively for the first time retail individual investors in securities market, whose gross total income for the year is less than or equal to Rs.10 lakh. The investor would get under Section 80CCG of the Income Tax Act, a 50% deduction of the amount so invested, up to a maximum investment of Rs.50000, from his/her taxable income for that year. The objective of the Scheme is to encourage the flow of savings and to improve the depth of domestic capital markets. This would help in promoting an ‘equity culture’ in India. The Scheme aims at widening the retail investor base in the Indian securities markets and also furthers the goal of financial stability and financial inclusion.

Swavalamban Scheme: The New Pension System (NPS) is aimed to inculcate the saving habit and to provide pension benefit to the citizens through systematic savings plan. Under this, the government has made a provision to pay an incentive of Rs.1000 per year (up to 2014) to every NPS account opened subject to the minimum contribution of Rs.1000 and maximum Rs.12000 per annum. The age of the subscriber should be between 18 to 60 years. The subscriber is required to invest minimum 40% accumulated savings to purchase a life annuity from any IRDA regulated insurance company, in case where he opts for exit at the age of 60. If the subscriber prefers to exit before 60 years, he is required to invest minimum 80% of accumulated savings in annuity policy. In an unfortunate event, the nominee receives 100% of the NPS pension wealth in lump sum. However, the exit would be subject to the overriding condition that the amount of pension wealth to be annuitized should be sufficient to yield a minimum amount of Rs.1000 per month. If not, the percentage of pension wealth to be annuitized would be increased so that the pension amount becomes Rs.1000 per month, failing which the entire pension wealth would be subject to annuitisation.

New Pension Scheme is introduced for Bank Employees in the year 2010 under which Bank employees are eligible for Defined Contributory Pension Scheme (DCPS). It is mandatory that all employees who have joined the service of the Bank or after 1st April 2010 enroll themselves as members of this scheme which entails obtaining of Permanent Retirement Account Number (PRAN) from NSDL who are the Central Record Keeping Agency. Under this scheme, the members shall contribute 10% of the Basic pay and Dearness Allowance towards the DCPS and the bank shall make a matching contribution in respect of these employees. The scheme is governed by Pension Fund Regulatory and Development Authority (PFDRA) and the funds are managed by approved fund managers from public and private sector with proven track record. Employees would be free to carry their PRANS to new employments or continue as individuals after change of employment status.

Aadhaar Project: The Unique Identification Authority of India (UIDAI) was established by Government of India with an objective to implement Multipurpose National Identity Card (UID Card) in India. It is aimed to eliminate duplicate/fake identities and to put hassle-free, cost effective verification/authentication system in place thereby to save considerable resources of various User Departments as well as beneficiaries at large. Central/State Governments and Public Sector Banks are acting as Registrars for AADHAAR project. The Registrar or its agents collect details of Demographic information and Biometric details such as Facial Image (Photo), Finger Prints (10) and iris scan of the applicant to establish individual’s uniqueness. De-duplication exercise ensures that nobody gets more than one number and in case a person already enrolled approaches the registrar, his biometric parameters will be run through the database and if matches his application will be rejected right away. It is a 12 digit identity code and will remain a permanent identifier. It gives a big push to the government’s financial inclusion agenda and provides strong foundation to deliver better services and improve the operational efficiency of the system. It is aimed to cover 60 crore enrollments by 2014.

Money Mules: An individual with bank account is recruited to receive cheque deposits or wire transfers and then transfer these funds to accounts held on behalf of another person or to other individuals is called Money Mules. The fraudsters adopt variety of methods including spam e-mails, advertisements on genuine recruitment web sites, social networking sites, instant messaging and advertisements in newspapers. Many times the address and contact details of such mules are found to be fake and making difficult for enforcement agencies to locate the account holder. RBI advised the banks to strictly adhere to the guidelines on KYC/AML/CFT to protect our customers from misuse by such fraudsters.

Core Banking Services (CBS): It is an integrated solution where entire data of branches is stored in a central server and all the transactions of the branches will be done through this server. All back office activities such as Interest calculations, Levying Service Charges, Parameter Setting / Updation, Generation of Reports / Returns, Providing MIS, Start of Day and End of Day operations are undertaken by the central server. The customer’s data can be accessed from various outlets at various geographical centers. It enables the bank to provide triple “A” services (Any Branch, Any Time, Any Where) to the customers through Multiple Delivery Channels viz., Branches, ATMs, Mobile, Lobby, Corporate Terminals, Kiosks and Internet Banking. It enabled the banks to introduce technology embedded value added products besides implementing Data Warehousing, Data Mining and Customer Relationship Management concepts. CBS is an opportunity to banks to improve customer service as well as operational efficiency of the banks. However, it is an imperative for banks to have a relook to the existing systems and procedures to suit the changed environment.

Unique Customer Identification Code (UCIC): The increasing complexity and of financial transactions necessitate that customers do not have multiple identities within a bank, across the banking/financial system. Government of India has proposed the introduction of UCIC for customers across different banks/financial institutions for setting up a Centralized KYC Registry. RBI advised the banks to initiate steps for allotting UCICs for their customers by providing them a relationship number. This enables the banks to identify customers, track the facilities availed, monitor the financial transactions in a holistic manner.

Internal Capital Adequacy Assessment Process (ICAAP): This is intended to ensure that the capital held by the Bank is commensurate with the Bank’s overall risk profile. The ICAAP takes into account effectiveness of Bank’s risk management system in identifying, assessing, measuring, monitoring and managing various risks. ICAAP comprises all of the Bank’s procedures and measures designed to ensure appropriate definition and measurement of risks and appropriate level of internal capital in relation to Bank’s risk profile.

International Financial Reporting Standards (IFRS): Convergence to IFRS will require significant alterations to financial accounting and reporting processes and systems. The potential benefits of an integrated global capital market regulated by a single world-wide financial reporting language would be long lasting and it is a big step towards improving the efficiency of international capital markets. Regulators will benefit from greater consistency and quality of information. It also enhances the communication of the Bank’s financial results and position together with other performance indicators to analysts, investors, customers as well as other stakeholders. It also benchmarks the entity against its global peer group gaining a broader and deeper understanding of its relative strengths by looking beyond the country and regional bench marks. It is proposed that the Corporates are to be moved to IFRS in a phased manner.

Banking Ombudsman (BO) Scheme – It cover redressal of grievances against deficiency in banking services viz., deposits, loans, debit/credit cards, remittances (DD/PO/ECS/NEFT/RTGS) etc. BO undertakes the cases where the value of dispute does not exceed Rs.10 lakhs. The complaints can be made in any form including online (email) and the same will be processed without any fee. The complainant is required to take up the matter with the concerned branch for redressal of the grievance and wait for 30 days and if not addressed he can approach the BO. He should not have filed a complaint before any other forum or court or consumer forum or arbitrator on the same subject matter and be pending when he approaches the B.O. On receipt of the complaint, notice will be sent to the bank advising the bank to settle the grievance within fifteen days from the date of receipt of the notice or else submit version and also attend a conciliation meeting at the office of the BO. If the grievance is not settled by conciliation, it will be taken up for passing an award. The complainant will have to accept award within fifteen days of receipt of the award. The time limit for implementation of award is 30 days from the date of such receipt of acceptance letter. However, Bank can approach Reviewing Authority (Deputy Governor RBI). Compensation for mental agony, reputation loss etc., will not be considered as per the provisions of the Scheme.

Adjusted Net Bank Credit (ANBC) denotes Net Bank Credit plus investments made by banks in non-SLR bonds held in HTM category. However, investments made by banks in the Recapitalization Bonds and Inter-bank exposures will not be taken into account for the purpose of priority sector lending targets/sub-targets.

Reverse Mortgage: The genesis of Reverse mortgage can be traced to developed countries where Silver Line segment (people above 65 years group) constitutes major chunk of population on account of higher standards of living, better access to health care and higher life expectancy. The ever-rising cost of living and health care has prompted Banks/Financial Institutions to introduce the Reverse Mortgage in the US, UK and Australia. It works like a traditional mortgage loan, but only in reverse direction. Under this borrower does not make regular payments to a lender; instead he receives payments from the lender. It supplements the income of the Senior Citizens, particularly to those whose pension or income is low. Instead of being dependent on their children/relatives for monetary support, this would be an ideal option for elderly people to continue with a graceful lifestyle. The borrower need not repay the loan during their life time and can also continue to live in their house during their life time. Thereafter, the legal heirs have the option to repay the bank loan and redeem the property. Otherwise, the bank will sell the property and liquidate the loan. The scheme is gaining momentum slowly.

Indian Rupee Symbol: After years of missing unique identity, India got a distinct symbol to distinguish from Pakistan, Nepal, Srilanka and Indonesia countries whose currencies are designated as Rupee or Rupiah which is similar to our currency i.e. Rupee. Now Indian rupee joined the select club of currencies such as the US Dollar, Euro, British Pound and Japanese Yen that have a clear distinguishing identity and it is considered as a step towards internationalization of Indian Rupee. Though the symbol is not be printed or embossed on currency notes or coins, it would be included in the Unicode Standard and major scripts of the world to ensure that it is easily displayed and printed in the electronic and print media. After incorporation in the global and Indian codes, the symbol would be used by all individuals and entities within and outside the country. The new symbol portrays the nation’s strength & stability, both politically and economically and acts as Brand Ambassador.

Rupay is the Indian domestic card payment network set up by National Payments Corporation of India (NPCI) at the behest of banks in India. Reserve Bank permitted to issue RuPay cards which are accepted for payment at all ATMs. The Logo is a coinage which indicates coming together of ‘Rupee’ and ‘Payment’ to announce the launch of a new world-class retail payment system in India. The orange and green arrows indicate a nation on the move and a service that matches its pace. The Indian colors connote that it’s deeply rooted in India. The color blue stands for tranquility and peace which is precisely the sense that people must get from the brand ‘RuPay’. The bold and unique typeface grants solidity and symbolizes a stable entity. Currently the merchant fee is significantly high ranging from 1 to 1.50% on account of inbuilt charges of VISA / Master and Banks. The Rupay system lowers the cost of the transactions for shops and enables them to adopt electronic mode of payments. In a way it reduces the overall transaction costs for the banks, merchants and nation as a whole. The other objective of Rupay is to develop appropriate products to meet the financial inclusion needs and to provide card payment service option to many banks with simplified norms. In the long run, it paves the way to migrate from cash transactions to electronic payments system in the country which will improve the efficiency in the entire eco system.

Whistle Blower Policy: In compliance with listing agreement relating to Corporate Governance, all banks are required to have a Whistle Blower Policy to enable the staff to inform the unethical behavior, actual or suspected fraud or violation of law or improper practice of the staff members of all cadres, direct to the Board of the Bank without informing their superiors. The employee shall make a written disclosure to the Audit Committee of the Bank in a closed/secured envelope along with supportive documents. The identity of the complainant will not be revealed. In case where the complainant is being victimized for filling a complaint, the complainant can approach CMD/ED for redressal. It provides protection to the Whistle Blowers from unfair termination/harassment from the superiors. Audit Committee of the Bank reviews the Whistle Blower mechanism at regular intervals.

Wilful Defaulters: As per RBI guidelines, a Wilful Defaulter would be deemed to have occurred, where the unit has defaulted in meeting its payment / repayment obligations to the lender even when it has capacity to honour the said obligations or where the unit has not utilized the finance for the specific purpose for which finance was availed of but has diverted the funds for other purposes or disposed of or removed the movable fixed assets or immovable property offered for the purpose of securing a term loan without the knowledge of the Bank/Lender. It covers all non performing borrowal accounts with aggregate outstanding balance (funded facilities and such non-funded facilities converted into funded facilities) of 25 lakhs & above. The classification of the borrower as Willful defaulter is vested with Committee at Head Office. However, the borrower will be given reasonable time (15 days) for making submission to the committee. Bank is required to submit the details of willful defaulters to RBI and CIBIL. RBI advised all Banks/Financial Institutions not to extend any additional credit facilities to the Wilful Defaulters and they are debarred from floating new ventures for a period of 5 years from the date RBI publication and also liable for criminal proceedings for breach of trust, cheating and wrong certification under IPC.

Right to Information Act 2005 – The act has come into effect from October 12, 2005. This Act is meant to give to the citizens of India access to information under control of public authorities to promote transparency and accountability in these organizations. However, this mechanism is meant for seeking information only and not for making complaints. Under this Act, Citizens of India will have the right to make the request for information in writing, clearly specifying the information sought. The application should accompany a fee of Rs.10/- either in cash or DD/PO. The application for request should give the contact details (postal address, telephone number, fax number, email address) so that the applicants can be contacted for clarifications or the information. All Public Sector Banks are covered under this act and they are required to furnish the information sought by the citizens of India. Branch Managers are designated as Central Assistant Public Information Officers (CAIPO) and they have to forward the requests received to the Zonal Managers concerned, who are designated as Central Public Information Officers (CPIO). The ultimate responsibility lies with CPIO to get the matter expedited within stipulated time of 30 days. While disposing off the request under RTI Act, CPIO is required to mention clearly the time limit of 30 days and address of the Appellate Authority to the complainant. The Appellate Authority is the Senior Central Public Information Officer, who will be one of the General Managers at Head Office.

Permanent Account Number (PAN): As per section 139 (4A) of Income Tax Act 1961, all individuals whose income exceeds the tax free limit and in case where the person carrying a business, the sales turnover or gross receipts exceeds 5 lakh in a year are required to have PAN and the same is to be quoted in all returns and correspondence with IT authorities. As per the extant guidelines, it is mandatory to furnish PAN number for all transactions viz., purchase/sale of immovable property of Rs.5 lakh and above, purchase/sale of motor vehicles (other than 2 wheeler), security transactions of above Rs.1 lakh, purchase/sale of shares/debentures/bonds of Rs.50000/- & more and bank transactions (cash) of Rs.50000/- & above and payment to hotels exceeding Rs.25000/- at any one time.

Shadow Banking is relatively a new concept and it refers to the Non Banking Financial Institutions that perform some banking functions. Shadow banking entities operate outside the regular banking system and yet engage in bank-like activities such as accepting funding with deposit-like characteristics, performing maturity and/or liquidity transformation and using direct or indirect financial leverage. These typically include, pension funds, investment banks, hedge funds, money market funds, finance, leasing and factoring companies, asset management companies etc. Shadow banking institutions are typically intermediaries between investors and borrowers. Shadow banking activities are useful part of the financial system and they channel resources towards specific needs more efficiently on account of increased specialization. These activities are exposed to similar financial risks as banks. Some of these risks can be systemic in nature due to the complexity of shadow banking entities and their crossjurisdictional reach and their links with the regular banking system. The regulators across the globe are now working in tandem to look into and understand the activities of the shadow banking system and bring them too under regulation so as to possibly prevent another global financial crisis in future.

Doorstep Banking: Extending Banking services like pick up of cash, instruments and delivery of cash etc., to Corporate Customers / Government Departments / PSUs / Individual Customers at their place through Employees / Agents is called Doorstep Banking. However, banks are not allowed to extend such services to Individual Customers. Cash collected from the customer should be acknowledged by issuing a receipt on behalf of the bank. Cash collected from the customer should be credited to the customer’s account on the same day or next working day, depending on the time of collection. Doorstep services should be offered only to KYC compliant customers and the charges should be prominently indicated on brochures. It is a win-win situation for both customers and banks.

One Person Company (OPC): In order to encourage unorganized proprietorship business entities to enter into organized corporate world, Companies Bill 2012 was passed. With introduction of OPC, a company can be started with one member and it is treated as Private Limited Company. The minimum share capital required is Rupees One Lakh. The promoter can appoint a nominee so that perpetual succession provision is ensured. OPC can be formed in three types viz., Company limited by shares, Company limited by guarantee and Unlimited company. OPCs are exempted from holding Annual General Meeting. Provisions relating to minimum board meeting, quorum is not applicable. In case OPC has more than one director, it shall conduct atleast one board meeting in each half-year and time gap between two meetings should be minimum 90 days. Relaxations and exemptions granted and benefits available will definitely encourage small and mid-size business to carryon business in corporate form.