Role of the Ministry of Micro, Small & Medium Enterprises

Role of the Ministry of Micro, Small & Medium Enterprises

The primary responsibility of promotion and development of micro and small enterprises lies with the State Governments. However, the Government of India, in recognition of the potential of these sectors in both creation of wealth and employment and of the need for a countrywide framework of policies and measures for their promotion and development, has always taken active interest in supplementing the efforts of the State governments in several ways. The Government of India set up the Small Industries Development Organization (SIDO) [now Office of the Development Commissioner (Micro, Small & Medium Enterprises)] in 1954, a public sector enterprise called the National Small Industries Corporation Limited (NSIC) in 1955, and enacted the Khadi and Village Industries Commission Act in 1956. Establishment of Khadi and Village Industries Commission (KVIC), Coir Board and Micro, Small & Medium Enterprises-Development Institutes [formerly known as Small Industries Service Institutes (SISIs)] in nearly every State followed.

Over the years, the Central Government has formulated policy packages for the promotion and development of the sector and has been also implementing a large number of schemes and programmes. The policies and programmes implemented by the Ministry span across different areas of operations of MSMEs, covering credit, marketing, technology, skill developement, infrastructure development, fiscal matters and legal/regulatory framework. These programmes are implemented through various organisations under the Ministry, commercial banks, Small Industries Development Bank of India (SIDBI) and the State/UT Government.

Besides, the Ministry runs three training institutes, namely, National Institute for Micro, Small and Medium Enterprises (NIMSME), Hyderabad (successor to the Central Industrial Extension Training

Institute), National Institute for Entrepreneurship and Small Business Development (NIESBUD), NOIDA, and Indian Institute of Entrepreneurship (IIE), Guwahati, with the objective of training and development of human resource relevant to small industries as also entrepreneurship. It has also supported in setting up a large number of entrepreneurship development institutes (EDI) in various States.

Office of the Development Commissioner (Micro, Small & Medium Enterprises)

The Office of the Development Commissioner (Micro, Small & Medium Enterprises) assists the Ministry in formulating, co-ordinating, implementing and monitoring different policies and programmes for the promotion and development of MSMEs in the country. In addition, it provides a comprehensive range of common facilities, technology support services, marketing assistance, etc. through its network of

30 Micro, Small and Medium Enterprises-Development Institutes (MSME-DIs); 28 Branch MSME-DIs; 4 MSME Testing Centres (MSME-TCs); 7 MSME-Testing Stations (MSME-TSs); 2 MSME-Training Institutes (MSME-TIs); and 1 MSME-Technology Development Center-Hand Tools (MSME-TDC-Hand Tools). The O/o DC (MSME) also operates a network of Tool Rooms and Technology Development Centres (including 2 Footwear Training Institutes) which are autonomous bodies registered as Societies under the Societies Act. The Office implements a number of schemes for the MSME sector, the details of which have been duly incorporated in the booklet.

Khadi & Village Industries Commission

The Khadi & Village Industries Commission (KVIC), established under the Khadi and Village Industries Commission Act, 1956 (61 of 1956), is a statutory organization engaged in promoting and developing khadi and village industries for providing employment opportunities in rural areas, thereby strengthening the rural economy. The Commission is headed by full time Chairman and consists of 10 part-time Members. The KVIC has been identified as one of the major organizations in the

decentralized sector for generating sustainable rural non-farm employment opportunities at a low per capita investment. This also helps in checking migration of rural population to urban areas in search of the employment opportunities.

The main functions of the KVIC are to plan, promote, organize and assist in implementation of the programmes/projects/schemes for generation of employment opportunities through development of khadi and village industries. Towards this end, it undertakes activities like skill improvement, transfer of technology, research & development, marketing, etc. KVIC co-ordinates its activities through State KVI boards, registered societies and cooperatives. It has under its aegis

a large number of industry-specific institutions spread in various parts of the country.

Coir Board

The Coir Board is a statutory body established under the Coir Board Industry Act, 1953 (No. 45 of 1953) for promoting overall development of the coir industry and improving the living conditions of the workers engaged in this traditional industry. The Coir Board consists of a full-time Chairman and 39 part-time Members. The activities of the Board for development of coir industries, inter-alia include undertaking scientific, technological and economic research and development activities; collecting statistics relating to exports and internal consumption of coir and coir products; developing new products and designs; organizing publicity for promotion of exports and internal sales; marketing of coir and coir products in India and abroad; preventing unfair competition between producers and exporters; assisting the establishment of units for manufacture of the products; promoting co-operative organization among producers of husks, coir fibre, coir yarn and manufactures of coir products; ensuring remunerative returns to producers and manufacturers, etc.

The Board has promoted two research institutes namely, Central Coir Research Institute (CCRI), Kalavoor, Alleppey, and Central Institute of Coir Technology (CICT), Bengalooru for undertaking research

activities on different aspects of coir industry which is one of the major agro based rural industries in the country. The two major strengths of the coir industry are it being export oriented and generating wealth out of the waste (coconut husk).

National Small Industries Corporation Limited (NSIC)

NSIC, established in 1955, is headed by Chairman-cum-Managing Director and managed by a Board of Directors.

The main function of the Corporation is to promote, aid and foster the growth of micro and small enterprises in the country, generally on commercial basis.

NSIC provides a variety of support services to micro and small enterprises catering to their different requirements in the areas of raw material procurement; product marketing; credit rating; acquisition of technologies; adoption of modern management practices, etc.

NSIC implements its various programmes and projects throughout the country through its 9 Zonal Offices, 39 Branch Offices, 12 Sub Offices, 5 Technical Services Centres, 3 Technical Services Extension Centres, 2 Software Technology Parks, 23 NSIC-Business Development Extension Offices and 1 Foreign Office.

Salient Features of Micro, Small &

Medium Enterprises Development

(MSMED) Act, 2006

Salient features of Micro, Small and Medium Enterprises Development Act, 2006 are as follows:

1. Classification of Enterprises

The earlier concept of ‘Industries’ has been changed to ‘Enterprises’.

Enterprises have been classified broadly into:

(i) Enterprises engaged in the manufacture/production of goods pertaining to any industry; and

(ii) Enterprises engaged in providing/rendering of services.

Manufacturing Enterprises have been defined in terms of investment in plant and machinery (excluding land & buildings) and further classified into:

- Micro Enterprises – investment up to Rs. 25 lakh.

- Small Enterprises – investment above Rs. 25 lakh and up to Rs. 5 crore

- Medium Enterprises – investment above Rs. 5 crore and up to Rs. 10 crore.

Service Enterprises have been defined in terms of their investment in equipment (excluding land & buildings) and further classified into:

- Micro Enterprises – investment up to Rs. 10 lakh.

- Small Enterprises – investment above Rs. 10 lakh and up to Rs. 2 crore.

- Medium Enterprises – investment above Rs. 2 crore and up to Rs. 5 crore.

2. Filing of Memoranda by MSMEs

INTERNATIONAL COMMERCIAL TERMS (INCOTERMS)

INTERNATIONALCOMMERCIAL TERMS (INCOTERMS)

The Incoterms 2010 rules

The Incoterms 2010 rules are standard sets of trading terms and conditions designed to assist traders when goods are sold and transported. INCOTERMS are generally used in both International trade and Domestic Trade . INCO terms are a series of international sales terms, published by International Chamber Of Commerce

(ICC) and widely used in international commercial transactions. These are accepted by governments, legal

authorities and practitioners worldwide for the interpretation of most commonly used terms in international

trade. This reduces or removes altogether, uncertainties arising from different interpretation of such terms

in different countries. They closely correspond to the U.N. Convention on contracts for the international

sale of goods. The first version of INCO terms was introduced in 1936. INCO terms 2010 (8th edition) were

published on Sept 27, 2010 and these came into effect wef Jan 1, 2011.

Main changes in  INCOTERMS 2010

1. Removal of 4 terms (DAF, DES, DEQ and

DDU) and introduction of 2 new terms (DAP - Delivered at Place and DAT - Delivered at

Terminal). As a result, there are a total of 11

terms instead of 13 (2 additions, DAP and DAT and 4 deletions, DAF, DDU, DEQ and DES).

2. Creation of 2 classes of INCOTERMS - (1)

rules for any mode or modes of transport and (2) rules for sea and inland waterway [INCOTERMS 2000

had 4 categories namely E (covering departure), F (covering main carriage unpaid), C (covering main carriage paid) and D (covering arrival)

Each Incoterms rule specifies:

*the obligations of each party (e.g. who is responsible for services such as transport; import and export clearance etc)

*the point in the journey where risk transfers from the seller to the buyer

So by agreeing on an Incoterms rule and incorporating it into the sales contract, the buyer and seller can achieve a precise understanding of what each party is obliged to do, and where responsibility lies in event of loss, damage or other mishap.

The Incoterms rules are created and published by the International Chamber of Commerce (ICC) and are revised from time to time. The most recent revision is Incoterms 2010 which came into force on 1st January 2011.

The definitive publication on the Incoterms 2010 rules is the ICC publication number 715, which is available from various national bookshops.

This is essential reading for those with responsibility for setting a corporate policy or negotiating contracts with trading partners or service providers.

The logic of the Incoterms 2010 rules

The eleven rules are divided into two main groups

Rules for any transport mode

• Ex Works EXW

• Free Carrier FCA

• Carriage Paid To CPT

• Carriage & Insurance Paid to CIP

• Delivered At Terminal DAT

• Delivered At Place DAP

• Delivered Duty Paid DDP     

Rules for sea & inland waterway only

• Free Alongside Ship FAS

• Free On Board FOB

• Cost and Freight CFR

• Cost Insurance and Freight CIF


In general the “transport by sea or inland waterway only” rules should only be used for bulk cargos (e.g. oil, coal etc) and non-containerised goods, where the exporter can load the goods directly onto the vessel. Where the goods are containerised, the “any transport mode” rules are more appropriate.A critical difference between the rules in these two groups is the point at which risk transfers from seller to buyer. For example, the “Free on Board” (FOB) rule specifies that risk transfers when the goods have been loaded on board the vessel. However the “Free Carrier” (FCA) rule specifies that risk transfers when the goods have been taken in charge by the carrier.

Another useful way of classifying the rules is by considering:

Who is responsible for the main carriage – the buyer or the seller?

If the seller is responsible for the main carriage, where does the risk pass from the seller to the buyer – before the main carriage, or after it?

This gives us these four groups:



Buyer responsible for all carriage – EXW

Buyer arranges main carriage – FAS; FOB; FCA

Seller arranges main carriage, risk passes after main carriage – DAT; DAP; DDP

Seller arranges main carriage, but risk passes before main carriage – CFR; CIF; CPT; CIP

Eleven terms



Group-1 INCO terms

1. EXW means that a seller has the goods ready for collection at his premises (works, factory,

warehouse, plant) on the date agreed upon. The buyer pays transportation costs and bears the risks for

bringing the goods to their final destination. This term places the greatest responsibility on the buyer and

minimum obligations on the seller.

2.FCA — Free Carrier (named places) : The seller hands over the goods, cleared for export, into the

custody of the first carrier (named by the buyer) at the named place. This term is suitable for all modes of

transport, including carriage by air, rail, road, and containerized / multi-modal sea transport.

3. CPT — Carriage Paid To (named place of destination): (The general/containerized/multimodal

equivalent of CFR) The seller pays for carriage to the named point of destination, but risk passes when

the goods are handed over to the first carrier.

4. CIP — Carriage and Insurance Paid (To) (named

place of destination): The containerized transport/multimodal equivalent of CIF. Seller pays for carriage

and insurance to the named destination point, but risk passes when the goods are handed over to the first

carrier,

5. DAP : delivered at place

6. DAT I. delivered at terminal

7. DDP — Delivered Duty Paid (named destination place): This term means that the seller pays for all

transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used

interchangeably with the term "Free Domicile". It is the most comprehensive term for the buyer. In most of

the importing countries, taxes such as (but not limited to) VAT and excises should not be considered

prepaid being handled as a "refundable" tax. Therefore VAT and excise usually are not representing a

direct cost for the importer since they will be recovered against the sales on the local (domestic) market.



Group-2 INCO terms



8. FAS — Free Alongside Ship (named loading port): The seller must place the goods alongside the ship

at the named port. The seller must clear the goods for export. Suitable for maritime transport only but NOT

for multimodal sea transport in containers. This term is typically used for heavy-lift or bulk cargo.

9. FOB — Free on board (named loading 'port): The seller must themselves load the goods on board the

ship nominated by the buyer, cost and risk being divided at ship's rail. The buyer must instruct the seller

the details of the vessel and port where the goods are to be loaded, and there is no reference to, or

provision for, the use of a carrier or forwarder.

10.CFR or CNF — Cost and Freight (named destination port): Seller must pay the costs and freight to

bring the goods to the port of destination. The risk is transferred to the buyer once the goods have

crossed the ship's rail. Maritime transport only and Insurance for the goods is NOT included. Insurance is

at the Cost of the Buyer.

11.CIF — Cost, Insurance and Freight (named destination port): Exactly the same as CFR except that theseller must in addition procure and pay for insurance for the buyer (Maritime transport only).







Ten common mistakes in using the Incoterms rules



Here are some of the most common mistakes made by importers and exporters:

•           Use of a traditional “sea and inland waterway only” rule such as FOB or CIF for containerised goods, instead of the “all transport modes” rule e.g. FCA or CIP. This exposes the exporter to unnecessary risks. A dramatic recent example was the Japanese tsunami in March 2011, which wrecked the Sendai container terminal. Many hundreds of consignments awaiting despatch were damaged. Exporters who were using the wrong rule found themselves responsible for losses that could have been avoided!

•           Making assumptions about passing of title to the goods, based on the Incoterms rule in use. The Incoterms rules are silent on when title passes from seller to buyer; this needs to be defined separately in the sales contract

•           Failure to specify the port/place with sufficient precision, e.g. “FCA Chicago”, which could refer to many places within a wide area

•           Attempting to use DDP without thinking through whether the seller can undertake all the necessary formalities in the buyer’s country, e.g. paying GST or VAT

•           Attempting to use EXW without thinking through the implications of the buyer being required to complete export procedures – in many countries it will be necessary for the exporter to communicate with the authorities in a number of different ways

•           Use of CIP or CIF without checking whether the level of insurance in force matches the requirements of the commercial contract – these Incoterms rules only require a minimal level of cover, which may be inadequate.

•           Where there is more than one carrier, failure to think through the implications of the risk transferring on taking in charge by the first carrier – from the buyer’s perspective, this may turn out to be a small haulage company in another country, so redress may be difficult in the event of loss or damage

•           Failure to establish how terminal handling charges (THC) are going to be treated at the point of arrival. Carriers’ practices vary a good deal here. Some carriers absorb THC’s and include them in their freight charges; however others do not.

•           Where payment is with a letter of credit or a documentary collection, failure to align the Incoterms rule with the security requirements or the requirements of the banks.

•           When DAT or DAP is used with a “post-clearance” delivery point, failure to think through the liaison required between the carrier and the customs authorities – can lead to delays and extra costs

International Finance - Translation Exposure

Translation exposure, also known accounting exposure, refers to a kind of effect occurring for an unanticipated change in exchange rates. It can affect the consolidated financial reports of an MNC.

From a firm’s point of view, when exchange rates change, the probable value of a foreign subsidiary’s assets and liabilities expressed in a foreign currency will also change.

There are mechanical means for managing the consolidation process for firms that have to deal with exchange rate changes. These are the management techniques for translation exposure.

We have discussed transaction exposure and the ways to manage it. It is interesting to note that some items that create transaction exposure are also responsible for creating translation exposure.

Translation Exposure – An Exhibit
The following exhibit shows the transaction exposure report for Cornellia Corporation and its two affiliates. Items that produce transaction exposure are the receivables or payables. These items are expressed in a foreign currency.

From the exhibit, it can be easily understood that the parent firm has mainly two sources of a probable transaction exposure. One is the Canadian Dollar (CD) 200,000 deposit that the firm has in a Canadian bank. Obviously, when the Canadian dollar depreciates, the deposit’s value will go down for Cornellia Corporation when changed to US dollars.

It can be noted that this deposit is also a translation exposure. It is a translation exposure for the same reason for which it is a transaction exposure. The given (Peso) Ps 3,000,000 accounts receivable is not a translation exposure due to the netting of intra-company payables and receivables. The (Swiss Franc) SF 375,000 notes for the Spanish affiliate is both a transaction and a translation exposure.

Cornellia Corporation and its affiliates can follow the steps given below to reduce its transaction exposure and translation exposure.

Firstly, the parent company can convert its Canadian dollars into U.S. dollar deposits.

Secondly, the parent organization can also request for payment of the Ps 3,000,000 the Mexican affiliate owes to it.

Thirdly, the Spanish affiliate can pay off, with cash, the SF 375,000 loan to the Swiss bank.

These three steps can eliminate all transaction exposure. Moreover, translation exposure will be diminished as well.

Hedging Translation Exposure
The above exhibit indicates that there is still enough translation exposure with changes in the exchange rate of the Mexican Peso and the Euro against the U.S. dollar. There are two major methods for controlling this remaining exposure. These methods are: balance sheet hedge and derivatives hedge.

Balance Sheet Hedge
Translation exposure is not purely entity specific; rather, it is only currency specific. A mismatch of net assets and net liabilities creates it. A balance sheet hedge will eliminate this mismatch.

Using the currency Euro as an example, the above exhibit presents the fact that there are €1,826,000 more net exposed assets than liabilities. Now, if the Spanish affiliate, or more probably, the parent firm or the Mexican affiliate, pays €1,826,000 as more liabilities, or reduced assets, in Euros, there would be no translation exposure with respect to the Euro.

A perfect balance sheet hedge will occur in such a case. After this, a change in the Euro / Dollar (€/$) exchange rate would not have any effect on the consolidated balance sheet, as the change in value of the assets would completely offset the change in value of the liabilities.

Derivatives Hedge
According to the corrected translation exposure report shown above, depreciation from €1.1000/$1.00 to €1.1786/$1.00 in the Euro will result in an equity loss of $110,704, which was more when the transaction exposure was not taken into account.

A derivative product, such as a forward contract, can now be used to attempt to hedge this loss. The word “attempt” is used because using a derivatives hedge, in fact, involves speculation about the forex rate changes.

International Finance - Transaction Exposure

There are various techniques available for managing transactional exposure. The objective here is to shun the transactions from exchange rate risks. In this chapter, we will discuss the four major techniques that can be used to hedge transactional exposure. In addition, we will also discuss some operational techniques to manage transactional exposure.

Financial Techniques to Manage Transaction Exposure
The main feature of a transaction exposure is the ease of identifying its size. Additionally, it has a well-defined time interval associated with it that makes it extremely suitable for hedging with financial instruments.

The most common methods for hedging transaction exposures are −

Forward Contracts − If a firm has to pay (receive) some fixed amount of foreign currency in the future (a date), it can obtain a contract now that denotes a price by which it can buy (sell) the foreign currency in the future (the date). This removes the uncertainty of future home currency value of the liability (asset) into a certain value.

Futures Contracts − These are similar to forward contracts in function. Futures contracts are usually exchange traded and they have standardized and limited contract sizes, maturity dates, initial collateral, and several other features. In general, it is not possible to exactly offset the position to fully eliminate the exposure.

Money Market Hedge − Also called as synthetic forward contract, this method uses the fact that the forward price must be equal to the current spot exchange rate multiplied by the ratio of the given currencies' riskless returns. It is also a form of financing the foreign currency transaction. It converts the obligation to a domestic-currency payable and removes all exchange risks.

Options − A foreign currency option is a contract that has an upfront fee, and offers the owner the right, but not an obligation, to trade currencies in a specified quantity, price, and time period.

Note − The major difference between an option and the hedging techniques mentioned above is that an option usually has a nonlinear payoff profile. They permit the removal of downside risk without having to cut off the profit from upside risk.

The decision of choosing one among these different financial techniques should be based on the costs and the penultimate domestic currency cash flows (which is appropriately adjusted for the time value) based upon the prices available to the firm.

Transaction Hedging Under Uncertainty
Uncertainty about either the timing or the existence of an exposure does not provide a valid argument against hedging.

Uncertainty about transaction date
Lots of corporate treasurers promise to engage themselves to an early protection of the foreign-currency cash flow. The key reason is that, even if they are sure that a foreign currency transaction will occur, they are not quite sure what the exact date of the transaction will be. There may be a possible mismatch of maturities of transaction and hedge. Using the mechanism of rolling or early unwinding, financial contracts create the probability of adjusting the maturity on a future date, when appropriate information becomes available.

Uncertainty about existence of exposure
Uncertainty about existence of exposure arises when there is an uncertainty in submitting bids with prices fixed in foreign currency for future contracts. The firm will pay or receive foreign currency when a bid is accepted, which will have denominated cash flows. It is a kind of contingent transaction exposure. In these cases, an option is ideally suited.

Under this kind of uncertainty, there are four possible outcomes. The following table provides a summary of the effective proceeds to the firm per unit of option contract which is equal to the net cash flows of the assignment.

Operational Techniques for Managing Transaction Exposure
Operational strategies having the virtue of offsetting existing foreign currency exposure can also mitigate transaction exposure. These strategies include −

Risk Shifting − The most obvious way is to not have any exposure. By invoicing all parts of the transactions in the home currency, the firm can avoid transaction exposure completely. However, it is not possible in all cases.

Currency risk sharing − The two parties can share the transaction risk. As the short-term transaction exposure is nearly a zero sum game, one party loses and the other party gains%

Leading and Lagging − It involves playing with the time of the foreign currency cash flows. When the foreign currency (in which the nominal contract is denominated) is appreciating, pay off the liabilities early and collect the receivables later. The first is known as leading and the latter is called lagging.

Reinvoicing Centers − A reinvoicing center is a third-party corporate subsidiary that uses to manage one location for all transaction exposure from intra-company trade. In a reinvoicing center, the transactions are carried out in the domestic currency, and hence, the reinvoicing center suffers from all the transaction exposure.

Reinvoicing centers have three main advantages −

The centralized management gains of transaction exposures remain within company sales.

Foreign currency prices can be adjusted in advance to assist foreign affiliates budgeting processes and improve intra affiliate cash flows, as intra-company accounts use domestic currency.

Reinvoicing centers (offshore, third country) qualify for local non-resident status and gain from the offered tax and currency market benefits.

Policy Framework for International Trade

1. Introduction to India’s Foreign Trade:
International business operations at firm level are considerably influenced by various policy measures employed to regulate trade, both by home and host countries. Exportability and importability of a firm’s goods are often determined by trade policies of the countries involved. Price-competitiveness of traded goods is affected by import and export tariffs.
The host country’s trade and FDI policies often influence entry decisions in international markets. Policy incentives help exporters increase their profitability through foreign sales. High import tariffs and other import restrictions distort free market forces guarding domestic industry against foreign competition and support indigenous manufacturing.
Therefore, a thorough understanding of the country’s trade policy and incentives are crucial to the development of a successful international business strategy.
Trade policy refers to the complete framework of laws, regulations, international agreements, and negotiating stances adopted by a government to achieve legally binding market access for domestic firms. It also seeks to develop rules providing predictability and security for firms. To be effective, trade policy needs to be supported by domestic policies to foster innovation and international competitiveness.
Besides, the trade policy should have flexibility and pragmatism.
Trade in developing countries is characterized by heavy dependence on developed countries, dominance of primary products, over-dependence on few markets and few products, and worsening of terms of trade and global protectionism, all of which make formulation and implementations of trade policy critical to economic development.
The strategic options for trade policy may either be inward or outward looking. As a result of liberalization and integration of national policies with WTO agreements, there has been a strategic shift in trade policies. Like other developing countries, India’s trade policies have also made a gradual shift from highly restrictive policies with emphasis on import substitution to more liberal policies geared towards export promotion.
India’s foreign trade policy is formulated under the Foreign Trade (Development and Regulation) Act, for a period of five years by the Ministry of Commerce, Government of India. The government is empowered to prohibit or restrict subject to conditions, export of certain goods for reasons of national security, public order, morality, prevention of smuggling, and safeguarding balance of payments.
Policy measures to promote international trade, such as schemes and incentives for duty-¬free and concessional imports, augmenting export production, and other export promotion measures are discussed in-depth
The multilateral trading system under the WTO trade regime significantly influences trade promotion measures and member countries need to integrate their trade policies with the WTO framework. The WTO trade policy review mechanism provides an institutional framework to review trade policies of member countries at regular intervals.

Trade Policy Options for Developing Countries:

There exists a huge gap in per capita income between the developed and the developing countries. Most of the world’s population lives in countries that are considerably poor.
Efforts to bridge the income gap between developed and developing countries, to raise living standards by increasing income levels, and to cope with the uneven development in the domestic economy, remain the central concern of economic and trade policies of developing countries. With low production base and constraints in value addition, most developing countries remain marginal players in international trade
Key characteristics of developing countries’ trade include the following:
(i) Heavy Dependence Upon Developed Countries:
Developing countries’ trade is often dependent upon developed countries which form export destinations for the majority of their goods. Moreover, developing countries also heavily depend on developed countries for their imports. Trade among developing countries is relatively meagre.
(ii) Dominance of Primary Products:
Exports from developing countries traditionally comprised primary products, such as agricultural goods, raw materials and fuels or labour-intensive manufactured goods, such as textiles. However, over recent years, dependence on primary products has considerably decreased, especially for newly industrialized countries, such as South Korea and Hong Kong.
India’s dependence on agro exports has also declined considerably from 44.2 per cent in 1960-61 to about 10 per cent in 2006-07.
(iii) Over-dependence on a Few Markets and a Few Products:
A large number of developing countries are dependent on just a few markets and products for their exports. For instance, Mexico is heavily dependent on the US which is the destination for 89 per cent of its total exports whereas the Dominican Republic exports 80 per cent and Trinidad and Tobago 68 per cent of its goods to the US.
In terms of product composition, petroleum accounts for 96 per cent of total exports from Nigeria, 86 per cent of total exports from Saudi Arabia, and 86 per cent of total exports from Venezuela. Over the years, India’s basket of export products has widened remarkably with decreased dependence on any single product category

(iv) Worsening Terms of Trade:
Distribution of gains from trade has always been disproportionate and therefore, a controversial issue. Developing countries often complain of deterioration in their terms of trade, mainly due to high share of primary products in their exports.
(v) Global Protectionism:
Developed countries often provide heavy subsidies to their farmers for agricultural production and shield them from competition from imported products, besides imposing tariffs. Moreover, a number of non-tariff barriers such as quality requirements, sanitary and phytosanitary measures, and environmental and social issues, such as child labour offers considerable obstacles to products emanating from developing countries.
Trade Policy Strategic Options for International Trade:
‘Economic dualism’, where a high-wage capital-intensive industrial sector co-exists with a low-wage unorganized traditional sector, prevails in most developing countries. Promoting indigenous industrialization and employment generation become key concerns of their economic policies. A country may adopt any of the following strategic options for its trade policy
i) Inward Looking Strategy (Import Substitution):
Emphasis is laid on extensive use of trade barriers to protect domestic industries from import competition under the import-substitution strategy. Domestic production is encouraged so as to achieve self-sufficiency and imports are discouraged.
Import- substitution trade strategy is often justified by the ‘infant industry argument’, which advocates the need of a temporary period of protection for new industries from competition from well-established foreign competitors.
Most developing countries, such as Brazil, India, Mexico, Argentina, etc., during the 1950s and 1960s employed an inward-looking trade strategy.

International trade policy frame work

Organizational bodies

WTO

The World Trade Organization (WTO) is an intergovernmental organization that regulates international trade. The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by 124 nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948. It is the largest international economic organization in the world.



The WTO deals with regulation of trade in goods, services and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments. The WTO prohibits discrimination between trading partners, but provides exceptions for environmental protection, national security, and other important goals. Trade-related disputes are resolved by independent judges at the WTO through a dispute resolution process.



WTO came into being on 1995.

It has come into existence after GAAT General Agreement on Tariffs and Trade (GAAT)

It helps producers of good and services, importer, exporters to do their business

Uruguay rounds of talks made for the formation of WTO

Totally 164 countries present in WTO as of July 29th 2016

In 2000 agriculture and services discussions started in Doha round of talks

Fourth ministerial conference held in Doha Qatar in november20001

In the fourth conference non-agricultural tariff antidumping details are discussed

World bank identified 32 major regional trade blocks

Trade block means group of countries that have established preferential trade agreements among member countries

PTA stands for preferential trade agreements

Most commonly used PTA is Free Trade agreement

Free Trade Agreement means reducing or removing the tariff and non-tariff barrier between member nations but not with the non-member nations

A step forward for the FTA is the Custom Union (CU) where not only removing trade barrier with the member nations but also maintaining the identical trade with non-members.

Regional and Bi lateral trade agreements can cause trade diversion and trade distortions

List of RTB:

ASEAN: It was founded in August 8th 1967

Meeting will be held annually

APEC: Asia Pacific Economic Cooperation

It has 21 members called Member Economies

EAEC: East Asia Economic Caucus

It is known as Asian Plus Three

ASEM: Asia Europe Meeting

It is established in 1996

CHOGM: Common Wealth Heads of Government Meetings

EU: European Union strong international trade

There are five EU institutions namely European Parliament, Council of EU, E Commission, Court of Justice, Court of Auditors

NAFTA: North America Free Trade Agreement

CIS: Common Wealth of Independent States

COMESA: Common Market for Eastern and Southern Africa

SAARC: South Asian Association of Regional Cooperation established on Dec 8th 1985

ITR: Intellectual Property rights

It will be held annually.

MERCOSUR: It is a tariff union of South American Countries

It is the fastest growing trading blocks

G-15 group established in 1989

G7 economic power group became G8 after adding Russia

G77 is the third largest world coalition in United Nations

D8 is the group of developing eight countries

IOR-ARC (Indian Ocean Rim Association for Regional Cooperation) established in Mauritius March 1995

RISK MANAGEMENT important terms

Credit risk : The possibility of loss arising on account default by the borrower or counterparties due to inability or willingness
or deterioration in the quality of credit portfolio.
Default risk The risk on account of potential failure of the borrower to make promised payments, partly or wholly. Credit
spread risk or downgrade risk : The risk arising on account of actual or perceived deterioration in credit quality and may arise
from a rating change. There may not be actual default on the part of the borrowers.
Systematic or intrinsic risk : It is the risk which corresponds to the risk to that segment of the economy, to which that loan is
extended. If a portfolio is diversified across regions, industries, markets and borrowers, the portfolio risk is minimized but the
risk is still prevalent due to risk to those regions, industries or market.
Concentration risk : The risk to the portfolio on account of concentration of loans in specific regions, industries, markets or
borrowers, instead of diversification of the portfolio.
Counterparty risk : The risk arising on account of non-performance of trading partners of the borrower, leading to default by
the borrower. It is a transient financial risk associated with trading.
Country risk : The risk arising due to default by the borrower or counterparty on account of restrictions imposed by the govt.
of other countries due to economic conditions prevailing in the countries of counterparties.
Credit rating : An assessment of the borrower to determine whether after expiry of a given period, the borrower will have the
capability to honour the financial commitments.

Credit rating model : The tool or a methodology, used by a credit rating agency to carry credit rating.
Rating migration : The change in the rating of a borrower over a period of time when rated on the same standard or model,
which may lead to down grade risk.
Altman's Z Score : A credit rating model that forecasts the probability of a firm becoming bankrupt within 12 months' period.
It combines five financial ratios.
JPMorgan's Credit Metrics: A credit rating model developed by .113 Morgan which focuses on estimating the volatility in the
value of assets caused by variations in the quality of assets.
Credit Risk+: A credit rating model by Credit Swiss which is based on actuarial calculation of expected default rates and
unexpected losses from the default.
Credit appraisal : The process of evaluation of creditworthiness of the borrower and the activity/project with a view to take
decision on the credit request from a prospective borrower.
Prudential limits : The ceilings fixed by the bank on different type of exposure say, loan concentration, credit exposure,
maturity profile of the loan book etc.
Risk pricing : The fixation of interest rates and other levies by the bank corresponding to the quantified risk.

Loan review mechanism: A tool for constant evaluation of the quality of the loan portfolio with a view to bringing qualitative
improvements in credit administration.
Credit risk mitigation : The process through which the credit risk is reduced or transferred to a counter party. It may involve
proper documentation, securing through collaterals etc.
Securitisation: A process where the financial securities are issued against the cash inflows (in the form of repayment of
principal and interest) generated from a pool of loan assets.
Special purpose vehicle : An agency that carries the process of securitization.
Credit derivatives : The tradable financial instruments created on the basis of underlying credit assets (like loans, bonds,
accounts receivables etc.) by unbundling them into a commodity. CDs transfer the risk in the credit assets without
transferring the underlying assets_
Protection buyers The originators of the credit derivatives which transfer the credit risk to the protection sellers without
transferring the credit asset.
Protection sellers: The party which undertakes to provide the protection to the protection buyer, for a price, from credit risk
with reference to a notional value.
Credit event: In the context of credit derivatives, it is a happening like delinquency, default, foreclosures, prepayment etc. as
agreed in the contract, taking place with reference to the obligation, when protection seller shall be required to make the
payment.
Credit default swaps (CDS) A simple and popular form of Credit Derivative under which the protection buyer agrees to pay
regular premium to the protection seller for buying protection against the reference obligation. These are generally offbalance
sheet items.
Credit linked notes (CLN) : These are on-balance sheet equivalents of a credit default swap, that combine credit derivatives to
normal bond instruments. lt converts a credit derivative to a marketable instrument.
Total return swap (TRS): Under this arrangement the protection buyers swaps with the Protection seller , the actual return on
an asset, in return for a premium.

Operational Risk Quantification...Risk management

Operational Risk Quantification
The Basel Committee has put forward a framework consisting of 3 options for calculating operational risk capital charges in a
'continuum' of increasing sophistication and risk sensitivity. These are, in the order of their increasing complexity, viz.,
(i) the Basic Indicator Approach
(ii) the Standardised Approach and
(iii) Advanced Measurement Approach.
Reserve Bank has initially allowed the banks to use the Basic Indicator Approach for computing regulatory capital for
operational risk. Some banks are expected to move along the range toward more sophisticated approaches as they develop
more sophisticated operational risk management systems and practices which meet the prescribed qualifying criteria.
The Basic Indicator Approach

At the minimum, banks in India should adopt this approach immediately while computing capital for operational risk. Under this,
the banks have to hold capital for operational risk equal to a fixed percentage (alpha) of a single indicator which has currently been
proposed to be "gross income". This approach is available for all banks irrespective of their level of sophistication. The charge may
be expressed as follows:
K BIA = [ E (GI a)]/n
Where: KBIA = the capital charge under the Basic Indicator Approach.
GI = annual gross income, where positive, over the previous three years
a =15% set by the Committee, relating the industry-wide level of required capital to the industry-wide level of the indicator.
n = number of the previous three years for which gross income is positive.
The Standardised Approach
In the Standardised Approach, banks' activities are divided into 8 business lines given above.
Within each business line, gross income is a broad indicator that serves as a proxy for the scale of business operations and thus the
likely scale of operational risk exposure within each of these business lines. The capital charge for each business line is calculated
by multiplying gross income by a factor (denoted beta) assigned to that business line. Beta serves as a proxy for the industry-wide
relationship between the operational risk loss experience for a given business line and the aggregate level of gross income for that
business line_ It should be noted that in the Standardised Approach gross income is measured for each business line, not the whole
institution, i.e. in corporate finance, the indicator is the gross income generated in the corporate finance business line.
Beta factors for different business lines
Corporate finance Gross income 18% Trading and sales Gross income 18%
Retail banking Gross income 12% Commercial banking Gross income 15%
Payment and settlement Gross income 18% Agency services Gross income 15%
Asset management Gross income 12% Retail brokerage Gross income 12%
Advanced Measurement Approaches (AMA)
Under the AMA, the regulatory capital requirement will be equal the risk measure generated by the bank's internal operational risk
measurement system using the quantitative and qualitative criteria for the AMA. Use of the AMA is subject to supervisory approval.
Supervisory approval would be conditional on the bank demonstrating to the satisfaction of the relevant supervisors that the
allocation mechanism for these subsidiaries is appropriate and can be supported empirically.. The board of directors and senior
management of each subsidiary are responsible for conducting their own assessment of the subsidiary's operational risks and
controls and ensuring the subsidiary is adequately capitalised in respect of those risks.
Generic Measurement Approach
Measurement approach implementation begins with operational risk profiling which involves the following:
 Identification and quantification of operational risk
 Prioritization of operation risk and identification of risk concentrations
 Formulation of strategy by the bank for operational risk management and risk based audit. The
estimated levels of operational risk depend on:
(a) Estimated probability of occurrence which is mapped on a scale of 5 which implies
1. negligible risk
2. low risk
3. medium risk
4. high risk &
5. very high risk.
(b) Estimated potential financial impact : It is also mapped on,a scale of5 as above.
(c) Estimated impact of internal controls: This is estimated as fraction in relation to total control which is valued at 100%.
For example if the probability of occurrence is medium i.e. 2, potential financial impact is very high i.e. 4 and impact of internal
controls is 50%, the estimated level of operational risk can be worked out as:
Estimated level of operational risk = estimated level of occurrence x estimated potential financial impact x estimated impact of
internal controls.
=I (2 x 4 x (1— 0.5] ^0.5 =1.73 or Low.
Risk mitigation
Under the AMA, a bank will be allowed to recognise the risk mitigating impact of insurance in the measures of operational risk used
for regulatory minimum capital requirements. The recognition of insurance mitigation will be limited to 20% of the total
operational risk capital charge calculated under the AMA. A bank's ability to take advantage of such risk mitigation will depend on
compliance with the following criteria:
 The insurance provider has a minimum claim paying ability rating of A (or equivalent).
The insurance policy must have an initial term of no less than one year. For policies with a residual term of less than one year, the
bank must make appropriate haircuts reflecting the declining residual term of the policy, up to a full 100% haircut for policies with a
residual term of 90 days or less. The insurance policy has a minimum notice period for cancellation of 90 days

 The insurance policy has no exclusions or limitations triggered by supervisory actions or, in the case of a failed bank, that
preclude the bank. receiver or liquidator from recovering for damages suffered or expenses incurred by
the bank, except in respect of events occurring after the initiation of receivership or liquidation proceedings in respect of the
bank, provided that the insurance policy may exclude any fine, penalty, or punitive damages resulting from supervisory actions.
 The risk mitigation calculations must reflect the bank's insurance coverage in a manner that is transparent in its relationship to,
and consistent with, the actual likelihood and impact of loss used in the bank's overall determination of its operational risk
capital.
 The insurance is provided by a third-party entity. In the case of insurance through captives and affiliates, the exposure has to be
laid off to an independent third-party entity, for example through re-insurance, that meets the eligibility criteria_
 The framework for recognising insurance is well reasoned and documented.
 The bank discloses a description of its use of insurance for the purpose of mitigating operational risk.
Scenario analysis
A bank must use scenario analysis of expert opinion in conjunction with external data to evaluate its exposure to high-severity
events. This approach draws on the knowledge of experienced business managers and risk management experts to derive
reasoned assessments of plausible severe losses_ For instance, these expert assessments could be expressed as parameters of an
assumed statistical loss distribution. In addition, scenario analysis should be used to assess the impact of deviations from the
correlation assumptions embedded in the bank's operational risk measurement framework, in particular, to evaluate potential
losses arising from multiple simultaneous operational risk loSs events. Over time, such assessments need to be validated and reassessed
through comparison to actual loss experience to ensure their reasonableness.
Business environment and internal control factors
in addition to using loss data, whether actual or scenario-based, a bank's bank-wide risk assessment methodology must capture
key business environment and internal control factors that can change its operational risk profile. These factors will make a bank's
risk assessments more forward-looking, more directly reflect the quality of the bank's control and operating environments, help
align capital assessments with risk management objectives, and recognise both improvements and deterioration in operational
risk profiles in a more immediate fashion. To qualify for regulatory capital purposes, the use of these factors in a bank's risk
measurement framework must meet the following standards:
 The choice of each factor needs to be justified as a meaningful driver of risk, based on experience and involving the expert
judgment of the affected business areas. Whenever possible, the factors should be translatable into quantitative measures that
lend themselves to verification.
 The sensitivity of a bank's risk estimates to changes in the factors and the relative weighting of the various factors need to be
well reasoned. In addition to capturing changes in risk due to improvements in risk controls, the framework must also capture
potential increases in risk due to greater complexity of activities or increased business volume.
 The framework and each instance of its application, including the supporting rationale for any adjustments to empirical
estimates, must be documented and subject to independent review within the bank and by supervisors.
 Over time, the process and the outcomes need to be validated through comparison to actual internal loss experience, relevant
external data, and appropriate adjustments made.
Integrated Risk Management (IRM)
IRM stands for management of all risk that are associated with the activities undertaken across the entire organistion. For banks
these risks are liquidity risk, interest rate risk, market risk, credit risk and operational risks.
Total risk to an organization is the net effect of all risks associated with the activities of a bank. Net effect of all risks may not be
same as sum total of all risk due to diversification effect of risk. Hence integration implies a coordinated approach (and not
accounting approach) across various activities and taking benefit of various diversification opportunities that exist or may be
created in the bank.
Need for IRM: This approach centralizes the process of supervising risk exposure so that the organization can determine how
best to absorb, limit or transfer the risk. The information available with the bank can be analyzed to determine the overall
nature of organizational risk exposures including their correlation, dependencies and off-sets. The advantages are:
1. It aligns the strategic aspects of risk with day to day operational activities.
2. It facilitates greater transparency for investors and regulators
3.- It enhances revenue and earning growth
4. It controls downside risk potential.
Integrated Risk Management Approach
The process of IRMconsists of :
(a) strategy—integration of risk management as a key corporate strategy.
(b) organization—establishment of Chief Risk Officer position with accountability to board.
(c) process— identifying, assessing and controlling risk should be common across the banks
(d) systems — risk management systems should be developed to provide information to support the enterprise risk management
functions.
Organizational structure : The Board is the apex unit responsible for the entire risk of the bank. Risks are not to be seen in
isolation and have to be managed in an integrated manner.
Policies and procedures: These should be developed using a top down approach and consistent with one another. Risk
limits: Such limits assist in maintaining overall exposures at acceptable levels.
Risk reporting : Bank wide risk reports are used to quantify sources of risk across the bank and to estimate total exposure to
financial markets.
Integrated systems: The framework should be supported by an information technology architecture consistent with such
integration.

Trade finance

Trade finance

Trade finance is the financing of international trade flows. It exists to mitigate, or reduce, the risks involved in an international trade transaction.

There are two players in a trade transaction: (1)an exporter, who requires payment for their goods or services, and (2)an importer who wants to make sure they are paying for the correct quality and quantity of goods.


WHAT ARE THE RISKS?

As international trade takes place across borders, with companies that are unlikely to be familiar with one another, there are various risks to deal with. These include:

Payment risk: Will the exporter be paid in full and on time? Will the importer get the goods they wanted?

Country risk: A collection of risks associated with doing business with a foreign country, such as exchange rate risk, political risk and sovereign risk. For example, a company may not like exporting goods to certain countries because of the political situation, a deteriorating economy, the lack of legal structures, etc.

Corporate risk: The risks associated with the company (exporter/importer): what is their credit rating? Do they have a history of non-payment?

To reduce these risks, banks – and other financiers – have stepped in to provide trade finance products.


TYPES OF TRADE FINANCE PRODUCTS

The market distinguishes between short-term (with a maturity of normally less than a year) and medium to long-term trade finance products (with tenors of typically five to 20 years)

             





Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade.

LOANS AND ADVANCES INCLUDING BALANCE SHEET ANALYSIS

LOANS AND ADVANCES INCLUDING BALANCE SHEET ANALYSIS

1. ˜Credit Rating Agencies in India are regulated by: RBI
2. ˜CRISIL stands for: Credit Rating Information Services of India Ltd.
3. ˜Deferred Payment Guarantee is : Guarantee issued
when payment by applicant of guarantee is to be made in installments over a period of time.
4. ˜If Break Even Point is high, it can be construed that the margin of safety is ____: Low.
5. ˜Long Term uses – 12; total Assets – 30; Long Term source 16; What is net working capital : 4
6. ˜On which one of the following assets, depreciation is applied on Straight line method: Computers.
7. ˜Projected Turnover is Rs.400 lacs, margin by promoter is Rs. 20 lacs. What is maximum bank
finance as per Annual Projected Turnover method: 80 lakhs.
8. ˜Rohit was a loanee of the branch and news has come that he has expired. On enquiry, it was
observed that he left some assets. Upto what extent the legal heirs are liable to the Bank? Legal heirs are
liable for the liabilities upto the assets inherited by them.
9. ˜The appraisal of Deferred Payment Guarantee is same as that of a) Demand Loan b) OD c) Term
Loan d) CC : Term Loan.
10. A cash credit account will be treated as NPA if the CC limit is not renewed within ___days from the
due date of renewal: 180 days.
11. A director of a bank wants to raise loan of Rs 10 lakh from his bank against Life Insurance Policy with
surrender value of more than Rs 15 lakh. What will be done?: Bank can sanction.
12. A firm is allowed a limit of Rs.1.40 lac at 30% margin. It wants to avail the limit fully. How much will
be the value of security : Rs.2 lac
13. A guarantee issued for a series of transactions is called: Continuing guarantee
14. A lady who has taken a demand loan against FD come to the branch and wants to add name of her
minor son, as joint a/c holder. What you will do?: Name can be added only after adjustment of the loan.
15. A letter of credit which is issued on request of the beneficiary in favour of his supplier: Back to Back

LC
16. A loan is given by the bank on hypothecation of stock to Mr. A. Bank receives seizure order from
State Govt. What should bank do?: Bank will first adjust its dues and surplus if any wilt be shared with
the Govt.
17. A loan was sanctioned against a vacant land. Subsequently a house was constructed at the site.
What security is available now to the bank? : Both
18. A minor was given loan. On attaining majority he acknowledges having taken loan and promises to
pay. Whether the loan can be recovered? : He can not ratify the contract. Hence recovery not possible.
19. A negotiating bank and issuing bank are allowed days each for scrutiny of documents drawn
under Letter of credit to ensure that documents are as per LC: 5 banking days each.
20. Age limit staff housing loan: 70 years;
21. An L/C is expiring on 10.05.2008. A commotion takes place in the area and bank could not open.
Under these circumstances can the LC be negotiated?: The L/C can not be negotiated because expiry date
of LC can not be extended if banks are closed for reasons beyond their control.
22. As per internal policy of certain banks, the net worth of a firm does not include: a. Paid up capital b.
Free Reserve c. Share Premium d. Equity received from Foreign Investor : Revaluation Reserves
23. Authorised capital is Rs.10 lac. Paid up capital Rs.6 lac. The loss of previous year is Rs.1 lac. Loss in
current year is Rs3 _ lac. The tangible net worth is : Rs.2 lac
24. Authorised capital= 10 lac, paid-up capital = 60%, loss during current year = 50000, loss last year =
2 lacs, what is the tangible net worth of the company? : 3.5 lac
25. Bailment of goods by a person to another person, to secure a loan is called : Pledge
26. Balance outstanding in a CC limit is Rs.9 lakh. Value of stock is Rs.5 lakhs. It is in doubtfUl for more
than two years as on 31 March 2012. What is the amount of provision to be made on 31-03-2013?: Rs.9
lakhs (100% of liability as account is doubtful for more than 3 years)
27. Balance Sheet of a firm indicates which of the following – Balance Sheet indicates what a firm
owes and what a firm owns as on a particular date.
28. Bank limit for working capital based on turn over method: 20% of the projected sales turnover
accepted by Banks
29. Banks are required to declare their financial results quarterly as per provisions of : SEBI
30. Banks are required to maintain -a margin of ___ for issuing Guarantee favouring stock exchange on
behalf of share Brokers.
31. Banks are required to obtain audited financial papers from non corporate borrowers for granting
working capital limit of: Rs.25 lakh &above
32. Banks provide term loans and deferred payment guarantee to finance capital assets like plant and
machinery. What is the difference between these two: Outlay of funds.
33. Benchmark Current Ratio under turn over method is: 1.25
34. Break Even Point: No profit no loss. ( TR-TC=Zero)
35. Calculate Debt Equity ratio – Debenture – Rs 200, capital 50; reserves – 80; P& L account credit
balance – Rs 20: 4: 3 ( 200 divided by 150).
36. Calculate Net working capital– Total assets 1000; Long Term liabilities 400; Fixed assets, Intangible
assets and Non current assets (i.e. long term uses) Rs 350; What is net working capital : 400- 350= Rs
50
37. Calculate Tangible Net Worth: Land and building: 200 Lacs; Capital:80000 intangible asset:15000:

Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

  

The Government of India has enacted the Micro, Small and Medium Enterprises Development

(MSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006. With the

enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the

services sector in the definition of Micro, Small & Medium enterprises, apart from extending

the scope to medium enterprises. The MSMED Act, 2006 has modified the definition of micro,

small and medium enterprises engaged in manufacturing or production and providing or

rendering of services. The Reserve Bank has notified the changes to all scheduled commercial

banks.

1.1 Definition of Micro, Small and Medium Enterprises

(a) Manufacturing Enterprises i.e. Enterprises engaged in the manufacture or production,

processing or preservation of goods as specified below:

(i) A micro enterprise is an enterprise where investment in plant and machinery does not

exceed Rs. 25 lakh;

(ii) A small enterprise is an enterprise where the investment in plant and machinery is more

than Rs. 25 lakh but does not exceed Rs. 5 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more

than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost

excluding land and building and the items specified by the Ministry of Small Scale Industries

 (b) Service Enterprises i.e. Enterprises engaged in providing or rendering of services and

whose investment in equipment (original cost excluding land and building and furniture, fittings

and other items not directly related to the service rendered or as may be notified under the

MSMED Act, 2006) are specified below.

(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs.

10 lakh;

(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10

lakh but does not exceed Rs. 2 crore; and

(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2

crore but does not exceed Rs. 5 crore.

1.2 Bank Loans to Micro and Small enterprises, both Manufacturing and Service are eligible

to be classified under Priority Sector advance as per the following:

1.2.1 Direct Finance

1.2.1.1 Manufacturing Enterprises

The Micro and Small enterprises engaged in the manufacture or production of goods to any

industry specified in the first schedule to the Industries (Development and regulation) Act, 1951

and notified by the Government from time to time. The manufacturing enterprises are defined

in terms of investment in plant and machinery.

1.2.1.2. Loans for food and agro processing

Loans for food and agro processing will be classified under Micro and Small Enterprises,

provided the units satisfy investments criteria prescribed for Micro and Small Enterprises, as

provided in MSMED Act, 2006.

1.2.1.3 Service Enterprises

Bank loans up to Rs.5 crore per borrower / unit to Micro and Small Enterprises engaged in

providing or rendering of services and defined in terms of investment in equipment under

MSMED Act, 2006.

1.2.1.4 Export Credit

Export credit to MSE units (both manufacturing and services) for export of goods/services

produced / rendered by them.

1.2.1.5 Khadi and Village Industries Sector (KVI)

All loans sanctioned to units in the KVI sector, irrespective of their size of operations and

location and amount of original investment in plant and machinery. Such loans will be eligible

for classification under the sub-target of 60 percent prescribed for micro enterprises within the

micro and small enterprises segment under priority sector.

1.2.1.6. If the loans under General credit Card (GCC) are sanctioned to Micro and Small

Enterprises, such loans should be classified under respective categories of Micro and Small

Enterprises.

1.2.2 Indirect Finance

(i) Loans to persons involved in assisting the decentralised sector in the supply of inputs to

and marketing of outputs of artisans, village and cottage industries.

(ii) Loans to cooperatives of producers in the decentralised sector viz. artisans village and

cottage industries.

(iii) Loans sanctioned by banks to MFIs for on-lending to MSE sector as per the conditions

specified in extant Master Circular on Priority Sector Lending.

1.3 Lending by banks to medium enterprises will not be included for the purpose of

reckoning of advances under the priority sector.

1.4 Since the MSMED Act, 2006 does not provide for clubbing of investments of different

enterprises set up by same person / company for the purpose of classification as Micro, Small

and Medium enterprises, the Gazette Notification No. S.O.2 (E) dated January 1, 1993 on

clubbing of investments of two or more enterprises under the same ownership for the purpose

of classification of industrial undertakings as SSI has been rescinded vide GOI Notification No.

S.O. 563 (E) dated February 27, 2009.

Customer service in banks as per RBI circulers

Customer service in banks

1. Introduction

Customer service has great significance in the banking industry. The banking system in India today has perhaps the largest outreach for delivery of financial services and is also serving as

an important conduit for delivery of financial services. While the coverage has been expanding day by day, the quality and content of dispensation of customer service has come under

tremendous pressure mainly owing to the failure to handle the soaring demands and expectations of the customers.

The vast network of branches spread over the entire country with millions of customers, a complex variety of products and services offered, the varied institutional framework – all these add

to the enormity and complexity of banking operations in India giving rise to complaints for deficiencies in services. This is evidenced by a series of studies conducted by various committees

such as the Talwar Committee, Goiporia Committee, Tarapore Committee, etc., to bring in improvement in performance and procedure involved in the dispensation of hassle-free customer service.

Reserve Bank, as the regulator of the banking sector, has been actively engaged from the very beginning in the review, examination and evaluation of customer service in banks. It has

constantly brought into sharp focus the inadequacy in banking services available to the common person and the need to benchmark the current level of service, review the progress periodically,

enhance the timeliness and quality, rationalize the processes taking into account technological developments, and suggest appropriate incentives to facilitate change on an ongoing basis

through instructions/guidelines.

Depositors' interest forms the focal point of the regulatory framework for banking in India. There is a widespread feeling that the customer does not get satisfactory service even after

demanding it and there has been a total disenfranchisement of the depositor. There is, therefore, a need to reverse this trend and start a process of empowering the depositor.

Broadly, a customer can be defined as a user or a potential user of bank services. So defined, a ‘Customer’ may include:

· a person or entity that maintains an account and/or has a business relationship with the bank;

· one on whose behalf the account is maintained (i.e. the beneficial owner);

· beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors, etc., as permitted under the law, and

· any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as

a single transaction.

1.1 General

Policy for general management of the branches

Banks' systems should be oriented towards providing better customer service and they should periodically study their systems and their impact on customer service. Banks should have a Board

approved policy for general management of the branches which may include the following aspects:-

(a) providing infrastructure facilities by branches by bestowing particular attention to providing adequate space, proper furniture, drinking water facilities, with specific emphasis on

pensioners, senior citizens, disabled persons, etc.

(b) providing entirely separate enquiry counters at their large / bigger branches in addition to a regular reception counter.

(c) displaying indicator boards at all the counters in English, Hindi as well as in the concerned regional language. Business posters at semi-urban and rural branches of banks should also be

in the concerned regional languages.

(d) posting roving officials to ensure employees' response to customers and for helping out customers in putting in their transactions.

(e) providing customers with booklets consisting of all details of service and facilities available at the bank in Hindi, English and the concerned regional languages.

(f) use of Hindi and regional languages in transacting business by banks with customers, including communications to customers.

(g) reviewing and improving upon the existing security system in branches so as to instil confidence amongst the employees and the public.

(h) wearing on person an identification badge displaying photo and name thereon by the employees.

(i) Periodic change of desk and entrustment of elementary supervisory jobs.

(j) Training of staff in line with customer service orientation. Training in Technical areas of banking to the staff at delivery points. Adopting innovative ways of training / delivery

ranging from job cards to roving faculty to video conferencing.

(k) visit by senior officials from Controlling Offices and Head Office to branches at periodical intervals for on the spot study of the quality of service rendered by the branches.

(l) rewarding the best branches from customer service point of view by annual awards/running shield.

(m) Customer service audit, Customer surveys.

(n) holding Customer relation programmes and periodical meetings to interact with different cross sections of customers for identifying action points to upgrade the customer service with

customers.

(o) clearly establishing a New Product and Services Approval Process which should require approval by the Board especially on issues which compromise the rights of the Common Person.

(p) appointing Quality Assurance Officers who will ensure that the intent of policy is translated into the content and its eventual translation into proper procedures.

2. Customer Service: Institutional Framework

Need for Board's involvement

Matters relating to customer service should be deliberated by the Board to ensure that the instructions are implemented meaningfully. Commitment to hassle-free service to the customer at

large and the Common Person in particular under the oversight of the Board should be the major responsibility of the Board.

2.1 Customer Service Committee of the Board

Banks are required to constitute a Customer Service Committee of the Board and include experts and representatives of customers as invitees to enable the bank to formulate policies and assess

the compliance thereof internally with a view to strengthening the corporate governance structure in the banking system and also to

.bring about ongoing improvements in the quality of customer service provided by the banks.

2.1.1 Role of the Customer Service Committee

Customer Service Committee of the Board, illustratively, could address the following:-

· formulation of a Comprehensive Deposit Policy

· issues such as the treatment of death of a depositor for operations of his account

· product approval process with a view to suitability and appropriateness

· annual survey of depositor satisfaction

· tri-enniel audit of such services.

Besides, the Committee could also examine any other issues having a bearing on the quality of customer service rendered.

2.1.2 Monitoring the implementation of awards under the Banking Ombudsman Scheme

The Committee should also play a more pro-active role with regard to complaints / grievances resolved by Banking Ombudsmen of the various States.

The Scheme of Banking Ombudsman was introduced with the object of enabling resolution of complaints relating to provision of banking services and resolving disputes between a bank and its

constituent through the process of conciliation, mediation and arbitration in respect of deficiencies in customer service. After detailed examination of the complaints / grievances of

customers of banks and after perusal of the comments of banks, the Banking Ombudsmen issue their awards in respect of individual complaints to redress the grievances. Banks should ensure that

the Awards of the Banking Ombudsmen are implemented expeditiously and with active involvement of Top Management.

Further, with a view to enhancing the effectiveness of the Customer Service Committee, banks should also :

.

a) place all the awards given by the Banking Ombudsman before the Customer Service Committee to enable them to address issues of systemic deficiencies existing in banks, if any, brought out

by the awards; and

b) place all the awards remaining unimplemented for more than three months with the reasons therefor before the Customer Service Committee to enable the Customer Service Committee to report

to the Board such delays in implementation without valid reasons and for initiating necessary remedial action.

2.1.3 Board Meeting to Review and Deliberate on Customer Service

Banks are advised to review customer service / customer care aspects in the bank and submit a detailed memorandum in this regard to the Board of Directors, once every six months and initiate

prompt corrective action wherever service quality / skill gaps have been noticed.

2.2 Standing Committee on Customer Service

The Committee on Procedures and Performance Audit of Public Services (CPPAPS) examined the issues relating to the continuance or otherwise of the Ad hoc Committees and observed that there

should be a dedicated focal point for customer service in banks, which should have sufficient powers to evaluate the functioning in various departments. The CPPAPS therefore recommended that

the Ad hoc Committees should be converted into Standing Committees on Customer Service.

On the basis of the above recommendation, banks are required to convert the existing Ad hoc Committees into a Standing Committee on Customer Service. The Ad hoc Committees when converted as a

permanent Standing Committee cutting across various departments can serve as the micro level executive committee driving the implementation process and providing relevant feedback while the

Customer Service Committee of the Board would oversee and review / modify the initiatives. Thus the two Committees would be mutually reinforcing with one feeding into the other.

The constitution and functions of the Standing Committee may be on the lines indicated below :-

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i) The Standing Committee may be chaired by the CMD or the ED and include non-officials as its members to enable an independent feedback on the quality of customer service rendered by the

bank.

ii) The Standing Committee may be entrusted not only with the task of ensuring timely and effective compliance of the RBI instructions on customer service, but also that of receiving the

necessary feedback to determine that the action taken by various departments of the bank is in tune with the spirit and intent of such instructions.

iii) The Standing Committee may review the practice and procedures prevalent in the bank and take necessary corrective action, on an ongoing basis as the intent is translated into action only

through procedures and practices.

iv) A brief report on the performance of the Standing Committee during its tenure indicating, inter alia, the areas reviewed, procedures / practices identified and simplified / introduced may

be submitted periodically to the Customer Service Committee of the Board.

With the conversion of the Ad hoc Committees into Standing Committees on Customer Service, the Standing Committee will act as the bridge between the various departments of the bank and the

Board / Customer Service Committees of the Board.

2.3 Branch Level Customer Service Committees

Banks were advised to establish Customer Service Committees at branch level. In order to encourage a formal channel of communication between the customers and the bank at the branch level,

banks should take necessary steps for strengthening the branch level committees with greater involvement of customers. It is desirable that branch level committees include their customers

too. Further, as senior citizens usually form an important constituent in banks, a senior citizen may preferably be included therein. The Branch Level Customer Service Committee may meet at

least once a month to study complaints/ suggestions, cases of delay, difficulties faced / reported by customers / members of the Committee and evolve ways and means of improving customer

service.

The branch level committees may also submit quarterly reports giving inputs / suggestions to the Standing Committee on Customer Service thus enabling the

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Standing Committee to examine them and provide relevant feedback to the Customer Service Committee of the Board for necessary policy / procedural action.

2.4 Nodal department / official for customer service

Each bank is expected to have a nodal department / official for customer service in the Head Office and each controlling office, with whom customers with grievances can approach in the first

instance and with whom the Banking Ombudsman and RBI can liaise.

3. Board approved policies on Customer Service

Customer service should be projected as a priority objective of banks along with profit, growth and fulfilment of social obligations. Banks should have a Board approved policy for the

following:

3.1 Comprehensive Deposit Policy

Banks should formulate a transparent and comprehensive policy setting out the rights of the depositors in general and small depositors in particular. The policy would also be required to

cover all aspects of operations of deposit accounts, charges leviable and other related issues to facilitate interaction of depositors at branch levels. Such a policy should also be explicit

in regard to secrecy and confidentiality of the customers. Providing other facilities by "tying-up" with placement of deposits is clearly a restrictive practice.

3.2 Cheque Collection Policy