Full Details about National Company Law Tribunal (NCLT) & difference between NCLT & NCLAT

Full Details about National Company Law Tribunal (NCLT) & difference between NCLT & NCLAT


National Company Law Tribunal is the outcome of the Eradi Committee. NCLT was intended to be introduced in the Indian legal system in 2002 under the framework of Companies Act, 1956 however, due to the litigation with respect to the constitutional validity of NCLT which went for over 10 years, therefore, it was notified under the Companies Act, 2013. It is a quasi-judicial authority incorporated for dealing with corporate disputes that are of civil nature arising under the Companies Act. However, a difference could be witnessed in the powers and functions of NCLT under the previous Companies Act and the 2013 Act. The constitutional validity of the NCLT and specified allied provisions contained in the Act were re-challenged. Supreme Court had preserved the constitutional validity of the NCLT, however, specific provisions were rendered as a violation of the constitutional principles.

NCLT works on the lines of a normal Court of law in the country and is obliged to fairly and without any biases determine the facts of each case and decide with matters in accordance with principles of natural justice and in the continuance of such decisions, offer conclusions from decisions in the form of orders. The orders so formed by NCLT could assist in resolving a situation, rectifying a wrong done by any corporate or levying penalties and costs and might alter the rights, obligations, duties or privileges of the concerned parties. The Tribunal isn’t required to adhere to the severe rules with respect to appreciation of any evidence or procedural law.

The National Company Law Tribunal (NCLT) is a quasi-judicial body in India that adjudicates issues relating to Indian companies. The NCLT was established under the Companies Act 2013 and was constituted on 1 June 2016 by the government of India & is based on the recommendation of the justice Eradi committee on law relating to insolvency and winding up of companies.

The NCLT has eleven benches, two at New Delhi (one being the principal bench) and one each at Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. Justice M.M. Kumar, a retired Chief Justice of the Jammu & Kashmir High Court has been appointed as President of the NCLT

The NCLT has the power under the Companies Act to adjudicate proceedings:

Initiated before the Company Law Board under the previous act (the Companies Act 1956);
Pending before the Board for Industrial and Financial Reconstruction (BIFR), including those pending under the Sick Industrial Companies (Special Provisions) Act, 1985;
Pending before the Appellate Authority for Industrial and Financial Reconstruction; and
Pertaining to claims of oppression and mismanagement of a company, winding up of companies and all other powers prescribed under the Companies Act.

NCLT & NCLAT

The NCLT or “Tribunal” is a quasi-judicial authority created under the Companies Act, 2013 to handle corporate civil disputes arising under the Act. It is an entity that has powers and procedures like those vested in a court of law or judge. NCLT is obliged to objectively determine facts, decide cases in accordance with the principles of natural justice and draw conclusions from them in the form of orders. Such orders can remedy a situation, correct a wrong or impose legal penalties/costs and may affect the legal rights, duties or privileges of the specific parties. The Tribunal is not bound by the strict judicial rules of evidence and procedure. It can decide cases by following the principles of natural justice.

NCLAT or “Appellate Tribunal” is an authority provided for dealing with appeals arising out of the decisions of the Tribunal. It is formed for correcting the errors made by the Tribunal. It is an intermediate appellate forum where the appeals lie after order of the Tribunal. The decisions of Appellate Tribunal can further be challenged in the Supreme Court. Any party dissatisfied by any order of the Tribunal may bring an appeal to contest that decision. The Appellate Tribunal reviews the decisions of the Tribunal and has power to set aside, modify or confirm it.

Difference between NCLT and NCLAT

The NCLT has primary jurisdiction whereas NCLAT has appellate jurisdiction. NCLAT is a higher forum than NCLT. Evidence and witnesses are generally presented before NCLT for taking the decisions and NCLAT generally reviews decisions of NCLT and checks it on a point of law or fact. Fact finding and evidence collection is primarily a task of Tribunal whereas the Appellate Tribunal decide cases based on already collected evidences and witnesses.

Background of NCLT

NCLT was conceptualized by Eradi Committee. It was initially introduced in Companies Act, 1956 in 2002 but the provisions of Companies (Second Amendment) Act, 2002 were never notified as they got mired in litigation surrounding constitutionality of NCLT. 2013 Act was enacted and the concept of NCLT was retained. However, the powers and functions of NCLT under 1956 Act and 2013 Act are different. The constitutionality of NCLT related provisions were again challenged and this case was finally decided in May 2015. The Apex Court upheld the constitutionality of the concept of NCLT but some of the provisions on constitution and selection process were found defective and unconstitutional.

Notification of NCLT:

Provisions for constitution of NCLT and NCLAT were notified on 1st June 2016. In the first phase powers of CLB are transferred to NCLT. In the next stage the government will move for second set of notifications by which powers of High Courts and BIFR will also be vested with NCLT. Along with transfer of powers to NCLT, new powers and functions are also vested in NCLT.

Transition from CLB to NCLT

The Act has set out in detail the procedure to deal with cases which are pending in various forums in Section 434. The Government has notified 1st June 2016 for transfer of matters from CLB to NCLT. On that date, all the pending proceedings before CLB will be transferred to NCLT and Tribunal will dispose of such matters in accordance with the provisions of law. Tribunal has discretion to take up the pending CLB proceeding from any stage. At its discretion, it can take up the matter at stage where it was left by CLB or start the proceedings afresh or from any stage it deems fit.

Powers vested in NCLT

Some of the important powers that are presently vested with NCLT are as follows:

1. Class Action:

Protection of the interest of various stakeholders, especially non-promoter shareholders and depositors, has always been the concern of company law. There were several frauds and improprieties that were noticed where the key losers were the shareholders and depositors. The shareholders who invested in listed companies saw their investments and savings drying up when the companies that they invested in cheated the investors.

The Companies Act, 2013 has provided a very good combination of remedies where the offender will be punished and the people who are involved (whether it is the company or directors or auditor or experts or consultants) will be liable even for a civil action (namely class action), wherein they have to compensate the shareholders and depositors for the losses caused to them on account of the fraudulent practices or improprieties.

A class action is a procedural device that permits one or more plaintiffs to file and prosecute a lawsuit on behalf of a larger group, or “class”. It is in the nature of a representative suit where the interest of a class is represented by a few of them. A huge number of geographically dispersed shareholders/depositors are affected by the wrongdoings. It is a useful tool where a few may sue for the benefit of the whole or where the parties form a part of a voluntary association for public or private purposes, and may be fairly supposed to represent the rights and interests of the whole.

Section 245 has been introduced in the new company law to provide relief to the investors against a large set of wrongful actions committed by the company management or other consultants and advisors who are associated with the company.

Class action can be filed against any type of companies, whether in the public sector or in the private. It can be filed against any company which is incorporated under the Companies Act, 2013 or any previous Companies Act. The Act provides only one exemption i.e. banking companies.

2. Deregistration of Companies:

The procedural errors at the time of registration can now be questioned at any time. The Tribunal is empowered to take several steps, including cancellation of registration and dissolving the company. The Tribunal can even declare the liability of members unlimited. Sec 7(7) provides this new way for de- registration of companies in certain circumstances when there is registration of companies is obtained in an illegal or wrongful manner. Deregistration is a remedy that is distinct from winding up and striking off.

3. Oppression and Mismanagement:

The remedy of oppression and mismanagement is retained in 2013 Act. The nature of this remedy has however changed to certain extent and it needs to be seen in light of the changes made to the Companies Act, 2013. The 2013 Act has reset the bar for oppression to a little lower level but has set the bar of mismanagement a little higher by applying the test “winding up on just and equitable grounds” even to mismanagement matters. The Act permits dilution of the eligibility criteria with the permission of Tribunal, where a member below the eligibility criteria can apply in deserving cases.

4. Refusal to Transfer shares:

The power to hear grievance of refusal of companies to transfer securities and rectification of register of members under Section 58 and 59 of the new Act were already notified and were being taken up by CLB. Now. The same are transferred to NCLT. The remedy for refusal to transfer or transmission were restricted only to shares and debentures under 1956 Act. The provisions for refusal to transfer and transmit under Companies Act, 2013 Act extends to all securities. These sections gives express recognition to contracts or arrangements for transfer of securities entered into between two or more persons with respect to shares of a public company and thus clears any doubts about the enforceability of these contracts.

5. Deposits:

Chapter V dealing with deposits was notified in phases in 2014 and powers to deal with the cases under it were assigned in CLB. Now the said powers will be vested in NCLT. The law on deposits is quite distinct under the Companies Act, 2013 as compared to the Companies Act, 1956. The provision for deposits under 2013 Act were already notified. Aggrieved depositors also have the remedy of class actions for seeking redressal for the acts/omissions of the company which hurt their rights as depositors.

6. Reopening of Accounts & Revision of Financial Statements:

Several instances of falsification of books of accounts were noticed under the Companies Act, 1956. To counter this menace, several measures have been provided in the Companies Act, 2013. One such measure is the insertion of Section 130 and 131 read with sec 447, 448 in the new Act. Section 130 read with sec 131 are newly inserted provisions that prohibit the company from suo motu opening its accounts or revising its financial statements. This can be done only in the manner provided in the Act. Section 130 and 131 provides the instances where financial statements can be revised/reopened. Section 130 is mandatory, where the Tribunal or Court may direct the company to reopen its accounts when certain circumstances are shown. Section 131 allows company to revise its financial statement but do not permit reopening of accounts. The company can itself approach the Tribunal under sec 131, through its director for revision of its financial statement.

7. Tribunal Ordered Investigations:

Chapter XIV provides several powers to the Tribunal in connection with investigations. The most important powers that are conferred to the Tribunal are:

a) power to order investigation: Under the Companies Act, 2013, only 100 members (as against 200 members required under the Companies Act, 1956) are required to apply for an investigation into the affairs of a company. Further, the power to apply for an investigation is given to any person who is able to convince the Tribunal that circumstances exist for initiating investigation proceedings. An investigation can be conducted even abroad. Provisions are made to take as well as provide assistance to investigation agencies and courts of other countries with respect to investigation proceedings.

b) power to investigate into the ownership of the company

c) power to impose restriction on securities: The restriction earlier could be imposed only on shares. Now, the Tribunal can impose restrictions on any security of the company.

d) power to freeze assets of the company: The Tribunal is given the power to freeze assets of the company which can not only be used when the company is under investigation, but can also be initiated at the insistence of a wide variety of persons in certain situations.

8. Conversion of public company into private company

Sections 13, 14, 15 and 18 of the Companies Act, 2013 read with rules regulate the conversion of public limited company into private limited company. It requires approval from the NCLT. Approval of the Tribunal is required for such conversion. The Tribunal may at its discretion impose certain conditions subject to which approvals may be granted (sec 459).

9. Tribunal Convened AGM:

General meetings are required to assess the opinion of shareholders from time to time. The Act mandatorily requires one meeting to be called, which is termed as the “annual general meeting” or ‘AGM’. Any other general meeting is termed as “extra ordinary general meeting” or ‘EOGM’. If the AGM or EOGM cannot be held, called or convened in the manner provided under the Act or the Rules by the Board or the Member due to certain extraordinary circumstances, then the Tribunal is empowered under Section 97 and 98 of 2013 Act to convene general meetings under the Companies Act, 2013. The provisions for convening an annual general meeting and extra ordinary general meeting in the Companies Act, 2013 are almost similar to the provision provided in the Companies Act, 1956. However, the draft rules have inserted an additional provisions that require intimation of such cases to be given to ROC.

10. Compounding of Offence:

Provisions of compounding under the 2013 Act were notified before the constitution of NCLT and were assigned to CLB. This power will now be vested with NCLT, and all compounding matters which are above the prescribed monetary limit will be approved by NCLT.

11. Change in Financial Year:

Section 2 (41) also has been already notified on 1 April 2014. The Act requires that every company or body corporate, new or existing, must have a uniform financial year ending on 31 March. It provides an exception where certain companies can apply to the Tribunal to have a different financial year. A company or a body corporate can make an application to the Tribunal. As the Tribunal was not notified at the time when this section was notified, the power to alter the financial year on application was granted to the CLB. The regulation provides the manner for making the application to CLB. The same has notified on the site of CLB vide order dated 28 January 2015. All the application that are not disposed of at the time when NCLT provisions are notified, will also be transferred to the Tribunal.

Current affairs on 11.09.2018

Economic Times

📝 Govt may seek NRIs' help to cure ailing rupee

📝 Last date for filing GSTR-1 for July 2017 to Sep 2018 extended till Oct 31

📝 Jan Dhan overdraft option likely to give Rs 32,000 crore boost to economy

📝 Banks opening up loan window to high rated gold jewellers, but no respite for smaller ones

📝 SC lifts stay on safeguard duty on solar imports

📝 Policy tweak in works to allow companies to sell oil & gas to affiliates

📝 IOC to invest Rs 170 crore in strategically vital Siliguri oil terminal

Business Standard

📝 With more focus on regional advertisers, Google, Amazon step up local play

📝 Tata Global Beverages rejigs global management to streamline business

📝 Microsoft partners with SRL Diagnostics to train its AI in detecting cancer

📝 Rupee to hit 73 by Mar 2019; fiscal target to be breached, says report

📝 Cryptocurrency wipeout deepens to $640 bn as Ether leads declines

📝 Once-in-a-life deals fuel $100-billion mergers-and-acquisitions boom

📝 DoT meet to finalise in-flight connectivity rules to take place today

Financial Express

📝 JLR reports 4.9% fall in global sales for August

📝 India bright spot in steel demand in Southeast Asia, says Moody’s

📝 Sun acquires 18.75% stake in Israel-based Tarsius Pharma for $3 million

📝 Pre-owned luxury car market on high growth path

📝 India's economic growth to slow in second half of this fiscal, says UBS report

📝 CAI retains cotton crop estimate at 365L bales

📝 NCLT needs Supreme Court nod before finalising bids for Ruchi Soya

Mint

📝 India tells US it won’t accept caps on steel, aluminium exports

📝 ArcelorMittal raises bid for Essar Steel to ₹42,000 crore

📝 Google agrees to comply with RBI’s data localization norms

📝 ACME Solar Holding in talks to raise up to ₹3,000 crore through InvIT

📝 Sun Pharma’s Mohali plant on FDA radar

📝 Aadhar Housing Finance to raise up to ₹1,400 crore via NCDs

📝 ICICI Banks files insolvency plea against Jaiprakash Associates.

ABBREVIATIONS

 ABBREVIATIONS
 RAM - Random Access Memory
 ROM - Read Only Memory
 CPU - Central Processing Unit
 CDMA- Code Division Multiple Access
 EDP - Electronic Data Processing
 EDI - Electronic Data Interchange
 EFT - Electronic Fund Transfer
 GPRS – General Packet Radio Service
 MICR - Magnetic Ink Character Recognition
 WWW - World Wide Web
 SFMS - Structured Financial Messaging Solutions
 GUI - Graphical User Interface
 HTML- Hyper Text Markup Language
 HTTP - Hyper Text Transfer Protocol
 FTP - File Transfer Protocol
 ISDN - Integrated Service Digital Network
 IMPS- Immediate Payment service.
 VSAT - Very Small Aperture Terminal
 USSD - Unstructured Supplementary Services
Data
 NPCI-National Payment Corporation of India
 MDR: Merchant Discount Rate
 MTSS: Money Transfer service scheme.
 MAB: MERCHANT ACQUIRING BUSINESS
 TSP: Technology Service Provider.
 ADS- Active Directory Services
 BAS-Biometric Authentication Solution
 ASBA- Applications Supported by Blocked
Amount
 NACH- National Automated Clearing House
 MPLS- Multi Protocol Label Switching
 OCAS- Online Customer Acquisition System
 POS- Point Of Sale
 UPI- Unified Payment Interface
 APBS- Aadhar Payment Bridge System
 AEPS- Aadhar Enabled Payment System
 QR code- Quick Response Code
 BBPS-Bharat Bill Payment System
 MMID-Mobile Money Identifier
 MPIN- Mobile PIN
 VPA- Virtual Payment Address

CAIIB Rural Banking PDF

CAIIB Rural Banking PDF

Download link here

https://drive.google.com/file/d/1dwncrwtR8PJe80bjxGvfthlPQOO4qtrn/view?usp=sharing

All the best

Current Affairs on 10th September 2018

Today's Headlines from www:

*Economic Times*

📝 Bharti Infratel revenue, Ebitda may dip till FY20: Analysts

📝 Per capita spending on legal aid in India is Rs 0.75

📝 Indian paper industry growing at 6-7%, says industry official

📝 Nifty likely to touch 12,000 by December: Edelweiss

📝 FPIs turn net sellers in Sept, pull out Rs 5,600 crore

📝 Power projects heading to NCLT may get to retain fuel supply pacts

📝 600-700 Indian companies acquired annually since 2010: CII-PwC report

📝 Yes Bank aims to grow retail portfolio by 75 percent in two years to Rs 56,000 crore

*Business Standard*

📝 Icra downgrades ratings of IL&FS loans, debentures to 'junk' status

📝 New drone regulations to boost transparency in India's real estate sector

📝 RP-Sanjiv Goenka group is building a new home for apparel brand 2Bme

📝 Govt grappling with measures to regulate virtual currencies despite RBI ban

📝 Seven of top 10 companies lose Rs 756 bn in m-cap, HUL takes steepest hit

📝 Volume growth concerns recede, realisation gains key for cement stocks

📝 Jack Ma not retiring and will unveil transition plans on Monday: Alibaba

*Financial Express*

📝 Indian insurance to be $280 billion industry by 2019-20: Assocham

📝 CBS Corp settles lawsuit over company control; Leslie Moonves may resign

📝 ICPA opposes Air India move to recover over-time flying allowance

📝 Google CEO Sundar Pichai writes to Ravi Shankar Prasad, says free cross-border data flow to help startups

📝 Reliance Retail buys 16.31 percent in Genesis Colors, acquires stake in 5 more companies

📝 Walmart says Flipkart acquisition will impact its net income this fiscal

📝 Blueprint drawn to boost production of EVs, take total share to 15% in 5 years: Nitin Gadkari

*Mint*

📝 Department of Posts to set up insurance firm in 2 years

📝 Only 33% Indians save regularly for retirement, HSBC report says

📝 NMDC seeks exploration license for Tungsten in Australia

📝 RBI may conduct OMO buyback this week to ease liquidity, say bankers

📝 ₹ 3.4 trillion bank recap since Great Recession but no end in sight

📝 Mastercard’s Hany Fam bats for open system for processed data

📝 Tea start-up Haazri raises seed funding from Artha Venture Fund.

Inflation Index Bond

Inflation Indexed Bond (IIB) is a bond issued by the Sovereign, which provides the investor a constant return irrespective of the level of inflation in the economy. The main objective of Inflation Indexed Bonds is to provide a hedge and to safeguard the investor against macroeconomic risks in an economy.

Issue of IIBs has assumed significance in the context of high level of inflation experienced in the Emerging Market and Developing Economies during the recent years, as the value of money[1] loses rapidly in an environment of high inflation. The issue of Inflation Indexed bonds in advanced economies is limited on account of low inflation experienced in these economies.


Operation of IIBs

For understanding the concept of IIB, it has to be compared with the instrument of fixed deposits with the bank. While fixed deposit offers a fixed rate of interest for the investment for a given number of years, it does not protect the investor from the erosion of real value of the deposit due to inflation. IIB on the other hand, gives a constant minimum real return[2] irrespective of inflation level in the economy. Capital increases with the inflation, so actual interest is better than originally promised. In case of deflation, interest payments decrease with the negative inflation. However, capital does not decline below the face value, ie. Initial investment, in case of deflation. The working of IIB is given through the following example:

End of the 1st year End of the 2nd year
Principal : Rs 1000 Principal : Rs 103
Inflation in the economy : 3 percent Inflation in the economy : 6 percent
Inflation accrual : Rs. 30 Inflation accrual : Rs.61.8
Principal at the end of the first year : Rs 1030 Principal at the end of the 2nd year : Rs 1091.8
 
Promised rate of return : 3 percent Promised rate of interest : 3 percent
Interest : 1030 x 3/100: Rs 31 Interest : 1091.8 x 3/100: Rs 32.7
Totalreturn:Rs.30(inflation)+Rs:31(interest):Rs 61 Total return:Rs61.8(inflation)+Rs:32.7(interest): :Rs 94.5


Thus, inflation component on principal is not paid with interest but the same is adjusted in the principal. At the time of redemption, adjusted principal or the face value, whichever is higher, would be paid. If adjusted principal goes below the face value due to deflation, the face value would be paid at redemption and thus, capital will get protected. Interest rate will be provided protection against inflation by paying fixed coupon rate/interest rate on the principal adjusted against inflation.

There are no special tax concessions for these bonds. IIBs are treated as government securities (G-Sec) and therefore, would be eligible for short-sale and repo transactions and gets SLR status (i.e., they are eligible to be kept as part of Statutory Liquidity Ratio requirements of banks).


Background

In the Indian context, inflation was one of the major macroeconomic concerns of the economy during the period 2008-2013 where real interest rates[3] were consistently negative. The period also was noted for the high current account deficit (CAD)[4] , which saw huge investment in the alternate instrument – gold – by the households, necessitating heavy import of gold. In order to reduce the attractiveness of gold for investment and reduce the CAD, the Government of India launched Inflation indexed bonds (IIB) on 4 June 2013[5].

The Reserve Bank of India auctioned its first tranche, linking to Wholesale Price Index (WPI) inflation, as WPI headline inflation was then used as the key measure of inflation by RBI. IIB bonds were issued on monthly basis (on last Tuesday of each month) till December 2013. These bonds offered annual return of 1.44% (through half yearly coupon) over and above the headline inflation (WPI). These 10 year bonds could be traded in the Order Matching Negotiated Dealing Systems (NDS-OM), NDS-OM (web-based), Over the Counter (OTC) market, and stock exchanges. Approximately IIB bonds worth Rs 6500 crore were issued in 2013.

Over the time, IIB bonds lost its attractiveness, as there has been significant moderation in inflation since 2014-15. The IIB bonds turned highly illiquid, as WPI inflation remained negative for consecutive 15 months (as on Feb 2015) since November 2014. With a view to improve the liquidity in G Secs market, Government decided to buy back the IIB bonds. The Government of India announced the repurchase of 1.44% Inflation government stocks 2023 in February 2016 through reverse auction for an aggregate amount of Rs. 6500 crore (face value). The repurchase was undertaken as an adhoc measure to redeem the government stock prematurely by utilizing surplus cash balance.

Since April 2014, RBI adopted consumer price index (CPI -combined) as the key measure of inflation for its monetary policy stance. In case RBI issues new IIB bonds in the near future, it would be based on CPI, as CPI (combined) has been accepted by RBI as the key measure of inflation for its monetary policy stance, since 2014.

A predecessor of Inflation Indexed Bonds (IIBs) was Capital Indexed Bonds (CIBs) issued during 1997. However, the CIBs issued in 1997 provided inflation protection only to principal and not to interest payment. IIBs provide inflation protection to both principal and interest payments.


1.Here, real value of money means what one unit of money is capable of purchasing; in short, its purchasing power. For instance, if a person is able to get only 1 unit of a good with Rs. 1 now as compared to 2 units of that good in a previous period, we can say that the value of money has decreased. This happens because the price of the good has doubled.

2.Real Return = Rate of Nominal Return – rate of Inflation

3.See footnote 2

4.When value of imports exceeds that of exports, resulting in net outflow of money from the economy

5.It was announced in the Union Budget 2013-14 as an instrument to protect savings from inflation, especially the savings of the poor and middle classes.

Working capital numerical useful for CCP

Working capital numerical useful for CCP

Question 1 A newly formed company has applied to the Commercial Bank for the first time for financing its working capital requirements. The following information is available about the projections for the current year: Per unit Elements of cost: (Rs.) Raw material 40 Direct labour 15 Overhead 30 Total cost 85 Profit 15 Sales 100 Other information: Raw material in stock : average 4 weeks consumption, Work – in progress (completion stage, 50 per cent), on an average half a month. Finished goods in stock : on an average, one month. Credit allowed by suppliers is one month. Credit allowed to debtors is two months. Average time lag in payment of wages is 1½ weeks and 4 weeks in overhead expenses. Cash in hand and at bank is desired to be maintained at Rs. 50,000. All Sales are on credit basis only. Required: (i) Prepare statement showing estimate of working capital needed to finance an activity level of 96,000 units of production. Assume that production is carried on evenly throughout the year, and wages and overhead accrue similarly. For the calculation purpose 4 weeks may be taken as equivalent to a month and 52 weeks in a year.(ii) From the above information calculate the maximum permissible bank finance by all the three methods for working capital as per Tondon Committee norms; assume the core current assets constitute 25% of the current assets. (PCC-Nov. 2007)(8 marks) Answer Calculation of Working Capital Requirement (A) Current Assets Rs. (i) Stock of material for 4 weeks (96,000  40  4/52) 2,95,385 (ii) Work in progress for ½ month or 2 weeks Material (96,000  40  2/52) .50 73,846 Labour (96,000  15  2/52) .50 27,692 Overhead (96,000  30  2/52) .50 55,385 1,56,923 (iii) Finished stock (96,000  85  4/52) 6,27,692 (iv) Debtors for 2 months (96,000  85  8/52) 12,55,385 Cash in hand or at bank 50,000 Investment in Current Assets 23,85,385 (B) Current Liabilities (i) Creditors for one month (96,000  40  4/52) 2,95,385 (ii) Average lag in payment of expenses Overheads (96,000  30  4/52) 2,21,538 Labour (96,000  15  3/104) 41,538 2,63,076 Current Liabilities 5,58,461 Net working capital (A – B) 18,26,924 Minimum Permissible Bank Finance as per Tandon Committee Method I : .75 (Current Assets – Current Liabilities) .75 (23,85,385 – 5,58,461) .75 (18,26,924) – 5,58,461 = Rs. 13,70,193 Method II : .75  Current Assets – Current Liabilities .75  23,85,385 – 5,58,461 17,89,039 – 5,58,461 = Rs. 12,30,578 Method III: .75 (Current Assets – CCA) – Current Liabilities
.75 (23,85,385 – 5,96,346) – 5,58,461
.75 (17,89,039) – 5,58,461

13,41,779 – 5,58,461 = Rs. 7,83,318

Aml kyc recollected questions 1st of September 2018

Aml kyc recollected questions 1st of September 2018
3 steps of basic money laundering cycle
2 questions on funnel accounts
Connected accounts
1 question on wire transfer
1 question on hawala
Non member of Wolfsburg group
Law in UK related to AML
Around 5 questions on 2017 amendments of pmla (already discussed here in this group)
1 question on NI act
1 question on intermediates ( non-intermediaries of options)
1 question on whether to file STR
1 question on who will decide to file STR
Time limit for STR
1 question on enhanced due diligence
Time limit for freezing accounts
Time limit for kyc updation
1 question on juridical persons
1 question on specific beneficial owner
1 question on small account
1 question on cross border wire transfer
CTR time limit for filling
Which report don't have ceiling limits
STR typology
Staff callousness
Principal officer
Kyc aml interconnectedness

Masala Bonds

 Masala Bonds
The term is used to refer to rupee-denominated borrowings by Indian entities in overseas
markets. Masala bonds can be quite a significant plus for the Indian economy. They are issued
to foreign investors and settled in US dollars. Hence the currency risk lies with the investor and
not the issuer, unlike external commercial borrowings (ECBs), where Indian companies rais money in foreign currency loans. While ECBs help companies take advantage of the lower
interest rates in international markets, the cost of hedging the currency risk can be significant. If
un-hedged, adverse exchange rate movements can come back to bite the borrower. But in the
case of Masala bonds, the cost of borrowing can work out much lower.
Masala bonds can have implications for the rupee, interest rates and the economy as a whole.
A vibrant bond market can open up new avenues for bond investments by retail savers. If
Masala bonds are acquired by overseas investors, this can help prop up the rupee. Masala
bonds are a good idea to shield corporate balance sheets from exchange rate risks.
RBI has permitted Indian banks to masala bonds to finance their Tier 1, Tier 2 capital and
infrastructure financing.
Canada’s British Columbia becomes the first foreign govt. issuer of masala bonds by
successfully raising Rs.5 billion through a rupee-denominated bond in the London Stock
Exchange.
HDFC is first ever Indian corporate to list Masala bond, chooses London Stock Exchange for
landmark issuance. Rupee denominated bond raises INR 30 billion (USD 450 million
equivalent), with 8.33% annual yield, attracting global investor support.

Cheque

A Cheque can be

a) An open cheque – payable at the counter of the bank
b) Bearer Cheque – payable to the person who presents the cheque for encashment.
Transferable by mere delivery.
c) Order Cheque – payable to the person named in the cheque. When the word bearer is
cancelled it becomes an order cheque.
d) Crossed Cheque – cheque with two parallel transverse lines are drawn with or without
the words between the lines. It can only be credited to the account of the payee.
e) Stale Cheque – a Cheque whose validity period is over. An Out-dated cheque.
f) Ante-dated cheque – a cheque contains the date on which it is drawn. If it bears a
priordate or back date, it is called ante-dated cheque.
g) Post-dated cheque – cheque bearing a date later than the date on which it is drawn.
h) Mutilated cheque – torn into pieces.
a) General Crossing - cheque bearing two transverse parallel lines at the left hand top
corner, with or without words (not negotiable).
b) Special crossing – when a cheque bears the name of the bank with or without the words
(not negotiable) between the transverse lines.
c) Restrictive crossing / Account payee Crossing – cheque can be paid by way of credit to
account only. Marked as a/c payee between the lines.
d) Double Crossing – when a second bank act as an agent of the first collecting banker it is
said to be doubly crossed.

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:

KYC AML Terms

AML Anti-Money Laundering
BM Branch Manager
BDD Basic Due Diligence
CAP Customer Acceptance Program
CBI Central Bureau of Investigation
CBS Core Banking Solution
CCR Counterfeit Currency Report
CRCM Customer Risk Categorisation Model
CDD Customer Due Diligence
CIP Customer Identification Program
CRO Customer Relationship Officer
CTR Cash Transaction Report
DCCB District Central Cooperative Bank
EDD Enhanced Due Diligence
FATF Financial Action Task Force
FIU-IND Financial Intelligence Unit - India
HNI High Net Worth Individual
HUF Hindu Undivided Family
IBA Indian Banks’ Association
KYC Know Your Customer
ML Money Laundering
NRI Non-Resident Indian
PACS Primary Agricultural Cooperative Societies
PEP Politically Exposed Person
PIO Person of Indian Origin
PMLA Prevention of Money Laundering Act 2002
PMLR Prevention of Money Laundering Rules 2005
PO Principal Officer
RBI Reserve Bank of India
RRB Regional Rural Banks
NABARD National Bank for Agriculture and Rural Development
NAFSCOB National Federation of State Cooperative Banks
NRI Non Resident Indian
NSDL National Securities Depository Limited
NTR Non-Profit Organisation Transaction Reports
SA Staff Assistant
SCB State Cooperative Banks
SDD Simplified Due Diligence
STR Suspicious Transaction Report
UAPA Unlawful Activities Prevention Act
UN United Nations
UNSCR United Nation Security Council Resolution

Mortgage and various types of charges

mortgage
A legal agreement that conveys the conditional right of ownership on an asset or property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan. The lender's security interest is recorded in the register of title documents to make it public information, and is voided when the loan is repaid in full.

Virtually any legally owned property can be mortgaged, although real property (land and buildings) are the most common. When personal property (appliances, cars, jewelry, etc.) is mortgaged, it is called a chattel mortgage. In case of equipment, real property, and vehicles, the right of possession and use of the mortgaged item normally remains with the mortgagor but (unless specifically prohibited in the mortgage agreement) the mortgagee has the right to take its possession (by following the prescribed procedure) at any time to protect his or her security interest.

In practice, however, the courts generally do not automatically enforce this right when it involves a dwelling house, and restrict it to a few specific situations. In the event of a default, the mortgagee can appoint a receiver to manage the property (if it is a business property) or obtain a foreclosure order from a court to take possession and sell it. To be legally enforceable, the mortgage must be for a definite period, and the mortgagor must have the right of redemption on payment of the debt on or before the end of that period. Mortgages are the most common type of debt instruments for several reasons such as lower rate of interest (because the loan is secured), straight forward and standard procedures, and a reasonably long repayment period.

The document by which this arrangement is effected is called a mortgage bill of sale, or just a mortgage.

Purpose, Various types of charges:

1. Pledge - It is used when the bank (or, lender, known as pledgee) takes

actual possession of the securities, such as goods, certificates, golds,

etc, (you provide it to bank to avail loan) which are generally movable in nature.



Bank keeps the securities with itself, and provide loan to you.

Bank will return the securities (possession of goods) to you (borrower,known

as pledgor), after you repay all the debts (i.e., loan) to the bank. In case you

are unable to pay back, then the bank has the right to sell the assets,

and recover the loan amount (with interest).

Example - Gold loans, Jewellry loans, warehouse finance.

2. Hypothecation - It is used when you (borrower) have the

actual possessionof the asset, for which you have taken the loan. Generally,

this is charged against loans for movable assets, like car, bus, etc.

(i.e., vehicle loans). Here, the assets (bus, car, etc.) remain with you, and you

are hypothecated to the bank for the loan granted.

In case you are unable to repay the loan amount, then the bank has the right

to sell the asset (bus, car, etc.), (which is possessed by you) and recover the

total amount (with interest).

Example - Car loans, Bus loans, etc.

3. Mortgage - It is used when you (borrower) have the

actual possession of the assets, for which you are granted loan (e.g., house

loan), or against whichyou are granted loan (e.g., house

mortgaged). Mortgages are generally those assets, which

are permanently attached with Earth surface, like house, land, factory etc.

In case you are unable to repay the loan amount, the bank has

the right to seize and sell the mortgage, and recover the loan amount (with

interest).



4. Lien - It is almost similar to Pledge, except that in case of lien,

the lendercan only detain the asset/goods until the borrower repays the loan,

but have no right to sell the asset, unless explicitly declared in the lien

contract. (For a pledge, the lender can sell the asset, if the borrower is unable

to pay the loan). Loan against FD is a lien .

5. Assignment: It is done in case of loan is provided on documents of some

other organization. Like, Loan against assignment policies, NSC, etc. A

notification is required to be sent to the concerned organization to inform that the

original document is with you as a security for loan. Else, the customer can apply

with indemnity to the concerned organization for issuance of duplicate doc and

defraud you.

A&L

According to Accounting terms

ASSETS

Assets are the economic resources of business or we can say assets are the property owned by the business to get benefit on future.

In other words, assets are valuable resources owned by a business which were acquired at a measurable money cost for usefulness.

The various types of assets are:

1- Fixed assets: those assets which are acquired for the purpose of increasing profit earning capacity of the business and are purchased not for sale purpose, they will remain in the business till the business winds up. Example, land and building, plant and machinery etc

2- Current assets: those which can be converted into cash within a short period say one year. These are short term assets for the purpose of converting them into cash. Example, cash in hand, debtors, stock, bank balance etc.

3- Liquid assets: similar to current assets, but they are those assets which can be easily and in a very short period of time can be converted into​ cash, so all current assets except stock and prepaid expenses are considered liquid assets.

4- Tangible assets: assets which having some physical existence or we say which can be touched and seen like land and building, machinery, stock etc

5- Intangible assets: those assets which can't be seen or touched and there revenue generation is assumed to be uncertain. Moreover they can't be purchased or sold in open market examples are goodwill, patents, trademarks etc.

6- Fictitious assets: those assets which do not have any real value and do not have any physical form but are called assets on the basis of legal and technical grounds, as they do not have any real value so they are written off in the future, for example preliminary expenses, discount on issue of shares and debentures etc.

7- Wasting assets: those assets when with the passage of time value of assets decreases, example patents, leasehold property.

LIABILITIES

Liabilities are the claims against those resources or liabilities are the amount which a business owes to outsiders or claim of outside towards business. We should remember one thing that we take all the claims against business except the claims of proprietors. Because claim of proprietors against business is called internal liability or capital.

Example of liabilities are, creditors, bills payable, bank overdraft etc.

We should note that total assets are always equals to total liabilities.

Types of liabilities are:

1- Fixed liabilities: which are payable after a long period or normally one year. Example long term loans, debentures etc.

2- Current liabilities: those which are payable within one year example, bills payable, creditors etc

3- Contingent liabilities: those liabilities which are not a liability for today but it may be liability in future depending on the future events, they are uncertain liabilities so that is why they are called doubtful liabilities also. Example, value of bill discounted, cases pending in court etc.

Total assets=total liabilities

Or

Total assets= internal liabilities+external liabilities

Or

Total assets= Capital+ liabilities

Or

Liabilities= Assets-capital.

Different types of banking

Para Banking:

Para banking activities are defined as those banking activities which a bank performs apart from its daily activities like withdrawal or deposit of money.

Under para banking activities banks can undertake activities either departmentally or by setting up subsidiaries.

Narrow Banking:

This is a type of banking in which banks invest money mostly in government bonds and securities.

This is done to avoid risk in the market.

Banks dedicated to such type of banking are also known as Narrow Banks.

Offshore Banking

When a bank accepts currencies of countries abroad, such an activity is known as Offshore banking

Sometimes people require more than their local banks can offer. In such cases, they opt for Offshore banking.

It provides financial and legal benefits like privacy and minimal taxation.

Green Banking

Green banking promotes deployment of clean energy technologies.

It stresses on environmentally friendly practices and aims at reducing the carbon footprint from banking activities.

These activities seek to reduce costs of energy for ratepayers, private sector investments and other economic activities.

Retail Banking

Retail banking is a type of banking in which direct dealing with the retail customers is done. This type of banking is also popularly known as consumer banking or personal banking

Retail banking is the visible face of banking to the general public.

Wholesale Banking

Wholesale banking can be referred to as the services provided by banks to organisations like Mortgage Brokers, corporate clients, medium scale companies, real estate developers and investors, international trade finance businesses, institutional customers (such as pension funds & government agencies) and services offered to other banks or financial institutions.

Universal Banking

The recommendation of the concept of Universal Banking was done by the R H Khan committee.

This is a type of banking in which banks are allowed to undertake all types of financial activities regarding banking or development in accordance with the statutory and other requirements of RBI, Government and related legal Acts.

Universal Banking includes activities like accepting deposits, issuing credit cards, investing in securities, merchant banking, foreign exchange operations, etc.

Different types of banking

Islamic Banking

Islamic banking is a kind of banking activity which strictly follows the principles of the Islamic law (Sharia) and its application practically through the development in Islamic economics

A better and more apt term for Islamic banking is Sharia Compliant Finance.

Unit Banking

USA is where such type of banking was first introduced.

In such a type of banking, all the operations are performed from a single branch.

A customer having an account in a specified branch has to undergo all banking activities through that branch.

Examples are Regional Rural Banks and Local Area Banks.

Mixed Banking

Mixed banking is a type of banking in which deposits and investment activities take place simultaneously.

It can also be described as the dual functioning of investment banking and commercial banking.

Chain Banking:

Chain banking is a type of banking which is a group of minimum 3 banks held together by a group of people to carry out effective banking activities.

Instead of having a holding company the bank functions independently.

The revenue is maximised since there is no overlap of activities.

Relationship Banking

In such a type of banking, the the major needs of the customers are understood by the bank and accordingly banking services are provided to the individual.

Banks get to know if the customer is credit worthy since they have to gather information about its customers.

Correspondent Banking

In more than 200 countries, this type of banking is prevalent and is considered the most profitable way of doing business.

In such a type of banking, the bank does not have a physical presence or any limitations in the permission of operations.

It acts as a banking agent for a home bank.

Very Nice article on The importance of a vibrant MSME sector

 Very Nice article on The importance of a vibrant MSME sector

The importance of a vibrant MSME sector in the context of the aggregate economy can’t
be over-estimated as it accounts for:
• Roughly one-third of aggregate economy gross value added
• Approximately one-third of manufacturing output in the country
• 45% of all Indian exports
• Three-fourths of all establishments in the country
• Provide employment to around 131.2 million people

However, the MSME sector has not received the due attention it deserves from the financial system on account of the various
challenges inherent in servicing this segment. Like we demonstrated earlier, lending to MSMEs should allow the banks to ameliorate the
deleterious impact of the secular trend of Disintermediation and the cyclical challenges of rising NPAs due to an over-extended largesize
corporate sector.
Thus, it would be fair to surmise that a business realignment towards MSME lending is the antidote to the ills afflicting the Indian banking
system currently. This is one of the rare instances where the commercial imperative of higher growth and profitability is aligned with the
societal imperative of financial inclusion.
The rest of this report deals with the key issues impacting the supply and demand of credit to the MSME segment. Effort has been made
to diagnose the key financial and operational challenges involved in servicing this segment. Finally, the key thrust of this report is to
illustrate the similarities between the business models for the retail and the MSME segment and the relevance of applying the key
success strategies especially the adoption of a credit scoring fueled information lending model in achieving robust and sustainable risk
adjusted growth.
MSME FINANCING – SUPPLY, DEMAND & GAP ANALYSIS
Source: RBI & TransUnion CIBIL Calculations
Overall bank credit to the Micro & Small Enterprises (MSE) has increased at a CAGR of 15.2% from INR 2.5 trillion in FY08 to INR 9.0
trillion FY17. This is marginally ahead of the 13.4% and 13.9% growth exhibited by the Nominal GDP and the Non-food Credit
respectively over the same time period. Thus, MSE credit penetration (as measured by proportion to GDP) has increased from around
5.2% in FY08 to a high of 6.4% in FY15.
Ongoing deceleration in economic activity and the emergence of the NPA overhang in the past couple of years has meant that credit
growth to the MSE sector has slowed down considerably. This has manifested itself in share of MSE Lending coming down as a
proportion of the GDP as well as a proportion of the total non-food credit.
Most SMEs in India face poor access to finance within a financial system dominated by banks. The following points will conclusively
highlight the scale of funding challenges faced by the Indian MSME sector:
• MSME bank credit to GDP ratio for India was at around 6.2% in FY 15 – less than one-sixth of the levels seen in countries like Korea
and China. It is around one-fourth of countries like Thailand and Malaysia and is even lower than Bangladesh.
• As per IFC, the total financing demand of the Indian MSME sector is around INR 32.5 trillion – comprised of entrepreneur’s contribution
of INR 4.6 trillion and estimated external finance demand of INR 27.9 trillion.
• Considering that the MSMEs have access to formal finance of around INR 10 trillion, the sector is grappling with a formal credit gap of
around INR 17.9 trillion. The enormity of the financial challenge is clear from the fact that the credit gap is close to twice the actual
outstanding amount of formal credit extended to the sector.

From a sectoral perspective, the credit gap for the manufacturing sector (73% of aggregate credit gap) is much higher than services
sector due to the capital intensive nature of the manufacturing enterprises. This trend is exacerbated by the fact the bank lending to the
Services sector has expanded at the expense of Manufacturing. Share of Services sector in aggregate MSE lending has increased from
47% in FY08 to 59% in FY17.

• As per the sixth economic census, roughly 78% of all enterprises in India are self-financed and have no access to financing from
formal sources.
MSME FINANCING – KEY CHALLENGES

Inadequate access to financing by the MSMEs is a function of the inherent limitations of the current business models of the financial
institutions. The underlying heterogeneity, pervasive geographical presence of the MSME sector and the utilization of physical bank
branches for bulk of the loan origination means that entrepreneurs in remote locations lack access to finance. Even though Banks have
tried to ease this issue through the usage of the Banking Correspondents model, access remains a key challenge – especially for
entrepreneurs based out of low-income or geographically far-flung areas.


The current business model is also characterized by manual check-list based risk assessment at the origination stage. MSMEs are also
bedeviled by the insistence of the banks on following a cumbersome and inflexible documentation procedure that is difficult for new
borrowers. The net result is a significant increase in turnaround times. Currently, the sector is characterized by turnaround times (for
loans < INR 1 Million) ranging from 17 days for the NBFC sector to 30 days for PSU Banks.
Such high level of turnaround time means that the formal financial sector is unable to provide timely credit to entrepreneurs in times of a
crisis – especially important as MSME entrepreneurs have very limited financial capabilities to handle life cycle shocks. These
entrepreneurs turn to informal sources in such crisis situations and it is difficult to bring them back into the formal financial sector after
such an experience.
Despite the preponderance of evidence to the contrary (NPA analysis by size segments showed that the MSME-CMR segment had one
of the best performance), most financial sector participants consider the MSME sector to be massively risky and are loath to disburse
loans without adequate collateral. World Bank Enterprise surveys show that around 81% of all loans in South Asia are collateralized –
significantly higher than the 64% share in high income OECD countries. Further, most financial institutions insists on immovable
collateral like land or buildings on account of unenforceable secured transaction laws. Thus, MSME loans have comparatively higher


rejection rate for feasible projects.
The informal nature of most MSMEs, consequent lack of adequate compliance to tax and other legal regulations means that most
MSMEs find it difficult to adapt to the high levels of document requirements of the formal financial system. This situation is exacerbated
by the lack of qualified personnel for preparing the annual financial statements. Consequently, most MSMEs gravitate towards the
informal system that ask for little documentation.
The combination of the above discussed trends of physical branch based origination systems, low access, high turnaround times due to
complicated processes, inadequate access to collateral and documentation and perceptions of higher risk translate into significantly
higher cost of funding in terms of both the interest rate as well as processing costs for the MSMEs. The high cost of financing in turn has
a significant adverse impact on the future profitability and growth of the sector.
MSME LENDING – CREDIT SCORING BASED INFORMATION LENDING
The centrality of the MSMEs in ensuring India’s future economic and employment growth and the inability of the formal financial sector in
supporting the continued robust growth of MSMEs underline the need for a radical redesign of the entire MSME lending value chain.
Fortunately, the banks and the NBFCs already have a business segment – Retail Lending – that can serve as a guidepost for
redesigning a business model that can facilitate robust volume growth whilst maintaining risk under control.
As our previous research article “Credit Bureaus, Scoring & Technology – Key Pillars Of Sustainable Retail Lending” illustrated, financial
institutions have been able to robust risk-adjusted growth in retail lending in the past few years as the confluence of the structural trends
of the advent of the Credit Bureaus like TransUnion CIBIL, increasing information technology intensity and the resultant development of
credit scoring based automatic decision making has radically redefined the consumer lending business model from “manual, judgmental
and relationship driven” to “digital, credit scoring and transaction driven”. This paradigm shift in the business model has translated into
multi-faceted benefits for consumer lending industry, consumers and the aggregate economy.

In contrast to the current practice of a one-size-fits-all risk assessment system based on financial statement analysis and
collateralization, banks need to come up with risk assessment systems that are targeted at different commercial client segments.

6/8
Financial Statement Lending is suitable for large enterprises with a significant history of audited financial statements and consequent
financial transparency. Risk assessment and monitoring is largely a function of achievement and maintenance of financial performance
covenants.
Asset Based Lending i.e. Collateralized Lending should be used for medium-sized firms that exhibit the characteristics of limited
financial transparency, inadequate future cash flow generation capacity but access to reasonable amount of moveable collateral like
high quality accounts receivables and inventory and immovable collateral like land and buildings.
Credit Scoring Based Information Lending is the most appropriate form of lending for Micro and Small Enterprises that may lack
updated financial statements as well as reasonable amounts of collateral. In this type of lending, decisions involving the approval of the
loan, pricing and the other terms and conditions are linked to the Credit Score.
Credit Scoring is a quantitative technique in which the future probability of default is determined by financial and non-financial
characteristics of both the business and the business owner. A well-known example of Credit Score is the CIBIL MSME Rank (MSME
(CMR)) score provided by TransUnion CIBIL. The MSME (CMR) measures and predicts the future probability of default over a one-year
horizon on a rank scale of 1 to 10 with 1 being the best and 10 being the worst.
CREDIT SCORING BASED INFORMATION LENDING – KEY BENEFITS
Just like Consumer Lending, judicious use of credit scoring results in multifaceted benefits to lenders, borrowers and the aggregate
economy.
Use of credit scoring and the associated change in risk assessment practices leads to greater process standardization and concomitant
increase in objectivity in risk assessment practices. Financial Institutions can achieve meaningful increase in profitability as credit
scoring can reduce the costs associated with the processing of individual applications whilst increasing the volumes as lenders are able
to safely approve marginal applications that an individual underwriter may have rejected.
Various international studies have documented the positive impact of credit scoring on the availability, price and risk of credit to micro
and small enterprises. A US Study examining the benefits of credit scoring for micro business lending estimated that the usage of credit
scoring resulted in the loan processing costs coming down from a range of USD 500-1800 to around USD 100. Another study by the
Federal Reserve Bank of Atlanta found out that usage of credit scoring led to significant increase in credit availability especially in lowincome
areas – traditionally the geographic segments facing the largest credit gap – due to the rise in objectivity of the credit
assessment process.
The usage of credit scoring has the potential of solving the access challenges faced by MSMEs based in geographically remote areas
that have comparatively lower penetration of formal financial sector. Research by Raghuram Rajan and Mitchell Peterson showed that
the confluence of the trend of availability of credit information from infomediaries like Credit Bureaus and ability of banks to synthesize
this information through Credit Scoring and Information Technology investments has resulted in significant expansion of the distance
between the small firms and their lenders.
The combination of credit scoring and automatic decisioning platforms provided by Credit Bureaus like TransUnion CIBIL can have a
significant impact on the turnaround time of micro and small business lending. Since the majority of applications come from applicants
that are low risk in nature, an automatic decision rule (say accept all companies having a MSME (CMR) rank of 4 or below) would
significantly reduce the turnaround time for bulk of the applicants. Conversely, turnaround times are also reduced by explicit rejection
rules e.g. reject all applicants having a MSME (CMR) rank of 8 or above. It is our opinion that the current turnaround time of 17-30 days
can be reduced to around 1-5 days by utilizing the credit scoring risk assessment system in conjunction with automatic rule-based
decisioning systems.
Proactive utilization of Consumer Bureau data as well periodic monitoring of bureau scores should lead to a meaningful reduction in bad
debts. It is a well-established fact that enterprises would exhibit certain behavior patterns like irregular payments, deteriorating credit
score, multiple financial enquiries etc. before showing actual delinquency. A well-thought out delinquency indicator alert system
developed in partnership with a Credit Bureau would allow a lender to identify the set of clients going through a challenging time. This in
turn allows the financial institutions to limit the bad debt exposure as well as implement risk mitigation strategies that benefit both the
lender and the borrower.
In addition to application scoring, Credit Scores like the MSME (CMR) developed by TransUnion CIBIL can be leveraged for Collections
purposes as well. Collection process efficiency and profitability can be significantly increased by segmenting the default and the neardefault
clients into collection priority buckets through the usage of scores and ability and propensity of future payments.
Thus, the principal benefits accruing to a lender – lower bad debt expense, reduced turnaround time, lesser processing / operational
cost – result in expanded credit at comparatively lower cost to the micro and small enterprises. Additionally, there is a meaningful
improvement in the service quality as well.
In conclusion, it would be fair to say that the usage of credit scoring would go a long way in expanding credit availability at comparatively
lower cost to the MSME sector – one of the prime movers of the Indian economy and one of the principal sectors suffering from financial
exclusion.
MSME LENDING – PROFITABILITY STRATEGIES
Conventional wisdom suggests that the profitability of the MSME segment is likely to below-par on account of myriad operational and
financial challenges in servicing this segment. The profitability question become even more challenging in today’s economic scenario
characterized by weakening economic growth and rising NPAs.
However, IFC research of MSME Banking business models across various countries shows that banks can tackle this challenge by
having some innovations in the business model. Following best practices that banks have used to enhance the profitability of the SME
lending segment:
• Transitioning the business model from a relationship based lending business model to a sophisticated high volume approach that
emphasizes quantitative credit score based risk assessment system to get scalability and efficiency advantages.
• Harnessing the synergy between the MSME lending and personal banking of the MSME owners through retail or personal banking
divisions to enhance aggregate profitability.
• Sophisticated risk-tier based pricing dynamic pricing to better capture the risk-adjusted profitability and allow differentiated lending to
different risk profiles.
• Successful banks have developed product-specific profitability models to identify the optimum bouquet of products / services for the
MSME segment. In addition to asset products, successful banks have targeted the sale of non-lending products to enhance the overall
risk-adjusted profitability.
• Early warning risk indicators that allow the bank to proactively tackle the loans that are about to become delinquent is also a major
factor that distinguishes between a profitable and loss making portfolio. Key attributes of this approach would include the ability to timely
respond to arrears, maintenance of credit relationships as long as the situation seems resolvable and proactive loss minimization when
risk mitigation fails.

Risk management

Risk management is the process of identifying, assessing and controlling threats to an organization's capital and earnings. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters. IT security threats and data-related risks, and the risk management strategies to alleviate them, have become a top priority for digitized companies. As a result, a risk management plan increasingly includes companies' processes for identifying and controlling threats to its digital assets, including proprietary corporate data, a customer's personally identifiable information and intellectual property

Risk management standards
Since the early 2000s, several industry and government bodies have expanded regulatory compliance rules that scrutinize companies' risk management plans, policies and procedures. In an increasing number of industries, boards of directors are required to review and report on the adequacy of enterprise risk management processes. As a result, risk analysis, internal audits and other means of risk assessment have become major components of business strategy.

Risk management standards have been developed by several organizations, including the National Institute of Standards and Technology and the ISO. These standards are designed to help organizations identify specific threats, assess unique vulnerabilities to determine their risk, identify ways to reduce these risks and then implement risk reduction efforts according to organizational strategy.

The ISO 31000 principles, for example, provide frameworks for risk management process improvements that can be used by companies, regardless of the organization's size or target sector. The ISO 31000 is designed to "increase the likelihood of achieving objectives, improve the identification of opportunities and threats, and effectively allocate and use resources for risk treatment," according to the ISO website. Although ISO 31000 cannot be used for certification purposes, it can help provide guidance for internal or external risk audit, and it allows organizations to compare their risk management practices with the internationally recognized benchmarks.

The ISO recommended the following target areas, or principles, should be part of the overall risk management process:

The process should create value for the organization.
It should be an integral part of the overall organizational process.
It should factor into the company's overall decision-making process.
It must explicitly address any uncertainty.
It should be systematic and structured.
It should be based on the best available information.
It should be tailored to the project.
It must take into account human factors, including potential errors.
It should be transparent and all-inclusive.
It should be adaptable to change.
It should be continuously monitored and improved upon.
The ISO standards and others like it have been developed worldwide to help organizations systematically implement risk management best practices. The ultimate goal for these standards is to establish common frameworks and processes to effectively implement risk management strategies.

These standards are often recognized by international regulatory bodies, or by target industry groups. They are also regularly supplemented and updated to reflect rapidly changing sources of business risk. Although following these standards is usually voluntary, adherence may be required by industry regulators or through business contracts.

Risk management strategies and processes
All risk management plans follow the same steps that combine to make up the overall risk management process:

Risk identification. The company identifies and defines potential risks that may negatively influence a specific company process or project.
Risk analysis. Once specific types of risk are identified, the company then determines the odds of it occurring, as well as its consequences. The goal of the analysis is to further understand each specific instance of risk, and how it could influence the company's projects and objectives.
Risk assessment and evaluation. The risk is then further evaluated after determining the risk's overall likelihood of occurrence combined with its overall consequence. The company can then make decisions on whether the risk is acceptable and whether the company is willing to take it on based on its risk appetite.
Risk mitigation. During this step, companies assess their highest-ranked risks and develop a plan to alleviate them using specific risk controls. These plans include risk mitigation processes, risk prevention tactics and contingency plans in the event the risk comes to fruition.
Risk monitoring. Part of the mitigation plan includes following up on both the risks and the overall plan to continuously monitor and track new and existing risks. The overall risk management process should also be reviewed and updated accordingly.
Risk management approaches
After the company's specific risks are identified and the risk management process has been implemented, there are several different strategies companies can take in regard to different types of risk:

Risk avoidance. While the complete elimination of all risk is rarely possible, a risk avoidance strategy is designed to deflect as many threats as possible in order to avoid the costly and disruptive consequences of a damaging event.
Risk reduction. Companies are sometimes able to reduce the amount of effect certain risks can have on company processes. This is achieved by adjusting certain aspects of an overall project plan or company process, or by reducing its scope.
Risk sharing. Sometimes, the consequences of a risk is shared, or distributed among several of the project's participants or business departments. The risk could also be shared with a third party, such as a vendor or business partner.
Risk retaining. Sometimes, companies decide a risk is worth it from a business standpoint, and decide to retain the risk and deal with any potential fallout. Companies will often retain a certain level of risk a project's anticipated profit is greater than the costs of its potential risk.

Consumer disputes redressal agencies

Consumer disputes redressal agencies

Consumer disputes redressal agencies are established in each district and state and at national level.


i. District Forum: The forum has jurisdiction to entertain complaints, where value of the goods or services and the compensation claimed is up to Rs. 20 lakhs The District Forum is empowered to send its order/decree for execution to appropriate Civil Court.

ii. State Commission: This redressal authority has original, appellate and supervisory jurisdiction. It entertains appeals from the District Forum. It also has original jurisdiction to entertain complaints where the value of goods/service and compensation, if any claimed exceeds Rs. 20 lakhs but does not exceed Rs. 100 lakhs. Other powers and authority are similar to those of the District Forum.

iii. National Commission: The final authority established under the Act is the National Commission. It has original; appellate as well as supervisory jurisdiction. It can hear the appeals from the order passed by the State Commission and in its original jurisdiction it will entertain disputes, where goods/services and the compensation claimed exceeds Rs.100 lakhs. It has supervisory jurisdiction over State Commission.

All the three agencies have powers of a Civil Court.

Pecuniary limit for filing an application in DRT increases from 10 Lacs to 20 Lacs: MoF

Monetary limit for filing cases in DRT doubled to Rs 20 lakh

The move is aimed at helping reduce pendency of cases in DRTs. There are 39 DRTs in the country.

The government on Thursday doubled the pecuniary limit to Rs 20 lakh for filing loan recovery application in the Debt Recovery Tribunals (DRT) by banks and financial institutions.

The move is aimed at helping reduce pendency of cases in DRTs. There are 39 DRTs in the country.

The Central government has raised "the pecuniary limit from Rs 10 lakh to Rs 20 lakh for filing application for recovery of debts in the Debts Recovery Tribunals by such banks and financial institutions," said a Finance Ministry notification.

As a result, any bank or financial institution or a consortium of banks or financial institutions cannot approach DRTs if the amount due is less than Rs 20 lakh.

As per RBI data on global operations (with provisional data as on March 2018), aggregate amount of Rs 3,98,671 crore was written-off by banks over the last four financial years. Over the same period, their NPAs reduced by Rs 2,57,980 crore due to recoveries.

Banks and financial institutions' recovery of dues takes place on ongoing basis through legal mechanisms, which inter-alia includes Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, Recovery of Debts to Banks and Financial Institution (DRT) Act and Lok Adalats.

The borrowers of such loans continue to be liable for repayment even when the loans have been removed from the balance sheet of the bank(s) concerned.

To make the tribunals more effective and to facilitate fast disposal of debt recovery cases, the government has made several amendments in different laws, including the SARFAESI Act.

Notification from Govt

MINISTRY OF FINANCE
(Department of Financial Services)
NOTIFICATION
New Delhi, the 6th September, 2018
S.O. 4312(E).—Whereas, sub-section (4) of section 1 of the Recovery of Debts due to Banks and Financial
Institutions Act, 1993 ( 51 of 1993) provides that the provisions of the said Act shall not apply where the amount of debt
due to any bank or financial institution or to a consortium of banks or financial institutions is less than ten lakh rupees or
such other amount, being not less than one lakh rupees, as the Central Government may, by notification, specify;
And whereas, the Central Government has considered it necessary to raise the pecuniary limit from ten lakh
rupees to twenty lakh rupees for filing application for recovery of debts in the Debts Recovery Tribunals by such banks
and financial institutions.
Now therefore, in exercise of the powers conferred by sub-section (4) of section 1 of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993, the Central Government hereby specifies that the provisions of the
said Act shall not apply where the amount of debt due to any bank or financial institution or to a consortium of banks or
financial institutions is less than twenty lakh rupees.
[F. No. 3/4/2018-DRT]
SUCHINDRA MISRA, Jt. Secy.