MSMEs in India -Opportunities, Issues and Challenges

MSMEs in India -Opportunities, Issues and Challenges

 The MSME sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. It contributes significantly in the economic and social development of the country by fostering entrepreneurship and generating the largest employment opportunities at comparatively lower capital cost, next only to agriculture. It has played a crucial role in not only providing large employment opportunities and increasing exports but also in promoting industrialisation of rural and backward areas, thereby reducing regional socio-economic imbalances. MSMEs are complementary to large industries as ancillary units, and this sector contributes significantly in the inclusive industrial development of the country. The UN General Assembly in its 74th  Plenary held on April 6, 2017 declared June 27 as MSMEs Day, recognising the importance of MSMEs in achieving sustainable development goals and in promoting innovation, and sustainable work for all. MSME defined MSMEs are defined under Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006), on the basis of the original cost of investment in plant and machinery / equipment as mentioned in Table 1. The Government of India (GoI) has introduced the Bill to redefine MSMEs from ‘investment in plant and machinery / equipment’ to ‘annual turnover’ as follows: • A Microenterprise will be defined as a unit where the annual turnover does not exceed INR 5 crores. A Small enterprise will be defined as a unit where theannual turnover is more than INR 5 crore but does not exceed INR 75 crore. • A Medium enterprise will be defined as a unit where the annual turnover is more than INR 75 crore but does not exceed INR 250 crore. After passing of the Bill in the Parliament, Section 7 of the MSMED Act, 2006 will accordingly be amended to define units producing goods and rendering services in terms of annual turnover as above

Mission to redefine  MSME
Taking turnover as a criterion can be pegged with reliable figures available eg in GST Network and other methods of ascertaining which will help in having a non-discretionary, transparent and objective criteria and will eliminate the need for inspections, make the classification system progressive and evolutionary, help in overcoming the uncertainties associated with the classification based on investment in plant and machinery / equipment and employment and improve the ease of doing business and the consequent growth and will pave the way for

increased direct and indirect employment in the MSME sector of the country. It has also received criticism, to redefine MSME on the turnover basis, on the ground that: • It will end the distinct identity of the MSME; • There should be an arm’s length to the large industry so that MSME can evolve with all support from the government; • Nowhere in the world, turnover is the sole criterion to define MSME. MSME in Indian Economy – Potentialities for growth and opportunities Globally, the MSMEs segment plays a crucial role in employment generation and contributes significantly to overall economic activity. In India, the MSME sector: • Constitutes a vast network of over 63 million units. • Employs around 111 million people. • The share of MSME in overall GDP is around 30 percent (GoI,2018). • Contributes 40 percent of total exports of the country. • Accounts for 45 percent of manufacturing output. MSMEs, as above, have significantly contributed to the development of Indian economy. MSMEs have greater opportunities to grow as ancillary industries to unleash higher industrial growth. MSMEs being less capital intensive and more employment-friendly have easier access to raw-materials, subsidies and other incentives under cluster programmes. Development of this sector is, therefore, extremely important as it holds the key to inclusive growth and plays a pivotal role in the economic development of the country. The MSME sector has the potentialities to emerge as the backbone of the Indian economy and to continue as an engine of growth, must be provided with an environment-friendly policy framework and enabling infrastructural support. MSME issues Credit flow to MSMEs As per a quarterly report by Transunion Cibil and Small Industries Development Bank of India (SIDBI), the overall credit to the MSME segment grew 16.1 percent for the year to June 2018, in which, PSBs reported a growth of 5.5 percent, compared with 23.4 percent for the private sector competitors. Data given in Chart 2 and Chart 3 reveal that the credit to MSME has shown an increasing trend during and after 2017. As per the (Mint Street Memo No 13) RBI report dated August 17, 2018, credit growth in the MSME sector had started decelerating even before demonetisation and declined further during the demonetisation phase. In contrast, GST implementation does not seem to have had any significant impact on credit. Overall, MSME credit and especially microcredit to MSMEs including loans by banks and NBFCs shows a healthy rate of growth in recent quarters. During the quarter April-June 2018, bank credit to MSMEs increased on average by 8.5 percent (y-o-y). The Reserve Bank of India (RBI) observed ‘Despite significant contribution to economic growth, MSMEs face several bottlenecks inhibiting them from achieving their full potential. A majorobstacle for the growth of MSMEs is their inability to access timely and adequate finance as most of them are in niche segments where credit appraisal is a major challenge. The challenges faced by MSMEs in accessing finance are due to lack of comprehensive formal documentation relating to accounts, income and business transactions. As a result, loans are provided to the MSMEs mainly through the appraisal of their collaterals rather than assessing their true business potentials. Further, banks do not trust start-ups, view such loans as risky and thus do not prefer extending finance to MSMEs’. (RBI CIR-Aug 18) (2) Private Banks, NBFCs outdo PSBs in lending to SMEs In a study conducted by Transunion Cibil, it is found that there has been an increase in the Turn-Around Time (TAT) for loan processing across all the three segments as mentioned in Table 3:
In order to improve the TAT for processing of MSME loan proposals, the Finance Minister on 25thwww.psbloansin59minutes.com September, 2018 while reviewing the performance of PSBs announced a common online portal for MSMEs credit space. ‘The web portal () will enable in principle approval for MSME loans up to INR 1 crore within 59 minutes, without entrepreneurs having to visit branches, from SIDBI and five Public Sector Banks (PSBs)’. From the Chart 4, 5a and 5b data, it is indicated that : • The share of Scheduled Commercial Banks (SCBs) to MSME credit has shown a declining trend; whereas the share of NBFCs has an increasing trend. (Chart-
4) • The share of PSBs has a declining trend vis-à-vis an increasing trend revealed by private sector banks. • The share of credit extended to MSMEs in overall bank credit declined steadily to around 14 percent by end-March 2018 from about 17 percent in 2007. This could be partly due to over-lending to large corporates (now stressed) in the second half of the 2000s. Additionally, within the credit to the industrial sector, the share of credit to medium enterprises has dropped significantly as compared to the share of micro and small enterprises .From from the data collected by Transunion Cibil and SIDBI, the share of 21 PSBs has fallen to 50.7 percent as of June 2018, from 55.8 percent in June 2017 and 59.4 percent in June 2016. (3) Non-Performing Assets (NPAs) From the data in chart 6, it is clear that the growth of credit by PSBs during the past three years has declined. Conversely, the NPAs has increased. The credit growth was 7 percent, and NPA increase was 13.1 percent. In the case of Private sector banks, the credit growth toMSME sector registered 14.3 percent, and NPA level is contained at a manageable level of 2.7 percent. As per the data obtained by Transunion Cibil, despite aggressive growth, private sector banks and NBFCs far better on asset quality as well. The PSBs (NPAs) from the MSME book increased to 15.2 percent (June 2018) from 14.5 percent(June 2017), while in case of private sector banks, the ratio decreased marginally to 3.9 percent in June 2018 from 4 percent in June 2017. (4) Documentation Many of the MSMEs, particularly the Micro units, do not have adequate documentation to match the rigours of a formal financial system. The absence of documentation drives the small entrepreneurs to informal sources that are willing to provide credit with minimum documentation. Further, a vast majority of the MSMEs are informal, which brings down the credit score of the entrepreneur and hinders the ability of the formal financial system to lend to them. Banks, on their part, will need to leverage modern technology algorithms and big data so that they can differentiate between a good borrower and not so good one even in the absence of conventional documentation.Documentation has now, of late, not posed a problem since most of the banks have adopted simple common loan application forms for extension of credit facilities to MSMEs up to credit limit of INR 2 crore.Further, Financial Literacy Centre (FLC) have been started by different banks which help in capacity building in existing and potential entrepreneurs.Similarly, (RSETIs) Rural Self Employment Training Institutes, is initiated as an initiative of Ministry of Rural Development (MoRD) to have dedicated infrastructure in each district of the country to impart training and skill upgradation of rural youth geared towards entrepreneurship development. RSETIs are managed by banks with active co-operation from the GoI and State Governments. MSME – Challenges: In spite of substantial contributionsmade by MSME enterprises for the development of the economy, they face following common challenges which prove obstacles in the path of their growth and development: 1. Lack of adequate capital and credit. 2. Poor and inadequate infrastructure. 3. Market access. 4. Lack of skilled human resources. 5. Inadequate access to new technology. 6. Cumbersome regulatory practices. MSME challenges – A breather Following are some of the solutions provided by GoI, RBI, Ministry of MSME, Banks and others for mitigating the challenges of MSME: 1. Capital is the lifeblood of business. Without adequate capital and credit, MSME units will either not come forward or die prematurely. (a) Now MSME units are provided with working capital facility @ 25 percent of turnover and in case of MSME units that transact digitally @ 30 percent of turnover instead of 20 percent earlier. (b) Guarantees are provided by Credit Guarantee Trust Micro and Small Enterprises (CGTMSE) for extending collateral free lending to MSMEs through Banks and financial institutions (Fis) including NBFCs.

(c) ‘Credit Linked Capital Subsidy Scheme (CLCSS)’ provides a capital subsidy on institutional finance. (d) Various credit rating agencies like Small and Medium Enterprises Rating Agencies (SMERA) has been established for a rating of MSME units which help banks in the assessment of credit facilities. Such ratings also enable MSME units to get interest concessions from various banks and Fis. (e) In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to achieve: • 20 percent year–on–year growth in credit to micro and small enterprises; • 10 percent annual growth in the number of microenterprise and accounts; and • 60 percent of total lending to the MSE sector as on corresponding quarter of the previous year to microenterprises. (f) As per the RBI guidelines, banks are mandated not to accept collateral security in the case of loans up to INR 10 lacs extended to units in the MSE units. Further, banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to INR 25 lacs (with the approval of the appropriate authority). (g) A composite loan limit of INR 1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window. The Ministry of MSMEs has vide their GazetteNotification dated May 29, 2015 had notified a ‘Framework for Revival and Rehabilitation of MSMEs’ to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs. 2. (a) SFURTI – Scheme of Fund for Regeneration of Traditional Industries is the scheme to organise traditional industries and artisans into clusters to make them competitive and provide support for their long term sustainability. (b) Scheme for Micro and Small Enterprises Cluster Development Programme (MSE-CDP): The Ministry has adopted the cluster development approach as a key strategy for enhancing productivity and competitiveness as well as capacity building of MSEs. 3. The government has introduced a flexible growth stimulating and artisan oriented Market Development Assistance (MDA) scheme, in place of the erstwhile system of Rebate. Under MDA, financial assistance is provided to the institutions @ 20 percent of the value of production of khadi and polyvastra, to be shared among artisans, producing institutions and selling institutions in the ratio of 40:40:20. As a boost for marketing assistance, Special Marketing Assistance Scheme (SMAS) has been launched in which SC / ST entrepreneurs shall be allowed reimbursement under SMAS for a maximum of 2 international events and four domestic events in a financial year. 4. Under the Ministry of MSME, A Scheme for Promotion of Innovation, Rural and Entrepreneurship (ASPIRE) has been developed to: • Create new jobs and reduce unemployment; • Promote entrepreneurship culture in India; • Grassroots economic development; • Facilitate innovative business solution for unmet social needs; and • Promote innovation to strengthen the competitiveness of the MSME sector. National Small Industries Corporation (NSIC) is an ISO 9001-2008 certified Government Enterprise under Ministry of MSME is a premier organisation fostering the growth of MSMEs. It promotes and supports MSMEs by providing integrated support services encompassing, Marketing, Finance, Technology and other Services. National Institute for MSMEs (NIMSME) has been in existence since 1960. Enterprise promotion and entrepreneurship development being the central focus of NIMSME’s functions, the Institute’s competencies converge on the following aspects:
• Enabling enterprise creation • Capacity building for enterprise growth and sustainability • Creation, development and dissemination of enterprise knowledge • Empowering the underprivileged through enterprise creation. While inaugurating the Udyam Sangam – 2018 in New Delhi on International MSME Day 2018, the President of India Ram Nath Kovind launched Udyam Sakti portal of the MSME Ministry and said that it would empower women and weaker sections by providing training to 80 lac women. 5. The Ministry of MSMEs, GoI has launched on 18th October, 2016 a new scheme ‘Financial support to MSMEs in ZED Certification scheme’ for the benefit of MSMEs. The scheme envisages promotion of Zero Defect and Zero Effect (ZED) manufacturing amongst MSMEs for developing an ecosystem for Zero Defect manufacturing in MSMEs, promoting adaption of quality tools / systems and energy efficient manufacturing without impacting the environment. 6. (a) To enable ease of registration of MSMEs, the Ministry of MSME has notified a simple one-page registration form ’Udyog Aadhaar Memorandum’ (UAM) on 18th September, 2015. (b) To facilitate the enterprises to take benefit of various schemes by the Office of Development Commissioner (MSME), his office has launched a web-based application module, namely, MyMSME. (c) The Ministry has started an MSME internet grievance monitoring system (e-SAMADHAN) to track and monitor other grievances and suggestions received in the Ministry. MSME SAMADHAAN launched on8th December, 2017 under the MSMED Act, 2006 deals with addressing the issues relating to the Delayed Payments to MSEs by the buyers to the MSE supplier. (d) MSME-SAMBANDH: The Ministry of MSMEs MSME-SAMBANDH launched on 8th December, 2017 notified the public procurement policy for MSMEs which mandates 20 percent of annual procurement from MSEs including 4 percent from enterprises owned by SC / ST entrepreneurs by the Central Ministries / Departments of Central Public Sector Enterprises. (e) Banking Codes and Standard Board of India (BCSBI) prepared code in place in 2008 and revised in 2015 in which it sets minimum standards of banking practices for banks to follow while dealing with MSEs. (f) Banking Ombudsman Scheme: Within 30 days of lodging a complaint with the bank, if MSEs do not get a satisfactory response from a bank and MSEs wish to pursue other avenues it may approach Banking Ombudsman. Conclusion MSME sector is a platform of nursery for entrepreneurship development and a school of innovation. Countless medium and large corporates in India have evolved out of being micro and small entrepreneurs. MSME sector is crucial for the success of the national agenda of Financial Inclusion. Technology and innovation will continue to play a pivotal role in creating a businessfriendlyatmosphere for the MSMEs. This sector has exhibited enough resilience to sustain itself on the strength of our traditional skills and expertise and by infusion of new technologies, capital and innovative marketing strategies and possesses enough potential and possibilities for accelerated industrial growth in our developing economy and well poised to support various national programmes like ‘Make in India’. All stakeholders – whether banks, MSME firms or the policymakers- must make efforts in their respective domains to seize the opportunity that the MSME sector provides. For a healthy and mutually beneficial relationship between the banks and borrowers, it would be essential for both parties to understand and appreciate each other’s point of view and work proactively.

Crypto Currency – Is it Safe?

Crypto Currency – Is it Safe?

Crypto-currency is a digital asset that can be used as a form of electronic payment and an alternative to Fiat currency. It is generated by a process called mining and no entity or government can influence the value of the cryptocurrency, since it is born within the network, and it stays there. It works on cryptography proof that allows any two willing parties to transact directly with each other without the need for a trusted third party – whether it is State or Bank or Regulator. The important crypto currencies that are in circulation viz., Bitcoin, Ethereum, Litecoin, Zcash, Dash, Ripple, Rilcoin etc. It is a fast evolving in terms of merchant adoption and many large business houses, including Microsoft, Dell, PayPal, Dish Network, Expedia, NewEgg and TigerDirect are accepting crypto currency as mode of payment. Opportunities / Challenges: Though, it suits for cost effective cross-border money transfers, it lack intrinsic value as their value depends only on the willingness of users to accept them. There are concerns with regard to maintenance of its value, KYC compliance, taking undue advantage of the system by unscrupulous persons/agencies and lack of consumer protection. The circulation of crypto-currencies may lead to proliferation of black money, heaven for drug peddlers and source for terror funding, which are detrimental to the interest of the nations/globe. The major challenge is the integrating of crypto currency with the existing financial system where global central banks control the strings. With currency in circulation having major bearing on inflation and monetary policies, these banks are unlikely to allow digital currencies to disrupt the balance. Present Status: Globally, different regulatory approaches are emerging by recognizing virtual currencies as payment method by Canada, Switzerland and Thailand while Russia, Israeli, Japan and USA are considered to be more user-friendly with little regulatory controls. The Central Banks of Europe, China, and India expressed their concerns about the usage of the unregulated currency and imposed ban on dealing with crypto currencies. There is an imminent need to have proper control mechanism to reap the associated benefits through implementing adequate security protocols, comply with AML guidelines and ensure greater transparency with regard to reporting and disclosure requirements.

Mergers/Consolidation of Banks : Boon or Bane?

Mergers/Consolidation of Banks : Boon or Bane?

Background: Banking was not a smooth sail and it had witnessed turbulent times especially with regard to Private Sector Banks. Around 1600 banks were closed down their operations and many of the depositors lost their money during 1913 to 1960s. To address the issue, Banking Regulation Act suitably amended in 1960 to protect the interests of the depositors. Any failed bank would likely to be put on moratorium followed by merger with peer bank. It is a fact that there was no instance where the bank depositor (Public/Private banks) lost a single rupee on account of bank failure in the post nationalisation era. Merger Banks: In the first phase, some mergers have taken place but mostly confined to new generation private sector banks and very little happened on PSBs front. In the past, the amalgamation of banks was primarily triggered by the weak financials where as now the mergers are taking place among healthy banks, driven by business and commercial considerations. However, in the post reform era, majority of mergers happened among Private/Public/RRBs. Merger of RRBs: The initiatives of the government to promote amalgamation of geographically neighbouring Regional Rural Banks (RRB) with in a state with an objective to improve operational efficiency proved success as the number of RRBs have come down from 196 in 2005 to 45 in 2019 and moving forward to consolidate further to 38 by end of the current financial year. Of course, the issues confronted in the RRBs merger process are limited as both the merged entities belong to similar operating and geographical environment. Merger of PSBs: Many small private sector banks got merged with PSBs on account of weak financials during pre and post reform periods. The merger of New Bank of India with Punjab National Bank; State Bank Associates & Bharatiya Mahila Bank with State Bank of India; Dena Bank, Vijaya Bank with Bank of Baroda has unveiled the first round of consolidation of PSBs. The imminent mergers viz., Oriental Bank of Commerce and United Bank of India with Punjab National Bank; Syndicate Bank with Canara Bank; Andhra Bank and Corporation Bank with Union Bank of India; and Allahabad Bank with Indian Bank have unveiled second round of mega mergers among PSBs. The consolidation process was aimed to strengthen the health of the weak PSBs reeling under increased stressed assets and capital inadequacy. Broadly the mergers can be categorized into Compulsive, Forced Mergers and Synergy-Driven. In the past, the merger of banks primarily triggered by the weak financials where as now the mergers are taking place even among the healthy banks driven by business and commercial considerations. Opportunities: i) Economies of Scale: High Volume – Low Margin – High Profit is the Mantra of Present Banking in India. The large scale operations enable the banks to bring down the operation costs substantially and facilitate to offer better interest rates to the customers. To survive in the present competitive market, banks need to improve the operational efficiency which includes cost efficiency and profit efficiency, which is possible only through economies of scale. Similarly, the size offers greater manoeuvrability in enhancing business volume and productivity. ii) Capital Base: Banks need to improve the capital base to tap the potential business opportunities as well as to meet the Basel-III requirements. Further, the adverse business cycles put pressure on the banks on account of increased NPAs thereby the denting the capital for provisioning requirements. Thus, banks need to generate additional capital from its own internal sources besides scouting options for rights/follow-on issues. However, Public Sector Banks face strange situation as the existing guidelines do not permit to dilute equity beyond 51%, thereby the chances for raising funds from market are limited. And also the market conditions are not favourable to go for public issue. On the other hand, the government is unable to provide budgetary support on account of increased fiscal deficit. Hence, consolidation may be a route for PSBs to infuse funds to strengthen their capital base.
iii) Diversified Activities: The improvement in capital will enable the banks to take up new and diversified activities, such as financing equity underwriting, distributing investment and insurance
products, issuing asset-based securities and providing new delivery channels for their products. It provides the opportunity to cross-sell products by leveraging on technology. iv) Risk Spread: Mergers enable the banks to extend the business to various segments at many locations across the country/globe. Hence, the risks are spread across various regions and segments, which protect the Banks from adverse Business Cycles and unexpected financial crisis. Presence in large geographical area paves the way to reduce risks on both asset and liability side. v) Improved Delivery: Shared infrastructure will give customers a wider use of delivery channels such as Branch and ATM network in a most cost effective way. vi) Other Positive Triggers: Technology: Hitherto, technology used to be the major impediment for bank’s mergers as there was no uniformity among banks with regard to adoption of technology. Of late, almost all banks have moved to Core Banking platform and have been operating in technology neutral environment. Standardization: The recent standardization initiatives taken by the Government with regard to recruitment policies, internal promotions, performance appraisals, accounting practices, audit procedures etc., especially among Public Sector Banks will definitely be handy for banks to go for consolidation. HR Practices: Issues such as pay structure, incentives, perks, retirement age, service conditions etc., are also similar to a great extent across PSBs. Regulated environment: In the deregulated environment, banks are free to fix their own interest rates on deposits and advances but in reality more or less the similar interest rates are seen across the banks. In a way, Regulated interest rate regime is in vogue in the deregulated environment, this led for smooth merger process. Challenges - For smooth process of Mergers in the Indian Banking industry, Banks need to focus attention on the following areas: Share value/Swap Ratio: The valuation of Banks is a critical activity since it involves both financial and human assets while arriving swap ratio. Attention must be paid to evolve more realistic and transparent methodology. Identity & Cultural issues: Majority of PSBs have grown from specific regions and have retained certain unique strengths despite some of them coming under the government fold. A merger of such institutions with another bank would whittle down such strengths. Further, there are bound to be problems in the areas of corporate culture, values and approach. Integrating work forces is always a tough task, and any incompatibility in the process may result in gross inefficiencies, defeating the very objective of the mergers. Human Resources are another sensitive issue on the road to consolidation. Mergers make some of the workforce redundant; and banks are forced to undertake large-scale redeployment exercise for effective use of human resources. The anchor bank may be forced to absorb the entire workforce without a commensurate business requirement. It also requires the integration of the heterogeneous work cultures. The views of the employees towards various aspects of the new organization, management styles, training, leadership, etc are to be considered in a critical manner. The varied aspects of the work environment, if not handled properly, may lead to resentment and shrinkage in productivity. Change Management: Managing the merged entity by the management teams drawn from different banks is really a formidable task. Improving the quality of management is yet another challenge for anchor bank. Monopolistic structures: It is a fact that the mergers act as impediment to perfect competition and may give rise to monopolistic structures. In the process, these entities are likely to levy higher fees / service charges to the customers. De-nationalization: The other counter argument with regard to Mergers is that it derails the very objective of Nationalization of Banks. In fact today our country need more number of branches to be opened instead of Merger of Banks to accelerate the Financial Inclusion initiatives thereby Inclusive Growth. The biggest strengths of PSBs are its branch network and trained manpower which require harnessing the said strengths further. The idea of creating bigger banks to take on competition sounds attractive but one must realize even the largest banks through the proposed consolidation are small by global standards. Most importantly, the mergers ignore the fact that beyond a point, the size may not enhance efficiency. Creating behemoths of large banks is likely to add more layers to the organisation structure which may potential lead to bureaucratic culture. Recent Developments: Mergers are supposed to take place through mutual understanding and with the consent of the respective Bank Boards, but the recently concluded mergers and the proposed mega mergers are happening at the instance of government mandate which is against the basic principles of mergers

In order to leverage the benefits of bigger size, geographic expansion, huge loan portfolios, improved technology, product diversification and reduced transaction costs, Indian banks are gradually but surely moving from a cluster of “Large number of Small Banks” to “Small number of Large Banks”. Consolidation will positively amplify the business prospects of the industry in the domestic as well as in the international markets. Thus, it is desirable to look for Synergy Driven Mergers rather than Compulsive/Forced Mergers.

Strategies to avert Slowdown in Economy

Strategies to avert Slowdown in Economy

 Background: Global GDP growth has been coming down (around 3%) over the years. The recent US-China trade war, currency devaluations by major economies and the volatile political and economic situations across the globe have been adding fuel to the fire. The Indian economy is also showing signs of downward spiral despite initiating bold and important reforms like GST, Insolvency and Bankruptcy Code (IBC), FDI liberalization, and better ease of doing business. Major sectors are drastically slowing down and layoffs are increasing. NITI Aayog opined that the current stress in the financial sector is unprecedented and urged government to initiate necessary steps to avert slowdown. In the above backdrop, the Finance Minister, Mrs. Sitharaman has announced the following slew of measures in August 2019 to take the reform process forward and to bring the economy on track. Banking/Finance Sector: Government announced upfront capital infusion of `70000 crore into PSBs to add liquidity to the financial system by generating fresh lending to the tune of `5 lakh crore.
Providing `20000 crore liquidity support in addition to `10000 crore support announced earlier by
National Housing Corporation (NHB), to the struggling Housing Finance Companies (HFC) to enhance their lending capacity. Directed the banks to pass on RBI rate cut benefits to the borrowers by introducing Repo or External Benchmark Linked rates to retail loans. Proposed to introduce online tracking of loan applications by customers of Retail, MSME, Housing, Vehicle and Working Capital limits with an aim to increase transparency and to improve Turn Around Time (TAT). Banks to issue improved transparent OTS policy to benefit to MSME and Retail borrowers with simplified procedure (Check box approach) Rationalization/Simplification of Taxes: Withdrawal of enhanced super-rich tax (imposed in the recent budget) on foreign and domestic equity investors. All tax notices to be issued from centralized system to end harassment of taxpayers. Start-ups will get exemption from “Angel Tax”. Pending GST refunds to MSMEs shall be paid within 30 days and future refund matters to be sorted out within 60 days. Corporate Tax: In order to encourage the domestic companies, the corporate tax rate is reduced from 30% to 22% for all existing companies and it is 15% for new manufacturing units that start production before 2023. The sharp cut in direct taxes has the potential to revive growth. MSME Sector: Amendment to MSME Act to move towards single definition to be considered. Use of GSTN system, in long run, to enhance market for bill discounting (TReDS). U K Sinha Committee recommendations on ease of credit, marketing, technology, delayed payments etc., are to be implemented within 30 days Automobile Sector: Increase of depreciation rate from existing 15% to 30% on all vehicles acquired from now till March 2020. Ban on govt departments lifted for purchase of vehicles to replace old ones. Government will come out with a ‘scrap age’ policy for old vehicles to revive demand for the already dented sector. Bond Market: Establish an organization to improve access to long term finance to Infrastructure and Housing projects. Development of Credit Default Swap market in consultation with RBI and SEBI. Infrastructure Industry has been reeling under stress on account of structural issues and delayed payments from Government/CPSEs, which need to be addressed on priority. Government announced that the issue of delayed payments is to be monitored by Department of Expenditure and reviewed by Cabinet Secretariat. Proposed to form “Inter-ministerial Task force” by Department of Economic Affairs to finalize the pipeline of infrastructure projects. Way forward: Hope, the measures initiated by the government, definitely paves the way to arrest slowdown and keep the economy on the growth path. Indian Economic Slowdown: A long term problem, how to come out of it? Indian Economy, no doubt is passing through a sluggish economic growth since 2016 as compared to earlier years, although Indian Economy is still showing positive growth at the rate which may not be considered as very slow, if we go by the global economic growth standards. The facts and background India’s Economic growth has slowed for 5 consecutive quarters beginning from late 2015-16 onwards. Now growth is slower than it was in the quarter in which The Modi Government assumed office. It could be serious blow for a government that had promised to turn around the economy through decisive governance. India’s GDP growth has gone down from a high of 9.2% in third Quarter of the year 2016 to 5.7% in current 4th
All four contributors to economic growth – domestic consumption, foreign consumption or exports, private investment and government spending – are hit by the slowdown. In the first quarter of this fiscal year, domestic consumption fell to 6.66% as against 8.41% in the same period last fiscal; exports as a share of the Gross Domestic Product was down to 19% from 20%; quarter of 2017. The economic growth rate is probably the slowest in last many years. However, Indian Economy as per global standard is not in recessionary stage. The UK and the European Union consider an economy in recession only when real GDP growth actually turns negative over two consecutive quarters and by this criterion, with a positive growth rate of 5.7%, Indian economy is far off from being in a recession.
and fixed capital formation decreased from about 31% of the GDP to 29.8%, signalling a slowdown in the industry as well. Causes of Economic slow down The cause of the problem as shared by some of the experts consists of supply-side shocks. Besides, three important contributors to this problem include Demonetisation & stressed banking sector, GST Implementation and problems in Agriculture sector. The public goods are provided by government and the government needs tax revenues to supply them, and these depend upon national income. Then there is employment. A demand for labour exists only when there is a demand for goods. So growth is necessary if employment is to be assured. There is not only a pool of unemployed persons in India to absorb but the country also needs to provide employment to youth continuously entering the labour force. The slowing of the economy is a source of concern as an economy that has been slowing for five quarters is unlikely to turn around quickly. Besides, it may not be able to revive on its own. No demand - No Investment: Vicious Circle operates Since it is capital formation, or investment, that drives growth in the economy, investment is an immediate source of demand as firms that invest buy goods and services to do so. It also expands the economy’s capacity to produce. The two sources of investment are private and public. The Private investment source is depressed as of now due to the factors cited above and is difficult to revive unless some external force is applied for example – tax sops, incentives for investment, creating demand for certain products through public funded projects among others. When there is no demand, supply has to be stopped due to piling up of stocks and production units go idle, leading to cut in labour force. It further reduces the income leading to less demand and further reduction in supply and stopping of production. Since, investment involves committing funds for a long period under uncertainty, the stepping-up of public investment when private firms are unwilling to invest more is required. Increased public investment increases demand and quicken growth and also encourages private investors, as the market for their goods expands. Reforms: Are they leading to slowdown? Structural reforms are being taken by almost all the governments or they have been claiming to be doing for more or less a quarter of a century now. Since 2014, in particular, “the ease of doing business” has received great attention from this government. But, the economy today is still less regulated than it was in 1991. Labour market reforms have not been taken up yet in Parliament. Share of manufacturing may rise if the labour market is liberalised. Another fact is how the economy came close to achieving 10% growth in the late 1980s and during 2003-08 when the policy regime was no more liberal than it is now. It is also difficult to relate slowing domestic growth to sluggish world trade as data show 2016-17 to be a year of a major turnaround in exports. On the other hand, capital formation as a share of output has declined almost steadily for six years now. In 2014-15 it rose slightly. Is it temporary phenomenon? A few of the experts see it as a temporary or technical issue and think that its effects would soon fade out while others view this as a more serious crisis created by a barrage of supply-side shocks to the economy. However, the crisis is seen as a deep structural issue rather than merely a short-run one. Now the government has to play a key role and understand the economic realities and avoid adventurism in policymaking and implementation. Corporate sector & Industry criticize the Government Although, a concrete plan to address the problem is being developed in consultation with Prime Minister Narendra Modi. However, a section of the industry and many economists have criticised the government for not being prudent enough to read the distress signs and for treating the slowdown as temporary and transient. The economy grew by a mere 5.7% in the quarter ended June 2017. In the first quarter of this financial year, growth fell to 5.7% as against 7.9% in the same period last fiscal year.
How can India come out of slow down? Leading economists and market researchers suggest following remedies to bring the Indian Economy on high growth track More Government Expenditure Government needs to spend more now to overcome the situation. Although the government has already spent much of its budgeted expenditure, it needs to spend more to spur investment and demand in the economy. An immediate boost without worrying much for consequences is needed by way of spending. Let Indian Rupee be weaker Even a weaker Indian rupee should not be a problem. Stronger rupee is hurting both the exports and the business. Imports are surging and they are eating into the domestic market share. India needs growth now, so there is no need for ratings as of now. Lower Lending rates The recently announced monetary policy of RBI has not given any relief to boost Indian economy. The economists now advocate a steep rate cut in the benchmark lending rates to allow for monetary policy expansion. The Reserve Bank needs to cut interest rates for banks, thereby making borrowing cheaper for the industry and spurring investment. Certainty in Business required More certainty in the business environment is required. Businesses should be without shocks like demonetisation. In fact, after demonetisation shock, there is an environment of uncertainty in the economy. This stops the Private sector short of announcing the new projects. There should be an environment of certainty that no such disruptive moves would rock the economy in the near term. No need for excuses: Acknowledge and spend in rural areas The government needs to spend more on rural areas. Increasing rural people’s incomes can drive up the consumption demand, which in turn will boost the industry. To create more demand the Government needs to spend more in rural areas, construction sector and the unorganised sector World Bank hopeful: Slow down to wane soon
Corporate Governance is the system by which companies are directed and controlled by the Management with greater transparency in the best interest of all the stake-holders viz., Customers, Employees, Investors, Vendors, Government, Regulators and society at large. India’s corporate governance regulations rely heavily on Independent Directors (ID) but in reality, they are the weakest link and quite a few corporate boards feature proxy IDs who toe the line of the promoter. This has led to many corporate scams in India such as Stock market, UTI, Khetan Parek, Satyam etc. In the above backdrop, SEBI set up a committee under the Chairmanship of Uday Kotak in this regard. The committee recommended increasing the number of IDs from the existing 3 to 6 members with requisite qualifications and competency; and also suggested strengthening the hands of the auditors to gauge the operations of the company in a prudent manner. The committee has recommended creating a roster of “Fit and Proper” professionals for IDs and drawing them as and when required. Banks & Corporate Governance: The major recommendations of Ganguly Committee are Boards should be more contemporarily professional by inducting technical and specially qualified personnel (marketing, technology and systems, risk management, strategic planning, treasury operations, credit recovery, etc.). Directors should comply “fit and proper” norms viz., formal qualification, experience and track record. The eligible criteria to become director of PSBs should be between 35 to 65 years of age and, among other things, should not be The recent slowdown in India's economic growth is temporary and is an "aberration" mainly due to the temporary disruptions in preparation for the GST. It will get corrected in the coming months. The World Bank President Jim Yong Kim said that the Goods and Services Tax (GST) is going to have a hugely positive impact on the Indian economy. According to him, "We think that the recent slowdown is an aberration which will correct in the coming months, and the GDP growth will stabilise during the year. We've been watching carefully, as Prime Minister Modi has really worked on improving the business environment, and so, we think all of those efforts will pay off as well." Accordingly, if the due corrective steps are taken, Indian Economy could come back on rails with a high growth achievement of 10%.

Evolving Economy

Evolving Economy

 Multiple Opportunities for Banks to Grow Despite the backdrop of articulation of a clear vision to
increase the size of the economy to US $ 3 trillion by 2020, US $ 5 trillion by 2025 on its way to reach US $ 10 trillion by 2030 as envisaged in the interim budget, union budget and followed by reinforcing policies, there is a marked slowdown of GDP to 5 percent in Q1 of the current fiscal obfuscating such aspirations. Notwithstanding such near term disruptions, the potential spurt in the size of the economy would open up multiple opportunities to different sectors, more importantly, to banks that are meant to undertake speedy and efficient financial intermediation. Banks can take a cue from the most important intentions, and aspirations were set out beginning with the economic survey, union budget, series of stimulus packages and more significant is the proposed mergers among the Public Sector Banking space. These could pose both challenges and opportunities to the banks to move to a higher growth trajectory. But the realisation of growth objectives will be contingent upon coordinating synergy of a large number of players that have an umbilical connect with banks such as nonbanks,fintech companies and peer-to-peer lenders and so on. Going by the same logic, deposits of the banking system now at INR 127 trillion and bank credit at INR 97 trillion (September 13, 2019) should be close to double its size by 2025. The stronger and fewer Public Sector Banks (PSBs) in new dispensation can look forward to handling business size far higher than they handle today. The capacity needs to be increased with improved human resource productivity and synergy of technology. With consolidation and big banks in the fray, better economies of scale can be attained. The 27 PSBs at one point of time now turning into 12 should be able to make them more capable of handling a larger chunk of business. But to tap such newer opportunities, organisational preparedness requires a granular analysis of impending scope to work out growth strategies for different lines of business. 1. Opportunities for banks To start the journey of the uphill trek to reach the GDP target of US $ 5 trillion, the road map and resource algorithm in union budget and stimulus packages (UB&Sps) are well-calibrated with continued thrust on fiscal prudence with an avowed objective to peg fiscal deficit at 3.3 percent of the GDP. It is the right opportunity for banks, more importantly, the stronger and bigger PSBs whose market share has been declining after the asset quality review (AQR) of the Reserve Bank of India (RBI) and its aftermath. PSBs need to reinstate their strategic role in supporting the economic growth and help attain the sustainable development goals set out by Niti Ayog. Overcoming the near term disruptions, achieving a sustained real GDP growth of 8 percent per annum will be necessary to inch up close to the long term growth objectives. It may look to be a tough challenge to realise the broad vision of growth, but banks can sense huge opportunities in the new measures of relief. In a bank-led economy, the efficiency of the financial sector will be critical for ensuring seamless monetary transmission and flow of credit. Many thoughtful measures built in the set of UB&Sps for strengthening the banking sector and rescuing Non-Bank Finance Companies (NBFCs) can lead to the development of a robust financial sector ecosystem. The upfront infusion of INR 70000 crores of capital into selected PSBs can shore up capital adequacy and create more lending space. The impact of these relief measures on how the financial sector groaning under the weight of ailing NBFCs and continued asset quality woes will be able to work will depend on the strategies designed andimplemented with full vigour. To unleash such opportunities, banks will have to work out strategies to overcome the series of shocks and collateral damage caused to the financial sector. It began with Infrastructure Leasing and Financial Services (IL&FS) fiasco in September 2018 with its ramifications on Dewan Housing Finance Limited (DHFL) and other interconnected NBFCs. It exacerbated with the fallout of fraud in Punjab and Maharashtra Cooperative Bank (PMCB) perpetrated in connivance with Housing Development Infrastructure Limited (HDIL). These adverse developments weakened the sentiments in financial intermediation impeding the growth. 2. Consolidation of PSBs When 18 PSBs eventually converge into 12 large and more capable PSBs, they can compete with large private peers and pose a challenge to other financial intermediaries. In the process, the customers can look forward to improved quality of customer service with fine-tuned risk-based pricing policies. Realising the need for a strong capital base to comply with Basel – III standards by March 2020, the government has infused capital in many targeted PSBs assessing the needs. It is in addition to INR 2.5 trillion already provided to PSBs in the last five years. The enhanced capital allocation can restore lending appetite.

The slowdown in credit growth in the last three years due to large-scale bad loans is also being tackled by amending several clauses of Insolvency and Bankruptcy Code -2016 (IBC) to make it strong and pragmatic. Near term disruption in the working of 10 PSBs to be formed into four large banks cannot be ruled out, but it needs to be minimised with a suitable plan of action. But more important is to derive the synergy of amalgamation in the long term. With boards of PNB, Union Bank, Canara Bank and Indian bank approving the amalgamation plan, the process has moved to the next stage to obtain formal approval of the government. Out of the newly carved outset of PSBs, six of them will be bigger in size and reach, and their role will be significant to decide the future course of financial intermediation. The 10 PSBs under merger plans have a total business share of INR 55.56 trillion with a branch network of 37663. They together wield significant clout on the banking system. It will be challenging for them to minimise the disruption in the working. The process of amalgamation should not be allowed to mar the prospects of their growth in the intervening period. Formation of separate teams for rolling out amalgamation plans and hiving off lines of responsibilities will be essential. Cordoning the disruption from stretching to operations need to be pursued by enhancing the levels of follow up and monitoring of regular performance. 3. Policy impact on banks Policies are getting aligned to work out the methods to prevent other people (other than account holder) from depositing money into a bank account. This has become necessary after the large-scale deposit of funds by the third party into the account belonging to someone else during demonetisation that impacted the efficacy of the process. It will help banks check the menace of money laundering. It will further scale down cash transactions. As part of the ease of living for customers, PSBs are expected to harness technology and increase the offer of personal loans online and can roll out doorstep banking. Senior citizens and people needing special assistance and differently-abled would get preferred attention of banks as a part of the transformation. Liquidity relief is provided to the NBFCs that have caused huge collateral damage to the financial system after IL&FS collapse and its aftermath. The lingering liquidity shortfall continues causing successive default in honouring their financial commitments. Under the new arrangement, the government will now encourage PSBs to buy highrated pooled assets of the sound NBFCs up to INR 1 trillion for which the government will provide a one-time six-month partial credit guarantee for the first loss of up to 10 percent. Banks are also incentivised to support the NBFCs by using one percent of their Net demand and time liabilities (NDTL) to be treated as high-quality liquid assets for computing their liquidity coverage ratio (LCR). This extra liquidity can be used to extend fresh funding to NBFCs and Housing Finance Companies (HFCs) effective July 5, 2019. NBFCs will also be treated at par with banks in respect of tax breaks on interest received. They will now be able to handle taxes on losses arising out of Non- Performing Assets (NPAs). Government has proposed an amendment to Section 45-IA of the RBI Act 1934 to empower the central bank to supersede the board of NBFCs and enable resolution of financially troubled NBFCs through merger, restructuring or splitting them into viable and non-viable units known as bridge institutions. RBI can now remove auditors, call for audit of any group company of an NBFC and can even decide upon the compensation of senior management. Such comprehensive empowerment can improve public confidence in the NBFC sector. RBI will now regulate HFCs, a power so far vested with National Housing Bank (NHB). Out of the 82 HFCs, top five HFCs have a marketshare of over 90 percent that is more important to be brought under robust regulations. 4. Scope for increased flow of credit Despite hefty repo rate cuts by the RBI in the current rate cycle beginning February 2019, the role of banks in transmitting policy rates has remained subdued. The weighted average lending rates (WALR) on fresh rupee loans hardly decreased by 29 basis points (bps) and the WALR on outstanding loans increased by seven bps.
Further drilling down the WALR trends will indicate that foreign banks, private banks and PSBs have brought them down by 66, 48 and 25 bps respectively. Similarly, the market share of fresh rupee loans of private banks has gone up to 49.3 percent as against 39.8 percent of PSBs during the fiscal up to August 2019. Such trend reflects a more aggressive role of private banks compared to PSBs that are struggling with the high volume of toxic assets. The rest of the market share of 10.9 percent of fresh rupee loans goes to other sectors of banks. Since the bulk of the beneficiaries at the bottom of the pyramid are with PSBs, the flow of credit may not have reached the wider section of the society limiting the revival process. However, with an increasing market share of private banks and enhanced lending activism, the benefit is beginning to impact the larger segment of borrowers even at the lower rung of the society. Even an overall trend of credit growth of banks does not augur well to push growth prospects. The year-on-year (y-o-y) bank credit growth has been tepid at 10.3 percent as on September 13, 2019 as against 13.5 percent recorded during the corresponding period of the previous year that reflects marked slowdown in credit off-take during current fiscal 2020. Banks can work on new opportunities to increase credit flow based on the recent additional tax concessions extended up to INR 1,50,000 on interest on affordable housing loans. The increased allocation under Pradhan Mantri Awas Yojana (PMAY) will open up more scope for the retail lending sector. Similarly, the tax concession on home loans now at INR 2 lacs will go up to INR 3.5 lacs. The added tax concession will be available only to fresh loans to be granted during the financial year 2020. It will increase the sudden demand for home loans. With the Real Estate Regulatory Authority (RERA) institutionalised in many states, the construction / housing sector will be better regulated, protecting the rights of buyers. With a target of 1.95 crore housing units to be constructed in a record time of next two-three years to move towards the objective to provide housing for all by 2022, the sector will get a boost, and banks can tap this source which has a high cross-selling opportunity. Similarly, the income tax concession on interest on loans taken to buy electric vehicles can create additional demand for car loans. Eventually, even the auto industry may gradually shift towards manufacturing electric vehicles to fall in-line with green initiatives. With hardly one percent of the people opting for electric vehicles as of now, there will be a spurt in buyers in higher tax bracket who can save more. Increase in retail loan portfolio could be possible with the new dispensation. The infrastructure sector will be under focus with an expenditure outlay of INR 1 trillion to be spent in the next five years. Allocation of INR 80250 crores for phase-III of Pradhan Mantri Gram Sadak Yojana (PMGSY) for the upgradationof 1.25 lac kilometres of road in the hinterland will activate many interdependent businesses to boost rural infrastructure. Similarly, under ‘National Rural Drinking Water Mission’, all rural households are to be provided piped water supply by 2024. Presently, 18 – 20 percent of the households have such facility. This will also bring up many rural activities right from laying pipelines, construction of overhead tanks, civil works, job works, and sale of hardware accessories along with the job creation. Every such activity brings increased bank collaboration. Proposals to increasingly use the Public-Private Partnership (PPP) model by railways and privatisation of some of its activities when seen together with increased capital expenditure (capex) spent by the government will benefit many sectors. The proposal to raise foreign currency resources from overseas will open up new opportunities for many sectors of the economy. 5. Increased thrust on MSME Since MSME and ‘Startups’ are known to be critical employment-intensive sectors, measures are proposed to increase the flow of credit to unleash its potentiality. The angel tax has been addressed, and a two percent interest subvention is allowed on fresh loans to be granted to Goods, and Service Tax (GST) registered MSMEs for which an allocation of INR 350 crores is made in Union Budget 2019-20. Rationalisation of labour laws can help them accelerate the formalisation of the economy. The corporate tax rate is brought down to 25 percent for the firms having a turnover of up to INR 400 crores, raised from INR 250 crores which will provide relief to 99.3 percent of the 1.5 lac companies incorporated so far according to the data of Ministry of Corporate Affairs (MCA).
To reinforce ‘Make in India’ campaign to pump prime manufacturing activity, the import tariffs are calibrated to boost local manufacturing. Increase in customs duty of certain automobile components and electronic devices will increase local manufacturing activities and more so when loans are made
available with interest subvention. MSME units will be encouraged to increase production by taking benefit of concessions using digital mode. When these budgetary sops are seen together with the key recommendations of the recent report of the ‘Expert Committee on MSME (Chairman: U K Sinha)’, it will provide further insight on the emerging potentiality of the sector. Among many far reaching recommendations, the game changing proposals relate to (I) formation of Stressed Asset Fund of INR 5000 crores for the units impacted by change in external environment beyond the control of the entrepreneur; (ii) setting up an apex National / State level council for MSMEs; (iii)doubling of limits of collateral free loans under Pradhan Mantri MUDRA Yojana and Startup India to increase flow of funds; (iv)expansion of scope of Small Industries Development Bank of India (SIDBI) to be the fulcrum to steer the sector to the next level of growth; (v) creation of incentives and disincentives to the lenders by introducing Rural Infrastructure Development Fund (RIDF) scheme requiring the banks to deposit shortfall in achieving MSME targets; (vi)making it mandatory to source 25 percent of Public Sector Undertakings (PSU) needs from MSME units through Government e-Marketplace (GeM) portal; (vii) expansion of number of MSE Facilitation Council (MSEFC) to help address the delayed payment conundrum of the sector along with strengthening Trade Receivables electronic Discount System (TreDS) platform. At the same time, the government has also directed PSBs to assign credit availability aspects of MSME sector to GM level executive for accelerating the flow of credit. It also suggested a well-calibrated monitoring mechanism to institutionalise weekly feedback in a bid to improve accountability for performance. Despite several expert committees providing guidance and policy interventions from time to time, the plight of MSME continues to be weak. To energise the sector, the government had earlier rolled out 12-point MSME outreach initiatives in November 2018. One of the most important initiatives was the introduction of ‘in-principle’ sanction of loans to MSME units up to INR 1 crore in just 59 minutes. The intending borrower should log into a dedicated website – ‘psbloansin59minutes’ which will collect borrower’s details online from various digitally connected sources such as income tax department, GST and other sources to provide an in-principle sanction with which the potential borrower can approach any PSB to get the loan. These are some early efforts to speed up credit delivery, if implemented well may facilitate the borrowers. The demand for external credit of MSME sector is estimated to be in the range of INR 37 trillion in 2018 as against formal credit flow of INR 14.5 trillion that hardly meets half its needs. Bank credit to MSME sector was INR 11.7 trillion in March 2015 that could reach INR 15.77 trillion by March 2019 working out an annualised growth of 6.9 percent far below the banking industry credit growth. Because of these developments, banks can work towards increasing exposure to the MSME sector in a big way and pursue inclusive development.

Why Urban Co-operative Banks (UCBs) failing often?

Why Urban Co-operative Banks (UCBs) failing often?

Introduction: The UCBs are playing an important role in providing basic banking services to the general public across the country. There are around 1550 UCBs operating in India with a deposit base of `4.60 lakh crore and credit portfolio of `2.80 lakh crore. Majority of the depositors of these banks are middle class people and senior citizens who are attracted by the higher interest rate compared to Public Sector Banks. Present Reference: The Punjab & Maharashtra Cooperative Bank Ltd (PMC), a multi-state cooperative bank with a network of 137 branches spread in six states with total business of `20000 crore (Dep `12000 crore & Adv `8000 crore) failed to meet the commitments to the customers in September 2019. Another Bangalore based bank, Guru Raghavendra Sahakara Bank joined in the fray in January 2020 and RBI imposed restrictions on the Bank. The major reasons for fallout of UCBs are: Small Capital Base - The capital required for opening of a UCB is `25 lakhs compared to `100 crore for small finance banks. These guidelines enabled many unscrupulous elements to enter in to this sector easily. Vested Interests – UCBs are susceptible for external influences and sanction huge amounts without valid purpose. Majority of these loans are not backed by collateral securities. The promoters are misusing their official position and siphoning funds. Undue exposure to Real Estate Companies is also one of the reasons for failure of UCBs. Lack of Supervision – UCBs are operating under dual control viz., RBI and Registrar of co-operatives. RBI’s supervision is not as stringent as that of commercial banks and the regular audit by the respective state governments is not effective. Recent Developments: In order to protect the interests of the small depositors of Urban Co-operative Banks, RBI initiated the following measures: The exposure limits are revised - Single borrower from 15% to 10% and a Group of connected borrowers from 40% to 25% of Tier-1 capital. The priority sector targets increased from 40% to 75% of ANBC by 31st March 2023 with a stipulation that minimum 50% of credit should comprise with `25 lakh and below credit limits. The said measures are expected to reduce the credit concentration risk of the UCBs. The CRILC guidelines are now applicable to all UCBs and they need to share information of borrowers having aggregate exposure (fund ad nonfund) of `5 crore and above to CRILC. RBI advised all UCBs with deposits of over `100 crore to constitute a Board of Management (BoM) comprising experts to oversee their functioning with an objective to improve the corporate governance in UCBs.

BANKING BUSINESS STRATEGY

BANKING BUSINESS STRATEGY

BRANCH LEVEL BUSINESS STRATEGY CASA STRATEGY _ To undertake massive CASA Campaign across the country to mobilize new accounts _ Focus on relationship building and posting of relationship officer/manager at least at district level & relationship manager of Scale IV/V at state level to have good liaison with government departments/corporate. _ To have School/College teachers account to boost our retail liability/retail asset products portfolio. _ Allocation of Publicity budget to identified block level branches for increasing visibility. Conduct of Regular CASA Campaigns during each quarter with specific emphasis on CASA Accounts mobilization from HNI / Payroll accounts, Government Departments ( Panchayat, Block level, District level and state level accounts, RUSA,Govt. school & Colleges, MP/MLA accounts/ TASC account _ Revival of Inoperative / Dormant accounts _ Focus on New Branches for exponential growth in CASA of new branches _ Organizing HNI / NRI Meets at frequent intervals at all major centers. _ Transformation of additional Shikhar branches with a view to enhance customer service resulting in higher CASA growth. ( we have seen 20% CASA growth in these branches) COMPETITION WITH PAYMENT BANK _ New banks will offer interest higher than PSBs hence retail depositors will move to payment bank, have impact on CASA of banks, tighten NIM of banks, _ Customer will open account with payment banks for small ticket payments _ Customer will get newest / easy technology for their payments _ If will have less impact if they offer easy payment options for their small tickets payment by offering new tech based App _ Step to minimize impact on PSBs: _ New technology for payments need of customers, provide better platform for mobile payments, _ improve customer service, Banks need to understand their customers, in order to understand the current market trends and predict the future trends, segmentation of customers and specific / appealing products for a particular segment, rewards/points for making payments, privacy and security _ collaborate with them to create a partnership model CUSTOMER SERVICE _ In order to achieve the set goals, Customer Service needs to be given adequate attention. Following customer centric initiatives undertaken to reduce customer complaints and enhance business:- _ Counter service to be improved. _ Rude behavior of staff to be eliminated and Zero tolerance level for rude behavior. During FY15-16, 131 cases of rude behavior were reported. _ Timely and Speedy redressal of customer complaints. _ Providing priority services to the Senior Citizens and Pensioners. _ Motivating customers as well as staff for usage of Tech products. _ Popularizing Missed Call Facility, Internet and Mobile Banking, Canara e-info book, Canara Easy Cash etc. _ Sensitization of staff to improve our position in BCSBI rating amongst all Banks. _ Steps initiated towards Information dissemination, Transparency, Customer Centricity, Grievance Redressal, Customer feedback etc. LOSS MAKING TURNAROUND _ Stress on improving net interest income _ Increasing the CD ratio _ Reduction in cost of deposits by increasing CASA ratio and reducing Bulk deposit _ Reducing / eliminating NPA _ Containing the operating expenses

RETAIL LENDING _ Retail Lending by every branch and aim to achieve NIL lending branches. _ Task force to be made in each Circle for branches having CD Ratio less than 50% in order to improve the CD Ratio to minimum 70%. _ Marketing of Online Instant In-principle Sanction for Housing Loan and Car Loan on digital platform throughout the year. _ Wide publicity of Housing Loan and Car Loan products especially during festival time to increase the visibility. _ Focus on reduction in turnaround time at RAH from 9 days to 7 days. _ Tie up with premier education institutions Viz. IIMs, IITs, NITs & other Premier institutes _ Extending the services of Direct Selling Agents to all the Circles. _ Chalking out quarterly schedule of Campaigns targeting different segments viz. Housing, Vehicle coinciding with festival season and Education coinciding with Admission period. MSME _ Each ELB/ VLB to identify and finance at least one Small & Medium Enterprises Unit every month. _ All branches to source and refer minimum one Credit proposal per quarter to their respective SME Sulabh for sanction. _ Focus on “PRODUCT SPECIFIC MONITORING”. _ MSME CONNECT- Mega Credit camps will be continued in each quarter of 2016-17 at all Circles on a single day to create and sustain awareness and pool sources for increased flow to MSME sector. _ Regular Camps & Cluster meets for sourcing the proposals will be conducted at Sulabhs and cluster of branches. _ START UP SUMMIT – Summits will be arranged at all centres for Start up Entrepreneurs inviting _ Distinguished guests from Government departments and local industrial bodies/organizations for necessary inputs and guidance for successful entrepreneurship. BANKING BUSINESS STRATEGY STRATEGY TO REDUCE NPA / STRESS ASSETS ACTION PLAN: Before formulating the strategy for reducing NPA's, a diagnostic study must be conducted to ascertain the reasons for high percentage of non-performing advances (NPAs). Thereafter, ABC analysis should be undertaken to identify the critical areas, which should focus the activities to be monitored by the Branch Head and those activities which can be delegated to the Asst Manager and Loans Officers. Positive Intentions (+ive), Negative Intentions (-lye) The information collected in the above formats will be converted into intelligence for drawing out the strategies and the action plan. TWO PRONGED STRATEGY: a) Increasing fresh advances and ensuring that they remain performing advances i.e. checking the slippage into nonperformance category. b) Recovery and adjustment of non-performing advances. A) INCREASING FRESH ADVANCES: SWOT analysis will be undertaken to aSsess the potential of credit off-take and also identify the industries / business ventures on the basis of products and services and also the changing environment. The survey done by Development Financial Institutions will be consulted as these provide adequate information. STEPWISE ACTION PLAN a) Scanning the area and preparing the profile of existing units / potential - sunrise areas in agriculture, industry, infrastructure, housing, retail.lending. b) Identifying Govt. agencies where there can be bulk credit off-take i.e., Indirect financing through corporations, boards and other agencies. c) Credit off-take through automobile financing and financing to consumers for white good durables d)Lending to stock brokers / investors against shares of blue chip companies in demat form. e) All existing A - Category ( high value standard category) borrowers will be contacted and motivated for introducing new borrowers / facilitating switch over to our banks. f) Quantitative targets will be fixed and progress reviewed on monthly basis. B) RECOVERY AND ADJUSTMENT OF NON - PERFORMING ADVANCES:

Since Head Office has fixed the targets for reducing the NPA percentage, as such the strategy at the branch level should clearly spell out the time frame. The target will be bifurcated on monthly basis so that corrective steps can be taken if the degree of variation in actual results and targets fixed is large. STEP - I : SEGMENTATION OF BORROWAL ACCOUNTS a) Experience indicates that the number of accounts in the category of Rs.50 lac and above is very small but percentage of amount involved in this category is very high. As such, this category of accounts will be monitored at personal level on daily / weekly basis. Accounts in the category of below Rs. 50 lac but up to Rs. 10 lac are small but amount involved will be high Accounts in the category of below Rs. 10 lac will be very large but percentage of amount involved will be less. As such, loan officer will be assigned the task for recovery and overall review will be undertaken by the manager and senior manager on personally level on monthly basis. The.theme behind the above strategy /classification is that, even if by monitoring and follow up, few very large accounts are shifted into performing category, the percentage of NPA's will reduce substantially. STEP - II: CLASSIFICATION OF ACCOUNTS ON THE BASIS OF VIABILITY AND INTENTION OF THE BORROWER The underlying idea is to develop structured action approach so that broad guidelines are provided to the manager and the loan officer for monitoring and follow-up. For this purpose the NPA accounts will be classified into four heads: a) NPA accounts which are viable and intention of the borrower is positive. b) NPA accounts which are non-viable and intention of the borrower is positive c) NPA accounts which are viable but intention of the borrower is negative. d) NPA accounts which are non-viable but intention of the borrower is negative. STEP - III: STRUCTURED ACTION APPROACH A) NPA ACCOUNTS WHICH ARE VIABLE AND INTENTIONS ARE POSITIVE. a) Reschedulement / restructuring and where enhancement of limit is required, the same will be done on priority basis. b) Need - based enhancement be done by taking adequate collaterals / third party guarantee. B) NPA ACCOUNTS WHICH ARE NON-VIABLE AND INTENTIONS ARE POSITIVE Borrowers will be encouraged for compromise / one time settlement (OTS). C) NPA ACCOUNTS WHICH ARE VIABLE BUT INTENTIONS ARE NEGATIVE Efforts will be made through guarantors / other influential person for regularisation of the account and thereafter adjustment of the accounts. 13) NPA ACCOUNTS WHICH ARE NON-VIABLE BUT INTENTIONS ARE NEGATIVE Here bank has no options but to go in for recovery through following actions: a) Criminal Action - Where security has been sold / misappropriated. b) Civil Suit / Debt Recovery Tribunal / Actions under SARFAESI Act for possession of the securities and thereby liquidation of outstandings. HOW TO INCREASE PROFITABILITY With the entry of Foreign / Private sector banks, competition in the banking sector has intensified putting a severe pressure on profitability. The 'Spread' or NIM (Net interest margin) is shrinking. As such, it has become necessary to focus on profit as a key to survival in the competitive environment. Profitability = 'SPREAD' + Other Income - Other Expenses,Where Spread = Interest Charged - Interest Paid Any exercise on increasing profitability has essentially to concentrate on following critical areas: a) Increasing Interest charged. b) Reducing Interest paid. c) Increasing Other Income / fee based income. d) Reducing or rationalisation of expenditure. STRATEGIES FOR INCREASING INTEREST CHARGED: a) Change in Advances - Mix: Lending to those sectors / segments where bank can charge higher rate of interest. b) Reducing NPA and recovery of Bad debts. c) Compromise / One Time Settlement (OTS) for recovery of non-viable cases. d) Plugging of revenue leakages. STRATEGIES FOR REDUCING INTEREST PAID: a) Change in Deposit-Mix (Increasing low cost deposits i. e, saving and current deposit)

b) Increasing float / pipe line deposits (as remittance etc.) STRATEGIES FOR INCREASING OTHER INCOME: a) Increasing non-fund based / fee based business. b) Cross-Selling of the products. c) Effective Cash management d) Investment in high-yielding securities. e) Handling of Merchant Banking business with focus on Issue Management / float funds and fee based income. STRATEGIES FOR REDUCING OR RATIONALISATION OF EXPENDITURE: Rationalizing of expenses such as telephone, electricity, stationery etc. CUSTOMER RELATIONSHIP MANAGEMENT ACTION PLAN : Customer Relationship Management (CRM) is a customer driven business strategy designed to optimize profitability,revenue and customer satisfaction. CRM is also a paradigm shift from "product centric and mass marketing" to "customer centric" way of business. CRM involves relationship marketing, which is to establish, maintain, enhance (long term) the relationship with the customers and other partners so that the objectives of the parties involved are met. This is achieved by mutual exchange and fulfilment of promises. CRM is based on the short-term orientation of the management with focus on achieving the following objectives: a) Attract new Customers. b) Increase Sales per customer. c) Reduce Costs through optimization of business process. d) Improve Customer relationship/increase loyalty. CRM has a number of positive effects on the running of a bank. It provides management with a clear picture of the business, facilitating decision-making. Using a common architecture and data mode, customer information can be shared faultlessly between front-end staff facing the customers to deliver services and the back-office staff who structure the deals. Front-end staff of a bank can profile a customer, create and maintain a customer account with contacts, manage activities, and explore business development possibilities. Similarly, a call center agent can maintain client data / information, produce call notes, replies to customer inquiries, and address and track customer service requests. In a nutshell, implementation of the CRM concept in banks can result in the following advantages: a) Speed and accuracy in information analysis. b) Foundation for organization-wide data and information. c) Understanding customer behaviour. d) Facilitating Business process re-engineering. e) Multiple products — credit deposits, investment, insurance etc. f) Multiple distribution channels — branch, Internet, call center, field sales etc. g) Multiple customers group — customers, small business, corporation etc. IMPLEMENTATION STRATEGY: a) Motivation for Bank staff The first step in implementation of CRM in banks is to motivate and train the staff to do so. The motivation must come from the side of the management in the form of regular training in behavioural and functional aspect of banking. b) Change of Mind-set and Customer Classification Change of mind-set of staff members is very important. It should be realized that all customers are not equal. Customer profitability varies from person to person/context to context and not all customers are evenly desirable for the banks. Banks must differentiate their customers based on the 'value criteria' i.e. how valuable the customer is? Value is nothing but the profit the customer adds to the bank's account. Put simply, a more profitable customer is a 'high value' customer and a less profitable customer is a 'low value' customer. A bank's CRM system must also capture customers' taste, preference, behaviour, living style, age, education, cultural background, and physical and psychological characteristics, sensitivity etc., while differentiating them by the value criteria into low 'and high value customers. By combining the profitability potential of a given customer and his/her personality profile including their expectations, customers can be grouped into four categories as follows: 1) Low value / less profitable customer desiring high-grade service. 2) Low value / less profitable customer with potential to become high value in incoming days. 3) High value ! more profitable customer desiring high-grade service.

4) High value more profitable customer requiring low-grade service. Once the banks differentiate their customers vis-a-vis the profitability and their other traits, it becomes easy for banks to customize their services and offerings to maximize the overall value of their customer portfolio. c) Ambiance for Banking The customers are comfortable going to banks that have a customer friendly environment. It may be due to the vast expansion of the premises, personal cubicles created, plush interiors, soft furniture, etc. Some banks go to the extent of playing soft music, setting up coffee shops, display work of art, etc., to create the right ambiance for a perfect CRM. d) Customer Retention Retention of old customers is more profitable than acquiring new ones. Happy and satisfied old customer brings in many other new customers. It has been realised that it pays more to keep your existing customer content, which results in cross selling and purchase of products. SUGGESTIONS: a) The banks can be made more customers friendly. b) Top management and senior executives must be committed and dedicated so that the lower employees are adequately motivated to implement better CRM. c) More funds to be allotted for implementation of IT, which not only speeds up transactions for customers but also avoids unnecessary friction between employees and customers. d) It pays to appoint well-educated, young, smart, highly trained and motivated relationship managers. e) The bank employees must be informed about new products and services at regular intervals. The communication channel needs to be more efficient between the management and employees. Handbooks can be printed and circulated for this purpose. f) The preparation of customers profile is very necessary to have a customer data base. g) Data mining needs to be dope at regular intervals for effective cross selling of products. h) Bank employees of all cadres need to be trained in effective implementation of CRM. i) The net banking concept needs to be tapped fully by banks. Computerisation needs to be done in more and more branches and they also should be connected through computer network, e-mail, etc. j) The belief that banks have poor customer relationship needs to be shattered by improving their image, wide publicity and campaigning by the media which will help to a great extent. k) The efficient employees who have effectively implemented CRM need to be rewarded within the limits of the management. It has been revealed that untimely transfers and lack of rewards are the main factor that discourages practicing better CRM by employees. The management can work up schemes to award cash prizes or give additional points for promotion to those employees maintaining good relations with customers. I) New products are to be lalinched keeping in view the services offered by foreign banks. m) Unlike the traditional approach where customers are acquired through mass media advertising, CRM normally gets its customers through referrals. CREDIT OFF – TAKE AT BRANCH LEVEL BACKGROUND : Budget is not just allocation or fixing targets. It is consultative and participative exercise done by the Head Office and concerned Branch Managers in an open atmosphere. Lot of home -work goes into the whole exercise. Branch Head, is supposed to have good idea of business environment and potential of his target area. Apart from this, past performance is also available in the form of statements. Historical data on recovery, quality, NPAs, court cases, compromises etc. is also available. The most important information that is crucial in business performance is the quality of staff and management of personnel, which depend to a large extent, on the attitude of Branch Head, Zonal Head, and other officers as well as the status of industrial relations at the branch. OBJECTIVES: To ensure credit off-take to the targeted level, the principle underlined is that the Decision should transcend: a) The Safety and Security of advances. b) Profitability aspect of advances. c) Spread of risk branch wise, product wise, area wise and customer wise for reducing concentration of risk exposure. HOME WORK BEFORE TAMING BECOSION : The ABC analysis will be undertaken with the focus on the past data of the existing branches regarding both quantity and quality of advances and also the potential available, product-wise and customer-wise and area-wise.

The first step in the analysis of data will be to identify top hundred borrowers who are in the Standard category. They can be classified into manufacturers, exporters, wholesalers, retailers and others. A meeting/calls will be conducted / made, with these 100 borrowers with the purpose of assessing their future business requirements i.e. the enhancement of limits required by them. Even top 100 depositors will be identified and honored. Their business requirements will be assessed. The services of these 100 top borrowers will be utilized in identifying a chain. of new trade borrowers who have good reputation in the market and are also availing huge limits from other banks. The existing borrowers will also be used to persuade / motivate the new chain of borrowers to switch over to our bank. Different trade associations dealing in different products will be contacted through the top 100 trade borrowers and potential borrowers having huge borrowings with other bank will be identified for take-over. Identification of potential traders / dealers, through professionals such as Chartered Accountants, Cost Accountants, Tax Consultants etc., who are not dealing with our bank. The capacity, expertise and experience of. the staff dealing in advances will be assessed. If need be, a workshop for reinforcement of advances skills will be organized for the dealing staff. FIXATION OF TARGETS: The allocation of the targets will be done on the basis of mix of Customer-wise, Product-wise, Area-wise and Branch-Wise to ensure spread of risk. CUSTOMER WISE: Customer specific targets can be set on the basis of the homework undertaken. While allocating targets, it will be broadly kept in mind that 60% of the targets should be earmarked for the existing top good borrowers and 40% for new borrower identified through existing top borrowers, trade associations and by the branch managers. PRODUCT WISE: While allocating the targets, the nature of the product will be kept in view on the basis of characteristics such as perishability, price fluctuation, and demand forecasts. Further, a balance will be maintained so as to ensure against overexposure in a particular product segment. It has to be ensured that adequate collaterals/third party guarantees are taken invariably. In exceptional cases, the specific clearance will be necessary from the region. AREA WISE: There are some trading activities confined to some areas. For example, apple, potato, kinnow, vegetables like tomato, cauliflower, onion, garlic, ginger etc., such areas may have a number of wholesale dealers, commission agents, arhtias. The budget can be conveniently allocated to the branches in those areas. Past experience, NPAs and other qualitative aspects would of course be kept in view. BRANCH - WISE: There may be branches where specific products are traded like steel, furniture, construction material, timber, horticulture products and cash crops. Products specific budgets can be considered if past data about quality and recovery etc. is available. Some branches have predominance of wholesale traders, being historically established at the towns/ cities to serve as the source of supply to the remote places. These branches are having potential provided the past experience of trade advances has been satisfactory. While selected branches, specific areas and specific products would always be in sharp focus, no branch would be allowed to feel neglected and, similarly, no branch having no potential would be unnecessarily burdened. So, while all the above three considerations will be kept in mind, selectivity will guide the exercise. MARKETING OF RETAIL BANKING PRODUCTS Retail Banking is a composite activity encompassing the banking products and services specially designed for meeting the ongoing requirements of 'individual' customer. An individual customer develops banking habit mainly for three purposes,namely: a.For making Investments, b. For raising loans, and For availing any of the subsidiary services. Retail banking, therefore, becomes complete only when all these financial needs of an individual customer are met to his utmost satisfaction under one roof. Retail Banking is being increasingly focused in Indian. Banking industry today mainly due to high margin and low risk nature of the business coupled with the, increasing pace of consumerism in India. Other factors, such as, increased' economic activity, increase in purchasing power of the consumers, especially that of the younger generation, a huge middle class population, innovations in technology and low interest rate regime have contributed to growth of retail financing. With increasing competition, 'spread' in the Indian banking industry is under strain. As such, banks need to shift their

focus to innovative products and services, which are profitable. If banks intend to prosper, profitability of products and customer should become buzz word for them. MARKETING STRATEGIES 'Marketing' is a composite activity, which includes market study, designing of products, delivering and ensuring proper after sales services. In a 'race' it is the 'pace' that counts and for attaining a 'winning pace', marketing strategies have to be designed. Latest technology can be used by banks to target products to the right potential customers, by maintaining a database of customer profiles and their likely financial needs. Data mining has to be strengthened, as it will help banks in formulating products for specific set of customers. The first step in designing the strategy is to identify the target customers and target products for which market segmentation exercise has to be undertaken. a) Market Segmentation: Segmentation of existing as well as potential retail clientele into housewives, professionals, salaried personnel, workers, company executives, businessmen, farmers be done to identify the needs of the target group and facilitate structuring financial products I services to match their needs. Further, the same data can be utilized for evolving different techniques of marketing depending on the target groups. b) Central Data Base: Bank should build up a central database to contain the profile of all high value retail clientele. Communication (either as seasonal greetings or for highlighting the significant measures for improved services, new products) through 'e' mail / postal mode should be sent at regular intervals from the corporate office itself directly to those high value customers identified by the marketing team stationed at all key delivery units. c) Financial Super Market: In view of the exposure of Indian customers to global products and services they have become more demanding, and they want fast, convenient and hassle-free services from banks in India. The traditional loyalty and inertia associated with the Indian consumer is changing very fast. As such the success of retail marketing largely depend on how banks understand its customers and the market. Development of skills for managing customers has become of crucial importance,if banks of today have to survive. Bank should become a 'one stop shop' for all the banking needs and services. For the retailers investing in low cost deposit schemes, add-on benefits like demand drafts, funds transfer facility, Anywhere Banking, ATM cards, name printed cheque books, monthly statement of accounts (direct to residence / office), Customer terminal (installed at their. premises),concessional collection charges, Mobile Banking, Internet Banking, Depository services, Portfolio Management Service,standing instructions, Insurance products should be extended either at concessional or nil cost. A cost study should be conducted to introduce a business linked tariff structure for all these services. All these services with technology should instill in the customer a sense of pride in banking with us. d) Retail Financing as Core Activity: Banks should prepare a list of preferred areas of retail finance town-wise, keeping the potential in view. SWOT analysis will help in identifying high profile towns from retail lending point of view. This will help in making focussed attention on retail financing by banks in specific potential areas. Ground work required for retail financing will involve: • Operational Manuals: To ensure uniformity and facilitate faster appraisal and decision making, operational manual has to be developed by banks. With this staff members at the grass roots level will not violate norms and by pass systems and procedures. • Credit Scoring & Loan Pricing model: To enable the frontline staff to take quick credit decisions, an efficient credit scoring and loan pricing system has to be designed. This will strengthen credit appraisal and post- sanction monitoring systems. • Centralised Processing: To have a competitive edge and gain the critical mass in the high volume game, the processing activity can be centralized. Processing excellence is crucial to sales and service quality. e) Portfolio Management Services: A retail investor still prefers 'safety' to 'returns' and hence Banks are the ultimate choice. Series of failures elsewhere have already made the investors lean towards the Banks. Bank can have portfolio management services for the retail investors so that they can have all investment options under one roof. • Target Approach: Targets can be fixed for all the units & teams dispensing retail banking products. • Well-Trained Marketing Teams: A product can be got sold in this highly competitive environment only through committed well-trained marketing teams. Exclusive marketing teams specially trained for this purpose should be stationed in all key places to ensure market presence and penetration. In all other places, the people at the delivery unit themselves should form the marketing team. • Brand Equity: Customer preference, under the present environment, is towards branded items. Brand equity should be created for all retail banking products and services through regular road shows, seminars, advertisements, exhibitions, market penetration.

• Pricing of Products and Services: For retail lending schemes, it is always the "cost" and 'care' that counts and these two aspects haunt the minds of retail borrowers. Rate of interest for the loans under retail lending should be rather based on the risk profile and where the credit risk is low or nil, the rate of interest should be the lowest and for others uniform guidelines for graded interest rates be introduced. • Feedback: A system for regular interaction and feedback from the retail 'customers be evolved to facilitate constant review and fine-tuning of strategies. • Non-Cash Incentives: Norms for non-cash incentives be evolved for the teams doing excellent business in retail banking. • Frill Benefits / Add-ons: All schemes under 'Retail lending" be insurance linked and procedural formalities to be reduced. Norms for 'Back ended interest rebate' for prompt repayments be also evolved to make the schemes still more attractive and customer friendly. TURN AROUND OF A BRANCH MIND SET – UP : The first step is to undertake the diagnostic study of the reasons the branch is running into loss. This will include scanning of the environment identifying the business potential and drawing up a strategy for turn-around of the branch.The ABC analysis both for deposits and advances will be undertaken. The target area will be scanned and all business potential entities I groups will be identified and quantified. Different associations / agencies will be used as a business promotion vehicle. Micro-analysis will be undertaken on a time frame 'basis. Target will be fixed and efforts made to achieve the same in the time schedule. STEP - WISE ANALYSIS WILL FOCUS ON: a) Scanning the area and preparing the profile of existing units / potential - sunrise areas in agriculture, industry,infrastructure, housing, retail lending. b) Identifying Govt. agencies where they can be bulk credit off-take i.e., Indirect Financing through corporations, boards and other agencies. c) Credit off-take through automobile financing and financing to consumers for white good durables, Lending to Stock Brokers / investors against shares of blue chip companies in demat form. d) All existing 'A' — Category (standard category) borrowers will be contacted and motivated for introducing new borrowers /facilitating switch over to our banks. e) Quantitative targets will be fixed and progress reviewed on monthly basis. The profitability could be achieved in two ways. Firstly, by earning more income, and secondly, by reducing or rationalizing expenditure. We can work on the following lines, keeping in mind our location. A) Income Oriented Activities; B) Expenditure Saving Activities;, C) Generation of Income through competitive services; D) Recovery Aspect. A) INCOME ORIENTED ACTIVITIES: The first step is to short list income generating sectors. The target area will be scanned and business potential activities such as schools, colleges, universities, .trade associations, industries, business ventures etc., will be listed. The activities should be focused keeping in mind following features: (a) Identification of existing SMALL/Medium Industrial Unit Situated in the Area. We should identify the SSI and other medium industries, which are working successfully in the area and are having their accounts with other banks. The details can be obtained from District Industries Centre. A list of successful small and medium industries working in the area could be obtained. The existing 'A category borrowers be pursued to introduce new good borrowers so that bank can facilitate them to switch over to your bank. (b) Facilities to Road Transport Operators: In the similar way, automobile dealers of buses; trucks and auto rickshaws could be contacted. If possible, a small advertisement display of the bank could be placed near their showrooms, with their consent. Assistance could be given to such road transport operators of the area. The well-established schools and colleges working in the area could also be contacted. Such institutions require vehicles for transporting their students. (c) Assistance to Distributors and Wholesale Traders Bank can approach various authorized dealers, distributors and other wholesale traders who have well-established business. They

could be requested to switch over to our bank. Their proposal could be got sanctioned frOm the higher authorities, if not within the vested powers of the branch manager. Such finance carry higher rate of interest and is collaterally well secured. The traders are financially sound and the possibility of the accounts becoming sticky, is very less because they have a wide spread network of retail outlets for their sales. (d) Assistance for Housing Housing loan is yet another important segment. It is a long-term income-yielding sector. Well reputed contractors; builders and architects could be contacted to know about the prospective customers. Municipal authorities could also be helpful in this purpose. Subsequently, the parties could be contacted to avail housing finance from our branches. B) EXPENDITURE SAVING ASPECTS: it is very common phrase that penny saved is the penny earned. We may have to put some extra efforts for earning extra income: But we can save a lot with a bit of care and proper management. The things, which appear very minor and petty in nature, go a long way in lot of savings. These even, are capable to turn loss-bearing units into profit earning units. Some of the important aspects where wastage could be avoided are as follows: a) Over staffing could be avoided. b) Staff should be properly utilized. c) Switches of fans and tubes should be at the nearest point to the working officer so that lights could be switched off as soon as the staff leaves. d) Misuse of Bank's vehicles should be checked. e) Proper log registers should be maintained and checked immediately on the return of the concerned employees. Vehicles should be properly got serviced at regular intervals so that wear and tear is reduced and fuel consumption is optimum. f) The articles, which are not in use, should be disposed-off with the prior sanction of the higher authorities. These should not be dumped unnecessarily. g) Record keepers and other subordinate staff members should be advised to maintain stationery properly. h) The sub standard article should not be purchased because they require regular repairing, and ultimately result into loss and inconvenience. i) The expenditure bearing articles should be replaced with new economical gadgets and articles. C) COMPETITIVENESS IN BANK'S SERVICES: Within the prescribed limit, branch can bring competitiveness in some of the services. For example, with prior permission, bank draft charges, lockers charges etc. could be conveniently re-fixed which may yield more income but do not effect service. If the charges levied by the bank are on higher side with comparison to other banks operating in the area, the case could be taken up with the higher authorities for the reduction of the same. D) RECOVERY ASPECT: Recovery of sticky and overdue loan accounts should be given top priority. Such accounts affect adversely the working of the branch in two ways. Such accounts should be short listed and field staff be given necessary instructions to maintain a regular and constant touch with the defaulters. Legal aspects should also not be delayed. Efforts should be made to get the recoveries through compromise. Such proposals should be forwarded to the higher authorities at priority level HOW TO IMPROVE INSPECTION / AUDIT GRADATION OF YOUR BRANCH The first step to handle the audit / inspection report is to prioritise the irregularities / discrepancy. Irregularities 1 discrepancies which are of serious and very sensitive nature and can cause financial loss to the bank, has to be given the top most priority and efforts will be made to rectify the same instantly. The monitoring and follow - up of irregularities has to be done on daily basis by the branch head himself. The irregularities be classified as follows: a) Section wise listing of irregularities: First of all the irregularities should be sorted out section wise. The departments, like deposits and advances, which are looked after by more than one officer, the lists of the irregularities should be made as per sub sections or as per work handled by the different officers. This would make it convenient to refer to the records, recording the irregularities removed and in some other aspects as well. b) Picking up the Experienced Staff for Removal of Irregularities: Well -experienced staff members should be listed, sector or business wise for removal of the irregularities. Technical officers or field staff could be taken up for irregularities related to the field job where we have to approach the customers.
c) Prioritizing the Irregularities: All the irregularities should be separately listed according to the gravity or the seriousness. Top priority irregularities pertaining to limitation, wrong documentation, stock

reports, cash department and so on should be given personal attention. A proper follow up should be maintained. d) Issue of Office order for removal of irregularities; A proper office order be issued to get the irregularities removed in a time bound frame. The officer order should also indicate the time for submission of progress made in this effort, i.e. weekly,fortnightly etc. FOLLOW – UP : a) Monitoring: The concerned employees be asked to submit their report to the Assistant Manager, who, in turn will submit the consolidated report to the incumbent incharge. The incumbent incharge may submit the progress report to the controlling officer accordingly. b) Instructions for Future: It is more important that the irregularities are not repeated in future. The staff members working on different seats should be asked in writing to follow the prescribed procedure strictly in letter and spirit. This will reduce the number of irregularities to a considerable low. The checking officials or officers should be asked to do proper checking. c) System of individual diarising the pendencies: A system should be adopted that pendencies pertaining to incomplete work be diarised by the individual Officers seat wise. The officer working on the seat should maintain the dairy on daily basis. The same should be completed at the particular date noted in the diary. Most of the irregularities occur because they slip out of mind. HUMAN RESOURCE MANAGEMENT Human Resource Management (HRM) broadly refers to a positive approach to the management of an organization's people who individually and collectively contribute to the achievement of sustainable competitive advantage. It basically refers to the management and development of the employees, to match with the business strategy of the organization. The FIRM philosophy is based on positive commitment towards the development of employees for ensuring their growth,development and performance to enhance human capital in the bank. The HRM model is composed of policies that promote mutual growth for achieving mutual goals coupled with mutual responsibilities and rewards, which in turn will yield both better economic performance and greater human development. AIMS OF HRM IN CHANGING ENVIRONMENT • HRM is seen as a partner aligned to business strategy, not only participating in setting performance objective of any employee but also creating development opportunity to achieve them. • To enable management to achieve organisational objectives through its workforce. _ To foster commitment in employees which will facilitate to gain competitive advantage. _ To establish an environment in which the latent creativity of the workforce will be unleashed. _ To achieve "strategic fit" between business strategy and HRM so that there is consistency between policy goals of HRM and that of the business. KEY STRATEGIC ISSUES IN HRM From the intervention strategy perspective, HRM must contextually respond to the following issues: ORGANISING PEOPLE TO WORK EFFECTIVELY A key starting point for effective human resource management is to build an organisational structure that is designed specially to carry out the bank's mission and strategy. The first and foremost task of HRM in banks, therefore, would be to organize its people so as to enable them to work effectively. OPTIMIZE THE ORGANISATION STRUCTURE - UP GRADATION OF TECHNOLOGY The technology up-gradation in the wake of competition has the effect of taking banks to become more efficient and capable of responding to the market conditions. The business strategies and technology up-gradation has a direct impact on the organisational structure. HRM must be able to re-design organisational structure as per external changes, business strategies and one step ahead of the competitor. Work process re-engineering to achieve greater efficiency and cost effectiveness must be attempted. BUILD THE RIGHT SKILLS AND WORK CULTURE Banks must have employees who offer the necessary range of job specific skills and whose attitude towards their work and,colleagues enable them to channel their skills and energies into performing productively for bank and its customers. ELIMINATING SKILL GAP Introduction of newer technologies by itself does not improve performance of banks. Introduction of new technologies necessarily involve re-examination of the existing human process so as to deliver better results. New technologies need new skills

but they do not replace human skills. The centralised core banking solution package being introduced in banks would necessitate far reaching changes in managerial practices besides rendering surplus age of employees. RE-LOCATION OF SURPLUS EMPLOYEES Focus of HRM should be to plan for effective relocation and utilisation of displaced employees and effective use of back office data. BUSINESS PROCESS OUTSOURCING Outsourcing, which is quite simply the transfer of operational responsibility of business processes, infrastructure management of an IT application to a third party for a fee, is gaining, acceptance amongst corporates globally so that they can concentrate on their core business i.e. banking. TOTAL ENTERPRISE TRANSFORMATION: Optimal results of technology implementation can be achieved with proper grooming, placements, training, rotation and changing the mind-set of the staff. HR is the key element in implementation of technology since men have to run, manage, operate and command the technology. BENEFITS OF TOTAL ENTERPRISE TRANSFORMATION Public Sector Banks will have the following tangible business benefits by total enterprise transformation. e Enhanced Competitiveness 0 Enhanced Operational Efficiency 0 Enhanced Customer Satisfaction. Enhanced Accountability • Better Financial management 0 Better Risk management MANAGERIAL ROLES Role is a position, which a person occupies in an organization, defined by the expectations of others (significant groups or individuals), and by himself. Role should be properly defined to avoid ambiguity, overlapping, transgression & stress. AS A PLANNER: A manager undertakes planning, which envisages goal setting and resource mobilization, essential for achievement of pre-determined and thoughtfully scheduled organisational goals. Appropriate strategies are worked out with periodical review if and when warranted by environment, particularly competition. AS A PERFORMER: A manager shows commitment and devotion. He sets example by bringing about congruence between personal objectives and organizational goals: He identifies Key Performance Areas (KPAs). His performance is quantifiable and visible. He lays down challenging tasks for himself, aims high, puts in hard work and becomes a trailblazer. AS AN ORGANIZER: A manager is an effective organizer of material and human resources. He ensures to utilize resources economically to give optimum results. He cares for human resources, plans training & development, motivates people,establishes instant and spontaneous rapport with others and creates conducive working climate. He infuses values and reinforces concepts like cost consciousness, total quality management leadership, responsibility to society, loyalty to organization, fellow feeling among the staff, zeal for intrapreneurship and innovation. AS A LEADER: A manager develops team, energizes organization and team members, motivates staff, shares knowledge, acts only after full investigation, invites suggestions, accepts change and enforces change through consultation and persuasion, keen on creativity and encourages creativity in the organisation, skilled in negotiation and communication. He is also self-confident, obeys codes of ethics & morality, shows high maturity, good listener and skilled in resolution of conflicts. He treats colleagues with respect. He acts in the true spirit of friend, philosopher and guide (counselor). AS A MOTIVATOR: A manager knows that people are invaluable resources of the organization. He keeps them motivated to accomplish goals. He knows that motivation is the resultant behaviour propelled by need arousal. People move from lower level (basic) needs to higher level needs (status and social recognition); they desire to reach a level of self-actualization. A manager, therefore, uses tact and philosophy to create a desire in his colleagues to have a vision of attaining higher goals and work for the same with dedication. AS A COMMUNICATOR: Makes clear and understandable communications, down the line. Informs Controller with facts and convincing logic. His communication is effective. He insists on feed-back. He gladly gives clarification, if sought. His communications are polite but firm and specific. He prefers discussing subjects threadbare in meetings. He does not take offence if opposite views are expressed; he removes fear in meetings. AS A MONITOR: He ensures compliance through statements and returns. He insists on feedback. Achievement of budgeted levels is appreciated liberally and negative variance is taken as opportunity to look into the environmental / hindering factors for suitable remedial actions, which he suggests. He offers support, if any, required.

AS A CHANGE AGENT & CATALYST: Changes take place regularly, sometimes abruptly, both internally and externally. He explains changes and their consequences; invites reactions, allays fears and persuades to accept changes for better results. Rationale is explained, holistic position described in global context, ensures acceptance of change willingly. AS A VISIONARY: Only a visionary manager thinks of extra-ordinary possibilities, he experiments on new possibilities and allows his subordinates to do likewise. He excuses routine and genuine mistakes. Vision brings about super synergy in the team, which is a force to meet and beat competition and become a winner. Vision infuses confidence and encourages killing instinct, and this is required in today's competitive environment. AS A IMAGE BUILDER: A manager represents an organisation. He builds its image, conducts him self-well, he projects his organization by his good deeds and actions. He has to ensure good working climate,. courtesy on the part of the staff, helpful & supportive attitude of all in the organisation towards the public calling at the premises or contacting on telephone etc., prompt & efficient customer service, zero mistake operations, prompt reply to communications, tailor-making schemes for certain target groups and sense of discipline on the part of all. He ensures that visit to the organisation is a delight indeed. AS A COORDINATOR: It is the responsibility of the manager to coordinate different aspects of an organisation. It is necessary to create the harmony between manpower, available resources and decides targets for effectiveness, efficiency and growth. All these roles culminate into the role of developer and this role can be achieved only by having the concept of 'leading by example'. WHAT MAKES A GOOD MANAGER PROBLEM SOLUTION (CONFLICT RESOLUTION) • JUDGEMENT SKILL — Distinguishes between what's important or controllable, and between what is not important or uncontrollable. Identifies who is skilled enough to handle an issue or reconcile a conflict situation. Ensures and priorities within time-frame work. • ANALYTICAL SKILL & INTEGRATIVE ABILITY— Identifies inconsistency in message contents and subtle relationships in information. Identifies facts from various and unconnected sources, and relates them to arrive at conclusions. Familiarizes with concepts. • DECISION MAKING AS CORE ACTIVITY— Considers the relevant facts for developing and evaluating all possible alternatives for solving a problem, habitually draws upon colleagues for suggestions, affords opportunity to the subordinates to develop. Realistic, practical constraints are considered and helping factors identified. • ADAPTABILITY — According to Charles Darwin, "it is not the strongest nor the ablest who survive, but it is the one who adapt to change that survive". A manager performs under less than optimum conditions e.g. unstructured problems, too little time and/or resources, insufficient information, mismatch between individual's skills and job requirements. • PERSONAL IMPACT— Affects others, convinces those holding opposing or neutral positions, push through interest or ideas despite opposition due to personal influence, style, endeavour, and ability to carry along colleagues. Takes charge of situation quickly, decides. INTER-PERSONAL SKILLS • COMMUNICATION: Communication instructions and proposals with facts and in clear and understandable language, avoids ambiguity, ensures feedback, listens patiently and carefully, holds meeting in cordial and encouraging manner and invites suggestions. • MANAGING INDIVIDUALS — Understands management principles and concepts, assists subordinates and peers involving management experts, to achieve their business and career objectives. Listens to others, acknowledges their strengths, and volunteers to remove their weaknesses. Ensures support and guidance, and understands individual differences. • PLANNING AND MANAGING GROUP PERFORMANCE — Formulates participative plans to achieve job objectives as part of organisational objectives, undertakes mid-term review of business plan, if found unrealistic or unreasonable due to environmental changes, sensitive to group co-operation, productivity and profitability. Sets up quality•circles and pushes forward through team spirit towards zero defect operations. • CONFLICT MANAGEMENT — Objectivity despite stress. Addresses conflict directly and tactually. • DIPLOMACY — Negotiates with win-win situation. Tailors approach to take into account the perceptions, needs or motivation of others, giving reasons and explanations for requests. PERSONAL ATTRIBUTES • COMMUNICATION — Speaks and writes well. Adapts communication style to suit the audience. Is easily understood. Ensures two-way communication. Gives clarification, if wanted.

• DECISIVENESS —Firm, chooses among alternatives, confronts higher management decisions. • CREATIVITY — Provides/anticipates new perspectives, approaches, experimentation. ENERGY • ACTIVITY LEVEL — Sustains high level of activity including speed, volume of work accomplished, endurance, balance, composure, civility, and enlightenedleadership. • FLEXIBILITY — Handles challenges. Copes with multiple changing demands and setbacks. STRATEGIC & OPERATIONAL CONTROL • STRATEGIC & ORGANIZATIONAL AWARENESS — Possesses awareness of interests and objectives of the organization, develops own plans and actions as part of overall organisational plan. Coordinates with and provides assistance to other units, keeps updated on changes. • ADMINISTRATIVE CONTROL— Prepares plans & tracks; documents the progress of programmes. Designs control systems. Keeps abreast of the details, which support them. • TECHNICAL MANAGEMENT — Ensures more technical expertise on the job than managerial expertise on the job. Provides current technical skills to subordinates and others to stay competitive in market. COMPETITIVE ANALYSIS & ASSESSMENT: Environment threat and opportunity analysis is required to know the strategy of the competitors and entry of new competitors and comparison of our resources and strategy with their plans. DELIVERING CUSTOMER DELIGHT Human beings are unique and complex entities. Each develops his/her own self-image, likes and dislikes. So is the case with our customers. Each of the customers has different features, characteristics and expectations - unique in one's own way: Global Customers: Often our customers operate in more than one country and their products, services, operations, and their end-users too are spread all over the world. To serve them means, 'thinking global". Technology Oriented Customers: Such customers focus on technology as their change agent which virtually governs the dynamics of their daily drills and they execute their plans with long-term leaps. For serving them we go by the dictum "thinking ahead, thinking competencies". Customers which are Demanding and Competitive:They judge themselves by making comparisons as to, what they can do better than their competitors do. How quickly and smartly they stay. They determine their success by positioning ahead in the market arena. In their case, it means to us "thinking business". Constantly Benchmarking Customers: They believe in setting standards not to stick to them as they consider them minimum, only to be raised consistently and quickly. Reaching global benchmarks is a given thing for them. Measuring quality, finding ways of removing or reducing defects and pursuing excellence constantly are ongoing commitment for them. They make us do "thinking metrics, thinking excellence'. Cost Focussed Customers: Business today is more conscious of pressure on bottom lines. Reducing costs, improving operational efficiencies are the things of the day. For such customers, we commit "thinking cost-effective solutions". HOW TO PROCEED TO SATISFY OUR CUSTOMERS? We must adopt a policy of collaboration / partnership with our customers to deliver the needed and perceived business solutions. The following propellers are indispensable in this regard: a) A matching mindset: We have to develop a mindset that not only brings about understanding of customers' needs and expectations but also dig deep to empathize with the customers' latent expectations needed relevant technologies and business goals. We can then succeed to deliver solutions with genuine passion. b) Honouring Delivery Schedule: Solutions have not only to be need-specific but also time-specific. Looking for ways to deliver solutions not just on time but ahead of time is the core of success in serving customers. c) Reservoir of Competencies to Lead: Highly competent professionals with rich domain competencies to understand the business of customers better must be in position. The technical team has to be supported to develop solutions for the customers, recognizing fully well that customers seek solutions, not technology. d) Cutting down on Cost: Rupee saved is rupee earned. The solutions, processes, and people should all be bottomline-focussed. Twin strategies of cost reduction and cost savings go hand-in-hand. These lead to. a discernible increase in operational efficiencies, resulting in increasing value for the customers' shareholders.

e) Value Addition: Adding value enhances customer delight. Endeavour to add value to every facet of the customer interaction has to be a permanent feature. Think of value addition to customer, relevant existing process, new plan, innovative idea etc. MEASURE AND DELIGHT APPROACH: Quality benchmarking being ongoing process means going beyond global benchmarks such as ISO 9001-2000, SEI-CMM Level 5 and other standard requirements. The goal should be to constantly raise the bar. Measurements monitoring, modifying and excelling help to apply the best quality practices for the customers. PROBLEM SOLVING & DECISION MAKING With the integration of Indian economy with the rest of the world, the pace of changes in the environment has increased, leading to an increase in organization problems. Dynamic management of an organization demands understanding the change, nature of change and the direction of the change. Manager by the process of decision-making undertakes to minimize the impact of changes and increase effectiveness for achieving organizational objectives. Decision-making is the process of selecting a course of action from among several alternatives. It is selection of the best possible alternative for the solution of a given problem. STEPS OF DECISION MAKING a) Problem Identification - Problems arise due to disparity between ' what is' and ' what should be'. The threats of environmental changes also create decision problem. A manager should identify and define the real problem in a straight way. A problem well defined is half solved. The problem should be classified on the following basis: • Nature of the decision, i.e. whether it is strategiINGc or routine. • Impact of the decision on the various functions of the business. • Futurity of the decision. • Periodicity of the decision, and • Limiting or strategic factors relevant to the decision. b) Diagnosing the Problem: Diagnosing the problem is knowing the real cause of the gap between what is and what should be. The problem should be understood in terms of its elements, its magnitude, its urgency, its course, and its relations with other problems. All pertinent facts and information must be collected and analysed to diagnose the problem quickly and correctly. c) Developing Alternatives: A manager, while making decision, should search for various alternatives, which should be identified and analysed. There is a no problem of decision making if there is only one way of solving a problem. A wide range of alternatives increases the freedom of decision maker. However such alternatives should not be considered which are not possible to be accomplished due to a limiting factors. d) Selection of Best Alternative: After evaluation of the various alternatives, the decision maker has to select the best alternative or that alternative which contributes maximum to the given objectives. It should be ensured that the decision taken is practicable, stable and it is not creating another problem. e) Implementation Decision: It implies laying down of derivative plans and their communication to all concerned who are responsible for its implementation within a given timeframe. f) Follow-Up: The implementation of the decision should be constantly monitored. No matter how scientific it is, decisionmaking has no guarantee that it is hundred percent correct. It may be defective and may cause loss to the organization. As such its progress should be watched carefully to minimise the chances of loss. If the decision taken is not yielding the desired results, necessary changes should be made in the decision or its implementation. Thus an effective follow-up may control the major deviation in time. One of the best ways to analyze the decision is to use the most common Decision Trees approach. Decision Trees depict, in the form of a tree, the decision points, chance events, and probability involved in various courses that might be undertaken. This approach makes it possible to see atleast the major alternatives and the fact that subsequent decision may depend upon events in the future.