Chapter II

Non-performing Assets

2.89 The asset quality of RRBs has been witnessing a significant improvement over the past few years. This has been possible due to their improved recovery performance. In order to reduce the level of NPAs as also to improve recovery of sick advances, one-time settlement scheme for recovery of NPAs was introduced in RRBs, effective upto March 31, 2002. The concomitant improvement in asset quality is evident from the fact that, the per cent of 'standard' assets have increased to 83.9 per cent in 2001-02 from 81.2 per cent in 2000-01 (Table II.27).

Table II.27: Classification of Loan Assets of all RRBs (As Percentage to Total Loan Assets)
							(Per cent)
Category		As at end-March
		1997	1998	1999	2000	2001	2002
	1	2	3	4	5	6	7
1.	Standard Assets	63.2	67.2	72.2	76.9	81.2	83.9
2.	Non-Performing Assets	36.8	32.8	27.8	23.1	18.8	16.1
	Sub-standard Assets	8.2	8.5	8.1	7.0	5.3	N.A.
	Doubtful Assets	24.0	20.4	17.0	14.0	12.0	N.A.
	Loss Assets	4.6	3.9	2.7	2.1	1.5	N.A.
N.A. Not available.
Source: NABARD

9. Local Area Banks

2.90 With a view to providing an institutional mechanism for promoting rural and semi-urban savings as well as provision of credit for viable economic activities at the local level, Local Area Banks (LABs) were established in the private sector. The related guidelines were announced by RBI in 1996. Five LABs have since been established of which licence in respect of one LAB viz., Vinayak Local Area Bank, Sikar has been cancelled in January 2002. The four banks which are functional are: (1) Coastal Local Area Bank Ltd., Vijayawada in the districts of Krishna, Guntur and West Godavari in Andhra Pradesh; (2) Capital Local Area Bank Ltd. Phagwara in the districts of Hoshiarpur, Jalandhar and Kapurthala in Punjab; (3) South Gujarat Local Area Bank Ltd., Navsari in the districts of Navsari, Surat and Bharuch in Gujarat; (4) Krishna Bhima Samruddhi Local Area Bank Ltd., Mehboobnagar in the districts of Raichur and Gulbarga in Karnataka and Mehboobnagar district in Andhra Pradesh. The performan ce of LABs during the period ended March 2002 is provided in Table II.28.

Table II.28: Performance of Local Area Banks
		(Amount in Rs. crore)
Name of the LAB	Deposits	Advances			CD ratio (per cent)
Coastal Local Area Bank Ltd.	21.90	17.80			81.29
Capital Local Area Bank Ltd.	47.29	30.00			63.46
South Gujarat Local Area Bank Ltd.	19.10	13.90			72.77
Krishna Bhima Samruddhi Local Area Bank Ltd.	0.40	2.55			637.5

10. Regional Spread of Banking

2.91 The total number of branches of commercial banks increased from 65,933 at end-June 2001 to 66,186 at end-June 2002. Rural branches accounted for the highest share (49.1 per cent), although marginally lower than that recorded in the previous year (49.4 per cent). The shares of semi-urban, urban and metropolitan branches remained at almost the same levels as in the earlier year (Appendix Table II.12). State-wise distribution of branches reveals that the number of branches in the central and eastern regions witnessed an increase owing to the opening of new branches in several new states. The maximum number of bank branches were opened in the state of Andhra Pradesh (47), followed by Kerala (43) and Maharashtra (40) (Appendix Table II.13). The southern region accounted for the highest share of bank branches at end-June 2002 (27.4 per cent), followed by central region (20.3 per cent) and eastern region (17.7 per cent), respectively.

11. Interest Rates of Scheduled Commercial Banks

Domestic Deposit Rates

2.92 The deposit rate across all maturities came down significantly during 2001-02 with the degree of moderation being higher for longer-term deposits. Reflecting the comfortable liquidity condition, deposit rates of PSBs, which were ranging from 4.00 to 10.50 per cent in March 2001, softened to 4.25 to 8.25 per cent by October 2002 in all maturities except for a marginal increase of 25 basis points at the short end of 15-day deposits. Deposit rates of private sector as well as foreign banks also declined during 2002-03 (Table II.29).

Table II.29: Movement in Deposit and Lending Interest Rates
Interest Rates				March 2001	October 2001	March 2002		October 2002
1				2	3		4	5
Domestic Deposit Rates
Public Sector Banks
	a)	Up to 1 year		4.00 – 8.00	4.25 – 7.50		4.25 – 7.50	4.25 – 6.75
	b)	1 year up to 3 years		8.00 – 9.50	7.75 – 9.00		7.25 – 8.50	6.50 – 7.75
	c)	Over 3 years		9.50 – 10.50	8.50 – 9.25		8.00 – 8.75	7.00 – 8.25
Private Sector Banks
	a)	Up to 1 year		5.00 – 10.25	5.00 – 9.50		5.00 – 9.00	4.00 – 8.75
	b)	1 year up to 3 years		9.00 – 11.00	8.00 – 10.50		8.00 – 9.50	7.25 – 9.50
	c)	Over 3 years		9.25 – 11.50	8.25 – 10.50		8.25 – 10.0	7.50 – 9.50
Foreign Banks
	a)	Up to 1 year		4.25 – 10.00	4.25 – 10.00		4.25 – 9.75	4.00 – 9.75
	b)	1 year up to 3 years		7.25 – 10.75	5.75 – 10.50		6.25 – 10.0	5.50 – 10.0
	c)	Over 3 years		7.25 – 10.50	7.25 – 10.50		6.25 – 10.0	5.50 – 10.0
Prime Lending Rates
	Public Sector Banks			10.00 – 13.00	10.00 – 12.50		10.00 – 12.50	10.00 – 12.50
	Private Sector Banks			10.25 – 15.50	10.50 – 15.50		10.00 – 15.50	9.50 – 15.50
	Foreign Banks			9.00 – 17.50	8.80 – 17.50		9.00 – 17.50	7.40 – 17.50

2.93 Long-term domestic deposit rates (over 3 year) of PSBs declined to 8.0 to 8.75 per cent by March 2002 from 9.50 to 10.50 per cent in March 2001. Reductions of the order of 125 and 25 basis points, respectively, in the maximum deposit rates for shorter maturities (less than one year) were observed in respect of private sector banks and foreign banks.

2.94 During the current financial year so far (upto October 2002), deposit rates of PSBs for maturity periods up to one year have remained in the range of 4.25 to 6.75 per cent. For longer maturities, as compared to March 2002, the rates for deposits of maturity over 1 year to 3 years declined by 75 basis points, while those for over 3 year maturity period declined by 50 to 100 basis points. There has also been a reduction in deposit rates of foreign banks. Private sector banks, however, reduced the deposit rates by 25 to 100 basis points for maturity upto one year, 75 basis points for over one year to 3 years, and 50 to 75 basis points for over 3 years.

Lending Rates (non-export credit)

2.95 During 2001-02, the range of prime lending rates (PLRs) of PSBs declined marginally by 50 basis points, as compared to the decline in long-term deposit rate by 150 to 175 basis points. At end of March 2002, the PLRs of PSBs ranged between 10.0 and 12.5 per cent as against 10.0 and 13.0 per cent at end-March 2001. While sub-PLR lending forms a part of pricing strategy of commercial banks, rigidities in lending rates still persist. At the end of October 2002, PLRs of PSBs remained at the March 2002 level of 10.0 to 12.5 per cent, although a number of PSBs reduced their PLRs by 25 to 100 basis points within the range. The foreign and private sector banks, on the other hand, reduced the PLRs at the lower end of the range (Table II.30). Moreover, after the announcement of April 2002 policy, a number of banks have reduced their spreads by 50 to 100 basis points. As a result, effective interest rate on lending has come down during the first half of 2002-03.

 

Table II.30: Bank Rate, Export Credit Rate and PLR (Public Sector Banks)
								(Per cent)
				Export Credit				PLR
			Bank Rate	Pre-shipment		Post-shipment		(Public
Effective				Upto 180 days	Beyond 180 days and Upto 270 days*	Upto 90 days (Not exceeding)	Beyond 90 days upto 180 days*	Sector Banks)
1			2	3	4	5	6	7
March 2, 1999			8.0	10.0	13.0	10.0	12.0	12.0 – 14.0
April 2, 2000			7.0	—	—	—	—	11.25 – 12.5
July 22, 2000			8.0	—	—	—	—	—
February 17, 2001			7.5	—	—	—	—	11.5 – 13.0
March 2, 2001			7.0	—	—	—	—	10.0 – 13.0
May 5, 2001			—	PLR minus 1.5	PLR plus 1.5	PLR minus 1.5	PLR plus 1.5	—
September 26, 2001			—	PLR minus 2.5	PLR plus 0.5	PLR minus 2.5	PLR plus 0.5	10.0 – 12.5
October 23, 2001			6.5	—	—	—	—	—
— indicates no change.
* Will be deregulated with effect from May 1, 2003.
Notes :	1.	The validity of the reduction in the interest rates on rupee export credit effective from September 26, 2001 would remain in force upto April 30, 2003.
	2.	The Bank Rate was reduced by 0.25 percentage point from 6.50 per cent with effect from the close of business on October 29, 2002.

12. Diversification in Banking Activities

Debit Card Business of Banks

2.96 The minimum net worth criterion of Rs.100 crore for banks issuing on-line debit cards was dispensed with, while retaining the same for offline cards. Some banks were also allowed to issue pre-paid smart cards (both on-line and off-line) to select customers who maintain accounts with banks for less than six months subject to their ensuring the implementation of 'Know Your Customer' (KYC) concept. Banks introducing off-line mode of operation of debit cards are required to adhere to the minimum period of satisfactory maintenance of accounts for six months.

Portfolio Investment

2.97 Seven banks in the public sector and one foreign bank were granted permission to contribute to the equity participation in Clearing Corporation of India Ltd. and one public sector bank was permitted to participate in the equity of PNB Gilts Ltd.

Insurance Business

2.98 One private sector bank was given approval for participating in insurance joint venture on risk participation basis. Thirteen private sector banks including foreign banks and one financial services company were given 'in principle' approval for acting as 'corporate agents' to undertake distribution of insurance products on agency basis without any risk participation. A few banks have been permitted to enter into referral arrangements with insurance companies subject to certain conditions to protect the interests of their customers.

Customer Service Measures

2.99 With a view to further improving the customer service in the banks, following major measures were taken:

(a)	Release of Assets of Deceased Customers to Legal Survivors/Claimants
	As against the earlier instructions that banks should not insist upon succession certificate from legal heirs where the amount to the credit of the deceased depositor does not exceed Rs.25,000, RBI has withdrawn the requirement of obtaining succession certificate from legal heirs, irrespective of the amount involved in the account of deceased customer. Banks were, however, advised to adopt such safeguards in settling claims as they consider appropriate including taking of an indemnity bond or even call for succession certificates from legal heirs of deceased depositors in cases where there are disputes and all legal heirs do not join in indemnifying the bank. Similar guidelines were issued to banks for release of other assets also, e.g. safe custody articles, mortgaged security, etc.
(b)	Introduction of Accounts and Documents for Identification
	Banks have been advised that it is not essential to open an account only through an introducer; it may be done on the basis of certain official documents such as passport, ration card, election card, Voter's identity card, driving licence, sales tax number, PAN card, etc. Identification of documents that are easily obtainable in any name should, however, not be accepted as the sole means of identification. Invariably the information made available by customers should be corroborated from other sources, in case of doubt. Banks can thus, follow a flexible approach by adopting alternate methods to establish identity of the person while opening an account. Moreover, at Government instance, banks have been advised not to insist on production of ration cards for purpose of verifying identity of an individual or proof of residence.
(c)	Delay in Collection of Outstation Cheques
	RBI, in consultation with the Indian Banks' Association, examined the question of reducing further the outer limit for collection of outstation cheques. It was felt that there was scope for commercial banks to further reduce the period of outer limit by introducing 'quick collection service' or by ascertaining the fate of collection by fax, etc. Banks may, therefore, review their existing arrangements and capabilities and work out a scheme for reduction in collection period.
(d)	Stapling of Note Packets
	To put an end to an undesirable practice and to prolong the life span of notes, banks have to do away with stapling of any note packets and instead secure them with paper bands. They should also sort notes into reissuables and non-issuables and issue only clean notes to public, and should stop writing on watermark window of bank notes.
(e)	Updating of Savings/Current Accounts Passbooks
	As part of better customer service, while updating passbooks of customers maintaining Savings/Current accounts, banks have been advised to provide complete information regarding every transaction by remodelling the packages, if necessary.
(f)	Reversal of Erroneous Debits in Deposit Accounts
	Banks have to remain vigilant about fraudulent encashment by unscrupulous persons opening deposit accounts in the name/s similar to already established concern/s resulting in erroneous and unwanted debit of drawer's accounts. Once the irregularity/fraud has been committed by its staff towards any constituent, banks should acknowledge its liability and pay the just claim: (i) in cases where bank is at fault, banks should compensate customer without demur; (ii) in cases where neither bank is at fault nor the customer is at fault, but the fault lies elsewhere in the system, then also bank should compensate customer (upto a limit).

13. Developments in Payment and Settlement Systems

Reports of Committees

Working Group on Systemically Important Payment Systems

2.100 Recognising the greater impetus ascribed towards payment and settlement systems, it was decided to assess the essential requirements for such systems which impact the economy as a whole. These 'systemically important payment systems' are those which have definitive impact on not only the entire payment system scenario, but also the economy, in general. To assess the various issues arising out of such systems, an internal Working Group on Systemically Important Payment Systems was constituted to examine the various payment systems in vogue. The systemically important systems identified by the Group include the Inter-Bank Clearing System, the High Value Cheque Clearing System, the MICR/Main Cheque Clearing, the Electronic Clearing System, the Electronic Fund Transfer System, and the Securities Clearing and Settlement Systems at Stock Exchanges. The RTGS system being implemented and the proposed Government Securities and Foreign Exchange Clearing and Settlement system were also identifie d as systemically important payment systems. The Group recommended that general guidelines should be formulated by the RBI in respect of such systemically important payment systems. Further, direct access to the RBI operated payment systems should be restricted only to banking entities, barring exceptions like Clearing Corporation of India Ltd., which have significant role in the payment and settlement systems. Moreover, all systemically important payment systems operated by other than the RBI should get their funds leg settled through any sponsor bank including the RBI.

Working Group on Amendments to the Negotiable Instruments (NI) Act

2.101 With proliferation in usage of electronic communication between banks and constituents, and the emergence of funds transfers based on modes other than paper based instruments, the need for a legal base to take care of such transactions, such as electronic based transactions has been engaging the attention of the RBI for some time. The Information Technology Act, 2000, which gives the legal backing to electronic records and digital signatures, however, does not apply to Negotiable Instruments as defined under the Negotiable Instruments (NI) Act, 1881, which is the base for banking transactions, especially those relating to effecting debits. To provide for these, a Working Group was set up (Chairman: Shri N.V. Deshpande) to suggest amendments to the NI Act. The Group's recommendations have been forwarded to the Government for further action in getting it notified. The recommendations provide for cheque truncation (which relates to the non-movement of physical paper based cheques for col lection) and e-cheques, which would meet the requirements of the banking sector consequent to technological developments in this area of operations.

Working Group on E-Money

2.102 With technology having a substantial impact on payment systems, especially with regard to non-paper based systems, the switch over to electronic money may take place. In order to analyse the impact of e-money a Working Group on Electronic Money (Chairman: Shri. Zarir J Cama) was constituted. The major recommendations of the Working Group relate to the issuance of e-money only against central bank money, only banks to issue multi-purpose e-money, the need for the central bank to monitor issue of e-money on credit, and the need to review issues relating to legal framework, technical security and settlement arrangements of e-money to preserve the integrity of the financial market.

Vision Document for Payment and Settlement Systems

2.103 In order to facilitate banks to formulate their plans for implementing effective payment systems within their own area of activities, a Vision Document was published in December, 2001. The document outlines the vision of the RBI in respect of payment and settlement systems for the immediate future and the medium term. The document indicates the broad framework of the initiatives being taken by the RBI and the approach adopted for time bound implementation of the various projects.

Electronic Funds Transfer (EFT) Systems

2.104 The electronic funds transfer was extended during the year to cover all the centres where RBI manages the clearing activities. EFT is now available at 15 centres of the country –Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur, Kolkata, Mumbai, Nagpur, New Delhi and Thiruvananthapuram. The maximum limit for any single transaction under the EFT which was Rs. 5.00 lakh was enhanced during the year to Rs. 2.00 crore. This is expected to give a fillip to the scheme, apart from making it an ideal means of funds settlement for the securities market which has migrated to the rolling settlement. The credit which was being afforded to the beneficiary’s account on the second working day – using the T+1 process cycle, has since been made to be completed on the same day and multiple settlements– at 12:00 noon, 2:00 p.m., and 4:00 p.m, have been introduced from January 2, 2002. Substantial efforts are being made through the National Clearing Cell s of the RBI to increase the scope, coverage and usage of both the Electronic Clearing Service (ECS) and EFT facilities; a few banks have integrated their funds transfer schemes with that of the RBI-EFT Scheme. In addition to the above, the EFT software has been integrated with Public Key Infrastructure (PKI) so as to provide for increased levels of security. Banks are encouraged to use the PKI by creating the required registration authority.

2.105 In order to ensure that the benefits of electronic modes of funds transfer are available across almost all the locations of the country and to provide for transfer of messages relating to EFT in a safe and secure manner, it is proposed to commence a National EFT using the facilities available under the SFMS over the INFINET. This would result in EFT being available from any branch of a bank which has connectivity to INFINET with the settlement taking place in the books of account of the RBI at a single location.

14. Developments in Technology for Banking

Working Group on Information Systems Security

2.106 The recommendations of the Working Group on Information Systems Security (Chairman:Dr. R. B. Barman) for the Banking and Financial Sector were circulated to banks/ FIs, requested to set up appropriate audit and security systems. One major recommendation is that each banking and financial sector organisation should conduct Information Systems Audit conforming to the 'Information Systems Audit Policy'.

15. Priority Sector Lending

2.107 Lending to priority sector continued to be an important aspect of agricultural lending (Chart II.11). Sector-wise break-up of priority sector advances of PSBs are detailed in Appendix Table II.14. Bank-wise details of advances to agriculture and weaker sections as well as NPAs arising out of advances to weaker sections are furnished in Appendix Tables II.15 (A) and (B).

Public Sector Banks

2.108 The outstanding priority sector advances of PSBs increased by 16.8 per cent to Rs.1,71,185 crore as on the last reporting Friday of March 2002. At this level, priority sector advances formed 43.1 per cent of net bank credit (NBC). While 'other priority sector advances' registered the maximum rise (33 per cent), direct and indirect advances to agriculture, taken together, registered an increase of Rs.9,398 crore (17.5 per cent). Advances to agriculture constituted 15.7 per cent of NBC as on the last reporting Friday of March 2002.

Private Sector Banks

2.109 Total priority sector advances extended by private sector banks as on the last reporting Friday of March 2002 amounted to Rs.25,709 crore and constituted 40.9 per cent of the NBC as compared with Rs.21,550 crore (38.2 per cent of NBC) a year ago. The share of other priority sector category was the highest at 14.4 per cent of NBC, followed by advances to small-scale industries (13.7 per cent of NBC) and agriculture (8.5 per cent) (Appendix Table II.16). Bank-wise details of advances to priority sector, agriculture and weaker sections as well as NPAs arising out of advances to weaker sections are furnished in Appendix Table II.17 (A) and (B).

Foreign Banks

2.110 Foreign banks operating in India have to achieve the target of 32.0 per cent of NBC for priority sector with sub-targets of 10.0 per cent of NBC for SSI and 12.0 per cent of NBC for exports. Lending to priority sector by foreign banks at Rs.13,414 crore constituted 34.2 per cent of NBC as on last reporting Friday of March 2002, of which the share of export credit, as percentage to NBC was 17.7 per cent (Appendix Table II.18).

Differential Rate of Interest (DRI) Scheme

2.111 The differential rate of interest (DRI) scheme, introduced in 1972, is being implemented by all SCBs throughout the country. Under the scheme, bank finance is provided at a concessional rate of interest of 4.0 per cent per annum to the weaker sections for engaging in productive and gainful activities, enabling thereby an improvement in their economic conditions. As per the scheme, banks are required to lend at least 1 per cent of their aggregate advances as at the end of the previous year. Moreover, two-thirds of the total DRI advances must be routed through the bank's rural and semi-urban branches. The annual income ceiling for eligibility is Rs.7,200 per family in urban or semi-urban areas and Rs.6,400 per family in rural areas. The size of land holding must not exceed one acre of irrigated land and 2.5 acres of unirrigated land, with exemptions for SCs/STs. The maximum assistance per beneficiary has been fixed at Rs.6,500 for productive purposes. In addition to this, physically han dicapped persons can avail of assistance to the extent of Rs.5,000 (maximum) per beneficiary for acquiring aids, appliances, equipment, provided they are eligible for assistance under the scheme. Similarly, members of SCs/STs fulfilling the income criteria under the scheme can avail of housing loan upto Rs.5,000 per beneficiary over and above the loan amount available under the scheme.

Special Agricultural Credit Plans (SACP)

2.112 In order to enable the achievement of the targeted agricultural lending, PSBs were advised to formulate Special Agricultural Credit Plans (SACP) since 1994-95, and fix self-set targets for achievement during the year (April-March). Since the introduction of the SACP, there has been substantial increase in the flow of credit to agriculture from Rs. 8,255 crore in 1994-95 to Rs.29,332 crore in 2001-02. During the year 2001-02, PSBs had disbursed Rs. 29,332 crore upto March 31, 2002, as against the target of Rs. 30,883 crore set for the year. The PSBs have set the target of Rs. 36,779 crore for the year 2002-03.

Swarnjayanti Gram Swarozgar Yojana (SGSY)

2.113 The Government had launched a restructured poverty alleviation programme, the Swarnjayanti Gram Swarozgar Yojana (SGSY) in April 1999, which subsumed the erstwhile Integrated Rural Development Programme (IRDP) and its allied programmes viz., Training of Rural Youth for Self Employment (TRYSEM), Development of Women and Children in Rural Areas (DWCRA), Supply of Improved Toolkits to Rural Artisans (SITRA), Ganga Kalyan Yojana (GKY) and Million Wells Scheme (MWS).

2.114 SGSY is a holistic programme covering all aspects of self-employment such as organization of the poor into self help groups, training, credit, technology, infrastructure and marketing. Subsidy will be uniform at 30.0 per cent of the project cost subject to a maximum of Rs.7,500. In respect of SCs/STs, it will be 50.0 per cent with a maximum of Rs.10,000. The subsidy for group loans will be 50.0 per cent of the project cost subject to a maximum ceiling of Rs.1.25 lakh. There will be no monetary limit on subsidy for irrigation projects. The sub-targets have been stipulated for borrowers under various categories viz., SCs/STs (at least 50.0 per cent), women (40.0 per cent) and physically handicapped (3.0 per cent). During the year 2001-02, the total number of Swarozgaris assisted were 8,00,593. Bank credit of Rs. 1,10,928 lakh and goverment subsidy amounting to Rs. 55,493 lakh were disbursed. Out of the total Swarozgaris assisted, 2,48,021 (30.9 per cent) were SC, 1,00,138 (12.6 per cent ) were ST, 3,28,660 (41.0 per cent) were women and 5,106 (0.6 per cent) were physically handicapped.

Lead Bank Scheme (LBS)

2.115 The main focus of Lead Bank Scheme (LBS) is to enhance the proportion of bank finance to priority sector. As at end-March 2002, the LBS covered 580 districts, including the five new districts formed due to re-organisation/bifurcation of the existing districts. The assignment of the new districts to PSBs is detailed in Table II.31.

Table II.31: Lead Bank Responsibility in respect of New Districts
	Name of the District	Name of the State		Date of Allocation	Name of the Lead Bank
	Ariyalur	Tamil Nadu		June 26, 2001	State Bank of India
	Latehar	Jharkhand		September 25, 2001	State Bank of India
	Jamtara	Jharkhand		September 25, 2001	State Bank of India
	Saraikella-Kharsawan	Jharkhand		September 25, 2001	Bank of India
	Simdega	Jharkhand		September 25, 2001	Bank of India

16. Banks' Liquidations and Amalgamations/Mergers

Liquidation of Banks

2.116 There were 78 banks under liquidation as on June 30, 2002. The matter regarding early completion of liquidation proceedings is being pursued with Official/Court Liquidators.

Merger/Amalgamation of Banks

2.117 The RBI accorded approval for merger of ICICI Ltd. with ICICI Bank Ltd. on April 26, 2002 subject to inter alia the following conditions: (a) ICICI Bank Ltd. would have to maintain SLR/CRR as prescribed on the net demand and time liabilities of the bank on the post merger liabilities even though the liabilities of ICICI Ltd. as existing prior to merger did not attract the reserve requirements; (b) since the assets and liabilities of ICICI Ltd. would be taken over by ICICI Bank Ltd. after the merger, the bank would have to comply with all prudential requirements, guidelines and other instructions concerning capital adequacy, asset classification, income recognition and provisioning requirements as applicable to banks after the merger. RBI had, however, given a transition period for compliance with certain prudential norms to avoid any hardship in the interim; (c) ICICI Bank Ltd. would have to deploy an additional 10.0 per cent, over and above the requirement of 40.0 per cent, on the re sidual portion of its advances after the merger till such time as the aggregate priority sector advances reach a level of 40.0 per cent of the total net bank credit of the bank.

2.118 The Central Government had sanctioned the scheme of amalgamation of the Benares State Bank Ltd. (BSBL) with Bank of Baroda (BoB) vide Notification dated June 19, 2002. Accordingly, the BSBL has been merged with BoB with effect from June 20, 2002 and all the branches of the erstwhile bank have started functioning as branches of BoB from July 19, 2002.

2.119 During the year, there have been several cases of mergers/acquisitions of banks abroad, which resulted in reorganization of foreign banks operating in India:

1. Morgan Guaranty Trust Company of New York merged with Chase Manhattan Bank and the new entity viz., JPMorgan Chase Bank came into existence on November 11, 2001. It has one branch in Mumbai.
2. Sanwa Bank Ltd. and Tokai Bank Ltd. merged globally and the Indian operations of both the banks (Sanwa Bank with one branch and Tokai Bank with a representative office) stood merged with effect from January 15, 2002. The new entity viz., UFJ Bank Ltd. is operating with one branch in New Delhi.
3. Fuji Bank Ltd., which has a branch in Mumbai, has been renamed as Mizuho Corporate Bank Ltd. consequent upon the merger of the bank with Dai-Ichi Kangyo Bank Ltd. and Industrial Bank of Japan on April 1, 2002.

Merger of Subsidiary/ies with Parent Bank

1. The Bank of Rajasthan Ltd. was given approval to merge with itself its wholly owned subsidiary viz., Rajasthan Bank Financial Services Ltd.
2. Andhra Bank was given 'in principle' approval to merge its housing finance subsidiary i.e. Andhra Bank Housing Finance Ltd. with itself.
3. Bank of India was given approval to merge its wholly owned subsidiary viz., BOI Finance Ltd. and BOI Asset Management Company Ltd. with itself.

17. Relaxations to Trade and Industry in Jammu & Kashmir

2.120 The concessions/credit relaxations to borrowers/customers in Jammu and Kashmir were extended for a further period of one year i.e upto March 31, 2003. The relaxations pertain to: (a) relaxation of inventory norms upto 50.0 per cent; (b) realistic appraisal of the change in the level of credit on purchases; (c) the incremental maximum permissible bank finance due to application of relaxed norms (limited to 50.0 per cent) (d) review of all borrowal accounts for speedy sanction of need-based working capital; (e) finance against accepted hundies (usance) bills to be encouraged; (f) 50.0 per cent reduction in service charges for remittances, collection of outstation cheques/ bills; (g) pragmatic approach towards debt-equity ratio, reschedulement of repayment programme in deserving cases; (h) extension of period of relaxation of bills purchased; (i) inland LC facilities with margin not exceeding 15.0 per cent; and (j) no delay in provision of banking services.

18. Miscellaneous Developments

Wilful Defaulters and Action Thereagainst

2.121 Considering the concerns expressed over the persistence of wilful default in the financial system in the Eighth Report of the Parliament's Standing Committee on Finance in May 2001, the RBI had, in consultation with the Central Government, constituted a Working Group on Wilful Defaulters (WGWD) (Chairman: Shri S.S. Kohli) for examining some of the recommendations of the Committee. The Group submitted its report in November 2001. The recommendations of the WGWD were examined by an in-house Working Group constituted by RBI and accordingly, revised definition of the term 'wilful default' was conveyed to all SCBs (excluding RRBs and LABs) and notified all-India FIs on May 30, 2002, in supersession of the earlier definition conveyed to them. They were advised to initiate penal measures, as mentioned therein, against the wilful defaulters so identified. In order to prevent the access to the capital markets by the wilful defaulters, a copy of the list of wilful defaulters would also be forwa rded to SEBI.

Adoption of 90 days' norm for Recognition of Loan Impairment - Application of Interest at Monthly Rests

2.122 In May 2001, banks were, inter-alia, advised that with a view to moving towards international best practices and ensuring greater transparency in repayment of loans, they should adopt 90 days' norm for recognition of loan impairment from the year ending March 31, 2004. As a facilitating measure, banks were advised to move over to charging of interest on loans/ advances at monthly rests with effect from April 1, 2002. Banks have however, the option to compound interest at monthly rests effective either from April 1, 2002, or July 1, 2002 or April 1, 2003. Moreover, it should be ensured by the banks that effective rate does not increase merely due to the switchover of charging / compounding interest at monthly rests and increase burden on borrowers (effective quarter beginning July1, 2002). The charging of interest at monthly rests would not be applicable to agricultural advances; the existing practice of charging / compounding of interest on such advances linked to crop seasons would h ave to be followed. In respect of advances to short duration crops and allied agricultural activities, banks should take into consideration due dates fixed on the basis of fluidity with borrowers and harvesting/marketing season while charging interest and compounding the same if the loan/instalment becomes overdue.

Full Convertibility of NRI Deposit Schemes

2.123 To provide full convertibility of deposit schemes for non-resident Indians and rationalise the existing non-resident deposit schemes, banks were to discontinue Non-Resident (Non-Repatriable) Rupee Account Scheme (NRNR) and the Non-Resident (Special) Rupee Account Scheme (NRSR) effective April 1, 2002. The existing accounts under NRNR account scheme could be continued upto the date of maturity. Further, the maturity proceeds under NRNR Account Scheme would be credited to the account holder's NonResident (External) Rupee account (NRE account), after giving notice to the account holder. As regards NRSR accounts, the existing term deposits under the NRSR accounts scheme could be continued till maturity and proceeds credited to the Non-Resident (Ordinary) Rupee Account (NRO account) of the account holder. The existing NRSR accounts, other than term deposits, have been discontinued after September 30, 2002 and may at the option of the account holder be closed or balance credited to the acco unt holder's NRO account on or prior to the date.

2.124 NRNR account holders have the option to directly credit maturity proceeds to NRE account but not to Foreign Currency (Non-Resident) Account (Banks) Scheme (FCNR(B) account). The proceeds of NRNR Deposits can be credited to NRE account only on maturity and in case of premature withdrawal, the proceeds are to be credited only to Non-Resident Ordinary Rupee (NRO) account.

Issue of Certificates of Deposit in Demat Form

2.125 Banks and FIs were advised to make investments and hold CPs only in the dematerialised form without prejudice to the Provisions of Depositories Act 1996. Existing outstandings had to be converted into demat form by October 31, 2001. Effective June 30, 2002, banks and FIs issue CDs only in the dematerialised form and existing outstandings of CDs were to be converted into the dematerialised form by October 31, 2002. In order to provide more flexibility for pricing of CDs and to give additional choice to both investors and issuers, banks and FIs may issue CDs on floating rate basis provided the methodology of computing the floating rate is objective, transparent and market-based.

Issue and Pricing of Shares of Private Sector Banks

2.126 According to the revised norms, all private sector banks, listed or unlisted, would be free to price and issue rights shares without prior approval of RBI. Bonus issue would be de-linked from the rights issue. However, for initial public offerings and preferential allotment of shares, RBI approval would be necessary. The banks are also free to price their subsequent issues once their shares are listed on the stock exchanges. Suitable advice has been given to the banks in this regard on March 20, 2002.

Indian Promoters' Holding in Private Banks

2.127 RBI, in consultation with the Central Government, has raised the maximum limit of shareholding of Indian promoters in private sector banks from 40.0 per cent to 49.0 per cent of their paid up capital vide notification dated June 7, 2002. Consequently, of the 4 banks, (IndusInd Bank Ltd, UTI Bank Ltd., ICICI Bank Ltd. and IDBI Bank Ltd.), the equity holding of promoters in UTI Bank Ltd. and IndusInd Bank Ltd. are presently within the permissible ceiling. Since RBI has approved the merger of ICICI Ltd. with ICICI Bank Ltd. effective March 30, 2002, the issue of dilution of promoters holding is no longer valid for ICICI Bank Ltd. The Central Government has granted time to IDBI Bank for reducing promoters’ equity upto September 30, 2002.

Government Securities Transactions

2.128 In the light of recent fraudulent transactions in the guise of Government securities transactions in physical format by a few co-operative banks with the help of some broker entities, the measures for further reducing the scope for trading in physical forms were accelerated. Accordingly, (i) for banks which do not have SGL account with RBI, only one CSGL account can be opened; (ii) in case CSGL account is opened with a SCB, the account holder has to open a designated funds account for all CSGL-related transactions with the same bank; (iii) the entities maintaining the CSGL/ designated funds accounts are to ensure availability of clear funds in the designated funds accounts for purchases and of sufficient securities in the CSGL account for sales before putting through the transactions; (iv) no transactions are to be undertaken in physical form with brokers; (v) it should be ensured that brokers approved for transacting in Government securities are registered with the debt market segmen t of NSE/BSE/OTCEI.

Lok Adalats

2.129 Lok Adalats have proved an effective institution for settlement of dues in respect of smaller loans. Guidelines were issued to banks and FIs in 2001 indicating that: (i) ceiling of amount for coverage under Lok Adalats would be Rs.5 lakh; (ii) the scheme may include both suit-filed and non-suit filed accounts in the doubtful and loss category; and (iii) the settlement formula must be flexible. Further, DRTs have been empowered to organise Lok Adalats to decide cases of NPAs of Rs.10 lakh and above. The public and private sector banks had recovered Rs. 78 crore by March 31, 2002 through the forum of Lok Adalats.

Debt Recovery Tribunals

2.130 Debt Recovery Tribunals (DRTs) aid the recovery of NPAs. To enhance the effectiveness of DRTs, the Central Government amended the Recovery of Debts due to Banks and Financial Institutions Act in January 2000. As on March 31, 2002, there were 22 DRTs and 5 Debt Recovery Appellate Tribunals (DRATs). In respect of public and private sector banks, the number of cases disposed by the DRTs increased from 8,625 (involving recovery of Rs.1,657 crore) as on March 31, 2001 to 13,520 (involving recovery of Rs.2,864 crore) as on March 31, 2002. RBI has suggested certain major amendments in the said Act to the Central Government.

Securitisation / Enforcement of Securities

2.131 The Central Government has re-promulgated 'The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002' on August 22, 2002 for regulation of securitisation and reconstruction of financial assets and enforcement of security interest and allied matters thereto. The Ordinance provides certain benefits to the banks and FIs in the direction of realisation of their loans and advances. In order to ensure strict compliance of the provisions of the Ordinance or any directions order issued thereunder, penalties have been prescribed for violation thereof. The Rules have been notified by the Central Government to carry out the provisions relating to enforcement of securities by banks and FIs. In a writ petition filed against the Ordinance, the Supreme Court has stayed the operations of the Ordinance to a limited extent i.e., secured assets can be seized but cannot be sold or leased or assigned pending replacement of the Ordinance by the Bill. The RBI has constituted two Working Groups for stipulating suitable norms for registration, prescribing prudential norms, recommending proper and transparent accounting and disclosure standards and framing appropriate guidelines for the conduct of asset reconstruction/ securitisation.

Frauds in Banks

2.132 During the period January to December 2001, commercial banks (other than RRBs) reported 2,076 cases of fraud involving a sum of Rs. 562 crore. These cases were followed up with the banks for necessary remedial action including examination of accountability.

2.133 During the year, 115 cases of robberies/ dacoities involving Rs. 5.6 crore were reported by PSBs.

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1 BSR-Basic Statistical Returns
2 Data available only as per sanctions
3 Commodities include cash crops, edible oils, agricultural produce and other sensitive commodities
4 NPAs refer to non-performing loans and advances.