CHAPTER 1

INTRODUCTION TO BANKING IN INDIA

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INTRODUCTION TO BANKING IN INDIA

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955. HISTORY Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period fey and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other

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infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." During the First World War (19141918) through the end of the Second World War (19391945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:

Number of banks Authorized capital Paid-up Capital that failed (Rs. Lakhs) (Rs. Lakhs)

1913 12

274

35

1914 42

710

109

1915 11

56

1916 13

231

1917 9

76

25

1918 7

209

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POST-INDEPENDENCE The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of theLaissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: The Reserve Bank of India, India's central banking authority, was established in April 1934, but was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[1] In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India" The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

Nationalization

Banks Nationalization in India: Newspaper Clipping, Times of India, July 20, 1969 Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The meeting received the paper with enthusiasm. Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969')) and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. These banks contained 85 percent of bank deposits in the country. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit
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Delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalization In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2010), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and Investment services are expected to be strong. One may also expect M&As , takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

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In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide

The Indian Banking System

scheduled banks of india

schedeuled commercial banks

scheduled urban cooperative banks

schedule d state cooperative banks Regional rural bank

public sector banks state bank of india and associate banks

private sector banks

foreign banks

nationaliz ed banks

old private banks

new private banks

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The formal banking system in india comprises the RBI , commercial banks , regional rural banks and the co-operative banks.In the recent past,private non banking finance companies also have been active in the financial system , and are being regulated by the RBI .

Reserve bank of India : The RBI established in 1935, is the central banking and monetary authority in India. The RBI manages the countrys money supply and foreign exchange and also serves as a bank for the government of India and for the countrys commercial banks. In addition to these traditional central banking roles, the RBI undertakes certain developmental and promotional roles. The RBI issues guidelines on various areas including exposure standards, income recognition, asset classification , provisioning for non performing assets , long term lending institutions and non bank finance companies . The RBI requires this institution to furnish information relating to their businesses to the RBI on a regular basis.

LOAN
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent. Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.

TYPES OF LOANS OFFERED BY THE BANKS

Secured

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral.

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A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security a lien on the title to the house until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer. Unsecured Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:

credit card debt personal loans bank overdrafts credit facilities or lines of credit corporate bonds (may be secured or unsecured)

The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974. Interest rates on unsecured loans are nearly always higher than for secured loans, because an unsecured lender's options for recourse against the borrower in the event of default are severely limited. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.

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CLASSIFICATION OF LOANS In India the bank loans are classified on the following basis. Performing Assets: Loans where the interest and/or principal are not overdue beyond 180 days at the end of the financial year.

Non-Performing Assets: Any loan repayment, which is overdue beyond 180 days or two quarters, is considered as NPA. According to the securitization and reconstruction of financial assets and enforcement of security interest ordinance, 2002 non-performing asset(NPA) means an asset or account of a borrower, which has been classified by a bank or Financial institution as sub-standard, doubtful or loss asset, in accordance with the Directions or guidelines relating to asset classifications issued by the Reserve Bank Internationally, income from non-performing assets is not recognized on accrual basis, but is taken into account as income only when it is actually received. It has been Decided to adopt similar practice in our country also. Banks have been advised that they should not charge and take to income account the interest on all Non-performing assets. An asset becomes non-performing for a bank when it ceases to generate income

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Loan Policy State Bank of Mysore (SBM) Loan Policy (hereinafter referred to as The Loan Policy or The Policy) is aimed at accomplishing its mission of all-round growth with maximum profits, a position of pre-eminence in banking, committed to excellence in customer, shareholder and employee satisfaction, with continuing emphasis on its Development Banking role, achieved through a skilled and committed workforce and technological upgradation. The Loan Policy of the bank has successfully withstood the test of time and with in-built flexibilities, has been able to meet the challenges in the market place. The policy exists and operates at both formal and informal levels. The formal policy is well documented in the form of circular instructions, periodic guidelines and codified instructions, apart from the Book of Instructions, where procedural aspects are highlighted.

The policy, at the holistic level is an embodiment of the bank's approach to sanctioning, managing and monitoring credit risk and aims at making the systems and controls effective. The Loan Policy also aims at striking a balance between underwriting assets of high quality, and customer oriented selling.

LOAN SCHEMES

Personal Loans
Eligibility Individuals, employees of state / central government, Public Sector undertakings, reputed profit making Public limited companies, Multi national companies with a minimum service of two years and drawing a net salary of Rs. 6,000/- or above. Purpose To meet personal expenses like marriage, family functions, medical expenses, travel etc., Loan Amount Upto Rs. 1.50 lacs depending on repayment capacity of the individuals. Security Third party guarantee of equal means. Securities like LIC policies, NSC, KVIP, Shares etc., Period of Repayment 12 months to 36 months.
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Type of Loan Demand loan. Processing Fee 1% of loan amount (one time).

Mortgage Loan
Eligibility Individuals, employees, professionals, self-employed and others who are income tax assessee whose net monthly income is of Rs. 12,000/- for salaried persons or net annual income of Rs. 1,50,000/- in case of others and self-employed. AGE Maximum age - 65 years. Loan Amount Rs. 1.00 lac to Rs. 50.00 lacs Salaried Class - Maximum 36 times net monthly income. Others - Maximum three times the net annual income. Type of Loan Term loan or current account overdraft Security Equitable mortgage of unencumbered residential house / flat or urban commercial or industrial property in the name and possession of the borrower, either self acquired or vacant property. Rented out property will be accepted as security only where lease is in existence in favour of corporation of good standing and repute. Power of attorney authorising the Bank to collect rent should be given. Margin 50% of the market value of the security. Period of Repayment Repayable in 84 equated monthly instalments. Processing Fee 1.25% of the loan amount (one time)
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INSURANCE The property being mortgaged should be insured against the risk of fire / riot / earthquake / lightning / floods etc.,

Housing Loan
Under Personal Segment, You can avail a loan for

Construction or Purchase of a new house or flat Repairs / Renovation / Extension of existing house For purchase of plot for construction of house within two years For purchase of built houses not more than 15 years old Housing loan against II charge For Purchase of Furnishings / Consumer durables as part of the project Quantum of Loan amount

Loan amount for all categories Net Annual Income EMI / NMI Ratio 20% 25% 30% 50% 55% 65%

Upto Rs. 60000/Above Rs. 60000 to less than Rs.1,20,000/Above Rs. 1,20,000/- to less than Rs.2,00,000/Above Rs. 2,00,000 to less than Rs.5,00,000/Above Rs. 5,00,000 to less than Rs.10,00,000/Above Rs. 10 lacs

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Maximum Repayment period Age For persons below 35 years of age For persons below 45 years of age For persons above 45 years of age Margin Amount Upto Rs. 30 lakhs Above Rs. 30 laks to 75 lakhs Above Rs 75 lakhs to 1.00 Crore Above Rs 1.00 crore Margin (%) 20% 20% 25% 40% Repayment period 25 years 20 years 15 years

Margin for Purchase of New houses which are ready for possession (Applicable to First sale only) Amount Upto Rs. 75 lakhs Above Rs.75 laks to 1 cr Above Rs 1.00 crore Margin (%) 15% 20% 30%

Interest Penal interest of 1% in case of default of three or more consecutive instalments. Loan amount Upto Rs 25 Lacs Processing Charges (w.e.f. 01.06.2011) 0.25% of loan amount, with a minimum of Rs 500/Page 13

Above Rs 25 Lacs and upto Rs 75 Lacs Above Rs 75.00 Lacs

Rs 10,000/Rs 20,000/-

Insurance The house property has to be insured covering all risks. Group insurance is available to cover the life of the borrower on payment of one time upfront premium. Disbursement Direct to the sellers in case of purchase. For Construction / Repairs / Renovations in a phased manner Repayment Repayable in monthly instalments. Repayment period ranging from 5 to 25 years, including a moratorium period ranging from 6 to18 months from the date of the first disbursement. Schemes and Interest Rates are subject to changes from time to time. Attractive features of State Bank of Mysores Housing Finance scheme

Loans from State Bank of Mysore are cheaper than housing finance agencies / companies. Nominal processing charges. No administration charges. No commitment charges. Interest charged on reducing balances. Facility available at all branches in India. Exemption from wealth tax for one house under Wealth Tax Act.

Pre-payment Penalty No Pre-closure / Pre-payment penalty on all Home Loans.

Happy Home- Consumer Durable Loan Scheme

Happy Home Loan Purpose State Bank of Mysore is now at your doorsteps to provide you all good things in life you have been craving for. You richly deserved them but couldnt buy them perhaps for want of ready cash. Here is where State Bank of Mysore steps in to solve your problems and make your home a Happy Home. Colour TV Sets, VCRs, Refrigerators, Cars, Scooters, Mopeds, Washing
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Machines, Mixers / Grinders, Coolers, Air conditioners, Furniture and what have you? All these goodies brought to you within your reach under State Bank of Mysores Happy Homes Scheme. Highlights of the Scheme Tailor-made for employees of Govt / Public Sector undertakings, Corporations, Private Sector Companies, Police, Defence forces and reputed establishments with a minimum of 5 years service. Professionals, Self-employed with a minimum of 5 years standing. Net monthly salary / income should be Rs.2000/75% of the cost of the articles.Maximum loan of Rs. 1.00 lac or eight times the net monthly income / salary of the borrower whichever is lower.

Repayable in 36 to 60 months. Minimum loan amount Rs. 10000/-. Demand Loans upto Rs.25000/payable in 36 months. Demand Loans above Rs. 25000/- repayable in 36 months Term loans repayable in more than 36 months and upto 60 months. Simple security needed.

Hypothecation of assets created (articles bought) Third party guarantee acceptable to the bank if check off facility is not available.

Insurance Cover

Vehicles bought to be insured for full value. For articles above Rs.10000/- insurance will be for market value or atleast 110% of the loan amount whichever is higher.

A small one-time service fee of 1% of the loan amount.

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Specially for the Salaried class for purchase of two-wheelers Minimum net salary of Rs.2000/- per month with availability of check off system. Loan sanctioned upto 90% of the cost of vehicle or 12 times the net monthly income whichever is less. Gross deduction including loan instalment should not exceed 33% of the gross salary.Maximum - Rs. 4.00 lacs or 80% of the cost of vehicle +1%. Second hand cars - 60% of market value; not older than 5 years; Maximum loan - Rs. 2 lacs. Repayable in 36 months, may be extended upto 60 months Security offered should be:

Hypothecation of vehicle Registration of hypothecation charge with Regional Transport Authority. Third party guarantee

Vehicle should be insured for full value. One-time service fee of 1% of loan amount.

Gnanamitra Educational Loan

Purpose To enable students with academic brilliance to meet tuition and other fees / maintenance costs / books and equipment and cost of passage for studies abroad etc., for pursuing studies at recognised school / college / institution. Courses Eligible- Higher Studies Diploma / Graduate / Post-graduate courses in the faculties of Engineering, Technology, Architecture, Medicine, Dental Science, Agricultural Science, Veterinary Science and Computer Certificate courses of reputed institutes accredited to department of electronics or affiliated to university

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Limit Amount of loan (in Indian Rupees) Higher Education- In India Higher Education- Abroad Margin Upto Rs. 4.00 lacs Above Rs. 4.00 lacs For studies in India For studies abroad Nil 5% 15% MIN(Rs.) MAX(Rs.) 10000 10000 10.00 lacs 20.00 lacs

INTEREST RATES: SCHEMES AND INTEREST RATES ARE SUBJECT TO CHANGES FROM TIME TO TIME. Second Educational Loan To enable the students for taking higher education, provided the student secures 60% marks in existing course. The second loan is to be availed only from the branch where the first educational loan has been sanctioned. Repayment Technical / Professional Higher studies in India / Abroad Repayment of loan to commence immediately after disbursal, by the parent / guardian, out of his / her income. Installments may be nominal (to cover interest portion, at least) during the period the student is undertaking the studies. The installments will be stepped up one year after the completion of the course or after the student gets a job, whichever is earlier, so that the loan gets repaid together with interest within a period of 60 to 84 months thereafter.

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Security Amount. Upto Rs. 4.00 lacs Above Rs. 4.00 lacs and upto Rs. 7.50 lacs Above Rs. 7.50 lacs and upto Rs. 10.00 lacs Security NIL Collateral in the form of a suitable 3rd party guarantee

Collateral security by way of immovable property or equal to the loan amount in the form of Government securities / NSCs / Units of UTI Guarantee of parents / guardians (in the case of minors, the parent / guardian will execute the documents on behalf of the minor and also in his capacity as co-borrower) / third party guarantee where sufficient collateral security is not available

Insurance An insurance policy will be taken on the life of the student borrower for an amount equivalent to the loan amount and the policy should be convertible whole-life one for 25 / 30 years, convertible after 5 years into one with endowment benefits. The Bank will pay the insurance premia on the policy by debiting it to the loan account. On liquidation of the loan, the policy will be reassigned and delivered to the borrower. Repayment Completion of course + 1 year or 6 months after getting a job, whichever is earlier.The interest to be debited monthly on simple basis during the repayment holiday / moratorium period. Penal interest @2% will be charged for amount above Rs. 2 lacs for the overdue amount and overdue period. Interest concession of 1% per annum is available, provided the interest is repaid during moratorium period as and when the interest is applied.

MyBank Scholar Loan

MYBANK SCHOLAR- A SCHEME FOR STUDENTS OF PREMIER AND REPUTED INSTITUTIONS Purpose Loans will be granted to deserving/meritorious students for pursuing full time courses in India at selected premier and reputed institutions identified by the Bank. Eligibility The applicant should be an Indian National and should have secured admission to full time professional/ technical courses in selected elite institutes
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Eligible Expenses

Fee payable to college/school/ hostel Examination/ Library/Laboratory fees Purchase of books/equipments/ instruments/ uniforms Caution deposit/ building fund/ refundable deposit supported by institution bills/receipts [not to exceed 10% of tuition fees for the entire course] Purchase of computers, if essential for completion of course Any other expense required to complete the course like study tours, visits to foreign universities in exchange programs, project work, thesis, etc

Institutes & loan amount: Presently 100, which include IIMs and IITs etc. Maximum loan amount Rs.15.00 lacs depending upon the course/institute. Courses covered Regular full time Degree/Diploma Courses and not certificate/part-time courses, through entrance test/ selection process. In case of IIMs full time Executive Management Courses like PGPX are covered

A) 2.50% above BASE RATE (Refer Interest rates) B) Simple Interest to be charged during moratorium/ repayment holiday. Interest concession of 1% for the entire period of loan if the interest is serviced during course period and moratorium. This concession will be released in two stages. Margin:

Upto Rs. 4 lacs: Nil. Above Rs.4 lacs: 5% Scholarship/ assistantship to be included in the margin Margin may be brought in on year to year basis as and when disbursements are made on a pro-rata basis

Security: Co-obligation of parent/guardian. In case of married person, co-obligation can either be of spouse or parent/parent-in-law. Processing Fee Nil Moratorium Period Up to 6 months after completing the course.
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Repayment Maximum 5-7 years after commencement of repayment

car Loan Scheme

For New Cars: Salient features of the scheme: Purpose: For the purchase of new passengers Cars, Jeeps, Multi Utility Vehicles (MUV) and SUVs.

Eligibility: Individuals between the age group of 21 years to 65 years. Annual Income: Salaried class with an annual income of Rs. 2,50,000/- & above. Self employed & Professionals with an annual income of Rs.2,50,000/- & above. Loan amount: For salaried persons: 48 times of the Net Monthly Income For others: 4 times of the Net Annual Income The income of the spouse can be included for arriving at the loan amount, provided spouse joins as co-borrower.

Margin: 15% Security: 1) Hypothecation Charge over the car. 2) Noting of Banks lien with the R.T.O.
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3) Third party guarantee (if there is a need) Repayment: the loan to be repaid in 84 EMIs (Maximum) Insurance: Comprehensive insurance cover for the full value of the vehicle. Service Charges: 0.50 % of the loan amount with a minimum of Rs.500/- and maximum of Rs.10,000/Prepayment charges: No Pre Closure / Pre Payment penalty on all car loans. FREE ACCIDENT INSURANCE COVER (DEATH RISK ONLY) Papers to be submitted: 1. 2. 3. 4. 5. 6. 7. 8. 9. Statement of Bank account of the borrower for last 12 months. 2 passport size photographs of borrower/guarantor. Signature identification from bankers of borrower/guarantor. A copy of Passport /Voters ID card/PAN card. Proof of residence by way of tax receipts, telephone bill, electricity bill or any other document that comply with the regulatory and/or KYC requirements. Latest salary-slip showing all deductions and TDS Certificate-Form 16 in case of salaried persons. Copy of Income tax Return for the last 2 financial years duly acknowledged by the ITO for professionals, Self employed and others. Proof of official address for non-salaried individuals. Proforma invoice of the vehicle.

For Used Cars: Salient features of the scheme: Purpose: For the purchase of passengers Cars, Jeeps, Multi Utility Vehicles which are not more than 5 years old. Valuation: Certificate of fitness / valuation from a reputed garage is required.

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Repayment: The loan has to be repaid within 7 years from the date of original purchase of the vehicle.

Loan for purchase of residential site / plot Eligibility Individuals not above the age of 60 years with a steady source of income Purpose To purchase site / plot by BDA / Housing Board / District Urban Development Authority / City Improvement Trust Board / Municipal Corporation / State Development Authority, on first sale only Loan Amount 24 times net monthly income / 2 years annual income (subject to production of satisfactory proof) or 80% of the cost of the site whichever is less Income of Spouse For arriving the quantum of loan, income of the spouse may be considered where the allotment will be in single name and spouse stands as guarantor Other Income Regular income of the borrower from all sources can be considered subject to the satisfactory proof of the income Margin 20% of the cost of site / plot Type of Account Medium Term Loan Account Repayment Maximum of 60 months in equated monthly instalments Processing Fee Rs. 500/- flat per account

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Security Equitable Mortgage of the site / plot to be purchased Other Conditions a) The letter of allotment / agreement for sale from the Housing Board / BDA / District Urban Development Authority / City Improvement Trust Board etc., should be obtained b) A letter signed by the allottee duly expressing his / her intention to create the Mortgage (equitable / registered) in favour of the Bank to be obtained and forwarded to the allotting agency c) The said letter should also contain a direction to the allotting agency to hand over the Documents directly to the Bank / Bank's Representative after registration of the property d) A letter of undertaking to be obtained from the site allottee to the effect that a house will be constructed in due course and the relative site will not be sold on commercial consideration

MYBANK ARAKSHAK Personal loan scheme for Police Personnel This scheme is introduced to assist the Police Personnel to avail the loan hastle free Eligibility All Police Personnels (Permanently employed) Purpose Personal loan for any purpose including purchase of consumer durables Loan Amount 10 times net monthly income with a maximum of Rs.1.50 lac Income of Spouse Spouse income may be considered to arrive at the eligible loan amount provided spouse is also employed (permanent employment) and stands as guarantor Type of Account Demand Loan Account

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Margin Nil Repayment Maximum of 36 months in equated monthly instalments Processing Fee Rs.250/- flat. Security Upto Rs.25,000/- Nil Above Rs.25,000/- check off facility. NSC,LIC policy may be insisted for security wherever possible or third party guarantee of equal means Other Conditions/Requirements Loan Recovery through check off facility

MYBANK ADHYAPAK Personal loan scheme for teacher community Eligibility Permanent Teachers / Non-Teaching Staff of Central / State Govt. Educational Institutions and also Teachers and Non-Teaching Staff of Govt. Recognised Schools / Colleges / Aided Institutions Purpose Personal Loan for any purpose including purchase of consumer durables Loan Amount 10 times net monthly income with a maximum of Rs.1.00 lac Income of Spouse Spouse income may be added to arrive at the eligible loan amount provided spouse is also employed and stands as guarantor. Type of Account Demand Loan Account Margin Nil
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Repayment Maximum of 36 months in equated monthly instalments Processing Fee Rs.250/- flat Security Upto Rs.25,000/- Nil (only Check off facility). Above Rs.25,000/- check off facility. NSC,LIC policy may be insisted for security wherever possible or third party guarantee of equal means

MYBANK UTSAV Personal loan scheme for individuals for meeting expenditure related to Festivals Eligibility a)Employees of State / Central Govt.,/ PSUs / profit making Public / Private Ltd., Companies, Institutions etc., with a minimum of 2 years service. b)Self employed persons with a minimum 3 years standing / experience. c)Persons having regular source of income from verifiable channels like Pensions and Interest on TDRs / NSCs / Govt. Securities etc., Purpose Loan to individuals for meeting expenditure related to Festivals Minimum Net Income Net Monthly Income (NMI) of Rs.3000/- & above Loan Amount Four times the net monthly income with a minimum of Rs.5000/- and a maximum of Rs.50,000/(Borrowers other than salaried people should produce acceptable proofs with respect to their annual income) Security Primary - Nil Collateral - personal guarantee of the spouse if employed, or any other person of adequate worth where check off facility is not available Repayment Period Maximum of 12 months through EMIs. No penalty for prepayment

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Processing Fee Rs.100/- per application Type of Loan Clean Demand Loan Disbursement To the borrowers by credit to their account

MYBANK ADHYAPAK Personal loan scheme for teacher community Eligibility Permanent Teachers / Non-Teaching Staff of Central / State Govt. Educational Institutions and also Teachers and Non-Teaching Staff of Govt. Recognised Schools / Colleges / Aided Institutions Purpose Personal Loan for any purpose including purchase of consumer durables Loan Amount 10 times net monthly income with a maximum of Rs.1.00 lac Income of Spouse Spouse income may be added to arrive at the eligible loan amount provided spouse is also employed and stands as guarantor. Type of Account Demand Loan Account Margin Nil Repayment Maximum of 36 months in equated monthly instalments Processing Fee Rs.250/- flat

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Security Upto Rs.25,000/- Nil (only Check off facility). Above Rs.25,000/- check off facility. NSC,LIC policy may be insisted for security wherever possible or third party guarantee of equal means

Sanjeevini
This scheme is introduced to provide timely assistance for obtaining Medical treatment for Salaried class, Self employed persons, Employees of reputed PSUs, Profit making public limited companies, Self employed engineers, Doctors, Architects, Chartered Accountants, MBAs, Pesioners of PSUs, Govt. (state/central) public sector banks and also pensioners of State Bank of Mysore. Salient features of the scheme: Eligibility: a) Employees of Government, Reputed PSUs and profit making Public Limited Compani, with a minimum of 10 years service b) Self Employed Engineers, Doctors, Architects, Chartered Accountants, MBAs, with a minimum 5 years standing. They should be below 65 years of age c) Pensioners of PSUs / Govt. (State/Central) Public Sector Banks who have taken premature voluntary retirement and are 60 years of age or less, including pensioners of SBM d) Agents of Insurance / KVP / Mutual Funds etc., who are tax assesees and whose gross annual income exceeds Rs. 1.50 lacs. The facility will be considered only if a power of attorney or mandate is registered with the principal organisation with which the agent deals, authorising them to remit the commission direct to the Bank. Provided, however, that if the person treated happens to be a minor Son / Daughter of an eligible applicant, the loan can be extended to the Parent earning Income Criteria: a) For Employees / Pensioner - Net monthly income Rs. 6000/b) For Self Employed Person - Net annual income of Rs. 1,50,000/- as per latest I.T. Returns c) For Agents - Gross income exceeding Rs. 1.50 lakh per annum (to produce latest I.T. Returns) d) Income of the spouse can be considered if the spouse guarantees the loan Loan Amount: Minimum Rs. 20,000/Maximum 12 months net monthly income, Net of all deductions, including Income Tax for salaried individuals and pensioners and 1 year's net annual income in case of Self-employed professionals subject to the ceilings as below: Employees and Professionals: Rs. 1.50 lacs
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Pensioners who have taken early retirement and Agents under eligibility above Rs. 1.00 lac Margin: 15 % of the total cost of Hospital bill Rate of Interest: (wef 10.08.2008) With check-off facility Without check-off facility Type of Loan: Medium Term Loan Security: Tangible Collateral Security. Procesing fee: 0.50% with a maximum of Rs. 500/-. Disbursal: 1. Directly to hospital against production of bills or 2. Payment against indents from hospital 3. Reimbursement may also be considered within 15 days from the date of discharge when payment has already been made Repayment: Minimum -36 months Maximum 72 months - out of Salary / Pension /Professional Income / Agricultural Income Age limit: Maximum 65 years Other Conditions: In case of Pensioners any one earning member of the family should be a co-borrower If salaried person is accepted as co-borrower / Guarantor, check-off facility to be obtained For professionals, minimum 2 years of Income tax assesment should be obtained 15.25% 15.50%

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Samachar
This product has been introduced to meet the needs of journalist community who are directly involved in providing updated happenings over the globe. For purchase of Cameras, Computer, Books, Two wheelers, Mobile phones etc., for permanent employees of leading Newspapers. Salient features of the scheme: Eligibility: a) Permanent employees of Leading Newspapers b) Minimum net salary Rs. 5000/- per month Loan Amount: a) 12 times of Net monthly income. b) Minimum Rs. 10000/-. Maximum Rs. 1,00,000/Margin: 10% Type of Loan: Term loan repayable in 36 - 60 months Security: Hypothecation of the articles / Vehicles purchased Guarantee: i) No guarantee needed if check-off facility is available ii) Acceptable third party guarantee if check-off facility is not available Insurance: 10% above the market value of articles Processing Charges: 0.50% with a maximum of Rs. 500/Disbursal: Direct to the dealer Necessary papers to be given by the applicants: 1. Application form 2. Credit Declaration form 3. Salary Certificate 4. Income Tax returns copy 5. Statement of Bank account for the last 6 months 6. Undertaking from the employer to deduct instalments
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7. 3 photographs of applicant / guarantor 8. Undertaking that articles are allowed to be inspected any time by the Bank officials

ADVANCES
Population group wise classification of Gross Advances

The population group-wise classification of the Banks Gross Advances is as under:

(Rs. in crores) As on March 31, 2006 March 31, 2007 March 31, 2008 March 31, 2009 March 31 2010 Sept 30, 2011

Rural Semi-Urban Urban Metropolitan Total

750.62 619.64 871.49 2287.29 4529.04

735.02 925.30 877.36 2636.29 5173.97

854.44 1062.82 895.03 2740.35 5552.64

982.24 1223.80 1040.34 3385.96 6632.34

1187.42 1491.19 1374.68 5071.22 9124.51

1294.39 1592.44 1470.30 6010.28 10367.41

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Chapter 2 RSEARCH Design

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DESIGN OF THE STUDY

Research design 2.1 Introduction
Any amount borrowed or lent is called a loan. If money is borrowed it is debt of business and if loan is given, it is receivable for the business.

Loan is a method of lending under which bank gives credit to a borrower for a fixed period and for a specific purpose. Loan are promises for future payment, they have to be repaid in periods beyond a year and are, therefore long term liabilities.

The process of granting of loans and advances post credit worthy evaluation of the borrower coupled with the legal documentation is more often than not , reinforced by a strong recovery and monitoring process. The risks associated with adverse selection and moral hazard are to be prevented at any cost

2.2 Review of literature

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2.3Statement of the Problem

SBM is one of the nationalized banks in India which provides loans and advances when it is required by individual or companies and accepts the deposits from public. Being in the business of primarily lending and taking deposits, State Bank of Mysore has a track record of low credit risk manifestation. Yet given the global recessionary trend, the Indian banks have also not been spared. The banking sector has, over the years, witnessed increasing trend of delinquent loan accounts. This study is focused at evaluating the credit management process at the State Bank of Mysore, Bangalore. The thrust will be on evaluating the quality of the loans and the level of nonperforming assets in the loan portfolio. At the end of the project the study will endeavor to find a conclusion to the question as to whether the State Bank of Mysore. Bangalore has managed its loan recovery system effectively and efficiently

2.4 Objectives

To study different types of loans extended by the bank. To study the procedure of granting loans and advances by the bank. To evaluate the norms for sanctioning loans. To confirm the non existence of the conditions of adverse selection and moral hazard. To ascertain the credit risk management system at the bank. To study about the lending policy followed by bank. To know about the percentage of recovery of loans. To know the techniques used by the bank to recover the loans.

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2.5 Research Methodology

Sources of data Collection

The data is most vital and the integral aspect, which is responsible for the completion of any project.

Primary data The primary data will be collected through personal interaction with the executives and managers of the Bank as also from an verification of the records to the extent permitted. Primary data will also be collected, collated and interpreted through observation of the processes at the bank.

Secondary data It will be retrieved and collated from the annual reports of the Bank, from reports in various magazines, academic journals and other published papers of repute.

Plan of Analysis
The data collected is analyzed using the various techniques and tools generally accepted as proper for such analysis. Techniques like Risk Identification and Trend Analysis will be used in arriving at the logical conclusion.

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2.6 Limitation
This study is limited by resource and time constraints. For the reasons mentioned above the study is restricted to only one Bank and in that direction it may not be reflective of the pattern at the other banks. Due to confidential nature of the record was not in a position to collect data in totality but through a representative sampling technique will endeavor to overcome this limitations. Detailed analysis was not possible because of non availability of the sufficient data.

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Chapter 3 COMPANY PROFILE

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3.1 History
State Bank of Mysore was established in 1913 as Bank of Mysore under the patronage of the erstwhile government of Mysore, at the instance of the banking committee headed by the great Engineer-Statesman, Late Dr Sir M Visvesvaraya. Subsequently, in March 1960, the bank became an Associate of State Bank of India. State Bank of India holds 92.33% of shares. The bank's shares are listed in Bangalore, Chennai, and Mumbai stock exchanges. SBM has a widespread network of 671 branches (as on 31.01.2009) and 20 extension counters spread all over India which includes 6 specialized SSI branches, 4 Industrial Finance branches, 3 Corporate Accounts Branches, 4 specialized Personal Banking Branches, 10 Agricultural Development Branches, 3 Treasury branches, 1 Asset Recovery Branch and 7 Service Branches, offering wide range of services to the customers. The bank has a dedicated workforce of 9720 employees consisting of 3169 supervisory staff, 6551 non-supervisory staff (as on 31.03.2008). The skill and competence of the employees have been kept updated to meet the requirement of our customers keeping in view the changes in the environment. The paid up capital of the Bank is Rs.360 Millions as on 31.03.2008 out of which State Bank of India holds 92.33%.The Bank has achixeved a capital adequacy ratio of 11.73% as at the end of March 2008. The bank has an enviable track record of earning profits continuously and uninterrupted payment of dividend since its inception in 1913. Total deposits of the bank as at the end of January 2009 is Rs 31817 Crores and the total advances stood at Rs. 24713 Crores which include export credit of Rs. 10159.50 million. The forex turnover of the bank crossed Rs 336963.50 million during the year March 2007 to March 2008 which is 44.66% higher. State Bank of Mysore is the first Karnataka-based Bank with fully networked branches. The bank is fully on 'CORE BANKING SOLUTION' from 31.12.2005. In record time of one calendar year, the bank completed the exercise of converting all the branches to Core Banking to provide the convenience of anytime, anywhere banking to all our valued customers. State Bank of Mysore embarked upon the latest Banking Technology platform by implementing the Core Banking Solutions (CBS) across all its branches, with an objective of providing banking convenience to the customers.

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Services offered by the company: Deposits

My bank Surakhshna- A unique deposit scheme linked with insurance cover has been introduced. Insurance cover to a maximum of Rs. 5 lakh on deposits held for 5 years and more. Saving Plus- In order to provide value added services to our Personal Segment customers, a new specialized auto sweep product for Personal Segment savings bank customers has been introduced. Saral Savings Bank account (No Frills account)- This account comes with very low minimum balances as well as low / nil charges, to cater to the needs of individual from the vast sections of population who are, otherwise, not fulfilling certain conditions of our existing Savings Bank requirements. SBM Tax Saver Scheme (Tax saving scheme under Sec 80c of the IT act)A Bank Term Deposit Scheme 2006 has been introduced by the Central Government commencing from the financial year 2006-07 wherein time deposits made upto Rs.1.00 lakh for a period of 5 years are exempted from payment of Income tax under Sec 80C
The following are the Deposit Scheme provided by State Bank of Mysore: My bank Akshaya - Recurring Deposit Scheme(with flexibility) The main feature of the scheme is that the depositors have an option to withdraw the monthly installments remitted, after every 6 months or in multiples of 6 months. The maximum period of deposit is 10 years. Ananya Deposit Scheme The scheme is made for retiring employees to deposit lumpsum amount and to get monthly income of Rs.800/- or Rs.1000/- for 12, 24 or 36 months. The deposit may be further reinvested once again Multi Option Deposit Scheme It combines the features of Current account, Savings Bank a/c, TDR or RID a/c. The product proposes to give liquidity to the depositor with high returns and convenience. It provides the depositor an automatic overdraft facility in Current a/c and automatic withdrawal of Term deposits in units through SB a/c. Depositor has to simultaneously open TDR / RID a/c for Rs.1000/-, SB a/c with balance Rs.500/- and Current a/c. Long Term Floating Deposit account A fixed deposit scheme for 5 & 8 years to get an additional interest of 0.25% and 0.5% Page 38

respectively more on base interest rate (of 3 years deposit). The depositor has the option to invest in long term maturity at a floating rate with an opportunity to gain in any upward movement in interest rate. Minimum deposit of Rs.50000/-. Savings Bank account Customer can open an account with a deposit as low as Rs.100/- to Rs.300/-(Rs. 250/- for chequebook facility and Rs.100/- without chequebook facility) depending upon the area and earn interest at 3.5% (wef 01/03/2003) per annum. Computerized branches - Rs.500/- and for Specialized hi-tech branches - Rs.2000/Term Deposits In this scheme, customers can invest a lumpsum amount for a specific period from 15 days upto 120 months and collect interest at monthly (discounted), quarterly, half- yearly or yearly intervals. Reinvestment Deposits According to this scheme, customers investment and interest for the specified period is paid together at the end of the term. It gives the highest yield of interest on savings taking care of customers future needs like marriage, house construction, children's higher education, etc., Period can be from 6 months upto 10 years Mystar Deposit Scheme Mystar deposit is a short-term deposit for 46 days where deposits along with interest are automatically renewable upto a maximum of 6 times, without production of receipt on each occasion. Power Money This is a flexible term deposit scheme. Deposits are accepted in units of Rs.500/- each with a minimum of Rs.5000/- (10 units) for a period of 1-10 years. Part of the money deposited can be withdrawn in units without loss of interest on premature withdrawal for the entire deposit. Loans / Overdrafts can be availed upto 75% on the balance of units held Recurring Deposits In this scheme, the minimum monthly installment is Rs.20/- and is accepted in multiples of Rs.5/- thereafter. Deposits are accepted from 6 months to 120 months

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Cash Certificate In this scheme, customers pay an odd sum of money and receive a huge round sum. The period of this scheme is from 6 months to 10 years, with quarterly compounding of interest. Grameena Thevani Yojana A special deposit scheme, with interest compounding quarterly for persons with seasonal income like agriculture. Deposit in five yearly installments gets a huge sum after 10 years. Perennial Income Plan A novel pension plan for a tension free future specially for self-employed / daily wage earners who are not covered under pension scheme. Customers save specified amount at regular monthly intervals for a specified period of say, 7 / 10 years when young and energetic. They get a regular monthly income after 7th / 11th year equal to or twice the monthly saving throughout life or get a huge sum for their large needs. Super Savings Package This is a plan which takes care of old age. Customers save a specified small sum every month for 15 or 25 years (renewed every 10 years) and it is re-cycled every 10 years to get the maximum benefit of compound interest. Bhagyalakshmi Deposit This deposit is an ideal deposit scheme for housewives and employees. Customer save a small amount every month for a specified period and the accumulated amount is invested for a specified period to get a big sum. Harsha Deposit This scheme offers to save with pleasure and with convenience. No penalty is charged on irregular remittance. Customer may enhance your installment upto 10 times your initial deposit. An ideal deposit scheme for all, whose income is flexible and also for the salaried who may have to incur unexpected expenditure.

Advances

Personal Banking schemes Commercial & Institutional Banking schemes Agricultural Banking schemes Micro and Small Enterprises schemes (MSE)
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NRI Services

NRI Deposits International Banking - Forex services Performa for foreign currency remittances Account opening form for non-resident Indians Interest rates on NRE Deposits and schemes Details of its correspondent Banks -Exchange companies with Draft drawing arrangement with the Bank -Money Transfer to India Through Western Union Remittance facility through State Bank of India, New York Branch

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