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RESTRICTIONS ON BANK LENDING


From time to time RBI issued guidelines regarding restrictions on bank lending. For the benefit of our readers, we reproduce below, the summary of these guidelines:

Advances against bank's Own Shares

In terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot grant any loans and advances on the security of its own shares.

Advances to banks Directors

Section 20(1) of the Banking Regulation Act, 1949 also lays down the restrictions on loans and advances to the Directors and the firms in which they hold substantial interest. The term `loans and advances' shall not include the loans or advances against Government securities, life insurance policies or fixed deposits.

Restrictions on Power to Remit Debts

Section 20A of the Banking Regulation Act, 1949 stipulates that notwithstanding anything to the contrary contained in Section 293 of the Companies Act, 1956, a banking company shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by any of its directors, or any firm or company in which any of its directors is interested as director, partner, managing agent or guarantor, or any individual, if any of its director is his partner or guarantor.

Restrictions on Holding Shares in Companies

In terms of Section 19(2) of the Banking Regulation Act, 1949, the banks should not hold shares in any company except as provided in sub-section (1) whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of its own paid-up share capital and reserves, whichever is less. Further, in terms of Section 19(3) of the Banking Regulation Act, 1949, the banks should not hold shares whether as pledgee, mortgagee or absolute owner, in any company in the management of which any managing director or manager of the bank is in any manner concerned or interested.

Restrictions on Credit to Companies for Buy-back of their Securities

In terms of Section 77A(1) of the Companies Act, 1956, the companies are permitted to purchase their own shares or other specified securities out of their - free reserves, or securities premium account, or the proceeds of any shares or other specified securities. subject to compliance of various conditions specified in the Companies (Amendment) Act, 1999. Therefore, the banks should not provide loans to companies for buy-back of shares/securities.

Granting loans and advances to relatives of Directors

Without prior approval of the Board or without the knowledge of the Board, no loans and advances should be granted to relatives of Bank's Chairman/Managing Director or other Directors, Directors (including Chairman/Managing Director) of other banks and their relatives, Directors of Scheduled Co-operative Banks and their relatives, Directors of Subsidiaries/Trustees of Mutual Funds/Venture Capital Funds set up by the financing banks or other banks.

Restrictions on Grant of Financial Assistance to Industries Producing/Consuming Ozone Depleting Substances

Government of India has advised that as per the Montreal Protocol, to which India is a party, Ozone Depleting Substances (ODS) are required to be phased out as per schedule prescribed therein. The Protocol has identified the main ODS and set time limit on phasing out their production/consumption in future, leading to a complete phase out eventually. Projects for phasing out ODS in India are eligible for grants from the Multilateral Fund. The banks should not extend finance for setting up of new units consuming/producing above ODS.

Restrictions on Advances against Sensitive Commodities under Selective Credit Control (SCC)

With a view to preventing speculative holding of essential commodities with the help of bank credit and the resultant rise in their prices, in exercise of powers conferred by Section 21 & 35A of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest to do so, issues, from time to time, directives to all commercial banks, stipulating specific restrictions on bank advances against specified sensitive commodities. The commodities, generally treated as sensitive commodities are food grains i.e. cereals and pulses, selected major oil seeds indigenously grown, viz. groundnut, rapeseed/mustard, cottonseed, linseed and castorseed, oils thereof, vanaspati and all imported oils and vegetable oils, raw cotton and kapas, sugar/gur/khandsari, cotton textiles which include cotton yarn, man-made fibres and yarn and fabrics made out of man-made fibres and partly out of cotton yarn and partly out of man-made fibres. Presently, buffer stock of sugar with Sugar Mills and unreleased stocks of sugar with Sugar Mills representing levy sugar, and free sale sugar are covered under stipulations of Selective Credit Control.

Loans and Advances against Shares, Debentures and Bonds

-No loans to be granted against partly paid shares.
-No loans to be granted to partnership/proprietorship concerns against the primary security of shares and debentures.
-Banks and their subsidiaries should not undertake financing of Badla transactions.

Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks

There have been instances where fake term deposit receipts purported to have been issued by some banks were used for obtaining advances from other banks.In the light of these happenings, the banks should desist from sanctioning advances against FDRs, or other term deposits of other banks.

Advances to Agents/Intermediaries based on Consideration of Deposit Mobilisation

Banks should desist from being party to unethical practices of raising of resources through agents/intermediaries to meet the credit needs of the existing/prospective borrowers or from granting loans to the intermediaries, based on the consideration of deposit mobilisation, who may not require the funds for their genuine business requirements.

Loans against Certificate of Deposits (CDs)

Banks cannot grant loans against CDs.

Financing of Infrastructure Projects

Banks should not provide finance for construction of buildings meant purely for Government/Semi-Government offices, including Municipal and Panchayat offices which are funded out of budgetary allocations.

Issue of Bank Guarantees in favour of Financial Institutions

Banks are precluded from issuance of guarantees favouring financial institutions, other banks and/or other lending agencies for the loans extended by the latter, as it is intended that the primary lender should appraise and assume the risk associated with sanction of credit and not pass on risk by securing itself with a guarantee.

Discounting/Rediscounting of Bills by Banks

Bills covering payments of electricity charges, customs duty, hire-purchase/lease rental instalments, sale of securities and other type of financial accommodation should not be discounted by banks.

Accommodation bills should never be discounted by the banks. The underlying trade transactions should be clearly identified and proper record thereof should be maintained at the branches discounting the bills.

Advances against Gold/Silver Bullion

Banks should not grant any advance against gold bullion, to the silver bullion dealers which are likely to be utilised for speculative purposes and to finance Badla transactions in silver (i.e. buying silver ready and selling forward to earn interest).

(source - RBI consolidated guidelines dated Nov 01, 2000)


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VOLUNTARY RETIREMENT SCHEME IN BANKS
(Salient Features)


The Banking Division, of Govt. of India, conveyed its assent to IBA recentlyfor circulation among PSBs for adoption, a uniform VRS for the banking sector giving PSBs a seven month time frame to attempt an optimal reduction of their excess staff. Before offering VRS, banks are required to undertake a complete manpower planning exercise. The salient features are:

Eligibility

  • All permanent employees with 15 years of service or 40 years of age
  • The following employees will not be eligible for this scheme.
  • i) Specialists officers/employees, who have executed service bonds & have not completed it, employees/officers serving abroad under special arrangements/bonds, will not be eligible for VRS. The Directors may however waive this, subject to fulfillment of the bond & other requirements.
  • ii) Employees against whom Disciplinary Proceedings are contemplated/pending or are under suspension.
  • iii) Employees appointed on contract basis.
  • iv) Any other category of employees as may be specified by the Board.

    Amount of Ex-gratia
    60 days' salary (pay plus stagnation increments plus special allowance plus dearness relief) for each completed year of service or the salary for the number of months service is left, whichever is less.

    Other Benefits
  • i) Gratuity as per Gratuity Act/Service Gratuity, as the case maybe.
  • ii) Pensions (including commuted value of pension)/bank's contribution towards PF, as the case may be.
  • iii) Leave encashment as per rules.

    Other features
  • It will be the prerogative of the bank's management either to accept a request for VRS or to reject the same depending upon the requirement of the bank.
  • Care will have to be taken to ensure that highly skilled and qualified workers and staff are not given the option.
  • There will be no recruitment against vacancies arising due to VRS.
  • Before introducing VRS ,banks must complete their manpower planning and identify the number of officers/employees who can be considered under the scheme.
  • ) Sanction of VRS and any new recruitment should only be in accordance with the manpower plan.

    Funding of the Scheme
  • a) Coinciding with their financial position and cash flow, banks may decide payment partly in cash and partly in bonds or in instalments, but minimum 50% of the cash instantly and remaining 50% after a stipulated period.
  • b) Funding of the scheme will be made by the banks themselves either from their own funds or by taking loans from other banks/financial institutions or any other source.

    Periodicity
    The scheme may be kept open up to 31.3.2001

    Sabbatical
    An employee/officer who may not be interested to take voluntary retirement immediately can avail the facility of sabbatical for five years, which can be further extended by another term of five years. After the period of sabbatical is over he may re-join the bank on the same post and at the same stage of pay where he was at the time of taking sabbatical. The period of sabbatical will not be considered for increments or qualifying service for person, leave, etc.


    ORGANISATIONAL RE-STRUCTURING IN INDIAN BANKS




    What is organisational restructuring ?

    Organisational restructuring can be defined as ‘fundamental rethinking and radical redesigning of organisational structures, business processes & procedures and functional structures.

    Why there is need for restructuing ?

    The traditional business structure of banks lacks creativity and flexibility, is un-responsive, has absence of customer focus, is obsessed with activity rather than result, suffers bureaucratic paralysis and sans innovation and marketing which has been resulting in lower productivity, lower return on assets and lower profitability. Hence, there is need for restructuring to achieve better results to remain competitive.

    What are the objectives of restructuring ?

    The objective of restructuring are to achieve desired improvement in critical contemporary performance parameters such as return on working funds, spreads, profitability, quality of assets, capital adequacy, productivity etc. by moving at required pace and in the right direction. The restructuring must translate itself into higher revenues, lower costs, improved customer satisfaction, better financial strength, higher employee moral or a combination of these and essentially be reflected in the improved bottomlines.

    What should be the focus of restructuring ?

    The restructuring essentially focuses on the customer and satisfaction of customer needs, the competition management to improve the market share and improve productivity, the process time reduction for better delivery chain management, the cost cutting to improve spreads and return on assets, the change management and the optimum utilisation of human and other resources.

    What process is followed for restructuring

    The organisations deciding to undertake restructuring, undertake introspection to understand the external and internal environment and the need for change and rationalisation of the existing set-up by way of a SWOT analysis. After in-depth examination of the important issues, the focus is on review of administrative and functional structure of corporate office, middle-rung administrative office and branches. Steps are then initiated to modify the set-up to suit the changed business requirements. Simultaneously identification of business thrust areas based on the potentials available in various geographic regions and economic and social activities of different population groups is undertaken and strategies to achieve business objectives are formulated.

    Who is to suggest the restructuring ?

    The restructuring exercise can be based on the reports and suggestion of an in-house committee comprising of group of individual visionaries. Alternatively, the assistance of some outside agency can be taken which banks and financial institutions are finding suitable. There are inherent merits in both these alternatives. However, the group has to develop a model of business, which essentially aims to achieve the aforesaid objectives of the organisation.

    What are the benefits from restructuring ?

    Restructuring generally generates positive effect on the top-line and bottomline by increasing the revenue and/or decreasing the costs and also brings a number of intangible effects such as measuring the performance in terms of contemporary parameters and not by the activities, change in the criterion for career path from the one based on the performance only to the ability to take more responsible jobs, change in the role of managers from supervisors to that of leaders etc.

    What are the limitations of restructuring ?

    It needs to be born in mind that the restructuring is no panacea for all ills and it is possible that some organisations which had gone in for re-structuring did not find the process very rewarding. The failure may be combination of a number of factor such as that objectives of restructuring were not very clearly laid, the potential of the people was over-stated and proper training and education was not imparted to them, steps were not taken to make employees appreciate the objectives and restructuring might have been forced on them, the management might have stopped midway allowing permissiveness to creep in, the strategies might have been based on unrealistic assumptions and good on paper only.

    It is important to appreciate that re-structuring has to be differentiated from other improvement processes like total quality management, kaizen, downsizing and at the worst, software re-engineering to make it an achievement oriented exercise.



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