News

Catholic Syrian Bank to offer mediclaim policy The bank has tied up with New India Assurance Company to issue mediclaim policy " CSB Health Care Support " to its customers. Syndicate Bank's CBS The bank has implemented the Core Banking Solution (CBS) in the 1001 branches with Flexcube from i-flex Solutions Ltd.

Bank Stock News

L&T picks up 9.99% in City Union Bank L&T got preferential allotment of 26.65 lakh shares at a price of Rs.169 a share costing it Rs.45 crore.

Class Room

Security Alert--------Lebanese Loop “Lebanese Loop” attacks have become common occurrence especially in the western countries. The modus operandi in Lebanese Loop is comparatively simple, using a combination of technical and social engineering / inter personal skills. The technological part of the Lebanese Loop involves inserting clear plastic sleeves into the card slot of the ATM in advance. When an unsuspecting customer inserts his card for operation, the ATM try to read card’s magnetic strip but the exercise would be in vain as the card will be slotted into the sleeve inserted by fraudster. The situation will prompt the system to display messages like “ System Temporarily out of order “ or “Enter PIN number” etc. Whatever the customer does, may not yield the desired result as the system will not be able to read any instructions keyed in as the card will be within the sleeve inserted by the fraudster. It is at this point in time, that one of the individuals involved in the fraudulent racket will turn up and offer to help. The person offering to help may emerge posing as another customer pretending to be also aggravated over the malfunctioning of the ATM or as someone simply offering to help the customer to wriggle out of the woes he is in, quoting their own similar experience. In either case, the objective, basically, of the person offering to help is to get to know the ATM PIN number of the customer. Needless to mention, any means of support by the stranger may not help in enabling the customer to operate the ATM for obvious reasons. On the other hand, the damage is already done as the PIN number would have, in all probability, been compromised with. After several unsuccessful attempts to re-enter the PIN or at retrieving the card, the user will come into terms with the fact that he cannot retrieve the card anymore from the ATM. He may then opt to intimate the bank instead, for retrieving his card from the ATM. Once the unsuspecting customer leaves, the fraudster will remove the sleeve from the ATM and retrieve the card therein. Thereafter the fraudster is entitled to a free run having both the customer’s card and PIN number at his disposal, which enables him to transact from the customer’s account at will. This modus operandi can be used for trapping all types of cards that are used in ATMs viz. the ATM/Debit/Credit card etc. It is important for each of the customers to remember that if they encounter a scenario as mentioned above, the card slot of the ATM may be carefully examined by running the fingers across it to find one or more of the imperceptible “ prongs “ attached to the plastic sleeve that are designed to enable the fraudster to remove it. It is important to understand that if the card is not possible to be retrieved for any reason, it is not always right to assume that the ATM swallowed it. Instead it is prudent to enquire with the concerned branch/any authorized officials of the bank whether any problem exists with the ATMs and communicate about the card being held back by the system. Most of the banks providing ATM services display in the ATM cabin, the contact numbers, in case of emergency. Timely information will facilitate the bank personnel to look into the issue and ensure that a potential Lebanese Loop attempt is not rendered successful. The branch officials shall therefore exercise prudence/presence of mind whenever such instances are reported. The modus operandi invariably necessitates a scenario wherein the fraudster has to first go to an ATM to rig the card slot and fix the sleeve. Needless to mention the fraudster/his accomplices also have to be present in the vicinity of the ATM/ATM cabin to lend the helping hand to a customer who has been victimized. The most important aspect to be borne in mind is that such of these activities relating to Lebanese Loop to happen without any hindrance, the ideal situation has to be an unmanned ATM location. An unmanned ATM location provides the fraudsters the opportunity to spend ample time at the ATM/in the ATM cabin as is required as a pre-cursor to such fraudulent attempts. The Best preventive measure in the case of manned ATMs is that the security guards posted at the ATM sites do have a close watch on the people entering the ATM cabin, fixing any gadgets in the ATM or in the ATM cabin and those who spend unduly long time inside/around the cabin. Lebanese Loop attempts can be definitely thwarted by the security guards and the timely intervention of the branch officials to a considerable extent. The security guards at the ATM sites and the branch officials should be primarily aware and be vigilant on such issues. The need of the hour, therefore, Is to proactively anticipate and foresee motives in any of the activities being attempted in or around the ATM cabin which is not in line with the normal/prescribed set of actions and activities.

Bank Stock News

UBS picks up stake in UTI Bank UBS Securities Asia Ltd has picked up nearly 2.5 per cent stake of UTI Bankfor Rs 344.58 crore in open market transaction. UBS Securities has acquired69.33 lakh equity shares at Rs 497 each, representing 2.47 per cent stake ofthe private bank in a block deal on the Bombay Stock Exchange.

News

Corpn Bank ties up with India Post In tune with intensifying its efforts to serve the rural community moreeffectively, Corporation Bank has initiated a process to sell its loanproducts in villages with the help of India Post. Corporation Bank, inassociation with India Post, has launched 'Corp Gram Mitra Yojana' asecurity-free consumption loan scheme for rural beneficiaries. To beginwith, the scheme has been introduced on a pilot basis in Goa. This tie-upbrings benefits to all stakeholders post office by way of fee income,borrowers by way of credit on easy terms, and the bank by way of newbusiness. The maximum amount of loan will be Rs 20,000, repayable along withinterest within two years in the form of monthly instalments. Applicationand documentation of loans will be done through the designated post officesin the respective places. Ms Noorjehan, Principal Chief Postmaster General,Maharashtra Circle, formally launched 'Corp Gram Mitra Yojana', at Nagoa inGoa. Mr K.L. Gopalakrishna, Executive Director of the bank, presided. Bank of Rajasthan plans insurance foray Private sector Bank of Rajasthan plans to get into life and generalinsurance businesses, after shoring up its net worth to Rs 1,000 crore in 18months, Director Mr Pravin Kumar Tayal said. The bank, he said, would set upseparate subsidiaries for the new ventures, joining many other banks vyingfor the country's fast growing but underserved life insurance market. Bankof Rajasthan now has a net worth of Rs 450 crore. BoJ rate hike 'any time now' The Bank of Japan Governor, Mr Toshihiko Fukui, reiterated that an interestrate hike could come at any time amid a strong economic recovery. The Bankof Japan's Policy Board voted unanimously to keep interest rates at 0.25 percent on November 16. The market is braced for a rate hike next month or inearly 2007. New norms to boost foreign bank lending Barclays Bank's total lending in India is just over Rs 4 crore, but itsoff-balance sheet liabilities are over Rs 2,50,000 crore. If the RBI goesahead and implements its revised priority sector lending guidelines fromApril 1, 2007, then the British bank will have to lend over Rs 1,200 croreto priority sectors. That's because the draft guidelines propose to useeither the net bank credit or credit equivalent of off-balance sheetexposure as the base for calculating bank's priority sector lendingobligations. The average credit equivalent of OBS for the entire bankingsystem about 1.9 per cent of the total contingent liabilities. The number ofbanks which are actively involved in these activities in India are only 15,most of which are foreign banks. The combined share of these 15 banks intotal off-balance sheet exposures steadily increased from 73.8 per cent inMarch 2002 to 82.3 per cent in March 2006. The growth in OBS exposures inIndia has been fuelled by the phenomenal increase in derivatives segment.

News

66 Union Bank ATMs at rly stations Union Bank of India has tied up with Indian Railways to provide a host ofservices to the commuters, including Internet ticketing. The bank has signeda memorandum of understanding with Indian Railways for opening of 66 ATMs atvarious railway stations throughout the country. It would also set up aseparate kiosk to provide Internet ticketing service to passengers. Also,the ATMs would provide cash withdrawals, balance enquiries, fund transfer inown account and also prepaid mobile top ups, the bank said in a releasehere. The bank has a network of 611 ATMs and aims to install 1,000 ATMsthroughout the country by March 2007. YES Bank plans to raise $90 m YES Bank Ltd, a two-year-old Indian bank partly owned by Rabobank Group ofthe Netherlands, plans to raise $90 million selling shares and bonds byMarch to fund expansion, said the Chief Executive, Mr Rana Kapoor. TheMumbai-based bank plans to have 60 branches by June, Mr Kapoor toldpresspersons in New Delhi on Sunday. YES Bank said it planned to raise atotal of $150 million for expansion. YES Bank is also raising Rs 180 crore($40 million) selling debt maturing in nine years and six months payinginvestors a coupon of 9.1 per cent, Mr Kapoor said American Dream for SBI, ICICI Bank State Bank of India and ICICI Bank, India's two largest banks, will spreadtheir operations in the US. According to senior government officials,following the government's talks with the US authorities, India's twoleading lenders may well be granted approval for fresh branch licences inthe next six months. Part of the problem can be traced to the fact that SBIwas fined $7.5 million in 2001 by the US regulators for what was seen as thebank's failure to put in place anti-money laundering safeguards. The banksubsequently agreed to pay the fine imposed both by the US treasury and theNew York State Banking Department. SBI has operations in New York, Chicago,Los Angels and Washington, while ICICI is seeking an entry into the US aftermaking some inroads into the UK and Canadian markets. The government and RBIhave said that they have been liberal in approving branch licensingproposals from foreign banks way above the annual cap of 12. Bajaj Allianz, Centurion Bank headed for a long legal battle The dissolution of the erstwhile partnership between Bajaj Allianz LifeInsurance and Centurion Bank of Punjab is embroiled in a major feud and thetwo parties may end up in arbitration. A couple of months after the mergerof Bank of Punjab and Centurion Bank in June last year, the merged CenturionBank of Punjab (CBoP) had called for fresh bids from insurers since eachbank had different partners. Existing regulations do not allow a bank tosell policies of more than one life insurers. The bank had indicated it hadchosen Aviva because the geographies in which the firm was present matchedbank's requirement. It had also said it would continue to service customersto whom it had sold Bajaj Allianz policies, and would not try to convertthem into becoming Aviva's policy holders. Another reason for the change wasthat Bajaj Allianz was pursuing a strategy of growing its agency force andCBoP saw this as an area of potential conflict. However, the decision to gowith Aviva didn't go well with Bajaj Allianz.

Bank Stock News

Vijaya Bank -------- Buy Healthy business growth, improving asset quality, a relatively de-risked bond book, and undemanding valuation lend credibility to the Vijaya Bank stock. Investors can consider fresh exposure to the stock at theits current price of Rs 53 with one/two-year perspective. Insipid performance of the bank until last year is one of the reasons for the poor valuation of athe stock. While net interest income has remained under pressure, bad loans piled up. However, things are gradually changing now. Through a sharper focus on recoveries and stricter credit monitoring, Vijaya Bank has been able to bring down the level of net non-performing assets (NPAs) to 0.6 per cent in September 2006 against 1 per cent a year ago. Further, the bad loan coverage ratio has also improved from 68.1 per cent a year ago to 78.5 per cent now. This, coupled with excess floating provisions of Rs 30 crore (or 30 per cent of the net NPAs), is likely to provide cushion to the bank in case of loan delinquencies. This is also likely to keep provisioning charges lower over the next few quarters. Business outlook For the September quarter, the bank recorded a healthy 24 per cent growth in business volumes. Its business reached Rs 50,000 crore six months ahead of the target date, and the bank has set a goal of Rs 60,000 crore to be achieved by FY-07. While its loan book has grown by about 25 per cent, pressure on margins still persists. The bank's cost of funds rose by about 30 basis points in the September quarter, affecting its net interest margins (NIMs). Though yields on advances have improved, rising deposit costs along with a marginal fall in low-cost deposit base have resulted in NIMs declining by about 22 basis points. At 3.12 per cent, NIMs are still healthy and on a par with industry average. Containing costs is likely to be a key element in determining earnings growth and, thus, holds greater significance. For Vijaya Bank, various technology-based initiatives are likely to help bring down the operating cost. The bank also has the leeway to re-deploy its excess investments in SLR in its loan book; this is expected to improve its margins over the medium term. With the bank's credit at 61 per cent of deposits, there is still headroom to increase its loan book. If this happens, margins and profitability are likely to improve. Investment portfolio The bank's investment portfolio appears largely insulated from interest rate risk. This is because over 70 per cent of its holdings in government securities are under the held-to-maturity (HTM) category. The continuing decline in bond yields this quarter is likely to have a positive effect on its bond book in the coming quarter or two. At its current price, the stock quotes at a price-to-book multiple of 1.3 times against 1.5-1.6 times for most other public sector banks. The return on shareholder funds has improved sharply to 20 per cent. The bank is likely to generate and sustain return on shareholders' funds in the 15-18 per cent range over the next year or two. This appears healthy and is enough to support the valuation of the stock and provide a cushion on the downside.

Bank Stock News

FIIs' investment in Yes Bank FIIs, NRIs and persons of Indian origin can now purchase equity shares andconvertible debentures of Yes Bank under the portfolio investment scheme upto 49 per cent of its paid-up capital, according to an RBI circular

News

PNB credit cards foray by March Punjab National Bank (PNB) plans to come up with its own credit card byMarch next year. It would soon invite ex-pression of interest (EOI) for ajoint venture partner in the proposed credit card venture. Currently, PNBhas a co-branding tie-up with HSBC in which latter is the card issuer andplays the dominant role. Indications are that PNB would withdraw from thistie-up as soon as the joint venture company takes off. "We have alreadyroped in Ernst & Young, who will help us identify joint venture partner",said Mr K. Raghuraman, Executive Director, PNB. Oriental Bank ties up with IL&FS Investsmart for online trading Oriental Bank of Commerce (OBC) would soon offer online share tradingfacility to its demat account holders. For this purpose, the bank has signeda memorandum of understanding with IL&FS Investsmart on Wednesday.Initially, the online share trading facility would be available on a pilotbasis at Mumbai. Currently, OBC has more than 1 lakh demat accounts spreadover 111 branches. The MoU, also provides for the bank's customers toundertake share trading at designated branches. "Our customers walking intodesignated branches could trade shares and IL&FS Investsmart personnel atthese branches would provide support for share trading," an OBC officialsaid. ICICI Bank pact with Canadian agency ICICI Bank has signed a memorandum of understanding with Export DevelopmentCanada (EDC), a Canadian export credit agency, for financing support toIndian buyers of capital goods and professional services from Canada. "ICICIBank will leverage its international presence to provide holistic support toIndian corporates in their global aspirations," said Ms. Chanda Kochhar,Deputy Managing Director, ICICI Bank. The bank has a subsidiary in Canada(ICICI Bank Canada) with five branches. 4 insurers wooing Union Bank Union Bank of India is being chased by four new life insurance companies tomake the Mumbai-based bank a shareholder in their ventures. Italy's largestinsurer Generali, Japan's Dai-Ichi Mutual Life Insurance, which has tied upwith Bank of India, Germany's second largest primary insurer The ErgoInsurance Group, and interestingly, Bharti Axa life insurance company, whichcommenced operations in August, have already made presentations to UnionBank. Experts say that roping in a bank makes more sense for Bharti Axa asit will help get a committed partner with a wide reach for selling theproducts. Union Bank officials confirmed that they have been approached bythese insurers and said the public sector bank was interested in having23-26 per cent equity stake in a life insurance company. IDBI, BoR ink deal on e-trading services IDBI Capital Market Services Ltd inked an agreement with the Bank ofRajasthan to offer advanced e-trading services throughwww.IDBIpaisabuilder.in to the customers of the bank. United Bank to move govt with capital rejig plan again United Bank of India (UBI) will once again ask the Centre to consider itscapital restructuring proposal. Earlier, the government had rejected theproposal and had asked the Kolkata-based bank to submit a fresh formula. Thebank, however, has decided against any modification and will place the sameplan yet again. The UBI board has approved the move on November 21. Themanagement felt that this was in the best interest of the bank, sourcessaid. However, UBI chairman and managing director PK Gupta refused tocomment. The government had rejected UBI's original proposal, following anote from the Reserve Bank of India (RBI) which is reportedly againstallowing more than 40% of bank's Tier-1 capital into preference shares. ButUBI's plan to restructure Rs 1,200 crore of equity capital intonon-convertible preference shares from the Tier-1 capital of Rs 1,600 croredoes not conform with RBI's thinking. It had proposed two other variationsof the restructuring plan. In both the cases, the conversion was in excessof 40% of the Tier 1 capital.

News

'Reserve train tickets at ATMs' The Railways would soon enable buying of reserved train tickets from ATMs, which are being set up at railway stations. The ATMs would have Internet access facility, using which passengers can book e-tickets. After entering into an agreement with the State Bank of India to set up 682 ATMs at railway stations, Indian Railways entered into an agreement with six nationalised banks to set up another 711 ATMs at railway stations for passengers to withdraw cash. Out of the 711 ATMs, 473 will have e-ticketing facilities. The banks include Canara Bank, Bank of Baroda, Dena Bank, Union Bank of India, Indian Bank and Punjab National Bank. Currently, 86 ATMs have been installed at various stations and by the end of 2006-07, 250 ATMs are expected to be operational. The Railways aims to set up 4,000 ATMs at various stations. PNB offers online share trading Punjab National Bank (PNB) has launched online share trading services for its customers. It has tied-up with IDBI Capital Market Services to enable the bank's customers to accesswww.IDBIpaisabuilder.in, a Web-based portal, for investing in equity, mutual funds and initial public offerings. This alliance with IDBI Capital Market Services would help the bank to offer online trading in shares and, thereby, enlarge the number of demat accounts. With this tie-up, a PNB customer can get an integrated 3-in-1 online account that includes bank, investment and demat accounts. One can even link existing savings and demat accounts. PNB is now serving about 3.8 crore customers through its 4,500 branches. At present, the bank has about 35,000 demat accounts spread across 165 branches in 55 cities. It expects to add another 25,000 demat accounts by Mar'07. Bank of India's e-share trading Bank of India is launching online share trading jointly with broking firm Asit C Mehta Investment Intermediates Ltd. The broking firm would provide the online trading facility while the bank would offer banking facilities like demat and savings bank accounts. SBI too joins e-trading brigade, strikes pact The country's largest bank, State Bank of India (SBI), is slated to enter into a strategic alliance with the Mumbai-based brokerage Motilal Oswal Securities to provide integrated e-trading platform to their customers. This will possibly be the first entry by a large PSU bank in the online trading arena. At present such services are provided by broking firms in partnership with private banks. Players like ICICI Bank and HDFC Bank offer seamless trading with their subsidiaries ICICIdirect.com and HDFC Securities, respectively. This will broaden the scope of trading since the less-savvy IT customers, who have always been banking with a PSU bank, will now have an access to online trading facilities with the tie-up.

Class Room

IIBF to launch diploma in banking & finance Indian Institute for Banking and Finance (IIBF), a premier training body promoted by public sector banks, is all set to launch a three-paper online diploma course in banking and finance. The institute is expected to offer it in the next academic session starting May-June 2007. "Even as there are a number of courses offered in banking for mid-career or junior executives, this will help in preparing a fresher with principles and practices of banking before they join a bank, said R Bhaskaran, CEO, IIBF. The institute will be soon introducing certificate courses in asset liability management, retail banking and risk management for working bank executives.

News

PNB add-on debit card Punjab National Bank (PNB) on Tuesday announced that all the core banking solution (CBS) branch customers with PNB debit card could now have two add-on-debit cards for his/her family members, who may be spouse and dependent children not below 18 years. The bank said that the add-on-card holders are also covered under the accident death insurance of Rs 1 lakh. The debit card is issued free-of-cost to the primary cardholders as well as to the add-on-card holders. Insurance cover of Rs 1 lakh is also> available free-of-cost. No curbs on Sangli Bank Sangli Bank has clarified that the RBI has not imposed any restriction on it, including expansion of its advances. Responding to a report published in Business Standard on November 16 (RBI clamps down on Sangli Bank), the clarification points out that the RBI has not stopped the bank management from going in for large deposits and from increasing its lending exposure. Nor has any restriction been imposed on it to open new branches. PSBs to ink MoU with Rlys for ATMs Six nationalized banks, including Punjab National Bank, Bank of Baroda and Indian Bank, will sign a MoU with Indian Railways on Wednesday to set up 711 ATMs at railway stations across the country. This is the second biggest MoU for Railways after SBI signed an agreement with it in August to install ATMs at 681 stations across the country, with e-ticketing facility at 383 major stations in association with the Indian Railway Catering and Tourism Corp.

News

Canara Bank raises $1.3 billion The bank has received a record $1.3 billion worth of subscription against the offering of $250 million for raising Tier-II capital. The issue, priced at par, has a coupon rate of 1.29% over the London Inter-bank Offered Rate (LIBOR). the tenure of the bond issue is 15 years. the bank can exercise a call option at the end of tenth year. After this issue bank will have Capital Adequacy Ratio of over 13%. Dena Bank scheme to double investment Dena bank has launched a new scheme, Dena Double Deposit Scheme, which gives an opportunity to the investor to double their investment in a maturity period of eight years nine months. The scheme will remain operational from Monday till March 31, 2007. The bank provides 8% interest per annum to the general public and 8.55% to senior citizens.

The Bank Page: Bank Stock News

The Bank Page: Bank Stock News

Bank Stock News

Andhra Bank --- BUY Business Line (19.11.2006) An investment may be considered in the stock of Andhra Bank with a one-year perspective. The bank's increasing focus on high-yielding loan segments, buoyancy in fee income and ability to mop up low-cost funds augur well for its growth over the medium term. For the September quarter, the bank has turned in a good set of numbers. Its strategy of adopting a controlled credit growth without unduly stretching its balance sheet appears to have paid off. Unlike many other banks, which have grown their loan book by about 40 per cent, Andhra Bank has recorded a modest 23 per cent growth in advances. By restricting its deposits growth to nine per cent against the industry average of 20 per cent, and staying away from bulk deposits to a large extent, the bank has managed to expand its net interest margins by about 10 basis points to 3.82 per cent on a sequential basis. The growth in low-cost deposits has also helped the bank in containing costs. Low-cost deposits, which grew by 21 per cent YoY, now accounts for close to 40 per cent of its total deposits. Non-fund based activities that remained relatively dull during FY 06 are now beginning to pick up sharply. The fee income has risen by 35 per cent in second quarter on the back of 12 per cent increase in first quarter. The momentum in the fee income is likely to remain high on the back of its initiatives in third-party distribution and credit cards business. The deliberate change in loan-mix with higher focus on high-yielding segments such as retail, agriculture and SMEs also augur well. The growth in retail assets has been highest at 36 per cent. Andhra Bank sports one of the cleanest balance sheets with bad loans constituting 0.1of net advances. Higher provisioning coverage (93.5 per cent) coupled with faster recoveries also offers a great deal of comfort on the asset quality. The bank's ability to sustain its return on networth of 18 per cent post-equity expansion is a strong positive. Even with a modest profit growth of 10-12 per cent, the bank is likely to sustain its return on equity. The stock is quoting at a P/BV of 1.3 times its trailing 12 months earnings and appears attractively valued.

Recruitment

State Bank of India and subsidaries call for Specialist Officers/Executives Last date for sending application : 09.12.2006 For details kindly visit www.statebankofinida.com www.employmentnews.gov.in or see employment news dated 18-24 November2006

Recruitment

IDBI Bank ltd: Post : Assistant Manager (Grade A) Number of posts : 550 Last date for receipt of application : 05-12-2006 (from far flung areas-15-12-2006) Reservation : As per government rules Eligibility Criteria: 1. Graduate in any discipline from a recognized university 2. The candidate should have minimum 3 years banking experience including clerical/executive experience or 1 year banking experience as an officer. Contractual experience will not be considered. Core banking experience will be desirable. Age (as on November 1,2006) Not more than 28 years. SC/ST/OBC/PH/Ex-servicemen will be eligible for relaxation as per government rules. Pay and Other benefits: 1. The starting basic pay would be Rs.11,250/- per month. The gross monthly emoluments at the start of scale would be Rs.15,600/- 2.In addition to pay and allowances, the selected candidate will be eligible for benefits like pension, gratuity, leave fare concession, reimbursement of medical expenses, vehicle maintenance allowance, vehicle loan, housing loan etc. as per banks rules. Bank accommodation will be provided subject to availability. Selection Process: Selection process will comprise of Written Test followed by Personal interview for those who qualify in written test. The written test will comprise of a) Test of Reasoning b) Test of English Language c) Test of quantitative Aptitude d) Test of General and Financial Awareness Test Centers: 1. Mumbai 2. Delhi 3.Kolkata 4. Chennai 5.Guwahati For more information and application form: www.idbibank.com www.employmentnews.gov.in or employment news dated 18-24 November 2006

News

Capital market exposure of Banks may go up If the modified Reserve Bank of India guidelines come into force from January 2007, the aggregated capital market exposure of banks can go up to 40% of their networth on both solo and consolidated basis. However, banks' direct capital market exposure will be limited to 20 percent of their individual net worth. Currently, banks' capital market exposure is restricted at 5 percent of their total outstanding advances. Within the overall new ceiling of 40 percent, banks' direct investment in shares, convertible bonds, debentures, units of equity oriented mutual funds and all exposure to venture capital funds should not exceed 20 percent of their net worth.

Class Room

Innovative instruments to raise banking capital Sunil Gidwani & Robin Roy (Business Line 18.11.2006) In an age where risk determined performance management is increasingly getting into board level agendas and where moves towards capital convergence are the order of the day, banks are compelled to look at innovative ways of continuously shoring up their capital base. Over the years since Basel I, banks have been providing for expected credit losses on credit portfolios, based on their historical defaults. Banks are currently required to provide for adequate capital for both credit and market risks on their banking and investment portfolios respectively. Under Basel II, banks can expect to put aside capital according to the "riskiness" of their credit portfolios and are now requird to have a capital cover for operational risks. Though Basel II is not a legal document, to synchronise with global trends and expectations of all stakeholders, banks are planning to adopt these guidelines as per local regulatory directives. In India, the transition to the new capital adequacy framework in accordance with Basel II norms (originally scheduled for March 2007 but recently extended), would require banks to raise additional capital, particularly for some of their credit portfolios and operational risk. Till now banks have not had many options to raise capital. It is here that the recent RBI guidelines, which allow banks to raise capital by issue of Innovative Perpetual Debt Instruments (IPDI) and Debt Capital, open the doors for looking at "innovative instruments" to raise further capital. Lets's take a look at the salient features of these instruments and the minimum qualifying requirements: Innovative Perpetual Debt Instruments are eligible to be issued as Tier I capital. It can be issued in rupees or with prior approval in foreign currency. Maximum amount that can be raised is 15 % of Tier I capital reduced by intangible asset. As the name suggest, the maturity period is perpetual. The instruments can be issued at fixed or floating rate referenced to a market determined rupee interest benchmark rate. As regards trading in options, investors are not allowed to exercise put options. Call options are exercisable only after 10 years and with RBI approval. Step option can be exercised in conjunction with the call option, and the step-up not nore than 100 bps. If the capital adequacy ratio is not met, then there can be lock-in period for the interest payment. In case of losses, RBI approval is required for payment of interest. Debt capital instruments are eligible to be issued as Upper Tier II capital. Maximum amount that can be raised should not exceed Tier I capital reduced by intangible assets. The maturity period is minimum of 15 years. The instruments can be issued at fixed or floating rate referenced to a market determined rupee interest benchmark rate. As regards trading in options, investors are not allowed to exercise put options. Call options are exercisable only after 10 years and with RBI approval. From the aforesaid features one can note that these instruments can be termed as what are globally known as hybrid intruments, that is, those having characteristics of both equity and debt capital which exhibit all the benefits of debt but can be treated as equity, creating a powerful proposition. This enables spacing out of maturity profiles of instruments.

Class Room

Gold based deposit scheme - proposal Bankers are trying to moot a gold-based scheme to raise the long term deposits. The scheme will be designed to induce people to invest in the yellow metal while simultaneously offering banks a new source of funds. The 'Gold Accumulation Scheme' as it is being referred to, was discussed by bankers at a meeting convened by Indian Banks' Association on Thursday. The proposed scheme will work like this; A customer can buy gold by depositing the market price of the metal with the bank. The bank will provide the customer a receipt for physical deposit of gold. The customer can either get the gold in physical form or its value at the prevailing market price anytime after a specified period, say five or 10 years. A customer can keep on depositing funds ( in other words, buying gold ) at intervals of his convenience and accumulate it for 5-10 years. Interest at a nominal rate will be paid on the deposit. For the customer, it will work like a Systematic Investment Plan. On the other part, banks will buy gold futures to hedge against price variations.