The document provides an overview of the history and development of banking in India. It discusses [1] the origins of banking tracing back to Vedic times, [2] the three phases of banking in India from the colonial era to post-independence reforms, and [3] the current structure and types of banks that operate in India including commercial banks, development banks, and cooperative banks.

1. INTRODUCTION OF BANKING
The name bank derives from the Italian word banco, desk, used during the
Renaissance by Florentines bankers, who used to make their transactions
above a desk covered by a green tablecloth.
Banking" means the accepting, for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, and order.
"Banking Company" means any company which transacts the business of
banking in India and includes the State Bank, but does not include the Industrial
Investment Corporation Limited. Explanation.--Any company which is engaged in
the manufacture of goods or carries on any trade and which accepts deposits of
money from the public merely for the purpose of financing its business as such
manufacturer or trader shall not be deemed to transact the business of banking.
Banking India
Banking in India has its origin as early as the Vedic period and form the economy
point of view, the major task of banks is to act as intermediaries channeling
saving to investment requirement of savers are reconciled with the credit need of
investors and consumers .
A bank is a business which provides financial services for profit. Traditional
banking services include receiving of money, lending money and processing
transactions.Some banks (called Banks of issue) issue as legal tender. Many
banks offer ancillary financial services to make additional profit; for example:
selling Insurance Product ,Investment product & stock broking.

2. The Indian Banking Industry can be categorized into non-scheduled banks and
scheduled banks. Scheduled banks constitute of commercial banks and co-
operative banks. There are about 67,000 branches of Scheduled banks spread
across India. During the first phase of financial reforms, there was a
nationalization of 14 major banks in 1969. This crucial step led to a shift from
Class banking to Mass banking. Since then the growth of the banking industry in
India has been a continuous process.
As far as the present scenario is concerned the banking industry in India is in a
transition phase. The Public Sector Banks (PSBs), which are the foundation of
the Indian Banking system account for more than 78 per cent of total banking
industry assets. Unfortunately they are burdened with excessive Non Performing
assets (NPAs), massive manpower and lack of modern technology. On the other
hand the Private Sector Banks are witnessing immense progress. They are
leaders in Internet banking, mobile banking, phone banking, ATMs. On the other
hand the Public Sector Banks are still facing the problem of unhappy employees.
There has been a decrease of 20 percent in the employee strength of the private
sector in the wake of the Voluntary Retirement Schemes (VRS). As far as foreign
banks are concerned they are likely to succeed. Indusland Bank was the first
private bank to be set up in India. IDBI, ING Vyasa Bank, SBI Commercial and
International Bank Ltd, Dhanalakshmi Bank Ltd, Karur Vysya Bank Ltd, Bank of
Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sector
include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad
Bank, Andhra Bank etc.
Currently in most jurisdictions the business of banking is regulated and banks
require permission to trade. Authorization to trade is granted by Bank regulatry
authorities and provide rights to conduct the most fundamental banking services
such as accepting deposist and making loans.

3. History of Banking in India
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it
should be able to meet new challenges posed by the technology and any other
external and internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the
main reasons of India's growth process.
The first bank in India, though conservative, was established in 1786. From 1786
till today, the journey of Indian Banking System can be segregated into three
distinct phases. They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks
Nationalization of Indian Banks and up to 1991 prior to Indian banking
sector Reforms.
New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991. To make this write-up more
explanatory, I prefix the scenario as Phase I, Phase II and Phase III.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of
Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks. These three banks were

4. amalgamated in 1920 and Imperial Bank of India was established which started
as private shareholders banks, mostly Europeans shareholders.
During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948. There were approximately 1100 banks,
mostly small. To streamline the functioning and activities of commercial banks,
the Government of India came up with The Banking Companies Act, 1949 which
was later changed to Banking Regulation Act 1949 as per amending Act of 1965
(Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers
for the supervision of banking in India as the Central Banking Authority.
During those day‟s public has lesser confidence in the banks. As an aftermath
deposit mobilization was slow. Abreast of it the savings bank facility provided by
the Postal department was comparatively safer. Moreover, funds were largely
given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale especially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960
on 19th July, 1969, major process of nationalization was carried out. It was the
effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major
commercial banks in the country were nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in
India. The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:

5. 1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 crore. After
the nationalization of banks, the branches of the public sector bank India
raised to approximately 800% in deposits and advances took a huge jump
by 11,000%.Banking in the sunshine of Government ownership gave the
public implicit faith and immense confidence about the sustainability of
these institutions.
Phase III
This phase has introduced many more products and facilities in the banking
sector in its reforms measure. In 1991, under the chairmanship of M
Narasimham, a committee was set up by his name which worked for the
liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are
being put to give a satisfactory service to customers. Phone banking and net
banking is introduced. The entire system became more convenient and swift.
Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered
from any crisis triggered by any external macroeconomics shock as other East
Asian Countries suffered. This is all due to a flexible exchange rate regime, the
foreign reserves are high, the capital account is not yet fully convertible, and
banks and their customers have limited foreign exchange exposure.

6. INDIAN BANKING STRUCTURE
SBI
Group Nationalized Regional
Banks Rural Bank
Foreign
Commercial
Banks in
India
Public
Indian Sector Scheduled
Commercial Commercial Banks
Banks Banks
Private
Sector
Non-
Scheduled
Banks
R
Co-operative State Central Primary
B Banks Co-operative Co-operative Credit
I Banks Banks Banks
IFCI, IRBI
SFC, NSIC
Industrial ICICI, IDBI
SIDC/SIIC
DICGC
Development Insurance
Banks and
Credit
Agricultural NABARD Guarantee
AFC
Investment LIC, GIC
UIT
Housing NHB
Export EXIM Banks
Import ECGC

7. Services typically offered by banks
Although the type of services offered by a bank depends upon the type of bank
and the country, services provided usually include:
 Taking deposits from their customers and issuing Checking and Saving
accounts to individuals and businesses.
 Extending Loans to individuals and businesses.
 Cashing Cheques
 Facilitating money transactions such as Wire Transfer and cashier
checks.
 Issuing Credit cards, ATM crads & debit crads
 Storing valuables, particularly in a Safe Deposits Box.
 Cashing and distributing Bank rolls.
 Financial Transactions can be performed through many different
Channels
o Branch
o ATM
o Mail
o Telephone Banking
o Online Banking
 INNOVATIONS IN BANKING IN INDIA
o Internet Banking
o Mobile Banking
o Payment Systems
o Benefits of Technology in Banking
 BANKING BEYOND BANKING
o Personal Banking
o Retail Banking
o NRI Services
o Any Branch Banking

8. Types of banks
Banks' activities can be characterized as retail banking dealing directly with
individuals and small businesses, and investment banking, relating to activities
on the financial markets. Most banks are profit-making, private enterprises.
However, some are owned by government, or are non-profit making.
Indian Banking system can be roughly classified into three broab categories viz.
 Commercial Banks
 Development Banks
 Co-operative Banks
 Commercial Banks
the term used for a normal bank to distinguish it from an investment bank. After
the great depression, the U.S. Congress required that banks only engage in
banking activities, whereas investment banks were limited to capital markets
activities. Since the two no longer have to be under separate ownership, some
use the term "commercial bank" to refer to a bank or a division of a bank that
mostly deals with deposits and loans from corporations or large businesses.
Today commercial banking system in india may be distinguished
1. Public Sectors Banks
2. Private Sector Banks.
 Development Banks
This type of bank provide long term finance to Industries and Trade.Development
banking sectors are as above-

9. 1. Industrial Finance Corporation Of India
2. Industrial development bank of india
3. Industrial Credit And Investment Bank Of India
4. Small Industrial Development Banks Of India
5. National Bank for Agriculture And Rural Development
6. Exprot Import And Of India
 Co-operative Banks
The Co operative banks in India started functioning almost 100 years ago. The
Cooperative bank is an important constituent of the Indian Financial System,
judging by the role assigned to co operative, the expectations the co operative is
supposed to fulfill, their number, and the number of offices the cooperative bank
operate. Though the co operative movement originated in the West, but the
importance of such banks have assumed in India is rarely paralleled anywhere
else in the world. The cooperative banks in India play an important role even
today in rural financing. The businesses of cooperative bank in the urban areas
also have increased phenomenally in recent years due to the sharp increase in
the number of primary co-operative banks. Co operative Banks in India are
registered under the Co-operative Societies Act. The cooperative bank is also
regulated by the RBI. They are governed by the Banking Regulations Act 1949
and Banking Laws (Co-operative Societies) Act, 1965.
 Co-operative Sectors
1. State Co-operative Bank
2. Central Co-operative Bank
3. Primary Agriculture Credit Societies
4. Urban Co-operative Bank
5. Primary Land Development Bank
6. State Land Development Bank

10. Values & Principles of Co-Operative Bank
Co-operatives are based on the values of self-responsibility, democracy, equality
and Solidarity. In the tradition of their founders, co-operative members believe in
the ethical values of honesty, openness, social responsibly and caring others.
Principles
1. Voluntary and open membership – Co-operative are voluntary
organizations, open to all persons able to use their services and willing to
accept the responsibility of membership without gender, social, racial,
political discrimination.
2. Democratic member control – Co-operative are democratic organization
control by their members, who actively participate in setting their polices
and making decision, men and women serving as elected representative
are accountable to the membership. In co-operatives, members have
equal voting rights and co-operative at other levels are also organized I a
democratic manner.
3. Member‟s economic participation – Members contributes equitably to
and democratically controls the capital of their co-operative. At least part
of capital is usually the common property of the co-operative.
4. Autonomy and independence – Co-operatives are autonomous, self
help organization control by their members.
5. Education training and information – Co-operative provides education
and training for their members, elected representatives, mangers and
employees so that they can contribute effectively to the development of
their co-operative.
6. Concern for community – Co-operative work for their substantial
development of their communities through policies approved by their
members.

11. Some facts about Cooperative banks in India
1. Some cooperative banks in India are more forward than many of the state
and private sector banks.
2. According to NAFCUB the total deposits & landings of Cooperative Banks
in India is much more than Old Private Sector Banks & also the New
Private Sector Banks.
3. This exponential growth of Co operative Banks in India is attributed mainly
to their much better local reach, personal interaction with customers, and
their ability to catch the nerve of the local clientele.
Cooperative banks in India finance rural areas under:
1. Farming
2. Cattle
3. Milk
4. Hatchery
5. Personal finance
Cooperative banks in India finance urban areas under
1. Self-employment
2. Industries
3. Small scale units
4. Home finance
5. Consumer finance
6. Personal finance

12. Developments in Co-operative Banking
Co-operative banking has passed through many phases since the enactment of
the Agricultural Credit Co-operative Societies Act in 1904. Co-operative banks,
developed largely as an offshoot of official policy, expanded rapidly in the post-
independence era and played an important role in implementation of various
Government schemes. Their business is now binger-engineered to strengthen
their role in contributing to financial inclusion and deepening banking penetration
in an increasingly competitive financial landscape.
The co-operative Banking system, with two broad systems of Urban and Rural
co-operative, forms and integral part of India finical system with a wide network
and extensive coverage, these institutions have played an important role in
enlarging the ambit of institutional credit by way of including banking habits
among the poor and those in remote areas. In recent time, co-operative banks
have tried to improve credit deliveries through some financial innovation.
 Urban Co-operative Banks
The term Urban Co-operative Banks (UCBs), though not formally defined, refers
to primary cooperative banks located in urban and semi-urban areas. These
banks, till 1996, were allowed to lend money only for non-agricultural purposes.
This distinction does not hold today. These banks were traditionally centered on
communities, localities work place groups. They essentially lent to small
borrowers and businesses. Today, their scope of operations has widened
considerably.
The origins of the urban cooperative banking movement in India can be traced to
the close of nineteenth century when, inspired by the success of the experiments
related to the cooperative movement in Britain and the cooperative credit
movement in Germany such societies were set up in India. Cooperative societies
are based on the principles of cooperation, - mutual help, democratic decision

13. making and open membership. Cooperatives represented a new and alternative
approach to organization as against proprietary firms, partnership firms and joint
stock companies which represent the dominant form of commercial organization.
The Beginnings (UCBs)
The first known mutual aid society in India was probably the „Anyonya Sahakari
Mandali‟ organized in the erstwhile princely State of Baroda in 1889 under the
guidance of Vithal Laxman also known as Bhausaheb Kavthekar. Urban co-
operative credit societies, in their formative phase came to be organized on a
community basis to meet the consumption oriented credit needs of their
members. Salary earners‟ societies inculcating habits of thrift and self help
played a significant role in popularizing the movement, especially amongst the
middle class as well as organized labour. From its origins then to today, the
thrust of UCBs, historically, has been to mobilize savings from the middle and
low income urban groups and purvey credit to their members - many of which
belonged to weaker sections.
The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to
broad basing it to enable organization of non-credit societies. The Maclagan
Committee of 1915 was appointed to review their performance and suggest
measures for strengthening them. The committee observed that such institutions
were eminently suited to cater to the needs of the lower and middle income strata
of society and would inculcate the principles of banking amongst the middle
classes. The committee also felt that the urban cooperative credit movement was
more viable than agricultural credit societies. The recommendations of the
Committee went a long way in establishing the urban cooperative credit
movement in its own right.
In the present day context, it is of interest to recall that during the banking crisis
of 1913-14, when no fewer than 57 joint stock banks collapsed, there was a there
was a flight of deposits from joint stock banks to cooperative urban banks.
Maclagan Committee chronicled this event thus:

14. “As a matter of fact, the crisis had a contrary effect, and in most provinces, there
was a movement to withdraw deposits from non-cooperatives and place them in
cooperative institutions, the distinction between two classes of security being well
appreciated and a preference being given to the latter owing partly to the local
character and publicity of cooperative institutions but mainly, we think, to the
connection of Government with Cooperative movement”.
UCBs are unique in terms of their clientele mix and channels of credit delivery.
UCBs reorganized with the objective of promoting thrift and self-help among the
middle class/lower middleclass population and providing credit facilities to the
people with small means in the urban/semi urban centers. On account of their
local feel and familiarity, UCBs are important for achieving greater financial
inclusion. In recent times, however, UCBs have shown several weaknesses,
particularly related to their financial health.Recognising their important role in the
financial system, it has been the endeavor of the Reserve Bank to promote their
healthy growth. However, the heterogeneous nature of the sector has called For
a differentiated regime of regulation. In recent years, therefore, the Reserve Bank
has provided regulatory support to small and weak UCBs, while the same time
strengthening their supervision.
 Recent Developments(UCBs)
Over the years, primary (urban) cooperative banks have registered a significant
growth in number, size and volume of business handled. As on 31st March, 2003
there were 2,104 UCBs of which 56 were scheduled banks. About 79 percent of
these are located in five states, - Andhra Pradesh, Gujarat, Karnataka,
Maharashtra and Tamil Nadu. Recently the problems faced by a few large UCBs
have highlighted some of the difficulties these banks face and policy endeavors
are geared to consolidating and strengthening this sector and improving
governance.

15. STRUCTURE OF CO-OPERATIVE BANK
Co-Operative Credit Structure
Agricultural Credit Non-Agricultural Credit
State Co-operative
Short-term & Long Term Banks
Medium Term
Central Co-operative
State State ARDBs Banks
Co-operative
Banks
Primary ARDBS Primary Credit Societies
Central
Co-operative
Banks
Employee
Urban Co- Other
Primary Credit Co- operative Societies
Societies operative Societies
Banks
1. PACS 5. Service Co-
2. FSS 6. M-p Soc.
3. L-SCS 7. Grain Banks
4. LAMPS

16. Features of Cooperative Banks
Co-operative Banks are organized and managed on the principal of co-operation,
self-help, and mutual help. They function with the rule of "one member, one
vote". Function on "no profit, no loss" basis. Co-operative banks, as a principle,
do not pursue the goal of profit maximization.
Co-operative bank performs all the main banking functions of deposit
mobilization, supply of credit and provision of remittance facilities. Co-operative
Banks provide limited banking products and are functionally specialists in
agriculture related products. However, co-operative banks now provide housing
loans also.
UCBs provide working capital loans and term loan as well. The State Co-
operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-
operative Banks (UCBs) can normally extend housing loans up to Rs 1 lakh to an
individual. The scheduled UCBs, however, can lend up to Rs 3 lakh for housing
purposes. The UCBs can provide advances against shares and debentures also.
Co-operative bank do banking business mainly in the agriculture and rural sector.
However, UCBs, SCBs, and CCBs operate in semi urban, urban, and
metropolitan areas also. The urban and non-agricultural business of these banks
has grown over the years. The co-operative banks demonstrate a shift from rural
to urban, while the commercial banks, from urban to rural.
Co-operative banks are perhaps the first government sponsored, government-
supported, and government-subsidized financial agency in India. They get
financial and other help from the Reserve Bank of India NABARD, central
government and state governments. They constitute the "most favored" banking
sector with risk of nationalization. For commercial banks, the Reserve Bank of
India is lender of last resort, but co-operative banks it is the lender of first resort

17. which provides financial resources in the form of contribution to the initial capital
(through state government), working capital, refinance.
Co-operative Banks belong to the money market as well as to the capital market.
Primary agricultural credit societies provide short term and medium term loans.
Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also
provide both short term and term loans.
Co-operative banks are financial intermediaries only partially. The sources of
their funds (resources) are (a) central and state government, (b) the Reserve
Bank of India and NABARD, (c) other co-operative institutions, (d) ownership
funds and, (e) deposits or debenture issues. It is interesting to note that intra-
sectoral flows of funds are much greater in co-operative banking than in
commercial banking. Inter-bank deposits, borrowings, and credit from a
significant part of assets and liabilities of co-operative banks. This means that
intra-sectoral competition is absent and intra-sectoral integration is high for co-
operative bank.
Some co-operative bank is scheduled banks, while others are non-scheduled
banks. For instance, SCBs and some UCBs are scheduled banks but other co-
operative bank is non-scheduled banks. At present, 28 SCBs and 11 UCBs with
Demand and Time Liabilities over Rs 50 crore each included in the Second
Schedule of the Reserve Bank of India Act. Co-operative Banks are subject to
CRR and liquidity requirements as other scheduled and non-scheduled banks
are. However, their requirements are less than commercial banks. Since 1966
the lending and deposit rate of commercial banks have been directly regulated by
the Reserve Bank of India. Although the Reserve Bank of India had power to
regulate the rate co-operative bank but this have been exercised only after 1979
in respect of non-agricultural advances they were free to charge any rates at their
discretion. Although the main aim of the co-operative bank is to provide cheaper
credit to their members and not to maximize profits, they may access the money
market to improve their income so as to remain viable.

18. PRUDENTIAL NORMS AND ASSETS-LIABILITY
MANAGEMENT GUILDLINES FOR UCBS.
The reserve bank continued with its efforts to enhance the financial health of
UCBs. In pursuance, certain policy changes were made in regard to prudential
norms on capital adequacy, income recognition, Assets classification and
provisioning in respect of UCBs.Capital adequacy requirement for UCBs are at
present lower then those prescribed for commercial banks. By March 31 st, 2005
UCBs. Would have to fall in line with the discipline applicable to commercial
banks. Accordingly, they are required to adhere to capital adequacy standards in
a phased manner over a period of three years.
CRAR ratio For UCBs.
AS ON 31ST CRAR FOR CR A R FOR CRAR FOR
MARCH SCHEDULED NON - COMMERCIAL
UCBS SCHEDULED BANKS
UCBS
2002 8 6 9
2003 9 7 9
2004 As applicable to 9 9
commercial bank
2005 As applicable to As applicable to
commercial bank commercial bank
2006 As applicable to As applicable to
commercial bank commercial bank

19. EXTENTION OF 90 DAYS NPA NORMS
RBI has been tightening prudential norms in line with the best international
practices in recent years. Accordingly, to ensure greater transparency, the time
period for reckoning as advance as non performing would be reduced from the
existing 180 days to 90 days with effect from March 31st, 2004. In this connection
banks were instructed to move over to charging of interest at monthly rates, with
effect from April 1, 2002.However, “gold” loans and “small” loans up to Rs.
100000 will continue to be covered by the 180 days norms for recognitions of
loan impairment.
LICENSING OF NEW BANKS
The number of UCBs has been rising rapidly recent years. The RBI has
constituted a screening committee of eminent external exports to examine not
only the background and credentials of promoters but also to consider but also
considering the environment / business projections submitted by the promoters
and other factors influencing the viability of the proposed bank. During the year
under review, the committee considered 90 proposals for the organization of the
new banks, and granted “in principle” approval in two cased. In addition, 22
proposals were closed, as the promoters of the proposed banks failed to comply
with the stipulated eligibility requirements. During the period under review, 131
licenses were issued for opening new branches.
WEAK BANKS
Based on new classification, the number of UCBs classifies under the class II / III
/ IV category as on March 31st, 2003 stood at 944. During the period under
review 142 weak banks could not comply with the stipulated minimum capital
requirements.

20. CHALLENGES FACED BY UCBs.
After a relatively fast growth during the priod,1993 to 1999 the sector saw a
substantial number of new urban co-operative banks coming up and growth rate
of the banks being consistently higher than the all India average for all banks,
the period of the year 2000-2001 till now has been that of sluggish growth and
difficulties for the sector. The share of urban banks in terms of resources grew
from around 4% in 1993-1994 to over (% in 2001-2002. The size of a large of
2000 strong urban banks also grew at a fast pace during this period. However,
involvement of one of the largest urban co-operative banks in Gujarat in the stock
market scam of 2001 sent stock waves in the entire urban co-operative banking
sector and affected the sector‟s public image very badly. Since a very large
number of smaller urban banks in Gujarat were having deposits with
Madhaupura Mercantile Co-operative bank (MMCB), which got involved in the
scam, the public confidence, which had come down very badly, has not been
restored till date. Similarly during these times there were some problems in a few
banks in Maharashtra on account of bad management. The responses of the
regulators have been by way of imposition of further stringent norms and rules in
order for them to be on par with those applied to commercial bank.
In the back drop of the developments that have taken place in the urban co-
operative banking sector during the last 4-5 years, the following could be
identified as main challenges to the sector in the coming years.
 STRENTENING THE PUBLIC IMAGE
Among all the section of banking industry urban co-operative banks constitute
the largest section in terms of number of institutions. They also constitute the
most unevenly distributed group among all section of the banking industry. Out of
over 2000 urban co-operative banks in the country, over 70% are concentrated in
three states of Maharashtra, Gujarat and Karnataka. Their compositions in terms

21. of size also vary vastly. While there are banks with over Rs.2000 Corore
deposits, a sizable number of banks are most advanced and technologically
being members of RTGS etc., a large number of them are in the initial stages of
computerization. Even the management styles, levels of professionalisation and
competence levels of staff also vary form bank to bank.
Urban co-operative banks in any town are typically promoted by prominent
members of the society there. They are usually businessman, traders,
landowners, teachers, lawyers, social workers etc., and while in small places, the
reputation of the bank generally is in keeping with the standing of the promoters
and the board members. And the society in that area, in larger cities the
members and the clients look at the banks and assess them largely on their
public image by focusing on two factors.
o Ensuring that the board members are persons of integrity and of good
standing in the society who have fair understanding of banking systems.
o Following principals of take adventurous decision to grow at a faster pace
than others.
While these are internal factors that are within the competence of the bank, there
are certain aspects on which it would not have much control but they would
nevertheless have important bearing on the public image of the bank. If there are
a number of urban co-operative banks in town, it has been observed that any
problem with one bank has a contagion effect on other banks also,
notwithstanding the fact that these other banks, Bering a few are not large
enough to have a brand name and an identity by which general public could
distinguish one from the other while taking decision on whether to keep moneys
in a particular bank or not .Today, the publics perception is that deposits with
only public sector banks are safe and that there is always an element of risk
involved when the deposits are with either smaller private sector banks or with
the co-operative banks, while it is not easy to change this perception, much can

22. be done by the urban co-operative banks by adhering strictly to the prudential
norms and following the disclosure requirements so that the depositors have
access to the true state of health of the bank. Following the disclosure norms
become easy if the banks has no weakness to hide. A very striking difference
between a co-operative bank and a commercial bank is the involvement of the
co-operative bank in social activities of the area of its operation. There are a
large number of well managed and sound co-operative banks who are involved in
many socially relevant activities in the field of health, education and at the time of
emergencies like natural calamities. These activities improve the image and
esteem of the bank in the eyes of the local citizens.
 MANGING THE GROWTH
It is possible to mange a small size bank with common sense and sincerity.
However, it requires professional approach and specialized financial knowledge
to mange a financial institution that is growing a very fast clip. It has been
observed that many of the urban co-operative banks which were in the range of
25-50 crores deposits have within a span of five years grown to banks with 300-
500 crores deposits. This phenomenal growth brings in its wake enormous
challenges. The board of directors, however well meaning they might be find it
very difficult to run the bank unless they are supported by professionals. The
challenge before the board would be to put a professional management team in
place and also to be able to work with that team, so that the synergies of the
board members in the form of the local feel and knowledge about the area in
which the bank operating is complimented with professional and technical
knowledge of the management team to get the best result for the bank. This
scenario would necessitate the board to drastically change its style of
functioning, introduce formal systems of accountability and also familiarize with
the management information systems. To bring about this change, there should
be complete willingness on the part of the board members to work hard towards
it.

23. Managing growth also involves constant efforts to look out for changes in
business profiles to maximize the return out of the growth and at the same time
to keep the risk management aspect in mind.
As the urban co-operative banks like any other institution in the co-operative
sector are democratic organizations, there is always involvement of local leaders
who invariably owe allegiance to one political party or the other. The challenge
before the urban co-operative banks is to utilize the strength of political
connections or allegiance of its members/promoters/directors to the benefit of the
institution rather than its detriment as it has often been observed in the history of
co-operative banks. These co-operative leaders must firmly put the interest of the
banks above any political consideration so that health of co-operative banks is in
way compromised. To elaborate, people in public life generally tend to oblige
others, and if this tendency is carried to the board room of the bank, the
institution could be put into difficulties on account of unprofessional decision.
 REGULAATION OF COMMUNITY BASED FINACIAL
INSTITUTION
This subject perhaps constitutes the most formidable challenge to the regulators,
the stockholders and the government. In setting out to meet the challenge of
regulating community based institutions like urban, co-operative banks, one must
first Cleary perceive institutions to be different from the commercial banks for the
simple reasons that the client base of co-operative banks is different from the
commercial banks. Commercial banks have the reach, the middle class and the
small section of the lower middle class as their depositors, large and medium
industries, SSIs, exporters and traders as their borrows, while the co-operative
banks have only the middle and lower middle class and weaker section as their
depositors and their borrowers. While commercial banks are speared over entire
geographical region with branches in large metros, town as well as villages, A
very large number of co-operative banks have their branches confine to a single

24. town, which may be a small urban area or Sámi rural place. The commercial
banks collect deposits from various centers to deploy them at other centers. The
urban co-operative banks usually deploy funds collected form one place for the
benefit of borrowers in that place only. While the commercial banks on account of
their resources and technology are in the position to offer a wide range of
services to their clients, the urban co-operative banks on the other hand by and
large, can offer only limited service to their customers.
In view of this significant difference in the working of co-operative banks ands
that of commercial banks, a uniform prescription of norms, particularly the
application of prudential norms will not yield the desire results. In the last 3 years
no worth while attempt has been made to define the role of urban co-operative
banks as a sections of community based banking systems, to ascertains in
details the impact of these banks in states where they are well establishes, the
need or otherwise for promoting such institutions in other states, and above all to
develop a system of regulation and supervision that will bring the best out of the
urban co-operative banks. This is a real challenge before the regulators. They
must recognize this challenge and work upon it. If the regulators continue to what
they have been ding during the last few years, and only concentrate on
imposition of norms that are not attainable by almost half of the total number of
urban co-operative banks, they would only be succeeding only in presiding over
closure of large number of them every year.

25. SURAT PEOPLE‟S CO-OPERATIVE BANK LTD
With the advent of 20th century, co-operative movement gathering momentum in
our country. In the early years of the century, there were only a few banks ran by
solely profit conscious foreign managements, absolutely unmindful of their social
obligation. Further there was also widespread economics exploitation of the
common man in general and of socially and economically weaker sections of the
society in particular by the money lenders who were lending money to them at
exorbitant rates of interest with stringent conditions subjected them to crushing
indebtedness. In such a socio-economic at the time, co-operative banks were
looked upon to play a vital role.
Inspired by the exhortation of late autorothfield, the then register of co-
operatives, Bombay province, that a large number of co-operative banks should
be established to cater to the banking needs of the common man, late
REVSAHEB VRUNDAVANDAS JADAV, A VISIONARY dreamt of establishing
a co-operative bank. this, dream of his turned into reality when he, ably aided by
late CHUNILAL SAPAIYA, a seasoned banker founded a co-operative bank in
the name and style of “ The Surat People's Co-operative Bank Ltd‟‟.in the year
1922 at SURAT . To be precise, it was registered on 10th march, 1922 and
started functioning with effect from 22nd April, 1922. It enjoys the distinction of

26. being the “first urban co-operative bank of India‟‟. The Surat People's Co-
operative Bank Ltd was popularly known as JADAVSAHEB‟S BANK, reason
being that one or the other of the four member of Jadav family were associated
with it in some way or other during a span of six decades. Late REVSAHEB
VRUNDAVANDAS JADAV, apart from being the founder of the bank, was also its
managing director since its inception till the year 1955. Late TAKOREBHAI
brother of REVSAHEB JADAV was honorary secretary and manager of the bank
since its inception till the year 1950.Whereas late SUDHIRBHAI JADAV, son of
late REVSAHEB JADAV , was the Managing Director of the bank form the year
1961 to 1985. After his retirement form the bank‟s service, he was on BOARD
OF DIRECTORS of the bank for one year.
Progressively marching ahead THE SURAT PEOPLE‟S CO-OPERATIVE BANK
acquired the status of 'Scheduled Bank' on 1st September, 1988. The bank has
been catering to the needs of small entrepreneurs, artisans, professionals, and
weaker section of the society to become a co-operative bank in letter and spirit.
Over the year, the SPCBL has set its eyes on strategic planning for the future in
order to arm itself to face competition in wake of sea change that the banking
industry has been witnessing on account of policy of liberalization of economy.

27. ORGANISATION STRUCTURE
President
Vice Director
Director
General Manager
Deputy General Manager
Asst. General Manager
Manager
Officers
Clerks
There are two AGMs in the bank. Under each AGM there is one Executive.
Under executive there are three managers, similarly under managers there are
two officers and there are three clerks.

28. OBJECT OF THE BANKS:
The objects of the bank are as under:
 To encourage thrift and mutual co-operative among its members.
 To create funds to be lent at moderate rate of interest to the members of
the banks in accordance with procedure specified in bye laws.
 To give possible help and necessary guidance to traders who are
members of the banks, in the conduct of their business.
 To do HUNDI business
 To lend money on security to member.
 With previous permission of the registrar, to purchase any property for the
business of or for the use of bank to construct it or to make suitable
alterations as may be necessary and to maintain the same.
 To perform any function as may be deemed lawful for the bank and that as
the central Government or State Government may direct.
 To do every kind of trust and agency business and particularly do the work
of investment of funds, sale of properties and of recovery or acceptance of
money.
 To undertake the management of trusts and for that purpose to accept any
office of trustees executors or any office to perform duties of such a
confidential nature either independently or jointly with some other person
as the Bord deems its.
 To undertake every kind of banking and sharafi business and also to
undertake of giving guarantee and letter credit on behalf of members.

29. STRENGTHS
 The bank was the first “ First Registered Urban Co-operative Bank” of
India
 Among the first 13 Co-operative Bank to get the “Scheduled Bank”
Status.
 The bank introduced "Total Branch Automation" in the 1992-93.
 Presently, all the branches are computerized.
 Bank has started its own “Training Centre” to provide training to the
employees of other co-operative banks since 1995-96.
 The first Bank to provide the "Depository Participant Services" in South
Gujarat.
 The Bank with "A" Rank.
 The Bank has implemented “Tele Banking Facility” and “view Account
Terminal” [VAT] facility at all branches for providing better customer
service.

30. PAST PERFORMANCE
Financial Position As on 31-3-2006
Detail Amount In Rs.
Authorized Share
25,00,00,000.00
Capital
Paid up Share
16,44,64,100.00
Capital
Reserve Fund 54,17,29,574.75
Other Reserves and
179,44,28,238.25
Funds
Deposits 720,16,49,931.56
Advances 359,13,32,357.81
Investments 449,74,69,866.70
Working Capital 1009,66,95,577.50
Net Profited 9,75,12,937.42
Net Non Performing
0.00
Assets
Audit Class "A"

31. NUMBERS OF MEMBERS
No. Of Members 70000
60000
50000
40000
30000 53,687 55,979 57,470 58,158 59,369
50,523
20000
10000
0 2001 2002 2003 2004 2005 2006
1 2 3 4 5 6
Year
Total Numbers have increased by 20% since 2001
PAID UP SHARE CAPITAL
18000000
Paid Up Share Capital
16000000
14000000
12000000
10000000
80000000
60000000
40000000
20000000
0
1 2 3 4 5 6 7
Year
Paid up Share capital has increased by nearly 60% since 2001

32. RESERVE FUND
60000000
Reserved Fund 50000000
40000000
30000000
20000000
10000000
0
1 2 3 4 5 6 7
Year
Reserved Fund has increased by nearly 42% since 2001
DEPOSITS
8E+09
7E+09
6E+09
Deposits
5E+09
4E+09
3E+09
2E+09
1E+09
0
1 2 3 4 5 6
Year
Deposits have increased by approximately 25% over 4 years since
2001

33. ADVANCES
4E+09
3.5E+09
Advances 3E+09
2.5E+09
2E+09
1.5E+09
1E+09
50000000
0
1 2 3 4 5 6
Year
Advances have increased by nearly 22% since 2001
The above charts and analysis shows the overall positive growth of the Surat
People‟s Co-operative Bank.

34. AWARDS
 As per @1st Annual Report (1996-97) of NAFCUB - New Delhi. The Bank
was awarded rank as under for :
Net Profit : 6th
Deposits : 8th
Advances : 9th
 Bank achieved the coveted "Award of Excellence" from NAFCUB,
New Delhi at their 8th all India conference of Urban Co-operative
Banks & Credits Societies.
 Surat Jilla Sahakari Sangh declared our bank as the best "Urban Co-
operative Bank” for the year 1999-2000 in Surat district.
 The bank with "A" Rank.

35. SERVICES
 Safe Deposit Lockers:
We are offering you safe deposit lockers for safety of your valuable
things like gold, silver, hard cash, diamonds, important documents.
We offer our customer safe deposit vault or locker at a large no of
branches. There is a nominal annual charge which depends on the size of
lockers. Basically use of lockers is to make your most valuable thing secure.
Your family is going out of station, or there 2 to 3 family member at your home
so at that there is fear of thief , and even for make your self tension free you
should go for safe deposit lockers. and this all things when ever you want back
you can take back instantly from bank and again if your purpose will be solve
again you can give it back.
 VAT (View Account Terminal) Services
You can easily have information about your account. You
can come to know account status like balance, latest transaction,
using just touch screen. VAT machine is available at our all branches.

36. Letter of Credit Service:
Document, consisting of specific instructions by a
buyer of goods, that is issued by a bank to the
seller who is authorized to draw a specified sum
of money under certain conditions, i.e., the receipt by the bank of certain
documents within a given time. An irrevocable L/C provides guarantee by the
issuing bank in the event that all terms and conditions are met by the buyer (or
drawee). A revocable L/C can be canceled or altered by the drawee after it has
been issued by drawee's bank.
 SMS banking Services :
We are providing tele banking service at our
all the branches. Using SMS banking you can have current information about
your status of account. Like balance of your account in English and gujrati
language both. Even you can come to know status about all kinds of account.
Like (Current account, Savings account, Loan Account, Overdraft). Even, we are
giving facility of tale fax also. So you can have your account statement on your
fax.

37.  Fund Transfer
In this facility, Bank gives facility of fund transfer of fund transfer between two
different branches. Bank provides this service at free charges. In this facility
customer has account in one branch of the bank, and he wants that money in
other branch of the bank then customer can get his/her money form other branch
without any risk or charges. It is not necessary customer has also account in
other branch but that branch where he deposited money; he has account in that
branch.
 ATM
In these facilities, Bank provides a service to customer of fastest transaction
in account. It is 24 hour services. Whenever customer require to withdraw
money form his account in off time of bank, customer can easily withdraw
money form their account, Even customer can easily get information about his
account like, account balace,statement of last 5 to 6 transaction. In SPCBL,
among 19 branches this service is providing in 9 branches.
 Pay Order Service:
Pay order is most secure way to make payment to your party. Pay order can be
make of your party's name. And it is best proof that you made a payment of this
amount and on this date. So, instead of giving cheque you can make pay order
from bank and bank will make a payment from your account. There is no charge
of pay order. It is absolutely free service.

38.  Demand Draft
Demand Draft is a less expensive way for remitters to transfer money to your
party's account.
A demand draft is more secure than a normal cheque as it can only be credited
to a specific payee's account, and a customer can only be reimbursed under
indemnity if the cheque is lost or stolen. It is secure and safe. It offers a
convenient way to settle your trade business when documentation is required.
People's bank draft is a law-cost, convenient method of making non-urgent
payments.
Bank will charge you only Rs. 20/- to make Demand draft of any amount
VISION 2010
 Home banking,
 Any Window concept
 Inter branches connectivity [Branchless banking]
 Global banking facility through interest banking
 Bank‟s presence in metros
 No.1 UBRAN Co-Operative BANK for business and profit per employee
 Patronage for development of Surat city.
 Introduction of full fledged specialized branch viz. foreign exchange,
agriculture advances & industries advances.
 Functioning as merchant banker.
 Technically qualified staff to meet challenges of high tech banking.

39. PRODUCTS
 DEPOSITS:
1. Current Account
2. Savings Account
3. Recurring Deposits
4. Fixed Deposits
5. Cash Certificate
6. Vashudhara Pension Plan
7. Monthly Income Plan
8. Vashudhara Deposit
 LOANS:
1. Vashudhara Awas Yojna (Home Loan)
2. Personal Loan
3. Loan for Self Employed and Professionals
4. Business or Industrial Loan
5. Consumer Loan
6. Vehicle Loan
- For Personal Vehicle (two Wheeler/Car Loan)
- For Commercial Loan – Vehicle using for commercial purpose.
7. Education Loan
8. Loan against N.S.C./K.V.P./ Gov. Security/ L.I.C. Policy
9. Mortgage Loan
10. Technology Up gradation Fund

40. Social Contribution
In this global jubilee years-
 The SPCP Memorable Trust with a fund of Rs 10 lakh was farmed in its
golden jubilee year.
 Fund stands at Rs.2.60 crror on 31st march 2001
 Trust donates from its interest incomes to various instantiations engaged
in –Social education & Medical services.
DONATIONS
Bank, too, donates. Form its charity funds to various institutions.
 Bank‟s civic contribution Swami Vivekananda Traffic, Island at makkai
pool, Nanpura, Surat.
 Surat People‟s bank senate Hall at VNSGU, Surat.
 Surat people‟s bank English Medium College Of Commerce Surat.
 Surat P.B.Mahavir C.T.Scan Centers Surat.
Benefits for share holders
 Insurance cover of Rs. 1 lakh 2 share holder in case death by accidents.
 Awards to children of shareholders on achievements of examinations.

41. Purpose of Study
We know that the basic function of bank is to accepting deposits for purpose
deposits for the purpose of lending and to make investments. It involves the
pricing mechanism to sustain in the market and to enhance the value creation for
shareholders and deposit holders of bank. In fact there is keen competition in
banking after the introduction of economic reforms lending to liberalization of
financial and banking sector. The changes that had taken place in the operational
side of banking in the form of diversification of products/services, free to choose
products/market segments, emphasis on customer service adoption of
sophisticated technology etc.
So we have to accept that now a day‟s scenario of banking is changed and
bankers are forced to come the edge of their seats rather than sit easily and do
the business. They have to keeping keen eye on each and every movement of
market, industry, economy and politics. Main thing for bankers to manage the
bank‟s assets and liabilities in order to maintain both liquidity and profitability.
ALM is the main and most important tools for banks management. An effective
ALM implementation makes the banker more alert in managing the assets and
liabilities by considering their respective maturity profiles to take necessary
initiatives. We all know that now a day‟s co-operative banking sector is passing
through crucial stage and for that main responsible factor is mis-management of
their Assets-liability. So as a member of co-operative banking family I have tried
my best to Focus on the most important subject and that is Assets and Liability
Management.

42. OVERVIEW ON ALM
Banking is the business which deals mainly with other people‟s money by way of
mobilizing deposits and deployment of funds through lending and investment.
Increasing the “spread” is an important object and out of which the bank has to
cover the Cost of Management (COM) and Risk Cost (RC) to earn net profit. It
increases the loan and investment portfolio, the liquidity will be affected and as
against this, if the high degree of liquidity is maintained the profitability may be
deteriorate. Therefore the position of a banker is between the “Devil and Deep
Sea” and it becomes crucial task of managing funds effectively. The bank must
give weight to the principals of safety, liquidity and profitability while managing its
affairs of business, therefore fund management is crucial task for banking
industry and ALM is main tool of fund management.
The deregulation and globalization of economy has changed the canvas
significantly. These changes led to major transformation in both the
administrative and operational side of the banking. These developments have
resulted in tough competition and more risk. The banks are moving towards
designing new innovative financial products/services to attract more and more
customers and moving in new direction along with their conventional banking. In
this backdrop, the status of co-operative banks is crucial and it is a big struggle
for them to retain their existence in the industry. They have to be
professionalized in their functions and operations especially in field of fund
management by adopting some standard tools and techniques like ALM. ALM is
a technique available for the bankers to manage the bank‟s assets liability order
to maintain both liquidity and spread on the basis of their respective maturity
period.
Considering the fact that the deregulated environment has brought the bank on
the subtle line of leeway where any error may prove to be very fatal and the fact
that it very to err. Assets and Liabilities management has to be foreseen as a
most vital component of banking industry and management.

43. DEFINATION AND MEAMING OF ALM
Assets
Items having realizable value owned by the business are known as assets.
Assets owned by the business are known as business assets. Cash, land,
building, machinery, stock, furniture, goodwill, patent, copyright, trademark,
etc.are included in assets.
Assets are classified into three types
 Fixed assets,
 Current assets,
 Fictitious assets
Liability
Any amount payable by the business to any outsiders is known as liability. By
credit purchase of goods, the amount becomes payable or liability is created.
Sometimes, liability is also created by borrowing funds.
There are two types of liabilities
 Current liability
 Long-term liability
Assets and liabilities, for not only facing the challenges ahead but also for
improving its bottom lines and thereby to improve the net worth of the bank. The
technique of mangeing assts and liabilities together know as Assets Liability
management (ALM) Through ALM banks not only equip themselves to price their
assets and liabilities at appropriate levels by also manage the related risks too.
Eventually role of the banks form mere deposit takers and distribute through
asset liability management in the coming years

44. Assets Liability Management
Asset-Liability Management has been defined as a continuous process planning,
organizing, and controlling Asset and Liability volumes, maturities, rates and
yields. In the present Environment it is defined as process of adjusting bank
liabilities to meet loan demands, liquidity needs and safety requirements. To put
it simply, assets-liability management is the management of total balance-sheet
dynamics with regard to its size and quality. It involves
 Quantification of risk and
 Conscious decision making with regard to assets-liability structure in order
to maximize interest earning within framework of perceived risk.
In other words ALM can be defined as the process of managing the net interest
margin (NIM) within the overall risk bearing capacity of a bank. Thus it calls for
an integrated approach towards financial management conditioned to
simultaneous decision making with regard to types and size of financial assets
and liabilities, their mix and volumes so as to insulate the spread from adverse
direction. Thus, the secret of successful banking under deregulated and
competitive environment hinges on matching of assets and liabilities in terms of
rate and maturity with a view to obtaining optimum yield.
In other way we said Assets liability management has been organizing and
controlling asset and liability volumes, maturities, rates and yields. Simply put,
assets liability management (ALM) is a tool that enables bank management, to
take business decision in a more informed framework. The ALM function informs
the manager what the current market risk profile of the bank is and the impact
that various alternative business decision would have on the future risk profile.
The manger can then choose the best course of action depending on his bord‟s
risk appetite. Consider for example, a situation where the chief of bank‟s retail
deposit mobilization function wants to know the kind of deposits that the

45. branches should be told to encourage. To answer this question correctly he
would need to know inter alia the exiting cash flow profile of the bank. Let us
assume that the structure of the existing assets and liabilities of the bank are
such that at the aggregate the maturity of assets is longer than maturity of
liabilities. This would expose the bank interest rates risk [if interest rates were to
increase it would adversely affect the banks net interest income] In order to
reduce the risk the bank would have to either reduce the average maturity of its
assets perhaps by decreasing its holding of Government securities or decrease
the average maturity of its assets, perhaps by reducing its dependence on call
money market funds. Thus, give the above information on the exiting risk profile
of the bank, the retail deposits chief knows that the bank can reduce its future
risk by marketing its long-term deposits products more aggressively. If necessary
he may offer increased rates on long-term deposits and or decreasing rates on
the shorter term deposits.
The above example illustrates how correct business decision making can be
added by the interest rate risk related information. The real world of banking is of
course more complicated. The risk related information is just one of many pieces
of information required by a manger to take decision. In the above example itself
the retail deposits chief would also have considered a host of other factors like
competitive pressures, demand and supply factors, impact of the decision on the
banks retail lending products, ECT before taking a final decision. The important
thing; however is that ALM is a tool that encourages business decision making in
a more disciplined framework with an eye on the risk that the bank is exposed to
ALM is thus a comprehensive and dynamic framework for measuring, monitoring
and managing the market risk, i.e., Liquidity interest and exchange rate risk of a
bank. It has to be closely integrated with the bank‟s business strategy as this
affects the future risk profile of the bank. This framework needs to be built around
a foundation of sound methodology and human and technology infrastructure. It
has to be supported by the bord‟s risk philosophy, which clearly specifies the risk
policies and tolerance limits.

46. OBJECTIVES OF ALM IN THE BANK
Main objectives of the ALM are:
1. To Protect / enhance the market value of the net worth
2. To increase the net interest income
3. To maintain / protect spreads or Net Interest Margin
The primary objective of the asset-liability management is not to eliminate risk,
but to manage it in such a way that the volatility of net interest income is
minimized in the short-term horizon. Broadly the objectives would include
controlling the volatility of net income, net interest margin, capital adequacy, and
liquidity risk and finally ensuring an acceptable balance between profitability,
growth and risk. In other words, the ultimate objective of ALM is profitability and
long term operating viability of the organization in risky environment.
Scope of ALM
A sound ALM should focus on
1. Review of interest rate outlook.
2. Fixation of interest / product pricing on both assets and liabilities.
3. Examining loan portfolio.
4. Examining investment portfolio.
5. Measuring foreign exchange risk.
6. Managing liquidity risk.
7. Review of actual performance vis-à-vis projections in respect of net profit,
interest spread and other balance sheet ratios.
8. Budgeting and strategic planning.
9. Examining the profitability of new products.
10. Review of transfer pricing

47. RBI GUIDELINES ON ASSETS LIABILITY MANAGEMENT
RBI had issued guidelines in February 1999 for putting in place Assets Liability
Management System in banks. These guidelines where issued for managing
liquidity risk, interest rate risk and currency risk. Banks were asked to set up an
internal assets liability committee (ALCO) headed by chief executive office / CMD
or the executive director. The managing committee of the board was also to
oversee the implementation of the system and also to review periodically.
Keeping in view the level of computerization and MIS system in banks adoption
of uniform Assets Liability Management System for all banks was considered not
to be feasible. To begin with, banks were directed to endeavor to cover at least
60% of the asset and liabilities for analysis and were required to set target for
coverage of 100% data by April 2000.
As banks are aware, interest rate risk is the risk where changes in market
interest rates might adversely affect a bank‟s financial condition. The immediate
impact of changes in interest rates is on bank‟s earnings (i.e. reported profits)
through changes in its Net Interest Income (NII). A long-term impact of changes
in interest rates is on bank‟s Market Value of Equity (MVE) or Net Worth through
changes in the economic value of its assets, liabilities and off-balance sheet
positions. The interest rate risk, when viewed from these two perspectives, is
known as „earnings perspective‟ and „economic value‟ perspective,
respectively.
The present guidelines to banks approach interest rate risk measurement from
the „earnings perspective‟ using the traditional Gap Analysis (TGA). To
begin with, the TGA was considered as a suitable method to measure Interest
Rate Risk. Reserve Bank had also indicated then its intention to move over to
modern techniques of Interest Rate Risk measurement like Duration Gap

48. Analysis (DGA), Simulation and Value at Risk over time, when banks acquire
sufficient expertise and sophistication in acquiring and handling MIS.
Reserve Bank had advised banks on June 24, 2004 to assign explicit capital
charge for interest rate risk in the trading book applying the standardized duration
gap approach advocated by the Basel Committee on Banking Supervision. Since
banks have gained considerable experience in implementation of the TGA and
also become familiar with the application of the DGA to their trading books, it is
felt that this would be an opportune time for banks to graduate to the Duration
Gap Analysis for management of Interest Rate Risk in its entirety. With this
move, banks would fully migrate to application of the „economic value
perspective‟ to interest rate risk management.
The salient features of the draft guidelines furnished in the
 . Banks shall adopt the DGA for interest rate risk management in addition to the
TGA followed presently.
 The proposed framework, both DGA and TGA, will be applied to all
assets, liabilities and off balance sheet items of the bank.
 Keeping in view the level of computerization and the current MIS in banks,
adoption of a uniform ALM System for all banks may not be feasible. The
proposed guidelines have been formulated to serve as a benchmark for
banks. Banks which have already adopted more sophisticated systems
may continue their existing systems but they should fine-tune their current
information and reporting system so as to be in line with the ALM System
suggested in the Guidelines.
 Banks should adopt the modified duration gap approach while applying
the DGA to measure interest rate risk in their balance sheet from the
economic value perspective. In view of the evolving state of
computerization and MIS in banks, a simplified framework has been
suggested, which allows banks to

49. o group assets and liabilities under the broad heads indicated in
Appendix I under various time buckets; and
o compute bucket-wise Modified Duration of these groups of assets/
liabilities using the suggested common maturity, coupon and yield
parameters;
 Reserve Bank is aware that measurement of interest rate risk with the
above approximations does not reflect the true level of risk and hence
would expect banks to migrate over time to application of the modified
duration approach to each item of asset/ liability/ off-balance sheet item
instead of applying it at the „group‟ level. However, banks with the
necessary IT support, MIS and skill capabilities may straightaway
implement the more granular DGA by computing the Modified Duration of
each item of asset, liability and off-balance sheet item.
 Each bank should set appropriate internal limits for interest rate risk based
on its risk bearing and risk management capacity, with the prior approval
of its Board / Risk Management Committee of the Board.
 Banks should compute the volatility of earnings (in terms of impact on Net
Interest Income) and volatility of equity (in terms of impact on it –book
value of net worth) under various interest rate scenarios.
 Banks should adopt a more granular approach to measurement of liquidity
risk by splitting the first time bucket (1-14 days as at present) in the
Statement of Structural Liquidity by dividing into two buckets viz. 1-7 days
and 8-14 days. In addition to the existing prudential limits operating for the
1-14 days bucket and the 15-28 days bucket, the negative mismatch
during the 1-7 days bucket should not exceed 20% of the cash outflows in
that bucket. The frequency of supervisory reporting of the Structural
Liquidity position shall be fortnightly instead of monthly, as at present.
While determining the likely cash inflow / outflows, banks have to make a
number of assumptions according to their assets liability profile. Indian banks
with large branch network can (on the stability of their deposit base as most

50. deposits are rolled over) afford to have large tolerance level in mismatch in
the long term if their term deposits base is quite high. While determining
tolerance level the banks may take into account all relevant factors based on
their assets liability base, nature of business, future strategy, etc.

51. NEED FOR IMPLEMENTING ALM SYSTEM IN
CO.OPERATIVE BANKS.
Banking industry in India has undergone many changes, By the introduction of
banking sector reforms, deregulation of interest rates, and competition in the
industry focus on customer relationship ect. The co-operative banks woke up and
started evolving strategies and practices to make sure of their presence. The
changes and development that took place in the industry‟s business practice
specially the field of fund management. Some initiatives were necessary to
improve further. Co-operative banks should not be exempted form such
developments and in fact it is essential for them to proceed on the professional
way with the objective of widening the interest spread. The co-operative banks
began to modify their resource pool particularly the deposit mix by accepting
more short term deposits to reduce the cost of funds and finally the short term
liabilities are the higher side then long term liabilities. This situation has caused
for the mis-matches in two ways:
 Maturity mis match between assets and liabilities, and
 Interest rate mis match between interest rate sensitive assets and interest
sensitive liabilities. The second factor gets direct impact on profitability.
The co-operative having local footing with strong membership base and at the
same time they have provided the required level of service to their members.
Therefore to gain the member confidence, as they are the investors, it is the duty
of co-operative banks to maintain sufficient liquidity by honoring their demands in
time. As a business proposition the co-operative banks also has to earn some
profit to meet other cost such as establishment cost and risk cost. With the
improved lines of business and diversified landing and investment portfolio in big
way, the co-operative banks are going to bear the impact of risk to greater extent
in the forth-coming days. Therefore the co-operative banks must evolve a

52. suitable ALM system as suggested by RBL (Based committee on banking
supervision) to their funds management practices. Implementing a suitable ALM
mechanism in co-operative banks provide the scope for exercising selective
control on assets and liabilities and also offer the following benefits.
 Striking a right balance between liquidly and profitability.
 Analyzing both the time and rate sensitivity of assets and liabilities.
 Supplying adequate data input to the budgeting and decision making
process of bank especially in the re-alignment of Assets Liability
composition.
 Leveling of funds in the long-run perspective by identifying the
surplus/deficit at regular intervals.
 Reducing interest rate risk (IRR) and liquidity risk (LR).
The very nature of the banking business is incurring risk to earn profit. The risk
factor is inherent in the banking business. The risks encountered by the banks
are as under:-
 Liquidity Risk
 Interest Rate Risk
 Credit Risk
 Market Risk
 Capital Risk
 Commercial Risk
 Price Risk
 Operational Risk
 Solvency Risk
 Exchange Rate Risk
 Political Risk
 Human Risk
 Technology Risk
 Legal Risk

53. ALM SYSTEM
The frame work of Assets Liability management in bank generally includes their
main divisions Viz. Information system process and committee which is illustrated
in the Figure – 1. The information system is the basic requirement for the ALM
technique, as the continuous supply of adequate data and information is always
needed.
The ALM process is an analytical framework, which enables to study the
dimensions of assets and liabilities and also to find liquidity and sensitivity
gaps. The ALM process gives weight to the following five elements.
o Risk Parameters.
o Risk Identification.
o Risk Measurement.
o Risk management.
o Risk Policies and Tolerance Level.
Third segment of ALM is the ALM committee (ALCO), which is responsible for
the successful implementation of system. The structure of the committee and the
level of Top management involvement should be well defined to excise proper
control over the whole system.

54. HOW TO WORK ALM
----------------------------------------------------------------------------------------------------------
SELECTED
BRANCH
D A 1
A
T L 2
Ho A ISM LGM IRRM
C 3
B
A 4
MONEY N O
MARKET K
ALM MIS ALM PROCESS ALCO
---------------------------------- ------------------------------------------ ----------------------
o ISM Interest Spread Management.
o LGM Liquidity Gap Management
o IRRM Interest Rate Risk Management
1. Developing implementation and managing annual budget.
2. Review of reports and monitoring the performance.
3. Risk management program.
4. Management reporting.

55. ALM INFORMATION SYSYEM (ALMMIS)
The implementation of ALM system necessitates the banks to conceive a
suitable management information system. The ALMMIS must ensure the
availability, accuracy, adequacy and expediency of information. The head office
should collect required data in a structural format and other information at a
regular interval from benches and it should be centralized into a databank. The
data must be accessible to make it easily available to suit the requirements of
ALM committee (ALCO)
The nature of data required is normally in the form of maturity wise pattern of
various assets and liabilities, into various time bands, needs some bases and this
process can be done through the past experience of bank. In these regard the
bank may collect information relating to the behaviors and maturity pattern of
deposits and advances form selected branches who contribute mainly to the
volume of business. This data collection serves the bank to make some rational
assumption for GAP analysis and report preparation. Reliable and authentic
information should also be collected from the money market. Therefore the MIS
must ensure the supply of timely adequate and accurate data and information
through reports collected from various terminals in order to make the ALM more
effective.
The problem of ALM needs to be addressed by following on ABC approach i.e.
analyzing the behavior of assets and liability products in the top branches
accounting for significant business and then making rational assumption about
the way in which assets and liabilities would behave in other branches. In respect
of foreign exchange investment functions it would be much easier to collect
reliable information. The data and assumptions can be refined over time as the
bank management gain experience of conduction business within an ALM
framework. The spread of computerization will also help banks in accessing data.

56. ALM ORGANIZATION (ALM COMMITTEE)
Successful implementation of the risk management process would require strong
commitment on the part of their boards and senior management. The board
should have overall responsibility for management of risks and should decide the
risk management policy and procedures, set prudential limits, auditing, reporting
and review mechanism in respect of liquidity rate and forex risks.
The Asset-Liability Committee (ALCO) consisting of bank‟s senior management
including CEO should be responsible for deciding the business strategy [on the
assets and liabilities sides] in line with the bank‟s business and risk management
objectives.
The ALM desk consisting of operating staff should be responsibilities for
analyzing, monitoring and reporting the risk profiles to the risk profile to the
ALCO. The staff should also prefer forecasts [simulation] showing the effects of
various possible changes in market conditions related to the balance sheet and
recommend the action to adhere to bank‟s internal limits.
The ALCO is decision making unit responsible for balance sheet planning from
risk-return perspective including the strategic management of liquidity, interest
rate and forex risks. The business and risk management strategy of the bank
should ensure that the bank operates within the limits/parameters set by the
board. The business issues that an ALCO considers, inter alia, includes pricing of
both deposits and advances, desired maturity profile and mix of incremental
assets and liabilities etc. in addition to monitoring the risk levels of the bank, the
ALCO should review the result of and progress in implementation of the decision
made in the previous meeting. The ALCO‟s future business strategy decision
should be based on the banks view on current interest rates. In respect of the
funding policy, for instance, its responsibility would be to decide on source and

57. mix of liabilities or sale of assets, Towards this end, it will have to develop a view
on future direction of interest rate movements and decide on funding mixes
between fixed vs. floting rate funds, wholesale vs. retail deposits, short term vs.
long term deposits etc,
Individual bank will have to decide the frequency for holding their ALCO meeting.
This committee meets regularly, at least once a month, through ideally it should
be once a fortnight , to review the liquidity potential vis-à-vis market conditions
and determines the strategies to maintain adequate liquidity, decides on raising
resources having regard to the cost in tune with the market condition, and
deployment of resources in profitable avenues.
RESPONSIBILITIES OF ALCO
Assessment of future interest rate scenario.
Assessment of the liquidity profile of the bank.
Assessment various risks, if any, in the balance sheet and drawing
strategies.
Monitoring spreads based on the changing scenario.
Drawing strategies to hedge risks perceived.
Guidance to the policies / strategies implemented and to alter/ change if
situation needs.
Review of actual performance vis-à-vis corporate projections.
Budgeting and planning.
Drawing short term as well as long term strategies depending on the
situation.

58. GUIDANCE
MONITORING
REVIEW
ASSESSMENT
ALCO STRATEGIES
PROJECTION PERCEIVED
BUDGTING

59. COMPOSITION OF ALCO
The size [number of members] of ALCO would depend on the size of each
institution, level of business and organization structure. The responsibility of
Asset Liability Management is on the treasury Department of the bank. To ensure
commitment of Top management and timely response to market dynamics, the
CEO or the Secretary should head the committee. The Chief of
investment/Treasury including forex, credit, planning etc, can be members of the
committee. In addition, the head of the Information Technology Division if a
separate division exists should also be invitee for building up of Management
Information System [MIS and related IT network. Some banks, large banks, may
even have sub-committees and supported Groups. The ALCO agenda consist of
comprehensive data on market conditions particularly with focus on liquidity in
Market ongoing interest rates fir sources and deployment avenues, the reserve
position, the yield pattern, spread, fee based income and overall profitability, the
avenues for raising resources and deployment, the classified data on maturity
pattern on assets and liabilities in different buckets [block/periods] as well as
classified data on interest rate sensitive assets and liabilities. The ALCO
considers maturity mismatches and ascertains gaps of creating liquidity in those
time buckets. While doing so Alco considers interest rate sensitive of respective
liabilities, if the resources are to be raised or respective assets, if surplus is to be
deployed. Major concern of ALCO in a sense, will be managing interest rate risk
and in the process, liquidity risk.

60. ALCO FUNCTION
ALCO meets periodically to assess the information of each department in detail.
Generally ALCO fixes the time horizon for planning. ALCO meets frequently
when market is volatile, sensitive, ect, so that prompt policy decision and
strategies can be planned.
During its meeting ALCO review;
a) Minutes of the previous meeting.
b) Review of fund gap reports and other reports.
c) Current commercial and market rates, to ensure that loans are priced
appropriately.
d) Current liability and deposit pricing matrixes so as to ensure that funds are
priced in accordance with overall funding policy.
e) Prospective assessment of accessibility of funds at a price that will give a
reasonable and consistent return on investment.
f) Results of the implementation of funding strategies which are designed to
ensure that the bank has adequate funds for credit, investment and
deposit repayment.
ALM committee at Surat People‟s bank include
 General Manger
 Deputy General Manger
 Assistant General Manger
 Investment Department Executive
 EDP executive

61. ALM PROCESS
In comparison with the commercial bank the scope of business and line of
banking operation of co-operative banks are limited. BY considering the ways
and means of resources mobilization and also based on the degree of exposure
to new risk related lending and investment portfolio of co-operative banks
exclusively focus on the following three major areas.
A. Identification of Risk
B. Measurement of Risk
C. Management of Risk
The identification stage intensifies different types of risk encountered by bank
due to interest rate fluctuations.
In the next stage bank tries to measure those risk using different models
suggested by RBI.
And finally bank takes various steps for the management of risk.
Now let us see each step in detail.

62. STAGE 1- IDENTIFICATION OF RISK
There are different types of risk faced by the bank. In this first stage bank tries to
identify those risk, which causes gap in Assets and Liabilities.
The uncertainty of interest rate movements gave rise to interest rate risk thereby
causing banks to look for processes to manage their risk. In the wake of interest
rate risk came with liquidity risk as inherent components of risk for banks. The
recognition of these risks brought Assets Liability Management to the centre-
stage of financial intermediation.
Now let us see about both the risk which causes mismatch in ALM.
1. Interest Rate Risk
CATGORIES OF INTEREST RATE RISK AND THEIR IMPACT
MISMATCH RISK
Banks, as apart of their business of intermediation between the savers and the
investors in the economy, assume liabilities and create assets, which are of
different maturities and sizes. The liabilities and assets are priced differently and
the difference between the interest received on assets and interest paid on
liabilities is bank‟s net interest income. Essentially, assets and liabilities mature
or fall due for reprising at different time intervals. Obliviously, there is a reprising
mismatch between assets and liabilities. The deposits have to be reprised, may
be at higher interest rates, at the end of one year while assets will continue to
provide fix return. If interest rates rise by the time the deposit is due to mature,
bank will be able to raise new deposit only at higher interest rates prevailing in
the market. This will result in interest spread between deposits and investment
getting reduced and adversely affecting Net Interest Income (NII) of the bank.

63. Also, mere maturity matching between assets and liabilities need not necessarily
protect bank from mismatch risk, the reprising may be at shorter interval and can
create mismatch in reprising and resultant interest rate risk.
 BASIS RISK
The risk of interest rates attached to different group of banks assets and liabilities
changing by different degrees are called basis risk. Further, changes in deposit
interest typically lag behind loan rates. The complex linkages between interest
rates in different segment of the market (Call, Repos, CDs. Inter bank Term
Money, etc.) contribute to the basis risk. Typically, in a falling interest rate
scenario, it is possible that interest rate on assets may be lowered generally
while the deposit may continue at the contracted higher interest rates The
following illustration will make the concept of basis risk clear.
(Interest sensitivity Gap Position 1-30 days Bucket)
LIABILITIES ASSETS
Call Money 50 Treasury Bills 30
Repo 50 Advances 120
Deposits 100
Total 200 Total 150
Negative Gap 50
If the interest rate rises by 1% bank will lose 0.5 crore per year assuming that the
rise in interest will be uniformly applicable to all the time items of assets and
liabilities. But in real world interest rates on assets and liabilities do not change in
same proportions. For instance, Call may go up 1%, Repo by 0.5%, Deposits by
0.25%, T-Bills by 1% and advances by 0.75%. The following table shows that if
interest rate the impact on net interest income will be gain of 0.2% crore instead
of loss of 0.5% crore as in the above case when on basis risk was taken into
account.

64. INCREASE IN (LOSS) / GAIN
INTEREST RATE DUE TO
INTEREST
RATE RISE
Call Money 50 0.01 (0.5)
Repo 50 0.005 (0.25)
Deposits 100 0.0025 (0.25)
Total (1)
Treasury Bills 30 0.01 0.3
Advances 120 0.0075 0.9
Total 1.2
Net Impact On NII 0.2(1.2-1)
 YIELD CURVE RISK
On account of volatility in interest rates, the yields curve unpredictability and
often substantially, change in shape. If the interest rates on assets and liabilities
are pegged to the bench mark rates (like T-bills cut off rates), there is the risk
that the interest spread may decreases as term spread narrows down. Assume
that the bank has raised a floating rate deposit, which will be reprised 1% above
the 91 day T-Bills cutoff and invested the amount in a floating rate loan of same
reprising interval but a spread of involved, as the spread between the two
maturities of T-Bills narrowed.

65. Period 91Days Tb 364 Days Term Interest
Tb spread Spread
Between
Deposit
And Loan.
April 2005 6.26 6.82 0.56% 1.56%
June 2005 6.34 6.98 0.64% 1.64%
August 2005 6.56 7.12 0.56% 1.56%
March 2007 6.89 7.34 0.45% 1.45%
 EMBEDDED OPTION RISK
Traditionally, Banks provide an option to depositors to prematurely close the
deposits and to borrowers to prepay the advances. Banks customers would be
exercising the option at the time most unfavorable to the bank in other words,
depositors may prematurely close the deposits when interest rates increase and
redeposit at higher rates and when interest rate decline borrowers may option to
prepay the loans and renew the same at the lower rate. In both cases banks NII
is adversely affected.
 REINVESTMENT RISK
The expected yield on investment, generally indicated by yield to maturity, is
based on the important assumption that the bond will be held till maturity during
the life of the bond, the periodic coupons received will be reinvested at an
interest rate equal to YTM. These assumption can go wrong in which case
income from investments by way of coupons get reinvested at lower rates incase
the interest rate decline.

66.  NON-PAYING LIABILITIES
The NII of the bank would be buoyant if it has more non-paying liabilities like
current deposits, float funds, etc, the volume of such deposits become volatile
and may even decline if the corporate undertake final cash management. With
the prospect of improvement in the payment and settlement infrastructure, such
idle balances left in the account by clients are likely to decline. The bank would
therefore be required to replace such liabilities with interest paying liabilities and
these would enhance the interest rate and sensitivity in the banks balance sheet.
Thus the volatility in the levels of non-paying liabilities would cause the risk to the
NII of the bank.
 PRICE RISK
The values of investments change inversely to interest rates. Thus if interest rate
in the market increase, investment suffers depreciation and if interest rate
declines investment in bank portfolio gain in value. The price changes in
investments are on account of present values of each cash flow being altered
when discounted by the new interest rate. However, we can generalize the
concept and extend the same to all items of assets and liabilities of bank balance
sheet, which conceptually constitute series of expected cash flows and as such,
have present values (market values) which vary with market interest rates. It
follows thus, that all items of assets and liabilities for a bank are exposed to price
risk. Price risk will impact the values for assets and liabilities and in turn, market
value of net worth which the difference between markets value of assets and
liabilities.