In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.

Types of Loan:-

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

A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property.

The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.

Unsecured - Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:

Credit card debt, personal loans, bank overdrafts, credit facilities or lines of credit ,corporate bonds

The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.

Interest rates on unsecured loans are nearly always higher than for secured loans, because an unsecured lender's options for recourse against the borrower in the event of default are severely limited. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.

Loans can also be subcategorized according to whether the debtor is an individual person (consumer) or a business. Common personal loans include mortgage loans, car loans, home equity lines of credit, credit cards, installment loans and payday loans. The credit score of the borrower is a major component in and underwriting and interest rates (APR) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well. For car loans in the U.S., the average term was about 60 months in 2009.³

Loans to businesses are similar to the above, but also include commercial mortgages and corporate bonds. Underwriting is not based upon credit score but rather credit rating.

Loan payment

The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same value over time.

The fixed monthly

Payment = P a loan = L months = n monthly interest rate = c is:-

Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness. Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The Internal Revenue Code lists “Income from Discharge of Indebtedness” in Section 61(a) (12) as a source of gross income.¹

There are many different types of loans you can take out. When you’re looking to borrow money, it’s important that you know your options.

Open-Ended and Closed-Ended Loans –

Open-ended loans are loans that you can borrow over and over. Credit cards and lines of credit are the most common types of open-ended loans. With both of these loans, you have a credit limit that you can purchase against. Each time you make a purchase, your available credit decreases. As you make payments, your available increases allowing you to use the same credit over and over.

Closed-ended loans –

Closed-ended loans cannot be borrowed once they’ve been repaid. As you make payments on closed-ended loans, the balance of the loan goes down. However, you don’t have any available credit you can use on closed-ended loans. Instead, if you need to borrow more money, you’d have to apply for another loan. Common types of closed-ended loans include mortgage loans, auto loans, and student loans.

Conventional Loans –

When it comes to mortgage loans, another term “conventional loan” is often used. Conventional loans are those that aren’t insured by a government agency like the Federal Housing Administration (FHA), Rural Housing Service (RHS), or the Veterans Administration (VA). Conventional loans may be conforming, meaning they follow the guidelines set forth by Fannie Mae and Freddie Mac. Non-conforming loans don’t meet Fannie and Freddie qualifications.

Loans to Avoid –

Certain types of loans should be avoided. Payday loans are short-term loans borrowed using your next paycheck as guarantee for the loan. Payday loans have notoriously high annual percentage rates (APRs) and can be difficult to pay off. If you’re in a financial crunch, seek alternatives before taking out a payday loans.

Advance-fee loans –

Advance-fee loans aren’t really loans at all. In fact, they’re simply scams to get money from you. Advance-fee loans use different tactics to convince borrowers to send money to obtain the loan. Once the money is sent (usually wired), the “lender” typically disappears without ever sending the loan.⁴

General categories of loans

Most loans fall into three major categories: fixed-rate, adjustable-rate, and hybrid loans that combine features of both.

 Fixed-rate mortgages

As the name implies, a fixed-rate mortgage carries the same interest rate for the life of the loan. Traditionally, fixed-rate mortgages have been the most popular choice among homeowners, because the fixed monthly payment is easy to plan and budget for, and can help protect against inflation. Fixed-rate mortgages are most common in 30-year and 15-year terms, but recently more lenders have begun offering 20-year and 40-year loans.

 Adjustable-rate mortgages (ARM)

Adjustable-rate mortgages differ from fixed-rate mortgages in that the interest rate and monthly payment can change over the life of the loan. This is because the interest rate for an ARM is tied to an index (such as Treasury Securities) that may rise or fall over time. In order to protect against dramatic increases in the rate, ARM loans usually have caps that limit the rate from rising above a certain amount between adjustments (i.e. no more than 2 percent a year), as well as a ceiling on how much the rate can go up during the life of the loan (i.e. no more than 6 percent). With these protections and low introductory rates, ARM loans have become the most widely accepted alternative to fixed-rate mortgages.

 Hybrid loans

Hybrid loans combine features of both fixed-rate and adjustable-rate mortgages. Typically, a hybrid loan may start with a fixed-rate for a certain length of time, and then later convert to an adjustable-rate mortgage. However, be sure to check with your lender and find out how much the rate may increase after the conversion, as some hybrid loans do not have interest rate caps for the first adjustment period.

Other hybrid loans may start with a fixed interest rate for several years, and then later change to another (usually higher) fixed interest rate for the remainder of the loan term. Lenders frequently charge a lower introductory interest rate for hybrid loans vs. a traditional fixed-rate mortgage, which makes hybrid loans attractive to homeowners who desire the stability of a fixed-rate, but only plan to stay in their properties for a short time.

Balloon payments

A balloon payment refers to a loan that has a large, final payment due at the end of the loan. For example, there are currently fixed-rate loans which allow homeowners to make payments based on a 30-year loan, even though the entire balance of the loan may be due (the balloon payment) after 7 years. As with some hybrid loans, balloon loans may be attractive to homeowners who do not plan to stay in their house more than a short period of time.

Time as a factor in your loan choice

As has been discussed, the length of time you plan to own a property may have a strong influence on the type of loan you choose. For example, if you plan to stay in a home for 10 years or longer, a traditional fixed-rate mortgage may be your best bet. But if you plan on owning a home for a very short period (5 years or less), then the low introductory rate of an adjustable-rate mortgage may make the most financial sense. In general, ARMs have the lowest introductory interest rates, followed by hybrid loans, and then traditional fixed-rate mortgages.

FHA and VA loans

U.S. government loan programs such as those of the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA) are designed to promote home ownership for people who might not otherwise be able to qualify for a conventional loan. Both FHA and VA loans have lower qualifying ratios than conventional loans, and often require smaller or no down payments.

Bear in mind, however, that FHA and VA loans are not issued by the government; rather, the loans are made by private lenders. FHA loans are insured to the actual lender and VA loans are guaranteed in case the borrower defaults. Remember too, that while any U.S. citizen may apply for a FHA loan, VA loans are only available to veterans or their spouses and certain government employees.

Banks Loan in INDIA

Due to the unequal distribution of wealth, India has arrived at a situation where the affluent class gets richer and richer and the underprivileged becomes poorer. To bridge this financial gap and to satisfy their day to day requirements, Bank plays a vital role by offering various loans to the finance seekers. Hence every borrower should have prior knowledge on the various Bank Loans in India, which are eligible for meeting their financial objectives.

Types of Bank Loans Offered by Banks in India

The various Loans offered by Banks in India are mentioned as under:

Personal Loans

Personal Bank Loans are the credits which a bank offers to its customer to meet his instant personal requirements ranging from home renovation to purchasing of new laptop, a getaway with family or for reimbursing the credit card liabilities, for buying a new car or for child's education, etc. Personal loan simplifies the cash flow of the customer besides handling its immediate needs.

Home Loans

To buy a dream home is the dream of every person. Home Loan has helped in changing every Indian's dream into reality. However, the every increasing property rates and escalating rates of interest sometimes act as an obstacle. Therefore, before opting for a home loan it is advisable to check every prospect of the product.

Eligibility	For salaried Individuals	For Self-Employed Individuals
Minimum and Maximum Age	21 years and 65 years respectively	21 years and 70 years respectively
Maximum Annual Income	1,00,000	1,50,000
Minimum years in service/ business	1 year	3 years
Loan Amount	2,00,000 to	2,00,00,000
----	2,00,000 to	2,00,00,000
Loan Tenure	5 years to 20 years	5 years to 20 years
Interest Rates	9-16%	9-16%

Tax Benefits on Home Loans: Any person who opts for home loan is entitled for tax benefits under Income Tax Act, 1961 on principal and the interest amount in the form of deductions from the chargeable earnings.

Bank Loans against Property

Property Loan or Loan against property is a kind of loan which is allowed by the bank on the condition of keeping the customer's current assets as a security with them. These loans are very useful when other resources of financing get exhausted.

It is significant to recognize that a loan against property is not similar to mortgage. While loan against property is obtained from the bank by allocating customer's current assets as a security against the credit, a mortgage is an instrument for purchasing an asset. On the basis of the current market situations, the paid up cost of the asset and other aspects, the cost of the credit against asset can range anywhere from 40% to 60% of the asset costs.

Eligibility	For salaried Individuals	For Self-Employed Individuals
Minimum and Maximum Age	21 years and 60 years respectively	21 years and 65 years respectively
Maximum Annual Income	1,20,000	1,50,000
Minimum years in service/ business	1 year	3 years
Loan Amount	2,00,000 to	1,50,00,000
Loan Tenure	1 years to 15 years	1 years to 15 years
Loan to cost ratio	60% of residential cost	50% of commercial cost
60% of residential cost	50% of commercial cost
Tax Rebate	NIL	NIL

Business Loans

Before starting a business, the entrepreneur should be mentally and financially prepared to encounter the fiscal setbacks during the process. To bail the companies out from the fiscal crunch, several banks in India offers business Loans both for meeting urgent official growth and expenses. Other details of Business Loans offered by Banks in India are:

Car Loans

Every individual want to own a car. Hence, the need for car loans emerges at some point or the other. While selecting a car loan it is always wise to scrutinize the various options accessible in the market besides analyzing its fiscal suitability.

Eligibility	For salaried Individuals	For Self-Employed Individuals
Minimum and Maximum Age	21 years and 60 years respectively	21 years and 65 years respectively
Maximum Annual Income	1,00,000	60,000
Loan Amount	1,00,000 (new) and ` 50,000 (old) to	20,00,000
Loan Tenure	1 years to 7 years	1 years to 7 years
Loan to cost ratio	85-90% of car cost	85-90% of car cost

Education Loans

Education Loans offered by various banks in India provide much required assistance to fund your child's education when all other resources of finance get exhausted. Education Loans are offered by almost every Indian bank thus providing ample opportunity to students to undergo higher education both in India and abroad.

Eligibility	For Students
Minimum and Maximum Age	16 years and 26 years respectively
Expenses covered	course and examination fee, refundable deposits, procurement of books, travel expenses
Loan Amount for studies in India	Upto ` 10,00,000
Loan Amount for studies abroad	Upto ` 20,00,000
Repayment Period	5-7 years

Above table estimate may vary from bank to bank or annual report.⁵

Loan Modification Programs

Since the mortgage crisis took flight, “loan modification programs” have become all the rage. Instead of originating new loans, former mortgage brokers and loan officers are shifting focus to reworking outstanding loans that have fallen behind in payments or are in danger of doing so. Ironically, many are getting paid to reverse the damage they caused to begin with. In the past couple years, millions of borrowers have fallen behind on their monthly mortgage payments, creating an unprecedented foreclosure epidemic. And because home prices are falling, many are seeing their home equity sucked dry or even worse, finding themselves underwater on their mortgages.

This environment has forced banks and mortgage lenders to begin modifying loans in an effort to recoup losses and prevent foreclosures, which puts even more downward pressure on home prices. Things have become so dire that a number of banks have initiated their own streamlined loan modification programs to complement their standard loss mitigation efforts.

There are also foreclosure prevention coalitions, such as Hope Now, which provide free assistance to struggling homeowners through a streamlined process using existing loss mitigation tools.

So now that we have a little background, let’s take a look at some of the most common loan modification options available to at-risk borrowers.

Repayment Plan

A repayment plan is one the most simple and typically most common loan workout options available to borrowers in arrears (behind on payments). It’s not really considered a loan modification, because the terms of the loan are essentially unchanged. Basically, the bank or lender will agree to take your delinquent payments and add them to your current monthly payments until you become current again. So if you owe say $4,000 in arrearage, they may add $500 to your monthly payment for eight months until you’re back on track.

Critics have panned repayment plans because they fail to address the affordability issues tied to delinquent loans. Because the debt is simply redistributed, borrowers who can’t afford the terms of their loan will likely re-default within months of receiving a repayment plan, especially as the monthly payment increases as a result.

Interest Rate Reduction

A more favorable loan modification is one that involves an interest rate reduction, so the monthly payment is actually made more affordable. In this case, the loan will be re-underwritten to determine what size of payment you would qualify for at a given debt-to-income ratio, generally around 38 percent.

The interest rate may be temporarily lowered, for a period of say five years, and then steadily increase, to the market rate at the time of modification, or it could be fixed for life. This is clearly a favorable option, as it cuts the borrower’s monthly payments for good.

Extended Amortization

Another relatively easy ways for banks and lenders to increase affordability and reduce monthly mortgage payments is to extend the amortization of the loan. Instead of a standard 30-year amortization period, the loan may be stretched another 10 years, pushing payments to a more acceptable level for the borrower.

Principal Reduction

While banks and lenders aren’t generally keen to offer principal reductions, it’s becoming increasingly common as desperation grows. Since so many borrowers are underwater, banks have little choice but to reduce the balance of the existing mortgage to put the borrower in a positive equity position. However, there are strings attached. In exchange for a principal reduction, some banks want a piece of the future appreciation, assuming there is any. This has created a huge hurdle, as no one can agree on what’s fair.

Partial Claim

This method, which is only available for FHA loans, creates an interest-free second mortgage that contains up to 12 months of accrued mortgage payments. It brings your account up to date immediately, and must be paid off when the first mortgage is paid off or the property sold.⁶

N.P.A MANAGEMENT –

Non-performing assets, also called non-performing loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time.²

The most calamitous problem facing banks all over the world in recent times is spiraling non performing asset (NPA). Which are affecting their viability and solvency and thus posing challenge to their ultimate survival.

NPA adversely affect lending activity of banks as non recovery of loan installment as also interest on the loan portfolio negates the effectiveness of credit – dispensation process.

Non recovery of loan also hurt the profitability of banks, besides banks with high level of NPA have to carry reserves and provision and to provide cushion for loan losses.

Banks have to make provisions on NPA from out of income learned by them on performing asset.³

Narsimham Committee, adopted by Indian banks from 1992-93 which culminate in giving a focus to NPA.⁷

All advances are required to be reviewed at regular intervals and are classified into two principle categories as under:

a- Performing Asset i.e. where the advances are earning interest income on an accrual basis. This includes regular and temporarily irregular accounts, as specified from time to time by the BANK/RBI.

b- Non Performing Asset i.e. where advances are not earning interest on an accrual basis. This includes irregular accounts, as specified from time to time by the BANK/RBI.

The accrual concept of accounting convention means that if a loan made by a bank fails to fetch a return in the norm of interest realized from the borrower, the bank has no right to book that interest chargeable as income in its balance sheet in that event it lignifies that the asst s not performing i.e., not yielding any income to the bank. This is the essence of income recognition norms.

Thus an asset which ceases to yield income for the bank should be treated as NPA, and any income from loan asset should not be booked as income until it is actually recovered. So, banks which have charged interest to such loan accounts park it in “Interest not collected account {INCA} until recover, and on recovery it from INC account and credit interest account.”

The non performing assets are further classified on the basis of period of irregularity and prospects of recovery as under:

a. Sub-Standard Assets – where the amount due remains unpaid for a certain specified period as determined from time to time by the RBI/BANK, but prospects of recovery of outstanding are otherwise good.

b. Doubtful Assets – where the amount due remains unpaid for more than the period prescribed for sub-standard category as per RBI/BANK norms announced in this regard from time to time, and on the basis of currently known fact, either full or a substantial portion of the outstanding are secured by tangible realizable security.

c. Loss Assets – where loss has been identified either for whole or substantial portion of the outstanding by the bank, or by the internal/ external auditor or by the RBI inspector. This asset is not secured by any substantial amount of tangible security, as such only option available is to write off either wholly or partly of outstanding.

Date of identification of NPA: NPAs are to be identified as on balance sheet date, but the age of NPAs are to reckoned from the date on which slippage occurred from standard on the basis of IRAC norms.

Norms for identification of NPA –

the norm for identification of NPA are announced by bank/RBI from time to time. The norms in force at present (March 2002) are as under:

Cash Credit/ Overdrafts Accounts: Cash Credit/ Overdrafts become NPA when an account is out of order as on the year ending 31^st March.

OUT OF ORDER:

The out of order position is determined on the basis of outstanding, limit, drawing power, credit in the accounts.

Out of order means:

1. Where outstanding are continuously for a period of two quarters in excess of the sanctioned limit/ DP. Or,

2. Where outstanding are less than the sectioned limit/ DP but there are no credits in the account continuously for two quarters ended on 31^st March. Or,

3. Where outstand are less than sanctioned limit/DP but credits in the accounts during the last two quarters are less than the amount debited as interest during the corresponding two quarters.

2. Term Loans: Term loans become NPA, if interest/ or installments of principle remain past due for a period of 2 quarters.

PAST DUE: An amount (interest/or installments) become past due if it remains unpaid as on due date.

ATL and ACC: Accounts become NPAs when installments and/or inters after becoming due remain unpaid for two harvesting seasons but not exceeding two Half-Years as on the date of balance sheet.

UPGRADATION of NPA to PA: NPA will be upgraded to PA (Standard asset) only after recovery of all dues in arrears as on the next balance sheet date.

Provision to be made:

Standard: 0.25%

Substandard: 10% flat.

Doubtful Asset up to 1 year 20% on Secured portion 100 % on unsecured portion.

Doubtful Asser from 1 to 3 years 50% on secured portion 100% on unsecured portion.

Loss 100% flat

Note: while arriving at the provision against NPA, balances in the following should be deducted from the outstand:

a- Interest not collected account (INC)

b- Interest Suspense account, if any.

c- Unrealized Interest of the previous year.

Provision is not required to be made against value/ surrender value of security like FDR/ NSCs LIC policies an receivable portion of DICGC/ ECGC cover.

Valuation of security: -

a- Security (Movable / Immovable) required being valued every year.

b- To be estimated on a realistic basis.

c- Valuation of inventory charged should be based on stock statement, which should be dated as close to the annual closing date as possible.

d- Net worth of borrower /guarantor should not be taken.

Booking of recovery in NPA:

a- Income from NPA should be booked as income only when it is actually received, even if the recovery is partial.

b- Payments made from fresh / additional limits into existing NPA, are not regarded as actual income.

Management of Non Performing Assets:

As a ground level operating functionary, an officer has to keep constant watch over the non performing assets at the branch. He has not only to supervise and ensure that the assets remain performing but also see that once they become non performing, effective measures are initiated to get full recovery and where this is not possible, prompt action is to be initiated to get rid off the NPA from the branch books.⁸

The term "wilful default" has been redefined in supersession of the earlier definition as under:

A "wilful default" would be deemed to have occurred if any of the following events is noted :-

(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.

(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

(d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.⁹

Role of Internal Audit / Inspection

The aspect of diversion of funds by the borrowers should be adequately looked into while conducting internal audit/inspection of their offices/branches and periodical reviews on cases of wilful defaults should be submitted to the Audit Committee of the bank.

Banks’ NPA Management Policy:

NPA management policy seeks to lay down the bank’s policy on management and recovery of Non Performing Assets and proactive initiatives to prevent generation of NPA.

Basic Tenets of the policy:

 Sop slippage of performing assets to non performing assets through early identification on the basis of early warning signals and initiation of corrective action.

 Once the assets are classified as NPA the branch / bank should redouble efforts to reduce the quantum of NPA.

Some of the ways for reducing the NPA areas under:

Recovery: Sustained efforts should be made to recover the outstand, while keeping the documents live and in force.

“Cash by case Analysis” should be done to find out if the default is due to reasons beyond the control of the borrowers. If so conversion / reconversion / rephasement / rescheduling of loan / loan installment should be done in all such cases.

While rephasing / rescheduling the term loan sanctioned for creation / acquiring of assets, care should be taken that the loan repayment period should not go beyond the economic life of the asset and total loan period should not exceed 15 years. Attachment and realization through sale of hypothecated / pledged / mortgaged assets. Seizure and sale of securities without the intervention of court is one of the modes of recovery of NPA. Though unpleasant, it is an effective measure of recovery. Banks may seize the securities by engaging its own staff. The services of private agency may also be engaged for seizure of security/ assets hypothecated to bank. In all such cases the decision has to be taken by the controlling Authority on a case basis depending on the individual merits of case.

Initiation of legal action, where filing of civil suits in the court of law is expected to yield results. Legal action under the model bills passed by the state Government, if any, may also be considered. The special tribunals for recovery of bank’s dues may be approached for recovery of dues wherever permitted.

Execution of Decree, Compromise, Compromise through lok-adalt, Write off.

The ways suggested above are only illustrative and exhaustive.

Non legal aspects of NPA reduction

Possible ways of reducing NPA without legal actions are:

1. Proper formulation of project and roper appraisal.

2. Proper credit monitoring measures.

3. Rephasement of term loans wherever required.

4. Conversion of crop loan to term loans where warranted.

5. Seizures and sale of goods hypothecated / pledged Compromise.⁸

KYC is useful to reduce Non performing Asset and also helpful to audit the source of Income of Customer for Bank

Know Your Customer (KYC) refers to both:

The activities of customer due diligence that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them

And the bank regulation which governs those activities

In the USA, KYC is typically a policy and process implemented to conform to a customer identification program (CIP) mandated under the Bank Secrecy Act and USA PATRIOT Act. Know your customer policies are becoming increasingly important globally to prevent identity, financial fraud, money laundering and terrorist financing.

Banks doing KYC monitoring for anti-money laundering (AML) and checks relating to combating the financing of terrorism (CFT) increasingly use specialized software such as names analysis software and risk scoring algorithm software. Typically, these software systems will identify potentially suspicious or risky customer accounts. The systems create "alerts" which are then subject to manual due or Enhanced Due Diligence (EDD) investigative processes.

KYC has different connotations and the definition above is from an AML/CFT perspective.

Know Your Customer processes are also employed by companies of all sizes for the purpose of ensuring their proposed agents', consultants' or distributors' anti-bribery compliance. Banks, insurers and export credit agencies are increasingly demanding that customers provide detailed anti-corruption due diligence information, to verify their probity and integrity.

Some specialist consultancies help multinational companies and SMEs conduct Know Your Customer processes when entering new markets.

AML-KYC day is observed in India on 1 August. If 1 August happens to be holiday, it is observed next day.

The objective of know your customer guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. Know your customer procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. Banks should frame their KYC policies incorporating the following four key elements:

Customer Acceptance Policy; Customer Identification Procedures; Monitoring of Transactions; and Risk management.

For the purpose of KYC policy, a ‘Customer’ may be defined as :

A person or entity that maintains an account and/or has a business relationship with the bank;

One on whose behalf the account is maintained (i.e. the beneficial owner); beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and Any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

Laws by country

India: The Reserve Bank of India introduced KYC guidelines for all banks in 2002. In 2004, RBI directed that all banks ensure that they are fully compliant with the KYC provisions before December 31, 2005. The purpose was to prevent money laundering, terrorist financing and theft.

South Africa: The Financial Intelligence Centre Act 38 of 2001 (FICA)

USA: Pursuant to the USA Patriot Act of 2001, the Secretary of the Treasury was required to finalize regulations before October 26, 2002, so KYC is now mandatory for all US banks

New Zealand: Updated KYC laws were enacted in late 2009, and entered into force in 2010. KYC is mandatory for all registered banks and financial institutions.¹¹

But let us first understand what KYC norms actually mean.

In order to prevent identity theft, identity fraud, money laundering, terrorist financing, etc, the RBI had directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account.

This involves verifying customers' identity and address by asking them to submit documents that are accepted as relevant proof. Mandatory details required under KYC norms are proof of identity and proof of address. Passport, voter's ID card, PAN card or driving license are accepted as proof of identity, and proof of residence can be a ration card, an electricity or telephone bill or a letter from the employer or any recognized public authority certifying the address.

Some banks may even ask for verification by an existing account holder. Though the standard documents which are accepted as proof of identity and residence remain the same across various banks, some deviations are permitted, which differ from bank to bank. So, all documents shall be checked against banks requirements to ascertain if those match or not before initiating an account opening process with any bank. Thus opening a new bank account is no longer a cake walk.

Those are the basic requirements of KYC to identify a customer at the account opening stage.

Let's check other aspects of KYC.

To prevent the possible misuse of banking activities for anti-national or illegal activities, the RBI has given various directives to banks:

Strengthening the banks' 'Internal Control System' by allocating duties and responsibilities clearly, and periodically monitoring them.

Before giving any finance at branch level, making sure that the person has no links with notified terrorist entities and reporting any such 'suspect;' accounts to the government.

Regular 'Internal Audit' by internal and concurrent auditors to check if the KYC guidelines are being properly adhered to or not by banks.

Most important, banks must keep an eye out for all banking transactions and identify suspicious ones. Such transactions will be immediately reported to the bank's head office and authorities and norms shall also be laid down for freezing of such accounts.

In 2004, the RBI had come up with more specific guidelines regarding KYC. These were divided into four parts:

Customer Acceptance Policy: All banks shall develop criteria for accepting any person as their customer to restrict any anonymous accounts and ensure documentation mentioned in KYC.

Customer Identification Procedures: Customer to be identified not only while opening the account, but also at the time when the bank has a doubt about his transactions.

Monitoring of Transactions:

KYC can be effective by regular monitoring of transactions. Identifying an abnormal or unusual transaction and keeping a watch on higher risk group of the account is essential in monitoring transactions.

Risk management:

This is about managing internal work to reduce the risk of any unwanted activity. Managing responsibilities, duties and various audits plus regular employee training for KYC procedures.

These guidelines also specify that KYC should be implemented for existing account holders on the basis of materiality and risk segments. The RBI had also directed all banks to make a policy for implementing 'Know Your Customer' and anti-money laundering measures and remain fully compliant with given guidelines before December 31, 2005.

But there have been instances of lapses in the implementation of KYC guidelines by several banks. That resulted into the infamous IPO scam. Since January 2006, the RBI has slapped penalties on several leading banks. Till date we have not come across any case of money laundering, terrorist financing or transfer of funds for anti-national activities, but in case of any more lapses in the 'Know Your Customer' guidelines, the threat of the misuse of the banking channels for anti-national activities always lurks around the corner.

MATERIAL AND METHOD:

Method of Research is totally based on Market Study, study of NPA cases and management by Bank and by various references.

RESULT:

After NPA case study it is necessary for management to keep monitoring on given Loan and annually check the status of assets and Proper credit monitoring measures. Try to practice with KYC given by RBI.

DISCUSSION:

It is better to keep eagle on every given loan and practice with KYC as it is not only use by INDIA but also Newzeland, South Africa and United State of America. Constantly measure each EMI paid by Customer and if it not submitting by Customer after intimation management may apply legal or non legal way of NPA management.

Bank must be sure that whether customer is coming under either Wilful default or Market failure if it is Market failure so treat case with Loan Modification as mention above.

REFERENCES-

1- http://en.wikipedia.org/wiki/Loan

2- http://moneyterms.co.uk/npa/

3- http://www.indiastudychhanel.com/resource

4- http://credit.about.com/od/avoidingdebt/a/types-of-loans.htm

5- http://business.mapsofindia.com/banks-in-india/loans.html

6- http://www.thetruthaboutmortgage.com/loan-modification-programs/

7- Training Manual for Pos/TOs volume III, State Bank of India, January 2012 pg. no. 197

8- Foundation training program phase III for probationary officers in agricultural banking and rural development, State Bank of India Hyderabad- 500019 pg no. 164 to 167.

9- http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6539#A3

10- http://www.rediff.com/money/2006/sep/12guest.htm

11- http://en.wikipedia.org/wiki/Know_your_customer

Received on 05.11.2012 Modified on 23.11.2012

Asian J. Management 3(4): Oct.-Dec., 2012 page 229-237