Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances - Projects under Implementation

Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances - Projects under Implementation

RBI/2009-10/424
UBD.BPD.PCB.Cir.No. 59 /09.14.000 / 2009-10

April 23, 2010

The Chief Executive Officer
All Primary (Urban) Cooperative Banks

Dear Sir,

Prudential Norms on Income Recognition, Asset Classification and
Provisioning Pertaining to Advances - Projects under Implementation

'Project Loan' would mean any term loan which has been extended for the purpose of setting up of an economic venture. Banks must fix a Date of Commencement of Commercial Operations (DCCO) for all project loans at the time of sanction of the loan / financial closure* (in the case of multiple banking or consortium arrangements). For the purpose of IRAC norms, all project loans may be divided into the following two categories; (i) Project Loans for infrastructure sector (ii) Project Loans for non-infrastructure sector

2. Guidelines on Asset Classification of Projects under Implementation

2.1 Project Loans for Infrastructure Sector

2.1.1 A loan for an infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.1.3 to 2.1.5 below.

2.1.2 A loan for an infrastructure project will be classified as NPA if it fails to commence commercial operations within two years from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.1.3 to 2.1.5 below.

2.1.3 There may be occasions when completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring / rescheduling of loans by banks. If a project loan classified as 'standard asset' is restructured any time during the period up to two years from the original date of commencement of commercial operations (DCCO), in accordance with the instructions contained in our circular UBD.PCB.BPD.No. 53 / 13.05.000 / 2008-09 dated March 6, 2009 on prudential guidelines on restructuring of advances, it can be retained as a standard asset if the fresh DCCO is fixed within the following limits, and further provided the account continues to be serviced as per the restructured terms:

(a) Infrastructure Projects involving court cases

Up to another 2 years (beyond the existing extended period of 2 years i.e total extension of 4 years), in case the reason for extension of date of commencement of production is arbitration proceedings or a court case.

(b) Infrastructure Projects delayed for other reasons beyond the control of promoters

Up to another 1 year (beyond the existing extended period of 2 years i.e. total extension of 3 years), in other than court cases.

2.1.4 The dispensation in para 2.1.3 is subject to the condition that the application for restructuring should be received before the expiry of period of two years from the original DCCO and when the account is still standard as per record of recovery. The other conditions applicable would be :

In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond two years from the original DCCO, considering the high risk involved in such restructured accounts.

Banks should maintain provisions on such accounts as long as these are classified as standard assets as under :

Until two years from the original DCCO 0.40%

During the third and the fourth years after the original DCCO.
1.00%


2.1.5 For the purpose of these guidelines, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same.

2.2 Project Loans for Non-Infrastructure Sector

2.2.1 A loan for a non-infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.2.3 to 2.2.5 below.

2.2.2. A loan for a non-infrastructure project will be classified as NPA if it fails to commence commercial operations within six months from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.2.3 to 2.2.4 below.

2.2.3 In case of non-infrastructure projects, if the delay in commencement of commercial operations extends beyond the period of six months from the date of completion as determined at the time of financial closure, banks can prescribe a fresh DCCO, and retain the "standard" classification by undertaking restructuring of accounts in accordance with the provisions contained in our circular dated March 6, 2009, provided the fresh DCCO does not extend beyond a period of twelve months from the original DCCO. This would among others also imply that the restructuring application is received before the expiry of six months from the original DCCO, and when the account is still "standard" as per the record of recovery.

The other conditions applicable would be :

In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond six months from the original DCCO, considering the high risk involved in such restructured accounts.

Banks should maintain provisions on such accounts as long as these are classified as standard assets as under :

Until the first six months from the original DCCO 0.40%

During the next six months
1.00%


2.2.4 For this purpose, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same.

2.3. These guidelines will however not be applicable to restructuring of advances referred to in para 7.1.3 of circular dated March 6, 2009 viz., commercial real estate and housing loans.

2.4 Other Issues

2.4.1 All other aspects of restructuring of project loans before commencement of commercial operations would be governed by the provisions of our circular dated March 6, 2009. Restructuring of project loans after commencement of commercial operations will also be governed by these instructions.

2.4.2 Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if :

(i) The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.

(ii) The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay.

(iii) The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCP.

(iv) On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch.

3. The definition of infrastructure lending and exposure to commercial real estate are given Annex 1 II respectively.

4. Please acknowledge receipt to the Regional Office concerned.

Yours faithfully

(A.K. Khound)
Chief General Manager

* For greenfield projects, financial closure is defined as a legally binding commitment of equity holders and debt financiers to provide or mobilise funding for the project. Such funding must account for a significant part of the project cost which should not be less than 90 per cent of the total project cost securing the construction of the facility.


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Annex 1

Definition of 'Infrastructure Lending'



Any credit facility in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an infrastructure facility as specified below falls within the definition of "infrastructure lending". In other words, a credit facility provided to a borrower company engaged in


*
developing or


*
operating and maintaining, or


*
developing, operating and maintaining any infrastructure facility that is a project in any of the following sectors, or any infrastructure facility of a similar nature :



i.
a road, including toll road, a bridge or a rail system;



ii.
a highway project including other activities being an integral part of the highway project;



iii.
a port, airport, inland waterway or inland port;



iv.
a water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system;



v.
telecommunication services whether basic or cellular, including radio paging, domestic satellite service (i.e., a satellite owned and operated by an Indian company for providing telecommunication service), network of trunking, broadband network and internet services;



vi.
An industrial park or Special Economic Zone;



vii.
generation or generation and distribution of power;



viii.
transmission or distribution of power by laying a network of new transmission or distribution lines;



ix.
construction relating to projects involving agro-processing and supply of inputs to agriculture;



x.
construction for preservation and storage of processed agro-products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality;



xi.
construction of educational institutions and hospitals;



xii.
laying down and / or maintenance of gas, crude oil and petroleum pipelines.



xiii.
any other infrastructure facility of similar nature.


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Annex 2

Definition of Commercial Real Estate Exposure (CRE)

Real Estate is generally defined as an immovable asset - land (earth space) and the permanently attached improvements to it. Income-producing real estate (IPRE) is defined in para 226 of the Basel II Framework as under :

"Income-producing real estate (IPRE) refers to a method of providing funding to real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels) where the prospects for repayment and recovery on the exposure depend primarily on the cash flows generated by the asset. The primary source of these cash flows would generally be lease or rental payments or the sale of the asset. The borrower may be, but is not required to be, an SPE (Special Purpose Entity), an operating company focused on real estate construction or holdings, or an operating company with sources of revenue other than real estate. The distinguishing characteristic of IPRE versus other corporate exposures that are collateralised by real estate is the strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property".

2. The Income Producing Real Estate (IPRE) is synonymous with Commercial Real Estate (CRE). From the definition of IPRE given above, it may be seen that for an exposure to be classified as IPRE / CRE, the essential feature would be that the funding will result in the creation / acquisition of real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels) where the prospects for repayment would depend primarily on the cash flows generated by the asset. Additionally, the prospect of recovery in the event of default would also depend primarily on the cash flows generated from such funded asset which is taken as security, as would generally be the case. The primary source of cash flow (i.e. more than 50% of cash flows) for repayment would generally be lease or rental payments or the sale of the assets as also for recovery in the event of default where such asset is taken as security.

3. In certain cases where the exposure may not be directly linked to the creation or acquisition of CRE but the repayment would come from the cash flows generated by CRE. For example, exposures taken against existing commercial real estate whose prospects of repayments primarily depend on rental / sale proceeds of the real estate should be classified as CRE. Other such cases may include ; extension of guarantees on behalf of companies engaged in commercial real estate activities, corporate loans extended to real estate companies etc.

4. It follows from the definition at para 2 and 3 above that if the repayment primarily depends on other factors such as operating profit from business operations, quality of goods and services, tourist arrivals etc., the exposure would not be counted as Commercial Real Estate.

5. UCBs should not extend finance for acquisition of land even if it is part of a project. However, finance can be granted to individuals for purchase of a plot, provided a declaration is obtained from the borrower that he intends to construct a house on the said plot, within such period as may be laid down by the banks themselves.

Simultaneous Classification of CRE into other Regulatory Categories

6. It is possible for an exposure to get classified simultaneously into more than one category, real estate, CRE, infrastructure etc as different classifications are driven by different considerations. In such cases, the exposure would be reckoned for regulatory / prudential exposure limit, if any, fixed by RBI or by the bank itself, for all the categories to which the exposure is assigned. For the purpose of capital adequacy, the largest of the risk weights applicable among all the categories would be applicable for the exposure. The rationale for such an approach is that, while at times certain classifications / categorizations could be driven by socio-economic considerations and may be aimed at encouraging flow of credit towards certain activities, these exposures should be subjected to appropriate risk management / prudential / capital adequacy norms so as to address the risk inherent in them. Similarly, if an exposure has sensitivity to more than one risk factor it should be subjected to the risk management framework applicable to all the relevant risk factors.

7. In order to assist banks in determining as to whether a particular exposure should be classified as CRE or not, some examples based on the principles described above are given below. Based on the above principles and illustrations given, banks should be able to determine, whether an exposure not included in the illustrative examples is a CRE or not and should record a reasoned note justifying the classification.

Illustrative Examples

A. Exposures which should be classified as CRE

1. Loans extended to builders for construction of any property which is intended to be sold or given on lease (e.g. loans extended to builders for housing buildings, hotels, restaurants, gymnasiums, hospitals, condominiums, shopping malls, office blocks, theatres, amusement parks, cold storages, warehouses, educational institutions , industrial parks) In such cases, the source of repayment in normal course would be the cash flows generated by the sale / lease rentals of the property. In case of default of the loan, the recovery will also be made from sale of the property if the exposure is secured by these assets as would generally be the case.

2. Loans for Multiple Houses intended to be rented out

The housing loans extended in cases where houses are rented out need to be treated differently. If the total number of such units is more than two, the exposure for the third unit onwards may be treated as CRE Exposure as the borrower may be renting these housing units and the rental income would be the primary source of repayment.

3. Loans for integrated Township Projects

Where the CRE is part of a big project which has small non-CRE component, it will be classified as CRE exposure since the primary source of repayment for such exposures would be the sale proceeds of buildings meant for sale.

4. Exposures to Real Estate Companies

In some cases exposure to real estate companies is not directly linked to the creation or acquisition of CRE, but the repayment would come from the cash flows generated by Commercial Real Estate. Such exposures illustratively could be :

Corporate Loans extended to these companies
Investments made in the debt instruments of these companies
Extension of guarantees on behalf of these companies
5. General Purpose loans where repayment is dependent on real estate prices
Exposures intended to be repaid out of rentals / sale proceeds generated by the existing CRE owned by the borrower, where the finance may have been extended for a general purpose.

B. Exposures which may not be classified as CRE

1. Exposures to entrepreneurs for acquiring real estate for the purpose of their carrying on business activities, which would be serviced out of the cash flows generated by those business activities. The exposure could be secured by the real estate where the activity is carried out, as would generally be the case, or could even be unsecured.

(a) Loans extended for construction of a cinema theatre, establishment of an amusement park, hotels and hospitals, cold storages, warehouses, educational institutions, running haircutting saloons and beauty parlours, restaurant, gymnasium etc. to those entrepreneurs who themselves run these ventures would fall in this category. Such loans would generally be secured by these properties.

For instance, in the case of hotels and hospitals, the source of repayment in normal course would be the cash flows generated by the services rendered by the hotel and hospital. In the case of a hotel, the cash flows would be mainly sensitive to the factors influencing the flow of tourism, not directly to the fluctuations in the real estate prices. In the case of a hospital, the cash flows in normal course would be sensitive to the quality of doctors and other diagnostic services provided by the hospital. In these cases, the source of repayment might also depend to some extent upon the real estate prices to the extent the fluctuation in prices influence the room rents, but it will be a minor factor in determining the overall cash flows. In these cases, however, the recovery in case of default, if the exposure is secured by the Commercial Real Estate, would depend upon the sale price of the hotel / hospital as well as upon the maintenance and quality of equipment and furnishings.

The above principle will also be applicable in the cases where the developers / owners of the real estate assets (hotels, hospitals, warehouses, etc.) lease out the assets on revenue sharing or profit sharing arrangement and the repayment of exposure depends upon the cash flows generated by the services rendered, instead of fixed lease rentals.

(b) Loans extended to entrepreneurs, for setting up industrial units will also fall in this category. In such cases, the repayment would be made from the cash flows generated by the industrial unit from sale of the material produced which would mainly depend upon demand and supply factors. The recovery in case of default may partly depend upon the sale of land and building if secured by these assets. Thus, it may be seen that in these cases the real estate prices do not affect repayment though recovery of the loan could partly be from sale of real estate.

2. Loans extended to a company for a specific purpose, not linked to a real estate activity, which is engaged in mixed activities including real estate activity. For instance, a company has two divisions. One division is engaged in real estate activity, and other division is engaged in power production. An infrastructure loan, for setting up of a power plant extended to such a company, to be repaid by the sale of electricity would not be classified as CRE. The exposure may or may not be secured by plant and machinery

3. Loans extended against the Security of future rent receivables

A few banks have formulated schemes where the owners of existing real estate such as shopping malls, office premises, etc. have been offered finance to be repaid out of the rentals generated by these properties. Even though such exposures do not result in funding / acquisition of commercial real estate, the repayment might be sensitive to fall in real estate rentals and such exposures should be classified as CRE. However, if there are certain in built safety conditions which have the effect of delinking the repayments from real estate price volatility like, the lease rental agreement between the lessor and lessee has a lock in period which is not shorter than the tenor of loan and there is no clause which allows a downward revision in the rentals during the period covered by the loan banks can classify such exposures as non CRE. Banks may, however, record a reasoned note in all such cases.

4. Credit facilities provided to construction companies which work as Contractors

The working capital facilities extended to construction companies working as contractors, rather than builders, will not be treated as CRE exposures because the repayment would depend upon the contractual payments received in accordance with the progress in completion of work.

5. Financing of acquisition / renovation of self-owned office / company premises

Such exposures will not be treated as CRE exposures because the repayment will come from company revenues. The exposures to industrial units towards setting up of units or projects and working capital requirement, etc. would not be treated as CRE Exposures.

Read more »

Historic Settlement

The so called Historic Settlement has shown how much poor vision our top most union leadership has. After the meeting with IBA when it was decided that all employees / officers who are in the service have to contribute 1.6 times of November, 2007 salary towards their contribution towards giving another chance to PF optees. In all the circulars it was clearly indicated that this has been done with a view so that no legal hurdles are raised. Mr. Nadaf, who himself patted for the Fair settlement, has written that this is necessary as on earlier occasions (read earlier 7th and 8th settlements), PF optees have sacrificed their share.

As late as on 24/04/10 evening Mr.NADAF's Silver Jubilee speech on AIBOC's HISTORIC achievement of 9th BP, he had again reiterated before the members that pension-optees have to contribute as PF optees earlier had foregone their proportionate share in earlier revisions. However, now the same leaders have changed their tones and have gone for agreement with IBA wherein existing pension optees have been exempted from payments and the contribution from PF optees has been increased from 1.6 times to 2.8 times of November, 2007 Pay.

We give below the extracts from the so called "DETAILS OF TNBEF CC MEETING HELD ON 22/8/2009 -CHENNAI, as circulated earlier:

1 The CC congratulated the Units for successful implementation the 6/7 th August Strike.

2 Com CHV elaborately explained the happenings before the strike call and about the CLC proceeding on 7th Aug 2009.

3 The raising of the issue inside the parliament by various opposition leaders forced the Govt to reverse their decisions.

4 It was agreed to offer 17.5 % and also to accept the earlier formula of Pension Option.

5 Sharing the cost of Pension in each settlement is nothing new and it has been there right from the implementation of Pension Settlements

in the Year 1993 - Pension settlement - Pension in lieu of PF 10 %

1995 - 6th Bi-partite - Pension in lieu of PF 10 %

2000 - 7th Bi-partite - 26.5 % minus 10 % = 16.50 %

Additional Cost shared in the ratio 50:50 @ 8.25 % each by Empl & Banks

2005 - 8th Bi-partite - 30.50 % minus 10 % = 20.50 %

Additional cost shared in the ratio 45:55 @ 9.25 % & 11.25 %

2009 - 9th Bi-partite - Cost sharing @ 30 : 70

IBA's present position : In 10th Bi-partite the cost of pension should be worked out and the gap between the cost and 10 % of Basic Pay to be shared @ 30:70. So it is not a new condition imposed by IBA."

Now questions arises as to whether these retired leaders are so foolish that for last 30 months they have not even thought of consulting some lawyer or taken some legal opinion on so much important issues. They collect hundreds of crores of Rupees every year and they are not ready to pay a lakh or so for such an important issue to get the legal position before the start of the negotiations. What should members think about these so called GREAT LEADERS? It is truly said it is not negotiation, but SALE OF THE PRESTIGE OF THE BANKERS BY THESE RETIRED AND TIRED LEADERS.

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HOW OUR SO CALLED SUPER HERO LEADERS WERE BEFOOLED BY IBA

Almost every banker in last few months have seen number of circulars by our union leaders wherein they have showered whole lot of praise on themselves for achieving a historical settlement. But one more example of "How they have been befooled by IBA" has come to our knowledge through one of readers. A reading of this will make you feel whether our union leaders are really capable of calculations or they go around hotels and enjoy their meals and sleep in the meetings.

Let us go through this example :
(A) WHAT IS THE RECOVERY AMOUNT FOR PENSION FUND AS PER IBA VERSION :
Total amount to be recovered for pension fund = Rs.1,800.00 Crore

(B) WHAT IS THE TOTAL BURDEN DUE TO INCREASE IN SALARIES AS PER IBA VERSION :
Total Amount of increase per year as on 1-11-07 : Rs.4816.00 Crore
( in other words total amount of increase per month : Rs.401.33 Crore)
Thus, all the bankers are required to pay the arrears for 4.485 (say 4½) months only to fully pay the gap of Rs.1800 crs agreed to be recovered from the existing employees.

(C ) WHAT IS ACTUALLY BEING PAID BY THE EXISTING EMPLOYEES :
With lot of negotiations and as a biggest gesture, IBA has agreed that all existing employees will pay 1.6 times of the New Salary as on November, 2007.
Now, question arises whether 1.6 times of the new salary as on November, 2007 is less than or equal to the 4½ months arrear?

Let anybody calculate his gross arrears as on November, 2007, and multiply the same by
4½ and they see what he is asked to contribute towards pension fund.
The CAT IS OUT of the BAG. This contribution ranges from 7.42 to 13.07 months salary for Scale I, II and III officers (it varies depending on what %age of HRA you are entitlede). It ranges from 5.75% to 8.92 months gross increase in salary for Scale IV and V officers. Thus, on an average, it appears officers are contributing almost double of the amount that was required as per above calculations to collect Rs.1,800 crores.

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Meeting With Finance Minister

What is the likely impact of meeting with Finance Minister for recently retired bankers.

Meeting With Finance Minister :
It has been reported that UFBU leaders represented to the Finance Minister that since the Actuarial Report was based on the details of 31-3-2008, the pension option settlement should be effective from 1-4-2008, i.e. those who were on service on 1-4-2008 should be treated as existing employees for the sake of the settlement and pension payments on account of the option should be made from 1-4-2008.
FM did not agree with this viewpoints. However, he stated that the effective date can be taken as 27-11-2009, i.e. the date on which we had signed the MOU.
What is the impact of this decision, which is likely to be the agreed upon by all (IBA & UFBU):
Now, let us try to analyse as to what will be its impact on recently retired bankers.
We are of the opinion that all those bankers who retired between 01-11-2007 and 26/11/2009 (i.e. almost a period of two years) and were PF optees and now wish to switch over to Pension option, will be at a great loss. These people were being given the impression that as the new settlement will be effective from 1-11-2007, at least all these bankers will be at par with the bankers who are in service at present.
Now all those retirees (i.e. ex bankers who retired between 01.11.2007 and 26.11.2009), have to return 156% of the bank's contribution of PF amount, instead of merely 1.6 times of the salary of November, 2007. Had they been considered at par with the existing bankers in service, they would have been asked to merely pay 1.6 times of the salary of November, 2007 + bank's contribution was to be returned.

Let us take an Example : Let us suppose a person who retired on 31st October, 2009, and he received PF amount, which included bank's contribution to the tune of Rs.10,00,000/-, and the Basic Pay we got fixed under the new scales is Rs.38200/-. Now, in case he wishes to opt for the pension, he will have to shell out Rs.15,60,000/- from his savings. Had he retired on 30th November, 2009, he would have to merely pay Rs. 61,120/-+Rs10,00,000/-. Thus, he will be paying almost Rs 4,98,000/- extra merely because he retired only one month earlier (of course he retired after the date of the New Settlement i.e 01-11-2007). It was merely due to the delaying tactics of IBA that this person will be suffering. Mostly likely they also have to pay the 1.6 times of the November, 2007 salary as this is to be paid by everybody who is entitled for arrears wef 01-11-2007.

We feels this group of people will be the most affected in terms of immediate maximum outflow of funds. Most of them have hardly used the funds received at the time of retirement.
Their cases are even more genuine then the existing pension optees who are asked to contribute towards the gap for offering 2nd option to PF optees. In case of pension optees, unions may still be able to prove that PF optees actually shared some load in earlier settlements to pay off the pension optees. However, in case of retirees after 01-11-2007, it is strong case as the new settlement is effective from 01-11-2007 for all almost all purposes expect for 2nd option for pension.

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Background for Pension Facilities in Banking Industry in India

Background for Pension Facilities in Banking Industry in India :
The present guidelines indicate that employees who have joined in the service of the bank on or after 29-09-1995 are automatically covered under the Pension Scheme. However, employees who were in the serving in the banks up to 28.09.1995 have to opt for Pension. This option was allowed as one time exercise in 1995, and employees who opted for Pension were not eligible for the bank contribution to PF.

A) Various Types of Pension

The following types of Pension are normally available to employees in banks, under Employees Pension Regulations, 1995:-

1. Superannuation Pension.:

Granted on attaining the age of superannuation. Minimum 10 years qualifying service required. Maximum service reckoned is 33 years (for this purpose fraction of service in excess of 6 months will be reckoned as one year).

2. Pension on Voluntary Retirement.

Minimum 20 years qualifying service is required. The qualifying service of an employee retiring voluntarily shall be increased by a period not exceeding five years subject to the condition that the retiree has got remaining service of 5 years and the total qualifying service shall not in any case exceed 33 years.

The employee may give notice of not less than three months in writing to the appointing authority; seeking voluntary retirement. The notice of voluntary retirement shall require acceptance by the appointing authority.

3. Invalid Pension.

This is applicable to employees who retire from service on account of bodily or mental infirmity, which permanently incapacitates him from the service. Minimum 10 years qualifying service is required to apply for invalid Pension. He has to submit a medical certificate of incapacitation from a Medical Officer approved by the bank.

4. Compassionate Allowance.

An employee who is dismissed or removed or terminated from service shall forfeit pension. In such cases the authority higher than the authority competent to dismiss or remove or terminate him may, if the case is deserving of special consideration, sanction of a compassionate allowance not exceeding two third of the Pension which would have been admissible to him on the basis of the qualifying service rendered up to the date of dismissal.

5 Premature Retirement Pension.

Premature retirement pension may be granted to employees who have rendered minimum 10 years of service and retires from service on account of orders of the bank to retire prematurely in the public interest or for any other reason specified in service regulations or settlement; if otherwise he was entitled to such pension on superannuation on that date.

6 Compulsory Retirement Pension.

An employee compulsorily retired from service as a penalty in terms of service regulations or settlement by the authority higher than the authority competent to impose such penalty may be granted Pension at a rate not less than 2/3 and not more than full Pension admissible to him on the date of his compulsory retirement, if otherwise he was entitled to such pension on superannuation on that date.

B) Rate of Pension :

Minimum Pension Rs 1435/- per month, who retire on or after 01.05.2005.

C) Maximum Pension

Those who have got 33 years of qualifying service will get 50% of their average emoluments as Basic Pension and where the qualifying service is less than 33 years; the basic pension would be proportionate to their service.

D) Calculation of Basic Pension.

Average of 10 months pay prior to the date of retirement has to be calculated (pay includes BP + increment component of FPP+PQP).

Basic pension = (10 months’ Average Pay x No of years of service) / (2x33)

E) Dearness Relief on Basic Pension.

In respect of employees who retire on or after 1.5.2005, Dearness Relief shall be payable for every rise or be recoverable for every fall, as the case may be of every 4 points over 2288 points in the quarterly average of the All India Average Consumer Price Index for Industrial Workers in the series 1960 = 100, at the rate 0.18% of Basic Pension.

F) Family Pension :

In the event of death while in service or after retirement, family pension shall be payable to spouse/dependents at the following rates w.e.f. 01.5.2005.

Scale of pay per month Amount of Family Pension

Upto Rs 5720 30% of the pay as family pension

with minimum of Rs 1435/-

Rs 5720 to 11440 20% of the pay as family pension

with minimum of Rs 1715

Above Rs 11440 15% of the pay as family pension

with minimum of Rs 2292 and

Maximum of Rs 4784

Dearness Relief is applicable to Family Pension at the same rate applicable to Pension.

There is no stipulation for minimum service for Family Pension. In the case of an employee who dies after 7 years of service, higher family pension equal to 50% of pay last drawn by the deceased employee or twice the ordinary rate of family pension whichever is less, is payable till the date of deceased employee would have attained the age of 65 years subject to a maximum period of 7 years.

Also in the event of death after retirement, before attaining the age of 65 years, higher family Pension as above shall be given. Pay for this purpose has to be computed as given in clause D above.

G Commutation of Pension

One third of Basic Pension may be commuted.

Commuted Value = 1/3rd Basic Pension x 12 x factor corresponding to age next birthday as on date of application for commutation as given in the table below.

After commutation, monthly Pension will be 2/3rd of Pension but D.A. is payable on full Pension. At the end of 15 years after commutation, full pension shall be restored. Commutation amount is exempted from Income Tax.

H. Gratuity
Gratuity is payable on death, retirement, permanent disablement or resignation of an employee and it is calculated by two methods as given below and the amount whichever is higher will be paid. Gratuity amount up to 3.50 lacs is exempted from Income Tax.


I. Gratuity Act 1972:

An employee is eligible for gratuity after completion of 5 years of service. The Gratuity payable under the act is 15 days wages for every completed years of service. The maximum gratuity payable under the Act is Rs.3.50 lacs.(AIBOC has represented to the Labour Ministry to raise the maximum limit to Rs 10 lacs, as allowed to Central Govt Employees).

Wages for this purpose will mean Basic Pay + PQP + FPP (less HRA component) + Dearness Allowance).

The Calculation is as follows:

Gratuity Amount = (Wages) x No of year of service x 15/26

j. Gratuity as per Service Regulations

An employee is eligible for gratuity after completion of 10 years service. The gratuity payable is 15 months pay up to 30 years of service plus additional 15 days pay for every completed years of service beyond 30 years (Pay for this purpose means BP + PQP + Increment component of FPP).

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