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    Welcome to

    IIBFs - JAIIB Virtual

    Classes

    PRINCIPLES OF BANKING

    Module A & B

    April 15/2008

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    Financial System in India

    Financial Sector consists of threemain segments viz.,

    1) Financial institutions -banks,

    mutual funds, insurancecompanies

    2) Financial markets -moneymarket,

    debt market,capital market, forexmarket

    3) Financial products -loans,

    deposits, bonds, equities

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    Financial Sector - Regulators

    Regulators

    Reserve Bank ofIndia

    (RBI)

    Securities ExchangeBoard of India

    (SEBI)

    Insurance Regulatoryand Development

    Authority

    (IRDA)

    BanksCapital Markets/

    Mutual Funds

    Insurance

    Companies

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    Banking in India

    Legal frame work

    of

    Banks

    Banking RegulationAct,1949

    Reserve Bank of IndiaAct,1934

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    Banking in India

    - Banking in India is governed byBR Act,1949 and RBI Act,1934

    - Banking in India is controlled/monitored

    by RBI and Govt of India- The controls for different banks are

    different

    based on whether the bank/s is/are

    a) statutory corporation

    b) a banking company

    c) a cooperative society

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    Banking Regulation Act,1949 (BR Act)-1

    - BR Act covers banking companies and

    cooperative banks, with certain modifications.- BR Act is not applicable to

    a) primary agricultural credit societies b) landdevelopment banks

    - BR Act allows RBI (Sec 22) to issuelicence for banks

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    Banking Regulation Act,1949 (BRAct)-2

    Regulation

    Control over

    management

    Penalities

    Suspension

    &Winding up

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    Reserve Bank of India

    Act,1934(RBI Act)-1- RBI Act was enacted to constitute the

    Reserve Bank of India

    - RBI Act has been amended from time to

    time

    - RBI Act deals with the constitution,

    powers and functions of RBI

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    Reserve Bank of India Act,1934(RBIAct)-2

    - RBI Act deals with:- incorporation, capital management and

    business of banks

    - central banking functions- financial supervision of banks and

    financial institutions

    - management of forex/reserves- control functions : bank

    rate,audit,accounts

    - penalities for violation

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    Reserve Bank of India - 1

    Reserve Bank of India was established in1935, after the enactment of the ReserveBank of India Act 1934 (RBI Act).

    Banking Regulation Act,1949 (BR Act)gavewide powers to RBI as regards toestablishment of new banks/mergers andamalgamation of banks,opening of new

    branches,etcBR Act,1949 gave RBI powers to

    regulate,superivse and develop the bankingsystem in India

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    Reserve Bank of India 2

    CENTRAL BANK

    RBI

    REGULATOR SUPERVISOR FACILITATOR

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    Money Market Instruments

    Inter bank call money/deposit Inter bank notice money/deposit

    Inter bank term money/deposit

    Certificates of Deposit Commercial Paper

    Treasury Bills

    Bill rediscounting Repos

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    Certificates of Deposit

    CDs are short-term borrowings in the form ofUPN issued by scheduled commercial banksand are freely transferable by endorsementand delivery.

    Introduced in 1989

    Minimum period 7 days and maximum periodone year. FIs are allowed to issue CDs for aperiod between 1 year and up to 3 years

    Minimum amount is Rs 1,00,000.00

    Subject to payment of stamp duty under theIndian Stamp Act, 1899

    Issued to individuals, corporations, trusts,funds and associations

    Issued at a discount rate freely determined bythe market/investors

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    Commercial Paper

    Short-term borrowings by corporates, financialinstitutions, primary dealers from the moneymarket

    Can be issued in the physical form (Usance

    Promissory Note) or de mat format Introduced in 1990

    When issued in physical form are negotiable byendorsement and delivery and hence, highly

    flexible Maturity is 7 days to 1 year

    Unsecured and backed by credit rating of theissuing company

    Issued at discount to the face value

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    Repos

    Repo (repurchase agreement)instruments enable collateralised short-term borrowing through the selling ofdebt instruments

    A security is sold with an agreement torepurchase it at a pre-determined dateand rate

    Reverse repo is a mirror image of repoand reflects the acquisition of a security

    with a simultaneous commitment toresell

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    INDIAN CAPITAL MARKET

    Indian Capital Market plays an important rolein the economic development of the country

    It provides opportunities for investors to investin the market and also to earn attractive rate

    of return.

    It also creates source of funds for the varioussectors

    National Stock Exchange (NSE) and BombayStock Exchange (BSE) are the major stockexchanges in India

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    Securities & Exchange Board of India(SEBI)

    SEBI was constituted on April 12/1988,and obtained the statutory powers inMarch,1992

    SEBIs functions:

    To protect the interests of investorsTo recognize the business in stock

    exchanges and other security markets

    To supervise and regulate work ofintermediaries, such as stock brokersmerchant bankers/custodians

    depositories/bankers to the issues

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    Association of Mutual Funds in India(AMFI)

    AMFI is an association as a nonprofit organization.

    AMFI represents mutual funds in

    India and working for healthygrowth of the Mutual Funds.

    AMFI conduct examinations for MF

    executives as part of their trainingactivities

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    Insurance Regulatory & DevelopmentAuthority (IRDA)

    The regulator for insurancebusiness in India is IRDA.

    IRDA was established in 2000

    IRDAs functions:To regulate, promote and ensure

    orderly growth of the insurance

    business and reinsurance businessin India

    To protect the interests of policy

    holders

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    Insurance Sector

    Insurance Sectorin India can bedivided into twomain sections

    General Insurance

    Life Insurance

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    Financial Intermediaries (1)

    Mutual Funds- As financial intermediarypromote savings and mobilise funds which areinvested in the stock market and bond market

    MFs are associations or trusts of publicmembers and assist them in makinginvestments in the financial instruments of thebusiness/corporate sector for the mutualbenefit of its members.

    MFs aims to reduce the risks in investmentsMutual funds help their investors to enhancetheir value by investing the funds in capitalmarket.

    Mutual funds offer various schemes: growthfund, income fund, balanced fund,sector wisefunds, etc.,

    Regulated by SEBI

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    Financial Intermediaries (2)

    Merchant banking- Another importantfinancial intermediary which managesand underwrites new issues, undertakesyndication of credit, advise corporate

    clients on fund raising Subject to regulation by SEBI and RBI

    SEBI regulates them on issue activity

    and portfolio management of theirbusiness.

    RBI supervises those merchant bankswhich are subsidiaries or affiliates of

    commercial banks

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    Indian Banking - Significant events1

    Three presidency banks were established in Calcutta

    (1806) in Bombay (1840) and in Madras (1843) In the early part of 20th century, on account of the

    Swadeshi movement a number of join stock banks wereestablished by Indians like Bank of India, Bank of Barodaand Central Bank of India.

    In 1921 the three presidency banks were merged and

    the Imperial Bank of India was created. During the period 1900 to 1925 many banks failed, and

    the Government appointed in 1929 a Central BankingEnquiry Committee to trace the reasons for the failureof banks.

    The Reserve Bank of India Act was passed in 1934 and

    the RBI came into existence in 1935 and RBI wasnationalised in 1949 The Banking Regulation Act,1949 gave wide powers to

    RBI to act as the regulator for banks in India

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    Indian Banking -Significant events 2

    In 1955 State Bank of India became thesuccessor to the Imperial Bank of India ,underthe State Bank of India Act,1955.

    In 1959 State Bank of India (Subsidiary Banks)Act was passed to enable SBI to take overState Associated banks as SBIs subsidiaries

    In 1969 the Government of India nationalised14 major commercial banks having deposits ofRs.50 crore or more

    In 1975 Regional Rural Banks were establishedunder RRB Act 1976, which was preceded byRRB Ordinance in 1975

    In 1980 six more commercial banks werenationalised, with a deposit of Rs.200 crore ormore

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    Progress of banking in India

    In the liberalised, privatised andglobalised environment, banksopeating

    in India have diversified theirbanking activities by offering ParaBanking facilities like

    Merchant banking/Mutual funds ATMs/Credit Cards/Internet banking

    Venture capital funds

    Factoring

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    Classification of Banks-1

    Central

    Bank

    RBI

    Public Sector

    Banks

    New Private

    Sector

    Banks

    Old

    Private

    Sector

    Foreign Banks

    Co-operative

    Banks

    Regional

    Rural

    Banks

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    Classification of Banks-2

    PUBLIC SECTOR

    BANKS

    STATE BANK OFINDIA

    SBI

    SBI ASSOCIATE

    BANKS

    NATIONALISED

    BANKS

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    Classification of Banks-3

    Public Sector Banks =State Bank ofIndia+SBIs associate banks+

    Nationalised banks

    Private Sector Banks=IndianPrivate Sector Banks (Old/Newgeneration banks)+Foreign banks

    in India Other Banks=Regional Rural

    Banks(RRB)

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    Functions of Banks - 1CENTRAL BANK

    RBI

    REGULATOR SUPERVISOR FACILITATOR

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    RESERVE BANK OF INDIA

    SUPERVISORY & REGLATORY

    Issuance of currency notes

    Bankers BankerLender of the last resort

    Credit Control & Monetary Policy

    Exchange Control & Forex ManagementFunds Transfer

    C IT C T

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    C IT C T

    QUANTITATIVE CREDIT CONTROL

    QUALITATIVE CEDIT CONTROL

    CRR & SLR BANK RATE

    OPEN MARKET OPERATIONS

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    Functions of Banks - 2

    Commercial Banks-Core BankingFunctions

    - Acceptance of deposits from public- Lending funds to public/corporates

    - Investing funds in variousopportunities

    - Collecting cheques/drafts andother Negotiable Instruments

    -

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    Functions ofBanks-3

    Commercial Banks Para BankingServices

    Providing safe deposit lockers

    Acceptance of safe custody items Acceptance of standing instructions Offering internet banking facilities Issuance of credit and other cards

    including ATM cards Offering various products like Mutual

    funds,insurance products, merchantbanking services

    Acting as executors and trustees

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    Commercial BanksDEPOSIT PRODUCTS

    CERTIFICATE

    FLEXI

    RECURRING

    FIXED

    SAVINGS

    CURRENT

    DEPOSITS

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    Non-Resident Accounts - 1

    Rupee accounts

    Non-residentOrdinary account

    (NRO)

    Non-residentExternal account

    (NRE)

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    Deposit Accounts FCNR(B)

    FCNR (B) accounts NRIs,PIOs,residing outside India can open

    FCNR (B) accounts

    FCNR (B) accounts are maintained as fixeddeposits in certain designated currencies The designated currencies are: US$, GBP, Japanese Yen, Euro, Cad$, Aus $ Maintained in Banks in India in the above

    mentioned foreign currencies and interest isalso earned in such foreign currencies

    Repatriation of funds (principal, interest) isallowed

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    Loan Products Fund Based

    BILLSFINANCE

    TERMFINANCE

    RETAILFINANCE

    OVERDRAFT

    CASH CREDIT

    LOANS&

    ADVANCES

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    Loan Products Non Fund Based

    Letters of

    Credit

    Bank Guarantee

    Co-Acceptance

    Of

    Bills

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    Know Your Customer (KYC) -1Know Your Customer (KYC) -1

    KYC: Know Your CustomerKYC: Know Your Customer

    Know your customer (KYC) norms areKnow your customer (KYC) norms are

    applicable to all types of customer a/cs.applicable to all types of customer a/cs.

    It deals with not only to identify theIt deals with not only to identify the

    customer but also to understand thecustomer but also to understand the

    activities of the customer, and to ensureactivities of the customer, and to ensure

    that the operations in the customerthat the operations in the customer

    account/s is/are for genuine purposeaccount/s is/are for genuine purpose

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    Know Your Customer (KYC) -2

    Application of KYC norms havebecome

    important due to various reasons.

    In view of many issues on accountof drugs smuggling, moneylaundering, terrorist activities,

    arms dealing,etc.,banks need to be careful in dealingwith their clients.

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    Know Your Customer (KYC) -3

    Customer

    Acceptance

    Policy

    Monitoring ofTransactions

    Risk Management

    CustomerIdentification

    Procedure

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    Bank Customers - 1

    Power of

    Attorney

    Holders

    Executors/Trustees

    Illiterate

    Perons

    Minors

    Joint account

    hoders

    Individuals

    Bank Customers

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    Bank Customers - 2

    Sole

    Proprietor

    Clubs/

    Socities

    Coproates

    Hindu

    Undivided

    Family

    Partnership

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    BANKER-CUSTOMER

    RELATIONSHIP

    DEBTOR-CREDITOR

    CREDITOR-DEBTOR

    AGENT-PRINCIPAL LESSOR-LESSEE

    BAILEE-BAILOR

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    CHEQUES

    OPEN

    CROSSED

    ORDER

    BEARER

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    NEGOTIABLE INSTRUMENTSPaying Banker:

    Payment in

    Due

    Course

    ApparentTenor

    In good faith WithoutNegligence

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    NEGOTIABLEINSTRUMENTS

    BANKERS DUTIES

    &

    RESPONSIBILITIES

    C0LLECTING

    BANKER

    COLLECTION OF

    CHEQUES

    HOLDER INDUE

    COURSE

    CONSIDERATIONTITLE

    BEFOREMATURITY

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    Six Cs

    Character

    Capital

    CapacityCollateral

    Condition

    Compliance

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    Working Capital Cycle

    Cash

    Raw material

    Semi finished goodsFinished goods

    sales

    Bills receivables

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    CHARGES

    HYPOTHECATION

    PLEDGEMORTGAGE

    ASSIGNMENT

    LIEN

    SET OFF

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    Risk Management

    Credit

    Risk

    Liquidity

    Risk

    Operations

    Risk

    Price

    Risk

    Interest Rate

    Risk

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    SRFAESI Act,2002

    - Securitisation and Reconstruction ofFinancial Assets and Enforcement of

    Security Interest Act (SRFAESI) was

    enacted in 2002_ Securitisation Company/Reconstruction

    Company (SCRC) can finance the

    acquistion from own resources or rise

    sources from Qualified Institutional

    Buyers (QIBs)

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    SRFAESI Act,2002

    Enforcement of

    Security interest

    Transfer of NPA

    Legal framework

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    Priority Sector 1

    Priority Sector

    Primay Secondary Teritary

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    Priority Sector 2

    Primary Sector

    Agriculture Allied Activities

    Direct Indirect

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    Priority Sector 3

    Secondary Sector

    SSI/SME SSSBE

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    Priority Sector 4

    Tertiary Sector

    Small road/water

    Transport operator

    Small business/businee

    enterprises

    Professional/self

    employed

    Educational loans

    Housing finance

    Others

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    Small & Medium Enterprises(SMEs) SMEs are classified based on Small &

    Medium Enterprises DevelopmentAct,2006

    SMEs are divided into micro,small &medium sized entities.

    SMEs are classified based on twocategoriesviz., manufacturing units and servicecompanies.

    In case of manufacturing unitsinvestmentsin plant and machinery and for servicecompanies investments in equipment

    are

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    Credit Management in Banks

    Capital adequacy

    norms

    Prudential

    norms

    Credit appraisal

    system

    Exposure

    norms

    Risks-ALM

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    Documentation 1

    - Loan documents are classified as

    primary and secondary- Documents are obtained based on the

    type of credit facility/constitution of theborrower/nature of securities offered by the

    borrowers- Documents should have a clear titleand can be valid to be enforced in acourt of law

    - Wherever required documents need to be

    stamped appropriately- Documents should be properly filled up and

    dulyexecuted by authorised persons.

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    Documentation 2

    Documentary evidence as perSec 61

    of Evidence Act :

    c) Primary: original documentsneeds to

    be produced for inspection ofcourt

    b) Secondary:- certified copies

    - copies made from or compared

    with

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    E banking

    E Banking

    CreditCards

    InternetBanking

    Core

    Banking

    Solutions

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    ALL THE BEST & THANK YOU

    T.M.C.VARADARAJANTEL : 022-25638965 (R)

    022-66364206 (O)

    e.mail:[email protected]

    [email protected]

    mailto:[email protected]:[email protected]:[email protected]:[email protected]