jaiib prin banking mod

8/12/2019 Jaiib Prin Banking Mod

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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 three mainsegments viz.,

1) Financial institutions -banks, mutualfunds, insurance companies

2) Financial markets -money market,

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 corporationb) 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 (BR Act)-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(RBI Act)-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 in

1935, after the enactment of the Reserve

Bank 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,etc BR Act,1949 gave RBI powers to

regulate,superivse and develop the bankingsystem in India


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Reserve Bank of India2

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 of UPNissued by scheduled commercial banks and arefreely transferable by endorsement and delivery.

Introduced in 1989

Minimum period 7 days and maximum period one

year. FIs are allowed to issue CDs for a periodbetween 1 year and up to 3 years

Minimum amount is Rs 1,00,000.00

Subject to payment of stamp duty under the Indian

Stamp Act, 1899 Issued to individuals, corporations, trusts, funds and

associations

Issued at a discount rate freely determined by themarket/investors


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Commercial Paper

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

Can be issued in the physical form (Usance PromissoryNote) or de mat format

Introduced in 1990 When issued in physical form are negotiable by

endorsement and delivery and hence, highly flexible

Maturity is 7 days to 1 year

Unsecured and backed by credit rating of the issuingcompany

Issued at discount to the face value


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Repos

Repo (repurchase agreement) instrumentsenable collateralised short-term borrowingthrough the selling of debt instruments

A security is sold with an agreement torepurchase it at a pre-determined date and

rate Reverse repo is a mirror image of repo and

reflects the acquisition of a security with asimultaneous commitment to resell


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INDIAN CAPITAL MARKET

Indian Capital Market plays an important role in theeconomic development of the country

It provides opportunities for investors to invest in themarket and also to earn attractive rate of return.

It also creates source of funds for the various sectors

National Stock Exchange (NSE) and Bombay Stock

Exchange (BSE) are the major stock exchanges inIndia


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Securities & Exchange Board of India(SEBI)

SEBI was constituted on April 12/1988, andobtained the statutory powers in March,1992

SEBIs functions:

To protect the interests of investors

To recognize the business in stock exchangesand other security markets

To supervise and regulate work ofintermediaries, such as stock brokers

merchant bankers/custodians

depositories/bankers to the issues


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Association of Mutual Funds in India(AMFI)

AMFI is an association as a non profitorganization.

AMFI represents mutual funds in India

and working for healthy growth of theMutual Funds.

AMFI conduct examinations for MF

executives as part of their trainingactivities


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Insurance Regulatory & DevelopmentAuthority (IRDA)

The regulator for insurance business inIndia is IRDA.

IRDA was established in 2000

IRDAs functions: To regulate, promote and ensure

orderly growth of the insurance

business and reinsurance business inIndia

To protect the interests of policy

holders


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Insurance Sector

Insurance Sector inIndia can be dividedinto two mainsections

General Insurance

Life Insurance


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Financial Intermediaries (1)

Mutual Funds- As financial intermediary promotesavings and mobilise funds which are invested in thestock market and bond market

MFs are associations or trusts of public members andassist them in making investments in the financialinstruments of the business/corporate sector for the

mutual benefit of its members. MFs aims to reduce the risks in investments

Mutual funds help their investors to enhance theirvalue by investing the funds in capital market.

Mutual funds offer various schemes: growth fund,income fund, balanced fund,sector wise funds, etc.,

Regulated by SEBI


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Financial Intermediaries (2)

Merchant banking- Another importantfinancial intermediary which manages andunderwrites 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 their business. RBI supervises those merchant banks which

are subsidiaries or affiliates of commercialbanks


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Indian Banking - Significant events 1

Three presidency banks were established in Calcutta (1806) in

Bombay (1840) and in Madras (1843) In the early part of 20thcentury, on account of the Swadeshi

movement a number of join stock banks were established byIndians like Bank of India, Bank of Baroda and Central Bank ofIndia.

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 Banking EnquiryCommittee to trace the reasons for the failure of banks.

The Reserve Bank of India Act was passed in 1934 and the RBIcame into existence in 1935 and RBI was nationalised in 1949

The Banking Regulation Act,1949 gave wide powers to RBI toact as the regulator for banks in India


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Indian Banking -Significant events 2

In 1955 State Bank of India became the successor tothe Imperial Bank of India ,under the State Bank ofIndia Act,1955.

In 1959 State Bank of India (Subsidiary Banks) Actwas passed to enable SBI to take over StateAssociated banks as SBIs subsidiaries

In 1969 the Government of India nationalised 14major commercial banks having deposits of Rs.50crore or more

In 1975 Regional Rural Banks were established underRRB Act 1976, which was preceded by RRB

Ordinance in 1975 In 1980 six more commercial banks were

nationalised, with a deposit of Rs.200 crore or more


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Progress of banking in India

In the liberalised, privatised andglobalised environment, banks opeating

in India have diversified their banking

activities by offering Para Bankingfacilities like

Merchant banking/Mutual funds

ATMs/Credit Cards/Internet banking

Venture capital funds

Factoring

Bancassurance


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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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Functions of Banks - 1CENTRAL BANK

RBI

REGULATOR SUPERVISOR FACILITATOR


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RESERVE BANK OF INDIA

SUPERVISORY & REGLATORY

Issuance of currency notes

Bankers Banker

Lender of the last resort

Credit Control & Monetary Policy

Exchange Control & Forex Management Funds Transfer


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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 various opportunities

- Collecting cheques/drafts and otherNegotiable Instruments

- Remitting funds


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Functions of Banks-3

Commercial BanksPara 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 Mutualfunds,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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Foreign Currency Non-residentDeposit AccountsFCNR (B)

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

accounts

FCNR (B) accounts are maintained as fixed depositsin 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 is alsoearned in such foreign currencies

Repatriation of funds (principal, interest) is allowed


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Loan ProductsFund Based

BILLSFINANCE

TERMFINANCE

RETAILFINANCE

OVERDRAFT

CASH CREDIT

LOANS&

ADVANCES


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Loan ProductsNon Fund Based

Letters ofCredit

Bank Guarantee

Co-Acceptance

Of

Bills


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Know Your Customer (KYC) -1

KYC: Know Your Customer

Know your customer (KYC) norms are

applicable to all types of customer a/cs.

It deals with not only to identify the

customer but also to understand the

activities of the customer, and to ensure

that the operations in the customer

account/s is/are for genuine purpose


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Application of KYC norms have becomeimportant due to various reasons.

In view of many issues on account of

drugs smuggling, money laundering,terrorist activities, arms dealing,etc.,

banks need to be careful in dealing with

their clients.


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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 accounthoders

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

Capacity

Collateral

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

PLEDGE MORTGAGE

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 Sector2

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 Development Act,2006

SMEs are divided into micro,small & mediumsized entities.

SMEs are classified based on two categories

viz., manufacturing units and servicecompanies.

In case of manufacturing units investmentsin plant and machinery and for service

companies investments in equipment areconsidered for classification as SMEs


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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 theborrowers

- 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 duly

executed by authorised persons.


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Documentation 2

Documentary evidence as per Sec 61of Evidence Act :

a) Primary: original documents needs to

be produced for inspection of courtb) Secondary:

- certified copies

- copies made from or compared withoriginal


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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.VARADARAJAN TEL : 022-25638965 (R)

022-66364206 (O)

e.mail: [email protected] [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]