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Welcome to
IIBFs - JAIIB Virtual Classes
PRINCIPLES OF BANKING
K.CHOCKALINGAMConsultant Faculty
IIB & F
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Financial System in India
Financial Sector consists of three mainsegments viz.,
1) Financial institutions -banks, mutual
funds, insurance companies2) Financial markets -money market,
debt market, capital market, forex
market3) Financial products -loans, deposits,
bonds, equities
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Financial Sector - Regulators
Regulators
Reserve Bank of
India
(RBI)
Securities Exchange
Board of India
(SEBI)
Insurance Regulatory
and Development
Authority
(IRDA)
BanksCapital Markets/
Mutual Funds
Insurance
Companies
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Banking in India
Legal frame work
of
Banks
Banking Regulation
Act,1949
Reserve Bank of India
Act,1934
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Banking in India
Banking in India is governed by BR Act,1949and 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) land development banksBR Act allows RBI (Sec 22) to issue
license for banks
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Banking Regulation Act,1949(BR Act)-2
Regulation
Control overmanagement
Penalities
Suspension&
Winding up
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Reserve Bank of IndiaAct,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 IndiaAct,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) gave widepowers to RBI as regards to establishment ofnew banks/mergers and amalgamation of banks,opening of new branches, etc
BR Act,1949 gave RBI powers to regulate,supervise and develop the banking system inIndia
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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 are freelytransferable by endorsement and delivery.
Introduced in 1989
Minimum period 7 days and maximum period one year.FIs are allowed to issue CDs for a period between 1 yearand up to 3 years
Minimum amount is Rs 1 Lac.
Subject to payment of stamp duty under the IndianStamp Act, 1899
Issued to individuals, corporations, trusts, funds andassociations
Issued at a discount rate freely determined by the
market/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 demat 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 to
repurchase 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 the
market and also to earn attractive rate of return.
It also creates source of funds for the various sectors
National Stock Exchange (NSE) and Bombay StockExchange (BSE) are the major stock exchanges in India
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Securities & Exchange Board ofIndia (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 inIndia (AMFI)
AMFI is an association as a non profitorganization.
AMFI represents mutual funds in India andworking for healthy growth of the MutualFunds.
AMFI conduct examinations for MFexecutives as part of their training
activities
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Insurance Regulatory &Development Authority (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 andreinsurance business in India
To protect the interests of policy holders
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Insurance Sector
Insurance Sector inIndia can be dividedinto two main
sections General Insurance
Life Insurance
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Financial Intermediaries (1) Mutual Funds- As financial intermediary, promote
savings 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 financial
instruments of the business/corporate sector for themutual benefit of its members. MFs aims to reduce the risks in investments
Mutual funds help their investors to enhance their valueby 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 important financialintermediary which manages and underwritesnew issues, undertake syndication of credit,
advise corporate clients on fund raising Subject to regulation by SEBI and RBI
SEBI regulates them on issue activity andportfolio management of their business.
RBI supervises those merchant banks which aresubsidiaries or affiliates of commercial banks
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Indian Banking - Significantevents 1
Three presidency banks were established in Calcutta (1806) inBombay (1840) and in Madras (1843)
In the early part of 20thcentury, on account of the Swadeshimovement 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 theImperial 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 to
act as the regulator for banks in India
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Indian Banking -Significant events2
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) Act waspassed to enable SBI to take over State Associatedbanks as SBIs subsidiaries
In 1969, the Government of India nationalised 14 majorcommercial banks having deposits of Rs.50 crore ormore
In 1975 Regional Rural Banks were established underRRB Act 1976, which was preceded by RRB Ordinance in1975
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 and globalisedenvironment, 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
BanksOld
Private
Sector
Foreign Banks
Co-operative
Banks
Regional
Rural
Banks
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Classification of Banks-2
PUBLIC SECTOR
BANKS
STATE BANK OF
INDIA
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=Indian PrivateSector Banks (Old/New generation
banks)+Foreign banks in India Other Banks=Regional Rural Banks(RRB)
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Functions of Banks - 1
CENTRAL 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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CREDIT CONTROL
QUANTITATIVE CREDIT CONTROL
QUALITATIVE CEDIT CONTROL
CRR & SLR
BANK RATE
OPEN MARKET OPERATIONS
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Functions of Banks - 2
Commercial Banks-Core Banking Functions
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 Banking Services Providing safe deposit lockersAcceptance of safe custody itemsAcceptance of standing instructions Offering internet banking facilities Issuance of credit and other cards
including ATM cards
Offering various products like Mutualfunds,insurance products, merchant bankingservices
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 deposits 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 is also earnedin such foreign currencies
Repatriation of funds (principal, interest) is allowed
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Loan Products Fund Based
BILLSFINANCE
TERMFINANCE
RETAILFINANCE
OVERDRAFT
CASH CREDIT
LOANS&
ADVANCES
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Loan ProductsNon Fund Based
Letters ofCredit
Bank Guarantee
Co-AcceptanceOf
Bills
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Know Your Customer (KYC) -1
KYC: Know Your Customer
Know your customer (KYC) norms areapplicable to all types of customer a/cs.
It deals with not only to identify thecustomer but also to understand theactivities of the customer, and to ensure
that the operations in the customer
account/s is/are for genuine purpose
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Know Your Customer (KYC) -2
Application of KYC norms have become
important due to various reasons.
In view of many issues on account ofdrugs smuggling, money laundering,terrorist activities, arms dealing,etc.,
banks need to be careful in dealing withtheir 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
Corporates
Hindu
Undivided
Family
Partnership
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BANKER-CUSTOMERRELATIONSHIP
DEBTOR-CREDITOR
CREDITOR-DEBTORAGENT-PRINCIPAL
LESSOR-LESSEE
BAILEE-BAILOR
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CHEQUES
OPEN
CROSSED
ORDER
BEARER
NEGOTIABLE INSTRUMENTS
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NEGOTIABLE INSTRUMENTSPaying Banker:
Payment in
Due
Course
ApparentTenor
In good faith WithoutNegligence
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NEGOTIABLE INSTRUMENTS
BANKERS DUTIES
&
RESPONSIBILITIES
C0LLECTING BANKER
COLLECTION OFCHEQUES
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
SRFAESI A t 2002
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SRFAESI Act,2002
Securitization and Reconstruction of
Financial Assets and Enforcement of
Security Interest Act (SRFAESI) was
enacted in 2002
Securitization Company/Reconstruction
Company (SCRC) can finance the
acquisition 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 Sector3
Secondary Sector
SSI/SME SSSBE
P i it S t 4
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Priority Sector 4
Tertiary Sector
Small road/water
Transport operator
Small business/business
enterprises
Professional/self
employed
Educational loans
Housing finance
Others
Small & Medium Enterprises
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Small & Medium Enterprises(SMEs)
SMEs are classified based on Small & MediumEnterprises Development Act,2006
SMEs are divided into micro,small & medium
sized entities. SMEs are classified based on two categories
viz., manufacturing units and service companies. In case of manufacturing units, investments
in plant and machinery and for service units,investments in equipment are considered forclassification.
Credit Management in
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Credit Management inBanks
Capital adequacy
norms
Prudential
norms
Credit appraisal
system
Exposure
norms
Risks-ALM
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Documentation 1
- Loan documents are classified asprimary and secondary
- Documents are obtained based on thetype of credit facility/constitution of the borrower/nature
of securities offered by the borrowers- Documents should have a clear titleand can be valid for enforcement 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 61
of Evidence Act :
a) Primary: original documents needs to
be produced for inspection of court
b) Secondary:
- certified copies
- copies made from or compared withoriginal
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E banking
E Banking
CreditCards
InternetBanking
CoreBanking
Solutions
h k
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hank ou
K Chockalingam
TEL : 9322295394
e.mail: [email protected]@iibf.org.in