jaiib_presentation1_nov08

8/21/2019 jaiib_presentation1_nov08

1/63

Welcome to

IIBFs - JAIIB Virtual Classes

PRINCIPLES OF BANKING

K.CHOCKALINGAMConsultant Faculty

IIB & F


2/63

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


3/63

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


4/63

Banking in India

Legal frame work

of

Banks

Banking Regulation

Act,1949

Reserve Bank of India

Act,1934


5/63

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


6/63

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


7/63

Banking Regulation Act,1949(BR Act)-2

Regulation

Control overmanagement

Penalities

Suspension&

Winding up


8/63

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


9/63

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


10/63

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


11/63

Reserve Bank of India2

CENTRAL BANK

RBI

REGULATOR SUPERVISOR FACILITATOR


12/63

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


13/63

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


14/63

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


15/63

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


16/63

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


17/63

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


18/63

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


19/63

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


20/63

Insurance Sector

Insurance Sector inIndia can be dividedinto two main

sections General Insurance

Life Insurance


21/63

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


22/63

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


23/63

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


24/63

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


25/63

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


26/63

Classification of Banks-1

Central

Bank

RBI

Public Sector

Banks

New Private

Sector

BanksOld

Private

Sector

Foreign Banks

Co-operative

Banks

Regional

Rural

Banks


27/63


PUBLIC SECTOR

BANKS

STATE BANK OF

INDIA

SBI

SBI ASSOCIATE

BANKS

NATIONALISED

BANKS


28/63


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)


29/63

Functions of Banks - 1

CENTRAL BANK

RBI

REGULATOR SUPERVISOR FACILITATOR


30/63

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


31/63

CREDIT CONTROL

QUANTITATIVE CREDIT CONTROL

QUALITATIVE CEDIT CONTROL

CRR & SLR

BANK RATE

OPEN MARKET OPERATIONS


32/63

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


33/63

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


34/63

Commercial BanksDEPOSIT PRODUCTS

CERTIFICATE

FLEXI

RECURRING

FIXED

SAVINGS

CURRENT

DEPOSITS


35/63

Non-Resident Accounts - 1

Rupee accounts

Non-residentOrdinary account

(NRO)

Non-residentExternal account

(NRE)


36/63

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


37/63

Loan Products Fund Based

BILLSFINANCE

TERMFINANCE

RETAILFINANCE

OVERDRAFT

CASH CREDIT

LOANS&

ADVANCES


38/63

Loan ProductsNon Fund Based

Letters ofCredit

Bank Guarantee

Co-AcceptanceOf

Bills


39/63

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


40/63


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.


41/63


Customer

Acceptance

Policy

Monitoring ofTransactions

Risk Management

CustomerIdentification

Procedure


42/63

Bank Customers - 1

Power of

Attorney

Holders

Executors/Trustees

Illiterate

Perons

Minors

Joint account

hoders

Individuals

Bank Customers


43/63

Bank Customers - 2

Sole

Proprietor

Clubs/

Socities

Corporates

Hindu

Undivided

Family

Partnership


44/63

BANKER-CUSTOMERRELATIONSHIP

DEBTOR-CREDITOR

CREDITOR-DEBTORAGENT-PRINCIPAL

LESSOR-LESSEE

BAILEE-BAILOR


45/63

CHEQUES

OPEN

CROSSED

ORDER

BEARER

NEGOTIABLE INSTRUMENTS


46/63

NEGOTIABLE INSTRUMENTSPaying Banker:

Payment in

Due

Course

ApparentTenor

In good faith WithoutNegligence


47/63

NEGOTIABLE INSTRUMENTS

BANKERS DUTIES

&

RESPONSIBILITIES

C0LLECTING BANKER

COLLECTION OFCHEQUES

HOLDER INDUE

COURSE

CONSIDERATIONTITLE

BEFOREMATURITY


48/63

Six Cs

Character

Capital

Capacity

Collateral

Condition Compliance


49/63

Working Capital Cycle

Cash

Raw material

Semi finished goodsFinished goods

sales

Bills receivables


50/63

CHARGES

HYPOTHECATION

PLEDGE

MORTGAGE

ASSIGNMENT

LIEN

SET OFF


51/63

Risk Management

Credit

Risk

Liquidity

Risk

Operations

Risk

Price

Risk

Interest Rate

Risk

SRFAESI A t 2002


52/63

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)


53/63

SRFAESI Act,2002

Enforcement of

Security interest

Transfer of NPA

Legal framework


54/63

Priority Sector 1

Priority Sector

Primay Secondary Teritary


55/63

Priority Sector2

Primary Sector

Agriculture Allied Activities

Direct Indirect


56/63

Priority Sector3

Secondary Sector

SSI/SME SSSBE

P i it S t 4


57/63

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


58/63

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


59/63

Credit Management inBanks

Capital adequacy

norms

Prudential

norms

Credit appraisal

system

Exposure

norms

Risks-ALM


60/63

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.


61/63

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


62/63

E banking

E Banking

CreditCards

InternetBanking

CoreBanking

Solutions

h k


63/63

hank ou

K Chockalingam

TEL : 9322295394

e.mail: [email protected]@iibf.org.in