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PRINCIPLES OF BANKING Module A & B April 15/2008

Financial System in India
Financial Sector consists of three main segments viz., 1) Financial institutions -banks, mutual funds, insurance companies 2) Financial markets -money market, debt market,capital market, forex market 3) Financial products -loans, deposits, bonds, equities

Financial Sector - Regulators
Regulators

Reserve Bank of India (RBI)

Insurance Regulatory Securities Exchange and Development Board of India Authority (SEBI) (IRDA)

Banks

Capital Markets/ Mutual Funds

Insurance Companies

1949 Reserve Bank of India Act.1934 .Banking in India Legal frame work of Banks Banking Regulation Act.

1949 and RBI Act.Banking in India .1934 .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 .Banking in India is governed by BR Act.Banking in India is controlled/monitored by RBI and Govt of India .

Banking Regulation Act.1949 (BR Act)1 . .BR Act is not applicable to a) primary agricultural credit societies b) land development banks .BR Act covers banking companies and cooperative banks.BR Act allows RBI (Sec 22) to issue licence for banks . with certain modifications.

Banking Regulation Act.1949 (BR Act)-2 Penalities Regulation Suspension & Winding up Control over management .

Reserve Bank of India Act.1934(RBI Act)-1 .RBI Act was enacted to constitute the Reserve Bank of India . powers and functions of RBI .RBI Act has been amended from time to time .RBI Act deals with the constitution.

RBI Act deals with: .penalities for violation . capital management and business of banks .accounts .financial supervision of banks and financial institutions .audit.central banking functions .Reserve Bank of India Act.management of forex/reserves .incorporation.control functions : bank rate.1934(RBI Act)-2 .

etc BR Act. after the enactment of the Reserve Bank of India Act 1934 (RBI Act).Reserve Bank of India . Banking Regulation Act.superivse and develop the banking system in India .opening of new branches.1949 gave RBI powers to regulate.1949 (BR Act)gave wide powers to RBI as regards to establishment of new banks/mergers and amalgamation of banks.1      Reserve Bank of India was established in 1935.

Reserve Bank of India CENTRAL BANK RBI 2 REGULATOR SUPERVISOR FACILITATOR .

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 .

trusts. funds and associations Issued at a discount rate freely determined by the market/investors .Certificates of Deposit CDs are short-term borrowings in the form of UPN issued by scheduled commercial banks and are freely transferable by endorsement and delivery. 1899 Issued to individuals. Introduced in 1989 Minimum period 7 days and maximum period one year.00 Subject to payment of stamp duty under the Indian Stamp Act. FIs are allowed to issue CDs for a period between 1 year and up to 3 years Minimum amount is Rs 1.00. corporations.000.

Commercial Paper Short-term borrowings by corporates. highly flexible Maturity is 7 days to 1 year Unsecured and backed by credit rating of the issuing company Issued at discount to the face value . primary dealers from the money market Can be issued in the physical form (Usance Promissory Note) or de mat format Introduced in 1990 When issued in physical form are negotiable by endorsement and delivery and hence. financial institutions.

Repos Repo (repurchase agreement) instruments enable collateralised short-term borrowing through 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 a simultaneous commitment to resell .

It also creates source of funds for the various sectors National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the major stock exchanges in India .INDIAN CAPITAL MARKET Indian Capital Market plays an important role in the economic development of the country It provides opportunities for investors to invest in the market and also to earn attractive rate of return.

Securities & Exchange Board of India (SEBI) SEBI was constituted on April 12/1988. and obtained the statutory powers in March.1992 SEBI s functions: To protect the interests of investors To recognize the business in stock exchanges and other security markets To supervise and regulate work of intermediaries. such as stock brokers merchant bankers/custodians depositories/bankers to the issues .

AMFI represents mutual funds in India and working for healthy growth of the Mutual Funds.Association of Mutual Funds in India (AMFI) AMFI is an association as a non profit organization. AMFI conduct examinations for MF executives as part of their training activities .

IRDA was established in 2000 IRDA s functions: To regulate. promote and ensure orderly growth of the insurance business and reinsurance business in India To protect the interests of policy holders .Insurance Regulatory & Development Authority (IRDA) The regulator for insurance business in India is IRDA.

Insurance Sector Insurance Sector in India can be divided into two main sections Life Insurance General Insurance .

Financial Intermediaries (1) Mutual Funds. Regulated by SEBI . etc. income fund. Mutual funds offer various schemes: growth fund. MFs aims to reduce the risks in investments Mutual funds help their investors to enhance their value by investing the funds in capital market. balanced fund.As financial intermediary promote savings and mobilise funds which are invested in the stock market and bond market MFs are associations or trusts of public members and assist them in making investments in the financial instruments of the business/corporate sector for the mutual benefit of its members.sector wise funds..

Another important financial intermediary which manages and underwrites new issues. undertake syndication 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 commercial banks .Financial Intermediaries (2) Merchant banking.

and the Government appointed in 1929 a Central Banking Enquiry Committee to trace the reasons for the failure of banks. The Reserve Bank of India Act was passed in 1934 and the RBI came into existence in 1935 and RBI was nationalised in 1949 The Banking Regulation Act. Bank of Baroda and Central Bank of India.Indian Banking .1949 gave wide powers to RBI to act as the regulator for banks in India . During the period 1900 to 1925 many banks failed. In 1921 the three presidency banks were merged and the Imperial Bank of India was created.Significant events 1 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 were established by Indians like Bank of India.

under the State Bank of India Act. which was preceded by RRB Ordinance in 1975 In 1980 six more commercial banks were nationalised.200 crore or more .Indian Banking -Significant events 2 In 1955 State Bank of India became the successor to the Imperial Bank of India . with a deposit of Rs. In 1959 State Bank of India (Subsidiary Banks) Act was passed to enable SBI to take over State Associated banks as SBI s subsidiaries In 1969 the Government of India nationalised 14 major commercial banks having deposits of Rs.50 crore or more In 1975 Regional Rural Banks were established under RRB Act 1976.1955.

privatised and globalised environment. banks opeating in India have diversified their banking activities by offering Para Banking facilities like Merchant banking/Mutual funds ATMs/Credit Cards/Internet banking Venture capital funds Factoring Bancassurance .Progress of banking in India In the liberalised.

Classification of Banks-1 Regional Rural Banks Central Bank RBI Co-operative Banks Public Sector Banks Foreign Banks New Private Sector Banks Old Private Sector .

Classification of Banks-2 PUBLIC SECTOR BANKS STATE BANK OF INDIA SBI SBI ASSOCIATE BANKS NATIONALISED BANKS .

Classification of Banks-3 Public Sector Banks =State Bank of India+SBI s associate banks+ Nationalised banks Private Sector Banks=Indian Private Sector Banks (Old/New generation banks)+Foreign banks in India Other Banks=Regional Rural Banks(RRB) .

1 CENTRAL BANK RBI REGULATOR SUPERVISOR FACILITATOR .Functions of Banks .

RESERVE BANK OF INDIA  SUPERVISORY & REGLATORY  Issuance of currency notes  Banker¶s Banker  Lender of the last resort  Credit Control & Monetary Policy  Exchange Control & Forex Management  Funds Transfer .

CREDIT CONTROL ‡ ‡ ‡ ‡ ‡ QUANTITATIVE CREDIT CONTROL QUALITATIVE CEDIT CONTROL· CRR & SLR BANK RATE OPEN MARKET OPERATIONS .

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 other Negotiable Instruments Remitting funds .Functions of Banks .

Functions of Banks-3         Commercial Banks ± Para Banking Services 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. merchant banking services Acting as executors and trustees .

Commercial Banks DEPOSIT PRODUCTS CURRENT CERTIFICATE SAVINGS DEPOSITS FLEXI FIXED RECURRING .

Non-Resident Accounts .1 Rupee accounts Non-resident Ordinary account (NRO) Non-resident External account (NRE) .

Japanese Yen. Aus $ Maintained in Banks in India in the above mentioned foreign currencies and interest is also earned in such foreign currencies Repatriation of funds (principal. GBP. interest) is allowed .PIOs. Cad$.Foreign Currency Non-resident Deposit Accounts FCNR (B)        FCNR (B) accounts NRIs.residing outside India can open FCNR (B) accounts FCNR (B) accounts are maintained as fixed deposits in certain designated currencies The designated currencies are: US$. Euro.

Loan Products Fund Based CASH CREDIT BILLS FINANCE LOANS & ADVANCES OVERDRAFT TERM FINANCE RETAIL FINANCE .

Loan Products ±Non Fund Based Co-Acceptance Of Bills Letters of Credit Bank Guarantee .

and to ensure that the operations in the customer account/s is/are for genuine purpose .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.

In view of many issues on account of drugs smuggling. terrorist activities. arms dealing. .Know Your Customer (KYC) -2 Application of KYC norms have become important due to various reasons.. money laundering.etc. banks need to be careful in dealing with their clients.

Know Your Customer (KYC) -3 Risk Management Customer Acceptance Policy Monitoring of Transactions Customer Identification Procedure .

1 Individuals Power of Attorney Holders Joint account hoders Bank Customers Executors/Trustees Minors Illiterate Perons .Bank Customers .

2 Clubs/ Socities Sole Proprietor Coproates Partnership Hindu Undivided Family .Bank Customers .

BANKER-CUSTOMER RELATIONSHIP DEBTOR-CREDITOR CREDITOR-DEBTOR AGENT-PRINCIPAL LESSOR-LESSEE BAILEE-BAILOR .

CHEQUES BEARER ORDER CROSSED OPEN .

NEGOTIABLE INSTRUMENTS Paying Banker: Payment in Due Course Apparent Tenor In good faith Without Negligence .

NEGOTIABLE INSTRUMENTS BANKER¶S DUTIES HOLDER IN DUE & COURSE RESPONSIBILITIES CONSIDERATION BEFORE C0LLECTING TITLE MATURITY BANKER COLLECTION OF CHEQUES .

Six Cs 
Character  Capital  Capacity  Collateral  Condition  Compliance

Working Capital Cycle

Bills receivables

Cash

sales

Raw material

Finished goods

Semi finished goods

CHARGES 
    

HYPOTHECATION PLEDGE MORTGAGE ASSIGNMENT LIEN SET OFF

Risk Management Operations Risk Credit Risk Interest Rate Risk Liquidity Risk Price Risk .

Securitisation and Reconstruction of Financial 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) .SRFAESI Act.2002 .

SRFAESI Act.2002 Legal framework Enforcement of Security interest Transfer of NPA .

Priority Sector 1 Priority Sector Primay Secondary Teritary .

Priority Sector 2 Primary Sector Agriculture Allied Activities Direct Indirect .

Priority Sector ± 3 Secondary Sector SSI/SME SSSBE .

Priority Sector 4 Tertiary Sector Small road/water Transport operator Small business/businee enterprises Professional/self employed Educational loans Housing finance Others .

. 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 companies investments in equipment are considered for classification as SMEs .small & medium sized entities.Small & Medium Enterprises (SMEs) SMEs are classified based on Small & Medium Enterprises Development Act.2006 SMEs are divided into micro.

Credit Management in Banks Credit appraisal system Capital adequacy norms Prudential norms Risks-ALM Exposure norms .

Documents are obtained based on the type of credit facility/constitution of the borrower/nature of securities offered by the borrowers .Documents should be properly filled up and duly executed by authorised persons.Documents should have a clear title and can be valid to be enforced in a court of law .Documentation 1 .Loan documents are classified as primary and secondary .Wherever required documents need to be stamped appropriately . .

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 with original .

E banking E Banking Credit Cards Internet Banking Core Banking Solutions .

com tmc_varadarajan@yahoo.varadarajan@scotiabank.M.C.VARADARAJAN TEL : 022-25638965 (R) 022-66364206 (O) e.ALL THE BEST & THANK YOU T.in .co.mail: t.

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