Welcome to

¡¡BF's - JA¡¡B Virtual
Classes
PR¡NC¡PLE8 OF BANK¡NG
Module A & B
April 15/2008
Financial System in !ndia
- 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 oI
India
(RBI)
Securities Exchange
Board oI India
(SEBI)
Insurance Regulatory
and Development
Authority
(IRDA)
Banks
Capital Markets/
Mutual Funds
Insurance
Companies
anking in !ndia
egal Irame work
oI
Banks
Banking Regulation
Act,1949
Reserve Bank oI India
Act,1934
anking in !ndia
· anking in !ndia is governed by
R Act,1343 and R! Act,1334
· anking in !ndia is controlled/monitored
by R! and Covt of !ndia
· 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
anking Regulation Act,1343 (R Act)·1
· R Act covers banking companies and
cooperative banks, with certain
modifications.
· R Act is not applicable to
a) primary agricultural credit societies b) land
development banks
R Act allows R! (Sec 22) to issue
licence for banks
anking Regulation Act,1343 (R Act)·2
Regulation
Control over
management
Penalities
Suspension
&
Winding up
Reserve Bank of Ìndia
Act,1934(RBÌ Act)-1
- RBÌ Act was enacted to constitute the
Reserve Bank of Ìndia
- RBÌ Act has been amended from time to
time
- RBÌ Act deals with the constitution,
powers and functions of RBÌ
Reserve ank of !ndia Act,1334(R! Act)·2
· R! 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
Reserve Bank of Ìndia - 1
Reserve Bank of Ìndia was established in
1935, after the enactment of the Reserve
Bank of Ìndia Act 1934 (RBÌ Act).
Banking Regulation Act,1949 (BR Act)gave
wide powers to RBÌ as regards to
establishment of new banks/mergers and
amalgamation of banks,opening of new
branches,etc
BR Act,1949 gave RBÌ powers to
regulate,superivse and develop the banking
system in Ìndia
Reserve ank of !ndia - 2
CENTRAL BANK
RBÌ
REGULATOR SUPERVÌSOR FACÌLÌTATOR
oney arket !nstruments
- !nter bank call money/deposit
- !nter bank notice money/deposit
- !nter bank term money/deposit
- Certificates of Deposit
- Commercial Paper
- Treasury ills
- ill rediscounting
- Repos
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.
- !ntroduced in 1383
- inimum period 7 days and maximum period one
year. F!s are allowed to issue CDs for a period
between 1 year and up to 3 years
- inimum amount is Rs 1,00,000.00
- Subject to payment of stamp duty under the !ndian
Stamp Act, 1833
- !ssued to individuals, corporations, trusts, funds and
associations
- !ssued at a discount rate freely determined by the
market/investors
Commercial Paper
- Short·term borrowings by corporates, financial
institutions, primary dealers from the money market
- Can be issued in the physical form (Usance Promissory
Note) or de mat format
- !ntroduced in 1330
- When issued in physical form are negotiable by
endorsement and delivery and hence, highly flexible
- aturity is 7 days to 1 year
- Unsecured and backed by credit rating of the issuing
company
- !ssued at discount to the face value
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
!ND!AN CAP!TAL ARKET
- !ndian Capital arket plays an important role in the
economic development of the country
- !t provides opportunities for investors to invest in the
market and also to earn attractive rate of return.
- !t also creates source of funds for the various sectors
- National Stock Exchange (NSE) and ombay Stock
Exchange (SE) are the major stock exchanges in
!ndia
Securities S Exchange oard of !ndia
(SE!)
- SE! was constituted on April 12/1388, and
obtained the statutory powers in arch,1332
- SE!'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
Association of utual Funds in !ndia
(AF!)
- AF! is an association as a non profit
organization.
- AF! represents mutual funds in !ndia
and working for healthy growth of the
utual Funds.
- AF! conduct examinations for F
executives as part of their training
activities
!nsurance Regulatory S Development
Authority (!RDA)
- The regulator for insurance business in
!ndia is !RDA.
- !RDA was established in 2000
- !RDA's functions:
- To regulate, promote and ensure
orderly growth of the insurance
business and reinsurance business in
!ndia
- To protect the interests of policy
holders
!nsurance Sector
- !nsurance Sector in
!ndia can be divided
into two main
sections
General Ìnsurance
Life Ìnsurance
Financial !ntermediaries (1)
- utual Funds· As financial intermediary promote
savings and mobilise funds which are invested in the
stock market and bond market
- Fs 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.
- Fs aims to reduce the risks in investments
utual funds help their investors to enhance their
value by investing the funds in capital market.
- utual funds offer various schemes: growth fund,
income fund, balanced fund,sector wise funds, etc.,
- Regulated by SE!
Financial !ntermediaries (2)
- erchant banking· Another important
financial intermediary which manages and
underwrites new issues, undertake
syndication of credit, advise corporate clients
on fund raising
- Subject to regulation by SE! and R!
- SE! regulates them on issue activity and
portfolio management of their business.
- R! supervises those merchant banks which
are subsidiaries or affiliates of commercial
banks
!ndian anking · Significant events 1
- Three presidency banks were established in Calcutta (1806) in
ombay (1840) and in adras (1843)
- !n the early part of 20
th
century, on account of the Swadeshi
movement a number of join stock banks were established by
!ndians like ank of !ndia, ank of aroda and Central ank of
!ndia.
- !n 1321 the three presidency banks were merged and the
!mperial ank of !ndia was created.
- During the period 1300 to 132S many banks failed, and the
Covernment appointed in 1323 a Central anking Enquiry
Committee to trace the reasons for the failure of banks.
- The Reserve ank of !ndia Act was passed in 1334 and the R!
came into existence in 133S and R! was nationalised in 1343
- The anking Regulation Act,1343 gave wide powers to R! to
act as the regulator for banks in !ndia
!ndian anking ·Significant events 2
- !n 13SS State ank of !ndia became the successor to
the !mperial ank of !ndia ,under the State ank of
!ndia Act,13SS.
- !n 13S3 State ank of !ndia (Subsidiary anks) Act
was passed to enable S! to take over State
Associated banks as S!'s subsidiaries
- !n 1363 the Covernment of !ndia nationalised 14
major commercial banks having deposits of Rs.S0
crore or more
- !n 137S Regional Rural anks were established under
RR Act 1376, which was preceded by RR
Ordinance in 137S
- !n 1380 six more commercial banks were
nationalised, with a deposit of Rs.200 crore or more
Progress of banking in !ndia
- !n the liberalised, privatised and
globalised environment, banks opeating
in !ndia have diversified their banking
activities by offering Para anking
facilities like
- erchant banking/utual funds
- ATs/Credit Cards/!nternet banking
- venture capital funds
- Factoring
- ancassurance
Classification of anks·1
Central
Bank
RBÌ
Public Sector
Banks
New Private
Sector
Banks
Old
Private
Sector
Foreign Banks
Co-operative
Banks
Regional
Rural
Banks
Classification of Banks-2
PUBLÌC SECTOR
BANKS
STATE BANK OF
ÌNDÌA
SBÌ
SBÌ ASSOCÌATE
BANKS
NATÌONALÌSED
BANKS
Classification of anks·3
- Public Sector anks =State ank of
!ndia+S!'s associate banks+
Nationalised banks
- Private Sector anks=!ndian Private
Sector anks (Old/New generation
banks)+Foreign banks in !ndia
- Other anks=Regional Rural
anks(RR)
Funcfions of 8onks - I
CENTRAL BANK
RBÌ
REGULATOR SUPERVÌSOR FACÌLÌTATOR
RESERVE BANK OF ÌNDÌA
SUPERVÌSORY & REGLATORY
Ìssuance of currency notes
Banker's Banker
Lender of the last resort
Credit Control & Monetary Policy
Exchange Control & Forex Management
Funds Transfer
CPEDIT COMTPOL
· QUAMTITATIVE CPEDIT COMTPOL
· QUALITATIVE CEDIT COMTPOL'
· CPP & SLP
· 8AMI PATE
· OPEM MAPIET OPEPATIOMS
Functions of anks · 2
Commercial anks·Core anking
Functions
· Acceptance of deposits from public
· Lending funds to public/corporates
· !nvesting funds in various opportunities
· Collecting cheques/drafts and other
Negotiable !nstruments
· Remitting funds
Funct|ons of ßanks-3
Commercial Banks ÷ Para Banking
Services
Providing safe deposit lockers
Acceptance of safe custody items
Acceptance of standing instructions
Offering internet banking facilities
Ìssuance 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 anks
DEPOS!T PRODUCTS
CERT!F!CATE
FLEX!
RECURR!NC
F!XED
SAv!NCS
CURRENT
DEPOS!TS
Non·Resident Accounts · 1
Rupee accounts
Non-resident
Ordinary account
(NRO)
Non-resident
External account
(NRE)
Foreign Currency Non·resident
Deposit Accounts -FCNR ()
FCNR () accounts
NR!s,P!Os,residing outside !ndia can open FCNR ()
accounts
FCNR () accounts are maintained as fixed deposits
in certain designated currencies
The designated currencies are:
US$, CP, ]apanese Yen, Euro, Cad$, Aus $
aintained in anks in !ndia in the above
mentioned foreign currencies and interest is also
earned in such foreign currencies
Repatriation of funds (principal, interest) is allowed
Loan Products - Fund ased
!LLS
F!NANCE
TER
F!NANCE
RETA!L
F!NANCE
OvERDRAFT
CASH CRED!T
LOANS
S
ADvANCES
Loan Products ÷Non Fund Based
Letters of
Credit
Bank Guarantee
Co-Acceptance
Of
Bills
Know Your Customer (KYC) Know Your Customer (KYC) - -1 1
KYC: Know Your Customer KYC: Know Your Customer
Know your customer (KYC) norms are Know your customer (KYC) norms are
applicable to all types of customer a/cs. applicable to all types of customer a/cs.
Ìt deals with not only to identify the Ìt deals with not only to identify the
customer but also to understand the customer but also to understand the
activities of the customer, and to ensure activities of the customer, and to ensure
that the operations in the customer that the operations in the customer
account/s is/are for genuine purpose account/s is/are for genuine purpose
Know Your Customer (KYC) ·2
- Application of KYC norms have become
important due to various reasons.
- !n 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.
Know Your Customer (KYC) -3
Customer
Acceptance
Policy
Monitoring of
Transactions
Risk Management
Customer
Ìdentification
Procedure
ank Customers · 1
Power of
Attorney
Holders
Executors/Trustees
Ìlliterate
Perons
Minors
Joint account
hoders
Ìndividuals
Bank Customers
ank Customers · 2
Sole
Proprietor
Clubs/
Socities
Coproates
Hindu
Undivided
Family
Partnership
BANKER-CUSTOMER
RELATÌONSHÌP
DEBTOR-CREDÌTOR
CREDÌTOR-DEBTOR
AGENT-PRÌNCÌPAL
LESSOR-LESSEE
BAÌLEE-BAÌLOR
CHEQUES
OPEN
CROSSED
ORDER
EARER
NECOT!ALE !NSTRUENTS
Paying anker:
Payment in
Due
Course
Apparent
Tenor
In good Iaith
Without
Negligence
NEC0T|AßLE
|N8TRUHENT8
BANKER'S DUTÌES
&
RESPONSÌBÌLÌTÌES
C0LLECTÌNG
BANKER
COLLECTÌON OF
CHEQUES
HOLDER !N
DUE
COURSE
CONS!DERAT!ON
T!TLE
EFORE
ATUR!TY
Six Cs
Character
Capital
Capacity
Collateral
Condition
Compliance
Working Capital Cycle
Cash
Raw material
Semi finished goods Finished goods
sales
ills receivables
CHARCES
HYPOTHECAT!ON
PLEDCE
ORTCACE
ASS!CNENT
L!EN
SET OFF
Risk anagement
Credit
Risk
Liquidity
Risk
Operations
Risk
Price
Risk
Ìnterest Rate
Risk
SRFAES! Act,2002
· Securitisation and Reconstruction of
Financial Assets and Enforcement of
Security !nterest Act (SRFAES!) was
enacted in 2002
_ Securitisation Company/Reconstruction
Company (SCRC) can finance the
acquistion from own resources or rise
sources from Qualified !nstitutional
uyers (Q!s)
SRFAES! Act,2002
EnIorcement oI
Security interest
TransIer oI NPA
egal Iramework
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
ProIessional/selI
employed
Educational loans
Housing Iinance
Others
Small S edium Enterprises (SEs)
- SEs are classified based on Small S
edium Enterprises Development Act,2006
- SEs are divided into micro,small S medium
sized entities.
- SEs are classified based on two categories
viz., manufacturing units and service
companies.
- !n case of manufacturing units investments
in plant and machinery and for service
companies investments in equipment are
considered for classification as SEs
Credit anagement in anks
Capital adequacy
norms
Prudential
norms
Credit appraisal
system
Exposure
norms
Risks-AM
Documentation 1
· Loan documents are classified as
primary and secondary
· Documents are obtained based on the
type of credit facility/constitution of the
borrower/nature of securities offered by the
borrowers
· Documents should have a clear title
and can be valid to be enforced in a
court of law
· Wherever required documents need to be
stamped appropriately
· Documents should be properly filled up and duly
executed by authorised persons.
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
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ALL THE EST S THANK YOU
- T..C.vARADARA]AN
- TEL : 022·2S63836S (R)
- 022·66364206 (O)
- e.mail: t.varadarajan@scotiabank.com
- tmc_varadarajan@yahoo.co.in