“Control system in bank.

A Project Submitted to

University of Mumbai

For Partial completion of the Degree of

Under the faculty of Commerce

Bachelor of Commerce (Banking and Insurance)

By

SHIV YADAV

Under The Guidance of

NAMEOFTHEPROJECTGUIDE

Mr.Raju Gole

Sadhana Education Society’s

L.S.RAHEJACOLLEGEOFARTSANDCOMMERCE
Juhu,Road,Santacruz (West),Mumbai400054

1
 DECLARATION

I, the undersigned Miss. SHIV MAHENDRA YADAV hereby declare that the work
embodied in this project work titled “CONTROL SYSTEM IN BANKS “forms from my own
Contribution to the research work carried out under the guidance of Mrs RAJU GOLE is a
result of my own research work and has not been submitted to any other University for any
other Degree/Diploma to this or to any other University.

Wherever reference has been made to previous work of others, it has been clearly indicated as
such and included in the Bibliography.

I, here by further declare that all the information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Shiv mahendra yadav

Roll no: 3558

Signature

2
 CERTIFICATE

This is to certify that Mr.SHIV MAHENDRA YADAV worked and duly completed his Project
Work for the degree of Bachelor in Commerce (Banking and Insurance) under the Faculty of
Commerce in the subject of Project Work and his project is entitled,
“CONTROL SYSTEM IN BANKS”
I further certify that the entire work has been done by the learner under my guidance and
that no part of it has been submitted previously for any Degree or Diploma of any
University.
It is her/his own work and facts reported by her personal finding sand investigations.

Mrs.DHARAVORA Dr.DEBAJITN.SARKAR
(Principal)

(Guiding teacher) Mr.RAJU GOLE

(CourseCoordinator) (ExternalExaminer)

SealoftheCollege

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 ACKNOWLEDGEMENT

I would like to acknowledge the following as being the idealistic channel sand fresh
dimensions incompletion of this project.

I take this opportunity to thank the University of Mumbai for giving me a chance to do this
project.

I would like to thank my Principal , Dr.Debajit N. Sarkar for providing me the necessary
facilities required for completion of this project.

I would like to thank my Coordinator ,Mrs.Dhara Vora for her moral support and guidance.

I would also like to express my sincere gratitude towards my Project guide Mr.
RAJU GOLE whose guidance and care made the project successful.

I would like to thank my college library, for having provide various reference books and
magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me
incompletion of the project especially my parents sand peers who supported me
throughout the project.

4
 PREFACE
It was a pleasurable experience for me to work on this project report ― Control

system in bank.
It has not only helped me to enhance my knowledge about various strategies
followed by the company but also reviewed my knowledge about training & job
opportunities for the management students. In this project report every possible effort
has been made to highlight the major aspects related to the topic by a comprehensive
study of literature and by survey information. .
To make it easier different tabular and diagrammatic approach has been used
which help in understanding the theme. It gives brands, a market image as well as depicts
phase of their life cycle to understand the company value in a better way. Survey report
and secondary data are an important document and contains information that can be used
to find out what are the findings of the research. I have tried my best to explore the truth
in my project reality regarding the survey and understanding practical way of working.

EXECUTIVE SUMMARY

The project scans the risky nature of banking with reference to various types of
transactions and their vulnerability to fraud. Prevention is better than cure. In bank
administration, one feels that not much attention is paid to preventive measures. Bank
managements must direct their orientation towards preventive rather than detective or
punitive measures. Preventive vigilance must be the prime agenda to bring down the
occurrence of fraud in banks.
Bankers must be properly educated and trained on the effect and consequences of
dilution and distortion of the prescribed norms. Retention and deployment of
experienced and specialized staff in the respective fields of operation will minimize
fraud. Bankers have to overcome the inertia that prevents them from learning new and
effective technology. Means and Modes of Frauds and RBI‘s Guidelines for the
detection and registration of the same and their dynamics should be made familiar to the
employees of a Bank so as to bring about awareness and at the same time create vigilance

5
amongst the employees, so as to equip them with the resources required to deal with
such frauds, as and when they happen.
The Major Banking Frauds that were bought into the limelight by the authorities and
other relevant departments, which saw banking frauds, and revealed the loop holes in
the already laid down strategy to deal with the frauds should be made familiar to the
public at large and the bankers at the same time.

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 INDEX

SR.NO PARICULAR PAGE NO.

Chapter 1 Executive summary. 8

Chapter Introduction. 9-21

Chapter Objectives 22-34

Chapter Scope. 35-43

Chapter Research 44-52

Methodology.

Chapter Findings 53-62

Chapter Data. 72-81

Chapter Features/Importance 82-88

Chapter Limitation

Chapter10 Comparison/Impact. 89-94

Chapter 11 Conclusion. 95-96

Chapter 12 References. 97-99

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 CHAPTER NO: 1
EXECUTIVE SUMMARY

Control system in banks

Technology has become a part of all walks of life and across all business sectors, and even
more so in banking. There has been massive use of technology across many areas of banking
business in India, both from the asset and the liability side of a bank’s balance sheet. Delivery
channels have immensely increased the choices offered to the customer to conduct
transactions with ease and convenience. Various wholesale and retail payment and settlement
systems have enabled faster means of moving the money to settle funds among banks and
customers, facilitating improved turnover of commercial and financial transactions. Banks
have been taking up new projects like data warehousing, customer relationship management
and financial inclusion initiatives to further innovate and strategise for the future and to
widen the reach of banking.

The dependence on technology is such that the banking business cannot be thought of in
isolation without technology, such has been the spread of technology footprints across the
Indian commercial banking landscape. Developments in IT have also brought along a whole
set of challenges to deal with. The dependence on technology has led to various challenges
and issues like frequent changes or obsolescence, multiplicity and complexity of systems,
different types of controls for different types of technologies/systems, proper alignment with
business objectives and legal/regulatory requirements, dependence on vendors due to
outsourcing of IT services, vendor related concentration risk, segregation of duties, external
threats leading to cyber frauds/crime, higher impact due to intentional or unintentional acts of
internal employees, new social engineering techniques employed to acquire confidential
credentials, need for governance processes to adequately manage technology and information
security, need for appreciation of cyber laws antheir impact and to ensure continuity of
business processes ….

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 CHAPTER NO :2

HISTORY(INTRODUCTION)

The Vedas (2000–1400 BCE) are the earliest Indian texts to mention the concept of usury,
with the word kusidin translated as "usurer". The Sutras (700–100 BCE) and the Jatakas
(600–400 BCE) also mention usury. Texts of this period also condemned usury: Vasishtha
forbade Brahmin and Kshatriya varnas from participating in usury. By the 2nd century CE,
usury became more acceptable.[11] The Manusmriti considered usury an acceptable means of
acquiring wealth or leading a livelihood.[12] It also considered money lending above a
certain rate and different ceiling rates for different castes a grave sin.[13]

The Jatakas, Dharmashastras and Kautilya also mention the existence of loan deeds, called
rnapatra, rnapanna, or rnalekhaya.[14][15]

Later during the Mauryan period (321–185 BCE), an instrument called adesha was in use,
which was an order on a banker directing him to pay the sum on the note to a third person,
which corresponds to the definition of a modern bill of exchange. The considerable use of
these instruments has been recorded[citation needed]. In large towns, merchants also gave
letters of credit to one another

Medieval era

The use of loan deeds continued into the Mughal era and were called dastawez. Two types of
loans deeds have been recorded. The dastawez-e-indultalab was payable on demand and
dastawez-e-miadi was payable after a stipulated time. The use of payment orders by royal
treasuries, called barattes, have been also recorded. There are also records of Indian bankers
using issuing bills of exchange on foreign countries. The evolution of hundis, a type of credit
instrument,

Colonial era

During the period of British rule merchants established the Union Bank of Calcutta in 1929,
first as a private joint stock association, then partnership. Its proprietors were the owners of

9
the earlier Commercial Bank and the Calcutta Bank, who by mutual consent created Union
Bank to replace these two banks. In 1840 it established an agency at Singapore, and closed
the one at Mirzapore that it had opened in the previous year. Also in 1840 the Bank revealed
that it had been the subject of a fraud by the bank's accountant. Union Bank was incorporated
in 1845 but failed in 1848, having been insolvent for some time and having used new money
from depositors to pay its dividends.

The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock
bank in India, it was not the first though. That honour belongs to the Bank of Upper India,
which was established in 1863 and survived until 1913, when it failed, with some of its assets
and liabilities being transferred to the Alliance Bank of Simla.

Foreign banks too started to appear, particularly in Calcutta, in the 1860s. Grindlays Bank
opened its first branch in Calcutta in 1864. The Comptoir d'Escompte de Paris opened a
branch in Calcutta in 1860, and another in Bombay in 1862; branches followed in Madras and
Pondicherry, then a French possession. HSBC established itself in Bengal in 1869. Calcutta
was the most active trading port in India, mainly due to the trade of the British Empire, and
so became a banking centre.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in
Lahore in 1894, which has survived to the present and is now one of the largest banks in
India. Around the turn of the 20th Century, the Indian economy was passing through a
relative period of stability. Around five decades had elapsed since the Indian rebellion, and
the social, industrial and other infrastructure had improved. Indians had established small
banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks
and a number of Indian joint stock banks. All these banks operated in different segments of
the economy. The exchange banks, mostly owned by Europeans, concentrated on financing
foreign trade. Indian joint stock banks were generally under capitalised and lacked the
experience and maturity to compete with the presidency and exchange banks. This
segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the
times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into
separate and cumbersome compartments.

10
The period between 1906 and 1911 saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to
found banks of and for the Indian community. A number of banks established then have
survived to the present such as Catholic Syrian Bank, The South Indian Bank, Bank of India,
Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement led to the establishment of many private banks in
Dakshina Kannada and Udupi district, which were unified earlier and known by the name
South Canara (South Kanara) district. Four nationalised banks started in this district and also
a leading private sector bank. Hence undivided Dakshina Kannada district is known as
"Cradle of Indian Banking”

The inaugural officeholder was the Britisher Sir Osborne Smith(1 April 1935), while C. D.
Deshmukh(11 August 1943) was the first Indian governor. On December 12,
2018,Shaktikanta Das, who was the finance secretary with the Government of India, begins
his journey as the new RBI Governor, taking charge from Urjit R Patel.

During the First World War (1914–1918) through the end of the Second World War (1939–
1945), and two years thereafter until the independence of India were challenging for Indian
banking. The years of the First World War were turbulent, and it took its toll with banks
simply collapsing despite the Indian economy .

11
Liberalisation in the 1990s.

In the early 1990s, the then government embarked on a policy of liberalisation, licensing a
small number of private banks. These came to be known as New Generation tech-savvy
banks, and included Global Trust Bank (the first of such new generation banks to be set up),
which later amalgamated with Oriental Bank of Commerce, IndusInd Bank, UTI Bank (since
renamed Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth
in the economy of India, revitalised the banking sector in India, which has seen rapid growth
with strong contribution from all the three sectors of banks, namely, government banks,
private banks and foreign banks.

The next stage for the Indian banking has been set up, with proposed relaxation of norms for
foreign direct investment. All foreign investors in banks may be given voting rights that
could exceed the present cap of 10% at present. It has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4–6–4 method (borrow at 4%; lend at 6%; go home at 4) of functioning. The new
wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.
All this led to the retail boom in India. People demanded more from their banks and received
more.

Early phase of Indian Banks ,1786 to 1969.

• The first bank in India, the General Bank of India, was set-up in 1786. Bank of
Hindustan and Bengal Bank followed.

• The East India Company established Bank of Bengal (1809),Bank of Bombay (1840)
and Bank of Madras (1843) as independent units and called them Presidency banks.
These three banks were amalgamated in 1920 and the Imperial Bank of India, a bank
of private shareholders, mostly Europeans, was established.

• Allahabad Banks was established, exclusively by Indians, in 1865.

• Punjab National Bank was set-up in 1894 with headquarters in Lahore.

• Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank and Bank of Mysore were set-up.

12
• The Reserve Bank of India came in 1935.

• To streamline the functioning and activities of commercial banks, the Government of

india came up with the Banking Companies Act, 1949, which was later changed to the
Banking Regulation Act, 1949.

Banking sector Reforms from 1969 to 1991.

• In 1955, government nationalised the Imperial Bank of India and started offering
extensive banking facilities, especially in rural and semi-urban areas

• The government constituted the State Bank of India to act the principal agent of the
RBI and to handle banking transaction of the Union Government and State
Government all over the country.

• 7 banks owned by the Princely state were nationalised in 1959 and they become
subsidiaries of the 1959 and they became subsidiaries of the State Bank of India. In
1969, 14 commercial bank in the country were nationalised.

• In the phase of banking sector reforms, 7 more banks were nationalised in 1980. With
this, 80% of the banking sector in India came under the government ownership.

New Phase of Banking System,Reforms after 1991.

• This phase has introduced many more products and facilities in the banking sector as
part of the reforms process.
• In 1991, under the chairmanship of M Narasimham, a committee was set-up, which
worked for the liberalisation of banking practices.

• In the phas, the country is flood with foreign bank and their ATM stations. Efforts are
being put to give a satisfactory service to customers.

• Phone banking and net banking are introduced.The entire system became more
convenience and swift. Time is given importance in all money transactions.

13
Recent Development in Banking Sectors.

Kotak Mahindra Bank and Yes Bank got a license from RBI to entry in the system in
the year 2003 and 2004.
In 2014, RBI grants in-principle approval to IDFC and Bandhan Financial Services to
set up banks.
Today, Indian Banking industry is one of the most growing flourishing industries.
Banking systems of any country need to be effective, efficient as it plays the active in
the economic development of the country.

Internal control in Banks.

Internal control, as defined by accounting and auditing, is a process for assuring of an

organization's objectives in operational effectiveness and efficiency, reliable financial
reporting, and compliance with laws, regulations and policies. A broad concept,
internal control involves everything that controls risks to an organization.

It is a means by which an organization's resources are directed, monitored, and

measured. It plays an important role in detecting and preventing fraud and protecting
the organization's resources, both physical (e.g., machinery and property) and
intangible (e.g., reputation or intellectual property such as trademarks).

At the organizational level, internal control objectives relate to the reliability of

financial reporting, timely feedback on the achievement of operational or strategic
goals, and compliance with laws and regulations. At the specific transaction level,
internal controls refers to the actions taken to achieve a specific objective (e.g., how
to ensure the organization's payments to third parties are for valid services rendered.)
Internal control procedures reduce process variation, leading to more predictable
outcomes. Internal control is a key element of the Foreign Corrupt Practices Act
(FCPA) of 1977 and the Sarbanes–Oxley Act of 2002, which required improvements
in internal control in United States public corporations. Internal controls within
business entities are also referred to as operational controls.

14
 Early History of an internal Control.

Internal controls have existed from ancient times. In Hellenistic Egypt there was a
dual administration, with one set of bureaucrats charged with collecting taxes and
another with supervising them.

Committee on Banking sector Reforms l l

The Government of India therefore felt towards the end of 1997 that the time was ripe
to look ahead and ‘chart the reforms necessary in the years ahead so that India’s
banking system can become stronger and better equipped to complete effectively in a
fast changing international economic environment19’. Another committee specifically
called Committee on banking Sector Reforms was accordingly constituted on
December 26, 1997 under the chairmanship of the same M. Narasimham. We may
refer to this Committee as Narasimham Committee II. The terms of reference of the
committee were as follows.

• To review progress in reforms in the banking sector over the past six years, with
particular reference to the recommendations made by the (Narasimham) Committee
on the Financial System (Narasimham committee I) in 1991.

• hen India’s banking system and make it internationally competitive, taking account of
the vast changes in international financial markets and technological advances and the
experience of other developing countries in adapting to such changes.

• To make detailed recommendations in regard to banking policy – its institutional,

supervisory legislative and technological dimensions.
• The Committee submitted its Report in April 1998. It has made a wide range of
recommendations to consolidate the reform process commenced in 1992. The
proposed reforms focus on improving the systems, productivity, efficiency and
profitability as also on providing greater operational flexibility and functional
autonomy in decision-making.

Major Recommendation of Narasimham committee-ll

15
 Strengthening the Banking System.

Internationally accepted measuring rod of ‘CAMELS’ - which stands for Capital

adequacy, Asset quality, Management, Earnings, Liquidity and (internal control)
Systems – provides a framework for evaluation of the current strength as well as
direction to proceed further.

Capital Adequacy.

• There should be 5 percent weight for market risk for government and approved
securities as against zero risk weight presently. In other words, while considering
capital adequacy, risk element in holding government and government approved
securities should be taken into account .

• The risk weight for government guaranteed advances should be the same as for other
advances (for future advances)
• iii. Foreign exchange open position (i.e., ‘overbought or ‘oversold’ position as against
‘Square’ position in respect of foreign currencies) should carry a 100 percent risk
weight.
• iv. The capital adequacy ratio for banks should be raised from present 8 percent to 10
percent in a phased manner by the year 2002. In the case of weak banks, it may be
pegged higher on merits.

Assets quality.

• Government guaranteed advances, which have turned sticky, should also be classified
as NPAs.
• vi. No further capitalization of banks be undertaken from the government budget. (So
far government has contributed about Rs. 20,000crore on account of this by way of
recapitalisation bonds).
• vii. The objective should be to reduce the average level of net NPAs for all banks to
below 5 percent by the year 2000 and to 3 percent by 2002 (for banks with
international presence, these percentages should be in respect of gross NPAs). .

16
• viii. To take care of hard core NPAs, an Asset Reconstruction Company (ARC)
should be established by a bank/ a group of banks which badassets should be
transferred at an agreed price to be paid for by way of NPA swap bonds guaranteed by
government. For this stamp duty rates should be minimal and tax incentives should be
provided to banks.
• While the share of directed lending may not be reduced, to bring down the future high
level of NPAs in such lending, the beneficiaries under government-sponsored credit
linked schemes should be identified by branch managers (and not by government
departments/politicians). The committee has reiterated the point made by the first
Committee that the pursuit of the redistributive objective should use the
instrumentality of the fiscal system rather than the credit system.
• x. Rules for provisioning against standard, sub-standard and doubtful assets should be
changed in keeping with the international practice and consideration should be given
to make such provisions tax deductible.
• xi. Asset-liability management techniques and risk management techniques like
‘value at risk’ should be adopted by banks. (The dangers to liquidity and solvency, of
a mismatch between assets and liabilities either in terms of currency maturity or asset
value have been brought home by the recent experience of banks in East and South-
East Asia). Sometimes hedging instruments (derivatives like swaps, futures, options)
themselves generate risks.
• There should be full disclosure of connected lending (to Groups, associates, interested
parties, etc) and lending to sensitive sectors.
• xiii. An independent loan review mechanism especially for large borrowal accounts
and system to identify potential NPAs should be instituted by banks. There should be
no recourse to any scheme of debt waiver in view of its serious and deleterious impact
on the culture of credit
• xiv. Earnings and profitability
• The committee has pinpointed a number of areas where expenses can
• be reduced and earnings to be increased.

17
Swadeshi movement.

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political leaders to
found banks for the Indian community. A number of banks established then have survived to
the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara
Bank and Central Bank of India.
The Evolution of Banking in India 71
Ammembal Subbarao Pai founded “Canara Bank Hindu Permanent Fund” in1906. Central
Bank of India wasestablished in 1911 by Sir Sorabji Pochkhanawala and was the first
commercial Indian bank completely owned and managed by Indians. In 1923, it acquired the
Tata Industrial Bank.
The fervour of Swadeshi movement lead to establishing of many private banks
in Dakshina Kannadaand Udupi district which were unified earlier and known by thename
South Canara (South Kanara )district. Four nationalized banks started in this district and also
a leading private sector bank. Hence, undivided Dakshina Kannada district is known as
“Cradle of Indian Banking".

Development after freedom.

The second milestone in history of Indian banking was India becoming a sovereign republic.
The Government of India initiated measures to play an active role in the economic life of the
nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a
mixedeconomy. This resulted into greater involvement of the state in different segments of
the economy including banking and finance. The banking sector also witnessed the benefits;
Government took major steps in this Indian Banking Sector Reform after independence.
• First major step in this direction was nationalization of Reserve Bank in 1949.
• Enactment of Banking Regulation Act in 1949
• Reserve Bank of India Scheduled Banks' Regulations, 1951.
• Nationalization of Imperial Bank of India in 1955, with extensive banking facilities on a
large scale especially in rural and semi-urban areas.
• Nationalization of SBI subsidiaries in 1959.

18
Government of India took many banking initiatives. These were aimed to provide banking
coverage to all section of the society and every sector of the economy.
The Industrial Credit and Investment Corporation of India Limited (ICICI) was incorporated
at the initiative of World Bank, the Government of India and representatives of Indian
industry, with the objective of creating a development financial institution for providing
medium-term and long-term project financing to Indian businesses.

Nationalization Process.

Nationalization of banks in India was an important phenomenon. Despite the provisions,

control and regulations of Reserve Bank of India, banks in India except the State Bank of
India or SBI, continued to be owned and operated by privatepersons. By the 1960s, the Indian
banking industry had become an important tool to facilitate the development of the Indian
economy. At the same time, it had emerged as a large employer, and a debate had ensued
about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of
India, expressed the intention of the Government of India in the annual conference of the All
India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The
meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance
and nationalized the 14 largest commercial banks with effect from the midnight of July 19,
1969. Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9 August 1969.
The Evolution of Banking in India 73
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery.
With the second dose of nationalization, the Government of India controlled around 91% of
the banking business of India. Later on, in the year 1993, the government merged New Bank
of India with Punjab National Bank. It was the only merger between nationalized banks and
resulted in the reduction of the number of nationalized banks from 20 to 19. Currently there
are 27 nationalized commercial banks.

Economical Liberalisation.

19
second major turning point in this phase was Economic Liberalization in India. After
Independence in 1947, India adhered to socialist policies. The extensive regulation was
sarcastically dubbed as the "License Raj". The Government of India headed by Narasimha
Rao decided to usher in several reforms that are collectively termed as liberalization in the
Indian media with Manmohan Singh whom he appointed Finance Minister. Dr. Manmohan
Singh, an acclaimed economist, played a central role in implementing these reforms. ,
licensing a small number of private banks. These came to be known as New Generation tech-
savvy banks, and included Global Trust Bank (the first of such new generation banks to be
set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI
Bank),ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy
of India, revitalized the banking sector in India, which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks.
Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is
to manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time- especially
in its services sector-the demand for banking services, especially retail banking, mortgages
and investment services are expected to be strong.

The English traders that came to India in the 17th century could not make much use of the of
indigenous bankers, owing to their ignorance of the language as well the inexperience
indigenous people of the European trade. Therefore, the English Agency Houses in Calcutta
and Bombay began to conduct banking business, besides their commercial business, based on
unlimited liability. The Europeans with aptitude of commercial pursuit, who resigned from
civil and military services, organized these agency houses.
A type of business organization recognizable as managing agency took form in a period from
1834 to 1847. The primary concern of these agency houses was trade, but they branched out
into banking as aside line to facilitate the operations of their main business. The English
agency houses, that began to serve as bankers to the East India Company had no capital of

20
their own, and depended on deposits for their funds. They financed movements of crops,
issued paper money and established joint stock banks. Earliest of these was Hindusthan Bank,
established by one of the agency houses in Calcutta in 1770.
Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790;
both are now defunct. The oldest bank in existence in India is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank
of Bengal. This was one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under charters from the
British East India Company. For many years the Presidency banks acted as quasi-central
banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India.

21
 CHAPTER NO:3
OBJECTIVES OF CONTROL SYSTEM

Reserve Bank of India (RBI) is India’s central banking institution, which controls the
monetary policy of the Indian rupee. It commenced its operations on 1 April, 1935 during the
British Rule in accordance with the provisions of the Reserve Bank of India Act, 1934. The
original share capital was divided into shares of 100 each fully paid, which were initially
owned entirely by private Shareholders. Following India’s independence on 15 August, 1947,
the RBI was nationalised on 1 January, 1949.

• Monetary Authority: Formulates, implements and monitors the monetary policy for
A) maintaining price stability, keeping inflation in check ; B) ensuring adequate flow
of credit to productive sectors.

• Regulatory and supervisor of the Financial System: lays out parameters of banking
operations within which the country”s banking and financial system functions for– A)
maintaining public confidence in the system, B) protecting depositors’ interest ; C)
providing cost-effective banking services to the general public

• Regulatory and supervisor of the Payments systems: A) Authorises setting up of

payment systems; B) Lays down standards for working of the payment system; C)lays
down policies for encouraging the movement from paper-based payment systems to
electronic modes of payments. D) Setting up of the regulatory framework of newer
payment methods. E) Enhancement of customer convenience in payment systems. F)
Improving security and efficiency in modes of payment.

• Manage the Foreigh Exchange: RBI manages forex under the FEMA- Foreign
Exchange Management Act, 1999. in order to A) facilitate external trade and
payment B) promote development of foreign exchange market in India.

• Issue the currency Notes: RBI issues and exchanges currency as well as destroys
currency & coins not fit for circulation to ensure that the public has adequate quantity
of supplies of currency notes and in good quality.

22
• Development to control. RBI performs a wide range of promotional functions to
support national objectives. Under this it setup institutions like NABARD, IDBI,
SIDBI, NHB, etc.

• Bankers to the Government: performs merchant banking function for the central and
the state governments; also acts as their banker.

• Bankers to banks: An important role and function of RBI is to maintain the banking
accounts of all scheduled banks and acts as banker of last resort.

• Agent of Government of India in the IMF

• To manage the monetary and credit system of the country.

• Stabilize internal and external value of rupee.

• Establish monetary relations with other countries of the world and international
financial institutions.

• To maintain balance between the demand and supply of currency.

• The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the
Reserve Bank as: “to regulate the issue of Bank notes and the keeping of reserves
with a view to securing monetary stability in India and generally to operate the
currency and credit system of the country advantage.

23
• To promote and perform promotional functions to support national banking and other
financial objectives.

• To offer banking solutions to the Central and State Governments.

• To act as a banker for the Central and State Governments.

• To be the Chief Banker to every bank across the country and maintain all the banking
accounts of every scheduled bank.

Objectives for credit control:

The important objectives of credit control are given below :

• Price Stability: Violent price fluctuations cause disturbances and maladjustments in

the economic system and have serious social consequences. Hence, price stability is
an important objective of credit control policy. The central bank, by regulating the
supply of credit in accordance with the commercial needs of the people, can bring
about price stability in the country.

• Economic Stability: Operation of the business cycle brings instability in

a capitalist economy. The objective of the credit control policy of the
credit control policy of the central bank should be to eliminate cyclical
fluctuations and ensure economic stability in the economy.
Maximisation of EMPLOYMENT: Unemployment is economically wasteful an
And undesirables.Therefore economic stability with full employment and higher p
er capita income has considered as an important objectives of an credit control
policy.

Economic Growth: The main objective of credit control policy in the under –
Developed should be promotion to an economic growth within the shortes.
Period of time .

24
 * To achieve internal price stability.
*To meet the financial requirement during slump in the economy.
*To maximize income, output and employment in the economy.
*Meeting the financial requirement during a slump in the economy and in the
Normals time as well.
*Control business cycles and bussiness needs.
*credit control is an important objectives used by reserve bank of India.

OBJECTIVES TO AN ACCOUNTING CONTROL IN BANKS .

Accounting also makes use of controls in order to ensure the accuracy and integrity of
financial records. These controls are related to but different from overall internal controls,
though they are just as vital. The objective of accounting controls is to help keep management
and others with a vested interest in the company from inflating numbers in order to make a
company appear to be more profitable than it actually is.Accounting controls include things
like keeping certain financial documents out of the hands of management and keeping
records in a locked location or away from where day-to-day business operations are
performed. Accounting teams often make use of preventive, detective and corrective controls
in their methods for accounting control, and accounting control makes accurate internal
audits more possible for the

25
The objective of every type of internal control within an organization is to ensure ethical and
efficient functioning in the following three areas:

• Operations : Internal controls help an organization operate at peak efficiency when it

comes to finances, personnel and business procedures. They also aid organizations in
loss prevention and future projections.

• Reporting : Internal controls make all types of reporting more accurate, financial or
otherwise. Their objective is to identify problems, solve them and then prevent them
in the future, all while documenting things thoroughly and accurately.

• Compliance : Internal controls aim to ensure that a company is in compliance with all
internal and external rules and regulations that pertain to its industry. This includes
everything from manufacturing to labor laws, branding and even OSHA standards.

• Control Activities: Control activities include the policies and procedures institutions
establish to manage risks and ensure pre- defined control objectives are met.
Preventative controls are designed to deter the occurrence of an undesirable event.
Detective controls are designed to identify operational weaknesses and help effect
corrective actions. Control activities should cover all key areas of an organization and
address items such as organizational structures, committee compositions and authority
levels, officer approval levels, access controls (physical and electronic), audit
programs, monitoring procedures, remedial actions, and reporting mechanisms.

• Monitoring : Internal control systems must be monitored to ensure they operate

effectively. Monitoring may consist of periodic control reviews specifically designed
to ensure the sufficiency of key program components, such as risk assessments,
control activities, and reporting mechanisms. Monitoring the effectiveness of a control
system may also involve ongoing reviews of routine activities. The effectiveness of a
periodic review program is enhanced when people with appropriate skills and
authority are placed in key monitoring roles.

• Cash Controls : Institutions should provide tellers with a separate cash drawer to
which they have sole access. Common cash funds should not be used. An inability to

26
 fix responsibility in the event of a discrepancy could unnecessarily embarrass an
employee or result in improper termination. Random cash drawer audits are also a
fundamental control process.

• Control Standards : The control environment begins with the board of directors,
which must establish appropriate control standards. The board of directors or an audit
committee,

recorded, and settled. When establishing segregation-of- duty standards, management

should assign responsibilities so that one person cannot dominate a transaction from
inception to completion. For example, a loan officer should not perform more than
one of the following tasks: make a loan, disburse loan proceeds, or accept loan
payments. Individuals having authority to sign official checks should not reconcile
official check ledgers or correspondent accounts, and personnel that originate
transactions should not reconcile the entries to the general ledger.

Additionally, information technology (IT) personnel should not initiate and process
transactions, or correct data errors unless corrections are required to complete timely
processing. In this situation, corrections should be pre-authorized, when possible, and
authorized personnel should review and approve all corrections as soon as practical
after the corrections are processed, regardless of any pre-authorizations.

• To ensure that the business transactions take place as per the general and specific
authorisation of the management

• To make sure that there is a sequential and systematic recording of every transaction,
with the accurate amount in their respective account and in the accounting period in
which they take place. It confirms that the financial statement fulfils the relevant
statutory requirements.

• To provide security to the company’s assets from unauthorised use. For this purpose,
physical security systems are used to provide protection such as security guards, anti-
theft devices, surveillance cameras, etc.

27
• To compare the assets in the record with that of the existing ones at regular intervals
and report to the those charged with governance (TCWG), in case any difference is
found.

• To evaluate the system of accounting for complete authorisation of the transactions.

• To review the working of the organization and the loopholes in the operations and
take necessary steps for its correction.

• To ensure there is the optimum utilization of the firm’s resources, i.e. men, material,
machine and money.

• To find out whether the financial statements are in alignment with the accounting
concepts and principles.

• Preventive Controls: These controls are introduced in the firm to stop errors and
irregularities from taking place.
• Detective Controls: These controls are implemented to reveal errors and irregularities,
once they take place.
• Corrective Controls: These controls are designed to take corrective action for
removing errors and irregularities after they are detected.
• The type of internal control system implemented in the organization will be based on
the company’s nature and requirements.

28
 *Achievement of good change management process
*Accuracy and completeness of data
*Upholding positive and effective cash management
*Confidentiality of customers data
*Authentication and authentication of processes
*Safeguarding of both IT and non IT resources
*Achieving efficiency and effectiveness in implementing operations

Objectives of an internal control system of Banks in Auditing:

• Proper control : One of the main objectives of an internal audit is to keep stringent
control over all the activities of an organization. The management needs assurance of
the authenticity of the financial records and the efficiency of the operations of the
firm. An internal audit helps establish both.

• Perfect accounting systems : An internal audit keeps a very close check on the
accounting system of an organization. It checks everything from the vouchers, to the
authority of transactions to mathematical accuracy. All entries are verified against
documents and other proof. Chances of mistakes or frauds are greatly reduced.

• Assets Protection : In the process of internal audit, there is always a valuation and
verification of an asset. There is also a physical verification of the ownership and
possession of the asset.

Benefits of internal control in banks :

• Helping protect assets and reduce the possibility of fraud.

• Improving efficiency in operations.

• Increasing financial reliability and integrity.

• Ensuring compliance with laws and statutory regulations.

• Establishing monitoring procedures.

Benefits of internal control in Audit:

29
• The scope is defined by management or the Board (not an outside agency or
adversarial entity).

• Internal Auditor “reports” directly to management or the Board

• Improves the “control environment” of the organization

• Makes the organization process-dependent instead of person-dependent
• Identifies redundancies and provides recommendations
• Early Warning System, enabling deficiencies to be identified and remediated on a
timely basis
• Increases accountability within the organization.

Benefits of Good internal control :

• Improving accountability of operations.

• It helps in the safeguarding of assets and reduces fraudulent transactions.

• Improving the efficiency of operations.

• Increasing financial transparency.

• Meeting legal and statutory regulations.

• Establishing monitoring procedures.

• Protection and optimum utilization of resources.

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 Control Environment .

Control environment is the base of all other standards of internal control system. It
comprises working approach and outlook of management that guides the execution of
all other activities in the system.

It addressees the morale values, ethics, work philosophy, objectives and management
style of the organisation.
Functions .

• Establishment of internal structure and hierarchy.

• Development of an ethical and moral code of conduct.

• Establishing accountability and responsibility.

Risk Assessment .

• Risk assessment is the process of identifying, analyzing and managing the risks that can
be a threat to achievement of organizational goals.

This component not only includes assessment of risks but also management of same.

31
 The risk assessment process covers both internal and external risks of the organisation.

The risk management part deals with prevention and avoidance of risks with help of
tools and strategies.

Functions .

• Assessment of risks.

• Based on pre-established objectives.

• Risk identification and mitigation.

• Risk management.

Control activities:

Control activities are a sum of rules, policies, and procedures that ensure that the
directives of the management are implemented effectively.

Functions .

• Development of control activity functions.

• Establishment of internal technology control.

• Deployment of policies and bylaws.

Control activities can be divided in to four categories :

Information and communications .

32
 Effective communication and timely exchange of important information can help the
management to achieve their organizational goals and reduce the risks associated with
them.

Control over information and communication helps in better management of

operations. It is important to ensure the right flow of information.

The communication and exchange of information should be in a appropriate language

to be understood easily by the end-mile users..

The communication should be in detail but not over informative in nature.Ensuring the
safety of exchange and privacy of information should also be taken consideration.

Functions.

• Setting up channels of internal & external communication.

• Establishing communication flow.

• Safety and Privacy of information.

Monitoring Activities .

Monitoring is a continuous process for an organization. It verifies that whether the

System is working or not according to an objectives .
Functions.
• Evaluation of organizational activities.

• Communication of deficiency to top management.

• Comparison of targets with actual results.

33
 CHAPTER NO:4
SCOPE

• Monetary Note of Issue .

Like any other cen-tral bank, the RBI acts as a sole currency authority of the country.
It issues notes of every denomination, except one-rupee note and coins and small
coins, through the Issue Department of the Bank.

34
 One- rupee notes and coins and small coins are issued by the Government of India. In
actuality, the RBI also issues these coins on behalf of the Government of India. At
present, notes of denominations of rupees two, five, ten, twenty, fifty, one hundred
and five hundred are issued by the RBI.

Prior to 1956, the principle of note issue of the RBI was based on proportional reserve
system. This system was replaced by the minimum reserve sys-tem in 1956 under
which the RBI was required to hold at least Rs. 115 crores worth of gold as back-ing
against the currency issued.

The rest (Rs. 85 crores) should be in foreign securities, so that to-gether with gold and
foreign exchange reserve the minimum value of these assets is Rs. 200 crores.

• Bankers Bank.

As bankers’ bank, the RBI holds a part of the cash reserves of commercial banks and
lends them funds for short periods. All banks are required to maintain a certain
percentage (lying between 3 per cent and 15 per cent) of their total liabilities. The
main objective of changing this cash reserve ratio by the RBI is to control credit.

• Cost Effective Internal Controls.

Internal control will vary depending on the plan’s size, type and complexity; whether
the plan uses outside service organizations to process transactions and manage plan
investments; and the size and qualifications of the department responsible for
financial reporting.

Internal control should be based on a systematic and risk-oriented approach, to ensure

that there are adequate individual controls in areas with high risk, and that they are not
excessive in areas with low risk. Before making the decision to adopt a control,
analyze the costs of establishing and maintaining it, and consider:

• The potential benefits the control will provide.

• The possible consequences of not implementing it.

• Occurrence or Existence.

35
 Do assets and liabilities actually exist at a given date? Did recorded transactions occur
during the current year or did they take place in an earlier or later year? For example,
all assets in the investment account must physically exist and be available to pay
benefits or plan expenses.

• Rights and Obligiations.

Do assets and liabilities reported in the financial statements represent the rights and
obligations of your plan
as of the date of the statement of net assets available for benefits? For example, an
investment should not be reported as an asset unless it is owned by the plan.
Liabilities should be reported only if they represent actual obligations of your plan,
not obligations of an insurance company or another entity.

• Completeness.

Are all transactions and accounts that should be presented in the financial statements
actually included? For example, all administrative expenses incurred during a given
year must be recorded, and all amounts owed to brokers for securities purchased must
be included in liabilities.

• Accuracy or evaluation and allocation.

Are assets and liabilities valued appropriately? Are assets, accrued liabilities, and
accumulated benefit obligations included in the financial statements at appropriate
amounts, and any resulting valuation or allocation adjustments recorded
appropriately? For example, investments must be reported at fair value, and any
related investment income appropriately allocated.

• Understandability.

Are transactions and

events recorded in the proper accounts? Is the financial information appropriately
presented and described, and is information in disclosures expressed clearly? For
example, costs must be properly classified
as either expenses or assets, and information about prohibited transactions that have
occurred at your plan must be disclosed in the notes to your plan’s financial
statements.

36
• Control objectives should be established for each of your plan’s financial statement
assertions. Control objectives related to the plan’s financial statement assertions
should cover each of the following areas:
• Plan Investments.

An example control objective for the “valuation” assertion related to investments

would be that the control helps ensure that investments are measured at fair value.

• Contributions received.

An example control objective for the “existence or occurrence” assertion for

contributions received would be that the control helps ensure that contributions by
employers and participants meet authorized or required amounts.

• Benefits Payments.

An example control objective for the “completeness” assertion related to benefit

payments would be that cash disbursement records are reconciled to ensure that all
benefit payments are recorded.

• Plan obligiations.

An example control objective for the “rights and obligations” assertion for plan
obligations would be that the control helps ensure that the actuarial valuation of
benefit obligations reflects the understanding and agreement of the plan committee or
responsible officials.

• Administrative Expenses record.

An example control objective for the “accuracy” assertion related to administrative

expenses would be that the control helps ensure that expenditures for administrative
expenses are not mistakenly recorded as benefit payments.

• Growth of banks.

balanced panel data set covering the period of 1992-2004 and employing a Data
Envelopment Analysis (DEA)-based Malmquist Total Factor Productivity (TFP)
index. The empirical study indicated that, after an initial adjustment phase, the
Indian banking industry experienced sustained productivity growth, which was

37
 driven mainly by technological progress. Banks' ownership structure does not
seem to matter as much as increased competition in TFP growth. Foreign banks
appear to have acted as technological innovators when competition increased,
which added to the competitive pressure in the banking market. Finally, our results
also indicate an increase in risk-taking behaviour, along with the whole deregulation
process.

It was found in the study of Goyal and Joshi (2011a) that small and local banks face
difficulty in bearing the impact of global economy therefore, they need support and it
is one of the reasons for merger. Some private banks used mergers as a strategic tool
for expanding their horizons. There is huge potential in rural markets of India, which
is not yet explored by the major banks. Therefore ICICI Bank Ltd. has used
mergers as their expansion strategy in rural market. They are successful in
making their presence in rural India. It strengthens their network across
geographical boundary

• Market Discipline.

transparency and disclosure norms as part of internationally accepted corporate

governance practices are assuming greater importance in the emerging
environment. Banks are expected to be more responsive and accountable to the
investors. Banks have to disclose in their balance sheets a plethora of information on
the maturity profiles of assets and liabilities, lending to sensitive sectors, movements
in NPAs, capital, provisions, shareholdings of the government, value of investment in
India and abroad, operating and profitability indicators.

• Financial Improvement.

financial inclusion has become a necessity in today’s business environment.

Whatever is produced by business houses, that has to be under the check from
various perspectives like environmental concerns, corporate governance, social and
ethical issues. Apart from it to bridge the gap between rich and poor, the poor people
of the country should be given proper attention to improve their economic condition.

• Control Money supply.

38
 To control demand and supply of money in Economy by Open Market Operations,
Credit Ceiling, etc. RBI has to match the credit requirements of the rest of the banking
system. It needs to maintain price stability and a high rate of economic growth.

• Act as Clearing house.

It acts as a custodian of FOREX. It administers and enforces the provision of Foreign

Exchange Management Act (FEMA), 1999. RBI buys and sells foreign currency to
maintain the exchange rate of Indian rupee v/s foreign currencies.

• Regulatory of Economy.

It controls the money supply in the system, monitors different key indicators like
GDP, Inflation, etc.

• Manage Government Securities.

RBI administers investments in institutions when they invest specified minimum

proportions of their total assets/liabilities in government securities.

• Supervisory of payments.

The Payment and Settlement systems Act of 2007 (PSS Act) gives RBI oversight
authority for the payment and settlement systems in the country. RBI focuses on the
development and functioning of safe, secure and efficient payment and settlement
mechanisms.

• Development Role.

This role includes the development of the quality of banking system in India and
ensuring that credit is available to the productive sectors of the economy. It provides a
wide range of promotional functions to support national objectives. It also includes
establishing institutions designed to build the country’s financial infrastructure. It also
helps in expanding access to affordable financial services and promoting financial
education and literacy

• Publish monetary data.

39
 RBI maintains and provides all essential banking and other economic data,
formulating and critically evaluating the economic policies in India. RBI collects,
collates and publishes data regularly.

• Exchange Managers.

RBI represents India as a member of the International Monetary Fund [IMF]. Most
commercial banks are authorized dealers of RBI.

• Banking ombadsman scehmes.

RBI introduced the Banking Ombudsman Scheme in 1995. Under this scheme, the
complainants can file their complaints in any form, including online and can also
appeal to the RBI against the awards and the other decisions of the Banking
Ombudsman.

• Protect Banking Codes.

To measure the performance of banks against Codes and standards based on

established global practices, the RBI set up the Banking Codes and Standards Board
of India (BCSBI).

• Fair practices Codes.

RBI formulated the Fair Practices Code for Lenders which was communicated to
banks to safeguard the interest of the borrowers. All the banks are supposed to follow
the codes formulated by RBI.

• Miscellaneous Functions.

The RBI collects, collates and publishes all monetary and banking data regularly in its
weekly statements in the RBI Bulletin (monthly) and in the Report on Currency and
Finance.

• Provision of Induatrial finance.

Rapid industrial growth is the key to the development of the economy. Providing
adequate and timely credit to small, medium and large industry is very important. The

40
 RBI has played a pivotal role in setting up special financial institutions such as IDBI
Ltd, ICICI and EXIM BANK etc.

• Provisions of Training.

The RBI has always tried to provide essential training to the staff of the banking
industry. The RBI has set up the bankers’ training colleges at several places. National
Institute of Bank Management i.e NIBM, Bankers Staff College i.e BSC and College
of Agriculture Banking i.e CAB are few to mention.

• Current Senario”

The role of RBI in Indian economy has changed according to the scenario in the
country. In April 2019 the RBI took the monetary policy decision to lower its
borrowing rate to 6%. This was the second rate cut for 2019 and is expected to have a
positive impact on the borrowing rate across the credit market more substantially.
Prior to April, credit rates in the country have remained relatively high, despite the
central bank’s positioning, which has been limiting borrowing across the economy.
The central bank must also grapple with a slightly volatile inflation rate that is
projected at 2.4% in 2019, 2.9% to 3% in the first half of 2020, and 3.5% to 3.8% in
the latter half of 2020.

• Promotion of commercial banking.

• Promotion of cooperative banking.
• Promotion of industrial finance.

• Industrial Development.

The developments in Indian industry and government and the integration of India with
the global markets also offer innumerable opportunities to the banking sector.
Companies and governments are increasingly seeking high-quality banking services
to improve their own operating efficiency. Companies seek to offer better customer
service and maximize shareholder returns and governments seek to improve the
quality of public services. The internationalization of India offers banks the
opportunity to service cross-border needs of Indian companies and India-linked needs
of multinationals.
Knowledged Society

41
• Knowledge Society.

Building knowledge-driven, learning organizations is important in the current

scenario of rapidly evolving operating environments. Knowledge and assimilation of
new ideas and trends are essential to keep the organization ahead on the curve. This is
true for banking as it is for all other sectors. Banks must continuously seek to be
aware of cutting edge practices in banking internationally and institutionalize this
learning across the organization. This will prepare them for the future as Indian
markets become more sophisticated and integrated into the global financial markets.
Another critical area for the Indian banking sector is people. The ability to attract and
retain talent is a key success factor for a people-oriented business like banking. Banks
have to build organizations that are process driven yet innovative, stable yet flexible,
and responsive to change.

• Employee Retention.

The banking industry has transformed rapidly in the last ten years, shifting from
transactional and customer service-oriented to an increasingly aggressive
environment, where competition for revenue is on top priority. Long-time banking
employees are becoming disenchanted with the industry and are often resistant to
perform up to new expectations. The diminishing employee morale results in
decreased revenue. Due to the intrinsically close ties between staff and clients, losing
those employees completely can mean the loss of valuable customer relationships.
There tail banking industry is concerned about employee retention from all levels:
from tellers to executives to customer service representatives because competition is
always moving in to hire them away.

• Global Banking.

The impact of globalization becomes challenges for the domestic enterprises as they
are bound to compete with global players. If we look at the Indian Banking Industry,
then we find that there are 36 foreign banks operating in India, which becomes a
major challenge for Nationalized and private sector banks.

• Timely Technology.

42
 Already electronic transfers, clearings, settlements have reduced translation times. To
face competition it is necessary for banks to absorb the technology and upgrade their
services.

• Appraisal.

The word appraisal implies a critical evaluation and assessment of the existing
controls and operations of the business enterprise. The internal auditor should
appraise them on the basis of appropriate criteria.

• Examine and Evaluate.

The terms of examination and evaluation describe the two fold functional roles and
responsibilities of the internal auditor. Firstly the internal auditor should make an
examination and enquiry for fact finding. Secondly he should make a judgmental
evaluation after thorough examination.

• Control Over all Controls.

Controls are essential for every organization. In the absence of controls, it would be
impossible for any organization to protect its assets, rely on the records and perform
its functions successfully. The internal auditor examines the effectiveness of each
control system and traces out the deficiencies in each system.

• Services.

His services can be availed at any time of emergency. His advice can be obtained on
any matter or point significant from the business and strategic point of view..

CHAPTER NO:5
Research Methodology

Calculate the average cost and present it through curvature to judge the efficiency.
Such curvature would demonstrate relationship between Bank size and unit of production.

• DataEnvelopmentAnalysis(Non-Parametric).

43
• Stochastic Frontier Approach (Parametric).

In a Service Industry like Banking, it is not possible to measure physical output in

absence of clear definition. Therefore, neither of the aforesaid methods have been
used for the current study.

However, the study has been conducted by using specific financial ratios to study the
comparative analysis of the PSBs and Private Sector Banks. The specific ratios are
helpful in evaluating the efficiency of Banks, which not only indicate the past trend but
would predict the likely performance in future as well. These ratios have been classified
into five Performance indicators viz. Volume and Size, Efficiency, Profitability, Asset
Quality and Soundness, Growth trend and several specific performance ratios, as listed
in 2.8.4 and explained in Appendix -1, have been studied in depth to evaluate the
financial performance of Indian Banks (PSBs and PBs).The findings of the study would
be of assistance to the management of the Banks for planning their financial strategies
for attaining the set financial performance objectives and in exploring further
opportunities.

In addition to the above, following statistical tools have been used to analyse the
relevant data, in SPSS 16.0, for testing the Hypothesis framed for the study.

• Methods of an credit Control.

• Quantitative methods.
• Qualitative methods.

• Quantitative or General Methods:

The methods used by the central bank to influence the total volume of credit in the
banking system, without any regard for the use to which it is put, are called
quantitative or general methods of credit control

These methods regulate the lending ability of the financial sector of the whole
economy and do not discriminate among the various sectors of the economy. The
important quantitative methods of credit control are- (a) bank rate, (b) open market
operations, and (c) cash-reserve ratio.
.

44
• Qualitative or Selective Methods:

The methods used by the central bank to regulate the flows of credit into particular
directions of the economy are called qualitative or selective methods of credit control.
Unlike the quantitative methods, which affect the total volume of credit, the
qualitative methods affect the types of credit, extended by the commercial banks; they
affect the composition rather than the size of credit in the economy.

The important qualitative or selective methods of credit control are; (a) marginal
requirements, (b) regulation of consumer credit, (c) control through directives, (d)
credit rationing, (e) moral suasion and publicity, and (f) direct action.

• Bankrate Policy.

The bank rate policy is the traditional method of credit control used by a central bank.
The bank rate or the discount rate is the rate at which a central bank is prepared to
discount the first class bills of exchange. According to M. Spalding, the bank rate is
“the minimum rate charged by the central bank for discounting approved bills of
exchange.”

In its capacity as ‘lender of last resort’, the central bank helps the commercial banks
by rediscounting the first class bills (i.e., by advancing loans against approved
securities). The rate of interest which the central bank charges from the commercial
banks for rediscounting the bills is called bank rate.

The bank rate is distinct from the market interest rate. The bank rate is the rate of
discount of the central bank, while the market interest rate is the lending rate charged
in the money market by the ordinary financial institutions.

Bank rate policy aims at influencing- (a) the cost and availability of credit to the
commercial banks, (b) interest rates and money supply in the economy, and (c) the level
of economic activity of the economy. A rise in the bank rate makes the credit costlier,
reduces the volume of credit, discourages economic activity and brings down the price
level in the economy.

45
 Similarly, a fall in the bank rate makes the credit cheaper, increases the volume of
credit, encourages the businessmen to borrow and invest, and increases the levels of
economic activity and the price level.

These Methods are:

• Varying the bank rate.

• Engaging in open market operations; and

• Changing the reserve ratio, and

• Exercising selective credit controls.

It is through controlling the supply of credit and cost of credit (i.e., rate of interest on
it) that the central bank of a country tries to bring about stability in prices as well as in
overall level of economic activity. The central bank is the monetary authority of the
country and monetary policy is one of the important measures which are taken to avoid
and cure both depression and inflation.

In India Reserve Bank which is the central bank of the country has been making
important contribution to the achievement of the objective of price stability. To achieve
price stability Reserve Bank has been setting forgets of expansion in money supply
which are consistent with the growth of output. Control of inflation by checking
excessive expansion in credit supply has been the major concern of monetary policy
imposed by Reserve Bank of India.

• Leader of the Resort.

As mentioned above, the commercial banks operate on the basis of fractional reserve
system. Therefore, even a well-managed commercial bank can run into difficulty if
there is a great rush of demand for cash by the depositors, because with a fraction of its
deposits in cash, it will not be able to meet a sudden and large demand for cash. The
central bank must therefore come to their rescue at such times. Thus, central bank is the
last source of supply of credit.

• Promote Economic Development.

46
 Central bank adopts such a monetary policy as is conducive to economic growth. In
order to accelerate the rate of investment or capital formation, the central bank takes
steps to make more credit available for investment at lower lending rates of interest. In
the developing countries, the role of central bank as promoter of economic
de-velopment is very important.

Thus, in India apart from regulatory function, Reserve Bank of India has been playing
a promotional role. RBI has been making important contribution for building up
appropriate fi-nancial institutions such as Industrial Finance Corporation of India, State
Finance Corporations to promote saving and investment. By ensuring adequate supply
of agricultural credit, term finance to industries, credit for exports, RBI has performed
a useful promotional role in en-couraging economic growth.

• Managing exchanges rates of National currency.

Under these circumstances, it is the duty the central bank to prevent undue depreciation
or appreciation of the national currency. Since 1991 when the rupee has been floated,
the value of Indian rupee, that is, its exchange rate with US dollar and other foreign-
currencies has been left to be determined by market forces, RBI has been taking several
steps from time to time to stabilise the exchange rate of rupee, especially in terms of
US dollar.

• Research Methods.

• Literature Analysis.

This paper firstly reviews and summarizes the domestic and international researches on
the evaluation system of internal control. Then, combining the various practices of
domestic and international internal control evaluation, the author analyzes the specific
situation of selected listed companies to further verify the internal control Evaluation
system is effective.

• Case Study.

After establishing the evaluation system of internal control in the thesis research, in
order to verify the validity of the evaluation system, taking the five A-share listed

47
 companies of China Electronics Technology Group Corporation as an example, the
effectiveness of internal control is evaluated.

• Information Research Law.

During the research, we collected the annual public information of 5 listed companies
of A-share of China Electronics Technology Corporation by collecting them on the
websites of Shanghai Stock Exchange, Sina Finance Network, Shenzhen Stock
Exchange and other homepages of listed companies, mainly including annual report,
self-evaluation report of internal control, social responsibility report, interim
announcement, company rules and regulations and punishment and announcement of
major events. Through the collection, processing and collation of these information to
serve the research topics, as the data base of this study.

• Objectives of Research.

• To study the applications of Banking.

• To know the satisfaction level of the customers from the banking with
• particular sector i.e. whether private or public.

• To know the reason why people are using banking.

• To know factors affecting the banking decision of customers.

• To know the satisfaction level of the employees from the banking with
• particular sector i.e. whether private or public.

• To study the recent changes made in public sector banks due to

• competition arising thereof.

• RESEARCH DESIGN.

Research design is mainly of two types:

• Exploratory Research.
• Descriptive Research.

• Exploratory Research.

48
 Research is usually done to gain insight into the problem. This is generally conducted
for a problem, which the researcher knows nothing.

• Descriptive Research.

Research helps in determining the frequency with which something occurs or

relationship between two variables of trend of consumption of a project of such
characteristics as age, sex, geographic location etc. Descriptive research is generally
guided by one or more specific hypothesis.

• COLLECTION OF DATA.

The data can be collected from primary and secondary sources. The basic premises of
my study is primary data .Convenient sample that was representative of the target
market was chosen, the respondents were contacted personally and the instrument used
for collecting data is questionnaire.

• Primary data.
• Secondary data.

• Primary Data.

Primary data is collected by using the questionnaire method .

• Secondary Data.

The Main sources of Secondary data are combination of information from the internet,
research journals and books of the related topic.

• Methods of the study.

The internship program generally started with visit and observation. However, in
respective areas of the study different methods can be used where necessary. In
preparing this report some methods were followed as preparing a report about the
activities of any financial organization is a difficult and complicated task and no single
methods is appropriate for preparing the report. Effective research involves six basic
steps, shown in the following figure:

49
• A Case study of prime bank limited.

The type of this research is an explanatory research as it is not only identifies the
problems but also give suggestions. The reason behind the selection of this type of
research methodology is because of its nature of its findings. As I am working to
disclose the Importance of R&D in the banking sector then I need to concentrate on the
core activities of R&D Division. I need to know the organizational procedure of
accomplishing the works asked or suggested by other departments or the top
management. At the same time I also need to know the feedback of R&D to them
against the requirements. So observation and close attachment of activities of R&D will
help me to get the insight. That’s why explanatory research will help me to get the
insight.

50
• The Indian banking system consists of 27 public sector banks, 21 private sector banks,
49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384
rural cooperative banks, in addition to cooperative credit institutions.

• As of Q1 FY19, total credit extended by commercial banks surged to Rs 86,976.2

billion (US$ 1,297.4 billion) and deposits grew to Rs 115,070.3 billion (US$ 1,716.4
billion).

• Indian banks are increasingly focusing on adopting integrated approach to risk

management. Banks have already embraced the international banking supervision
accord of Basel II, and majority of the banks already meet capital requirements of Basel
III, which has a deadline of 31 March 2019.

• Reserve Bank of India (RBI) has decided to set up Public Credit Registry (PCR) an
extensive database of credit information which is accessible to all stakeholders. The
Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill has been passed
and is expected to strengthen the banking sector.

• Credit off-take has been surging ahead over the past decade, aided by strong economic
growth, rising disposable incomes, increasing consumerism & easier access to credit.

• During FY07-18, credit off-take grew at a CAGR of 11%. As of Q1 FY19, total credit
extended surged to Rs 86,976 billion (US$ 1,297.4 billion).

• Demand has grown for both corporate & retail loans; particularly the services, real
estate, consumer durables & agriculture allied sectors have led the growth in credit.

• Total banking sector assets (including public and private sector banks) have increased
at a CAGR of 6% to US$ 2.2 trillion during FY13–18. FY13-18 saw growth in assets
of banks across sectors.

• Marginal Requirement

Marginal requirement of loan current value of security offered for ban-value of loans
granted. The marginal requirement is increased for those business activities, the flow
of whose credit is to be restricted in the economy.

51
• Publicity.

RBI uses media for the publicity of its views on the current market condition and its
directions that will be required to be implemented by the commercial banks to control
the unrest. Though this method is not very successful in developing nations due to
high illiteracy existing making it difficult for people to understand such policies and
its implications.

• Direct Ration.

Under the banking regulation Act, the central bank has the authority to take strict
action against any of the commercial banks that refuses to obey the directions given
by Reserve Bank of India. There can be a restriction on advancing of loans imposed
by Reserve Bank of India on such banks. e.g. – RBI had put up certain restrictions on
the working of the Metropolitan co-operative banks. Also the 'Bank of Karad' had to
come to an end in 1992.

• Moral suasion.

This method is also known as "moral persuasion" as the method that the Reserve
Bank of India, being the apex bank uses here, is that of persuading the commercial
banks to follow its directions/orders on the flow of credit. It also be part of meetings
between RBI and Commercial Banks. RBI persuades the commercial bank to follow
their policies. RBI puts a pressure on the commercial banks to put a ceiling on credit
flow during inflation and be liberal in lending during deflation.

52
 CHAPTER NO:6
FINDINGS

• Findings.

On the basis of data analysis the findings are following:

• For Bankers.

• Majority of bankers are of the opinion that business environment is highly

competitive.

• Nearly half of the bankers say the competition is faced from public, private,
cooperative and foreign banks.

• Majority of bankers find very difficult to survive, grow, stabilize and excel in banking
business.

• For doing banking business effectively the strategies adopted are use of advance
technology, changes in working process and improving bank performance.

• Out of resources used in banking business the manpower is most important and
money is ranked second.

• Nearly three-fourth of banks agreed that the major advantages of higher performance
to banks are quality and quantity improvement, high productivity, employees’
satisfaction and higher profitability.

• More than half of bankers said that management of banks is highly interested to
manage performance of employees consistently.

• More than half of bankers said that the major functions performed by performance
management are setting goals and performance standards, communication, coaching
feedback, performance appraisal and development planning for future.

• Two third majority of bankers opined that the benefits of performance management to
banks are financial, nonfinancial and effective management control.

53
• Majority of respondents said that managers, supervisors and reviewers or exports all
play important roles in performance management process.

• Exactly half of bankers agreed that management is highly interested and one third said
interested to improve productivity of employees.

• Nearly two third of respondents said that the performance is carried out regularly in
their banks.

• More than half of respondents opined that traditional and modern both methods are
being used and nearly one fourth said that the modern methods are used mainly for
performance appraisal.

• 60% of respondents said the performance appraisal is beneficial whereas quarter of

respondents opined that it is beneficial but sometimes for the whole organization.

• Majority of bankers said that the objectives of measuring productivity are to search
for suitable technology, improving working efficiency, reducing operating costs and
improve overall profitability and goodwill.

• More than two-third of respondents agreed that physical working conditions use of
technology, training and development adequate compensation and favourable
management attitude affect the employee’s productivity.

• Two-third majority bankers opined that the factors affecting productivity

improvement are setting missions, goals and performance standards, motivation of
employees, training and development, performance appraisal, and future performance
development banks.

• Half of the respondents said that employees play very crucial and one third opined
crucial role in getting competitive edge over competitors.

• Nearly 60% of respondents strongly agreed and more than one-third agreed that the
employees are service providers, organization for customers, brand and marketers.

54
• Two-third of bankers opined that the future of banks with higher employee’s
productivity and performance is very bright.

• Half of the respondents opined that all banks are conscious about higher productivity
and performance of employees.

For Customers.

• Majority of customers are holding saving accounts and others are fixed deposits and
current account holders.

• Mainly more than one-third of customers visit to banks as and when required and one-
fourth of customers visit fortnightly.

• Majority of customers feel normal and one-fourth feel happy when they visit to banks
for transactions.

• Mainly the customers are convinced by goodwill and employees of banks to open a
new account.

• More than one third of customers take 10-20 minutes and nearly one third take up to
10 minutes for a bank transaction.

• Slightly more than half of the respondents said that average attention and one-fifth of
them said high attention is paid by employees for customers.

• Nearly two-third of the customers said that the employees are interested in the jobs.

• Nearly half of respondents opined average level and one third opined high level of
competencies the employees have to perform their jobs.

• More than half of customers said sometimes and one-fourth said rarely the employees
faced difficulties in performing their jobs.

• Less than half of customers agreed rarely and one third said sometimes the arguments
take place during transactions.

55
• Nearly half of the customers observed that employees showed willingness to shoulder
the responsibility to handle customers sometimes.

• Nearly two-fifth of customers found employees sometimes and one-fourth of them

found often motivated while performing their jobs.

• Nearly half of customers found employee behaviour cooperative and one-fourth of

them found employees very cooperative.

• Nearly half of the customers often found employees convincing the customers during
difficulties and one-fourth of them found employees always convincing.

• More than two-third of customers agreed often and nearly one third agreed sometimes
the employees take initiative to solve the problems while dealing the customers.

• More than one third customers found employees often satisfied and same percentage
also found sometimes satisfied during their meetings.

• More than one third of customers found average level of satisfaction of employees
and more than one-fourth found high level of satisfaction.

• Employees are products, brand, organization for customers and marketers for
customer agreed often by nearly half of the customers and one third said always.

• More than two-third of customers agreed that the employees contribute in achieving
the higher profitability and business, competitive advantage and goodwill of the
banks.

• More than one-third said crucial and less than one-third said very crucial is the role of
employees in banking service in present scenario.

• More than three fourth of customers said the impact of employees productivity is very
high on performance of banks, its profitability, progress and goodwill in the market.

56
• SYSTEM ANALYSIS AND OVERVIEW DESIGNS.
Systems development is systematic process which includes phases such as planning,
analysis, design, deployment, and maintenance. Here, in this tutorial, we will primarily
focus on –

• Systems analysis.
• Systems design.

• SYSTEM ANALYSIS.

It is a process of collecting and interpreting facts, identifying the problems, and

decomposition of a system into its components.
System analysis is conducted for the purpose of studying a system or its parts in
order to identify its objectives. It is a problem solving technique that improves the
system and ensures that all the components of the system work efficiently to
accomplish their purpose.

• SYSTEM DESIGN.
It is a process of planning a new business system or replacing an existing system
by defining its components or modules to satisfy the specific requirements. Before
planning, you need to understand the old system thoroughly and determine how
computers can best be used in order to operate efficiently.

System Design focuses on how to accomplish the objective of the system.

System Analysis and Design (SAD) mainly focuses on −:

• Systems.
• Processes.
• Technology.

• Constraints of a system.

• A system must have some structure and behavior which is designed to achieve a
predefined objective.

57
• Interconnectivity and interdependence must exist among the system components.

• The objectives of the organization have a higher priority than the objectives of its
subsystems.

❖ The main aim of any person is the utilization money in the best manner since
the India is country were more than half of the population has problem of

58
running the family in the most efficient manner. However Indian people faced
large number of problem till the development of the full-fledged banking
sector. The Indian banking sector came into the developing nature mostly after
the 1991 government policy. The banking sector has really helped the Indian
people to utilize the single money in the best manner as they want. People now
have started investing their money in the banks and banks also provide good
returns on the deposited amount. The people now have at the most understood
that banks provide them good security to their deposits and so excess amounts
are invested in the banks. Thus, banks have helped the people to achieve their
socio economic objectives. The banks not only accept the deposits of the
people but also provide them credit facility for their development. Indian
banking sector has the nation in developing the business and service sectors.
But recently the banks are facing the problem of credit risk .It is found that
many general people and business people borrow from the banks but due to
some genuine or other reasons are not able to repay back the amount drawn to
the banks. The amount which is not given back to the banks is known as the
non performing assets. Many banks are facing the problem of nonperforming
assets which hampers the business of the banks. Due to NPA the income of the
banks is reduced and the banks have to make the large number of the
provisions that would curtail the profit of the banks and due to that the
financial performance of the banks would not show good results The main aim
behind making this report is to know how Public Sector Banks are operating
their business and how NPA play its role to the operations of the Public Sector
Banks. The report NPA areclassified according to the sector, industry, and
state wise .The present study also focuses on the existing system in India to
solve the problem of NPA and comparative analysis to understand which bank
is playing what role with concerned to NPA. Thus, the study would help the
decision makers to understand the financial performance and growth of
selected Public Sector Banks and private sector banks as compared to the
NPA.

• In its financial stability report, released on December 23, the Reserve

Bank of India’s Governor Raghuram Rajan also warned that “corporate

59
 sector vulnerabilities and the impact of their weak balance sheets on
the financial system need closer monitoring".

• Indian companies have long been criticised for huge debts on their
books. According to the RBI’s analysis of 2,368 “non-government,
non-financial, listed companies”, 15.8% were defined as “weak
companies”, which are primarily firms whose interest paying ability is
stressed. The RBI has measured this by the interest coverage ratio,
which is less than one for these companies.

• Overall, the current financial health of banks in Asia’s third largest

economy is a mixed bag. While credit growth across the banking sector
has been inching higher, profits are moderating. Much of this can be
attributed to the rise in non-performing assets, which has been
repeatedly flagged by Rajan as a significant risk.

• Quartz brings to you some important indicators that give a snapshot of

India’s banking industry. (All years represented below are financial
years, and the data is updated till March 31, 2015.)

60
61
 Integrated Air Command and Control System (IACCS) is an automated Air
Defense Command and Control center for controlling and monitoring of Air
Operations by Air Force. In network centric warfare era, Recognized Air Situation
Picture (RASP) information plays a very critical role and is required to be made a

62
 CHAPTER NO:7
LIMITATIONS

Central bank exercises monetary policy to influence rate of interest, money supply and credit
availability. Central bank use different tools to achieve the objective of controlling the
availability of credit in economy.

There are several quantitative tools through which the central bank monitors liquidity of
commercial bank and money supply. These tools help central bank to keep economy
consistent. The different types of quantitative tools and Qualitative tools are as follows;

• Bank Rate.

Bank rate is the interest rate at which the central bank lends loan to the commercial
banks or it can also be defined as the rate at which the central bank discounts the bills
of commercial banks. The difference between the bank rate and the rate of interest is
that the bank rate is the rate at which central bank extends loans to the commercial
banks, whereas the rate of interest is the rate at which the commercial bank extends
loan to the general public.

The central bank uses the tool of bank rate to control volume of credit in an economy
in such a way that when bank rate is low, the commercial banks borrow more from
the central bank which increases the liquidity of commercial banks and they lend
more money to the general public. While on the other hand, when bank rate is high,
commercial bank borrow less from the central bank which in decreases their liquidity
and they lend less loans to the general public. This is how the central bank controls
credit availability through bank rate.

Limitations:

However, bank rate has certain limitations due to which the central bank strategy to
control credit becomes less effective. Such limitations are as follows;

• All the commercial bank does not cooperate with the rules and regulations of the
central bank.

• For bank rate bill market is important component, which is not well organized in the
developing countries

• The corporate sector does not distribute dividend to its shareholders and retain money
in their reserves which makes them less dependent on commercial banks for capital.

• Reserve Ratio.

63
 According to rules set by central bank every commercial bank has to keep specific
percentage of their deposits in the central bank as reserves. The central bank regulates
the liquidity of commercial banks through changing the reserve ratio.

When there is inflation in an economy and more money is in circulation, the central
bank increases the reserve ratio which decreases the money supply in the economy.
Whereas, when there is recession in an economy the central bank decreases the
reserve ration which increases the money supply in the market and the commercial
become more eligible to provide more loans to the general public.

Limitations.

The reserve ratio has certain limitations because of which the central bank couldn’t
exercise it effectively. Those limitations are as follows;

• The financial institutions such as house building societies and insurance companies
provide credit to public even when central bank decreases the liquidity of commercial
banks.

• Foreign banks extend loans when domestic banks decrease lending loans.

• Open Market Operations.

Open market operations is one of the strategies opted by the central bank for
controlling credit. The central banks hold certain kinds of financial instruments like
bonds and securities. Central bank regulates money supply in an economy by sale or
purchase of these financial instruments. When there is inflation in the economy, the
central bank sale these financial instrument and decreases the money supply in the
economy. While when there is recession in an economy, the central bank purchases
these financial instruments held by the general public by which money supply
increases in the economy.

• Limitations.

The policy of open market operations has certain limitations which are as follows;

• Open market operations are less effective in developing countries because they have
unorganized and limited stock markets and capital markets.

• Insufficient government securities make this policy ineffective.

• When commercial banks have sufficient liquidity they become less dependent on
central bank for loans.

• Credit Rationing.
Credit rationing refers to the limit imposed by the central bank upon commercial
banks up to which they can get loans from the central bank. This is how the central
bank controls the liquidity of commercial banks in order to achieve economic goals.

64
This policy by central bank differs in inflation and recession. When there is inflation
in the economy, the central bank extends fewer loans to the commercial banks. This
decreases the liquidity of commercial banks. Whereas, when there is recession in the
economy, the central bank extends more loans to the commercial banks which in
return increase the liquidity of commercial banks.

❖ The Central bank is the main government-controlled bank in a country, which

controls the financial affairs of the country by fixing main interest rates,
issuing currency, supervising the commercial banks and controlling the
foreign exchange rate. And credit control is a strategy employed by
manufacturers and retailers to promote good credit among the creditworthy
and deny it to delinquent borrowers.

❖ Sometimes central bank fails to control the flow of credit at an optimum level.
Those reasons are described below;

• To be successful in credit control program, full control over the money

market is essential. But sometimes it is not possible.

• There are different terms of the loan period credit control method can
only affect a short-term loan.

• The unorganized money market is not suitable for use of credit control
method.

• There is not much co-operation between commercial banks with the

central bank.

• An unstable economy is not suitable to use credit control method.

• If steps for credit control arc not taken at primary level, it will not be
effective later.

• If the lengthy plan is taken for credit control it will not work as
satisfactorily.

• Avaibility of Adequate and Proper securities.

If proper securities are not available with the public, a bank cannot
create credit. As Crowther has written—”the bank does not create
money out of thin air, it transmutes other forms of wealth into money.”

• Keeping of Reserve with central Bank.

65
 Every affiliated and attached bank has to keep certain reserves with the
Central Bank of the country. The Central Bank keeps on changing the
percentages of these reserves from time to time. When the Central
Bank increases the percentages of these reserves, then the power of the
commercial banks to create credit is reduced in the same proportion.

• Banking Habits of the people.

The banking habits of the people are an important factor which

governs the power of credit creation on the part of banks. If people are
not in the habit of using cheques, the grant of loans will lead to the
withdrawal of cash from the credit creation stream of the banking
system. This reduces the power of banks to create credit to the desired
level.

• Volume of currency circulation.

Volume of currency in circulation is an important factor of creation of

credit. If the primary deposits are large, then the derivative deposits
created on their basis will also be large. But the volume of primary
deposits is closely connected with the actual volume of currency in
circulation.

If the volume of currency in circulation increases the volume of

primary deposits will increase enabling the Commercial banks to
create a large volume of derivative deposits. On the other-hand if the
volume of currency in circulation decreases, the volume of primary
deposits with the bank will also decrease leading to a decrease in the
volume of derivative deposits created by the banks.

• Economic Conditions of trade and Bussiness.

Banks cannot continue to create credit limitlessly. Their power to

create credit depends upon the economic climate present in the
country. If there are boom times, there is a greater scope of profitable
investment and thus greater demand for bank loans on the part of
businessmen.

Selective credit control is applicable, when everything is considered to commercial banks and
to bank credit only.

Non-banking financial institutions generally remain out of the purview of the central bank,
and, to that extent, the desired objectives of selective credit control is also weakened by
alternative sources of credit, outside the organised money sector, such as moneylenders,
black (or unaccounted) money with the people, etc.

66
1. It is very difficult for banks to ensure advances made to the borrowers are not spent
on unintended purposes. Thus, qualitative credit control cannot materialise, in its real
sense.
2. Bank money also has its velocity. Thus, an amount once lent for a genuine purpose
may next be spent on undesirable purposes.
3. Moreover, there are no restrictions on clean credit under the selective control policy
as a result of which measures like higher margin requirements can be adjusted by the
borrowers through a clean loan. Thus, “the comparative lack of efficacy of the
selective measures by themselves results in the difficulties of securing compliances by
banks when control imposed after excessive lending has already taken place, or the
difficulties of adopting the controls on advances to the future pattern of production,
that is to say, of imparting the requisite flexibility in relation to changing credit
demands in system of control which is primarily regulated with reference to a base
period of curbing accumulation of inventories through alternative sources of finance,
so long as the initiating cause of a speculative wave, viz., scarcity of supplies in
relation to demand, persists.”
4. Commercial banks, motivated by profit, may play mischief by manipulating accounts
and sanctioning loans for forbidden uses. These malpractices defeat the very objective
of selective credit control.

Limitations of monetary policy control.

Monetary policy is used in stabilizing prices and controlling inflation. However,

monetary policy has quite a number of disadvantages and usually does not reach
expectations. These disadvantages are discussed below:

1) Case of Deflation.
Deflation is usually hard to control when compared with inflation. During
deflationary periods, the central bank reduces its policy rates to as low as zero. The
economy, therefore, cannot be stimulated beyond this point. We’ve recently seen
cases in which central banks have even opted for negative rates.

2) Cases of Banks Decresing Money.

67
 Although the money supply is rising, banks can have excess reserves which makes the
short-term rates decrease. This is mostly a result of the business environment.

3) Uncertainty of an Economy.
Uncertainty about the effect of a policy leads the economy and the prices on a
complicated path. Some economies might over or underreact to central bank policies.
Since economics is not an exact science, economists often disagree on the policies
central banks should use.

Any attempt of the monetary authority to manipulate the supply of money within an
economy does not always work as it cannot control the deposits made by households
and corporations to commercial banks.

4) Liquidity Trap.
A liquidity trap is a situation in which interest rates are close to zero and savings rates
are high, rendering monetary policy ineffective. In a liquidity trap, consumers choose
to avoid purchasing Treasury securities and keep their funds in savings because of the
prevailing belief that interest rates will soon rise which would push bond prices down.

5) Cases of Government Reducing Money Supply.

If a government decreases the money supply, for example with higher taxes,
individuals would expect low future inflation. This could render an expansionary
monetary policy ineffective.

6) Bond Market Vigilates.

Vigilantes are individuals who participate in the bond market which are capable of
reducing their demand for long-term bonds, thus raising their yields. The rise in yields
can easily make it difficult for any expansionary monetary policy to be effective

Quantitative Credit Control and its Limitations.

The control of credit is widely recognized as the main function of a central bank. It is a
function which embraces the most important questions of central banking policy. In fact, the
heart of monetary policy lies in credit control, i.e., monetary management.

68
However, there are serious difficulties in the way of achieving control over credit. In the first
place, there are difficulties in the way of controlling credit itself. Secondly, even if the bank
is able to control the volume of credit, the objectives concerned may not necessarily be
achieved. Several difficulties in the way of controlling credit may be noted.

Limitations.

First, bank credit is not the only form of credit. There is commercial credit like book credit,
bills of exchange and promissory notes (not discounted by banks). Over these the central
bank has little control. They are as much purchasing power as any other form of credit.

Secondly, even as regards bank credit, all banks of the country do not have direct relations
with the central bank. In the U.S.A., for instance one-half of the commercial banks with one-
fifth of resources are outside the Federal Reserve System. In India, the indigenous bankers,
accounting at present for 50 per cent of the banking business in the country, are still beyond
the influence of the Reserve Bank.

Thirdly, even if all banks were member-banks, commercial banks may not always co-operate
with the central bank and may not follow its lead. Such co-operation is indispensable for a
successful control of credit.

Fourthly, there are non-banking elements in the financial structure of a country. Among these

are the various circumstances that affect the temper of the business community. These are

beyond the scope of central banking action.

Finally the central bank cannot control the ultimate use to which credit may be put. Strictly
commercial loans, for instance, may be used for speculative purposes.

This, however, does not mean that any attempt to control credit on the part of the central bank
is bound to fail. These are the limitations to which the action of the central bank is subject

Even if the bank can control credit, it does not necessarily follow that the objectives of the
bank like price stability, exchange stability, etc., will automatically follow. There are
difficulties in their way too.

69
Limitations to an asset side.
I. Allow the central bank to better control the money supply, making everything from
negative rates and true (inflationary) helicopter drops to basic income possible.
II. Encourage transparency and traceability.
III. Reduce money laundering, tax evasion and all other socially destructive black market
activities enabled by cash.
IV. Create a potentially limitless source of safe asset value, at an interest rate that the
central bank could control.
V. Restrict bank deposits (and interest rate-based returns) to the risk inclined, leading to
the eventual shuttering of national deposit insurance schemes and the associated
moral hazard.
Moreover, since the rate on “official” e-money would never be more than zero, the banking
sector (including the shadow banking sector) could continue to compete with the central bank
for deposits by offering more attractive interest rates, which reflected the real risk being taken
by depositors in the private sector.

Put this way it all seemed so simple.

And yet, there was and remains a flaw in the logic.

We first dubbed this flaw the float management problem. But we now realise it might as well
be described as the central-bank balance-sheet issue.

Digital money liabilities ultimately must be offset by corresponding assets if the monetary
system is to remain liquid and stable. This is because liquid digital liabilities represent claims
on the real economy, which must be accommodated for by stable and replenish-able value
somewhere in the system. As it stands, the physical currency liabilities of a central bank are
just a small tranche of a much larger liability structure — a framework sees the central bank
essentially outsource the bulk of liability (and asset) creation to the private sector for good
reason.

Issuing liabilities from a central point is not the challenge. The challenge is centrally
managing all the corresponding liquid assets.

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It is this constraint, rather than any technological one, which poses the biggest challenge to
the mass issuance of digital central bank liabilities.

The criticality relates to the fact that the central bank alone would be responsible for
determining what assets to buy and it may not be as easy as just buying government bonds.

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.

CHAPETER NO:8
DATA

Central banking statistical stability or supervisory function have been increasingly driven by
(big) data, but little has changed in the methodology of supervisory data collection and
management, which is still widely reliant on the document-oriented approach. This is
intrinsically time-consuming, costly and complex. Data gaps still exist and so data remains a
critical factor for central banks. Innovative solutions are necessary, to effectively handle “Big
Data”.

The Central Banking Big Data Focus Report is a joint initiative of the Central Banking
Journal and BearingPoint. The report builds upon the results of the recent IFC survey and
takes a closer look at how central banks actually handle the challenge of data collection and
analytics with regard to technical platforms and standards, resources and data governance.

The report investigates the concrete action plans of central banks regarding data management
challenges in light of FinTech/RegTech developments and the objective of transparent and
effective risk-based supervision but also plans for central banks statistics for “going beyond

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the aggregates” especially for the micro-granular data handling. Finally, central banks are
evaluated how the BCBS 239 principle in an adapted version would apply to them today.

The focus report will draw on views from central bankers, industry experts, academics and
observers to look at:

• Financial stability and supervisory applications.

• Direct uses in economics and modelling.

• Who should ‘own’ big data?.

• Resourcing and budgets.

• Future developments.

• Operational challenges – gathering, structuring, storing and processing data.

The Central Banking Big Data Focus Report aims at giving a clear picture of where
central banks stand today with supervisory data management and defining fields of
action.

Our part in the report sets out the results of a survey of how central banks view big
data and data governance in their institutions. The survey was conducted by Central
Banking Publications, in association with BearingPoint, in August and September
2016. The work has only been possible with the support and cooperation of the central
bankers who agreed to take part. They did so on the condition that neither their names
nor those of their central banks would be mentioned in the report.

Article Content.

Responses to the Central Banking Big Data Focus Report were received from 42
central banks al across the globe. The average staff size was 1,652 and three-quarters
of respondents had less than 2,000 employees. Just over half of respondents were
from central banks in Europe. Those individuals taking part in the survey were drawn
in the main from the statistics function: 32, or three-quarters of respondents, were
located in this area. Three were from information technology, and responses were also

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received from research, banking supervision, international relations, data
management, infrastructure and technology, and data collection departments.

Big Data Analytics can become the main driver of innovation in the banking industry
— and it is actually becoming one. We list several areas where Big Data can help the
banks perform better.

Investments in Big Data analytics in banking sector totaled $20.8 billion in 2016,
according to the IDC Semiannual Big Data and Analytics Spending Guide of 2016.
This makes the domain one of the dominant consumers of Big Data services and an
ever-hungry market for Big Data architects, solutions and bespoke tools.

Within this wealth of investments, the allocation of funds mostly targeted the
customer support, risk assessment, decision-making support and researching for new
profit opportunities along with investing in new markets, lowering time-to-market and
funding the blockchain projects, as the PwC Global FinTech Report, published March
2016, shows.

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 The trend is growing and in 2017 these numbers became only bigger. The amount of

data generated each second will grow 700% by 2020, according to GDC prognosis.

The financial and banking data will be one of the cornerstones of this Big Data flood,

and being able to process it means being competitive among the banks and financial

institutions.

As we already elaborated while listing the types of Big Data tools IT Svit uses, the
really big data flows can be described with 3 v’s: variety, velocity, and volume. Here
is how these relate to the banks:

• Variety.

stands for the plenitude of data types processed, and the banks do have to deal with
huge numbers of various types of data. From transaction details and history to credit
scores and risk assessment reports — the banks have troves of such data.

• Velocity.

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 means the speed at which new data is added to the database. Hitting the threshold of
100 transactions per minute is easy for a respectable bank.

• Volume.

means the amount of space this data will take to store. Huge financial institutions like
the New York Stock Exchange (NYSE) generate terabytes of data daily.

However, as we explained in the article on the Big Data visualization principles, the 3
v’s are useless if they do not lead to the 4’th one — value. For the banks, this means
they can apply the results of big data analysis real time and make business decisions
accordingly. This can be applied to the following activities:

• Discovering the spending patterns of the customers.

• Identifying the main channels of transactions (ATM withdrawal, credit/debit card

payments).

• Splitting the customers into segments according to their profiles.

• Product cross-selling based on the customers’ segmentation.

• Fraud management & prevention.

• Risk assessment, compliance & reporting.

• Customer feedback analysis and application.

• Customers Spending Patterns.

The banks have direct access to a wealth of historical data regarding the customer
spending patterns. They know how much money you were paid as a salary any given
month, how much went to your saving account, how much went to your utility
providers, etc. This provides a reach basis for further analysis. Applying filters like
festive seasons and macroeconomic conditions the banking employees can understand
if the customer’s salary is growing steadily and if the spending remains adequate. This
is one of the cornerstone factors for risk assessment, loan screening, mortgage
evaluation and cross-selling of multiple financial products like insurance.

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• Transaction Channel Identification.

The banks benefit greatly by understanding if their customers withdraw in cash all the
sum available on the payday, or if they prefer to keep their money on the credit/debit
card. Obviously, the latter customers can be approached with the offers to invest in
short-term loans with high payout rates, etc.

• Customers Segmentation and profiling.

Once the initial analysis of customer spending patterns and preferred transaction
channels is complete, the customer base can be segmented according to several
appropriate profiles. Easy spenders, cautious investors, rapid loan repayers, deadline
rush returners… Knowing the financial profiles of all customers helps the bank
evaluate the expected spending and income next month and make detailed plans to
secure the bottom line and maximize income.

• Product Cross-selling.

Why not offer a better return on interest to cautious investors to stimulate them to
spend more actively? Is it worth providing a short-time loan to an easy spender who
already struggles to repay a debt? Precise analysis of the customers’ financial
backgrounds ensures the bank is able to cross-sell auxiliary products more efficiently
and better engage the customers with personalized offers.

• Fraud Management and Prevention.

Knowing the usual spending patterns of an individual helps raise a red flag if
something outrageous happens. If a cautious investor who prefers to pay with his card
attempts to withdraw all the money from his account via an ATM, this might mean
the card was stolen and used by fraudsters. A call from a bank requesting a clearance
for such operation helps easily understand if it is a legitimate claim or a fraudulent
behavior the cardholder does not know of. Analyzing other types of transactions helps
cut down the risk of fraudulent actions greatly.

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• Risk Assessment,compliance.

A similar procedure can be used for risk assessment while trading stocks or screening
a candidate for a loan. Understanding the spending patterns and previous credit
history of a customer can help rapidly assess the risks of issuing a loan. Big Data
algorithms can also help deal with compliance, audit and reporting issues in order to
streamline the operations and remove the managerial overhead.

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Data has become the latest talk of the town with its potential to influence the decision-making
framework in any firm. No matter which industry you are in, the new winners are the ones
who can innovate and create value using a data-driven approach. Tech firms such as Google,
Apple, Facebook and Amazon (GAFA) were early adopters, propelling their valuations to be
10x in comparison to banks. However, new banking challengers are quickly following in
their footsteps. For example, Monzo is famous for finding ways to save customers money by
looking at spending patterns. This strategy has helped them gain customers through word-of-
mouth referrals while at the same time cross-selling financial products.

• Embracing Data Minimization.

Data minimization is the concept where organizations strive toward only the data they
need. Minimal viable data will be the new trend in product design, backed by
algorithms for key business decisions. Data may start to be shared in data exchanges.
Wibson, for example, is a blockchain-based, decentralized data marketplace that
provides individuals a way to securely and anonymously sell validated private
information in a trusted environment.

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• The rise of phygital.

Studying the digital behavior of users is a powerful tool to understand what people
want and value. The experience of seamlessly moving between digital and physical
channels is evolving and paving the path toward a connected ecosystem of services
and experiences. Recently, Google and Mastercard have signed a deal to enable
Google to track retail sales using Mastercard transaction data. This shows that
Google’s collaboration with financial services players is raising the bar for a new,
innovative way of working. An understanding of the right data sources can drive new
product design decisions.

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• Data is driving the modern financial industry in many ways. Financials institutions are
making use of Big Data in various ways, ranging from boosting cybersecurity to
cultivating customer loyalty, reducing customer churn and more, through personalized
and innovative offerings that shape modern banking into an individualized
experience.

• As financial services companies embark on a journey to gain better understanding of

customers and their household preferences, in order to provide effective and
differentiated services, the amount of data is expected to grow, data collection will
occur more frequently, and data variety is estimated to become more complex.

• Various sources of data in the industry include traditional enterprise data from
operational systems related to customer touch points (such as ATMs, credit cards

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 mortgage units, volatility measures etc.), financials business forecast from various
sources (regulatory data, trading data etc.) and other sources (advertising and social
media).

• Big data analytics services and platforms allow thousands of customers (Banking) to
use similar resources, aiding BFSI companies to reduce their expenses and provide
valuable insights from the continuously evolving data, thus driving their adoption in
the industry.

• For instance, the RBI, the regulatory banking authority in India, announced its foray
into the world of big data analytics by opening a data sciences laboratory that would
employ professionals with skills in computer science, data analytics, statistics,
economics, econometrics, and finance.

• Another prominent trend in the market that aids the growth of big data analytics in the
banking sector includes increasing deployment of Internet of Things (IoT) devices in
the banking sector, such as banking on wearables.

• For instance, Bank of America provides applications for popular wearable's, such as
Apple Watch and FitPay. Also, Bank of China has increased its investments .

CHAPTER NO:9
Benefits/Features/Importance

Banks today are “critically dependent on IT to conduct business operations,” notes the
Federal Financial Institutions Examination Council (FFIEC). Given their level of exposure to
hackers and other cyber threats, it’s more important than ever before for banks’ boards and
senior management to understand and manage cybersecurity risks.

Last summer, in an effort to evaluate financial institutions’ cybersecurity preparedness, the

FFIEC piloted a cybersecurity examination work program (the “Cybersecurity Assessment”)
at more than 500 community banks. Ultimately, the FFIEC will use what it learned to update
its guidance to align with changing risks. But the agency’s “Cybersecurity Assessment
General Observations” helps point banks in the right direction and provides questions for
boards and management to consider as they assess their institutions’ preparedness.

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An effective internal control system includes organizational planning of a business and
adopts all work-system and process to fulfill the following targets:

• Safeguarding business assets from stealing and wastage.

• Ensuring compliance with business policies and the law of the land.

• Evaluating functions of each employee and officer to increase efficiency in operation.

• Ensuring true and reliable operating data and financial statements.

It is to be kept in mind, a business organization, be it’s small or large, can enjoy the
benefits of adopting an internal control system.

Prevention of stealing-plundering and wastage of assets is a part of the internal

control system.

Controlling is one of the most important functions of management. It is something

that every manager needs to carry out effectively at each level. Good controlling
measures often increase the effectiveness of other functions of management as well.
In order to perform this venture properly, managers must be aware of the features and
importance of controlling.

The following are some basic features of the controlling process:

• Forward Looking.

Controlling is a forward-looking process because all of its efforts dictate future

courses of action. Managers often use experiences from the past to make corrections
for the future.

• Exist at all Levels.

The process of controlling is all-pervasive. In other words, managers at all levels of

management hierarchies have to use controlling. The nature of controlling measures
that managers use might differ but they all have to use them.

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• Continuous Activity.

Controlling is not a one-off activity that managers have to perform once in a while. It
is generally a continuous process that goes on permanently in different ways.
Managers have to constantly compare their actual results with their targets and make
changes accordingly.

• Positive Purpose.

The objective of control is to create positive impacts at both organizational and

individual levels. At the organizational level, it aims to fulfill the organization’s goals.

At an individual level, control strives to increase productivity and make individuals

benefit as well. Hence, control has a largely positive purpose in every way.

• Importance.

The following are some factors contributing to the importance of controlling:

• Decentralisation of Authority.

Since managers at every level of an organization have to exercise control, the

controlling process leads to decentralization. This, in turn, enables middle and lower
level managers to have some autonomy in making decisions. An organization that
distributes authority at every level always works smoothly and efficiently.

• Increasing Managerial Activity.

By enabling all managers to possess the autonomy to make decisions, controlling

enhances their managerial abilities. With these skills, managers can further their
organization’s goals by adapting to diverse situations and problems. Furthermore, this
also helps managers grow and develop at an individual level by giving them new
experiences.

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• It accepts deposits from the customers, who can take back their money at will. A
saving bank also pays interest to customers on their deposits and is popular with small
savers.

• Customers can leave their cash with the bank as Saving Account, Current Account or

a Fixed Deposit Account.

• Customers deposit their money in Saving Bank Account to save a part of their current
incomes to meet their future needs and also intend to earn an income from their
savings (bank interest). For the depositor, the number of withdrawals over a period of
time and the total amount of one or more withdrawals on any date, are however
limited.

• A Current Account on the other hand is running account which may be operated upon
any number of times during a working day. There is no restriction on the number and
amount of with-drawls. The bank does not pay any interest; rather it takes incidental
charges from the depositor on such accounts in some cases.

• bank lends money to needy people at a certain interest rate. Banks give loan to
agriculturists, industrialists and businessman who invest it in their ventures to their
own profit and to the economic advancement of the country.

• bank issues notes and creates other inexpensive media of exchange-a note or a

cheque. The issue of notes is entrusted to the Reserve Bank of the country.

• deposits may be created by the bank itself by giving loans to its customers, in which
case the borrower is credited with a deposit account with draw able when needed. The
money borrowed from the bank is usually deposited in the same bank by the
borrowers either because the bank insists on it or because of the advantages of current
account deposit. Such deposits are known as Credit Deposits.

• The collection of cheques drawn on other banks.

• The collection of cheques drawn on other banks.

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• Dealing in foreign exchange to assist the settlement of overseas debts.

• Stock Exchange trustee and executor business.

• Safe deposit facilities.

• The primary function of the central bank is to control the money supply in the
economy. It is responsible for issuing currency on behalf of the government. In
addition to this primary function, the central bank performs the following duties:

• It receives the state revenues, keeps deposits of various departments and makes
payments on behalf of the government.

• It keeps the cash reserves of the commercial banks, acts as a clearing-house for the
inter-bank transactions and as a lender of last resort. It supervises the commercial
banking system and ensures its smooth running.

• It controls the money and capital markets by changing the supply of money and
thereby the rate of interest. The objective is to keep equilibrium in these markets.

• It is the custodian of the foreign exchange. It has to keep a closer check on the

external value of the domestic currency and prevent its deterioration.

• It is the adviser to the government in all the monetary affairs. It is responsible for the
formulation and implementation of the monetary policy.

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• Division of Duty.

The duties are segregated to improve the efficiency, quality and for controlling the
pilferage.

• Leadership.

Board of Directors, General Manager and other managers and supervisors must lead
the person by communicating the policies of the hotel to one and all and encourage
the person to have the best output and control.

• Organisation structure.

The chain of hotels or hotel as the case may be must have a clear organisational
structure and the personnel must know from whom to take orders and whom to report.

• Authorise Personnal.

The management must authorise clearly the personnel for taking the certain decision.
For example a person should be authorised to extend the discount, cancel a bill,
extend complimentary food/room, etc.

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• Records.

The records must be maintained to ensure internal control. The records like guest

registration cards, bills, K.O.T’s, control sheets, etc. Are not only maintained,

checked, verified but are also stored for future references.

• Control.

Control includes security services and measures for protecting assets, stores, guest’s
valuables, etc. The security services, as far as possible, must be hired from
professionals.

• Budget.

The Budgets like short-term, long-term, specific budgets, etc. Must be made for sale,
cost, production etc. The budgets must be achievable but not achievable so easily. The
goals of the hotel must be clearly mentioned and the goals must be made not only for
sale, cost etc. but must also be made for controlling pilferages.

• Independent checks.

The personnel responsible for performing the jobs should not be asked for the internal
checks but internal checks must be performed by different personnel either from the
permanent personnel employed in the hotel or sometimes maybe hired from outside.

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89
 CHAPTER NO:10

Comparison/Distinguish/Impact.

The lending process by its nature is imperfect. Credit analysis may be incomplete or based on
fault data, loan officers may ignore the true condition of a borrower with strong personalities
with the bank and a borrowers ability to repay may simply changed after a loan is granted.
Some of the managers give out credits indiscriminately they don’t adhere strictly on trust,
while some are given to friends, well-wishers and relations and some of the borrowers are
still having under the illusion that the loans are part of the their national cake without making
effort to repay the loan as they fall due. Not withstanding, some short-term projects lending
to mismatch and resultant default. Some bank customers are unable to adequately determine
the amount of loan facility required to finance a project. This results in customers sometimes
mismanage the funds disbursed to them. Some bank officials failed in their duty of
supervision and control of the loans disbursed to their customers and sometimes no reference
was obtained upon the guarantor who guarantees the applicant and borrowers. At times, the
cost of obtaining the loans is always on the high side and the size of the loan affects
repayment. Economic condition at times present a vital problem beyond the predictability of
both the bank and the borrower as these are environment within which the business operates.

• Internal control.
Effective and reliable internal control forms the basis for compliance with sound and
prudent business practices.
Internal control refers to procedures or practices within an organisation to ensure that
the organisation achieves the targets set in the strategy, uses resources economically
and the information in support of management decisions is reliable. Internal control
also ensures that risk management, custody of client assets and protection of property
is adequately arranged. Conformance to regulations and approved ethical principles,
too, are ensured through internal control.

Internal controls cover all operations, involving all OP Financial Group entities and sites. The
nature and extent of operations and, whenever necessary, special characteristics related to
international operations are taken into consideration in specifying internal controls. Internal
control covers all organisational levels. Internal control in its most extensive form primarily

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takes place at the operational level, where internal control is continuous and forms part of
daily activities.

Internal control is complemented by the opportunity of anyone employed by OP Financial

Group to report through an independent channel if they suspect that rules or regulations have
been violated (whistleblowing).

• Internal control Responsibilities.

The board of directors of each OP Financial Group entity is tasked with ensuring that
internal control is duly organised, taking account of the Group-level internal control
principles and the supplementary central cooperative guidelines. Each entity’s
managing director and executive management are responsible for ensuring internal
control in practice and that duties are duly segregated.

The centralised functions of Compliance organisation, Risk Management and Finance

and Treasury assist Group entities in ensuring internal control effectiveness. Internal
Audit and external auditors ensure the effectiveness of internal control.

• Internal Audit.

Internal Audit is a function independent of business lines that audits the effectiveness
and adequacy of OP Financial Group's internal control system, risk management as
well as management and governance processes. Internal audit has been organised on a
business organisation basis. All Group entities and functions are subject to internal
audit.

The Supervisory Board of the central cooperative appoints and dismisses the Chief
Audit Executive and decides his/her employment terms and conditions and
compensation.

The Supervisory Board's Audit Committee adopts the Internal Audit action plan. Internal
Audit reports on its audits to the central cooperative's Executive Board and Audit Committee
as well as to the management teams of functions. Audits for companies are reported to the
governing bodies and management of the companies

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. In its auditing work, Internal Audit complies not only with the Internal Audit Charter
confirmed in June 2018 by the Supervisory Board but also the International Standards for the
Professional Practice of Internal Auditing confirmed by the Institute of Internal Auditors
(IIA).

• External control and Audit.

OP Cooperative has one auditor, which must be a firm of authorised public

accountants certified by the Finland Chamber of Commerce. The auditor shall also
audit the consolidated financial statements as referred to in Section 9 of the Act on the
Amalgamation of Deposit Banks.

The Cooperative Meeting shall elect the auditor. The term of office of the auditor expires
upon the closing of the Annual Cooperative Meeting following its election. The Audit
Committee of OP Cooperative’s Supervisory Board puts audit services out to tender at some
five years’ interval (last time in 2018), on the basis of which it proposes eligible auditors to
the Annual Cooperative Meeting.

The auditors are tasked with auditing the accounting, internal control, accounting policies,
management accounting judgements, presentation and structure of the financial statements of
OP Financial Group, its entities and sub-groups in order to obtain assurance that the financial
statements of the Group and its entities have been prepared in compliance with the rules and
regulations in force governing the preparation of financial statements and give OP
Cooperative’s shareholders and other stakeholders a true and fair view of the financial
position, financial performance and cash flows of the Group. In addition, the auditors
regularly issue other statements on the basis of specific regulation applicable to the sector.
The Supervisory Board’s Audit Committee annually assesses the quality of the auditor’s
performance and ancillary services and the independence of auditors and the statement of the
ancillary services.

Banking has witnessed a significant change in recent times. Owing to the increasing
consumer expectancies, regulations, economic changes and constant competition, modern
banking has embraced technology. Digital platforms, mobile, internet banking, and payments

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bank have revolutionized the sector in a substantial way. “The Digital India Moment” has
also given the much-needed impetus to the digitization efforts in the banking sector.

Deloitte, a multinational professional service and one of the Big fours, studied these
fluctuations in financial structure and banking landscape and recently released a report
“Banking on the Future: Vision 2020” along with the Confederation of Indian Industry. The
report highlights the role of technology in banking and how technology-oriented innovation
will disrupt the market.

Here are the five crucial changes that will disrupt the Indian banking sector in 2020,
according to Deloitte.
• Payments Banks to Pave Way.

The report highlights the growing importance of payment banks in the ecosystem. In
India’s cash based economy, digital payment instruments will drive growth in non-
cash payments. PBs will have long term implications on the syntax of large financial
institutions as they disintermediate the value chain, by leveraging innovations in
“Financial Technology”, investing in innovations, and lowering transaction costs—the
report highlights. The reports also states that “Digital footprint” will be the way
forward for all PBs. How well PBs engage in coopetition with Fintech startups
playing in emerging technologies will determine how they can differentiate in an
increasingly crowded market.

• Role of Article Intelligence.

Artificial intelligence will be an integral part of smart banking. Banks can expand
their consumer base by learning what clicks with their users. Cognitive technology
with AI can offer features like cognitive engagement, cognitive automation, cognitive
perceptions, and cognitive strategy formation. Through AI, a support system can be
developed that targets the user’s personal preferences, reduces human intervention,
catches data patterns and devises strategies based on market subtilities.

• BlaockChain &Distributed Technology.

The concept of the banking system with Distributed Ledgers supported by Blockchain
will no longer be far-fetched. This step can initiate an uninterrupted and fairly
tamperproof information inter-changes between the involved parties in real-time.

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 Through a distributed network of computers, a common pool of information is
maintained. However, transactions are unassailable and inviolable due to
cryptographic algorithms. The financial services industry may be one of the firsts to
be impacted by wider adoption of Blockchain and its associated DLT, the report says.

• Cyber Security.

Proliferation of internet and mobile banking is posing new security challenges to

financial services firms across the globe. Security measures are present in the form of
KYC, 2 step authentication and EMV chip cards. However, the game needs to be
upped with looming threats like phishing fraud, app misuse, cyber intrusion, magnetic
strip duplicating of cards and so on. The report underscores the need for enhanced
cyber risk assessment framework and testing methodology to continuously detect and
protect against evolving cyber threats.

• Increasing the Uses Cases of RPA.

Robotic process automation will see more use cases in 2020 due to its benefits as
compared to the traditional automation technologies. The Deloitte reports lists down a
number of use cases that are already prevalent in the financial services sector,
including global investment banks and insurance firms. The challenges in adoption
are primarily around change in mind-sets, and building the right business use case and
operating model for RPA, the report adds.

• Impact on Inflation.

Inflation is largely misapprehended as just “rise in prices”. There may be temporary

phenomena like sudden bumper or unexpected failure in production of certain sectors
like agriculture which cause temporary price change. These price movements must
not be conceptualized into the inflation or deflation, but are simply market
occurrences of brief fluctuation in supply. Inflation is a multifaceted economic
concept and much more complex to deal with.

As Kaushik Basu, the Chief Economic Advisor to Ministry of Finance explains

inflation as “[Inflation] has little to do with these changes in relative prices (though
inflation rmand in an economy. So what any single source can influence is limited.

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Also, it is very difficult to learn, due to their interdependent nature, and to trace out
exactly which source is causing what and to

what extent is it affecting the economy. These restrains contribute to generating

inflation one of the toughest problems to handle making it the emperor of economic
maladies.

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 Chapter No:11

Conclusion

The conclusions resulted from interpretation of findings could be expressed as follows:

7.3.1. Necessity of EDP system in Islamic banks
Banks as a main sub-section of financial section in an economy
are directly involved in public interests and it might be expressed with more emphasis in
Islamic banking system in where the social priority such as economic growth as a foundation
of an Islamic bank is considered. However some managers, auditors, inspectors and experts
in Islamic banks believe that the percentage of depositing.

Today the bank’s clients in an Islamic bank in where they have generally lied down in less
developed as well as developing countries know the advantages of modern banking products
and they want to take choice, convenience and control at anywhere, anytime and anyway at
minimum time and maximum quality 24 x 7. Nowadays the customers in an Islamic bank
through communicational and technological progress are to be announced from new banking
products, however because of inappropriate infrastructure facilities they could not be properly
by an Islamic bank serviced e.g. in Iran by end of 2004 the customers have not been
facilitated by Internet banking.

As discussed, the data in every organisation could be processed in three system namely
manual, mechanical and EDP systems. The two first in many years ago could process data in
where the society was on the paper society structured. Nowadays in where the
communicational and technological progress does not know any boundaries and are sweeping
all distances, the process of data does not be able to construct in a paper society and banks
have been required to perform their operation in EDP system, appropriate to a paperless
society and it could be clearly stated that the process of data in an Islamic bank must be only
in an EDP system processed. So, the process of data on the basis of progress in technology
must be performed in EDP environment and the modern banking products should be
facilitated on the basis of electronic banking in where the E-banking could be only running in
EDP environment. Therefore the results in a closer view are that, the Islamic banks as a
necessity for their society should process their data in an EDP system in where the modern

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banking products are to be provided to facilitate the new wants of customer that are based on
the E-banking.

Generally a computer as a major machine in an EDP system is

addressed with high speed, accuracy, etc. and obviously it could not be rationally compared
with manual and mechanical system that the man is playing vital role in different processes of
data. In other words and in our case it might be stated that, due to its own internal system of
checking in a computer (EDP system), errors in the process of data in banks are highly
controlled. The process of data in a computer consists of three stages that are input, process
and output. To explain this matter it could be expressed that here, also the man is playing the
vital role in process of data and the first stage of data processing that is, entering the inputs, is
to be started with the power of man who is trying to prevent the errors but it could not be
assured that always accuracy would exist and as a result the accuracy of a computer is
directly related to a man, therefore the process of data in an EDP system with the existence of
internal system of checking in a computer is not sufficient and these above three stages
should be controlled.

As other fact in this respect is, the probability of frauds that through its own internal system
of checking in EDP system might be highly controlled. Here the problem as compared to
errors is more difficult and two sources of fraud’s events could be involved that are internal
sources (people working in a bank) and external sources (everybody outside a bank).
Generally the think of frauds could not be meant as an unwanted event and every frauds is
formed on the basis of a wanted event and as a result it should be stated that the existence of
internal system of checking in a computer could not be sufficient for the purpose of
prevention of frauds and a computer in an EDP system should be controlled.

Some authors believe that a computer has neutral nature that means it might be used in proper
manner or improper manner, it could be utilised to set up a fraud and also it could be utilised
to prevent a frauds.

97
 Chapter No:12

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