Professional Documents
Culture Documents
1) Principle of Intermediation
Concept of peer to peer lending like in case of lendbox the assumption of risk is by
the lender. In case of bank it acts like an intermediatery where the risk of default is of
the bank. It also helps in mobilisation of funds and creation of credit.
2) Principles of Liquidity
The principle of liquidity is very important for the commercial bank. Liquidity refers to
the ability of an asset to convert into cash without loss within a short time.
Paying the deposited money on demand of customers is called liquidity in the sense
of banking.
Time deposits which the bank has to repay after the expiry of a certain period
Further, on a daily basis, customers withdraw as well as deposit cash. therefore, all
commercial banks have to keep a certain amount of cash in their custody to meet
the cash demands of customers.
The asset liability management department in banks, ensure that banks remain
liquid at all points of time. Asset liability management (ALM) can be defined as the
comprehensive and dynamic framework for measuring, monitoring and managing the
financial risks associated with changing interest rates, foreign exchange rates and
other factors that can affect the organisation’s liquidity. ALM relates to management
of structure of balance sheet (liabilities and assets) in such a way that the net
earning from interest is maximised within the overall risk-preference (present and
future) of the institutions. We should also look at NPA ratio of bank.
3) Principles of Profitability
For example, if a bank's average interest-earning assets, which may include loans
and investment securities, stood at Rs 10,000 in a year and it earned an interest
income of Rs 600 and paid interest expense of Rs 300, the NIM would be (600 –
300) / 10,000 = 3 per cent.
4) Principles of Solvency
Capital adequacy ratio is the ratio of a bank’s capital in relation to its risk-
weighted assets and current liabilities. It is decided by central banks and bank
regulators to prevent commercial banks from taking excess leverage and becoming
insolvent in the process.
In other words, it measures how much capital does a bank has with it as a
percentage of its total credit exposure. Bank regulators enforce this ratio to ensure
credit discipline in order to protect depositors and promote stability and efficiency in
the financial system. CAR for Public Sector banks is 12% and for Private sector in
India is 9%. But government insist on maintain a high CAR.
A commercial bank accepts deposits from its customers and then invests it.
However, since it is investing the investor’s money it keeps the safety of the money
first.The safety of funds lent is another principle of lending. Safety means that the
borrower should be able to repay the loan and interest in time at regular intervals
without default. The repayment of the loan depends upon the nature of security, the
character of the borrower, his capacity to repay and his financial standing.
Like other investments, bank investments involve risk. But the degree of risk varies
with the type of security. Securities of the central government are safer than those of
the state governments and local bodies. And the securities of state government and
local bodies are safer than those of the industrial concerns. This is because the
resources of the central government are much higher than the state and local
In fact, the share and debentures of industrial concerns are tied to their earnings
which may fluctuate with the business activity in the country. The bank should also
take into consideration the debt repaying ability of the governments while investing in
their securities. Political stability and peace and security are the prerequisites for
this.
It is very safe to invest in the securities of a government having large tax revenue
and high borrowing capacity. The same is the case with the securities of a rich
making investments the bank should choose securities, shares and debentures of
such governments, local bodies and industrial concerns which satisfy the principle of
safety.
Definition of an NPA
The assets of the banks which don’t perform (that is – don’t bring any return) are called Non
Performing Assets (NPA) or bad loans. Bank’s assets are the loans and advances given to
customers. If customers don’t pay either interest or part of principal or both, the loan turns into bad
loan. According to RBI, terms loans on which interest or installment of principal remain overdue for a
period of more than 90 days from the end of a particular quarter is called a Non-performing Asset.
Asset Classification
3.1 Classification
3.1.1 Banks should classify their assets into the following broad groups, viz. -
(i) Standard Assets
(ii) Sub-standard Assets
(iii) Doubtful Assets
(iv) Loss Assets
3.2 Definitions
3.2.1 Standard Assets
Standard Asset is one which does not disclose any problems and which does not carry more than
normal risk attached to the business. Such an asset should not be an NPA.
3.2.2 Sub-standard Assets
(i) With effect from March 31, 2005 an asset would be classified as sub-standard if it remained NPA
for a period less than or equal to 12 months. In such cases, the current net worth of the borrowers /
guarantors or the current market value of the security charged is not enough to ensure recovery of the
dues to the banks in full. In other words, such assets will have well defined credit weaknesses that
jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks
will sustain some loss, if deficiencies are not corrected.
(ii) An asset where the terms of the loan agreement regarding interest and principal have been re-
negotiated or rescheduled after commencement of production, should be classified as sub-standard
and should remain in such category for at least 12 months of satisfactory performance under the re-
negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded
merely as a result of rescheduling, unless there is satisfactory compliance of this condition.
3.2.3 Doubtful Assets
With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has remained
NPA for more than 12 months. For Tier I banks, the 12-month period of classification of a substandard
asset in doubtful category is effective from April 1, 2009. As in the case of sub-standard assets,
rescheduling does not entitle the bank to upgrade the quality of an advance automatically. A loan
classified as doubtful has all the weaknesses inherent as that classified as sub-standard, with the
added characteristic that the weaknesses make collection or liquidation in full, on the basis of
currently known facts, conditions and values, highly questionable and improbable.
3.2.4 Loss Assets
A loss asset is one where loss has been identified by the bank or internal or external auditors or by
the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been
written off, wholly or partly. In other words, such an asset is considered un-collectible and of such little
value that its continuance as a bankable asset is not warranted although there may be some salvage
or recovery value.
Provisioning Norms
1) Classification directly as a loss asset, if there is erosion in the value of underlining security.
2) Classification is to be done borrower wise and not asset wise
3) If 3- 4 banks have given a loan to one person, then NPA classified on individual bank basis.
As of now there is no compulsion on Banks to provision for NPA even if the same borrower as
defaulted with other banks
4) For Government guarantee amount provisioning not required, but will be classified as NPA
5) Restructured NPA’s cannot be classified till it works satisfactorily upto a period of one year.
It can be compared with a bank, which holds the funds for depositors. A Bank – Depository
analogy is given in the following table:
BANK-DEPOSITORY – AN ANALOGY
BANK DEPOSITORY
At present two Depositories viz. National Securities Depository Limited (NSDL) and Central
Depository Services (India) Limited (CDSL) are registered with SEBI.
A Depository Participant (DP) is an agent of the depository through which it interfaces with
the investor and provides depository services. Public financial institutions, scheduled
commercial banks, foreign banks operating in India with the approval of the Reserve Bank of
India, state financial corporations, custodians, stock-brokers, clearing corporations /clearing
houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the
requirements prescribed by SEBI can be registered as DP. Banking services can be availed
through a branch whereas depository services can be availed through a DP.
As on September 30, 2008, a total of 711 DPs (266 NSDL, 445 CDSL) are registered with
SEBI.
The procedure for buying and selling dematerialised securities is similar to the procedure for
buying and selling physical securities. The difference lies in the process of delivery (in case
of sale) and receipt (in case of purchase) of securities.
In case of purchase:-
The broker will receive the securities in his account on the payout day.
The broker will give instruction to its DP to debit his account and credit BO's account.
BO will give ‘Receipt Instruction’ to DP for receiving credit by filling appropriate form.
However BO can give standing instruction for credit to his account that will obviate the
need of giving Receipt Instruction every time.
In a bank account, credit to the account is given only when a 'pay in' slip is submitted
together with cash/cheque. Similarly, in a depository account 'Receipt in' form has to be
submitted to receive securitiebs in the account. However, for the convenience of BOs, facility
of 'standing instruction' is given. If you say 'Yes' for standing instruction, you need not submit
'Receipt in' slip everytime you buy securities. If you are particular that securities can be
credited to your account only with your consent, then do not say 'yes' [or tick ] to standing
instruction in the application form.
. What is an ISIN?
As a normal customer we will not use ISIN often, but we need to know it in case of transfer of
securities from one demat to another and also when we are filling the Demat reques form
INE009A01021
Third Digit is to identify type of issuer like for Central Government (A), for state government (B) , for
companies (E) and so on
Next two digits to identify the type of security ie for equity it is 01, preference it is 03, for
debentures it is 12 and so on
The next two digits , that is 02 in the example are serially issued for each security of the issuer
entering the system
The last digit is called check digit, which is used for system check
In order to dematerialise physical securities one has to fill in a DRF (Demat Request Form)
which is available with the DP and submit the same along with physical certificates that are to
be dematerialised. Separate DRF has to be filled for each ISIN. The complete process of
dematerialisation is outlined below:
Step1: Beneficiary Owner (BO) has to open a demat account with a Depository participant (DP)
and obtain an account number.
Step 2: BO need to fill in a Demat Request Form (DRF) and submit the same with the physical
certificate/s to the depository participants for dematerialization. For each ISIN, a separate DRF has to
be used. If the BO has free as well as lock-in shares of the same ISIN, separate demat request has to
be set up for free shares and lock-in shares.
Step3: DP would verify that the DRF has been filled correctly.
Step 4: DP would setup a demat request on the CDSL or NSDL system and send the same to the
Company and the Registrar and Transfer Agent.
Step 5: Issuer/ Registrar and Transfer Agent (RTA) would verifies the genuineness of the
certificates and confirms the request from the Company also
Step 6: Once the request has been successfully made, DP would deface and mutilate the physical
certificates, generate a Demat Request Number (DRN) and send an electronic communication to the
depository and courier the DRF and the share certificate to the company by courier.
Step 7: On receiving confirmation, depository will credit an equivalent number of securities in the
demat account of the BO maintained with CDSL or NSDL.
Step 8: The depository will electronically download the details of the demat request and
communicate the same to the electronic registry maintained by the Registrar of Companies.
Contract Note
Contract note is the legal record of any transaction carried out on a stock exchange through a
stock broker. It serves as the confirmation of trade done on a particular day on behalf of a client
on a stock exchange (BSE/NSE). You receive this document from your broker at end of day if
you have bought or sold share through him. This document is also available in digitally signed
electronic format.
Brokerage
STT
SEBI Charges
Exchange Charges
Stamp Duty
Other charges
APEX Banks
NABARD
NABARD was set up with an initial capital of 100 crore. Consequent to the revision
in the composition of share capital between Government of India and RBI, the paid
up capital as on 31 March 2015, stood at 5000 crore with Government of India
holding 4,980 crore (99.60%) and Reserve Bank of India 20.00 crore (0.40%).
Mission
Promote sustainable and equitable agriculture and rural prosperity through effective
credit support, related services, institution development and other innovative
initiatives.
Functions Of NABARD
1) Financial
Refinance:
2) Developmental
Institutional Development
Farm Sector
Non Farm Sector
Financial Inclusion
Micro Credit Innovations
Research and Development
Core Banking Solution to
Co-operative Banks
Climate Change
3) Supervisory
Section 35(6) of the Banking Regulation Act, 1949, empowers NABARD to conduct
inspection of State Cooperative Banks (SCBs), Central Cooperative Banks (CCBs)
and Regional Rural Banks (RRBs). In addition, NABARD has also been conducting
periodic inspections of state level cooperative institutions such as State Cooperative
Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies,
Marketing Federations etc., on a voluntary basis.
Objectives of Supervision
SIDBI
Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under
an Act of Indian Parliament, acts as the Principal Financial Institution for the
Promotion, Financing and Development of the Micro, Small and Medium Enterprise
(MSME) sector and for Co-ordination of the functions of the institutions engaged in
similar activities.
Mission
"To facilitate and strengthen credit flow to MSMEs and address both financial and
developmental gaps in the MSME eco-system"
The business domain of SIDBI consists of Micro, Small and Medium Enterprises
(MSMEs), which contribute significantly to the national economy in terms of
production, employment and exports. MSME sector is an important pillar of Indian
economy as it contributes greatly to the growth of Indian economy with a vast
network of around 4.6 crore units, creating employment of about 11 crore,
manufacturing more than 6,000 products, contributing about 45% to manufacturing
output and about 40% of exports in terms of value, about 37% of GDP, directly and
indirectly.
The business strategy of SIDBI is to address the financial and non-financial gaps in
MSME eco-system. Financial support to MSMEs is provided by way of (a) Indirect
refinance to banks / Financial Institutions for onward lending to MSMEs and (b)
direct finance in the niche areas like risk capital/equity, sustainable finance,
receivable financing, service sector financing, etc. As on March 31, 2015, SIDBI has
made cumulative disbursements of over `3.90 lakh crore benefitting about 346 lakh
persons. By this way, SIDBI would be complementing and supplementing efforts of
banks/ FIs in meeting diverse credit needs of MSMEs.
Development Outlook
In order to promote and develop the MSME sector, SIDBI adopts a ‘Credit+’
approach, under which, besides credit, SIDBI supports enterprise development, skill
upgradation, marketing support, cluster development, technology modernisation,
etc., in the MSME sector through its promotional and developmental support to
MSMEs.
Functions of SIDBI
Direct Credit:
Receivable Finance
EXIM Bank
Export-Import Bank of India is the premier export finance institution of the country. It
commenced operations in 1982 under the Export-Import Bank of India Act 1981.
Government of India launched the institution with a mandate to not just enhance
exports from India, but also to integrate the country’s foreign trade and investment
with the overall economic growth. Exim Bank of India has been both a catalyst and a
key player in the promotion of cross border trade and investment. Commencing
operations as a purveyor of export credit, like other Export Credit Agencies in the
world, Exim Bank of India has evolved into an institution that plays a major role in
partnering Indian industries, particularly the Small and Medium Enterprises through a
wide range of products and services offered at all stages of the business cycle,
starting from import of technology and export product development to export
production, export marketing, pre-shipment and post-shipment and overseas
investment.
The key recommendations with respect to the banking sector were as follows:
Reduction in the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio
(CRR): The Narasimham Committee had recommended bringing down the statutory
pre-emptions such as SLR and CRR. It recommended that SLR should be reduced
to 25% over the period of time and CRR should be reduced to 10% over the period
of time. When these ratios are reduced, bank would have more funds in their hands
to deploy them in remunerative loan assets. The committee also recommended that
banks should get some interest on the CRR balanced.
Redefining the priority sector: The Narasimham Committee redefined the priority
sector to include the marginal farmers, tiny sector, small business and transport
sector, village and cottage industries etc. The committee also recommended that
there should be a target of 10% of the aggregate credit fixed for the Priority Sector at
least.
Deregulation: The committee recommended deregulation of the Interest Rates, so
that banks can themselves set the interest rates for their customers.
It did an splendid work in Asset Classification, defining the Non Performing Assets
(or bad debts) and recommendations towards transparency in the banking system
It also recommended setting up tribunals for recovery of Loans, tackling doubtful
debts, restructuring the banks and allowing entry of the new private Banks
Actions on recommendations of First Narasimham Committee
Many of the recommendations of the committee were acceded to by the government.
The SLR , which was around 38.5% in 1991-1992 was brought down to some 28% in
five years.
The CRR was also brought down from 14% to 10% by 1997.
The RBI introduced the CRAR or Capital to Risk Weighted Asset ratio in 1992 for the
soundness of the banking industry. RBI also included new prudential reforms for
classification of assets and provisioning of the non-performing assets.
Some strong banks (such as SBI) were allowed to seek access to capital markets.
The banks which were relatively weaker, were recapitalized by the government via
budgetary support. More private banks were allowed. More freedom was given to
banks to open branches. The RBI’s supervision system was strengthened. Rapid
computerization of the banks was adopted. RBI started helping the commercial
banks to improve the quality of their performance.
The government also enacted Recovery of Debts Due to Banks and Financial
Institutions (RDDBFI) Act, 1993 Debt Recovery Tribunals with an Appellate Tribunal
at Mumbai for quicker recovery of bad debts. In 1995, Banking Ombudsman scheme
was launched with an objective to provide quicker solutions to customers’
complaints.
Padmanabhan Committee
The first step towards rating of banks in India was taken up in 1995, when the
Reserve Bank of India established the S Padmanabhan Committee to take a fresh
look at the banking
Supervision. S Padmanabhan Committee recommended that Banking supervision
should focus on the parameters of the Financial Soundness, Managerial and
Operational Efficiency and firmness.
The Padmanabhan Committee recommended 5 points rating, which was based
upon the CAMELS Model.
CAMELS ratings is a Banks rating used in United States.
The 6 alphabets in CAMELS denote the following:
Since April 1997, banks have been given the freedom to assess working capital
requirement within prudential guidelines and exposure norms. Banks may evolve
their methods to assess the working capital needs of borrowers – the Turnover
Method or the Cash Budget Method or the MPBF System with necessary
modifications or any other system.
Brief History
The Reserve Bank of India is the central bank of the country. Central banks are a
relatively recent innovation and most central banks, as we know them today, were
established around the early twentieth century.
The Reserve Bank of India was set up on the basis of the recommendations of the
Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides
the statutory basis of the functioning of the Bank, which commenced operations on
April 1, 1935.
* To operate the credit and currency system of the country to its advantage.
The Bank began its operations by taking over from the Government the functions so far
being performed by the Controller of Currency and from the Imperial Bank of India, the
management of Government accounts and public debt. The existing currency offices at
Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became
branches of the Issue Department. Offices of the Banking Department were established
in Calcutta, Bombay, Madras, Delhi and Rangoon.
Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank
continued to act as the Central Bank for Burma till Japanese Occupation of Burma and
later upto April, 1947. After the partition of India, the Reserve Bank served as the
central bank of Pakistan upto June 1948 when the State Bank of Pakistan commenced
operations. The Bank, which was originally set up as a shareholder's bank, was
nationalised in 1949.
An interesting feature of the Reserve Bank of India was that at its very inception, the
Bank was seen as playing a special role in the context of development, especially
Agriculture. When India commenced its plan endeavours, the development role of the
Bank came into focus, especially in the sixties when the Reserve Bank, in many ways,
pioneered the concept and practise of using finance to catalyse development. The Bank
was also instrumental in institutional development and helped set up insitutions like the
Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India,
the Industrial Development Bank of India, the National Bank of Agriculture and Rural
Development, the Discount and Finance House of India etc. to build the financial
infrastructure of the country.
With liberalisation, the Bank's focus has shifted back to core central banking functions
like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments
System and onto developing the financial markets.
The Reserve Bank of India Act, 1934 sets out the objectives of the Reserve Bank:
’...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 to its advantage.’
The responsibility for ensuring financial stability has entailed the vesting of extensive
powers in and operational objectives for the Reserve Bank for regulation and
supervision of the financial system and its constituents, the money, debt and foreign
exchange segments of the financial markets in India and the payment and settlement
system. The endeavour of the Reserve Bank has been to develop a robust, efficient
and diversified financial system so as to anchor financial stability and to facilitate
effective transmission of monetary policy. In addition, the Reserve Bank pursues
operational objectives in the context of its core function of issuance of bank notes
and currency management as well as its agency functions such as banker to
Government (Centre and States) and management of public debt; banker to the
banking system including regulation of bank reserves and the lender of the last
resort.
Central Board
The Reserve Bank's affairs are governed by a central board of directors. The board
is appointed by the Government of India in keeping with the Reserve Bank of India
Act.
Offices
Subsidiaries
1. Monetary Authority
The framework aims at setting the policy (repo) rate based on an assessment Monetary policy
refers to the policy of the central bank with regard to the use of monetary instruments under its
control to achieve the goals specified in the Act. The Reserve Bank of India (RBI) is vested
with the responsibility of conducting monetary policy. This responsibility is explicitly mandated
under the Reserve Bank of India Act, 1934.
of the current and evolving macroeconomic situation; and modulation of liquidity conditions to
anchor money market rates at or around the repo rate. Repo rate changes transmit through the
money market to the entire the financial system, which, in turn, influences aggregate demand – a
key determinant of inflation and growth
2. Issuer of Currency
Along with Government of India, RBI is responsible for the design, production and overall
management of the nation’s currency, with the goal of ensuring an adequate supply of clean
and genuine notes. The Department of Currency Management at Central Office, Mumbai, in
cooperation with the Issue Departments of the Reserve Bank’s Regional Offices across India
oversees currency management. The function includes supplying and distributing adequate
quantity of currency throughout the country and ensuring the quality of banknotes in circulation
by continuous supply of clean notes and timely withdrawal of soiled notes.
This is achieved through a wide network of more than 4000 currency chests of commercial
banks. Currency chests are extended arms of the Reserve Bank Issue Departments and are
responsible for meeting the currency requirements of their respective regions.
Coins are minted by the Government of India. The Reserve Bank is the agent of the
Government for distribution, issue and handling of coins
Banker's bank
Banks are required to maintain a portion of their demand and time liabilities as cash reserves
with the Reserve Bank. For this purpose, they need to maintain accounts with the Reserve Bank.
They also need to keep accounts with the Reserve Bank for settling inter-bank obligations, such
as, clearing transactions of individual bank customers who have their accounts with different
banks or clearing money market transactions between two banks, buying and selling securities
and foreign currencies.
There are a number of commercial banks in a country. There should be some agency to regulate
and supervise their proper fuctioning. RBI acts as a banker to other banks The function is
performed through the Deposit Accounts Department (DAD) at the Reserve Bank’s Regional
offices. The Department of Government and Bank Accounts oversees this function and
formulates policy and issues operational instructions to DAD.
Developmental Role
This is one of the most critical role RBI plays in building the country's financial structure. Key
tools in this effort include Priority Sector Lending such as agriculture, micro and small enterprises
(MSE), housing and education. RBI work towards strengthening and supporting small local banks
and encourage banks to open branches in rural areas to include large section of society in
banking net.
Monetary Policy
Monetary Policy refers to the process employed by Central bank of the country to control
availability & cost of currency and thus keeping Inflation & Deflation low and stable. The central
bank does so by using various tools. Broadly these tools can be categorized in two parts as
Quantitative & Qualitative tools.
There are several direct and indirect instruments that are used for implementing monetary
policy.
Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to
banks against the collateral of government and other approved securities under the liquidity
adjustment facility (LAF).
Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on
an overnight basis, from banks against the collateral of eligible government securities under
the LAF.
Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo
auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected
under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help
develop the inter-bank term money market, which in turn can set market based benchmarks
for pricing of loans and deposits, and hence improve transmission of monetary policy. The
Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated
under the market conditions.
Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can
borrow additional amount of overnight money from the Reserve Bank by dipping into their
Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest . This provides a
safety valve against unanticipated liquidity shocks to the banking system.
Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in
the weighted average call money rate.
Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of
exchange or other commercial papers. The Bank Rate is published under Section 49 of the
Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore,
changes automatically as and when the MSF rate changes alongside policy repo rate
changes.
Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with
the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL)
that the Reserve Bank may notify from time to time in the Gazette of India.
Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe
and liquid assets, such as, unencumbered government securities, cash and gold. Changes in
SLR often influence the availability of resources in the banking system for lending to the
private sector.
Open Market Operations (OMOs): These include both, outright purchase and sale of
government securities, for injection and absorption of durable liquidity, respectively.
The objective of KYC/AML/CFT guidelines is to prevent banks/FIs from being used, intentionally or
unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC
procedures also enable banks/FIs to know/understand their customers and their financial dealings
better and manage their risks prudently.
APPLICABILITY
All types of banks and financial institutions life AMC, insurance companies, NBFC etc.
KYC Policy
Banks/FIs should frame their KYC policies incorporating the following four key elements:
Banks/FIs should develop clear customer acceptance policies and procedures, including a
description of the types of customers that are likely to pose a higher than average risk to the
bank/FI.
No account is opened in anonymous or fictitious/benami name.
Parameters of risk perception are clearly defined in terms of the nature of business activity,
location of the customer and his clients, mode of payments, volume of turnover, social and
financial status, etc. so as to enable the bank/FIs in categorizing the customers into low,
medium and high risk ones.
The bank/FI should have suitable systems in place to ensure that the identity of the customer
does not match with any person or entity, whose name appears in the sanction lists circulated
by the Reserve Bank.
Customer identification means undertaking client due diligence measures while commencing an
account-based relationship including identifying and verifying the customer and the beneficial owner
on the basis of one of the OVDs. Banks/FIs need to obtain sufficient information to establish, to their
satisfaction, the identity of each new customer, whether regular or occasional, and the purpose of the
intended nature of the banking relationship. The bank/FI must be able to satisfy the competent
authorities that due diligence was observed based on the risk profile of the customer in compliance
with the extant guidelines in place.
i. while selling banks’ own products, payment of dues of credit cards/sale and reloading of
prepaid/travel cards and any other product for more than Rs. 50,000/-.
ii. when carrying out transactions for a non-account based customer, that is a walk-in customer, where
the amount involved is equal to or exceeds Rs. 50,000/-, whether conducted as a single transaction or
several transactions that appear to be connected.
iii. when a bank/FI has reason to believe that a customer (account- based or walk-in) is intentionally
structuring a transaction into a series of transactions below the threshold of Rs. 50,000/-
Monitoring of Transactions
Risk Management
Banks/FIs should exercise on going due diligence with respect to the business relationship with every
client and closely examine the transactions in order to ensure that they are consistent with their
knowledge about the clients, their business and risk profile and where necessary, the source of funds.
Payments banks
The primary objective of payments banks, as stated by RBI before, will be to focus on
domestic payments services.
According to the guidelines, payments banks can open small savings accounts and accept
deposits of up to Rs.1 lakh per individual customer and provide remittance services. Hence,
the balance at the close of business on any day should not exceed Rs.1 lakh per customer.
RBI, on Thursday, clarified again that payments banks can’t accept fixed deposits (FDs),
term deposits, recurring deposits (RDs) and any non-resident Indian deposits. However, in-
bound remittance into accounts maintained by residents with payments bank will be
considered as deposits.
These banks can offer locker or vault services to enhance revenue generating opportunities.
This means that customers will now have more locker services options via payments banks.
The banks will have to provide normal banking services including accepting deposits
repayable on demand or otherwise, and withdrawal by cheque, draft or order, except lending.
This means, customers need to be given chequebooks and passbooks.
Payments banks can issue debit cards with Visa, MasterCard or Rupay, and are allowed to set
up their own ATMs (automated teller machines). RBI stated that the current norms of free
ATM transactions will be applicable to these banks as well.
“Allowing payments banks to offer lockers and set up ATMs is a good move. However,
payments banks can’t be compared with a commercial bank and, hence, keeping the number
of free ATM transactions at par with a large bank is not the best thing to do. It will be
difficult for the payments bank to recover costs and can discourage setting up ATMs. Also, it
may not be possible for a payments bank to offer many lockers since it works on an access
point model, whereas banks have branches where they can offer lockers,” said Pramod
Saxena, chairman and managing director, Oxigen Services (India) Pvt. Ltd. The company
plans to apply for a payments bank licence, and is ready with its application, added Saxena.
Payments banks are eligible to become members of clearing houses and electronic clearing
services, so they can provide consumers the ease of transferring money. They will also be
allowed to connect to the national unified unstructured supplementary service data platform
of the National Payments Corp. of India. This simply means that customers of payments
banks can avail mobile banking services.
Know-your-customer (KYC) norms will be as per the KYC guidelines applicable to other
scheduled commercial banks.
These banks are allowed to appoint business correspondents who can facilitate activities
such as loan sourcing for some other banks in addition to performing payment related
activities for the payments banks. They can sell credit products, mutual fund schemes,
insurance and trading products to customers on behalf of other banks and can recruit kirana
stores across the country as business correspondent agents to promote their services.
The payments banks can undertake other non-risk sharing, simple financial services
activities or non-risk government services—such as Aadhaar enrolment—that doesn’t require
any commitment of their own funds.
Small finance banks will be allowed to take deposits as well as lend money, and their focus
will be on small lending.
One of the concerns raised was that since the new banks will have to use the words ‘small
finance banks’ in its name, it will be a major challenge with regards to brand awareness and
brand equity compared with existing banks. It is a worry that it will take a long time for these
banks to build a good level of retail deposits and depositors would assume that since these
are ‘small’ banks, they might not be not as safe as ‘larger’ banks. RBI, however, reiterated
that the words ‘small finance bank’ has to be in the bank’s name.
In terms of products, these banks can offer payment or remittance products as well as access
to ATMs and point-of-sale terminals. Analysts say these banks are not expected to come out
with personal loan products. “Lending products will cater to day-to-day requirements and
don’t expect long-term financing right now. You will mostly see micro-finance kind of
lending products. Farm and gold loan products can be expected to be rolled out by these
banks. The main objective will be to address the needs of cash-in and cash-out and the entire
book will consist of retail products,” said Abhishek Kothari, banking analyst, Quant Broking
Pvt. Ltd.
RBI also stated that the operations of the bank should be technology-driven right from the
beginning, conforming to generally accepted standards and norms. The banks are being
encouraged to have new approaches for data storage, security, real time data update and so
on. A detailed technology plan for the same has to be given to RBI. Expect innovation with
the help of technology from these banks.
Lockers
Valuables are not safe, even in a bank locker. The RBI has stated that banks will not
compensate if the contents of the locker are stolen or damaged in a natural calamity.
The RBI and some PSU banks said that the relationship between a bank and a
customer with regards to lockers was that of a landlord and tenant. The tenant (that’s
you, the customer) was responsible for the valuables kept in the locker owned by the
bank.
Cheque and Demand drafts (DD) are both negotiable instruments. Both are
mechanisms used to make payments. A cheque is a Bill of Exchange drawn on a
specified banker and not expressed to be payable otherwise than on demand.
In cheque payment is made after presenting the cheque to the bank, while in DD is
given after making payment to the bank.
In cheque drawer and payee are different persons. In DD, both parties are banks. A
cheque needs signature to transfer amount, While DD does not require signature to
transfer funds.
Forex
Discussed about forex card, international credit card and forex rules (prepare your
own notes
Letter of credit
Please prepare your notes and examples as per discussion in the class.
Bank Guarantee
Bill Discounting
Merchant Banking
Underwriters
Custodial Services
The services such as DMAT, collection of dividends and interest payments, tax
support, and foreign exchange management are called custodial services. The fees
charged by custodians vary depending on the services that the client needs. It also
includes wills which client keep wit the banks.
A custodian is a company that has physical possession of your financial assets. It's
often a brokerage, commercial bank, or other type of institution that holds your
money and investments for convenience and security.
Ans. The acronym 'RTGS' stands for Real Time Gross Settlement, which can be
defined as the continuous (real-time) settlement of funds transfers individually on an
order by order basis (without netting). 'Real Time' means the processing of
instructions at the time they are received rather than at some later time; 'Gross
Settlement' means the settlement of funds transfer instructions occurs individually
(on an instruction by instruction basis). Considering that the funds settlement takes
place in the books of the Reserve Bank of India, the payments are final and
irrevocable.
Q2. How RTGS is different from National Electronics Funds Transfer System
(NEFT)?
Ans. NEFT is an electronic fund transfer system that operates on a Deferred Net
Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement
takes place with all transactions received till the particular cut-off time. These
transactions are netted (payable and receivables) in NEFT whereas in RTGS the
transactions are settled individually. For example, currently, NEFT operates in hourly
batches. [There are twelve settlements from 8 am to 7 pm on week days and six
settlements from 8 am to 1 pm on Saturdays.] Any transaction initiated after a
designated settlement time would have to wait till the next designated settlement
time Contrary to this, in the RTGS transactions are processed continuously
throughout the RTGS business hours.
Q3. Is there any minimum / maximum amount stipulation for RTGS transactions?
Ans. The RTGS system is primarily meant for large value transactions. The minimum
amount to be remitted through RTGS is ` 2 lakh. There is no upper ceiling for RTGS
transactions.
Q4. What is the time taken for effecting funds transfer from one account to another
under RTGS?
Ans. Under normal circumstances the beneficiary branches are expected to receive
the funds in real time as soon as funds are transferred by the remitting bank. The
beneficiary bank has to credit the beneficiary's account within 30 minutes of
receiving the funds transfer message.
Priority Sector Banking
Objective of Priority Sector Targets
The overall objective of priority sector lending programme is to ensure that adequate institutional
credit flows into some of the vulnerable sectors of the economy, which may not be attractive for the
banks from the point of view of profitability.
(i)Agriculture
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy
(viii) Others
Any loan to MSME industries for their business purposes comes under priority sector. MSMEs have
been defined by Ministry of Micro, Small and Medium Enterprises in 2006 as per investment limit in
plant & machinery as follows:
Small Enterprises More than twenty five lakh rupees but does not exceed five crore rupees
Medium Enterprises More than five crore rupees but does not exceed ten crore rupees
Small Enterprises More than ten lakh rupees but does not exceed two crore rupees
Medium Enterprises More than two crore rupees but does not exceed five core rupees
For service sector the Bank loans up to Rs. 5 crore per unit to Micro and Small Enterprises and Rs. 10
crore to Medium Enterprises engaged in providing or rendering of services are eligible.
This includes all types of services including restaurants, hotels, travel agents, software companies
etc. Further, the following loans are also counted as priority sector loans under MSME: Loans to
Khadi and Village Industries Sector (KVI) Loans to entities which provide inputs to artisans / village /
cottage industries and their cooperatives Loans to Micro-finance Institutions, which in turn use this
loan to disburse to MSME Loans under various schemes related to MSME scheme Overdraft under
Pradhan Mantri Jan-dhan Yojana up to Rs. 5000. Outstanding deposits with SIDBI and MUDRA Ltd.
on account of priority sector shortfall.
Export credit
It is a part of priority sector loan subject to 2% cap for domestic banks and foreign banks with >20
branches. However, for foreign banks with <20 branches, the export credit limit is up to 32% of the
ANBC
Education
This includes loans to individuals for educational purposes including vocational courses up to Rs. 10
lakh irrespective of the sanctioned amount will be considered as eligible for priority sector.
Housing
For housing loans to individuals, limit to be counted as priority sector loans is Rs. 28 Lakh in Metros
and Rs. 20 Lakh in other cities, towns and villages.
Social infrastructure
This includes loans up to ₹5 crore per borrower for building social infrastructure for activities viz.
schools, health care facilities, drinking water facilities and sanitation facilities including construction/
refurbishment of household toilets and household level water improvements in Tier II to Tier VI
centres.
Renewable Energy
This includes loan up to Rs. 15 crore to borrowers for purposes like solar based power generators,
biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy
based public utilities Viz. Street lighting systems, and remote village electrification. For individual
households, the loan limit will be ₹10 lakh per borrower.
to weaker sections up to Rs. 50,000 per borrower. Loans to distressed persons with a limit to Rs.
1,00,000/- per borrower to prepay their debt to non-institutional lenders Loans to State Sponsored
Organisations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and
supply of inputs and/or the marketing of the outputs of the beneficiaries of these organisations.