BANKING AND INSURANCE

Session I
BASICS OF BANKING
The bfsi Landscape
WHAT IS A BANK?
• A bank is an institution that provides financial service,
particularly taking deposits and extending credit
• Generally understood as an institution that holds a
banking license
• Most importantly provide collection and clearing
services
EVOLUTION OF BANKING
• Mid to late 1700s – General Bank of India
• Early 1800s – Establishment of the Presidency Banks – Bank of Bengal, Bank of
Madras and Bank of Bombay
• Mid to late 1800s – entry of European Banks – BNP and Credit Lyonnais
• 1921 – Amalgamation of all Presidency Banks – birth of Imperial Bank of India
(later changed to State Bank of India)
• Establishment of Reserve Bank of India – Apr 1, 1935
• Nationalization of banks – 1969 and 1980
• 1994-95 – entry of new-age private sector banks
• 1995 to date: banking transformation
• 2000 to date: IT as a change catalyst
INDIA
THE INTERMEDIARY ROLE
Economy
Surplus Deficit
B
A
N
K
I
N
G
• Households
• Businesses
• Insurance Companies
• Mutual Funds
• Households
• Businesses
• _ _ _ _ _ _ _ _ _ _
Channelising Funds
THE TRANSFORMATIONAL ROLE
Key Requirements
• Safety & Security
• Growth
• Liquidity
Key Requirements
• Time/Schedule
• Risk
Transforming Needs & Profile
Economy
Surplus Deficit
B
A
N
K
I
N
G
THE TRANSACTIONAL ROLE
• Banks move money
• They help complete transactions
• They act as agents
• They provide other services that enable transactions
Importer / Buyer
(USA-based)
Exporter / Seller
(India-based)
Quantity/Quality Payment/Timeliness
BANKING
Move money and complete transactions
THE STABILIZING ROLE
• Provide stability to an economy’s financial system
• Stability achieved by identifying and managing risks
OTHER ROLES
• Guarantor Role
• Advisor Role
• Custodian Role
• Policy Role

Not all roles are played by all banks – there are many
different types of banks – some perform all roles, while
others focus on a few of these roles
TYPES OF BANKS IN INDIA
Public Sector
Banks
Foreign
Banks
Regional Rural
Banks
Private Sector
Banks
• Predominantly
Government of
India owned
• Limited autonomy
in operations
• Directed lending to
a certain extent
• Vast branch
network
• Laggards in
technology
adoption
• Two sub-groups
– new age
private sector
and old age
private sector
• Tech savvy,
aggressive,
innovative new
age banks –
broad basket of
products
• Relationship
oriented,
localized old age
banks
• Established for
meeting
banking
requirements
of specific
groups
• Prominent in
Maharashtra
and Gujarat
• Limited
product
offerings
• Limited presence
• Growing interest
• Expanding
operations
• Typically catered
to the
requirements of
MNCs and blue-
chip Indian
corporates
• A few in consumer
lending
Cooperative
Banks
• Focused on rural
markets
• Focused on
financial inclusion
• Promoted by any
one of the Public
Sector Banks
• Products and
Services geared
to meet rural
requirements
BANKING SECTOR REFORMS

 Several committees constituted to resolve problems of
Commercial Banking in India, two most important are-
a) Narasimham Committee I (1991)- aimed at bringing
―operational flexibility‖ and ―functional autonomy‖ so as
to enhance efficiency, productivity and profitability

b) Narasimham Committee II (1998)- bringing structural
changes so as to strengthen banking system to make it
more stable

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MAJOR RECOMMENDATIONS
NARISHIMAM COMMITTEE REPORT I
 Four-tier hierarchy for banking structure - three to four large
banks with SBI at top
 Parity in treatment of Private sector banks lic sector banks
 Follow BIS/Basel norms
 Lifting of ban - setting new banks in Private sector
 Liberal Governmental policies for expansion of foreign bank
branches and rationalization of foreign operations of Indian
banks
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MAJOR RECOMMENDATIONS (CONTD.)
 Progressively bring down - Statutory Liquidity Ratio (SLR) and Cash
Reserve Ratio (CRR)
 Tighten prudential norms for the commercial banks
 Deregulate interest rates
 Redefine priority sector - to comprise SME and marginal farmers,
and EWS
 Increase competition in lending between DFIs and banks
 Disinvest in PS banks
 Each public sector bank - set up at least one RBS and treated at par
with RRBs



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MAJOR RECOMMENDATIONS (CONTD.)
Narasimham Committee Report II

 Merger of strong PS banks and closure of some weaker banks
 Amicable golden handshake scheme for surplus banking sector
staff
 Setting up ARC to tackle NPAs in banks
 Enhancement of capital adequacy norms
 Healthy competition between PS banks and private sector banks
essential.




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PRE-GLOBALIZED SCENARIO OF
SERVICE CULTURE IN THE INDIAN BANKS
SERVICE CULTURE
WAS EXTREMELY
DEMOTIVATED & NON INTERESTED
EMPLOYER& EMPLOYEE.
NON COMPETETIVE
ATTITUDE.
PRODUCT FOCUSED & NOT
CUSTOMERSERVICE FOCUSED.
CUSTOMER UNFRIENDLY
FORMALIZED
THE BANKING SECTOR TODAY
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Depth

 Countrywide coverage
 Large number of players
 Increasingly
sophisticated financial
markets


Technology

 Increasing use of
technology in operations
 Poised to expand and
deepen technology usage


Diversification
 Emergence of integrated
players
 Diversifying capital
deployment
 Leveraging synergies

Regulation
 Robust regulatory system
aligned to international
standards
 Efficient monetary
management
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A New orientation among banks…

 Sell products
 Product research: what
will sell?
 Product sales and
profitability targets
 Product specialist
groups
 Introduce new
offerings every few
years/months
 “Branch banking”
 Focus - customer
acquisition

 Meet customers’ needs
 Customer research:
what does the customer
want?
 Customer segment
sales and profitability
targets
 Customer owners
 Customer specific new
offerings every
week/day
 Customer convenience
 Deepen relationships
Traditional/ public sector
New/ private sector
Mobile
&
Internet
banking
Good Waiting room
Low
interest
rates
Change in
Product line
Financial
service
Flower of
banking service
Technological Innovations
in Banking sector.
Data Mining.
Tie up Arrangements
Plastic money.
Virtual banking-
don’t visit the branch

ATM
Insurance Product

Marketing Agents for
Distribution of Products
Mobile Banking

Phone Banking


Additional Banking Services

Merchant Banking
Loan Syndication.
Mutual Fund
Factoring.

Forfeiting.
Venture Capital.
YOU ARE A CORPORATE BANKER IF……
Understanding Role of Central Banks
RESERVE BANK OF INDIA
CENTRAL BANK IN INDIA – THE RBI
Govt. of India
Reserve Bank of India
Powerful –authorized
to enact banking laws
Central Banker or
Banker’s Banker
• Banking Regulation
Act
• Negotiable
Instruments Act
Monetary
Policy
Banking
Regulation
Financial
Ind. Health
Devpt.
Role
Payment
Systems
INTRODUCTION
 Regulatory framework of the country.
 Degrees of Imperfections cannot be denied
 Financial system deals in other people’s
money
 Trust ,confidence and faith in it is crucially
important for its smooth functioning


CONTD……..
 Centre of the Indian Financial and Monetary
System
 Apex Institution – Guiding, Monitoring and
Controlling.
 Started functioning from 1
st
April 1935 , on
the terms of Reserve Bank of India Act,1934
 Was a Private Shareholders Institution till Jan
1949 after which it became a state-owned
institution under the RBI Act.

FUNCTIONS OF RBI
 To maintain Monetary Stability
 To maintain Financial Stability
 To maintain stable payment system
 To promote the development of financial
infrastructure of markets and systems
 credit allocation
 To regulate the overall volume of money
ROLES OF RBI
 Note Issuing Authority
 Governments Banker
 Bankers’ Bank
 Supervising Authority
 Exchange
control authority


NOTE ISSUING AUTHORITY
 Since its inception, RBI has the sole right or
authority or monopoly of issuing currency
notes other than one rupee notes and coins,
and coins of smaller denominations.
 Although one rupee notes and coins, and
coins of smaller denominations are issued by
Government of India, they are put into
circulation by RBI
 All affairs of the bank relating to note issue
are conducted by its Issue Department

CONTD…
BANKER TO THE GOVERNMENT
 Maintaining Accounts
 Receiving the Revenue
of the governments
 Making Payments of the
governments
 Providing Remittance
Facilities
 Issuing Treasury Bills
 Providing Ways & Means
Finance
 Advisor to the
Government
 Representing the
Government
BANKERS’ BANK
 The bank controls the
volume of reserves of
commercial banks and
thereby determines the
deposits/credit creating
ability of the banks.
 The banks hold a part of
their reserves with the RBI
 In times of need, the
banks borrow funds from
RBI
 It is, therefore, called the
bank of last resort or the
lender of the last resort.

CONTD…
 Clearing House & Remittance Facilities
 Real Time Gross Settlement: Introduced in
2004, it is the beginning of a clearing system
at the national level
 On the whole, the RBI is the ultimate source
of money and credit in India
SUPERVISING AUTHORITY
 Supervise and control commercial and co-
operative banks.
 To issue the licenses for the establishments
of new banks
 To issue licenses for setting up of bank
branches
 To prescribe minimum requirements
regarding paid-up capital and reserves,
maintenance of cash and other liquid assets.


CONTD…
 To inspect the working of banks in India as
well as abroad in respect of their
Organizational set- up
 To conduct the investigations , from time to
time , regarding irregularities, frauds,
complaints, etc…
 To control methods of operations of banks
 To control appointment, re-appointment,
termination of appointment of the chairman
and CEOs of Private sector banks
EXCHANGE CONTROL AUTHORITY
 It manages the exchange rate between the
rupee and other currencies
 To negotiate with the monetary authorities and
financial institutions like IMF, World Bank and
Asian Development Bank.
 The RBI is the custodian of the country’s foreign
exchange reserves, and it is vested with the
responsibility of managing the investment and
utilization of the reserves in the most
advantageous manner.


MONETARY POLICY

TECHNIQUES USED BY RBI
 OMO - Open market operations.
 Bank Rate - The rate at which RBI rediscounts
the bills.
 Cash Reserve Ratio – The CRR refers to the
cash which banks have to maintain with the
RBI as a percentage of their demand liabilities.
 Statutory Liquidity Ratio – The SLR is the ratio
of cash in hand exclusive of cash balances
maintained by banks for CRR.

PAYMENT SYSTEM
 Paper-based Payments
 Use of paper-based instruments (like cheques, drafts, and the like)
accounts for nearly 60% of the volume of total non-cash transactions in
the country.
 In value terms, the share is presently around 11%. This share has been
steadily decreasing over a period of time and electronic mode gained
popularity due to the concerted efforts of Reserve Bank of India to
popularize the electronic payment products in preference to cash and
cheques.
 Since paper based payments occupy an important place in the country,
 Reserve Bank had introduced Magnetic Ink Character Recognition
(MICR) technology for speeding up and bringing in efficiency in
processing of cheques.

ELECTRONIC PAYMENTS

 Electronic Clearing Service (ECS) Credit
 The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and
repetitive payment requirements (like salary, interest, dividend payments) of
corporates and other institutions. ECS (Credit) facilitates customer accounts to be
credited on the specified value date and is presently available at all major cities in the
country.
 National Electronic Funds Transfer (NEFT) System
 In November 2005, a more secure system was introduced for facilitating one-to-one
funds transfer requirements of individuals / corporates. Available across a longer time
window, the NEFT system provides for batch settlements at hourly intervals, thus
enabling near real-time transfer of funds. Certain other unique features viz. accepting
cash for originating transactions, initiating transfer requests without any minimum or
maximum amount limitations, facilitating one-way transfers to Nepal, receiving
confirmation of the date / time of credit to the account of the beneficiaries, etc., are
available in the system.
 Real Time Gross Settlement (RTGS) System
 RTGS is a funds transfer systems where transfer of money takes place from one bank
to another on a "real time" and on "gross" basis. Settlement in "real time" means
payment transaction is not subjected to any waiting period. "Gross settlement" means
the transaction is settled on one to one basis without bunching or netting with any
other transaction. Once processed, payments are final and irrevocable. This was
introduced in in 2004 and settles all inter-bank payments and customer transactions
above ` 2 lakh.


KYC
KNOW YOUR CUSTOMER
INTRODUCTION
 Based on the RBI guidelines,our Banks Board has
approved the new ―Know Your Customer (KYC) Policy and
Anti Money Laundering (AML) Policy in November 2004
for implementation across the bank based on the Basel
Committee recommendation on Customer Due Diligence
and suggestion made by the Financial Action Task
Force(FATF) on Anti Money Laundering(AML) standards
for combating Financing of Terrorism (CFT)



OBJECTIVES OF KYC & AML
 To enable the Bank to know/understand its customers
and their financial dealings better.
 To protect the Bank’s reputation
 To protect bank’s channels, products, services form
being used as a channel for misuse/money laundering
 To protect the bank, its employees & customers from
this menace
 To adhere to KYC policies and procedures
 To take appropriate action & report the same once
suspicious activity is detected
 To comply with applicable local & international laws
adopted by banks
OBJECTIVES OF KYC
 KYC_AML standards will help banks in weeding out unwanted
customers and serving genuine customers. This way, banks
will help themselves in better control over business. This will
protect reputation risk / operational risk and integrity of
banking industry.
 Money laundering doesn’t affect individuals directly but it do
affects entire society / economy across the world. It do affects
genuine customers. Money Laundering affects demand /
supply for money / exchange rates in money market / capital
flows.

BANKING CONCEPTS

 PLR or prime lending rate - rate of interest at which banks lend to their
credit-worthy or favored customers.
 It is treated as a benchmark rate for most retail and term loans.
 influenced by RBI’s policy rates — the repo rate and cash reserve ratio

 Deposit Rates - Interest rate paid on deposit accounts by commercial
banks and other Fis

 Bank rate - rate of interest which RBI charges on loans and advances that
it extends to commercial banks and other financial intermediaries.
Changes in the bank rate are often used by RBI to control money supply
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 Repo Rate - rate at which banks borrow from RBI. A reduction in repo
rate will help banks to get money at a cheaper rate.


 Reverse Repo rate - rate at which RBI borrows money from banks. An
increase in Reverse repo rate can cause banks to transfer more funds to
RBI due to this attractive interest rates. It can cause the money to be
drawn out of the banking system.
Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo
Rate and Reverse Repo rate our banks adjust their lending or investment
rates for common man.


Difference between Bank Rate and Repo Rate
 While repo rate - applicable to short-term loans and used for controlling
amount of money in market, bank rate - a long-term measure and
governed by long-term monetary policies
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STATUTORY LIQUIDITY RATIO (SLR)

OBJECTIVE
1) To restrict expansion of bank credit.
2) To augment investment of the banks in Government securities.
3) To ensure solvency of banks.
 Commonly used to contain inflation and fuel growth, by increasing or
decreasing it respectively

 MAINTAINED IN THE FORM OF :
a) Cash
b) Gold – marked to market
c) Unencumbered approved securities or Gilts - valued at a price as
specified by RBI

 CURRENT SLR –

 SLR RATE = Total Demand/Time Liabilities x 100%

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CASH RESERVE RATIO (CRR)


 OBJECTIVE
 Banks required to hold a certain proportion of their deposits in the form of
cash, deposited with RBI/currency chests, considered as equivalent to
holding cash with themselves
 This minimum ratio (that is the part of the total deposits to be held as
cash) is stipulated by RBI - CRR or Cash Reserve Ratio
 Also known as - Cash Asset Ratio or Liquidity Ratio

 PURPOSE –
 Higher the ratio (i.e. CRR), lower is amount that banks will be able to use
for lending and investment.

 EXISTING CRR




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