Welcome to IIBF s — JAIIB Virtual Classes PRINCIPLES

Welcome to IIBF’s - JAIIB Virtual Classes PRINCIPLES OF BANKING K. CHOCKALINGAM Consultant Faculty IIB & F

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

Financial Sector - Regulators Reserve Bank of India (RBI) Securities Exchange Board of India (SEBI) Insurance Regulatory and Development Authority (IRDA) Banks Capital Markets/ Mutual Funds Insurance Companies

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

Banking in India is governed by BR Act, 1949 and RBI Act, 1934 n Banking in India is controlled/monitored by RBI and Govt. of India n The controls for different banks are different based on whether the bank/s is/are n a) statutory corporation b) a banking company c) a cooperative society

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

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

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

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

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

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

Money Market Instruments n Inter bank call money/deposit n Inter bank notice money/deposit n Inter bank term money/deposit n Certificates of Deposit n Commercial Paper n Treasury Bills n Bill rediscounting n Repos

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

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

Repos n n n Repo (repurchase agreement) instruments enable collateralised short-term borrowing through the selling of debt instruments A security is sold with an agreement to repurchase it at a pre-determined date and rate Reverse repo is a mirror image of repo and reflects the acquisition of a security with a simultaneous commitment to resell

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

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

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

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

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

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

Financial Intermediaries (2) Merchant banking- Another important financial intermediary which manages and underwrites new issues, undertake syndication of credit, advise corporate clients on fund raising n Subject to regulation by SEBI and RBI n SEBI regulates them on issue activity and portfolio management of their business. n RBI supervises those merchant banks which are subsidiaries or affiliates of commercial banks n

Indian Banking - Significant events 1 n n n Three presidency banks were established in Calcutta (1806) in Bombay (1840) and in Madras (1843) In the early part of 20 th century, on account of the Swadeshi movement a number of join stock banks were established by Indians like Bank of India, Bank of Baroda and Central Bank of India. In 1921 the three presidency banks were merged and the Imperial Bank of India was created. During the period 1900 to 1925 many banks failed, and the Government appointed in 1929 a Central Banking Enquiry Committee to trace the reasons for the failure of banks. The Reserve Bank of India Act was passed in 1934 and the RBI came into existence in 1935 and RBI was nationalised in 1949 The Banking Regulation Act, 1949 gave wide powers to RBI to act as the regulator for banks in India

Indian Banking -Significant events 2 n n n In 1955, State Bank of India became the successor to the Imperial Bank of India , under the State Bank of India Act, 1955. In 1959, State Bank of India (Subsidiary Banks) Act was passed to enable SBI to take over State Associated banks as SBI’s subsidiaries In 1969, the Government of India nationalised 14 major commercial banks having deposits of Rs. 50 crore or more In 1975 Regional Rural Banks were established under RRB Act 1976, which was preceded by RRB Ordinance in 1975 In 1980, six more commercial banks were nationalised, with a deposit of Rs. 200 crore or more

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

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

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

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

Functions of Banks - 1 CENTRAL BANK RBI REGULATOR SUPERVISOR FACILITATOR

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

CREDIT CONTROL n QUANTITATIVE CREDIT CONTROL n QUALITATIVE CEDIT CONTROL’ n CRR & SLR n BANK RATE n OPEN MARKET OPERATIONS

Functions of Banks - 2 n Commercial Banks-Core Banking Functions Acceptance of deposits from public Lending funds to public/corporates Investing funds in various opportunities Collecting cheques/drafts and other Negotiable Instruments Remitting funds

Functions of Banks-3 Commercial Banks – Para Banking Services Providing safe deposit lockers Acceptance of safe custody items Acceptance of standing instructions Offering internet banking facilities Issuance of credit and other cards including ATM cards n Offering various products like Mutual funds, insurance products, merchant banking services n Acting as executors and trustees n n n

Commercial Banks DEPOSIT PRODUCTS CURRENT CERTIFICATE SAVINGS DEPOSITS FLEXI FIXED RECURRING

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

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

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

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

Know Your Customer (KYC) -1 n KYC: Know Your Customer n Know your customer (KYC) norms are applicable to all types of customer a/cs. n It deals with not only to identify the customer but also to understand the activities of the customer, and to ensure that the operations in the customer account/s is/are for genuine purpose

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

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

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

Bank Customers - 2 Sole Proprietor Clubs/ Socities Partnership Corporates Hindu Undivided Family

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

CHEQUES BEARER ORDER CROSSED OPEN

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

NEGOTIABLE INSTRUMENTS HOLDER IN DUE COURSE BANKER’S DUTIES & RESPONSIBILITIES C 0 LLECTING BANKER COLLECTION OF CHEQUES CONSIDERATION TITLE BEFORE MATURITY

Six Cs n Character n Capital n Capacity n Collateral n Condition n Compliance

Working Capital Cycle Bills receivables sales Cash Raw material Finished goods Semi finished goods

CHARGES n HYPOTHECATION n PLEDGE n MORTGAGE n ASSIGNMENT n LIEN n SET OFF

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

SRFAESI Act, 2002 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI) was enacted in 2002 Securitization Company/Reconstruction Company (SCRC) can finance the acquisition from own resources or rise sources from Qualified Institutional Buyers (QIBs)

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

Priority Sector 1 Priority Sector Primay Secondary Teritary

Priority Sector – 2 Primary Sector Agriculture Direct Allied Activities Indirect

Priority Sector – 3 Secondary Sector SSI/SME SSSBE

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

Small & Medium Enterprises (SMEs) SMEs are classified based on Small & Medium Enterprises Development Act, 2006 n SMEs are divided into micro, small & medium sized entities. n SMEs are classified based on two categories viz. , manufacturing units and service companies. n In case of manufacturing units, investments in plant and machinery and for service units, investments in equipment are considered for classification. n

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

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

Documentation 2 n Documentary evidence as per Sec 61 of Evidence Act : a) Primary: original documents needs to be produced for inspection of court b) Secondary: - certified copies - copies made from or compared with original

E banking E Banking Credit Cards Internet Banking Core Banking Solutions

hank ou n K Chockalingam n TEL : 9322295394 n e. mail: chockalingam_2000@yahoo. com chockalingam@iibf. org. in