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JAIIB Principles and Practices of Banking

Financial System in India Financial Sector consists of three main segments viz.,1) Financial institutions -banks, mutual funds, insurance companies2) Financial markets -money market, debt market, capital market, Forex market3) Financial products -loans, deposits, bonds, equities

Financial Sector - Regulators

Banking in India

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

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

Banking Regulation Act,1949 (BR Act)-2

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

Reserve Bank of India Act,1934(RBI Act)-2RBI Act deals with:

incorporation, capital management and business of bankscentral banking functionsfinancial supervision of banks and financial institutionsmanagement of Forex/reservescontrol functions : bank rate, audit, accountspenalties for violation

Reserve Bank of India - 1Reserve 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 etcBR Act,1949 gave RBI powers to regulate, supervise and develop the banking system in India

Reserve Bank of India 2

Money Market InstrumentsInter bank call money/depositInter bank notice money/depositInter bank term money/depositCertificates of DepositCommercial PaperTreasury BillsBill rediscountingRepos

Certificates of DepositCDs are short-term borrowings in the form of UPN issued by scheduled commercial banks and are freely transferable by endorsement and delivery. Introduced in 1989Minimum period 7 days and maximum period one year. FIs are allowed to issue CDs for a period between 1 year and up to 3 yearsMinimum amount is Rs 1,00,000.00Subject to payment of stamp duty under the Indian Stamp Act, 1899Issued to individuals, corporations, trusts, funds and associationsIssued at a discount rate freely determined by the market/investors

Commercial PaperShort-term borrowings by corporates, financial institutions, primary dealers from the money marketCan be issued in the physical form (Usance Promissory Note) or demat formatIntroduced in 1990When issued in physical form are negotiable by endorsement and delivery and hence, highly flexibleMaturity is 7 days to 1 yearUnsecured and backed by credit rating of the issuing companyIssued at discount to the face value

ReposRepo (repurchase agreement) instruments enable collateralized short-term borrowing through the selling of debt instrumentsA security is sold with an agreement to repurchase it at a pre-determined date and rateReverse repo is a mirror image of repo and reflects the acquisition of a security with a simultaneous commitment to resell

INDIAN CAPITAL MARKETIndian Capital Market plays an important role in the economic development of the country

It provides opportunities for investors to invest in the market and also to earn attractive rate of return.

It also creates source of funds for the various sectors

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,1992SEBIs functions:To protect the interests of investorsTo recognize the business in stock exchanges and other security marketsTo supervise and regulate work of intermediaries, such as stock brokers merchant bankers/custodians/depositories/bankers to the issues

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

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

Financial Intermediaries (1)Mutual Funds- As financial intermediary promote savings and mobilize 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.

MFs aims to reduce the risks in investments Mutual funds help their investors to enhance their value by investing the funds in capital market.

Mutual funds offer various schemes: growth fund, income fund, balanced fund, sector wise funds, etc.,

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

Subject to regulation by SEBI and RBI

SEBI regulates them on issue activity and portfolio management of their business.

RBI supervises those merchant banks which are subsidiaries or affiliates of commercial banks

Indian Banking - Significant events 1 Three presidency banks were established in Calcutta (1806) in Bombay (1840) and in Madras (1843)

In the early part of 20th 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 nationalized 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

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 SBIs subsidiaries

In 1969 the Government of India nationalized 14 major commercial banks having deposits of Rs.50cr 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 nationalized, with a deposit of Rs.200cr or more

Progress of banking in IndiaIn the liberalized, privatized and globalised environment, banks operating in India have diversified their banking activities by offering Para Banking facilities likeMerchant banking/Mutual fundsATMs/Credit Cards/Internet bankingVenture capital fundsFactoringBancassurance

Classification of Banks-1

Classification of Banks-2

Classification of Banks-3Public Sector Banks = State Bank of India + SBIs associate banks + Nationalized banksPrivate Sector Banks=Indian Private Sector Banks (Old/New generation banks)+Foreign banks in IndiaOther Banks=Regional Rural Banks(RRB)

Banking Regulation

Reserve Bank of India Act 1934Banking Regulation Act 1949

The Governor4 Dy. Governors (Appointed by union government)15 Directors

Generate & maintain trust in the publicProtect investors interest (GTB Example)Ensure financial markets are both fair & efficientParticipants measure up to the rules of the market placeLogic of regulating of Financial/banking system is;

Retail Banking, Whole Sale Banking & International Banking.

ADR, GDR & Participatory Notes

Multiple Products (Deposits, Credit Cards, Insurance, Investments & Securities)Multiple channels (Branches, Call Centre, Internet & Kiosk)Multiple Customer Group

Retail Banking

Fund Based Services (Term lending, working capital financing etc)Non- Fund based services ( Banking Guarantee, LC, Collection of bills)Value Added ServicesInternet Banking ServicesWhole Sale Banking

International Banking

Universal Banking

ADRs

GDRs

Participatory Notes (P Notes)

Primary MarketSecondary MarketStock Exchanges in India

Role & Functions of Capital Market - SEBI

Functions of Banks - 1

RESERVE BANK OF INDIASUPERVISORY & REGLATORYIssuance of currency notesBankers BankerLender of the last resortCredit Control & Monetary PolicyExchange Control & Forex ManagementFunds Transfer

CREDIT CONTROL

QUANTITATIVE CREDIT CONTROLQUALITATIVE CEDIT CONTROLCRR & SLRBANK RATEOPEN MARKET OPERATIONS

Functions of Banks - 2Commercial Banks-Core Banking FunctionsAcceptance of deposits from publicLending funds to public/corporatesInvesting funds in various opportunitiesCollecting cheques/drafts and other Negotiable InstrumentsRemitting funds

Functions of Banks-3Commercial Banks Para Banking ServicesProviding safe deposit lockersAcceptance of safe custody itemsAcceptance of standing instructionsOffering internet banking facilitiesIssuance of credit and other cards including ATM cardsOffering various products like Mutual funds, insurance products, merchant banking servicesActing as executors and trustees

Commercial Banks DEPOSIT PRODUCTS

Non-Resident Accounts - 1

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

Loan Products Fund Based

Loan Products Non Fund Based

Know Your Customer (KYC) -1KYC: Know Your CustomerKnow your customer (KYC) norms are applicable to all types of customer a/cs. 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) -2Application of KYC norms have become important due to various reasons.In view of many issues on account of drugs smuggling, money laundering, terrorist activities, arms dealing, etc.,

Know Your Customer (KYC) -3

Bank Customers - 1

Bank Customers - 2

BANKER-CUSTOMER RELATIONSHIPDEBTOR-CREDITORCREDITOR-DEBTORAGENT-PRINCIPALLESSOR-LESSEEBAILEE-BAILOR

CHEQUES

NEGOTIABLE INSTRUMENTSPaying Banker:

NEGOTIABLE INSTRUMENTSBANKERS DUTIES&RESPONSIBILITIESC0LLECTINGBANKERCOLLECTION OFCHEQUES

Six Cs CharacterCapitalCapacityCollateralConditionCompliance

Working Capital Cycle

CHARGESHYPOTHECATIONPLEDGEMORTGAGEASSIGNMENTLIENSET OFF

Risk Management

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

SRFAESI Act,2002

Priority Sector 1

Priority Sector 2

Priority Sector 3

Priority Sector 4

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

Credit Management in Banks

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

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

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