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Welcome toIIBF’s - JAIIB Virtual Classes
PRINCIPLES OF BANKINGModule A & BApril 15/2008
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
Regulators
Reserve Bank of India(RBI)
Securities ExchangeBoard of India
(SEBI)
Insurance Regulatoryand Development
Authority(IRDA)
BanksCapital Markets/
Mutual FundsInsurance Companies
Banking in India
Legal frame workof
Banks
Banking Regulation Act,1949
Reserve Bank of India
Act,1934
Banking in India
- Banking in India is governed by BR Act,1949 and RBI Act,1934 - Banking in India is controlled/monitored by 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 banks- BR Act allows RBI (Sec 22) to issue licence for banks
Banking Regulation Act,1949 (BR Act)-2
Regulation
Control overmanagement
Penalities
Suspension&
Winding up
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
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,superivse and develop the banking system in India
Reserve Bank of India – 2
CENTRAL BANKRBI
REGULATOR SUPERVISOR FACILITATOR
Money Market Instruments
• Inter bank call money/deposit• Inter bank notice money/deposit• Inter bank term money/deposit• Certificates of Deposit• Commercial Paper• Treasury Bills• Bill rediscounting• Repos
Certificates of Deposit
• 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 1,00,000.00• 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
• Short-term borrowings by corporates, financial institutions, primary dealers from the money market
• Can be issued in the physical form (Usance Promissory Note) or de mat 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
• 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
• Indian 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,1992
• SEBI’s functions:• To protect the interests of investors• To recognize the business in stock
exchanges and other security markets• To 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 2000• IRDA’s functions:• To regulate, promote and ensure
orderly growth of the insurance business and reinsurance business in India
• To protect the interests of policy holders
Insurance Sector
• Insurance Sector in India can be divided into two main sections
General Insurance
Life Insurance
Financial Intermediaries (1)• 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.
• 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 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
• 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
• 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
CentralBankRBI
Public Sector Banks
New PrivateSectorBanks
Old PrivateSector
Foreign Banks
Co-operativeBanks
RegionalRural Banks
Classification of Banks-2
PUBLIC SECTORBANKS
STATE BANK OF INDIA
SBI
SBI ASSOCIATEBANKS
NATIONALISEDBANKS
Classification of Banks-3
• Public Sector Banks =State Bank of India+SBI’s associate banks+
Nationalised banks• Private Sector Banks=Indian
Private Sector Banks (Old/New generation banks)+Foreign banks in India
• Other Banks=Regional Rural Banks(RRB)
Functions of Banks - 1
CENTRAL BANKRBI
REGULATOR SUPERVISOR FACILITATOR
RESERVE BANK OF INDIA
SUPERVISORY & REGLATORYIssuance of currency notesBanker’s BankerLender of the last resortCredit Control & Monetary PolicyExchange Control & Forex ManagementFunds Transfer
CREDIT CONTROL
• QUANTITATIVE CREDIT CONTROL• QUALITATIVE CEDIT CONTROL’• CRR & SLR• BANK RATE• OPEN MARKET OPERATIONS
Functions of Banks - 2
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 Offering various products like Mutual
funds,insurance products, merchant banking services
Acting as executors and trustees
Commercial Banks DEPOSIT PRODUCTS
CERTIFICATE
FLEXI
RECURRING
FIXED
SAVINGS
CURRENT
DEPOSITS
Non-Resident Accounts - 1
Rupee accounts
Non-residentOrdinary account
(NRO)
Non-residentExternal account
(NRE)
Foreign Currency Non-residentDeposit Accounts –FCNR (B) FCNR (B) accounts NRIs,PIOs,residing outside India can open
FCNR (B) accounts FCNR (B) accounts are maintained as fixed
deposits in certain designated currencies The 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 currencies Repatriation of funds (principal, interest) is
allowed
Loan Products – Fund Based
BILLS FINANCE
TERMFINANCE
RETAIL FINANCE
OVERDRAFT
CASH CREDIT
LOANS&
ADVANCES
Loan Products –Non Fund Based
Letters of Credit
Bank Guarantee
Co-Acceptance Of
Bills
Know Your Customer (KYC) -1Know Your Customer (KYC) -1
KYC: Know Your CustomerKYC: Know Your Customer Know your customer (KYC) norms are Know your customer (KYC) norms are
applicable to all types of customer a/cs. applicable to all types of customer a/cs. It deals with not only to identify the It deals with not only to identify the
customer but also to understand the customer but also to understand the activities of the customer, and to ensure activities of the customer, and to ensure that the operations in the customerthat the operations in the customer
account/s is/are for genuine purposeaccount/s is/are for genuine purpose
Know Your Customer (KYC) -2
• Application 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.,
banks need to be careful in dealing with their clients.
Know Your Customer (KYC) -3
Customer Acceptance
Policy
Monitoring of Transactions
Risk Management
CustomerIdentificationProcedure
Bank Customers - 1
Power ofAttorneyHolders
Executors/Trustees
Illiterate Perons
Minors
Joint accounthoders
Individuals
Bank Customers
Bank Customers - 2
Sole Proprietor
Clubs/Socities
Coproates
Hindu Undivided
Family
Partnership
BANKER-CUSTOMERRELATIONSHIP
DEBTOR-CREDITOR CREDITOR-DEBTOR AGENT-PRINCIPAL LESSOR-LESSEE BAILEE-BAILOR
CHEQUES
OPEN
CROSSED
ORDER
BEARER
NEGOTIABLE INSTRUMENTSPaying Banker:
Payment inDue
Course
ApparentTenor
In good faithWithout
Negligence
NEGOTIABLE INSTRUMENTSBANKER’S DUTIES
&
RESPONSIBILITIES
C0LLECTING
BANKER
COLLECTION OF
CHEQUES
HOLDER INDUE
COURSE
CONSIDERATIONTITLE
BEFOREMATURITY
Six Cs
CharacterCapitalCapacityCollateralConditionCompliance
Working Capital Cycle
Cash
Raw material
Semi finished goodsFinished goods
sales
Bills receivables
CHARGES
• HYPOTHECATION• PLEDGE• MORTGAGE• ASSIGNMENT• LIEN• SET OFF
Risk Management
Credit Risk
Liquidity Risk
Operations Risk
PriceRisk
Interest RateRisk
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
Enforcement ofSecurity interest
Transfer of NPA
Legal framework
Priority Sector 1
Priority Sector
Primay Secondary Teritary
Priority Sector – 2
Primary Sector
Agriculture Allied Activities
Direct Indirect
Priority Sector – 3
Secondary Sector
SSI/SME SSSBE
Priority Sector 4
Tertiary Sector
Small road/waterTransport operator
Small business/busineeenterprises
Professional/selfemployed
Educational loans
Housing finance
Others
Small & Medium Enterprises (SMEs)• SMEs are classified based on Small &
Medium Enterprises Development Act,2006• SMEs 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
Capital adequacynorms
Prudentialnorms
Credit appraisalsystem
Exposure norms
Risks-ALM
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 appropriately- Documents should be properly filled up and duly executed by authorised persons.
Documentation 2
• Documentary evidence as per Sec 61 of Evidence Act :a) Primary: original documents needs to be produced for inspection of courtb) Secondary: - certified copies - copies made from or compared with original
E banking
E Banking
CreditCards
Internet Banking
CoreBankingSolutions
ALL THE BEST & THANK YOU
• T.M.C.VARADARAJAN• TEL : 022-25638965 (R)• 022-66364206 (O)• e.mail:
t.varadarajan@scotiabank.com•
tmc_varadarajan@yahoo.co.in
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