Welcome to IIBF

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Welcome toIIBFs - JAIIB Virtual Classes

• PRINCIPLES OF BANKING
• K.CHOCKALINGAM
• Consultant Faculty
• IIB F

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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

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Financial Sector - Regulators
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Banking in India
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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

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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
• license for banks

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Banking Regulation Act,1949 (BR Act)-2
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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

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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

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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,
  supervise and develop the banking system in India

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Reserve Bank of India 2
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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

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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 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

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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 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

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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

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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

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Securities Exchange Board of India (SEBI)

• SEBI was constituted on April 12/1988, and
  obtained the statutory powers in March,1992
• SEBIs 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

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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

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Insurance Regulatory Development Authority
(IRDA)

• The regulator for insurance business in India is
  IRDA.
• IRDA was established in 2000
• IRDAs functions
• To regulate, promote and ensure orderly growth of
  the insurance business and reinsurance business
  in India
• To protect the interests of policy holders

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Insurance Sector

• Insurance Sector in India can be divided into two
  main sections

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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

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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

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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

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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 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

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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

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Classification of Banks-1
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Classification of Banks-2
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Classification of Banks-3

• Public Sector Banks State Bank of IndiaSBIs
  associate banks
• Nationalised banks
• Private Sector BanksIndian Private Sector Banks
  (Old/New generation banks)Foreign banks in India
• Other BanksRegional Rural Banks(RRB)

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Functions of Banks - 1
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RESERVE BANK OF INDIA

• SUPERVISORY REGLATORY
• Issuance of currency notes
• Bankers Banker
• Lender of the last resort
• Credit Control Monetary Policy
• Exchange Control Forex Management
• Funds Transfer

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CREDIT CONTROL

• QUANTITATIVE CREDIT CONTROL
• QUALITATIVE CEDIT CONTROL
• CRR SLR
• BANK RATE
• OPEN MARKET OPERATIONS

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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

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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

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Commercial Banks DEPOSIT PRODUCTS
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Non-Resident Accounts - 1
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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

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Loan Products Fund Based
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Loan Products Non Fund Based
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Know Your Customer (KYC) -1

• KYC Know Your Customer
• Know 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

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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.

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Know Your Customer (KYC) -3
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Bank Customers - 1
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Bank Customers - 2
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BANKER-CUSTOMERRELATIONSHIP

• DEBTOR-CREDITOR
• CREDITOR-DEBTOR
• AGENT-PRINCIPAL
• LESSOR-LESSEE
• BAILEE-BAILOR

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CHEQUES
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NEGOTIABLE INSTRUMENTSPaying Banker
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NEGOTIABLE INSTRUMENTS

• BANKERS DUTIES
• RESPONSIBILITIES
• C0LLECTING BANKER COLLECTION OF CHEQUES

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Six Cs

• Character
• Capital
• Capacity
• Collateral
• Condition
• Compliance

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Working Capital Cycle
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CHARGES

• HYPOTHECATION
• PLEDGE
• MORTGAGE
• ASSIGNMENT
• LIEN
• SET OFF

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Risk Management
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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)

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SRFAESI Act,2002
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Priority Sector 1
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Priority Sector 2
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Priority Sector 3
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Priority Sector 4
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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 units,
  investments in equipment are considered for
  classification.

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Credit Management in Banks
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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.

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Documentation 2

• Documentary evidence as per Sec 61
• of Evidence Act
• Primary original documents needs to
• be produced for inspection of court
• Secondary
• - certified copies
• - copies made from or compared with
• original

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E banking
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hank ou
T
Y

• K Chockalingam
• TEL [phone]
• e.mail chockalingam_2000_at_yahoo.com
• chockalingam_at_iibf.org.in