Classes PRNCPLE8 OF BANKNG Module A & B April 15/2008 Financial System in !ndia - 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 oI India (RBI) Securities Exchange Board oI India (SEBI) Insurance Regulatory and Development Authority (IRDA) Banks Capital Markets/ Mutual Funds Insurance Companies anking in !ndia egal Irame work oI Banks Banking Regulation Act,1949 Reserve Bank oI India Act,1934 anking in !ndia anking in !ndia is governed by R Act,1343 and R! Act,1334 anking in !ndia is controlled/monitored by R! and Covt of !ndia 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 anking Regulation Act,1343 (R Act)1 R Act covers banking companies and cooperative banks, with certain modifications. R Act is not applicable to a) primary agricultural credit societies b) land development banks R Act allows R! (Sec 22) to issue licence for banks anking Regulation Act,1343 (R Act)2 Regulation Control over management Penalities Suspension & Winding up Reserve Bank of ndia Act,1934(RB Act)-1 - RB Act was enacted to constitute the Reserve Bank of ndia - RB Act has been amended from time to time - RB Act deals with the constitution, powers and functions of RB Reserve ank of !ndia Act,1334(R! Act)2 R! 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 ndia - 1 Reserve Bank of ndia was established in 1935, after the enactment of the Reserve Bank of ndia Act 1934 (RB Act). Banking Regulation Act,1949 (BR Act)gave wide powers to RB as regards to establishment of new banks/mergers and amalgamation of banks,opening of new branches,etc BR Act,1949 gave RB powers to regulate,superivse and develop the banking system in ndia Reserve ank of !ndia - 2 CENTRAL BANK RB REGULATOR SUPERVSOR FACLTATOR oney arket !nstruments - !nter bank call money/deposit - !nter bank notice money/deposit - !nter bank term money/deposit - Certificates of Deposit - Commercial Paper - Treasury ills - ill rediscounting - Repos Certificates of Deposit - CDs are shortterm borrowings in the form of UPN issued by scheduled commercial banks and are freely transferable by endorsement and delivery. - !ntroduced in 1383 - inimum period 7 days and maximum period one year. F!s are allowed to issue CDs for a period between 1 year and up to 3 years - inimum amount is Rs 1,00,000.00 - Subject to payment of stamp duty under the !ndian Stamp Act, 1833 - !ssued to individuals, corporations, trusts, funds and associations - !ssued at a discount rate freely determined by the market/investors Commercial Paper - Shortterm 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 - !ntroduced in 1330 - When issued in physical form are negotiable by endorsement and delivery and hence, highly flexible - aturity is 7 days to 1 year - Unsecured and backed by credit rating of the issuing company - !ssued at discount to the face value Repos - Repo (repurchase agreement) instruments enable collateralised shortterm borrowing through the selling of debt instruments - A security is sold with an agreement to repurchase it at a predetermined date and rate - Reverse repo is a mirror image of repo and reflects the acquisition of a security with a simultaneous commitment to resell !ND!AN CAP!TAL ARKET - !ndian Capital arket plays an important role in the economic development of the country - !t provides opportunities for investors to invest in the market and also to earn attractive rate of return. - !t also creates source of funds for the various sectors - National Stock Exchange (NSE) and ombay Stock Exchange (SE) are the major stock exchanges in !ndia Securities S Exchange oard of !ndia (SE!) - SE! was constituted on April 12/1388, and obtained the statutory powers in arch,1332 - SE!'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 utual Funds in !ndia (AF!) - AF! is an association as a non profit organization. - AF! represents mutual funds in !ndia and working for healthy growth of the utual Funds. - AF! conduct examinations for F executives as part of their training activities !nsurance Regulatory S Development Authority (!RDA) - The regulator for insurance business in !ndia is !RDA. - !RDA was established in 2000 - !RDA's functions: - To regulate, promote and ensure orderly growth of the insurance business and reinsurance business in !ndia - To protect the interests of policy holders !nsurance Sector - !nsurance Sector in !ndia can be divided into two main sections General nsurance Life nsurance Financial !ntermediaries (1) - utual Funds As financial intermediary promote savings and mobilise funds which are invested in the stock market and bond market - Fs 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. - Fs aims to reduce the risks in investments utual funds help their investors to enhance their value by investing the funds in capital market. - utual funds offer various schemes: growth fund, income fund, balanced fund,sector wise funds, etc., - Regulated by SE! Financial !ntermediaries (2) - erchant 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 SE! and R! - SE! regulates them on issue activity and portfolio management of their business. - R! supervises those merchant banks which are subsidiaries or affiliates of commercial banks !ndian anking Significant events 1 - Three presidency banks were established in Calcutta (1806) in ombay (1840) and in adras (1843) - !n the early part of 20 th century, on account of the Swadeshi movement a number of join stock banks were established by !ndians like ank of !ndia, ank of aroda and Central ank of !ndia. - !n 1321 the three presidency banks were merged and the !mperial ank of !ndia was created. - During the period 1300 to 132S many banks failed, and the Covernment appointed in 1323 a Central anking Enquiry Committee to trace the reasons for the failure of banks. - The Reserve ank of !ndia Act was passed in 1334 and the R! came into existence in 133S and R! was nationalised in 1343 - The anking Regulation Act,1343 gave wide powers to R! to act as the regulator for banks in !ndia !ndian anking Significant events 2 - !n 13SS State ank of !ndia became the successor to the !mperial ank of !ndia ,under the State ank of !ndia Act,13SS. - !n 13S3 State ank of !ndia (Subsidiary anks) Act was passed to enable S! to take over State Associated banks as S!'s subsidiaries - !n 1363 the Covernment of !ndia nationalised 14 major commercial banks having deposits of Rs.S0 crore or more - !n 137S Regional Rural anks were established under RR Act 1376, which was preceded by RR Ordinance in 137S - !n 1380 six more commercial banks were nationalised, with a deposit of Rs.200 crore or more Progress of banking in !ndia - !n the liberalised, privatised and globalised environment, banks opeating in !ndia have diversified their banking activities by offering Para anking facilities like - erchant banking/utual funds - ATs/Credit Cards/!nternet banking - venture capital funds - Factoring - ancassurance Classification of anks1 Central Bank RB Public Sector Banks New Private Sector Banks Old Private Sector Foreign Banks Co-operative Banks Regional Rural Banks Classification of Banks-2 PUBLC SECTOR BANKS STATE BANK OF NDA SB SB ASSOCATE BANKS NATONALSED BANKS Classification of anks3 - Public Sector anks =State ank of !ndia+S!'s associate banks+ Nationalised banks - Private Sector anks=!ndian Private Sector anks (Old/New generation banks)+Foreign banks in !ndia - Other anks=Regional Rural anks(RR) Funcfions of 8onks - I CENTRAL BANK RB REGULATOR SUPERVSOR FACLTATOR RESERVE BANK OF NDA SUPERVSORY & REGLATORY ssuance of currency notes Banker's Banker Lender of the last resort Credit Control & Monetary Policy Exchange Control & Forex Management Funds Transfer CPEDIT COMTPOL CUAMTITATIVE CPEDIT COMTPOL CUALITATIVE CEDIT COMTPOL' CPP & SLP 8AMI PATE OPEM MAPIET OPEPATIOMS Functions of anks 2 Commercial anksCore anking Functions Acceptance of deposits from public Lending funds to public/corporates !nvesting funds in various opportunities Collecting cheques/drafts and other Negotiable !nstruments Remitting funds Funct|ons of anks-3 Commercial Banks Para Banking Services Providing safe deposit lockers Acceptance of safe custody items Acceptance of standing instructions Offering internet banking facilities ssuance 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 anks DEPOS!T PRODUCTS CERT!F!CATE FLEX! RECURR!NC F!XED SAv!NCS CURRENT DEPOS!TS NonResident Accounts 1 Rupee accounts Non-resident Ordinary account (NRO) Non-resident External account (NRE) Foreign Currency Nonresident Deposit Accounts -FCNR () FCNR () accounts NR!s,P!Os,residing outside !ndia can open FCNR () accounts FCNR () accounts are maintained as fixed deposits in certain designated currencies The designated currencies are: US$, CP, ]apanese Yen, Euro, Cad$, Aus $ aintained in anks in !ndia 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 ased !LLS F!NANCE TER F!NANCE RETA!L F!NANCE OvERDRAFT CASH CRED!T LOANS S ADvANCES Loan Products Non Fund Based Letters of Credit Bank Guarantee Co-Acceptance Of Bills Know Your Customer (KYC) Know Your Customer (KYC) - -1 1 KYC: Know Your Customer KYC: 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. t deals with not only to identify the t 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 customer that the operations in the customer account/s is/are for genuine purpose account/s is/are for genuine purpose Know Your Customer (KYC) 2 - Application of KYC norms have become important due to various reasons. - !n 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 Customer dentification Procedure ank Customers 1 Power of Attorney Holders Executors/Trustees lliterate Perons Minors Joint account hoders ndividuals Bank Customers ank Customers 2 Sole Proprietor Clubs/ Socities Coproates Hindu Undivided Family Partnership BANKER-CUSTOMER RELATONSHP DEBTOR-CREDTOR CREDTOR-DEBTOR AGENT-PRNCPAL LESSOR-LESSEE BALEE-BALOR CHEOUES OPEN CROSSED ORDER EARER NECOT!ALE !NSTRUENTS Paying anker: Payment in Due Course Apparent Tenor In good Iaith Without Negligence NEC0T|ALE |N8TRUHENT8 BANKER'S DUTES & RESPONSBLTES C0LLECTNG BANKER COLLECTON OF CHEQUES HOLDER !N DUE COURSE CONS!DERAT!ON T!TLE EFORE ATUR!TY Six Cs Character Capital Capacity Collateral Condition Compliance Working Capital Cycle Cash Raw material Semi finished goods Finished goods sales ills receivables CHARCES HYPOTHECAT!ON PLEDCE ORTCACE ASS!CNENT L!EN SET OFF Risk anagement Credit Risk Liquidity Risk Operations Risk Price Risk nterest Rate Risk SRFAES! Act,2002 Securitisation and Reconstruction of Financial Assets and Enforcement of Security !nterest Act (SRFAES!) was enacted in 2002 _ Securitisation Company/Reconstruction Company (SCRC) can finance the acquistion from own resources or rise sources from Oualified !nstitutional uyers (O!s) SRFAES! Act,2002 EnIorcement oI Security interest TransIer oI NPA egal Iramework 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/water Transport operator Small business/businee enterprises ProIessional/selI employed Educational loans Housing Iinance Others Small S edium Enterprises (SEs) - SEs are classified based on Small S edium Enterprises Development Act,2006 - SEs are divided into micro,small S medium sized entities. - SEs are classified based on two categories viz., manufacturing units and service companies. - !n case of manufacturing units investments in plant and machinery and for service companies investments in equipment are considered for classification as SEs Credit anagement in anks Capital adequacy norms Prudential norms Credit appraisal system Exposure norms Risks-AM 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 court b) Secondary: certified copies copies made from or compared with original E banking E Banking Credit Cards Internet Banking Core Banking Solutions ALL THE EST S THANK YOU - T..C.vARADARA]AN - TEL : 0222S63836S (R) - 02266364206 (O) - e.mail: t.varadarajan@scotiabank.com - tmc_varadarajan@yahoo.co.in