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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

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
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

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

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

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 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

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

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
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

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
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

Insurance Sector

Insurance Sector in
India can be
divided into two
main sections

Life Insurance
General 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 banks were established in Calcutta (1806) in
Three presidency

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
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

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
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

SBI ASSOCIATE
BANKS

NATIONALISED
BANKS

Classification of Banks-3
Public

Sector Banks =State Bank of

India+SBIs 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 BANK
RBI

REGULATOR

SUPERVISOR

FACILITATOR

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

CREDIT CONTROL
QUANTITATIVE

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

Functions of Banks - 2
Commercial

Functions

Banks-Core Banking

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
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 Nonresident

Deposit 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
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

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

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

CHEQUES
BEARER
ORDER
CROSSED
OPEN

NEGOTIABLE INSTRUMENTS
Paying Banker:
Payment in
Due
Course

Apparent
Tenor

In good faith

Without
Negligence

NEGOTIABLE INSTRUMENTS
BANKERS DUTIES
&
RESPONSIBILITIES

HOLDER IN
DUE
COURSE

CONSIDERATION

C0LLECTING BANKER
COLLECTION OF
CHEQUES

TITLE

BEFORE
MATURITY

Six Cs
Character
Capital
Capacity
Collateral
Condition
Compliance

Working Capital Cycle

Bills receivables

sales

Cash

Raw material

Finished goods

Semi finished goods

CHARGES
HYPOTHECATION
PLEDGE
MORTGAGE
ASSIGNMENT
LIEN
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
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.

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

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

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