This document provides an overview of banking and the financial system in India. It discusses the key segments of the financial sector including financial institutions, markets, and products. It also outlines the various regulators that oversee banks, capital markets, insurance companies. The document then describes the legal framework governing banking in India including the Banking Regulation Act of 1949 and Reserve Bank of India Act of 1934. It provides classifications of different types of banks operating in India and summarizes some of the major events and developments in the evolution of banking in India.
This document provides an overview of banking and the financial system in India. It discusses the key segments of the financial sector including financial institutions, markets, and products. It also outlines the various regulators that oversee banks, capital markets, insurance companies. The document then describes the legal framework governing banking in India including the Banking Regulation Act of 1949 and Reserve Bank of India Act of 1934. It provides classifications of different types of banks operating in India and summarizes some of the major events and developments in the evolution of banking in India.
This document provides an overview of banking and the financial system in India. It discusses the key segments of the financial sector including financial institutions, markets, and products. It also outlines the various regulators that oversee banks, capital markets, insurance companies. The document then describes the legal framework governing banking in India including the Banking Regulation Act of 1949 and Reserve Bank of India Act of 1934. It provides classifications of different types of banks operating in India and summarizes some of the major events and developments in the evolution of banking in India.
This document provides an overview of banking and the financial system in India. It discusses the key segments of the financial sector including financial institutions, markets, and products. It also outlines the various regulators that oversee banks, capital markets, insurance companies. The document then describes the legal framework governing banking in India including the Banking Regulation Act of 1949 and Reserve Bank of India Act of 1934. It provides classifications of different types of banks operating in India and summarizes some of the major events and developments in the evolution of banking in India.
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Welcome to
IIBFs - JAIIB Virtual Classes
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 Regulation
Control over management 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, 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
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 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 Public Sector Banks New Private Sector Banks Old Private Sector Foreign Banks Co-operative Banks Regional Rural 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 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-resident Ordinary account (NRO) Non-resident External account (NRE) Foreign Currency Non-resident 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 BILLS FINANCE TERM FINANCE OVERDRAFT CASH CREDIT LOANS & ADVANCES Loan Products Non Fund Based Letters of Credit Bank Guarantee Co-Acceptance Of Bills 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 Customer Acceptance Policy Monitoring of Transactions Risk Management Customer Identification Procedure Bank Customers - 1 Power of Attorney Holders Executors/Trustees Illiterate Perons Minors Joint account hoders Individuals Bank Customers Bank Customers - 2 Sole Proprietor Clubs/ Socities Corporates Hindu Undivided Family Partnership
BANKER-CUSTOMER RELATIONSHIP DEBTOR-CREDITOR CREDITOR-DEBTOR AGENT-PRINCIPAL LESSOR-LESSEE BAILEE-BAILOR CHEQUES OPEN CROSSED ORDER BEARER NEGOTIABLE INSTRUMENTS Paying Banker: Payment in Due Course Apparent Tenor In good faith Without Negligence NEGOTIABLE INSTRUMENTS BANKERS DUTIES & RESPONSIBILITIES
C0LLECTING BANKER COLLECTION OF CHEQUES
HOLDER IN DUE COURSE CONSIDERATION
TITLE BEFORE MATURITY Six Cs Character Capital Capacity Collateral Condition Compliance
Working Capital Cycle Cash Raw material Semi finished goods Finished goods sales Bills receivables CHARGES HYPOTHECATION PLEDGE MORTGAGE ASSIGNMENT LIEN SET OFF Risk Management Credit Risk Liquidity Risk Operations Risk Price Risk Interest Rate 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 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/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 Prudential norms Credit appraisal system 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 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