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Welcome to IIBF’s - JAIIB Virtual Classes. PRINCIPLES OF BANKING Module A & B April 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,

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Welcome to iibf s jaiib virtual classes l.jpg

Welcome toIIBF’s - JAIIB Virtual Classes

PRINCIPLES OF BANKING

Module A & B

April 15/2008


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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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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

    licence for banks



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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,superivse and develop the banking system in India



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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 1,00,000.00

  • 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


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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 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


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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

  • 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


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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

  • 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


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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 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


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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-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)



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RESERVE BANK OF INDIA

  • SUPERVISORY & REGLATORY

  • Issuance of currency notes

  • Banker’s 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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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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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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BANKER-CUSTOMERRELATIONSHIP

  • DEBTOR-CREDITOR

  • CREDITOR-DEBTOR

  • AGENT-PRINCIPAL

  • LESSOR-LESSEE

  • BAILEE-BAILOR



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NEGOTIABLE INSTRUMENTSPaying Banker:


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NEGOTIABLE INSTRUMENTS

BANKER’S DUTIES

&

RESPONSIBILITIES

C0LLECTING

BANKER

COLLECTION OF

CHEQUES


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Six Cs

  • Character

  • Capital

  • Capacity

  • Collateral

  • Condition

  • Compliance



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CHARGES

  • HYPOTHECATION

  • PLEDGE

  • MORTGAGE

  • ASSIGNMENT

  • LIEN

  • SET OFF



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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)







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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 companies investments in equipment are

    considered for classification as SMEs



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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 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.


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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

    b) Secondary:

    - certified copies

    - copies made from or compared with

    original



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ALL THE BEST & THANK YOU

  • T.M.C.VARADARAJAN

  • TEL : 022-25638965 (R)

  • 022-66364206 (O)

  • e.mail: [email protected]

  • [email protected]


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