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JAIIB Principles and

Practices of Banking

Knowise Learning Academy India Pvt

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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
 Financial Sector -
Regulators
Regulators

Insurance Regulatory
Reserve Bank of Securities Exchange
and Development
India Board of India
Authority
(RBI) (SEBI)
(IRDA)

Capital Markets/ Insurance

Banks
Mutual Funds Companies
 Banking in India
Legal frame work
of
Banks

Banking Regulation Reserve Bank of India

Act,1949 Act,1934
 Banking in India

- Banking in India is governed by BR Act,1949 and RBI Act,1934

- Banking in India is controlled/monitored 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
Control over
&
management
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
- penalties 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 1,00,000.00
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
 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

collateralized 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
Financial Intermediaries (1)

Mutual Funds- As financial intermediary promote savings and

mobilize 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 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 nationalized 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 nationalized 14 major

commercial banks having deposits of Rs.50cr 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 nationalized, with

a deposit of Rs.200cr or more
Progress of banking in India
In the liberalized, privatized and globalised environment,
banks operating
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
Regional Central
Rural Bank
Banks RBI

Co-operative Public Sector

Banks Banks

New Private
Foreign Banks Sector
Banks

Old
Private
Sector
Classification of Banks-2

PUBLIC SECTOR
BANKS

STATE BANK OF
SBI ASSOCIATE NATIONALISED
INDIA
BANKS BANKS
SBI
Classification of Banks-3

Public Sector Banks = State Bank of India + SBIs associate

banks + Nationalized banks
Private Sector Banks=Indian Private Sector Banks (Old/New
generation banks)+Foreign banks in India
Other Banks=Regional Rural Banks(RRB)
Banking Regulation
 Reserve Bank of India Act 1934
Banking Regulation Act 1949

The Governor
4 Dy. Governors
(Appointed by union government)
15 Directors
Logic of regulating of Financial/banking
system is;
Generate & maintain trust in the public
Protect investors interest (GTB Example)
Ensure financial markets are both fair & efficient
Participants measure up to the rules of the market place
Retail Banking, Whole Sale Banking &
International Banking.

ADR, GDR & Participatory Notes

Retail Banking

Multiple Products (Deposits, Credit Cards, Insurance, Investments &

Securities)
Multiple channels (Branches, Call Centre, Internet & Kiosk)
Multiple Customer Group
Whole Sale Banking

Fund Based Services (Term lending, working capital

financing etc)
Non- Fund based services ( Banking Guarantee, LC,
Collection of bills)
Value Added Services
Internet Banking Services
International Banking

Universal Banking
ADRs

GDRs

Participatory Notes (P Notes)

Role & Functions of Capital Market -
SEBI
Primary Market
Secondary Market
Stock Exchanges in India
 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

CURRENT

CERTIFICATE SAVINGS

DEPOSITS

FLEXI FIXED

RECURRING
Non-Resident Accounts - 1

Rupee accounts

Non-resident Non-resident
Ordinary account External account
(NRO) (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
CASH CREDIT

BILLS
OVERDRAFT
FINANCE

LOANS
&
ADVANCES

RETAIL
TERM
FINANCE
FINANCE
Loan Products Non Fund Based

Co-Acceptance
Letters of
Of
Credit
Bills

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.,
Know Your Customer (KYC)
-3

Customer
Risk Management Acceptance
Policy

Customer
Monitoring of
Identification
Transactions
Procedure
Bank Customers - 1

Individuals

Power of
Joint account
Attorney
hoders
Holders

Bank Customers

Executors/Trustees Minors

Illiterate
Perons
Bank Customers - 2

Clubs/ Sole
Socities Proprietor

Partnership
Coproates

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 Without
In good faith
Tenor Negligence
 NEGOTIABLE
INSTRUMENTS
BANKERS DUTIES HOLDER IN
DUE
& COURSE
RESPONSIBILITIES
CONSIDERATION BEFORE
C0LLECTING TITLE
MATURITY
BANKER
COLLECTION OF
CHEQUES
 Six Cs

Character
Capital
Capacity
Collateral
Condition
Compliance
Working Capital Cycle

Bills receivables Cash

sales Raw material

Finished goods Semi finished goods

CHARGES

HYPOTHECATION
PLEDGE
MORTGAGE
ASSIGNMENT
LIEN
SET OFF
 Risk Management

Operations Credit
Risk Risk

Interest Rate Liquidity

Risk Risk

Price
Risk
 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)
 SRFAESI Act,2002

Enforcement of
Legal framework
Security interest

Transfer of NPA
 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 Small business/businee Professional/self

Transport operator enterprises 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
companies investments in equipment are
considered for classification as SMEs
Credit Management in
Banks
Credit appraisal Capital adequacy
system norms

Prudential
Risks-ALM
norms

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 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
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