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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
Insurance Regulatory
Reserve Bank of Securities Exchange
and Development
India Board of India
Authority
(RBI) (SEBI)
(IRDA)
Penalities Regulation
Suspension
Control over
&
management
Winding up
Reserve Bank of India
Act,1934(RBI Act)-1
CENTRAL BANK
RBI
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 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 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
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
Regional Central
Rural Bank
Banks RBI
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
CENTRAL BANK
RBI
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)
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.,
banks need to be careful in dealing with
their clients.
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
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 Without
In good faith
Tenor Negligence
NEGOTIABLE INSTRUMENTS
BANKER’S DUTIES
& HOLDER IN
DUE
COURSE
RESPONSIBILITIES
CONSIDERATION BEFORE
TITLE
MATURITY
C0LLECTING BANKER
COLLECTION OF
CHEQUES
Six Cs
Character
Capital
Capacity
Collateral
Condition
Compliance
Working Capital Cycle
HYPOTHECATION
PLEDGE
MORTGAGE
ASSIGNMENT
LIEN
SET OFF
Risk Management
Operations Credit
Risk 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
Legal framework
Security interest
Transfer of NPA
Priority Sector 1
Priority Sector
Primary Sector
Direct Indirect
Priority Sector – 3
Secondary Sector
SSI/SME SSSBE
Priority Sector 4
Tertiary Sector
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
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 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
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Solutions
hank ou
K Chockalingam
TEL : 9322295394
e.mail: chockalingam_2000@yahoo.com
chockalingam@iibf.org.in