functions of banks ppt

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PRINCIPLES OF BANKINGModule A & BApril 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,

debt market,capital market, forex market

• 3) Financial products -loans, deposits, bonds, equities

Financial Sector - Regulators

Regulators

Reserve Bank of India(RBI)

Securities ExchangeBoard of India

(SEBI)

Insurance Regulatoryand Development

Authority(IRDA)

BanksCapital Markets/

Mutual FundsInsurance Companies

Banking in India

Legal frame workof

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 licence for banks

Banking Regulation Act,1949 (BR Act)-2

Regulation

Control overmanagement

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,superivse and develop the banking system in India

Reserve Bank of India – 2

CENTRAL BANKRBI

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 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

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

• 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

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• 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

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 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

CentralBankRBI

Public Sector Banks

New PrivateSectorBanks

Old PrivateSector

Foreign Banks

Co-operativeBanks

RegionalRural Banks


PUBLIC SECTORBANKS

STATE BANK OF INDIA

SBI

SBI ASSOCIATEBANKS

NATIONALISEDBANKS


• 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)

Functions of Banks - 1

CENTRAL BANKRBI

REGULATOR SUPERVISOR FACILITATOR

RESERVE BANK OF INDIA

SUPERVISORY & REGLATORYIssuance of currency notesBanker’s BankerLender of the last resortCredit Control & Monetary PolicyExchange Control & Forex ManagementFunds 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-residentOrdinary account

(NRO)

Non-residentExternal account

(NRE)

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

Loan Products – Fund Based

BILLS FINANCE

TERMFINANCE

RETAIL FINANCE

OVERDRAFT

CASH CREDIT

LOANS&

ADVANCES

Loan Products –Non Fund Based

Letters of Credit

Bank Guarantee

Co-Acceptance Of

Bills

Know Your Customer (KYC) -1Know Your Customer (KYC) -1

KYC: Know Your CustomerKYC: Know Your Customer Know your customer (KYC) norms are Know your customer (KYC) norms are

applicable to all types of customer a/cs. applicable to all types of customer a/cs. It deals with not only to identify the It deals with not only to identify the

customer but also to understand the customer but also to understand the activities of the customer, and to ensure activities of the customer, and to ensure that the operations in the customerthat the operations in the customer

account/s is/are for genuine purposeaccount/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

CustomerIdentificationProcedure

Bank Customers - 1

Power ofAttorneyHolders

Executors/Trustees

Illiterate Perons

Minors

Joint accounthoders

Individuals

Bank Customers

Bank Customers - 2

Sole Proprietor

Clubs/Socities

Coproates

Hindu Undivided

Family

Partnership

BANKER-CUSTOMERRELATIONSHIP

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

CHEQUES

OPEN

CROSSED

ORDER

BEARER

NEGOTIABLE INSTRUMENTSPaying Banker:

Payment inDue

Course

ApparentTenor

In good faithWithout

Negligence

NEGOTIABLE INSTRUMENTSBANKER’S DUTIES

&

RESPONSIBILITIES

C0LLECTING

BANKER

COLLECTION OF

CHEQUES

HOLDER INDUE

COURSE

CONSIDERATIONTITLE

BEFOREMATURITY

Six Cs

CharacterCapitalCapacityCollateralConditionCompliance

Working Capital Cycle

Cash

Raw material

Semi finished goodsFinished goods

sales

Bills receivables

CHARGES

• HYPOTHECATION• PLEDGE• MORTGAGE• ASSIGNMENT• LIEN• SET OFF

Risk Management

Credit Risk

Liquidity Risk

Operations Risk

PriceRisk

Interest RateRisk

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 ofSecurity 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/waterTransport operator

Small business/busineeenterprises

Professional/selfemployed

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

Capital adequacynorms

Prudentialnorms

Credit appraisalsystem

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 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 courtb) Secondary: - certified copies - copies made from or compared with original

E banking

E Banking

CreditCards

Internet Banking

CoreBankingSolutions

ALL THE BEST & THANK YOU

• T.M.C.VARADARAJAN• TEL : 022-25638965 (R)• 022-66364206 (O)• e.mail:

[email protected]•

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