FM 403 (4th SEM)

BFSI Sector Management - II

PAPER 1 – PRINCIPLES & PRACTICES OF BANKING
MODULE A – INDIAN FINANCIAL SYSTEM

A.1 Indian Financial System – An Overview

(Role of RBI, Commercial Banks, NBFCs, PDs, FIs, Cooperative
Banks, CRR, SLR; Equity & Debt Market; IRDA)
What is a Financial System?
The financial system enables lenders and borrowers to exchange
funds..
A financial system is a set of institutions and practices that facilitate
and allow for the exchange of funds between borrowers, lenders and
investors. Financial Market
 Financial system
Financial system a network of financial institutions
(COMMERCIAL BANKS, BUILDING SOCIETIES, etc.) and markets
(MONEY MARKET, STOCK MARKET), dealing in a variety of financial
instruments BANK DEPOSITS, STOCKS and SHARES, etc.), which
are engaged in money transmission activities and the provision
of LOAN and CREDIT facilities.

Insurance and Pension

Central Bank (RBI) Capital Market (SEBI)
Regulators (IRDA)

1)Equity market and debt 1)Regulatory framework

1)Monetary Control market supervision and including rules and
control regulations for running
2)Supervision Over 2)Supervision over insurance business
2)Supervising all insurance
companies both in general
 Commercial Bank  Stoke exchange and life insurance business
 Primary Dealers  Brokers
3)Regulating pricing,
 Financial  Equity and Debt
investments and cost
Institutions raiser
structure of insurance
 Cooperative Banks  Investment bankers companies
(Merchant Bankers)
 Clearing and
Settlement System  Foreign institutional 4)Regulation insurance
3)Management of investors brokers including agencies
Government debt both individual and Bank
 Custodians
 Depositories PENSIONS
4) Banker to Government
 Mutual Funds
5) Regulating monetary 1)Framing rules for pension
 Listed companies
instruments (CRR, SLR, funds
BANK RATE, REPO RATE,  Service providers to
MSF) capital
2)Regulating all pension
 Markets like funds
registrars
The three regulatory authorities are:
RBI( Reserve Bank of India) – for banks,
SEBI (Securities and Exchange Board of India) – for capital markets
and
IRDA (Insurance Regulatory and Development Authority of India) – for
insurance sectors.
Reserve Bank of India (RBI): is India’s central bank. It controls the
monetary policy.
Commercial Bank: that provides services such as accepting
deposits, making business loans, and offering basic investment
products
Public Sector Bank, Private sector Bank, Foreign Bank etc.
NBFC (Non Banking Financial Company):are lend monies through
various instruments for leasing, hire purchase and bill discounting.
Co-operative banks: are allowed to uplift deposits and give advances
to public,mainly to SME and Agri business.
Financial Institutions(FI): are institutions which provide long term
funds for industry and agriculture.
Primary dealers :deal in government securities, primary and also with
secondary markets.
SEBI ( Securities and Exchange Board of India): is the capital market
regulator.
FII(Foreign Institutional Investors): are given permission by SEBI to
invest in Indian equity and debt market through stock exchanges.
CRR(Cash Reserve Ratio):is the percentage of a bank’s total deposits
that it needs to maintain as liquid cash.
SLR(Statutory Liquidity Ratio) :is the minimum percentage of demand
and time liabilities of a bank which is held in prescribed government
securities by the bank.
Equity & Debt Market:
Equity market, or stock is a financial market in which shares are
issued and traded through exchanges.
Debt instruments are assets that require a fixed payment to the
holder, usually with interest.
IRDA:
The Insurance Regulatory Development Authority of India (IRDAI) is a
regulatory body created with the aim of protecting the policyholder's
interest. It also regulates and sees to the development of the
insurance industry(both Life and General insurance).
A 2 :Banking Regulation:
A2.1 RBI’s Constitution: The Reserve Bank of India was
established on April 1, 1935, and constituted under the Reserve Bank
of India Act, 1934.

It empowers to exercise control and regulations, over the Commercial

Banks, the non-banking finance companies and the financial
institutions.

Objectives:
 To regulate the issue of Banknotes.
 To secure monetary stability in the country.
 To meet the economic challenges by modernising the monetary
policy framework.

Functions of RBI:
1. Monetary Authority: The main function of RBI is formulating
implementing the monetary policies of India.

2. Regulator and supervisor of the financial system: RBI sets the

rules and regulations under which Indian banks and financial
system must operate.

3. Manager of Foreign Exchange: In India, all foreign currency flow

must be done as per FEMA (Foreign Exchange Management Act). It
is the RBI who ensures that transactions happens as per FEMA.
4. Issuer of Currency: The responsibility of the RBI to print and issue
new currency notes and exchange old or damaged notes for new
ones.

5. Regulator and Supervisor of Payment and Settlement Systems: all

payments must be settles as per PSS Act, 2007 (Payment and
Settlement Systems Act). RBI who ensures that transactions
happens as per PSS. there are several payments systems like ECS,
Credit Card, Debit Card, RTGS, NEFT, IMPS and UPI.

6. Banker to Government: RBI is the retail banker and merchant

banker for the Government of India (GOI).

7. Banker to Banks: All Banks in India maintains an account with the

RBI. They keep their statutory reserves and other deposits in this
account. Hence, this way RBI also functions as banker to the
banks.

Tools of Monetary Control:

A set of actions to maintain the price stability of a nation while
keeping in mind the objective of growth is called monetary policy.

This policy is adopted to control the money supply or the interest

rate payable for very short-term borrowing.

The following. Tools are used in monetary control

.Statutory Liquidity Ratio (SLR): The minimum percentage of deposits

that every commercial bank needs to keep to them in the form of
liquid cash or other securities.

 Cash Reserve Ratio (CRR): Every commercial bank must

maintain some liquid cash amount. The liquid cash percentage
of total securities is known as CRR.
 Repo Rate - Repo rate is the rate at which commercial banks
take loans from the Reserve bank of India.
 Reverse Repo Rate: The Reserve bank of India takes loans from
commercial banks to maintain liquidity in the market. The rate of
interest RBI gives this bank is known as the Reverse repo rate.
  Open Market Operations: The simultaneous purchase and sale
of government securities and treasury bills by the Reserve Bank
of India.
 Bank Rate (Discount rate): When a commercial bank lends
money from the National Bank, the rate of Interest is known as
the Bank Rate.

Regulatory Restrictions on Lending:

There are certain regulatory restrictions on lending by banks in
ters of RBI directives as follows:

1 No advance or loan can be granted against the securities of

bank’s own shares.

2 No bank can hold shares in a company:

a)As pledge or mortgage in excess of the limit of 30% of paid up

capital of that company.

b)in the management of which MD or manager of the bank is

interested.

3 Bank’s aggregate investment in shares,CDs,Bonds should not

exceed the limit of 40% of the bank’s net owned fund.

4 No bank should grant loans against:CDs,FDs issued by other

bank,money market MF.

5 Restrictions guideline regarding to the level of the credit

level,margin,interest rate.

6 No Loan on willful defaulters.

A3:Retail Banking, Wholesale and International Banking:

(Retail Banking- Products, Opportunities; Wholesale Banking,
Products; International Banking, Requirements of Importers &
Exporters, Remittance Services; Universal Banking; ADRs; GDRs;
Participatory Notes)
Retail Banking
•Retail Banking is doing banking business with individual Customers.

Three basic features:

1.Multiple Products (Deposits, Credit Card, Insurance, investments and securities)

2.Multiple Channels of distribution (Call Centre, Branch, Internet, ATM, Mobile &
Kiosk)

3.Multiple Customer Groups (Consumer, Small Business and corporate) •

•Retail Products:

1.Retail Deposit Products: SB A/c, RD A/c, CA, TD, Zero Balance Salary A/c,
BSBDA, Sr Citizen Deposit A/c.

2.Retail Loan products: Housing loan, Auto loan, consumer loan, Personal loan,
Education loan, Trade related loan to individuals, Crop loan, Credit Card etc.

3.Retail Services: Safe Deposit Lockers, Depository Services, Banc assurance

products etc

Drivers of Retail Business in India:

•Economic prosperity and increase in purchasing power.

•Changing consumer demographics- 70% of population is below 35 years of age.

•Technological innovations: Credit/Debit Cards, ATMs, Internet, Mobile etc.

•Lower rate of interests

•Opportunity to diversify risks for banks.

•Lower NPAs.
Opportunities of Retail Banking in India:

•Rise in the middle class – due to tremendous growth of software industry and retail
sector, the % of middle to high income Indian household is expected to continue
rising.

•Demand from Retail shopkeepers, pensioners, self employed and those employed in
the unorganized sector.

•Financial Inclusion Programme- implementation

•Introduction of CIBIL etc

Wholesale banking:

•Doing banking business with industrial and business entities. Also

called Corporate Banking/Commercial Banking.

Products:

1.Fund based : Term Lending, Short term Finance, WC Finance, Bill Discounting, ,
Export Credit.

2.Non Fund based : BG, LC and Collection of Bills and Documents.

3.Value Added Services: CMS, Vendor Financing, RTGS, Corporate Salary

accounts, Syndication Services, Forex , Money Market & Derivative products, Tax
Collection, Bankers to Right/Public Issue, NEFT, ECS

4.Internet Banking Services: Payment Gateway Services, Corporate Internet

Banking

•Services to Financial Institutions: CMS •Services to Mutual Funds: Collection

Services, Payment services, Custodial services, & Fund transfers.
•Bank cater the needs of stock brokers: Clearing Settlement Bankers, Bank
Guarantee etc.

International Banking:

•Banking services catering to cross border transactions is called International

Banking.

Services to exporters:

1.Export Packing Credit

2.Export Bill Negotiation

3.Export Bill Purchase and Discounting

4.Export Bill Collection Services

5.Bank Guarantee

6.Rupee Advance against FC Export Bills

7.Export LC Advising

8.Export LC Confirmation

9.Supplier’s Credit: Facility enables Indian exporters to extend term credit to

importers (overseas) of eligible goods at the post shipment stage.

Requirements of Importers

1. Import Bill Collection

2. Import Bill payments

3. Advance Payment towards Imports

4. Issue of Import Letter of credit

5. Arranging for Buyer’s and Supplier’s Credit

6. Bank Guarantee: Banks issue BG in FC on behalf of importers. ●

C. Remittance Services:

1.EEFC (Exchange Earners Foreign Currency) Accounts Services in all

permitted purposes.

2.Receipt of Foreign Inward Remittance Services:

3.Payment Services Abroad (Outward Remittances):

Universal Banking:

•Super Financial Hub for marketing of all financial products

•Benefit to Banks: – Cross selling of products – fee based and non fee based income.

•Benefit to Customers: Saving of time and speedy delivery at one place

Progress of Universal Banking in India: •Year 2000: Allowing banks to venture

into the insurance business- Life & Non Life. • Tie-up for mutual funds to market
their products.

•Merger of ICICI with ICICI Bank and IDBI with IDBI Bank.

•Refinance institutions like SIDBI & NABARD also jumped into direct financing.

•Distinction between development finance institutions and commercial banks has

greatly disappeared. •Selling of Gold coins. Depository Services either with NSDL
 or CDSL. •Merchant Banking Services •E-broking services directly or through tie up
arrangement with SEBI registered brokers.

American Depository Receipt (ADR) and

Global Depository Receipt (GDR):

•A Depository Receipt (DR) is a type of negotiable financial instrument that

is traded on a local stock exchange of a country but represents a security, usually in
the form of equity that is issued by a foreign publicly listed company.

•The DR, which is a physical certificate, allows investors to hold share in equity of
other countries.

•ADRs are typically traded on a US national stock exchange while GDRs are
commonly listed on European Stock exchange. •ADRs and GDRs are usually
denominated in USD, but can also be denominated in Euros.

•The benefit of DRs:

1.For the Company: Obtain greater exposure and raise capital in the world market.

2.For the Investor: Investors portfolio turns into a global one. Investors gain the
benefits of diversification.

ADR Vs GDR:Comparison Chart

BASIS FOR
ADR GDR
COMPARISON

Acronym American Depository Receipt Global Depository Receipt

Meaning ADR is a negotiable instrument GDR is a negotiable instrument

issued by a US bank, issued by the international
representing non-US company depository bank, representing
stock, trading in the US stock foreign company’s stock trading
BASIS FOR
ADR GDR
COMPARISON

exchange. globally.

Foreign companies can trade in

Foreign companies can trade in
Relevance any country’s stock market other
US stock market.
than the US stock market.

United States domestic capital

Issued in European capital market.
market.

Non-US Stock Exchange such as

American Stock Exchange such
Listed in London Stock Exchange or
as NYSE or NASDAQ
Luxemberg Stock Exchange.

Negotiation In America only. All over the world.

Disclosure
Onerous Less onerous
Requirement

Market Retail investor market Institutional market.

Participatory Notes (PN):

•Foreigners are not allowed to invest directly in the Indian Stock Market. • •

•PNs are issued by FIIs to entities that want to invest in the Indian stock market but do
not want to register themselves with the SEBI. • •

•FIIs registered with SEBI can issue, deal or hold PN. •

•FIIs are not allowed to issue PNs to Indian nationals, persons of Indian origin or
overseas corporate bodies.

Advantages of participatory notes:

 Anonymity: Any entity investing in participatory notes is not
required to register with SEBI, whereas all FIIs have to
compulsorily get registered. It enables large hedge funds to
carry out their operations without disclosing their identity.
 Ease of trading: Trading through participatory notes is easy
because they are like contract notes transferable by
endorsement and delivery.
 Tax saving: Some of the entities route their investment
through participatory notes to take advantage of the tax laws
of certain preferred countries.

Disadvantages of P-notes:
 Indian regulators are not very happy about participatory notes
because they have no way to know who owns the
underlying securities. It is alleged that a lot of
unaccounted money made its way to the country through
the participatory note route.

A-4:Role of Money Markets, Debt Markets &Forex Market

(Types of Money & Debt Market Instruments including G-Secs; ADs,
FEMA, LIBOR, MIBOR, etc.)

Call / Money Market

A market for short term instruments- overnight to 1 year

•Call money: one day market.

•Notice money: 2 days to 14 days market.

•Term money: Market for period exceeding 14 days.

Participants in the market: SCBs (excluding RRBs), Cooperative Banks other

than land development bank and Primary Dealers.

Borrowing limit: SCBs: 125% of their capital funds in call/notice money

market. 100% fortnightly average.

Lending limit: SCBs 50% of their capital funds on any day, average
fortnightly 25%.

Money Market instruments and operations

1.Treasury Bills: –To finance short term debt obligation of GOI. –Three types of T
Bills are issued 91 days, 182 days and 364 days through bidding. –Quoted at
a discount price. Min. Rs 25000. –

2.Certificate of Deposit (CD): –CD is a negotiable instrument issued at discount in

demat form as a usance promissory note by SCBs excluding RRBs / LABs / all India
FI. –Banks-Tenor not less than 7 days and max -1 year. –FIIs –min -01year and max
– 3 years –Min amount Rs 1 lakh or multiples thereof. –

3.Commercial Paper (CP): By corporate, all India FIs and PDs(primary dealers). –
Issued by a corporate at discount. –Eligibility:TNW is not less than Rs 4 cr and
sanctioned WC limit by bank/FIs & A/c is in Standard asset. Min credit rating P-2
of CRISIL or equivalent rating. –to Maturities:7 days 1 year. –Denomination Rs 5
lakh or multiples thereof.

4. Repo

5. Reverse Repo –

6. Collateralized Borrowing & lending obligation (CLBO): –Operated by CCIL for

its members to borrow or lend funds against the collateral of eligible securities. –
Issued at discount, maturity one day to 90 days.

Fixed income market

1.Govt. Securities: 1.Includes Central Govt. securities, T. Bills, State Development
loans. 2.Issued to finance the fiscal deficit and managing the temporary cash
mismatches. 3.Issued at par value and have a coupon rate. 4.These securities pay
interest at the coupon rate on a half yearly basis. 5.Highly liquid instruments

2.Corporate Bond Market: 1.Bonds issued by corporate for their normal business
activities. 2.Primary corporate debt market is dominated by finance companies.

3.Interest Rate derivatives: –is an instrument where the underlying asset has the
right to pay or receive amount of money at a given interest rate. 1.Interest Rate
swap: Two parties agree to exchange interest rate cash flows, based on a Notional
Principal amount from fixed to floating & vice versa 2.Interest rate futures: It is a
contract between buyer & seller agreeing to future delivery of an interest bearing
security

4.Inter corporate deposits(ICD): 1.Unsecured borrowing by corporate/FIs from

other corporate registered under Co. Act. 2.ROI of ICD would be higher than those of
CD market. 3.ICD restricted to 50% of Net Owned Funds and minimum tenor is 7 d to
1 year.

Foreign Exchange Market

•Exchange rate of one currency in terms of another currency is determined simply by

supply and demand. • •

•It is a 24 hour market that does not depend on certain business hours of foreign
exchanges, trade take place among banks located in different corners of the globe.

LIBOR & MIBOR

•LIBOR stands for London Inter Bank Offered Rate. –This is very popular benchmark
and is issued for $, GBP, Euro, Swiss Franc, Canadian Dollar and Japanese Yen (6
currencies). –The British Bankers Association (BBA) asks 16 banks to contribute to
the LIBOR for each maturity and for each currency.

•MIBOR stands for Mumbai Interbank Offered Rate –MIBOR is closely modeled on
the LIBOR. –MIBOR is calculated everyday on by NSE as a weighted average of
lending rates of a group of banks on funds lent to 1 st class borrowers.
 Foreign Exchange Management Act 1999 (FEMA)

•FEMA administers foreign exchange Transactions • •

•Facilitates external trade • •

•Promotes foreign exchange market in India. • •

•FEMA extends to the whole of India.

A-5: Role and Functions of Capital Markets, SEBI:

(Overview of Capital Market; Stock Exchange; Commonly used
Terms; Types of Capital Issues; Financial Products/
Instruments including ASBA, QIP; SEBI; Registration of Stock
Brokers, Sub-brokers, Share Transfer Agents, etc. QIBs.).

What is Capital Market?

 Capital Market, is used to mean the market for long term
investments, that have explicit or implicit claims to capital.
Long term investments refers to those investments whose
lock-in period is greater than one year.
 In the capital market, both equity and debt instruments, such
as equity shares, preference shares, debentures, zero-
coupon bonds, secured premium notes and the like are
bought and sold, as well as it covers all forms of lending and
borrowing.

Functions of Capital Market

 Mobilization of savings to finance long term investments.
 Facilitates trading of securities.
 Minimization of transaction and information cost.
 Encourage wide range of ownership of productive assets.
  Quick valuation of financial instruments like shares and
debentures.
 Facilitates transaction settlement, as per the definite time
schedules.
 Offering insurance against market or price risk, through
derivative trading.
 Improvement in the effectiveness of capital allocation, with
the help of competitive price mechanism.
Stock Exchange:
A stock exchange is a place where securities, shares, bonds and
other financial instruments are listed and bought and sold by traders or
brokers.There are two major stock exchanges in India- National Stock
Exchange of India (NSE) and Bombay Stock Exchange (BSE).

•Stock exchange: Approved by SEBI –Provides sale and purchase of securities

(equities, debt and derivates) on behalf of investors. –Provides clearing facilities for
getting of payments and securities delivery. Clearing houses guarantee all payments
and deliveries.

•Equity and Debt Raisers: –Companies wishing to raise equity and debt through
stock exchange have to approach SEBI for permission and get them listed on a stock
exchange. –

•Investment Bankers (merchant Bankers)(licensed by SEBI): –Undertake activities

like the issue of stocks, funds raising and management. –Provide advisory services
and counseling on mergers and acquisitions etc.

•Foreign Institutional Investors (FIIs) : –an investor or fund that is from or

registered in a country outside of the one in which it is currently investing. –
Authorized by the SEBI to invest in the Indian equity and debt market through stock
exchanges. • •Depositories: –Hold securities in demat form, maintaining accounts of
depository participants who, in turn, maintain sub accounts of their customers. –
Transfer securities from the buyers to sellers accounts in electronic form. •

•Registrars: –Maintain register of shares and debenture holders and process share and
debenture allocation, when issues are subscribed. –Registrars too need regulator’s
approval to do business.
 Capital Market

•Capital market is a market for long term debt and equity shares. •It can be further
divided into the primary and secondary market.:

1.Primary Market: Securities are offered to the public for subscription, for the
purpose of raising capital or fund.

1.Secondary Market: Market where securities are traded after being initially offered
to the public in the primary market and/or listed on the Stock Exchange. Secondary
market comprises equity markets and debt markets. ●

•Stock Exchanges in India: There are 22 recognized stock exchanges in India. •

•Demutualization of Stock Exchanges: Exchange has all functions clearly

segregated, i.e. the ownership, management and trading are in separate hands.
•Brokers: Approved by SEBI. Operate on the stock exchange. – Intermediaries
between buyers & sellers of securities. –They build up order book, carry out price
discovery and responsible for contracts being honored. –The services are subject to
brokerage.

•Sub Broker is affiliated to a member and is a person who is registered with SEBI.

Financial Products

•Various kinds of shares are: –Equity Shares: The holders of equity shares are
members(owners) of company and have voting rights.

Rights Issue/Right Shares: New securities to existing shareholders at a ratio to share

already held.

Bonus Shares: Share issued free of cost by capitalization of accumulated reserves. –

–

Preference Share/Preferred Stock: No voting right. Fixed dividend. Preference in

dividend payment and in liquidation, their claims rank above the equity shareholders.
––
Cumulative Preference Shares: Dividend accumulates if it remains unpaid. – –

Cumulative Convertible Preference Shares: Dividend accumulates if it remain

unpaid and after a specified date these shares will be converted into equity shares. – –

Participating Preference Share: Participate in profits, after a specified fixed

dividend.

•Government Securities (G-Secs): Sovereign coupon bearing instruments issued by

RBI on behalf of GOI. •

•Debentures: Issued by corporate bearing a fixed ROI and redemption on a particular

date. Normally secured. •

•Bonds: A Bond is a negotiable certificate evidencing indebtedness(unsecured) •

•Coupon Bonds: Issuer pay interest at predetermined rate (known as coupon). •

•Zero Coupon Bonds: Issued at discount and repaid at a face value is called a Zero
coupon bonds. •

•Convertible Bonds: Option to convert the bond into equity at a fixed conversion
price.

Regulatory Requirements for Corporate Debt Securities by SEBI

•The issue of debt securities having a maturity period of more than 365 days must
comply with the conditions prescribed by SEBI. •The debt securities shall carry a
credit rating from a credit rating agency registered with SEBI. • •

•The debt securities shall be issued and traded in the demat form.

What is ASBA?

 ASBA [Applications Supported by Blocked Amount] is a

system of blocking the funds of applicants of IPOs in their
 respective accounts and release the funds to the Company from
such blocked accounts only after the allotment to the extent of
allotment made and unblock the remaining amount in the account.

Features of ASBA

 ASBA IPO Applications will be received at the Designated

Branches

 On receipt of ASBA applications, the Branches will mark lien in the

specific account of the customer to the extent of amount applied

for through the system.

 This amount gets blocked in the account and money will however

continue to remain in the account of the customer till the date of

allotment.The details of the IPO application and the amount

blocked would be passed to the Exchange and Registrar through

the system.

Qualified Institutional Placement (QIP):

 A Qualified Institutional Placement is a capital raising

tool wherein a listed company can issue equity shares, fully

and partly convertible debentures, or any security other

than warrants that are convertible into equity shares.

 But unlike in an IPO or an FPO, only institutions or qualified

institutional buyers can participate in a QIP.

Advantages of a QIP

 This mode of qualified institutional placement is essentially the

most expeditious method by which capital can be raised
without undergoing any cumbersome process. Generally,
by other methods like FPO and rights issues, it takes a lot of
time and money to undergo the documentation and approval.

SEBI – Securities and Exchange Board of India

What is SEBI?

 SEBI is a statutory regulatory body established on the

12th of April, 1992 SEBI Act 1992. It monitors and
regulates the Indian capital and securities market while
ensuring to protect the interests of the investors formulating
regulations and guidelines to be adhered to. The head office of
SEBI is in Bandra Kurla Complex, Mumbai.

Functions of SEBI

 SEBI is primarily set up to protect the interests of investors

in the securities market.
 It promotes the development of the securities market and
regulates the business.
 SEBI provides a platform for stockbrokers, sub-brokers,
portfolio managers, investment advisers, share transfer
agents, bankers, merchant bankers, trustees of trust deeds,
registrars, underwriters, and other associated people to
register and regulate work.
  It regulates the operations of depositories, participants,
custodians of securities, foreign portfolio investors, and credit
rating agencies.
 It prohibits inner trades in securities, i.e. fraudulent and unfair
trade practices related to the securities market.

A-6: Factoring, Forfaiting Services and Off-Balance Sheet

items
(Types & advantages of Factoring & forfaiting services; Types of off-
balance sheet items)

Factoring:

•Factoring ……… receivables created out of sale of goods and

services are sold to an agency know as “factor’.

•On invoice submission , factor will pay 80 to 85% of invoice to the

seller.

•Balance paid to the seller on recovering from the purchaser. •The

Factor recovers finance / service charges for funds prepaid to the
seller •

Types of Factoring:

1.Recourse Factoring (with recourse):

2.Non – recourse Factoring (without recourse):

but in India without recourse is not permitted •Domestic

Factoring •International Factoring- Export factoring & import
Factoring.

Advantages of Factoring
  Factoring replaces high cost market credit and enables
purchases on cash basis for availing cash discount.

 The Customer gets instant finance against each invoice.

 Low margin (Up to 20%) thereby improvement cash flow.

 The customer gets large credit/grace period

 Each invoice is following up for payment by the factor on the

due date and thereafter.

 MIS reports and sales ledge administration is totally taken care

of by the factor.

Forfaiting Services:

•When an exporter transfers his right to receive payment in favour of forfaiter, the
transaction is called forfaiting. • • • •It is on without recourse basis. • •Exporter is
fully protected against interest and/or currency rate moving unfavorable during the
credit period as the entire risk is passed on to the forfaiter.

Advantage of Forfaiting:

Forfaiting provide a flexible, creative alternative to traditional international trade

financing methods and is particularly useful for transactions with buyers in
developing nations. The following are the advantages of forfaiting to the exporters:

 (i)Forfaiting provided 100% financing-without recourse and not occupying

exporter’s credit line. This is to say once the exporter obtains the financed fund,
he will be exempted from the responsibility to repay the debt.

 (ii)Forfaiting improves cash flow of the exporter-by converting receivables into

current cash inflow and it is beneficial to the exporter to improve his liquidity
and his ability to improve further the fund raising capability.
Off Balance sheet Items:

Which are not mentioned in the balance sheet of the bank. These contingent
liabilities are disclosed as ‘Notes to the Balance sheet’.

● 1.Guarantees

•Performance Guarantees: Issued in respect of performance of a contract or

obligation.

•Financial Guarantees: In lieu of financial commitments. Guarantee in favour of

custom authorities, Tax Authorities, an respect of any disputed liabilities.

•Deferred Payment Guarantees: DPG normally arise in the case of purchase of

machinery or such other capital equipment by customers.

Letter of Credit:

LC is a definite undertaking by bank, on behalf of buyer to the seller to pay for goods
and/or service, provided that the seller presents documents & complies with all the
terms and conditions of the documentary credit.

Parties to LC: 1

.Applicant: Importer or buyer.

2.Issuing Bank: Usually the applicant’s bank. Issuing bank is ultimately responsible
for payment under LC.

3.Advising Bank: A correspondent or a branch of the issuing bank is able to

authenticate the LC message before advising the same to the beneficiary.
4.Confirming Bank: Same role as advising bank except that the confirming bank
provides an undertaking to the beneficiary 5.Beneficiary: Exporter or seller of the
goods.

Types of LC

1.Irrevocable LC

2.Revocable LC – can`t be issued

3.Unconfirmed LC: Advising bank has no responsibility for payment.

4.Confirmed LC: Undertaking of the confirming bank to effect payment

5.Revolving LC:

6.Standby LC: Similar to BG but is issued in a format corresponding to that of a

documentary credit.

7.Transferable LC: When seller is acting as an agent in the export order. The LC is
transferred to the actual supplier of the goods. 8.Back to back LC: Open LC locally
in favour of manufacturer for supply of goods to himself on the security of Foreign
LC

9.Red clause LC is the one which provides for advance payment to exporter for the
procuring shipment material and arranging for its actual shipment.

10.If LC provides for further advance to facilitate temporary storage of goods at

exporters end, the LC will be know as Green Clause LC

Forward Exchange Contract:

•A contract between the bank and its customer • •for purchase/sale of a foreign
currency on a future date at a pre determined rate.
 • •On the due date when the contract is executed, the transaction will be put through
at the Contracted rate of exchange irrespective of the spot rate then prevailing.

Interest Rate Swap (IRS):

• Interest Rate Swap(IRS): –Financial contract between two parties exchanging a

stream of interest payments for a notional principal amount –

–on multiple occasions during a specified period.

–Such contracts generally involve exchange of fixed to floating or floating to fixed

rate of interest.

A-7:Risk Management, Basel Accords

(Introduction to Risk Management; Basel I, II &IIIAccords)

Risk Management:
In the course of their operations, banks are invariably faced
with different types of risks that may have a potentially
adverse effect on their business.
Banks are obliged to establish a comprehensive and reliable
risk management system, integrated in all business activities
and providing for the bank risk profile to be always in line with
the established risk propensity.
Risk Management Function:
 Risk management strategy and policies, as well as procedures
for risk identification and measurement, i.e. for risk
assessment and risk management;
 Appropriate internal organisation, i.e. bank’s organizational
structure;
 Effective and efficient risk management process covering all
risks the bank is exposed to or may potentially be exposed to
in its operations;
 Adequate internal controls system;
 Appropriate information system;
  Adequate process of internal capital adequacy assessment.
 Strong MIS for reporting, monitoring and controlling risks
 Well laid out procedures, effective control and comprehensive
risk reporting framework.
 Periodical review and evaluation.

Type of Risk Management

 Liquidity risk is the risk of potential occurrence of adverse
effects on the bank’s financial result and capital due to the
bank’s inability to meet the due liabilities caused by the
withdrawal of the current sources of funding, that is, the
inability to raise new funds (funding liquidity risk), aggravated
conversion of property into liquid assets due to market
disruption (market liquidity risk).
 Credit risk is the risk of potential occurrence of adverse
effects on the bank’s financial result and capital due to
debtor’s default to meet its obligations to the bank.

Risk Management System

•Banks are required to identify, measure, monitor and control the overall level of
risks undertaken by them.

•Risk Management Structure: Risk Management Deptt. /Committee.

•Loan Review Mechanism (LRM): evaluation of quality of loans and

improvements in credit administration. •

•Credit Risk: Credit default & counterparty risk •

•Market Risk: Market risk arising from adverse changes in market variable such
as interest rate, foreign exchange rate, equity price and commodity price •

–Liquidity Risk, Interest Rate Risk, Foreign Exchange Risk, Commodity Price Risk,
Equity Price Risk –

•Operational Risk: Risk of loss resulting from inadequate or failed internal

processes, people and systems or from external events.

Capital Adequacy for Banks

•Importance of capital for any organisation •

•Imp. Of stake •

•Capital helps absorb losses •

•Banks with low capital can`t increase business •

•DICGC cover only up to 1 lac •

BASEL- I
 In 1988, The Basel Committee on Banking Supervision (BCBS)
introduced capital measurement system called Basel capital
accord, also called as Basel 1.
 It focused almost entirely on credit risk, It defined capital and
structure of risk weights for banks.
 The minimum capital requirement was fixed at 8% of risk-
weighted assets (RWA).
  India adopted Basel 1 guidelines in 1999.
 In India, however banks are required to maintain a minimum
Capital-to-risk weighted Asset ratio (CRAR) of 9% on an
ongoing basis.

BASEL- II
 In 2004, Basel II guidelines were published by BCBS,
which were considered to be the refined and reformed
versions of Basel I accord.

BASEL – III
 Basel III or Basel 3 released in December, 2010 is the
third in the series of Basel Accords. These accords deal with
risk management aspects for the banking sector. So we can
say that Basel III is the global regulatory standard on bank
capital adequacy, stress testing and market liquidity risk.
(Basel I and Basel II are the earlier versions of the same, and
were less stringent).
 The RBI issued Guidelines based on the Basel III reforms
on capital regulation on May 2 2012, to the extent applicable
to banks operating in India. The Basel III capital regulation
has been implemented form April 1, 2013 in India in phase
and it will be fully implemented as on March 31, 2019.

Basel I Accord

•CAR- Bank of International Settlement- 1988

•Central Bank Governors-G – 10 Countries formed B.C.B.S. •

•8% of risk weighted assets ( RBI – 9%) •

• Only credit risk covered •

•In 1996, Market Risk also covered •

Basel II

•Basel II- Revised Framework considers capital requirement for not only credit &
Market risks but also operational risks •

•Basel II has 3 pillars

•1) Min. Capital requirement

•2) Supervisory Review

•3) market Discipline

Tier I , II & III Capital

•Tier I Capital •Paid up equity capital+ disclosed reserves •Perpetual non

cumulative pref. Shares-PNCPS

•Tier II Capital •Undisclosed reserves •revaluation reserves-55% •General

provisions- ( max. Up to 1.25% of RWA ) •Hybrid ( debt / equity ) capital
•Subordinated term Debt- over 5 years •This can be up to 50 % of Tier I •Tier II
capital can be up to 100% of Tier I capital
•Tier III Capital •Short term subordinated Debt covering Market Risk( not to
exceed 250 % of Tier I capital required to support Market Risks) •Investment in
subsidiaries & securitised assets will be reduced from Tier I & Tier II capital 50%
each

Supervisory Review- Pillar II

• •Need to consider systemic & other Bank specific risks as well

•4 Principles •1) Banks to have Internal system of assessing risks for computing
capital •

•2) Supervisors to review system to strengthen them •

•3) To have > min. Capital required •

•4) Ensure Min. Capital required is not breached

Market Discipline- Pillar III

•Relates to disclosures: (as per Board approved Policy) •

•Disclosures be made through annual report/ website •

•To enable market participants to take an informed view •

•Capital structure •Capital adequacy •Credit/market/ operational risks

•Credit risk mitigates

•Securitisation disclosures •

BASEL III

Objectives of the Basel III:

1.Improve bank’s ability to absorb shocks from financial and economic stress ●

2. Improve risk management and governance ●

3. Strengthen banks’ transparency and disclosures. ●

•Takes care of Economic or Financial stress of Banks – Features •

•1) Better quality capital- equity raised from 2% to 4.5% of RWA •

•Capital conservation buffer- 2.5% of RWA for economic & financial risks •

•Counter Cyclical Buffer- Increase capital in good times- 0 to 2.5% of RWA

•Tier I capital raised from 4% to 6% • •

•Total CAR to be 8% + 2.5% or 10.5% •

•Leverage ratio – capital/ total assets to be 3% •

Implementation of Basel III in India- RBI Guidelines

•1) To be implemented effective 31.3.19

•2) Initially CAR will be lower & higher later

3) Counter Cyclical Buffer guidelines to be issued later

4) As against 8% , RBI prescribed 9% CAR

•5) Min. Equity for Tier I to be 5.5% instead of 4.5% & overall to be 7% instead of
6%

6) Capital conservation Buffer to be 2.5% of RWA

•7) Leverage Ratio to be 4.5% instead of 3%

Aims of the Basel III

 Improve the banking sector’s ability to absorb ups and downs

arising from financial and economic instability
 Improve risk management ability and governance of banking
sector
 Strengthen banks’ transparency and disclosures.

A-8: CIBIL, Fair Practices Code for Debt Collection,BCSB

(Role and Functions of CIBIL; Fair Practices Code for Debt
Collection; Codes of BCSBI)
What is CIBIL:
CIBIL (Credit Information Bureau (India) Limited):
CIBIL (Credit Information Bureau (India) Limited) is a Credit
Bureau or Credit Information Company.
This company is engaged in maintaining the records of all the credit-
related activities of companies as well as individuals including credit
cards and loans.
The registered member banks and several other financial institutions
periodically submit their information to CIBIL.
Based on the information and record provided by these institutions,
CIBIL issues a CIR (Credit Information Report) as well as a credit
score.
Role:
 The Credit Information Companies (Regulation) Act, 2005, as well as
several Reserve Bank of India Rules and Regulations, have
given CIBIL (Credit Information Bureau (India) Ltd the authority to
collect data from various types of credit grantors (i.e. lenders), and then
share it with the rest of the group
 The goal of CIBIL is to meet the need for comprehensive credit
information among credit-providing institutions by collecting,
compiling, and disseminating credit information about commercial and
consumer borrowers to a closed user group of Members.
 CIBIL’s services are used by banks, financial institutions, non-banking
financial companies, housing finance companies, and credit card
companies

Functions/Products of CIBIL:
Credit bureaus are organizations that work with a variety of lenders and
creditors to assist them in making loan decisions.
CIBIL offers three products: a credit score, an individual credit report, and a
company credit report:
 Credit Information
CIBIL obtains credit information from a variety of sources, including other
creditors, debtors, debt collection agencies, credit card firms, and other
offices with public credit records.
 Credit Report
A credit report is a detailed description of an individual’s credit history.
 Credit Scores
A credit score is a three-digit(300 to 900) numerical value that measures an
individual’s creditworthiness.

Fair Practices Code for Debt Collection:

The banks’ debt collection fair practices code is based on treating clients with
dignity and respect.

Commercial banks in India have developed debt recovery codes that comply
with RBI regulation or monitoring instructions, the IBA Model Policy, and
the BCSBI Fair Practice Codes and Charters.
1)Demand for Lenders Liability Law
 The Securitisation and Reconstruction of Financial Asset
(SARFAESI)and Enforcement of Security Interest Act was
enacted in India in 2002.
 The Act allowed bank to take possession of assets of
defaulting companies without going through the
cumbersome legal process.
 All the banks in India have framed their own set of fair
practices codes as per the guidelines and implemented it
from November 1, 2003.

2)Application for Loans and their Processing

 Loan application form in respect of priority sector and
advances of up to Rs. 2 lakhs should be comprehensive. It
should include information about the fees/charges, if any,
payable for processing.
 In the case of small borrowers seeking loans up to Rs 2
lakhs, the lenders should convey in writing, the main
reason/ reasons which, in the opinion of the bank after due
consideration, have led to rejection of the loan applications
within the stipulated time.

Banking Codes and Standards Board of India (BCSBI):

The Banking Codes and Standards Board of India (BCSB) was established in
February 2006 to develop codes and standards to ensure that banks treat
consumers fairly.
Functions
 To act as an independent and autonomous watchdog, monitoring and
ensuring compliance with the Codes and Standards.
 To offer fair treatment to their consumers, banks must plan, evolve,
prepare, establish, promote, and publish voluntary, comprehensive
Codes and Standards.
 Conduct and research existing Codes and Standards in use around the
world.
 To enter into covenants with banks for the compliance of codes and
standards, as well as to teach bank workers on the Codes.
 To assist persons who have been impacted by natural disasters.
Monitoring the Code’s Implementation
 To determine whether there is a system-wide flaw, examine customer
complaints and orders/awards made by Banking
Ombudsmen/Appellate Authority.
 Organizes an annual conference with the member banks’ Principal Code
Compliance Officers to discuss implementation difficulties.
 Visits branches to find out how the Codes are being implemented on
the ground.
 Obtains an Annual Statement of Compliance from member banks (ASC)

A-9:Recent Developments in the Financial System:

(Structure, Reforms in the Indian Financial System; recent
developments in Money, Debt, Forex Markets; Regulatory
Framework; Payments and Settlement System)

Introduction to Financial System:

The Indian Financial System is made from various structures such as the
banking sector, capital market, money market, regulatory bodies, financial
institutions, and financial instruments.

Reforms enable to increase the efficiency of resource utilisation and

availability in the Indian economy.

The introduction of new instruments, broadening of participants base and

strengthening of institutional infrastructure have been pursued during the 1990s,
based on the framework provided by the Narayanan Vaghul and the Narasimham
Committee II.
Major Reforms:
As per the recommendations of the study groups and with the financial sector
reforms initiated in the early 1990s, the government has adopted following major
reforms in the Indian money market.
 Deregulation of the Interest Rate
 Money Market Mutual Fund (MMMFs)
 Liquidity Adjustment Facility (LAF)
 Electronic Transactions
 Establishment of the CCIL(Clearing Corporation of India Ltd)
 Development of New Market Instruments : The government has
consistently tried to introduce new short-term investment instruments.
Examples: Treasury Bills of various duration, Commercial papers,
Certificates of Deposits, MMMFs, etc. have been introduced in the Indian
Money Market.
The Reserve Bank has taken many initiatives towards introducing and
upgrading safe and efficient modes of payment systems in the country to
meet the requirements of the public at large.
Recent developments in paper-based instruments include launch
of Speed Clearing (for local clearance of outstation cheques drawn
on core-banking enabled branches of banks), introduction of cheque
truncation system (to restrict physical movement of cheques and
enable use of images for payment processing), framing CTS-2010
Standards (for enhancing the security features on cheque forms)
Payment and Settlement Systems:
Payment and Settlement Systems: In India, the payment and
settlement system are regulated by the Payment and Settlement
systems Act, 2007 (PSS Act)
RBI has since authorized payment system operator of pre-paid
payment instruments, card schemes, cross border in bound money
transfer, Automated Taller Machine(ATM) networks and centralized
clearing arrangements.
Types of Electronic payments:
The RBI introduced the ECS (Credit)( Electronic Clearing
Service )scheme during the 1990s to handle bulk and repetitive
payment requirements (Like salary, interest, Dividend payments) of
corporates and other institutions.
The Depositor Education and Awareness Fund Scheme, 2014(DEAF):

Pursuant to the amendment of the Banking Regulation Act 1949, section

26A has been interest in that Act, empowering Reserve Bank to
establish The Depositor Education and Awareness Fund (The
Fund) Under the provisions of this section the amount to the credit of any
account of the credit of any account in India with any bank which has
been operated upon for a period of ten years or any deposit or any amount
remaining unclaimed for more than 10 years shall be credited to the
fund, within a period of 3 months from the expiry of the said period 10
years.

MODULE B – FUNCTIONS OF BANKS

B-1:Banker Customer Relationship
(Types; Different Deposit Products & Services; Services to
Customers & Investors)

Banker: A banker is a person who conducts banking activities like accepting

deposits, lending money, withdrawing services, and exchanging money. A
banker oversees all banking operations and is either the owner or director of
the bank.

Customer: A customer is a person who has a bank account and for whom the
banker agrees to provide banking services.

Important Functions of the Bank :

 Accepting public deposits and utilising the funds through loans and
investments
 Collecting cheques and bills
 Conducting Government transactions (Central/State)
 Discounting of invoices
 Issuing credit letters and assurances
 Performing foreign currency transactions
 Remittances
 Renting security deposit lockers
 Safekeeping of objects
Different Types of Bank Deposits and Accounts:

 Savings Account
 Current Account
 Recurring Deposit (RD)
 Fixed Deposit (FD)

Different Products and Services Offered by Banks:

Retail Banking:

 Deposits
 Loans, Cash Credit and Overdraft
 Negotiating for Loans and advances
 Remittances
 Book-Keeping (maintaining all accounting records)
 Receiving all kinds of bonds valuable for safe keeping
Trade Finance:

 Issuing and confirming of letter of credit(LC).

 Issuing of Bank guarantee(BG).
 Drawing, accepting, discounting, buying, selling, collecting of bills of
exchange, promissory notes, drafts, bill of lading and other securities.
Treasury Operations:

 Buying and selling of bullion, Foreign exchange.

 Acquiring, holding, underwriting and dealing in shares, debentures, etc.
 Purchasing and selling of bonds and securities on behalf of constituents.
The banks can also act as an agent of the Government or local authority. They
insure, guarantee, underwrite, participate in managing and carrying out issue of
shares, debentures, etc.

Apart from the above-mentioned functions of the bank, the bank provides a whole
lot of other services like investment counseling for individuals, short-term funds
management and portfolio management for individuals and companies. It
undertakes the inward and outward remittances with reference to foreign
exchange and collection of varied types for the Government.
Banker-Customer Relationship:

Overview
The Banker Customer Relationship is dependent upon the actions, products,
and services offered by the bank or utilised by the customers. Therefore, the
relationship between a banker and a customer is purely transactional.

The success of a bank rests heavily on its relationship with the customer.
Thus, the importance of faith in establishing a healthy relationship between a
banker and a consumer cannot be overstated.

To constitute a customer the following requirements must be

fulfilled;

 The bank account may be savings, current or fixed deposit

must be operated in his name by making a necessary deposit
of money.
 The dealing between the banker and customer must be of
the nature of the banking business. The general relationship
between banker and customer.
 VARIOUS TYPES OF RELATIONSHIPS
Type of Transaction Bank Customer
Deposit in bank Debtor Creditor
Loan from bank Creditor Debtor
Safe Deposit vault (SDV
Lessor Lessee
Locker)
Safe Custody Bailee Bailor
Issue of Draft Debtor Creditor
Payee of a Draft Trustee Beneficiary
Collection of Cheque Agent Principal
Pledgee Pledger
Pledge
(Pawnee) (pawnor)
Mortgage Mortgagee Mortgagor
Hypothecation Hypothecatee Hypothecator
Sale/purchase of security on
Agent Principal
behalf of customer
Money deposited, but no
Trustee Beneficiary
instructions for its disposal
Article/Goods left by mistake
Trustee Beneficiary
by customer

Service to Customers and Investors:

Merchant Banking: Merchant banking can be defined as a skill-oriented

professional service provided by merchant banks to their clients, concerning
their financial needs, for adequate consideration, in the form of fee.
Services offered by Merchant Banks

Merchant Banks offers a range of financial and consultancy

services, to the customers, which are related to:
  Marketing and underwriting of the new issue.
 Merger and acquisition related services.
 Advisory services, for raising funds.
 Management of customer security.
 Project promotion and project finance.
 Investment banking
 Portfolio Services
 Insurance Services.
Merchant banking helps in reinforcing the economic development of the
country, by acting as a source of funds and information to the business
entities.

B-7:Non-Performing Assets
(Definition; Income Recognition; Asset Classification; Provisioning Norms; CDR)

Definition

 An asset, including a leased asset, becomes non-performing

when it ceases to generate income for the bank.

 Non-performing Asset (NPA) shall be an advance where,

Interest and/ or instalment of principal remain overdue for

a period of more than 90 days .

ASSET CLASSIFICATION

Categories of NPAs

Banks are required to classify non-performing assets further

into the following three categories based on the period for
 which the asset has remained non-performing and the
realisability of the dues:

 Sub-standard Assets
 Doubtful Assets
Loss Assets
SMA of stress asset:
SMA Sub-Categories
Basis for classification

Principal or interest payment not overdue for more than 30 days

SMA-0 but account showing signs of incipient stress)

SMA-1 Principal or interest payment overdue between 31 -60 days

SMA-2 Principal or interest payment overdue between 61-90 days

As per RBI norms, before a loan account turns into a NPA,

banks are required to identify incipient stress in the account by
creating stress sub-categories under the Special Mention
Account category as given below:

A-6:Types of collaterals:

Land & Buildings; Goods; Documents of Title to Goods; Advances against

Insurance Policies, Shares, Book Debts, Term Deposits, Gold, etc.; Supply
Bills
 B-2: KYC/ AML/ CFT norms
(PMLA Act; KYC Norms)

Know Your Customer (KYC) Norms, Anti Money Laundering (AML)

and Countering the Terrorist Financing (CTF)/ Combating the
Financing of Terrorism (CFT). The Prevention of Money Laundering

Act (PMLA):

KYC/AML/CFT Norms: Overview

The Reserve Bank of India (RBI) issued a Master Circular on its official website
(http://www.rbi.org.in) on 02nd July 2012, which consolidated
instructions/guidelines issued to banks on KYC/AML/CFT norms/obligation of
banks under PMLA, 2002, until 30th June 2012.

Purpose of KYC/AML/CFT Norms

RBI instructed banks to follow a specified customer identification procedure
for account opening and to monitor suspicious transactions to report them to
the competent authority.

These Know Your Customer (KYC) rules have been revised in consideration
of the Financial Action Task Force’s (FATF) recommendations on Anti-Money
Laundering (AML) practices and on Combating the Financing of Terrorism
(CFT). The Master Circular was posted on the Reserve Bank of India’s official
website.

The purpose of this Master Circular is to consolidate all instructions or

guidelines issued by RBI on Know Your Customer (KYC) norms/Anti-Money
Laundering (AML) standards/Combating Financing of Terrorism (CFT)
standards/Obligations of banks under PMLA(Prevention of Money Laundering
Act), 2002.

The purpose of the KYC/AML/CFT rules is to check criminal elements from

using banks purposefully or unwittingly for money laundering or terrorism
funding. By implementing KYC procedures, financial institutions or banks can
better understand and manage risks by getting to know and understand their
customers and their financial transactions.

What is KYC?
KYC stands for “Know your Customer” and refers to the identification of
customers. It entails making sensible efforts to ascertain the true identity
and beneficial ownership of accounts, the source of cash, the type of the
customer’s business, and the rationality of account transactions about the
customer’s business, etc.

All of these allow banks to handle their risks prudently. The KYC criteria
were designed to prevent criminals from using banks for money laundering,
whether on purpose or unintentionally.

Definition of Customer
KYC policy defines a Customer as:

a person who maintains an account or/and a commercial relationship with

the bank

 someone who keeps an account for someone else’s benefit (i.e. the
beneficial owner)
 a person who benefits from the transactions carried out by financial
intermediaries, like CAs, Stock Brokers, Solicitors etc. as permitted by
law
 a person or entity who is directly or indirectly involved in a financial
transaction that poses significant reputational or other risks to a bank,
like making a wire transfer or issuing a large-value demand draught,
etc.
KYC Policy
Banks should design their Know Your Customer (KYC) policies by
incorporating the following four elements:

 Customer Acceptance Policy (CAP)

 Customer Identification Procedures (CIP)
 Monitoring of Transactions
 Risk Management
Features and Documents for Customer Verification
Depending on the type of customer, the following features must be validated,
and documentation may be requested. Any document that satisfies the
bank’s requirements for customer information will work.

For Individual Accounts

Legal Name and Any Other Names Used
 Passport
 PAN card
 Voters Identity Card
 Driving License
 Job Card given by NREGA and fully signed by a State Government official
 The letter, having Aadhaar number, name, and address, given by the
Unique Identification Authority of India (UIDAI)
 Identity card (subject to the bank’s satisfaction)
 A letter from a recognised official authority or public servant
confirming the customer’s identity and residence to the bank’s
satisfaction
Correct Permanent Address
 Telephone bill
 Bank account statement
 A letter from a recognised official authority
 Electricity bill
 Ration card
 Letter from employer (subject to the bank’s satisfaction)
For Business Account
Features:
 Name of the Company
 Principal Place of Business
 Mailing Address of the Company
 Telephone/Fax Number
Documents
 Certificate of incorporation along with the Memorandum and Articles of
Association
 The decision of the Board of Directors to open a bank account and a list
of people authorised to run the account
 Granting authority to its management, executives, or workers to
conduct business on its behalf
 Copy of the letter of PAN allotment
  Copy of the telephone bill

The Prevention of Money Laundering Act (PMLA) was enacted by the

Indian Parliament in 2002 to prevent money laundering in India. This is an
important legislation, especially from an economy.

B-3:Bankers’ Special Relationship

What is copra act full form?

The full form of COPRA is The Consumer Protection Act, 1986.
This was the act of Parliament of India enacted in 1986 to protect the interests
of consumers in India.
It was made to establish consumer councils and other authorities to settle
consumer's grievances and matters connected with it.

Introduction
When a consumer opens an account with a bank, the bank becomes obligated
to the customer regarding specific rights and responsibilities. These rights
and obligations are sometimes known as “Bankers’ Special Relationship.” The
special relationships between banker and customer are as follows:

Mandate
 A mandate contract is a contract between the parties in which the
mandatary is expected to carry out a task in place of the mandator, and
the mandator is just required to pay if agreed upon or mandated by
law.
 The consumer notifies the bank that he has appointed someone to
manage his account on his behalf (mandate).
 The customer verifies the mandate signatures that are gathered in the
mandate letter.
 Normally, the mandate is only granted for a certain time.
 Institutional mandates are not acceptable.
 A power of attorney can be issued by an institution.
Power of attorney
A power of attorney is an authorisation document in which people or legal
organisations permit others to represent or act on their behalf to create and
fulfil civil transactions. In general, two forms of POA are provided:
  General or Universal
 Special or Limited
Letter of authority
A letter of authorisation is used to reveal confidential information or delegate
a specific responsibility. On the other hand, a power of attorney gives
someone else complete authority to act and make decisions on their behalf.
The authority can be limited to a specific task, such as the purchase of real
estate or a business deal, or it can be broad, granting complete authority to
make all decisions on their behalf.

Power of Attorney and Letter of Authority come into play when you have to give a third
party permission to act on your behalf, especially for situations where you can’t on your
own behalf, such as when you are not able to be there or when you want someone else
to take care of it. This situation usually arises in terms of financial matters, legal issues,
or for health directives.

Difference between letter of authority and power of attorney.

Power of Attorney and Letter of Authority come into play when you have to give
a third party permission to act on your behalf, especially for situations where you
can’t on your own behalf,

such as when you are not able to be there or when you want someone else to
take care of it. This situation usually arises in terms of financial matters,
legal issues, or for health directives.

B-4:Cash Operations
(Cash Management Services and its Importance)

Cash and Its Custody

(1)General

The cash and small coin balances must be kept in the strong room
in the joint custody of the Head Cashier/cashier and authorized
supervising official.

(2)Strong Room/ Safe

 The strong room or Safe must be under the the double lock of the
cashier and the supervising official in charge of cash.

(3)Cash Balance of the Bank

The bulk of the cash balance should always be in the strong room/
safe under joint custody. While the remainder (Cashier hand
balance) which will be kept as low as conveniently possible, will be
left with the Head Cashier/ Cashier during the day for the day’s
transactions.

(4) Checking of Cash Balance

Before taking notes and coins into “Joint Custody”, the

supervising official will :

Personally count all notes of denominations above Rs. 10.

Count all other notes on the “clip system”.
(5)Shortage or Excess in Cash

Any shortage in the cash balance should be recovered on the

same day from the Head Cashier/Cashier.
Any excess in the Cash Balance must be credited to Sundry
Creditors Account on the same day.
(6)Remittance of Cash

When remittances of currency notes are sent from one office to

another, following instructions must be strictly complied with :

Should not be allowed to be carried without and armed

guard.
Always entrusted to an authorised employee with
experienced subordinate staff and armed guard.
A register should be maintained to record all cash remittances.
(7)Insurance
 All cash remittance in transit are covered under the Blanket
Insurance Policy obtained by the Bank.
(8) Custody of Keys:

Particulars of all Important keys, including those of the Head

Cashier/ Cashier, must be entered in the Key Register
(9)Security Measures

The security Measures as advised by the Head Office in

respect of security guards deployed and use of alarm system
etc.

What is Cheque Truncation?

 Truncation is the process of stopping the flow of the physical
cheque issued by a drawer at some point by the presenting
bank en-route to the paying bank branch.
 In its place an electronic image of the cheque is transmitted
to the paying branch through the clearing house, along with
relevant information like data on the MICR band, date of
presentation, presenting bank, etc.
 Cheque truncation thus obviates the need to move the physical
instruments across bank branches, other than in exceptional
circumstances for clearing purposes. This effectively eliminates
the associated cost of movement of the physical cheques,
reduces the time required for their collection and brings elegance
to the entire activity of cheque processing.

B-5:Principles of Lending, Working Capital Assessment and Credit

Monitoring
(Cardinal Principles; Non-fund Based Limits; WC; Term Loans; Credit Appraisal Techniques;
Sources of WC Funds & its Estimation; Operating Cycle; Projected Net WC; Turnover Method;
Cash Budget; Credit Monitoring & Its Management; Base Rate)
Principles of Lending:
The Business of lending is not without certain risks, especially
when the lending banks depend largely on the borrowed funds.

The cardinal principles of lending are, therefore, as follows:

  Safety
 Liquidity
 Diversity
 Purpose
 Stability
 Profitability
Liquidity:

Liquidity is an important principle of bank lending. Bank lend for

short periods only because they lend public money which can be
withdrawn at any time by depositors. They, therefore, advance loans
on the security of such assets which are easily marketable and
convertible into cash at a short notice.

Safety:

. Safety means that the borrower should be able to repay the loan
and interest in time at regular intervals without default.

Diversity:

In choosing its investment portfolio, a commercial bank should follow the

principle of diversity. It should not invest its surplus funds in a particular
type of security but in different types of securities.

Purpose:

Loans for undersirable and speculative purposes cannot be granted.

Stability:

Another important principle of a bank’s investment policy should

be to invest in those stocks and securities which possess a high
degree of stability in their prices.
Profitability:

It must earn sufficient profits. It should, therefore, invest in such

securities which was sure a fair and stable return on the funds
invested.

Non- Fund Based Limits

While ascertaining the credit needs of the borrowers, the bankers

should assess both the fund based and non fund based limits
required by him together and sanction them as a package.

The Non-fund based limits are normally of two types:

 Bank Guarantees
 Letters of Credit
Bank Guarantees: A bank guarantee refers to a promise provided
by a bank or any other financial institution that if a certain borrower
fails to pay a loan, then the bank or the financial institution will take
care of the losses.

Letter of Credit (L/C): A letter of credit is a document that

guarantees the buyer’s payment to the sellers. It is Issued by a bank
and ensures the timely and full payment to the seller. If the buyer is
unable to make such a payment, the bank covers the full or the
remaining amount on behalf of the buyer.

Term Loan and Working Capital Loan

Term Loan:

A term loan is a loan that is repaid in regular intervals over a

pre-agreed period of time. The time period of a term loan can
last between one to ten years.

Working Capital Loan:

 A working capital loan is a short term loan with the aim of
financing the day to day business operations of a company.

Working capital loans are not used to inject capital into the
business or to purchase long-term assets or investments.

Instead, it is used for aspects such as to settle accounts

payables, pay monthly interest or with regard to any aspect
that is involved with current assets and current liabilities.

WC Formula:

Working Capital Requirement = Inventory+ Accounts

Receivables – Accounts payable.

Estimation of working Capital Needs:

The Conditions of commercial banks for lending on a short term basis

are rigorous. A customer has to satisfy his bank about his character,
capacity, capital and collateral, in brief he has to establish his
creditworthiness.

If the overall appraisal is satisfactory, the bank will finance only

the residual gap in the customers resources, after taking into
consideration the expected availability from all other sources of
funds.

There are four methods of estimating the working capital

requirement of a borrower:

 The Operating cycle method

 The Projected net working capital method
 The Projected turnover method
 The cash budget
There methods required the preparation of:
  Projected financial statements
 Projected fund flow statements
 Projected cash flow statements/cash budgets

Operating cycle method

Operating cycle method for estimating working capital is

based on the duration of the operating cycle.

Longer the period of the cycle, bigger will be the working

capital requirements.

Operating cycle means the cycle of raw material to work in

progress to finished goods to accounts payable and finally to
cash.

Operating cycle time is the time taken starting from raw

material purchases to its conversion into cash.

Example of Operating cycle:

 Procurement of raw material: 30 days

 Conversion/process time: 15 days
 Average time of holding of finished goods: 15 days
 Average collection period: 30days
 Total operating cycle: 90days
 Operating cycle in a year: 365/90=4
 Total operating expenses per annum: 60 lakhs
 Total turnover per annum: 70 lakhs
 Working capital requirement: 60/4=15lakhs
 Projected Turnover method

Turnover Method is used to assess the working capital requirement

of any borrower based on the turnover of the business.

RBI has given following instructions:

20% of their projected annual gross sales turnover may be

considered as minimum working capital finance by banks.

Cash Budget System

The current loan policies of most banks state that, for an

assessment of the working capital needs of a borrower who enjoys
or requires fund based limits in excess of Rs 10crs. The cash budget
system should be used.

Cash budget has to have the following steps in sequence when

prepared for a quarter.

 Actual receipts and payments during the first, the second

and the third month.

.The Position of the cash surplus/deficit is computed at

monthly intervals. A surplus is generated of the receipts exceed

the payment and a cash deficit occurs if payments are more

than the receipts during the month.

Credit Management:

Credit management is the process of granting credit, setting the

terms it’s granted on, recovering this credit when it’s due, and
ensuring compliance with company credit policy, among other credit
related functions.

The goal within a bank or company in controlling credit is to improve

revenues and profit by facilitating sales and reducing financial risks.

Credit Monitoring

Credit Monitoring is the tacking of an individual’s credit history, for

any changes or suspicious activities.

A credit monitoring service is will show an individual’s credit report

provide them with new information regarding new credit inquiries,
accounts etc.

B-6:Priority Sector Advances

(Targets; Sub-Targets; Recent Developments)

National Credit Council

 In July 1968, the Government of India emphasised that commercial
banks should increase their involvement in the financing of priority
sectors, viz., agriculture and small scale industries.
 All commercial banks were advised to achieve the target of priority
sector lending at 40 per cent of the aggregate bank advances by 1985
 Sub-targets were also specified for lending to agriculture and the
weaker sections within the priority sector. Since then, there have been
several changes in the scope of priority sector lending and the targets
and sub-targets applicable to various bank groups.
PSL:

The concept of ‘Priority sector lending’ focuses on the idea of

directing the lending of the banks toward a few specified sectors and
activities in the economy.
The term ‘priority sector’ indicates those activities which have national
importance and have been assigned priority for development. These primarily
include agriculture, small industries, etc.
The case has further been that these sectors and activities were neglected for
bank credit and therefore for accessibility of credit, these neglected ones are
considered to be a priority for providing credit.
Priority Sector Lending – Targets and Classification

RBI has updated Master Direction on priority sector lending guidelines via its
Master Circular RBI/FIDD/2020-21/72 Dt. 04.09.2020.
ADJUSTED NET BANK CREDIT (ANBC)

CreditEquivalent of Off-Balance Sheet Exposer(CEOBE)

2. Micro, Small, and Medium Enterprises (MSMEs)

Bank loans to Micro, Small, and Medium Enterprises(SME), for both
manufacturing and service sectors are eligible to be classified under the priority
sector as per the following norms. Within the MSME target, Micro Enterprises will
be 7.5% of ANBC or Off-Balance Sheet Exposure, whichever is higher.
CATEGORIES OF PRIORITY SECTOR:

1. Agriculture (Direct and Indirect finance)

 Direct finance to agriculture would include; short-, medium- and
long-term loans
given for agriculture and allied activities (dairy, fishery, piggery,
poultry,
beekeeping, etc.) directly to individual farmers, self-help groups
(SHGs) or joint
liability groups (JLGs) of individual farmers without limit and to
others (such as
corporates, partnership firms and institutions) up to certain limits,
for taking up
agriculture and allied activities.
 Indirect finance to agriculture shall include loans given for
agriculture and allied
 activities to those engaged in distribution of inputs like fertilizers,
pesticides, seeds,
cattle and poultry feeds, etc., and to State Electricity Boards and
such other
organizations.
2. Small Enterprises (Direct and Indirect Finance)
. Direct finance to small enterprises includes all loans given to micro
and small
(manufacturing) enterprises engaged in the manufacture/production,
processing or
preservation of goods, and micro and small (service) enterprises
engaged in providing or rendering of services, and whose investment in
plant and machinery and equipment (original cost excluding land and
building and such items).
 Indirect finance to small enterprises shall include finance to any
person providing inputs to or for marketing the output of artisans,
village and cottage industries, handlooms and to co-operatives of
producers in this sector.
TARGETS/SUB-TARGETS
 Within the overall main lending target of 40 per cent of net bank credit,
banks should ensure that eighteen(18) per cent of net bank credit goes
to agricultural sector, 10 per cent of net bank credit is given to the
‘weaker sections’ and one(1) per cent of previous year’s total advances
is given under the Differential Rate of Interest (DRI) scheme.
 Non-achievement of priority sector targets and sub-targets will be
taken into account by RBI while granting regulatory
clearances/approvals for various purposes.

RECENT DEVELOPMENTS IN PRIORITY SECTOR LENDING

The salient features of the guidelines are:

1) The Government will provide interest subvention of 2 per cent p.a.
to the banks
in respect of short- term production credit up to Rs, 3 lakh provided to
farmers
2) The RBI has advised banks to form farmers’ advisory committee in
all rural branches.
 3) A branch advisory committee comprising of select elected
representatives, including women leaders of local Panchayat Raj
institutions, within the service area of the branch, is established at
every rural branch.
It should meet at least once in a quarter. These meetings are made
mandatory and are to be attended by the controlling official of the
bank.

B-7:Micro, Small and Medium Enterprises

What is MSME?
MSME Full Form:- Micro Small, and Medium Enterprises come under the
Ministry of MSME. A lot of initiatives are taken by the Government of
India to make sure the proper functioning of the sector as this industry
is considered as the backbone of the Indian Economy because majority
of the employment is provided under this sector

B-6:Types of Collaterals Land and Buildings.

 GOODS.
 Documents of Title to Goods.
 Advances Against Life Insurance Policies.
 Advances against share.
 Loan Against Term Deposits.
 Loan against gold ornaments.

B-8: Government Sponsored Schemes

(SGSY; SJSRY; PMRY; SLRS)

The top six government sponsored schemes under which banks are
required to finance as per the respective scheme norms prescribed by
the RBI.
The schemes are: 1. DRI Scheme 2. SLRS 3. PMRY Scheme 4. SJSRY 5.
SGSY 6. SELF HELP GROUP.

1. DRI (Differential Rate of Interest Scheme):

Differential rate of interest means lower rate (4%) of interest. The
scheme has been initiated to provide financial help to lower strata of
population through the help of Banks.
 Advances under this scheme should be at least 1% of total advances as
at the end of previous year on an ongoing basis. SC/ST to get 40% of DRI
advances, 2/3rd of DRI are to be routed through rural/semi urban
branches of the banks.

2. SLRS (Scheme of Liberation and Rehabilitation of Scavengers):

The purpose of the scheme is to liberate the Scavengers and their
dependents from existing hereditary and obnoxious occupation of
manually removing shit, night soil and filth and to provide for and
engage them in alternative and dignified occupations.

3. PMRY (Prime Minister Rozgar Yojna):

The PMRY has been designed to provide employment to educated
unemployed youth of economically weaker sectors.

The scheme aims at assisting the eligible youths in setting up self-

employment ventures in industry, service and business sectors.

4. Swarna Jayanti Shahri Rozgar Yozna (SJSRV):

The scheme was launched in 1997 in all urban towns in India replacing 3
existing schemes:

i) Nehru Rozgar Yojna,

ii) Urban Basic Services for the poor, and

iii) Prime Minister Integrated Urban Poverty Eradication Programme.

The SJSRY seeks to provide gainful employment to the urban poor

living below the urban poverty line, unemployed or underemployed
through setting up of self-employment ventures.

The scheme is to be funded by central government and state

governments in the ratio of 75: 25 basis.

5. Swarna Jayanti Gram Swarozgare Yozna (SGSY):

The objective of SGSY is to bring the assisted poor families

(swarozgaries) above the poverty line by ensuring appreciable sustained
income over period of time.
 The rural poor such as those with land, landless labour, educated
unemployed, rural artisans and disabled etc. are covered under the
scheme.

6. Scheme for Financing Self Help Groups (SHGS):

A self help group consists of many members but under this scheme no
single member shall be financed by the bank. The bank shall extend
finance to the Group only.

Self Help Groups

Need for & Functions of SHGs; Role of NGOs in Indirect Finance to SHGs; SHGs & SGSY
Scheme; Capacity Building
Role of NGO in Self help group:
A Non-Governmental Organisation (NGO) is a voluntary organization
established to undertake social intermediation like organizing SHGs of micro
entrepreneurs and entrusting them to banks for credit linkage or financial
intermediation like borrowing bulk funds from banks for on-lending to SHGs.

MODULE C – BANKING TECHNOLOGY

Customer Demands have sparked intense competition among banks and
financial firms to apply information technology to their operations to
provide innovative goods and services at lower prices.

With increasing competition and threats banks are now seriously looking
for Security Considerations like IT Security and Audit.

Types of Threats

Threats to computerised systems appear as the following:

 Data and software errors and omissions

 Unauthorised release of sensitive information
 Abuse of computers and misappropriation of bank assets
 Cybercrime
Control Mechanism
Management of hazards linked with IT technologies necessitates the
implementation of appropriate control mechanisms.
Physical Control: Physical control refers to applying security measures
inside a defined structure to prevent unwanted access to sensitive
information.

Internal Control: Internal control is a method used by a company’s board of

directors, management, and other employees to offer reasonable confidence
that information is accurate, reliable, and timely. Laws, rules, contracts,
policies, and procedures must all be followed.

Operational Control: Security measures largely implemented and

performed by humans are known as operational controls.

Core Banking Solution

What is the Core Banking System?

Core Banking solutions are vital to the day-to-day functioning of any bank.
It is an integral part of the banking technology which aims to serve their clients and
customer with the best services.

In simple words, core banking solutions are account-management back-end

and front-end processes.

Core is short for “Centralized Online Real-time Exchange.” As the name

suggests, it is a centralized system or a network created by a bank and its
branches. This allows the customers of the bank to access, manage and perform
basic transactions from any branch of the bank they hold an account in. Thus, core
banking software allows the banks to create a centralized data center.

Core banking solutions offer the following advantages to the bank:

• Improved operations which address customer demands and industry

consolidation • Errors due to multiple entries eradicated • Easy ability to
introduce new financial products and manage changes in existing products •
Seamless merging of back office data and self-service operations.

Features of Core Banking Solution: • Customer-On Boarding. • Managing

deposits and withdrawals. • Transactions management • Interest. Calculation
 and management. • Payments processing (cash, cheques /checks, mandates,
NEFT, RTGS etc.). • Customer relationship management (CRM) activities. •
Designing new banking products. • Loans disbursal and management. •
Accounts management • Establishing criteria for minimum balances, interest
rates, number of withdrawals allowed and so on.

What is preventive vigilance measures in banks?

At the organisational level, the preventive vigilance measures in place include
identification of sensitive posts, surprise visits by senior officers to vigilance
sensitive areas, incorporating vigilance related sessions in the Human Resource
(HR) related training programmes at the Reserve Bank's training ...

MODULE D – SUPPORT SERVICES - MARKETING OF BANKING SERVICES/

PRODUCTS:

D-1:Channels for Banking Services:

The main channels used for the delivery of banking services.
The various channels are made available on a variety of modes (based on
applicability) such as:
 Branch Banking.
 Internet.
 Host to Host.
 ATMs.
 Cash Dispensers.
 Hand Held Devices.
 Kiosks.
 SMS.

Benefit of Direct Marketing

 It saves time and introduces customer to the various range of

products.
 It is convenient, easy and hassle free for the customer.
 Various products are available at customer’s disposition
 It opens various delivery channels to the customer.
  Banks can offer a real time, customized and personalized
marketing,
 It reduces the operational cost.
 It saves man hours and manpower in banks.
 It enables the banker to cater to the needs of individuals, both the
commoner and the techno savvy.
 It enables the banker to use his available time for doing marketing
jobs.
 It enables deployment of available manpower for other jobs

MODULE E – ETHICS IN BANKS AND FINANCIAL INSTITUTIONS:

E-5:Banking Ethics: Changing Dynamics

E-1:Ethics in Bank and Financial Institutions:Ethical Behavior at the
Workplace.

The workers must have some common attributes to follow in a workplace

and be moral. Some of the common attributes are:

Dedication,

Integrity,

Accountability,

Collaboration,

Self Control

Conduct,

Being A Better Worker,

Trusting Relationships,Team Cohesiveness,

.