Banking

5) Functions of RBI-
# 1. Monopoly of Note Issue:
Like any other central bank, the RBI acts as a sole currency authority of the
country. It issues notes of every denomination, except one-rupee note and coins
and small coins, through the Issue Department of the Bank.

One- rupee notes and coins and small coins are issued by the Government of
India. In actuality, the RBI also issues these coins on behalf of the Government
of India. At present, notes of denominations of rupees two, five, ten, twenty,
fifty, one hundred and five hundred are issued by the RBI.

# 2. Banker’s Bank:
As bankers’ bank, the RBI holds a part of the cash reserves of commercial
banks and lends them funds for short periods. All banks are required to maintain
a certain percentage (lying between 3 per cent and 15 per cent) of their total
liabilities. The main objective of changing this cash reserve ratio by the RBI is
to control credit.

The RBI provides financial assistance to commercial banks and State

cooperative banks through rediscounting of bills of exchange. As the RBI meets
the need of funds of commercial banks, the RBI functions as the Tender of the
last resort’.

# 3. Banker to the Government:

The RBI acts as the banker to the government of India and State Governments
(except Jammu and Kashmir). As such it transacts all banking business of these
Governments.

These are the following:

The RBI:
(i) Accepts and pays money on behalf of the Government.

(ii) It carries out exchange remittances and other banking operations.

As the Government’s banker, the RBI provides short-term credit to the

Government of India. This short-term credit is obtainable through the sale of
treasury bills. Not only this, the RBI also provides ways and means of advances
(repayable with 90- days) to State Government. It may be noted that the Central
Government is empowered to borrow any amount it likes from the RBI.

# 4. Controller of Credit:
The RBI controls the total supply of money and bank credit to sub serve the
country’s interest. The RBI controls credit to ensure price and exchange rate
stability.

To achieve this, the RBI uses all types of credit control instruments,
quantitative, qualitative and selective. The most extensively used credit
instrument of the RBI is the bank rate. The RBI also relies greatly on the
selective methods of credit control. This function is so important that it requires
special treatment.

Function # 5. Exchange Management and Control:

One of the essential central banking functions performed by the Bank is that of
maintaining the external value of rupee. The external stability of the currency is
closely related to its internal stability the inherent economic strength of the
country and the way it conducts its economic and monetary affairs.

Domestic, fiscal and monetary policies have, therefore, an important role in

maintaining the external value of the currency. Reserve Bank of India has a very
important role to play in this area.

The RBI has the authority to enter into foreign exchange transactions both on its
own account and on behalf of the Government.

The official external reserves of the country consist of monetary gold and
foreign assets of the Reserve Bank, besides SDR holdings. The Reserve Bank,
as the custodian of the country’s foreign ex- change reserves, is vested with the
duty of managing the investment and utilisation of the reserves in the , most
advantageous manger.

Function # 6. Miscellaneous Functions:

The RBI collects, collates and publishes all monetary and banking data
regularly in its weekly statements in the RBI Bulletin (monthly) and in the
Report on Currency and Finance (annually).

Function # 7. Promotional and Developmental Functions:

Apart from these traditional function, the RBI performs various activities of
promotional and developmental nature. It attempts to mobilise savings for
productive purposes. This is done in various ways. For instance, RBI has helped
a lot in building the huge financial infrastructure that we see now.

‘This consists of such institutions as the Deposit Insurance Corporation (to

safeguard the interests of depositors against bank failure), the Agricultural Re-
finance and Development Corporation (to meet the needs of agriculturists),
IFCI, SFCs, IDBI, UTI (to meet the long and medium term needs of industry),
etc.

As for cooperative credit movement, the RBI’s performance in really

commendable. This has resulted in curbing the activities of moneylenders in the
rural economy.

Thus, it is clear that RBI is not a typical Central Bank as is traditionally

understood. It is something more than a Central Bank. It regulates not only
currency and credit but aids the development of the Indian economy by
conducting various types of promotional activities. As such, in RBI we see
many activities combined into one.

Short notes on:

A)NPA(non-performing assets):

Nonperforming assets are typically listed on the balance sheets of banks. Banks
usually categorize loans as nonperforming after 90 days of nonpayment of
interest or principal, which can occur during the term of the loan or at maturity.
For example, if a company with a $10 million loan with interest-only payments
of $50,000 per month fails to make a payment for three consecutive months, the
lender may be required to categorize the loan as nonperforming to meet
regulatory requirements. A loan can also be categorized as nonperforming if a
company makes all interest payments but cannot repay the principal at maturity.

Types of Nonperforming Assets

Although the most common nonperforming assets are term loans, there are six
other ways loans and advances are NPAs:

 Overdraft and cash credit (OD/CC) accounts left out-of-order for more
than 90 days
  Agricultural advances whose interest or principal installment payments
remain overdue for two crop/harvest seasons for short duration crops or
overdue one crop season for long duration crops
 Bill overdue for more than 90 days for bills purchased and discounted
 Expected payment is overdue for more than 90 days in respect of other
accounts
 Non-submission of stock statements for 3 consecutive quarters in case of
cash-credit facility
 No activity in the cash credit, overdraft, EPC, or PCFC account for more
than 91 days

Banks are required to classify nonperforming assets in one of three categories

according to how long the asset has been non-performing: sub-standard assets,
doubtful assets, and loss assets. A sub-standard asset is an asset classified as an
NPA for less than 12 months. A doubtful asset is an asset that has been non-
performing for more than 12 months. Loss assets are assets with losses
identified by the bank, auditor, or inspector and have not been fully written off.

B) Peer-to-Peer lending:
Peer-to-peer (P2P) lending is a method of debt financing that enables individuals to borrow
and lend money without the use of an official financial institution as an intermediary. Peer-to-
peer lending removes the middleman from the process, but it also involves more time, effort
and risk than the general brick-and-mortar lending scenarios. P2P lending is also known as
social lending or crowdlending.

Traditionally, individuals and small businesses who want a loan usually apply for one through
the bank. The bank would run extensive financial checks on the applicant’s credit history to
determine if the entity would qualify for a loan and if yes, determines the interest rate that
will be charged on the loan. Individuals that want to avoid being charged high interest rates
or that would otherwise be rejected for a loan application due to poor credit history, may opt
for an alternative way of borrowing funds – peer-to-peer lending.

With peer-to-peer lending, borrowers take loans from individual investors who are willing to
lend their own money for an agreed interest rate. The profile of a borrower is usually
displayed on a peer-to-peer online platform where investors can assess these profiles to
determine whether they would want to risk lending money to a borrower. A borrower might
receive the full loan amount or only a portion of what he asked for from an investor. In the
case of the latter, the remaining portion of the loan may be funded by one or more investors
in the peer lending marketplace. In peer-to-peer lending, a loan may have multiple sources
and monthly repayment has to be made to each of the individual sources.

C) Capital Adeaquacy Ratio:

The reason minimum capital adequacy ratios (CARs) are critical is to make sure that
banks have enough cushion to absorb a reasonable amount of losses before they
become insolvent and consequently lose depositors’ funds. The capital adequacy
ratios ensure the efficiency and stability of a nation’s financial system by lowering the
risk of banks becoming insolvent.

During the process of winding-up, funds belonging to depositors are given a higher
priority than the bank’s capital, so depositors can only lose their savings if a bank
registers a loss exceeding the amount of capital it possesses. Thus the higher the
bank’s capital adequacy ratio, the higher the degree of protection of depositor's assets.

Tier One and Tier Two Capital

Tier one capital is the capital that is permanently and easily available to cushion losses
suffered by a bank without it being required to stop operating. A good example of a
bank’s tier one capital is its ordinary share capital.

Tier two capital is the one that cushions losses in case the bank is winding up, so it
provides a lesser degree of protection to depositors and creditors. It is used to absorb
losses if a bank loses all its tier one capital.

D) MCLR:

The marginal cost of funds based lending rate (MCLR) refers to the minimum
interest rate of a bank below which it cannot lend, except in some cases allowed
by the RBI. It is an internal benchmark or reference rate for the bank. MCLR
actually describes the method by which the minimum interest rate for loans is
determined by a bank - on the basis of marginal cost or the additional or
incremental cost of arranging one more rupee to the prospective borrower.
The MCLR methodology for fixing interest rates for advances was introduced
by the Reserve Bank of India with effect from April 1, 2016. This new
methodology replaces the base rate system introduced in July 2010. In other
words, all rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016
would be priced with reference to the Marginal Cost of Funds based Lending
Rate (MCLR) which will be the internal benchmark (means a reference rate
determined internally by the bank) for such purposes.

7) WHAT IS TRADE?
Trade is a basic economic concept involving the buying and selling of goods
and services, with compensation paid by a buyer to a seller, or the exchange of
goods or services between parties. The most common medium of exchange for
these transactions is money, but trade may also be executed with the exchange
of goods or services between both parties, referred to as a barter, or payment
with virtual currency, the most popular of which is bitcoin.

Trade refers to transactions ranging in complexity from the exchange of

baseball cards between collectors to multinational policies setting protocols for
imports and exports between countries. Regardless of the complexity of the
transaction, trading is facilitated through three primary types of exchanges.
Trades are executed with the payment of sovereign currency, the exchange of
goods and services, or payment with a virtual currency.

8) 4 METHODS OF PAYMENTS:

Cash-in-Advance
With cash-in-advance payment terms, an exporter can avoid credit risk because
payment is received before the ownership of the goods is transferred. For
international sales, wire transfers and credit cards are the most commonly used
cash-in-advance options available to exporters. With the advancement of the
Internet, escrow services are becoming another cash-in-advance option for small
export transactions. However, requiring payment in advance is the least attractive
option for the buyer, because it creates unfavorable cash flow. Foreign buyers are
also concerned that the goods may not be sent if payment is made in advance.
Thus, exporters who insist on this payment method as their sole manner of doing
business may lose to competitors who offer more attractive payment terms.

Letters of Credit
Letters of credit (LCs) are one of the most secure instruments available to
international traders. An LC is a commitment by a bank on behalf of the buyer that
payment will be made to the exporter, provided that the terms and conditions stated
in the LC have been met, as verified through the presentation of all required
documents. The buyer establishes credit and pays his or her bank to render this
service. An LC is useful when reliable credit information about a foreign buyer is
difficult to obtain, but the exporter is satisfied with the creditworthiness of the
buyer’s foreign bank. An LC also protects the buyer since no payment obligation
arises until the goods have been shipped as promised.

DOCUMENTARY COLLECTIONS:

A documentary collection (D/C) is a transaction whereby the exporter entrusts the

collection of the payment for a sale to its bank (remitting bank), which sends the
documents that its buyer needs to the importer’s bank (collecting bank), with
instructions to release the documents to the buyer for payment. Funds are received
from the importer and remitted to the exporter through the banks involved in the
collection in exchange for those documents. D/Cs involve using a draft that
requires the importer to pay the face amount either at sight (document against
payment) or on a specified date (document against acceptance). The collection
letter gives instructions that specify the documents required for the transfer of title
to the goods. Although banks do act as facilitators for their clients, D/Cs offer no
verification process and limited recourse in the event of non-payment. D/Cs are
generally less expensive than LCs.

OPEN ACCOUNT

An open account transaction is a sale where the goods are shipped and delivered
before payment is due, which in international sales is typically in 30, 60 or 90
days. Obviously, this is one of the most advantageous options to the importer in
terms of cash flow and cost, but it is consequently one of the highest risk options
for an exporter. Because of intense competition in export markets, foreign buyers
often press exporters for open account terms since the extension of credit by the
seller to the buyer is more common abroad. Therefore, exporters who are reluctant
to extend credit may lose a sale to their competitors. Exporters can offer
competitive open account terms while substantially mitigating the risk of non-
payment by using one or more of the appropriate trade finance techniques covered
later in this Guide. When offering open account terms, the exporter can seek extra
protection using export credit insurance.

9) CORE ELEMENTS OF KYC POLICY:

A) ACCEPTANCE POLICY

An open account transaction is a sale where the goods are shipped and delivered
before payment is due, which in international sales is typically in 30, 60 or 90
days. Obviously, this is one of the most advantageous options to the importer in
terms of cash flow and cost, but it is consequently one of the highest risk options
for an exporter. Because of intense competition in export markets, foreign buyers
often press exporters for open account terms since the extension of credit by the
seller to the buyer is more common abroad. Therefore, exporters who are reluctant
to extend credit may lose a sale to their competitors. Exporters can offer
competitive open account terms while substantially mitigating the risk of non-
payment by using one or more of the appropriate trade finance techniques covered
later in this Guide. When offering open account terms, the exporter can seek extra
protection using export credit insurance.

B) CUSTOMER IDENTIFICATION PROCEDURE:

 The policy approved by the board of banks must clearly spell out the Customer Identification
Procedure to be carried out at different stages i.e. while establishing a banking relationship;
carrying out a financial transaction or when the bank has a doubt about the authenticity /
veracity or the adequacy of the previously obtained customer identification data. Customer
identification means identifying the customer and verifying his/ her individuality by using
reliable, independent source documents, data or information. Banks need to obtain adequate
information necessary to establish, to their satisfaction, the identity of each new customer,
whether regular or irregular, and the purpose of the intended nature of banking relationship.
Being satisfied means that the bank should be able to satisfy the competent authorities that
due diligence was observed based on the risk profile of the customer in compliance with the
extant guidelines in place. Such risk-based approach is considered necessary to avoid
inconsistent cost to banks and a burdensome regime for the customers. In addition to risk
perception, the nature of information / documents necessary would also depend on the type of
customer (individual, corporate etc.) For customers that are natural persons, the banks must
obtain sufficient identification data to verify the identity of the customer, his address /
location, and also his recent photograph. For customers that are legal persons or entities, the
bank should :

 Verify the legal status of the legal person or entity through proper and significant documents
 Verify that any person declaring to act on behalf of the legal person / entity is so authorized
and identify and verify the identity of that person
 To understand the ownership and control structure of the customer and find out who are the
natural persons who ultimately control the legal person.

C) MONITORING OF TRANSACTIONS:

Transaction Monitoring can be defined as “A formal process for identifying suspicious

transactions and a procedure for reporting the same internally”. Monitoring means analysis of
a customer’s transactions to detect whether the transactions appear to be suspicious from an
AML or CFT perspective.

Approach of Banks for Monitoring of Transactions

 Banks should pay special attention to all complex, unusually large transactions and all
unusual patterns which have no apparent economic or visible lawful purpose.
 Banks may prescribe threshold limits for a particular category of accounts and pay
particular attention to the transactions which exceed these limits.
 Transactions that involve large amounts of cash inconsistent with the normal and
expected activity of the customer should particularly attract the attention of the bank.
 Very high account turnover inconsistent with the size of the balance maintained may
indicate that funds are being ‘washed’ through the account.
 Every bank should set key indicators for such accounts, taking note of the background
of the customer, such as the country of origin, sources of funds, the type of
transactions involved and other risk factors.
 Banks should put in place a system of periodical review of risk categorization of
accounts and the need for applying enhanced due diligence measures. Such review of
risk categorization of customers should be carried out at a periodicity of not less than
once in six months.
D) RISK MANAGEMENT:

The adoption of effective know-your-customer (KYC) standards is an essential part of banks' risk
management practices. Banks with inadequate KYC risk management programmes may be subject to
significant risks, especially legal and reputational risk. Sound KYC policies and procedures not only
contribute to a bank's overall safety and soundness, they also protect the integrity of the banking
system by reducing the likelihood of banks becoming vehicles for money laundering, terrorist
financing and other unlawful activities. Recent initiatives to reinforce actions against terrorism in
particular have underlined the importance of banks' ability to monitor their customers wherever they
conduct business.

Consolidated KYC Risk Management means an established centralised process for coordinating and
promulgating policies and procedures on a groupwide basis, as well as robust arrangements for the
sharing of information within the group. Policies and procedures should be designed not merely to
comply strictly with all relevant laws and regulations, but more broadly to identify, monitor and
mitigate reputational, operational, legal and concentration risks. Similar to the approach to
consolidated credit, market and operational risk, effective control of consolidated KYC risk requires
banks to coordinate their risk management activities on a groupwide basis across the head office and
all branches and subsidiaries.

Jurisdictions should facilitate consolidated KYC risk management by providing an appropriate legal
framework which allows the cross-border sharing of information. Legal restrictions that impede
effective consolidated KYC risk management processes should be removed.

KYC

Know Your Customer (KYC) is a standard due diligence process used by

investment companies to assess investors they are conducting business with. Apart
from being a legal and regulatory requirement, KYC is a good business practice as
well to better understand investment objectives and suitability, and reduce risk
from suspicious activities.
So, what is KYC? In a nutshell, it is the process of identifying who your investors
are, verifying the sources of the client's funds (if they are legitimate or not), and
requiring detailed anti-money laundering (AML) information from the clients.
Getting the detailed information about your customer protects both parties in a
business transaction and relationship. KYC serves an important purpose for
providing superior service, preventing liability, and avoiding association with
money laundering, and other illegitimate money frauds.

The importance of KYC

KYC is a standard business practice globally in the era of regulation within the
investment industry. It’s a requirement from industry regulations to protect all
stakeholders within the industry and its in the best business interest of any
investment firm or investor, especially if there is a lot of money at stake.
If a business or issuer complies with Know Your Customer policies, they will
reduce the financial risks of their business arrangements with particular clients.
Knowing where your clients are obtaining their income, gauging their capability of
investing in your market, and obtaining their complete financial portfolio and
background are aspects of KYC requirements. Those checks can also be vital risk
management strategies to avoid getting entangled in business relationships with
potential clients who have participated in shady dealings or other illegal activities.
The importance of KYC is evident even from the investor's point of view.
Although these rigorous checks can be a burdensome process for the investor, they
create a secure and trustworthy environment to enable financial or investment
activities with the company. The clients will feel they are working with a
legitimate company and educated in the understanding of whether they are ready to
invest in your market or not. Building trust between the parties in the business
relationship is the key to success, and everyone at Katipult is devoted to that goal.

10) MONEY LAUNDERING:

Money laundering is a term used to describe a scheme in which criminals try to

disguise the identity, original ownership, and destination of money that they have
obtained through criminal conduct. The laundering is done with the intention of
making it seem that the proceeds have come from a legitimate source. A simpler
definition of money laundering would be a series of financial transactions that are
intended to transform ill-gotten gains into legitimate money or other assets.
When money is obtained from criminal acts such as drug trafficking or illegal
gambling, the money is considered “dirty” in that it may seem suspicious if
deposited directly into a bank or other financial institution. Because the money’s
owner needs to create financial records ostensibly showing where the money came
from, the money must be “cleaned,” by running it through a number of legitimate
businesses before depositing it, hence the term “money laundering.” Because the
act is specifically used to hide illegally obtained money, it too is unlawful.
Different jurisdictions, both foreign and domestic, have their own specific
definitions of what acts constitute the crime of money laundering. Which
enforcement agency has the authority to investigate money laundering, as well as
punishments for the crime, are outlined in the statutes of each jurisdiction.
It has been estimated that at least $300 billion is laundered each year in the United
States alone. According to a 2009 study published by the United States Sentencing
Commission, more than 81,000 people are convicted of money laundering on some
level each year in the United States.

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