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JAIIB Principles and Practices of
Banking

Financial System in India
Financial Sector consists of three main segments viz.,
1) Financial institutions -banks, mutual funds, insurance companies
2) Financial markets -money market,
debt market, capital market, Forex market
3) Financial products -loans, deposits, bonds, equities
Financial Sector - Regulators
Regulators
Reserve Bank of
India
(RBI)
Securities Exchange
Board of India
(SEBI)
Insurance Regulatory
and Development
Authority
(IRDA)
Banks
Capital Markets/
Mutual Funds
Insurance
Companies
Banking in India
Legal frame work
of
Banks
Banking Regulation
Act,1949

Reserve Bank of India
Act,1934

Banking in India
- Banking in India is governed by BR Act,1949 and RBI Act,1934
- Banking in India is controlled/monitored RBI and Govt of India
- The controls for different banks are different based on whether the bank/s is/are

a) Statutory corporation
b) A banking company
c) A cooperative society

Banking Regulation Act,1949 (BR Act)-1
- BR Act covers banking companies and cooperative banks, with certain modifications.
- BR Act is not applicable to
a) primary agricultural credit societies
b) Land development banks
- BR Act allows RBI (Sec 22) to issue license for banks

Banking Regulation Act,1949 (BR Act)-2
Regulation

Control over
management
Penalities

Suspension
&
Winding up
Reserve Bank of India Act,1934(RBI Act)-1
- RBI Act was enacted to constitute the Reserve Bank of India
- RBI Act has been amended from time to time
- RBI Act deals with the constitution, powers and functions of RBI

Reserve Bank of India Act,1934(RBI Act)-2
RBI Act deals with:

- incorporation, capital management and business of banks
- central banking functions
- financial supervision of banks and financial institutions
- management of Forex/reserves
- control functions : bank rate, audit, accounts
- penalties for violation
Reserve Bank of India - 1
Reserve Bank of India was established in 1935, after the enactment of the
Reserve Bank of India Act 1934 (RBI Act).
Banking Regulation Act,1949 (BR Act)gave wide powers to RBI as regards
to establishment of new banks/mergers and amalgamation of banks,
opening of new branches etc
BR Act,1949 gave RBI powers to regulate, supervise and develop the
banking system in India

Reserve Bank of India 2
CENTRAL BANK
RBI
REGULATOR SUPERVISOR FACILITATOR
Money Market Instruments
Inter bank call money/deposit
Inter bank notice money/deposit
Inter bank term money/deposit
Certificates of Deposit
Commercial Paper
Treasury Bills
Bill rediscounting
Repos
Certificates of Deposit
CDs are short-term borrowings in the form of UPN issued by scheduled
commercial banks and are freely transferable by endorsement and
delivery.
Introduced in 1989
Minimum period 7 days and maximum period one year. FIs are allowed to
issue CDs for a period between 1 year and up to 3 years
Minimum amount is Rs 1,00,000.00
Subject to payment of stamp duty under the Indian Stamp Act, 1899
Issued to individuals, corporations, trusts, funds and associations
Issued at a discount rate freely determined by the market/investors
Commercial Paper
Short-term borrowings by corporates, financial institutions, primary dealers
from the money market
Can be issued in the physical form (Usance Promissory Note) or demat
format
Introduced in 1990
When issued in physical form are negotiable by endorsement and delivery
and hence, highly flexible
Maturity is 7 days to 1 year
Unsecured and backed by credit rating of the issuing company
Issued at discount to the face value
Repos
Repo (repurchase agreement) instruments enable collateralized short-
term borrowing through the selling of debt instruments
A security is sold with an agreement to repurchase it at a pre-determined
date and rate
Reverse repo is a mirror image of repo and reflects the acquisition of a
security with a simultaneous commitment to resell

INDIAN CAPITAL MARKET
Indian Capital Market plays an important role in the economic
development of the country

It provides opportunities for investors to invest in the market and also to
earn attractive rate of return.

It also creates source of funds for the various sectors

National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the
major stock exchanges in India
Securities & Exchange Board of India (SEBI)

SEBI was constituted on April 12/1988, and obtained the statutory powers
in March,1992
SEBIs functions:
To protect the interests of investors
To recognize the business in stock exchanges and other security markets
To supervise and regulate work of intermediaries, such as stock brokers
merchant bankers/custodians/depositories/bankers to the issues

Association of Mutual Funds in India (AMFI)
AMFI is an association as a non profit organization.
AMFI represents mutual funds in India and working for healthy growth of
the Mutual Funds.
AMFI conduct examinations for MF executives as part of their training
activities
Insurance Regulatory & Development Authority
(IRDA)
The regulator for insurance business in India is IRDA.
IRDA was established in 2000
IRDAs functions:
To regulate, promote and ensure orderly growth of the insurance business
and reinsurance business in India
To protect the interests of policy holders

Financial Intermediaries (1)
Mutual Funds- As financial intermediary promote savings and mobilize
funds which are invested in the stock market and bond market

MFs are associations or trusts of public members and assist them in
making investments in the financial instruments of the business/corporate
sector for the mutual benefit of its members.

MFs aims to reduce the risks in investments Mutual funds help their
investors to enhance their value by investing the funds in capital market.

Mutual funds offer various schemes: growth fund, income fund, balanced
fund, sector wise funds, etc.,

Regulated by SEBI
Financial Intermediaries (2)
Merchant banking- Another important financial intermediary which
manages and underwrites new issues, undertake syndication of credit,
advise corporate clients on fund raising

Subject to regulation by SEBI and RBI

SEBI regulates them on issue activity and portfolio management of their
business.

RBI supervises those merchant banks which are subsidiaries or affiliates of
commercial banks
Indian Banking - Significant events 1

Three presidency banks were established in Calcutta (1806) in Bombay
(1840) and in Madras (1843)

In the early part of 20
th
century, on account of the Swadeshi movement a
number of join stock banks were established by Indians like Bank of India,
Bank of Baroda and Central Bank of India.

In 1921 the three presidency banks were merged and the Imperial Bank of
India was created.

During the period 1900 to 1925 many banks failed, and the Government
appointed in 1929 a Central Banking Enquiry Committee to trace the reasons
for the failure of banks.

The Reserve Bank of India Act was passed in 1934 and the RBI came into
existence in 1935 and RBI was nationalized in 1949

The Banking Regulation Act,1949 gave wide powers to RBI to act as the
regulator for banks in India



Indian Banking -Significant events 2

In 1955 State Bank of India became the successor to the Imperial Bank of
India ,under the State Bank of India Act,1955.

In 1959 State Bank of India (Subsidiary Banks) Act was passed to enable
SBI to take over State Associated banks as SBIs subsidiaries

In 1969 the Government of India nationalized 14 major commercial banks
having deposits of Rs.50cr or more

In 1975 Regional Rural Banks were established under RRB Act 1976, which
was preceded by RRB Ordinance in 1975

In 1980 six more commercial banks were nationalized, with a deposit of
Rs.200cr or more




Progress of banking in India
In the liberalized, privatized and globalised environment, banks operating
in India have diversified their banking activities by offering Para Banking
facilities like
Merchant banking/Mutual funds
ATMs/Credit Cards/Internet banking
Venture capital funds
Factoring
Bancassurance
Classification of Banks-1
Central
Bank
RBI
Public Sector
Banks
New Private
Sector
Banks
Old
Private
Sector
Foreign Banks
Co-operative
Banks
Regional
Rural
Banks
Classification of Banks-2
PUBLIC SECTOR
BANKS
STATE BANK OF
INDIA
SBI
SBI ASSOCIATE
BANKS
NATIONALISED
BANKS
Classification of Banks-3
Public Sector Banks = State Bank of India + SBIs associate banks +
Nationalized banks
Private Sector Banks=Indian Private Sector Banks (Old/New generation
banks)+Foreign banks in India
Other Banks=Regional Rural Banks(RRB)
Banking Regulation
Reserve Bank of India Act 1934
Banking Regulation Act 1949

The Governor
4 Dy. Governors
(Appointed by union government)
15 Directors

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

ADR, GDR & Participatory Notes
Multiple Products (Deposits, Credit Cards, Insurance, Investments & Securities)
Multiple channels (Branches, Call Centre, Internet & Kiosk)
Multiple Customer Group

Retail Banking
Fund Based Services (Term lending, working capital financing etc)
Non- Fund based services ( Banking Guarantee, LC, Collection of bills)
Value Added Services
Internet Banking Services
Whole Sale Banking
International Banking

Universal Banking


ADRs

GDRs

Participatory Notes (P Notes)
Primary Market
Secondary Market
Stock Exchanges in India

Role & Functions of Capital Market - SEBI
Functions of Banks - 1
CENTRAL BANK
RBI
REGULATOR SUPERVISOR FACILITATOR
RESERVE BANK OF INDIA
SUPERVISORY & REGLATORY
Issuance of currency notes
Bankers Banker
Lender of the last resort
Credit Control & Monetary Policy
Exchange Control & Forex Management
Funds Transfer
CREDIT CONTROL

QUANTITATIVE CREDIT CONTROL
QUALITATIVE CEDIT CONTROL
CRR & SLR
BANK RATE
OPEN MARKET OPERATIONS
Functions of Banks - 2
Commercial Banks-Core Banking Functions
- Acceptance of deposits from public
- Lending funds to public/corporates
- Investing funds in various opportunities
- Collecting cheques/drafts and other Negotiable Instruments
- Remitting funds

Functions of Banks-3
Commercial Banks Para Banking Services
Providing safe deposit lockers
Acceptance of safe custody items
Acceptance of standing instructions
Offering internet banking facilities
Issuance of credit and other cards
including ATM cards
Offering various products like Mutual funds, insurance products, merchant
banking services
Acting as executors and trustees

Commercial Banks
DEPOSIT PRODUCTS
CERTIFICATE
FLEXI
RECURRING
FIXED
SAVINGS
CURRENT
DEPOSITS
Non-Resident Accounts - 1
Rupee accounts
Non-resident
Ordinary account
(NRO)
Non-resident
External account
(NRE)
Foreign Currency Non-resident
Deposit Accounts FCNR (B)
FCNR (B) accounts
NRIs, PIOs, residing outside India can open FCNR (B) accounts
FCNR (B) accounts are maintained as fixed deposits in certain designated
currencies
The designated currencies are:
US$, GBP, Japanese Yen, Euro, Cad$, Aus $
Maintained in Banks in India in the above
mentioned foreign currencies and interest is also earned in such foreign
currencies
Repatriation of funds (principal, interest) is allowed



Loan Products Fund Based
BILLS
FINANCE
TERM
FINANCE
RETAIL
FINANCE

OVERDRAFT
CASH CREDIT
LOANS
&
ADVANCES
Loan Products Non Fund Based
Letters of
Credit
Bank Guarantee
Co-Acceptance
Of
Bills
Know Your Customer (KYC) -1
KYC: Know Your Customer
Know your customer (KYC) norms are applicable to all types of customer
a/cs.
It deals with not only to identify the customer but also to understand the
activities of the customer, and to ensure that the operations in the
customer account/s is/are for genuine purpose
Know Your Customer (KYC) -2
Application of KYC norms have become important due to various reasons.
In view of many issues on account of drugs smuggling, money laundering,
terrorist activities, arms dealing, etc.,

Know Your Customer (KYC) -3
Customer
Acceptance
Policy
Monitoring of
Transactions
Risk Management
Customer
Identification
Procedure
Bank Customers - 1
Power of
Attorney
Holders
Executors/Trustees
Illiterate
Perons
Minors
Joint account
hoders
Individuals
Bank Customers
Bank Customers - 2
Sole
Proprietor
Clubs/
Socities
Coproates
Hindu
Undivided
Family
Partnership

BANKER-CUSTOMER RELATIONSHIP
DEBTOR-CREDITOR
CREDITOR-DEBTOR
AGENT-PRINCIPAL
LESSOR-LESSEE
BAILEE-BAILOR
CHEQUES
OPEN
CROSSED
ORDER
BEARER
NEGOTIABLE INSTRUMENTS
Paying Banker:
Payment in
Due
Course
Apparent
Tenor
In good faith
Without
Negligence
NEGOTIABLE
INSTRUMENTS
BANKERS DUTIES
&
RESPONSIBILITIES
C0LLECTING
BANKER
COLLECTION OF
CHEQUES

HOLDER IN
DUE
COURSE
CONSIDERATION

TITLE
BEFORE
MATURITY
Six Cs
Character
Capital
Capacity
Collateral
Condition
Compliance

Working Capital Cycle
Cash
Raw material
Semi finished goods Finished goods
sales
Bills receivables
CHARGES
HYPOTHECATION
PLEDGE
MORTGAGE
ASSIGNMENT
LIEN
SET OFF
Risk Management
Credit
Risk
Liquidity
Risk
Operations
Risk
Price
Risk
Interest Rate
Risk
SRFAESI Act,2002
- Securitisation and Reconstruction of
Financial Assets and Enforcement of
Security Interest Act (SRFAESI) was
enacted in 2002
_ Securitisation Company/Reconstruction
Company (SCRC) can finance the
acquistion from own resources or rise
sources from Qualified Institutional
Buyers (QIBs)
SRFAESI Act,2002
Enforcement of
Security interest
Transfer of NPA
Legal framework
Priority Sector 1
Priority Sector
Primay Secondary Teritary
Priority Sector 2
Primary Sector
Agriculture Allied Activities
Direct Indirect
Priority Sector 3
Secondary Sector
SSI/SME SSSBE
Priority Sector 4
Tertiary Sector
Small road/water
Transport operator
Small business/businee
enterprises
Professional/self
employed
Educational loans
Housing finance
Others
Small & Medium Enterprises (SMEs)
SMEs are classified based on Small & Medium
Enterprises Development Act,2006
SMEs are divided into micro,small & medium sized
entities.
SMEs are classified based on two categories
viz., manufacturing units and service companies.
In case of manufacturing units investments
in plant and machinery and for service companies
investments in equipment are
considered for classification as SMEs
Credit Management in Banks
Capital adequacy
norms
Prudential
norms
Credit appraisal
system
Exposure
norms
Risks-ALM
Documentation 1
- Loan documents are classified as
primary and secondary
- Documents are obtained based on the
type of credit facility/constitution of the borrower/nature of
securities offered by the borrowers
- Documents should have a clear title
and can be valid to be enforced in a
court of law
- Wherever required documents need to be
stamped appropriately
- Documents should be properly filled up and duly
executed by authorised persons.
Documentation 2
Documentary evidence as per Sec 61
of Evidence Act :
a) Primary: original documents needs to
be produced for inspection of court
b) Secondary:
- certified copies
- copies made from or compared with
original
E banking
E Banking
Credit
Cards
Internet
Banking
Core
Banking
Solutions
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