Welcome to JAIIB Classes

PRINCIPLES OF BANKING

FUNCTIONS OF BANKS

BANKER-CUSTOMERRELATIONSHIP

• DEBTOR-CREDITOR

• CREDITOR-DEBTOR

• AGENT-PRINCIPAL

• LESSOR-LESSEE

• BAILEE-BAILOR

KNOW YOUR CUSTOMER- KYC

• Know your customer norms are applicableto all customer accounts. It deals with notonly to identify the customer but alsoto understand the activities of the customer,to ensure that the operations in the customeraccount/s is/are for genuine purpose

KYC RULESThe main rules are –1. Customer identification 2. Ceiling and monitoring of cash transactions3. Internal Control Systems4. Prevention of Terrorism Finance5. Identification and Reporting of Suspicious Transactions6. Adherence to Foreign Contribution Regulation Act

(FCRA), 19767. Record Keeping8. Training of staff and management

BANKER - CUSTOMER RELATIONSHIP

Deposit Accounts

C U R R E N T

S A V IN G S

D E M A N D

F IX E D

C U M U L A TIV E

R E C U R R IN G

TE R M

C E R TIF IC A TE O F D E P O S IT

F L E X I-D E P O S IT

O TH E R S

Indian Banking - Significant events 1

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

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

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

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

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

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

Indian Banking - Significant events 1

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

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

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

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

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

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

Progress of banking in India

• In the liberalised, privatised and globalised environment, banks opeating in India have diversified their banking activities by offering Para Banking facilities like– Merchant banking/Mutual funds– ATMs/Credit Cards/Internet banking– Venture capital funds– Factoring– Bancassurance

Rupee accounts

Non-residentOrdinary account

(NRO)

Non-residentExternal account

(NRE)

Non-Resident Accounts - 1

Foreign Currency Non-residentDeposit Accounts –FCNR (B)

• FCNR (B) accounts • NRIs,PIOs,residing outside India can open FCNR (B) accounts• FCNR (B) accounts are maintained as fixed deposits in certain

designated currencies• The designated currencies are:• US$, GBP, Japanese Yen, Euro, Cad$, Aus $• Maintained in Banks in India in the above mentioned foreign currencies and interest is also earned in

such foreign currencies• Repatriation of funds (principal, interest) is allowed

Loan Products – Fund Based

BILLS FINANCE

TERMFINANCE

RETAIL FINANCE

OVERDRAFT

CASH CREDIT

LOANS&

ADVANCES

Loan Products –Non Fund Based

Letters of Credit

Bank Guarantee

Co-Acceptance Of

Bills

SERVICES OFFERED BY BANKSOver and above the traditional role of a bank to take

deposits and offer credit facilities Banks today offer the following services-

1. Internet Banking2. Telephone Banking3. Mobile Banking4. On-line trading in shares5. Bills payment on- line6. Booking air/ railway tickets on- line7. Bills payment on-line8. Cash Management Services

SERVICES OFFERED BY BANKS - contd

9 On-line remittance facility-RTGS/NEFT etc10 Sale of third party products – Mutual fund

schemes/insurance 11Safe Custody12 Safe deposit vault13 Depository Services14 tax payments on-line15 Counseling Services

CASH MANAGEMENT SERVICES• In today's competitive market place, effective

management of cash flows can make the difference between success and failure

• The cash management product usually offers corporate customers fast track cheque collections, speedier release of funds and profitable funds management, at a reasonable cost

• Payments received from buyers and made to suppliers of a corporate client are efficiently processed to optimise cash flow position and to ensure the effective management of business' operating funds

• The flow of receivables and payables can also usually be seen on-line.

DEPOSITORY SERVICES• With a view to adding value to banking services

and making available the numerous benefits of depository system to clients, banks in India offer Demat services through either Depositories viz.National Securities Depository Limited (NSDL) or Central Depository Services (India) Ltd. (CDSL) or both by becoming a sub-participant.

• Services offered are usually at par with those offered by specialized organizations like Integrated etc

COUNSELLING SERVICES• The following are the usual objectives of counselling

services provided by some banks. • Advising on gaining access to structured financial system

including banking • Creating awareness among the public about financial

management • Counseling people who are struggling to meet the

repayment obligations and helping debt resolution • Helping in rehabilitation of borrowers in friendly and

timely guidance not only to mitigate the immediate stress of the trapped individuals and their households, but also to help to infuse confidence in others who are in distress.

POWER OF ATTORNEY• Power of attorney (POA) also called letter of attorney is an

authorization to act on someone else's behalf in a legal or business matter. The person authorizing the other to act is the principal, granter or donor (of the power), and the one authorized to act is the agent

• A power of attorney may be special or limited to one specified act or type of act, or it may be general, and whatever it defines as its scope is what a court will enforce as being its scope. It may also be limited as to time.

• The POA is usually stamped and notarised• The POA can be cancelled or amended by the donor at any

time.However is responsible for all acts till he gives notice

MANDATE

• Usually an unstamped letter• Addressed to a particular bank• Authorises a third party to act on his/her

behalf• Issued for short/ temporary period• Not acceptable from limited companies/

cooperative societies

CHARGES

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

LIEN & SET OFF• A lien is the right of a creditor in possession of goods,

securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the contrary. It is a right to retain possession of specific goods or securities or other movables of which the ownership vests in some other person and the possession can be retained till the owner discharges the debt or obligation to the possessor.

• The right of set off is also known as the right of combination of accounts .A bank has a right to set off a debt owing to a customer against a debt due from him.

• Both the claim and the set-off must be mutual debts, due from and to the same parties, under the same right A claim by a person in a representative capacity cannot be set off against a personal claim

Garnishee Order• A garnishee order is an attachment order issued by a court

• Example : A borrows money from B .A fails to repay the loan. B files a suit under Civil Procedure Code and the Court issues

a decree and attaches the funds in A’s bank account with Bank XYZ Ltd.

• The order issued by the Court on bank XYZ Ltd is called a“Garnishee Order”

• B is called the judgement creditor. A is the Judgement debtor. Bank XYZ Ltd is Judgement debtor’s debtor

• It has 2 parts ‘order nisi’ , and ‘order absolute’

CHEQUES

OPEN

CROSSED

ORDER

BEARER

NEGOTIABLE INSTRUMENTSPaying Banker:

Payment inDue

Course

ApparentTenor In good faith Without

Negligence

NEGOTIABLE INSTRUMENTS

BANKER’S DUTIES&RESPONSIBILITIESC0LLECTINGBANKERCOLLECTION OFCHEQUES

HOLDER INDUE

COURSE

CONSIDERATION TITLE BEFOREMATURITY

Six Cs

• Character• Capital• Capacity• Collateral• Condition• Compliance

Working Capital Cycle

Cash

Raw material

Semi finished goodsFinished goods

sales

Bills receivables

FUND BASED FINANCE

BILLS FINANCE

TERMFINANCE

RETAIL FINANCE

OVERDRAFT

CASH CREDIT

LOANS&

ADVANCES

Non-Fund Based Finance

BANKGUARANTEE

CO-ACCEPTANCEOF BILLS

LETTERS OF CREDIT

Credit Management in Banks

Capital adequacynorms

Prudentialnorms

Credit appraisalsystem

Exposure norms

Risks-ALM