Banking Fundamentals Training
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Transcript of Banking Fundamentals Training
Banking Fundamentals Training
SESSION-1
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INTRODUCTION TO BANKING
Economic Activities of a Country are classified as under:
PRIMARY SECTOR : Direct & Indirect Agriculture Activities
e.g Animal Husbandry, Fishing etc
SECONDARY SECTOR: Manufacturing,Industrial & Core Activities
e.g Processing, Mining etc
TERTIARY SECTOR: All type of services
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INTRODUCTION TO BANKING
Service Sector includes variety of activities like:
Shipping, Airlines, Surface Transport etc
Trading, both inland and foreign trade
Financial sector
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Financial sector consists of:
Banking,
Financial Institutions,
NBFCs
Insurance companies etc.
INTRODUCTION TO BANKING
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Items which bear the word “bank”
Commercial Banks Scheduled Banks Cooperative Banks Merchant Banks Investment Banks NBFCs RBI RRB
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Items which bear the word “bank” (contd)
World Bank, ADB IDBI Exim Bank Residuary Non Banking Companies NABARD NHB Vote Banks
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DEFINITION OF BANKING
INTRODUCTION TO BANKING
Banking is accepting, for the purpose of lending and investment, of deposits of money from the public, repayable on demand, or otherwise and withdrawable by cheque, draft, order or otherwise.
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CENTRAL BANK
Bank in a country which is vested with the responsibility of maintaining the value of the currency, regulation of the banking sector etc.
In India, RBI (Reserve Bank of India) is vested with the responsibility of a Central Bank
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RESERVE BANK OF INDIA
RBI was established in 1935 as a private sector bank and later nationalised in 1949.
It plays the following important functions:Bank of Issue Banker to Government Bankers’ Bank and Lender of the Last ResortController of Credit Custodian of Foreign Exchange Reserves Promotional Functions
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RESERVE BANK
Commercial Banks Other Banks
Public Sector Private Sector
SBI and Associate Bank
Nationalized Banks
RRBs Cooperative Banks State Apex Banks
EXIM Bank
NABARD, NHB
IDBI, ICICI, IFCI
INDIAN BANKING STRUCTURE
Indian Banks Foreign Banks
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LAWS & REGULATIONS GOVERNING BANKS
Like any business, Banking is governed by many laws and regulations. In fact, the control on banking system is more stringent, as any destabilisation of the financial system will affect the entire business activities and the economy. The important Acts governing the banking system are
Banking Regulation Act
Reserve Bank of India Act
Companies Act
Negotiable Instruments Act
Foreign Exchange Regulation Act.
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BANKING BUSINESS
Sec. 6 of Banking Regulation Act enumerates the different types of business which a banking company can transact. These are:
• The borrowing of money• The lending of money with or without security• The drawing, making, discounting, collecting etc., of
bills of exchange, promissory notes etc.,• The buying and selling of foreign exchange • The buying, selling, underwriting of shares etc.,
Continued
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Collection, transmission of monies Acting as agent of the Government, Local Authority, etc., Issuance of Guarantees, indemnities etc., Acting as executor, trustee etc. , Acquiring any property which may form the security for
any loan advanced by the Bank Such other business which the Government may notify
BANKING BUSINESS
Recently RBI has notified that Banks can engage directly in the
Business of factoring, leasing and hire- purchase.
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Principal – Accepting deposits, granting loans and advances
Ancillary – Clearing, Discounting of bills and cheques, collection of cheques and bills, remittances, SDVs, Issue of documentary credits, guarantees
New Roles – Credit Cards, Project Advisory, Mutual Funds, Insurance, Factoring, Leasing Hire Purchase
BANKING FUNCTIONS
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Banker Customer Relationships
Debtor- Creditor (customer lends) Creditor – Debtor (Bank lends) Bank as trustee Bailee-bailor relationship Agent Principal relationship Lessor and lessee Bank as a consultant Trustee and beneficiary
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Structure of various banks
Commercial Banks – established either as a cooperative or as a company.
If the bank’s name appears in the Schedule 1 to BR Act, it is called a scheduled bank.
Merchant/Investment Banks – only fee based activities. NABARD and NHB – apex bodies for regulation and
refinance Exim Banks – for promoting trade
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Structure of various banks (cont’d)
NBFCs, RNBCs – don’t need banking license, don’t participate in money creation process. But collect deposits.
World bank, ADB, etc. Post Office Savings Scheme RRBs – Act in 1975. Equity shared by Central Govt, State Govt, Nationalised
Bank Governed by BR Act, Companies Act, RRB Act
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Commercial Banking Structure in India
RBI SBI and associate banks Nationalised Banks Old Private Sector Banks New Private Sector Banks Cooperative Banks Foreign Banks
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History of nationalisation of banks
14 banks nationalised in 1969 6 banks nationalised in 1980 New Bank of India merged with PNB. Hence only 19
nationalised banks today.
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New Developments
Narasimhan Committee recommendations Abolition of BSRB Mergers and acquisitions
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Development Financial Institutions
IFCI IDBI SFCs IRBI SIDBI Recommendation of Narasimhan Committee – DFIs
should be converted to commercial banks.
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Cooperative Banking in India
Acts of 1904 and 1912 Apex Banks (State Cooperative Bank) Central Cooperative Bank (District Level) Primary Credit Societies (Villages, Towns)
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CRR
Not all depositors end up together to withdraw their money. Banks can lend out part of their deposit portfolio, and more (fractional reserve system).
Part of the demand and time liabilities must be retained in order to honour withdrawal requests.
CRR is a cost of money creation process.
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SLR
Part of banks liabilities need to be invested in designated securities. This also helps govt. to raise money for development activities.
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CAR (Capital Adequacy Ratio)
How well can the bank take care of its assets out of its capital.
Can be improved either by infusion of capital, or by weeding out NPAs.
Based on Basle Accord.
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Banks Vs Insurance Companies
Insurance Companies are for risk management. Insurance Companies play no direct role in money
creation process. Bancassurance
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Universal Banking
All financial services available under one roof. Reality? With Internet and without Internet.
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Safety of Bank Deposits
DICGC insurance In theory, upto Rs. 1 Lakh. In practice, without limit
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BASIC BUSINESS OF A BANK
Assets and Liabilities
Services
Agency Functions
Income and Expenditure
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ASSETS AND LIABILITIES
BASIC BUSINESS OF A BANK
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LIABILITY PRODUCTS
• Demand Liabilities• Time Liabilities
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DEMAND LIABILITIES
Savings and Current Accounts• Cheque operated and non cheque operated• Different minimum balance requirements• Different interest rates, methods and frequencies• Number of withdrawals• Dormancy criteria• Modes of operation• Nomination• Service charges• Overdrafts in accounts
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Features Account Number generation Minimum level for posting transactions
Allowed No of withdrawals, Minimum bal for cheque Ledger folio/service charges, Dormancy/inactive criteria, Interest methods,
Charges for account opening, maintenance and closing,statement printing, commitment, etc.,.
DEMAND LIABILITIES
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Features
Cash, clearing and Transfer limits , Abnormal transaction limits,
Interest code (rate), minimum and max interest, days in a year, min interest paid, collected amounts, rounding off parameters, tax related, minimum balance etc.,.
Interest related – Normal P&L account, Interest Payable accounts, parking accounts prior to TDS, default interest frequencies etc.,. Pegging of interest
Some Basic methods applicable for product types are pre-configured.
DEMAND LIABILITIES
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Fixed Deposits Cumulative Deposits Recurring Deposits Cash Certificates Certificate of Deposits Notice Deposits Flexible fixed deposits
TIME LIABILITIES
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FEATURES
Associated with Tenor(Min and max period ) Min and max amount Fixed amount (one time or recurring) Interest pay out along with principal at the end of term or
periodic Renewable fixed number of times or unlimited Pre-terminated Extended Tax on interest Certificate printing/duplicate printing Adjustment of Lien on Maturity Transfer to Overdue on Maturity Deposit Modelling Interest rates depending on tenor and amount slab
TIME LIABILITIES
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ASSET PRODUCTS
Lending is one of the main activities of Bank Lending life cycle
• Pre-sanction• Sanction• Post-sanction
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FEATURES
Sanction Disbursement Interest application Asset classification Paying off Prepayment Rephasement of Loan Asset provisioning Writing off
ASSET PRODUCTS
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SERVICES
Issue of Letter of Credit Issue of Letter of Guarantee Collection of cheques, dividend warrants, interest warrants
etc Collection of trade bills of customers Remittance of funds from one centre to another ( issue of
draft, Mail transfer, Telegraphic Transfer, EFT etc) Miscellaneous Functions Executor and Trustee, underwriting of shares/ debentures
issued by companies Issue of travellers cheques, credit cards etc Lending Bank’s name on bills of exchange Delivery Channels
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AGENCY FUNCTIONS
Safe-keeping services ( safe keeping of valuables, safe deposit locker and safe-keeping of financial instruments).
D-MAT Account
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INCOME IS GENERATED BY WAY OF REVENUES EARNED BY THE BANK
EXPENDITURE IS THE EXPENSES INCURRED BY THE BANK
NET OF INCOME AND EXPENDITURE COMPUTES THE PROFIT OR LOSS OF THE BANK
INCOME AND EXPENDITURE
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INCOME
Banks earn Income by way of :
Interest
Commissions
Charges
Exchange Earnings
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Interest on Cash Credits
Interest on Loans
Interest on Overdrafts
Interest on Bills Purchased
Penal Interest
INTEREST INCOME
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COMMISSION INCOME
Commission on Bills
Commission on Remittances
Commission on Guarantees
Commission on Letter of Credits
Commission on Other Services
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CHARGES INCOME
Service Charges
Processing Charges
Incidental Charges
Commitment Charges
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EXPENDITURE
Banks incur expenditure by way of :
Interest on Deposits
Salaries of staff
Establishment Expenses
Maintenance Expenses
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