Banking Fundamentals Training

Banking Fundamentals Training SESSION-1

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

INTRODUCTION TO BANKING Service Sector includes variety of activities like: Shipping, Airlines, Surface Transport etc Trading, both inland and foreign trade Financial sector

Financial sector consists of: Banking, Financial Institutions, NBFCs Insurance companies etc. INTRODUCTION TO BANKING

Items which bear the word “bank” Commercial Banks Scheduled Banks Cooperative Banks Merchant Banks Investment Banks NBFCs RBI RRB

Items which bear the word “bank” (contd)‏ World Bank, ADB IDBI Exim Bank Residuary Non Banking Companies NABARD NHB Vote Banks

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.

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

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 Resort Controller of Credit Custodian of Foreign Exchange Reserves Promotional Functions

INDIAN BANKING STRUCTURE RESERVE BANK Commercial Banks Other Banks Public Sector Private Sector Cooperative Banks State Apex Banks RRBs SBI and Associate Bank Nationalized Banks EXIM Bank NABARD, NHB IDBI, ICICI, IFCI Indian Banks Foreign Banks

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.

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

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.

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

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

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

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

Commercial Banking Structure in India RBI SBI and associate banks Nationalised Banks Old Private Sector Banks New Private Sector Banks Cooperative Banks Foreign Banks

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.

New Developments Narasimhan Committee recommendations Abolition of BSRB Mergers and acquisitions

Development Financial Institutions IFCI IDBI SFCs IRBI SIDBI Recommendation of Narasimhan Committee – DFIs should be converted to commercial banks.

Cooperative Banking in India Acts of 1904 and 1912 Apex Banks (State Cooperative Bank)‏ Central Cooperative Bank (District Level)‏ Primary Credit Societies (Villages, Towns)‏

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.

SLR Part of banks liabilities need to be invested in designated securities. This also helps govt. to raise money for development activities.

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.

Banks Vs Insurance Companies Insurance Companies are for risk management. Insurance Companies play no direct role in money creation process. Bancassurance

Universal Banking All financial services available under one roof. Reality? With Internet and without Internet.

Safety of Bank Deposits DICGC insurance In theory, upto Rs. 1 Lakh. In practice, without limit

BASIC BUSINESS OF A BANK Assets and Liabilities Services Agency Functions Income and Expenditure

ASSETS AND LIABILITIES BASIC BUSINESS OF A BANK

LIABILITY PRODUCTS Demand Liabilities Time Liabilities

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

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

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

Fixed Deposits Cumulative Deposits Recurring Deposits Cash Certificates Certificate of Deposits Notice Deposits Flexible fixed deposits TIME LIABILITIES

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

ASSET PRODUCTS Lending is one of the main activities of Bank Lending life cycle Pre-sanction Sanction Post-sanction

FEATURES Sanction Disbursement Interest application Asset classification Paying off Prepayment Rephasement of Loan Asset provisioning Writing off ASSET PRODUCTS

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

AGENCY FUNCTIONS Safe-keeping services ( safe keeping of valuables, safe deposit locker and safe-keeping of financial instruments). D-MAT Account

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

INCOME Banks earn Income by way of : Interest Commissions Charges Exchange Earnings

Interest on Cash Credits Interest on Loans Interest on Overdrafts Interest on Bills Purchased Penal Interest INTEREST INCOME

COMMISSION INCOME Commission on Bills Commission on Remittances Commission on Guarantees Commission on Letter of Credits Commission on Other Services

CHARGES INCOME Service Charges Processing Charges Incidental Charges Commitment Charges

EXPENDITURE Banks incur expenditure by way of : Interest on Deposits Salaries of staff Establishment Expenses Maintenance Expenses

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Banking Fundamentals Training