B R ACT, AML & KYC,INVESTMENT AND AUDIT

1. B R ACT,AML & KYC,INVESTMENT AND AUDIT Presented By M C Parekh Faculty Member N. I. C. M. Gandhinagar

2. Spelled out in Section 56 of Part V of B. R. Act, 1949 • RBI regulates and supervises the UCBs vide the various provisions of the Act applicable to UCBs which is mainly relate to banking activities viz. • Requirement of minimum paid-up capital and reserves • Maintenance of cash reserve and liquid assets • Restrictions on loans and advances • Power to inspect the books of accounts • Power to give directions • The power to impose penalty

3. Relevant Provisions of B. R. Act, 1949 (AACS) • Section 56 • RBI exercises its regulatory, supervisory and developmental control on UCBs through the applicability of select provisions of the parent Act of this section from March 1966 • The duality of control was extended automatically to the sector with the extension of the Act to the UCBs

4. Not Authorized under B. R. Act • The following powers are not prescribed to RBI under the B. R. Act, 1949 (AACS): • Registration of cooperative banks • Constitution of Board of UCBs • Removal of directors • Superceding of the Board of Directors • Auditing of the cooperative banks • Enquiry into the affairs of the UCBs • Enquiry into the conduct of the CEO / Chairman / directors of UCBs • Winding up of UCBs

5. Important Sections • Section 5 – Definitions • "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, or otherwise; • "banking company" means any company which transacts the business of banking

6. Important Sections • Section 6 - Forms of business in which banking companies may engage • borrowing, raising, or taking up of money • acting as agents for any Government or local authority or any other person or persons • carrying on of agency business of any description including the clearing • RBI InspObs: Sect-6 not complied-Leasing out entire premises & earning rent

7. Important Sections (Contd.) • Section 8 - Prohibition of trading 􀂉 Notwithstanding anything contained in Sec. 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realization of security given to or held by it

8. Important Sections (Contd.) • Section 9 - Disposal of non-banking assets 􀂉 Notwithstanding anything contained in Sec. 6, no banking company shall hold any immovable property, howsoever acquired, except such as is required for its own use • RBI InspObs: Sec-9 not complied-Holding non banking assest >7 yrs

9. Section 11 Minimum Paid-up Share Capital • Minimum paid-up share capital required for UCBs to carry out banking business is Rs. 1 lakh • RBI Obs:Sect-11 not complied- REV less than Rs. 1 lakh

10. Section 18Cash Reserve • UCBs are required to maintain Cash Reserve Ratio on a daily basis in the following assets • Cash in hand and gold, Current Account balances with State Cooperative Banks and in notified banks including State Bank of India and its subsidiaries, and nationalised banks • The present stipulation is to maintain 3 per cent of the net demand and time liabilities on a daily basis • Obs. Sec-18-Included amount kept in current a/c with HDFC/AXIS bank for calculating CRR amount

11. Section 18 – Cash Reserve (Contd.) • Scheduled UCBs maintain CRR under the provisions of the Section 42 of the RBI Act, 1934 • The present stipulation is to maintain 4 per cent of the Demand and Time Liabilities on an fortnightly average basis • The returns are to be submitted in Form B within 7 days from the reporting fortnight • They are required to maintain a minimum of 70 per cent of CRR balance on a daily basis l • In case of short fall, penalty is levied at 3 per cent above Bank Rate on the amount of shortfall for the first fortnight and at 5 per cent above the Bank Rate for the subsequent fortnights, if the default continues

12. Section 19 Restriction on Holding Shares • No Cooperative Bank shall hold shares in any other cooperative society except to such extent and subject to such conditions as the Reserve Bank may specify in that behalf: • Provided that nothing contained in this section shall apply to— • shares acquired through funds provided by the State Government for that purpose; • in the case of a Central Co-operative Bank, the holding of shares in the State Cooperative Bank to which it is affiliated; Obs: Sec-19 Invested in IFFCO/KRIBHCO more than minimum level required for the representation in case of DCCBs

13. Section 20 Restriction on Loans and Advances • No UCBs can make loans against the security of its own shares • No UCBs are allowed to grant unsecured loans and advances Directors and to any firms where any of the Directors is having interest • Presently there is a complete ban on loans and advances to Directors and their relatives. However, the following categories of director related loans are presently permitted: • Regular employee-related loans to staff directors on the Board of UCBs • Normal loans as applicable to members to the directors on the Boards • of salary earners’ co-operative banks and • Normal employee-related loans to Managing Directors of Multi-State • co-operative banks • Section 21- relates to Rates of interest • Obs Sect-21-Interest rate violation & declaration from staff not taken

14. Section 22 - Licensing of UCBs • No co-operative society can carry on banking business unless it is a co-operative bank and holds a license issued by RBI • Sect-22(3)(a)-Real or exchangebable value of assets should be more than outside liabilities • obs :REV of assets less than Outside liabilities in case of some UCBs • Sect-22(3)(b)-Detrimental to interests of depositors-Poor Internal Checks & Control, Large scale frauds, Violation of Exposure norms, RBI guidelines not followed (KYC, Investment etc.)

15. Section 24Statutory Liquidity Ratio • Every UCB is required to maintain liquid assets in the form of cash, gold or unencumbered approved securities and Fixed Deposits with SCB which should not be less than 25 per cent of the total of its demand and time liabilities (In case of Scheduled UCB-23 %). • Obs : Sect-24 Separately not earmarked ACSF deposits, included SBI FD for calculating SLR amount

16. Section 26- Unclaimed Deposits Deposits not claimed for 10 years should be reported to RBI in the prescribed form, Obs: Sec-26 Unclaimed deposits not reported properly – Inoperative aor Dormant a/cs mixed up with unclaimed deposit

17. Section 27 Returns UCBs are required to submit offsite Returns to RBI/ NABARD –Tier-I UCBS-5 SOSS & Tier II – 8 OSS Returns Obs. Sect 27- Various returns to RBI not properly prepared and submitted in time

18. Section 29 and 31Account and Balance Sheet • At the end of each year UCBs are required to prepare balance-sheet and profit and loss account as on the last day of the year in the forms set out in the Third Schedule or is near thereto • To be submitted within 6 months

19. Section 35 – Inspection of UCBs • RBI inspects basically to verify • if the conditions subject to which the banks have been issued licence to undertake banking business continued to be fulfilled 􀂉 The bank has adequate capital structure (Section 11(1)) and earning prospects • It’s affairs are not conducted in a manner detrimental to the interest of the present and future depositors (section 22(3) (b)) • The general character of the management of the bank is not prejudicial to the public interest and the interest of the depositors. • The bank is in a position to pay its present and future depositors in full as and when the claim arise (section 22(3)(a) of B.R. Act, 1949 (AACS)

20. Supervision of Coops Bank • Coop Banks are supervised on the basis of • On-site Supervision i.e. inspection u/s 35 of BR Act • Off-site Supervision

21. On-site Supervision • To safeguard the interest of depositors • To maintain a sound banking system as per banking laws and regulations • Financial position – Assets & Liabilities

22. Off-site Supervision • Variation in periodicity • To bridge the gap between two inspections off-site monitoring system has been put up to have up to date evaluation of financial position

23. Off-site Supervision • Off-site supervision is done by calling various returns from the banks • These returns are of two types i.e. • Statutory Returns stipulated under either BR Act 1949 or RBI Act 1934 and • Other regulatory returns

24. Statutory Provisions OSS returns are statutory Sec. 27 (2) of BR Act : RBI may at any time direct a co-op bank to furnish it within such time, with such returns and information relating to business or affairs of the bank

25. Statutory Provisions Sec. 46 of BR Act specifies penalties for non submission of or wrong reporting of these returns Returns are signed by the bank’s authorized signatory and countersigned and certified by Chairman or his authorized representative from the top management – usually head of compliance

26. Prudential Concerns of Regulator • Solvency • Liquidity • Capital Adequacy • Asset Quality • Portfolio risk profile • Concentration of exposure • Connected/Related lending

27. Statutory Returns • FORM I • Form II • Form VI • Form VIII • Form IX • Balance Sheet and Profit & Loss A/c

28. Statutory Returns • FORM I • Sec. 24 of BR Act for SCBs / Sec 18 & 24 for other cooperative banks • Statement of demand and time liabilities in India and amount maintained in cash, gold and unencumbered securities • Monthly Statement

29. Statutory Returns • Form II • Unsecured Loans and Advances to Directors – firms in which they have interest • BR Act (AACS) Sec. 20 (2) • Monthly • To be submitted within 10 days after the end of month /Nil statement

30. Statutory Returns • Form VIII • Unclaimed Deposit Accounts not operated for more than 10 years • BR Act (AACS) Sec 26 • Yearly as on 31st December • To be submitted within 15 days from the close of calendar year • Discrepancies observed

31. Statutory Returns • Form IX and Special Form IX • Assets/Liabilities at close of business on last Friday of the month • BR Act (AACS) Sec 27 • Monthly • To be submitted with 10 days of completion of the month

32. Statutory Returns • Balance Sheet and Profit & Loss A/c • BR Act (AACS) Sec 29 and 31 • Yearly as on March 31 (Unaudited) • On or before 30 September (Audited)

33. Regulatory Returns • OSS returns: Statements 1 to 8 • RBI has prescribed the eight Off-site Surveillance returns under the prudential supervisory reporting system (PSRS) • Due Dates : Within 1 month from the close of the quarter/year

34. OSS / SOSS Returns • 8 OSS Returns by Tier II • 5 SOSS (Simplified OSS) Returns by • Tier I UCBs

35. Regulatory Returns

36. SOSS Returns

37. Section 35 A – Power of the Reserve Bank to give Directions • RBI may issue direction to UCBs if it is satisfied that in public interest or in the interest of the banking policy and to prevent the affairs of the bank from being conducted in a manner detrimental to the interest of the depositors and to secure proper management of the bank • RBI derives it powers to order winding up of an UCB or its reconstruction only for the "eligible cooperative bank" stipulated under section 2(gg) of the DICGC Act, 1961

38. Section 55 –Act 18 of 1891 & Act 46 of 1949 to apply in relation to Cooperative Banks • The Bankers' Books Evidence Act, 1891 shall apply in relation to a Co-operative Bank as it applies in relation to a bank as defined in Sec. 2 of that Act • The Banking Companies (Legal Practitioners' Clients' Accounts) Act, 1949, shall apply in relation to a Co-operative Bank as it applies in relation to a banking company as defined in Sec. 2 of that Act.”

39. Aspects to be seen • Whether Investment Policy is in vogue • Contents of the Policy - as per RBI Guidelines • Approval of policy by Board • Formation of Investment Committee • Delegation of Powers • Procedure for obtaining approval

40. Aspects to be seen .. Contd.. • Approved list of brokers • Criteria for empanelment • Verification of creditworthiness, market reputation of brokers - done or not • Annual review of list of approved brokers - done or not • Dealings through brokers - role of broker

41. Aspects to be seen .. Contd.. • Periodical reconciliation of SGL / CGSL balances • Generation of periodical reports and submission to BoD, RBI & NABARD • Submission of half yearly review note to Board • Whether the bank has invested its surplus funds in non-permissible investments

42. Aspects to be seen .. Contd.. • Whether bank has purchased or sold any security from / to broker on principal to principal basis • Volume of business with each broker not to exceed 5 % of the total transactions • Whether the contract note contains name of the counter party, details of settlement, etc

43. Aspects to be seen .. Contd.. • Whether the bank has specified single exposure norms • Whether stop loss limit has been mentioned in the policy • Whether the bank has violated the prudential norms fixed by RBI • Whether functional separation of the front office, mid office and back office exists

44. Front Office • Deals in securities (Buy, Sale, & Repo Deals) • Putting the bids in the auctions of T- bills and other securities • Maintenance of deal records including the tapping of telephonic conversation

45. Mid Office • Risk Monitoring • Risk Measurement • Risk Management • Management Information System • Formulation and review of investment Policy & • guidelines for transactions in securities • Submission of reports to the top executives & Board • Maintenance of data base and updating front office with relevant information

46. Back Office • Inter Bank settlements of funds borrowed or lent • Settlement of Call/ Notice/ Term/ CD/ CP/ REPO/ T-Bills/ NCD • Physical verification of securities • Monitoring brokers’ turnover • Reconciliation of RBI current A/c and constituents, own SGL investment portfolio • Interest collection on NCDs / Bonds • Dividend collection on shares or units • Follow-up on concurrent, statutory and RBI inspection reports

47. Exposure Norms – Coops. • Investments in PSU bonds Not to exceed 10% of the bank's deposits at the end of previous year • Investing FDs with Nationalised banks- total 20 % and individual 5 % of total Deposits

48. Classification of Investments SLR securities to be classified as under: Permanent- HTM- Premium to be amortised Current –HFT/AFS- Make Provisions Non SLR securites- To be provided if market price below b/v

49. Know Your Customer Norms

50. What is money laundering? Money Laundering is called what it is because that perfectly describes what takes place – illegal, or dirty money is put through a cycle of transactions or washed, so that it comes out of the other end as legal, or clean, money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income.