Banking Fundamentals Training SESSION-1. Universal Banking Solution from Infosys Confidential and Proprietary to Infosys Technologies Limited INTRODUCTION

Banking Fundamentals Training

SESSION-1

Universal Banking Solution from InfosysConfidential and Proprietary to Infosys Technologies Limited

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



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.



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


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 ResortController of Credit Custodian of Foreign Exchange Reserves Promotional Functions


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


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


Thank You

Documents

Banking Fundamentals Training SESSION-1. Universal Banking Solution from Infosys Confidential and Proprietary to Infosys Technologies Limited INTRODUCTION