The document discusses the general banking and compliance function. It provides an overview of the banking industry and regulations in India. It describes the key roles of compliance functions in maintaining corporate governance standards and regulatory compliance. It also summarizes the objectives and importance of training programs in helping participants understand banking regulations, practices, and how to optimally implement them.
2. Banking Industry in India is highly regulated and is governed by various
regulations. Indian banks, the dominant financial intermediaries have to abide
by these regulations
The Business Compliance functions play a key role in maintaining and
improving the corporate governance standards within the Bank
To fulfill the core values of the Bank within the regulatory ambit, a detailed
understanding of the „General Banking and Compliance Function‟ is essential.
The training therefore shall help the participants in a two pronged way as under:
Get insights into the regulations functioning and various practices that are
central and specific to banking.
Optimally utilize the training experience for implementing the same in their
respective business areas.
3. Management Perspective
Human capital is increasingly regarded as one of the major drivers
of productivity, economic growth and competitive advantage.
In the increased competitive scenario and complexity of Banking
functions, developing the human resource has become of key
ingredient for survival of Bank.
A learned employee can retain customers and increase business &
market share through proper behavior and good public relations
4. Attitude towards training
How is that related to what I do?
“I‟m good at my job and anyway, I have no
time”
“I suppose that‟s my weekends shot for
months!”
5. Why training?
The sharing of information through training is our
most valuable tool to develop our most valuable
asset…
Employees
6. How do Employees Learn the Best?
“Tell me and I forget, teach me and I
remember, involve me and I learn”
- Benjamin Franklin
7. Objective of this training
Overview of Banking in India
Types of Banking Institutions
Key characteristic of different Banking institutions
General Banking
Definition of Banking and Banking Company
Understanding of accounting framework of Banks
Banking terminologies
Regulatory Framework
Principal enactments
Important Regulatory guidelines
Compliance Function
Significance of Compliance function
Compliance process and procedure
8. Overview of Banking in India
There are four types of Banking institutions in India:
Regional rural banks
Co-operative banks
Development banks (more commonly known as „term lending
institutions)
Commercial banks
9. Overview of Banking in India (contd)
Key characteristic of Banking institutions
Type of Bank Characteristic
Regional Rural Bank They are formed for specifically lending to business like
farmers, agricultural marketing societies, co-operative
farming societies, small entrepreneurs, etc. Each RRB has a
public sector bank as its ‘sponsor bank’. Capital in each bank
is contributed by the Central government , the sponsor bank
and state government in proportion of 50, 35 and 15
percent respectively.
Co-operative bank These are banks in co-operative sector which cater primarily
to the credit needs of the farming and allied sectors. Co-
operative banks include central, state , primary (Urban) co-
operative banks. They operate within a specific geographic
jurisdiction as determined by its bye – laws. They lend
money only to its members or to registered societies
Development Bank These banks were started with objective of providing only
long term finance for development purpose.
10. Overview of Banking in India (contd)
Commercial banks can be divided into types based on their ownership
Public Sector banks
Comprises State Bank of India, its Seven Subsidiaries and nationalised banks.
Majority of Stake in State bank of India is of Government of India
Private Sector banks
Ownership is in private hands. They are three types:
Indian Scheduled Commercial bank other than public sector banks (Scheduled
Commercial bank means banks included in Second Schedule to the Reserve
Bank of India Act 1934)
Non - scheduled banks
Indian branches on banks incorporated outside India, commonly referred to as
„foreign banks‟.
11. General Banking
Definition of Banking
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;
(Section 5(b) of Banking Regulation Act, 1949)
Definition of Banking Company
Banking Company means company which transacts the business of banking in
India.
(Section 5(c) of Banking Regulation Act, 1949)
Two Essential Criteria:
1) Accepting deposits of money from public
2) For purpose of Lending or investment
12. General Banking (contd)
Other forms of business by banking company
In addition to the business of banking, banking company may engage in any one
or more of the forms of business prescribed in Section 6 sub section (1) of
Banking Regulation Act, 1949
Section 6 sub section (2) of Banking Regulation Act, 1949 prohibits a banking
company to engage in any form of business other than those referred to in
Section 6 sub section (1)
Other forms of business includes discounting bills of exchange, issuing letter of
credit, travellers cheque, buying and selling of foreign exchange, acting as agent
for government authority etc.
13. Accounting framework
Sources of Funds Cost
Deposits from Public Interest Payable (Expense)
Borrowings from Other Interest Payable (Expense)
financial institutions / RBI
Dividend Paid (Appropriation of Net
Capital (Owner)
Income)
Application of Funds Income
Lending (Advances) Interest Receivable and Fee (Income)
Investments Dividend / Interest Receivable (Income)
Deposits with other
Interest Receivable (Income)
financial institutions / RBI
Fixed Assets Depreciation (Non cash expenses – utilized for
creation of fixed asset in future)
14. Accounting framework (contd)
Cost / Expenditure
Interest Expense (on Deposits and Borrowings)
Operating Expenses
Employee Salaries
Rent
Printing and Stationery
Administrative expenses
Other Expenses (Directors fees, auditors fees etc)
Income
Interest and Divided Income (on Advances and Investments)
Other Income
Commission and brokerage
Profit on sale of investments & fixed assets
Profit on foreign exchange transactions
Miscellaneous income
15. Accounting framework (contd)
Provisions and Contingencies
Provision on Assets (Standard Assets, Non performing Assets,
restructured assets)
Provision for tax (Income tax, wealth tax, fringe benefit tax)
Other provision and contingencies
Surplus (Income minus Cost minus Provisions and contingencies)
Appropriated
Statutory reserves
Dividend to Shareholders
Balance if any is transferred to Reserves
16. Banking Terminology
Key Rates Brief Description
Repo Rate It is the rate at which banks borrow money from the RBI
for short period by selling their securities (financial
assets) to the central bank with an agreement to
repurchase it at a future date at predetermined price.
Reverse Repo Rate It is the rate of interest at which the RBI borrows funds
from other banks for a short duration. The banks deposit
their short term excess funds with the central bank and
earn interest on it.
Bank Rate It is the rate at which banks borrow money from RBI
without any sale of securities. It is generally for a longer
period of time.
17. Banking Terminology (contd)
Mandatory Ratios Brief Description
Cash Reserve Ratio (CRR) Banks are required to maintain a percentage of
their deposits as cash and can use only the
remaining amount for lending/investment. This
minimum percentage which is determined by the
RBI is known as CRR.
Statutory Liquidity Ratio Apart from keeping a portion of deposits with the
(SLR) RBI as cash, banks are also required to maintain a
minimum percentage of deposits with them at the
end of every business day, in the form of gold,
cash, government bonds or other approved
securities. This minimum percentage is called SLR
Capital Adequacy Ratio It is the ratio of qualifying capital to risk adjusted
(CAR) (or weighted) assets. The RBI has set the minimum
CAR at 9% for all banks. The ratio ensures that the
bank do not expand their business without having
adequate capital.
18. Banking Terminology (contd)
Other ratios Brief Description
Net Interest Margin NIM is a measure of the difference between the interest
(NIM) income and the amount of interest paid out to their
lenders (for example, deposits), relative to the amount of
their (interest-earning) assets. it is calculated as a
percentage of interest bearing assets.
Current Account and It is the ratio of deposits in the current and savings
Saving Account (CASA) accounts to its total deposits. A high ratio means that the
bank is getting money at low cost, since no interest is
paid on the current accounts and the interest paid on
savings account is usually low.
Credit to deposit Ratio This ratio indicates how much of the advances lent by
banks is done through deposits. It is the proportion of
loan-assets created from the deposits received. The ratio
reflects the ability of the bank to make optimal use of the
available resources.
19. Banking Terminology (contd)
Asset Quality Ratios Brief Description
Non Performing asset An NPA are those assets for which interest is overdue for
ratio (NPA) more than 90 days (or 3 months). Net NPAs are
calculated by reducing cumulative balance of provisions
outstanding at a period end from gross NPAs. Higher
ratio reflects rising bad quality of loans
Provision coverage It is a measure that indicates the extent to which the
ratio bank has provided against the troubled part of its loan
portfolio. A high ratio suggests that additional provisions
to be made by the bank in the coming years would be
relatively low (if gross non-performing assets do not rise
at a faster clip).
Return on Asset Ratio Returns on asset (ROA) ratio is the net income (profits)
generated by the bank on its total assets (including fixed
assets). The higher the proportion of average earnings
assets, the better would be the resulting returns on total
assets.
20. Regulatory framework
Principal enactments governing the functioning of various type of
banks are :
Banking Regulation Act, 1949
Reserve Bank of India Act, 1934
Foreign Exchange Management Act, 1999
Companies Act, 1956
Prevention of Money laundering Act, 2002
Banking Companies ( Acquisition and Transfer of Undertakings) Act, 1970
Securitisation and Reconstruction of Financial Asset and Enforcement of Security
Interest Act, 2002
Credit Information Companies Regulation Act, 2005
Income Tax Act, 1961
Service Tax Act, 1994
21. Regulatory framework (contd)
Important Regulatory guidelines
Sources of Funds Important Regulatory Guidelines
Deposits from Public Master Circular of instructions relating to deposits held in
FCNR (B) Accounts
Master Circular on Non-Resident Ordinary Rupee (NRO)
Account [FEMA Regulation]
Master Circular on Remittance Facilities for Non-
Resident Indians / Persons of Indian Origin / Foreign
Nationals [ FEMA Regulation]
Master Circular on NRO Account [FEMA Regulation]
Master Circular on KYC Norms
Borrowings from Other Master Circular on Call/Notice Money Market Operations
Master Circular - Guidelines for Issue of Certificates of
financial institutions / RBI Deposit
Master Circular - Guidelines for Issue of Commercial
Paper
Capital (Owner) Sec 11, 12 and 13 of Banking Regulation Act
Master Circular - Capital Adequacy
22. Regulatory framework (contd)
Application of Funds Important Regulatory Guidelines
Lending (Advances) Section 20 and 21 of Banking Regulation Act
Master Circular - Loans and Advances – Statutory
Restrictions
Master Circular – Housing finance
Master Circular – Exposure Norms
Master Circular – Lending to Micro, Small & Medium
Enterprises (MSME ) Sector
Master Circular – Lending to Priority Sector
Master Circular – Prudential Norms on Income Recognition,
Asset classification and provisioning pertaining to advances
Master Circular – Bank Finance to NBFC
Master Circular – Willful defaulters
Investments Master Circular – Prudential Norms for classification ,
valuation and operation of investment portfolio by banks
Master Circular on CRR and SLR
Sec 24 of Banking regulation Act [SLR]
Deposits with other financial Master Circular on Call/Notice Money Market Operations
institutions / RBI
23. Regulatory framework (contd)
Cost / Income Important Regulatory Guidelines
Interest Expense (on Master Circular - Interest Rates on Rupee Deposits held in
Domestic, Ordinary NRO, NRE accounts
Deposits and Borrowings)
Interest and Divided Master Circular - Interest Rates on Advances
Master Circular – Prudential Norms on Income Recognition,
Income (on Advances and Asset classification and provisioning pertaining to advances
Investments)
Other Income / Expenses Master Circular – Para Banking Activity
Service Tax Act
Provisions and Master Circular – Prudential Norms on Income Recognition,
Asset classification and provisioning pertaining to advances
Contingencies Income Tax Act , 1961.
- Provision on Assets
- Provision for tax
Appropriation Sec 17 of Banking Regulation Act
Statutory reserves RBI Circular dated September 20, 2006
Dividend to Shareholders
24. Regulatory framework (contd)
Other General Important Regulatory Guidelines
Master Circular - Disclosure in Financial Statements - Notes to Accounts
Master Circular on Customer Service in Banks
Master Circular on External Commercial Borrowings and Trade Credits
Master Circular on Acquisition and Transfer of Immovable Property in India by
NRIs/PIOs/Foreign Nationals of Non- Indian Origin
Guidelines on Fair Practices Code for Lenders
Code of Banks Commitment to Customer [IBA]
Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial
Services by banks
25. Compliance function
Who has to ensure compliance with all the statutory provisions
contained in various legislations?
RBI has issued circular dated April 20, 2007 on „Compliance
functions in banks‟ which states:
The Compliance Function has to ensure strict observance of all
statutory provisions contained in various legislations and also each
bank's internal policies. [Introduction Para]
Compliance function in banks is one of the key elements in the
banks‟ corporate governance structure. [Preamble]
26. Compliance function (contd)
Significance of Compliance function
Identifying the level of compliance risk in each business line, products and
processes and issue instructions to operational functionaries / formulate
proposals for mitigation of such risk.
The compliance risks in all new products and processes is thoroughly
analyzed and appropriate risk mitigants by way of necessary checks and
balances are placed before launching.
Dissemination of new instructions / guidelines issued by the regulatory
authorities across the Bank to ensure that the business and functional units
operate within the boundaries set by regulators.
Reference point for the bank's staff for seeking clarifications/ interpretations
of various regulatory and statutory guidelines
27. Compliance function (contd)
What is Compliance risk?
Compliance risk is defined as “the risk of legal or regulatory sanctions, material financial
loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws,
regulations, rules, related self-regulatory organization standards, and codes of conduct
applicable to its banking activities” [Para 2.1]
Who is responsible to manage Compliance risk?
The Board would be responsible for ensuring that an appropriate compliance policy is in
place in the bank to manage compliance risk and also overseeing its implementation.
[Para 3.1]
Reporting of Compliance failures
Instances of all material compliance failures which may attract significant risk of legal or
regulatory sanctions, financial loss or loss of reputation should be reported to the
Board/ACB/Board Committee promptly. [Para 7.4]
Non-compliance with any regulatory guidelines and administrative actions initiated against
the bank and or corrective steps taken to avoid recurrence of the lapses should be
disclosed in the annual report of the banks. [Para 6.13]
28. Compliance function (contd)
Compliance Process and Procedure
The Board of Bank has established Compliance Department for
implementations of the Compliance function and ensuring that operating
and business units comply with regulatory guidelines.
The Compliance department has appointed Nodal Compliance Officers
within each operating and business units for implementations of the
Compliance function.
The Compliance department of Bank also perform the following critical
function:
Monitoring and identification of suspicious transactions as per
Prevention of Money Laundering Act, 2002
Fraud Monitoring and reporting
Managing the risk associated with outsourcing of the activities of the
Bank
Notes de l'éditeur
Human Resource may be defined as the total knowledge, skills, creative abilities, talents and aptitudes of an organisation’s work force.
7 Subsidiaries -State Bank of Bikaner and Jaipur, State Bank of Indore, State Bank of Hyderabad, State Bank of Mysore, State bank of Patiala, State Bank of Travancore and State bank of Saurashtra.
(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scripts and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller'scheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling, of foreign exchange including foreign bank notes; the acquiring holding, issuing on commission, underwriting and dealing in stock, funds, shares debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities; (b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a 1[managing agent or secretary and treasurer] of a company; (c) contracting for public and private loans and negotiating and issuing the same; (d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; (e) carrying on and transacting every kind of guarantee and indemnity business; (f) managing, selling and realizing any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; (g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (h) undertaking and executing trusts; undertaking the administration of estates as executor, trustee or otherwise; (j) establishing and supporting or aiding in the establishment and support of association., institutions, funds, trusts and conveniences calculated to benefit employees or ex‑employees of the company or the dependents or connectionsof such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys forcharitable or benevolent objects or for any exhibition or for any public, general or useful object; (k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; (m) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of nature enumerated or described in this sub‑section; (n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (o) any other forms of business which the Central Government may by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.
Sec 17 (1) of Banking Regulation Act every banking company incorporated in India has to transfer 20% of its profit to its reserve fund each year before declaring dividends. Sep 20, 2006 – Prior approval of RBI is needed for any appropriation from statutory reserve or any other reserve.
Sec 17 (1) of Banking Regulation Act every banking company incorporated in India has to transfer 20% of its profit to its reserve fund each year before declaring dividends. Sep 20, 2006 – Prior approval of RBI is needed for any appropriation from statutory reserve or any other reserve.