Universal Banking

• Traditionally Banks financed Working capital by way of Cash

Credit, Bills finance or Overdrafts and DFIs financed long term
projects byway of Term Loans.
• In the era of globalisation, liberalisation and reforms in
financial sector traditional operational divisions have
increasingly become blurred.
• Narasimham Committee II felt that FIs should convert into
banks over a period of time.
• S H Khan also recommended the gradual elimination of the
extant distinctions between Banks and FIs.
• RBI facilitated such transition and today ICICI and IDBI are
universal banks.
 Narrow Banking

• Narrow banking means safe banking.

• Plain vanilla banking of acceptance of deposits and making of small
advances.
• Not to make large project loans.
• Not to undertake risky , innovative businesses.
• Narrow banks are safe banks. By not lending, and using their
deposits to buy government bonds, they carry virtually no credit
risk. There is no danger of non-performing loans and frequent
injections of equity capital that has to be funded by taxpayers. For
the Reserve Bank of India (RBI) too, supervision gets easier. There is
no need for deposit insurance.
• RBI imposes Prompt Corrective Action (PCA) on weak banks and
advises them to undertake narrow banking activities.
 Narrow Banking (contd.)

• Take for instance, lenders such as IDBI Bank and Indian

Overseas Bank. For both banks, close to one in every Rs 4
they have lent has turned bad. They are both under the so-
called prompt corrective action (PCA) framework of RBI;
the central bank has placed restrictions on their lending in
a scramble to ensure that their capital adequacy ratios
don’t plummet. Such lenders could just become large
payment banks. It need not be done overnight, but can be
done on an incremental basis by slowly whittling down
their loan books.
• Traditionally, the argument against such conversions has
been that narrow banks do not perform certain crucial
functions such as giving loans to the so-called priority
sectors.
 Private Sector Bank Guidelines

• Any company wishing to commence banking operations in

India is required to obtain a licence from RBI under section 22
of BR Act, 1949.
• 1991, the Committee on Financial System recommended that
RBI should permit new Banks in private sector in order to
bring competition and efficiency in banking sector.
• RBI guidelines on new private sector banks were issued in
January, 1993, revised in January, 2001.
• In 1993, Licences were granted to 10 banks.
• These guidelines were revised in 2001.
 Know Your Customer (KYC)

• Before opening a new a/c, the banker should take some precautions to
make inquiries about the person regarding his/her
• Identity
• Business/profession/trade
• Residential address/business address
• Nature of a/c he/she wants to open
• Who will introduce his a/c
• Often Banks make inquiries from the references or the existing customers
who want to introduce the a/c of the prospective customer as to the
integrity and respectability of the prospective customer. An ommission
may have serious consequences not only for the banker concerned but
also for the other bankers and public at large.
• This is required to judge if the person is a genuine person and a desirable
customer and not an imposter or a fraudulent rouge.
• In absence of this due diligence in opening an a/c a banker shall be held
liable.
 Know Your Customer (KYC)

Banks in India invariably obtain:

• An A/c Opening Form with Personal information about
customer including his financial position
• Aadhar Card
• PAN Card
• Two Photographs (one is kept with AOF and the other with
the signature card).
• Proof of residence
• Introduction by an existing Customer
 Anti Money Laundering

• The PMLA, 2002 has been enacted to prevent money laundering and to
provide for confiscation of property derived from or involved in money
laundering and for matters connected therewith or incidental thereto.
• PMLA (Amendment) Act, 2009 aims at combatting money laundering,
terror financing and cross border economic offences. It checks use of black
money for financing terror activities.
• Financial intermediaries like full fledged money changers, money transfer
service providers such as Western Union and International Payment
Gateways including VISA and MasterCard have been brought within the
ambit of PMLA 2002. Consequently Casinos have been brought under the
reporting regime of enforcement authorities.
• The amended provisions will check misuse of the “proceeds of crime”, be
it from sale of narco substances or breach of the Unlawful Activities
Prevention Act.
 Anti Money Laundering-Role of Banks

• Banks and other financial institutions are the

gatekeepers of the financial system and hold a
high level of responsibility to prevent financial
crime. They have worked hard to establish know-
your-customer (KYC) and anti-money-laundering
(AML) policies, procedures and systems to
support their efforts. However, changes created
by technology and increasingly common cross-
border transactions are rendering the platforms
they currently have in place ineffective.
 Anti Money Laundering-Role of Banks

• RBI has issued a Master Circular on KYC-Master

Direction which all Banks and in fact all Regulated
Entities (REs) are required to follow.
• All banks are required to comply with KYC norms. Of
identification and verification of customers.
• In case of all cash transactions of deposit or withdrawal
of Rs. 50000 and above PAN issued by Income Tax
Deptt be taken from customer. For the purpose all a/cs
of the customer be combined.
• Each Bank has a Principal KYC Compliance Officer for
ensuring compliance with KYC norms.
 Anti Money Laundering-Role of Banks

• Wire transfer
• REs shall ensure the following while effecting wire transfer:
• (a) All cross-border wire transfers including transactions using credit or debit card shall be accompanied by accurate and meaningful
originator information such as name, address and account number or a unique reference number, as prevalent in the country
concerned in the absence of account.

• Exception: Interbank transfers and settlements where both the originator and beneficiary are banks or financial institutions shall be
exempt from the above requirements.
• (b) Domestic wire transfers of rupees fifty thousand and above shall be accompanied by originator information such as name, address
and account number.

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• (c) Customer Identification shall be made if a customer is intentionally structuring wire transfer below rupees fifty thousand to avoid
reporting or monitoring. In case of non-cooperation from the customer, efforts shall be made to establish his identity and STR shall be
made to FIU-IND.
• (d) Complete originator information relating to qualifying wire transfers shall be preserved at least for a period of five years by the
ordering bank.
• (e) A bank processing as an intermediary element of a chain of wire transfers shall ensure that all originator information accompanying
a wire transfer is retained with the transfer.
• (f) The receiving intermediary bank shall transfer full originator information accompanying a cross-border wire transfer and preserve
the same for at least five years if the same cannot be sent with a related domestic wire transfer, due to technical limitations.
• (g) All the information on the originator of wire transfers shall be immediately made available to appropriate law enforcement and/or
prosecutorial authorities on receiving such requests.
• (h) Effective risk-based procedures to identify wire transfers lacking complete originator information shall be in place at a beneficiary
bank.
• (i) Beneficiary bank shall report transaction lacking complete originator information to FIU-IND as a suspicious transaction.
• (j) The beneficiary bank shall seek detailed information of the fund remitter with the ordering bank and if the ordering bank fails to
furnish information on the remitter, the beneficiary shall consider restricting or terminating its business relationship with the ordering
bank.
 Anti Money Laundering-Role of Banks

• Issue and Payment of Demand Drafts, etc.,

• Any remittance of funds by way of demand
draft, mail/telegraphic transfer/NEFT/IMPS or
any other mode and issue of travellers’
cheques for value of rupees fifty thousand and
above shall be effected by debit to the
customer’s account or against cheques and
not against cash payment.
 Anti Money Laundering-Role of Banks

• Quoting of PAN
• Permanent account number (PAN) of customers
shall be obtained and verified while undertaking
transactions as per the provisions of Income Tax
Rule 114B applicable to banks, as amended from
time to time. Form 60 shall be obtained from
persons who do not have PAN.
• The Banks submit CTR and STR to FIUD of Govt of
India.
 Anti Money Laundering-Role of Banks
• Selling Third party products
• REs acting as agents while selling third party products as per regulations in force from
time to time shall comply with the following aspects for the purpose of these
directions:
• (a) the identity and address of the walk-in customer shall be verified for transactions
above rupees fifty thousand as required under Section 13(e) of this Directions.
• (b) transaction details of sale of third party products and related records shall be
maintained as prescribed in Chapter VII Section 46.
• (c) AML software capable of capturing, generating and analysing alerts for the
purpose of filing CTR/STR in respect of transactions relating to third party products
with customers including walk-in customers shall be available.
• (d) transactions involving rupees fifty thousand and above shall be undertaken only
by:
• • debit to customers’ account or against cheques; and
• • obtaining and verifying the PAN given by the account based as well as walk-in
customers.
• (e) Instruction at ‘d’ above shall also apply to sale of REs’ own products, payment of
dues of credit cards/sale and reloading of prepaid/travel cards and any other product
for rupees fifty thousand and above.
 Anti Money Laundering-Role of Banks

• Hiring of Employees and Employee training

• (a) Adequate screening mechanism as an integral part of their
personnel recruitment/hiring process shall be put in place.
• (b) On-going employee training programme shall be put in
place so that the members of staff are adequately trained in
AML/CFT policy. The focus of the training shall be different for
frontline staff, compliance staff and staff dealing with new
customers. The front desk staff shall be specially trained to
handle issues arising from lack of customer education. Proper
staffing of the audit function with persons adequately trained
and well-versed in AML/CFT policies of the RE, regulation and
related issues shall be ensured.
 Anti Money Laundering-Role of Banks

• Adherence to Know Your Customer (KYC) guidelines by

NBFCs/RNBCs and persons authorised by NBFCs/RNBCs
including brokers/agents etc.
• (a) Persons authorised by NBFCs/ RNBCs for collecting the deposits and their
brokers/agents or the like, shall be fully compliant with the KYC guidelines applicable
to NBFCs/RNBCs.
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• (b) All information shall be made available to the Reserve Bank of India to verify the
compliance with the KYC guidelines and accept full consequences of any violation by
the persons authorised by NBFCs/RNBCs including brokers/agents etc. who are
operating on their behalf.
• (c) The books of accounts of persons authorised by NBFCs/RNBCs including
brokers/agents or the like, so far as they relate to brokerage functions of the company,
shall be made available for audit and inspection whenever required.
Financial Intermediary
 Constituent of Payment System

• A payment system is any system used to settle

financial transactions through the transfer of
monetary value, and includes the institutions,
instruments, people, rules, procedures, standards,
and technologies that make such an exchange
possible.
 Constituent of Payment System

• Payment and settlement systems in India are payment and

settlement for financial transactions. They are covered by the
Payment and Settlement Systems Act, 2007 (PSS Act),
legislated in December 2007 and regulated by the Reserve
Bank of India and the Board for Regulation and Supervision of
Payment and Settlement Systems.
• India has multiple payments and settlement systems, both
gross and net settlement systems. For gross settlement India
has a Real Time Gross Settlement (RTGS) system called by the
same name and net settlement systems include Electronic
Clearing Services (ECS Credit), Electronic Clearing Services
(ECS Debit), credit cards, debit cards, the National Electronic
Fund Transfer (NEFT) system, Immediate Payment Service and
Unified Payments Interface (UPI)
 Reserve Requirements

• Cash Reserve Ratio

• Statutory Liquidity Ratio

 Profitability of Banks
• To maintain healthy NIM
• To maintain asset quality
• To control expenditure
• To improve CASA
• To improve customer Service