Important Banking Awareness Materials: Crack SBI PO Mains 2017 (Day-6)- Download in PDF

Important Banking Awareness Materials: Crack SBI PO Mains 2017 (Day-6)- Download in PDF:

Dear Readers, SBI PO Mains Examination is approaching shortly and to Gear Up your preparation we have provided the “15 days Action Plan – Preparation Time Table for SBI PO Mains 2017”, based on the schedule we are provided Important Banking Awareness Materials, kindly make use of it.

BASEL Committee:

· The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974.

· It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.

· The Committee frames guidelines and standards in different areas - some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision.

· The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. However, the BIS and the Basel Committee remain two distinct entities.

· The Basel Accords refer to the banking supervision Accords (recommendations on banking regulations) - Basel I, Basel II and Basel III - issued by the Basel Committee on Banking Supervision (BCBS).

· They are called the Basel Accords as the BCBS maintains its secretariat at the Bank for International Settlements in Basel, Switzerland and the committee normally meets there. The Basel Accords is a set of recommendations for regulations in the banking industry

· Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992.

Main Framework:

· Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of 0% (for example cash, bullion, home country debt like Treasuries), 20% (securitizations such as mortgage-backed securities (MBS) with the highest AAA rating), 50% (municipal revenue bonds, residential mortgages), 100% (for example, most corporate debt), and some assets given No rating.

· Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets (RWA).

The tier 1 capital ratio = tier 1 capital / all RWA

The total capital ratio = (tier 1 + tier 2 + tier 3 capital) / all RWA

Leverage ratio = total capital/average total assets

· From 1988 this framework was progressively introduced in member countries of G-10, comprising 13 countries as of 2013 – Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States of America.

· It is an intermediate between the current Basel I accord and the Basel II accord that is being implemented.

· Basel IA would have been more risk sensitive than Basel I but would not be as complex as the advanced approach under Basel II.

· On July 20, 2007 by a deal between the various US banking regulators (The Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation) it was decided to drop the proposed Basel IA and allow Basel II Standardized in its place.

· The US initially proposed that banks would need to use the advanced approach only if they were to implement Basel II.

· The idea of Basel IA was to enable smaller US banks to adopt a methodology that is more risk sensitive than Basel I that they are currently using for calculating capital adequacy.

· The Fed chairman mentioned that smaller banks who do not wish to move to Basel II Advanced or Basel IA could continue to operate under Basel I.

· Basel II, initially published in June 2004, was intended to amend international standards that controlled how much capital banks need to hold to guard against the financial and operational risks banks face.

· These rules sought to ensure that the greater the risk to which a bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and economic stability.

· Basel II attempted to accomplish this by establishing risk and capital management requirements to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending, investment and trading activities.

· One focus was to maintain sufficient consistency of regulations so to limit competitive inequality amongst internationally active banks.

· Basel II was implemented in the years prior to 2008, and was only to be implemented in early 2008 in most major economies; that year's Financial crisis intervened before Basel II could become fully effective.

Objective:

· Ensuring that capital allocation is more risk sensitive;

· Enhance disclosure requirements which would allow market participants to assess the capital adequacy of an institution;

· Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques;

· Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

· While the final accord has at large addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic capital.

Basel II uses a "three pillars" concept –

(1) Minimum capital requirements (addressing risk)

(2) Supervisory review

(3) Market discipline

BASEL III:

· Basel III (or the Third Basel Accord) is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk.

· It was agreed upon by the members of the Basel Committee on Banking Supervision in 2010–11, and was scheduled to be introduced from 2013 until 2015; however, changes from 1 April 2013 extended implementation until 31 March 2018 and again extended to 31 March 2019.

· The third installment of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08.

· Basel III is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

· The Basel III standard aims to strengthen the requirements from the Basel II standard on bank's minimum capital ratios. In addition, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the risk of a run on the bank.

Key Principles:

· Capital requirements

· Leverage ratio

· Liquidity requirements

· A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time. In simple terms, an asset is tagged as non- performing when it ceases to generate income for the lender.

· According to RBI, any loan repayment which is delayed beyond 90 days in continuation has to be identified as an NPA.

· Accordingly, with effect from March 31, 2004, a non-performing asset

(NPA)is a loan or an advance where;

o Interest and/or installment of principal remain overdue for a period of more than 91 days in respect of a term loan,

o The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),

o The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

o Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and

o Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

o Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility.

o No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91days.

NPA’s are further sub-classified into -

o Sub-Standard Assets are those which are non-performing for a period not exceeding two years and also the asset in which bank have to maintain 15% of its reserves.

o Doubtful Assets are those loans which have remained non-performing for a period exceeding two years but which are not considered as loss assets.

o Loss Assets is one where loss has been identified but the amount has not been written off, wholly or partly. In other words, such as asset is considered non-recoverable.

Problems under NPAs:

· NPAs do not just reflect badly in a bank’s account books, they adversely impact the national economy. Following are some of the repercussions of NPAs:

o Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses

o Bank shareholders are adversely affected

o Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments.

o When bank do not get loan repayment or interest payments, liquidity problems may ensue.

Reasons for NPAs:

· NPAs result from what are termed “Bad Loans” or defaults. Default, in the financial parlance, is the failure to meet financial obligations, say non-payment of a loan installment. These loans can occur due to the following reasons:

o Usual banking operations /Bad lending practices

o A banking crisis (as happened in South Asia and Japan)

o Overhang component (due to environmental reasons, natural calamities, business cycle, Disease Occurrence, etc...)

o Incremental component (due to internal bank management, like credit policy, terms of credit, etc...)

SARFAESI ACT:

· The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the Sarfaesi Act) is an Indian law. It allows banks and other financial institution to auction residential or commercial properties to recover loans. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.

· To enforce the security as aforesaid, the following conditions need to be fulfilled

o The borrower has committed a default in payment and account is classified as NPA.

o The secured creditor has given a notice in writing to the borrower to discharge his liabilities within 60 days from the date of receipt of such notice.

o The borrower has failed to comply with the said notice.

o The amount due from the borrowers in more than Rs. 1 lakh.

· In case the borrower fails to discharge his ability in fully within the stipulated period of 60 days, the secured creditor may take recourse to one or more of the following measures.

o By taking possession of the secured assets including the right to transfer by way of lease, assignment or sale for releasing the secured assets.

o By taking over the management of the secured assets.

o By appointing a manager to manage the secured assets.

o By requiring any third party who has acquired the secured assets from borrower.

o In case of a consortium advance, the aforesaid actions can be taken only when secured creditors representing 75% or more in value agree for such action.

· Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company usually are sold to institutional investors that in turn, sell to the general public, on a securities exchange, for the first time.

· Through this process, a privately held company transforms into a public company. Initial public offerings are mostly used by companies to raise the expansion of capital, possibly to monetize the investments of early private investors, and to become publicly traded enterprises.

· ASBA (Applications Supported by Blocked Amount) is a process developed by the India's Stock Market Regulator SEBI for applying to IPO. In ASBA, an IPO applicant's account doesn't get debited until shares are allotted to them.

· An IPO accords several benefits to the previously private company:

o Enlarging and diversifying equity base

o Enabling cheaper access to capital

o Increasing exposure, prestige, and public image

o Attracting and retaining better management and employees through liquid equity participation

o Facilitating acquisitions (potentially in return for shares of stock)

o Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.

· There are several disadvantages to completing an initial public offering:

o Significant legal, accounting and marketing costs, many of which are ongoing

o Requirement to disclose financial and business information

o Meaningful time, effort and attention required of management

o Risk that required funding will not be raised

o Public dissemination of information which may be useful to competitors, suppliers and customers.

o Loss of control and stronger agency problems due to new shareholders

o Increased risk of litigation, including private securities class actions and shareholder derivative actions.

· National Payments Corporation of India (NPCI) is the umbrella organisation for all retail payment systems in India, which aims to allow all Indian citizens to have unrestricted access to e-payment services.

· Founded in 2008, NPCI is a not-for-profit organisation registered under section 8 of the Companies Act 2013. The organisation is owned by a consortium of major banks, and has been promoted by the country’s central bank, the Reserve Bank of India.

· Its recent work of developing Unified Payments Interface aims to move India to a cashless society with only digital transactions.

· It has successfully completed the development of a domestic card payment network called RuPay, reducing the dependency on international card schemes.

· The RuPay card is now accepted at all the ATMs, Point-of-Sale terminals and most of the online merchants in the country. More than 300 cooperative banks and the Regional Rural Banks (RRBs) in the country have also issued RuPay ATM cards.

· More than 250 million cards have been issued by various banks, and it is growing at a rate of about 3 million per month.

· A variant of the card called ‘KisanCard’ is now being issued by all the Public Sector Banks in addition to the mainstream debit card which has been issued by 43 banks.

· RuPay cards are also issued under the JanDhanYojana scheme. RuPay card was dedicated to the nation by the President, Pranab Mukherjee on 8 May 2014.

The corporation service portfolio now and in the future include:

· National Financial Switch (NFS) - network of shared automated teller machines in India.

· Unified Payment Interface (UPI) - Single mobile application for accessing different bank accounts

· BHIM App - Smartphone app built using UPI interface. ( Updated version of BHIM is named as BHIM 1.1[4] )

· Immediate Payment Service (IMPS) - Real time payment with mobile number.

· *99# - mobile banking using USSD

· National Automated Clearing House (NACH)-

· Cheque Truncation System -online image-based cheque clearing system

· Aadhaar Payments Bridge System (APBS) -

· RuPay - card scheme

· Bharat Bill Payment System (BBPS) - integrated bill payment system

· *99*99# - Aadhaar linked subsidy information

· Know your customer (KYC) is the process of a business identifying and verifying the identity of its clients.

· The term is also used to refer to the bank and anti-money laundering regulations which governs these activities.

· Know your customer processes are also employed by companies of all sizes for the purpose of ensuring their proposed agents, consultants, or distributors are anti-bribery compliant.

· Banks, insurers and export creditors are increasingly demanding that customers provide detailed anti-corruption due diligence information.

· Banks usually frame their KYC policies incorporating the following four key elements:

o Customer Policy;

o Customer Identification Procedures;

o Monitoring of Transactions; and

o Risk management.

For the purposes of a KYC policy, a Customer/user may be defined as:

· A person or entity that maintains an account and/or has a business relationship with the bank;

· One on whose behalf the account is maintained (i.e. the beneficial owner);

· Beneficiaries of transactions conducted by professional intermediaries such as stockbrokers, Chartered Accountants, or solicitors, as permitted under the law; or

· Any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, for example, a wire transfer or issue of a high-value demand draft as a single transaction.

KYC controls typically include the following:

· Collection and analysis of basic identity information such as Identity documents (referred to in US regulations and practice as a "Customer Identification Program" or CIP)

· Name matching against lists of known parties (such as "politically exposed person" or PEP)

· Determination of the customer's risk in terms of propensity to commit money laundering, terrorist finance, or identity theft

· Creation of an expectation of a customer's transactional behavior

· Monitoring of a customer's transactions against expected behavior and recorded profile as well as that of the customer's peers.

25th May 2017 – Today’s Preparation Schedule for SBI PO Mains 2017