SBAA7001 BANKING AND INSURANCE

MANAGEMENT
II MBA – BATCH (2019-2021)
SEMESTER III – AUGUST 2020
SCHOOL OF MANAGEMENT STUDIES

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 UNIT 3 – BANKING REGULATIONS

Banking Regulation Act,1949 - KYC and AML guidelines, Banking

Fraud, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR),
Asset Liability Management - Capital Adequacy in Banks - Basel norms
- CAMELS rating of Banks –Banking Ombudsman - SARFAESI Act.

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 What is Banking Regulation Act,1949?
The Banking Regulation Act 1949 is a legislation in
India, that states all banking firms will be regulated
under this Act.
There are a total of 55 Sections under the banking
Regulation Act.
Initially the law was only applicable to banks, but after
1965, it was amended to make it applicable too CO-
operative banks and also to introduce other changes.
The act provides a framework that regulates and
supervises commercial banks in India.
This act gives power to the RBI to exercise control and
regulate banks under supervision.
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 Introduction of Banking Regulation Act 1949

The act came into force on March 16th 1949.

It relates to various aspects vis-à-vis banking in India.
The main objective of the banking regulation act is to
ensure sound banking through regulations covering the
opening of branches and the maintenance of liquid
assets.

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 Objectives of Banking Regulation Act, 1949

The Banking Regulations Act was enacted in February

1949 with the following objectives:
The provision of the Indian Companies Act 1913 was
found inadequate to regulate banks in India. Therefore
a need was felt to introduce a specific legislation
having comprehensive coverage on issues relating to
the banking business in India.
Due to inadequacy of capital, many banks failed and
therefore prescribing a minimum capital requirement
was felt necessary. The Banking Regulation act brought
in certain minimum capital requirement for banks.

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 Objectives of Banking Regulation Act, 1949

The key objectives of this act was to cut competition among

banks. The act has regulated the opening of branches and also
changing the location of existing branches.
To prevent random opening of new branches and ensure
balanced development of banks through system of licensing.
Assigning power to RBI to appoint, reappoint and remove the
chairman, director and officers of the banks. This could
ensure the smooth and efficient functioning of banks in India.
To protect the interest of depositors and public at large by
incorporating certain provisions like prescribing cash reserve
ratio and liquidity reserve ratios.

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 Objectives of Banking Regulation Act, 1949
Provide compulsory amalgamation of weaker banks
with senior banks and thereby strengthen the banking
system in India.
Introduce provisions to restrict foreign banks investing
funds of Indian depositors outside India.
Provide quick and easy liquidation of banks, when
they are unable to continue operations or amalgamate
with other banks.

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 History of Banking Regulation Act, 1949
Banking in India originated in the last decades of the 18 th
Century.
Prior to Nationalization, the majority of the banks were
private banks.
Private Banks were class based and there would be
monopolies that would only benefit a few people.
With the nationalization of the banks, the credit scenario
changes benefitted all sections of society and contributed
to overall prosperity.
The Indian Government recognized the need to bring the
banks under some form of Government control, to be
able to finance India’s growing financial needs.
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 History of Banking Regulation Act, 1949

On 19th July 1969, 14 major Indian Commercial banks

of the country were nationalized .
After independence, the Government of India came up
with the Banking Companies Act, 1949, later changed
to Banking Regulation Act, 1949 as per the amending
Act of 1965, under which the Reserve Bank of India
was bestowed with extensive powers for the
supervision of banking in India as the central banking
authority.

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 Provisions of Banking Regulation Act, 1949

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 Provisions of Banking Regulation Act, 1949

Prohibition of trading(Section 8): According to Section 8

of the Banking Regulation Act, a bank cannot directly or
indirectly deal with buying or selling or bartering of
goods. However it may barter the transactions relating to
bills of exchange received for collection or negotiation.
Non-banking asset(Section 9): A bank cannot hold any
immovable property, howsoever acquired except for its
own use, for any period exceeding seven years from the
date of acquisition thereof. The company is permitted
within a period of seven years, to deal or trade in any
such property for facilitating its disposal.

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 Provisions of Banking Regulation Act, 1949

Management(Section 10): This rule states that every

bank shall have one of its directors as chairman on its
Board of Directors. It also states that not less than 51%
of the total number of members of the Board of
Directors of a bank shall consist of persons who have
special knowledge or practical experience in
accountancy, agriculture, banking, economics, finance,
law and co-operatives.
.

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 Provisions of Banking Regulation Act, 1949

Minimum Capital (section 11) -prescribes a minimum

capital of Rs.5.00 lakh only, Reserve Bank currently
prescribed a minimum paid-up capital of Rs.100 crore
for setting up a new bank­ing company. In the case of
foreign banks setting up office of business in India,
they are required to bring in a minimum of ten million
US dollars to India as Capital. (A million is equal to
ten lakhs). The minimum capital required to start a
Local Area Bank is fixed at Rs. 5.00 crores.

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 Provisions of Banking Regulation Act, 1949
Prohibition of charge on unpaid capital: Section 14 - No
banking company shall create any charge upon its unpaid
capi­tal, and any such charge if created, shall be invalid.
Limiting the payment of dividends : Section 15 (Preliminary
expenses, Brokerage and Commission on issue of shares)
Transfer to Reserve Fund: Section 17 -Under Section 17,
Banking companies incorporated in India are obligated to
transfer to the reserve fund a sum equivalent to not less than
20% of the profit each year, unless the amount in such fund
together with the amount in the share premium account is
more than or equal to its paid-up capital.

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 Provisions of Banking Regulation Act, 1949
Maintenance of cash reserve by non-scheduled
banks: Section 18 According to Section 18, every
banking company not being a scheduled bank (i.e., a
non-scheduled bank) has to maintain in India by way
of cash reserve with itself or in cur­rent account opened
with the Reserve Bank or the State Bank of India or
any notified Bank or partly in cash with itself and
partly in such account or accounts a sum equivalent to
at least 3% of its total time and demand liabilities.

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 Provisions of Banking Regulation Act, 1949

Restrictions on loans and advances: Sections 20 & 21

Section 20 lays down the restrictions on banking companies from entering into any
commitment from granting any loan to any of its director or to any firm in which a
director is interested or to any individual or whom a director stands as a guarantor.
Further the banking companies are prohibited from granting loans or advances on the
security of its own shares.
Under Section 21, the RBI has been empowered to determine the policy to be
followed by the banks in relation to advances. Thus, RBI gives directions to banking
companies on the following matters:
(i) The purposes for which an advance may or may not be granted
(ii) The margins to be maintained in case of secured advances
(iii) The rate of interest charged on advances, other financial accommodation and
commission on guarantees
(iv) The maximum amount of advance or other financial accommodation that a
bank may make to or guarantee that it may issue for, a single party, having regard to
the paid-up capital, reserves and deposits of the concerned bank.

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 Provisions of Banking Regulation Act, 1949

Licensing of banking companies: Section 22 -  that the company is in

a position to pay its present or future depositors in full as their claims
accrue;
(ii) that the affairs of the company are not likely to be conducted in a
manner detri­mental to the interests of its present or future depositors;
(iii) in the case of the carrying on of banking business by such
company in India will be in the public interest and that the government
or laws of the country in which it is incorporated does not discriminate
in any way against banking companies registered in India and that the
company complies with all the provisions of this Act, applicable to
banking companies incorporated outside India. However, RRBs have
been established under a separate Act of Parliament, viz., RRBs Act
1976 and not under Banking Regulation Act.

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 The Reserve Bank may cancel a license granted to a
banking company under this section:
(i) If the company ceases to carry on banking business in
India; or
(ii) If the company at any time fails to comply with any of
the conditions imposed upon it; or*
(iii) Any banking company aggrieved by the decision of the
Reserve Bank cancelling a license under this section may,
within thirty days from the date on which such decision is
communicated to it, appeal to the Central Government. The
decision of the Central Government shall be final.
Thus, every banking company which likes to start banking
business in India must obtain license from RBI.

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 Provisions of Banking Regulation Act, 1949

Control on the opening of new business: Section 23 -cording

to this section, the RBI has been empowered to control the
opening of new and transfer of existing places of business of
banking companies. As such, no banking company shall open a
new place of business in India or outside India and change the
place without obtaining the prior permission of the RBI.
No permission is required for opening a branch within the
same city, town or village and for opening a temporary place of
business for a maximum period of one month within a city,
where the banking company already has a place of business for
the purpose of pro­viding banking facilities to the public on the
occasion of an exhibition, a conference, a mela, etc.

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 Provisions of Banking Regulation Act, 1949

Maintenance of a percentage of liquid assets (SLR):

Section 24
Under this section, every banking company shall
maintain in India in liquid assets for an amount not less
than 25% of the total of its time and demand liabilities at
the close of business on any day. The liquid assets
include cash, gold or unencumbered approved secu­rities
and they are valued at a price not exceeding the current
market price.

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 Provisions of Banking Regulation Act, 1949
Maintenance of Assets in India: Section 25
Section 25 requires for the maintenance of assets equivalent
to at least 75% of its de­mand and time liabilities in India, at the
close of business of the last Friday of every quarter.
Submission of Returns of unclaimed Deposits: Section 26
According to this section, every banking company shall
submit a return in the pre­scribed form and manner to the RBI,
giving particulars, regarding unoperated accounts in India for 10
years. This return is to be submitted within 30 days after the
close of each calendar year.
In the case of fixed deposits, the 10 years period is counted from
the date of expiry of such fixed period. RRBs are however
required to forward such returns to NABARD.

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 Provisions of Banking Regulation Act, 1949
Submission of Return, Forms, etc., to RBI: Section 27
Under this section, every banking company shall submit to be RBI a
return in the prescribed form (form 13) and manner showing its assets and
liabilities in India on the last Friday of every month, (if that Friday is a
public holiday under the negotiable instruments Act, 1881, on the
preceding working day.)
Besides, the RBI may at any time direct a banking company to furnish
the statements and information relating to the business or affairs of the
banking company within the speci­fied period mentioned therein.
Such directions may be issued when the RBI considers it is necessary
or expedient to obtain for the purpose of the Act. And the RBI may call
for infor­mation every half year, regarding the investments of banking
company and the classifica­tions of advance given in respect of industry,
commerce and agriculture.

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 Provisions of Banking Regulation Act, 1949
Powers to Publish Information: Section 28
Under this section, the RBI is authorized to publish in the public interest any
informa­tion obtained under the Banking Regulation Act. The information is
published in the con­solidated form as the RBI may think fit.
Maintenance of Accounts and Balance Sheets: Section 29
This section provides for the preparation of Balance Sheet and Profit & Loss
Account as on the last working day of the year in respect of all business transacted
by a banking company incorporated in India and in respect of all business
transacted through its branches in India by a banking company incorporated
outside India. It is prepared in the forms set out in the Third Schedule.
The central government after giving not less than three months notice of its
intention so to do by a notification in the official gazette, may from time to time
by a like notification amend the forms set out in the Third Schedule.
In the view of the fact that in the opinion of experts, as well as the Banking
enquiry committee, that form “f ” required to be used by every company in
preparing its balance sheet.

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 Provisions of Banking Regulation Act, 1949
Inspection of books of accounts: Section 35
This Section was incorporated with a view to
safeguard the interest of shareholders and depositors of
banking companies, as a result of which bank directors
and managers are likely to be cautious in employing
the funds of their institutions.
This section provides wide powers to RBI to cause an
inspection of any banking com­pany and its books and
accounts.

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 Provisions of Banking Regulation Act, 1949
Giving directions to Banking Companies: Section 35A
Under Section on 35A, the Reserve Bank may caution or prohibit banking
companies generally or any banking company in particular against entering into
certain types of opera­tions.
Prior approval from RBI for appointment of Managing Director, etc. Section
35 AB
According to this section, prior approval of RBI should be obtained for the
appoint­ment, re-appointment, remuneration and removal of the chairman or a
director of a banking company. And for the amendments of provisions in the
Memorandum or Articles or Reso­lutions of a General Meeting or Board of
Directors, the prior approval of RBI is necessary.
Removal of managerial and any other persons from office: Section 36AA and
Section 36AB
Under these sections, the RBI has power to remove managerial and other
persons from office and to appoint additional directors.

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 Provisions of Banking Regulation Act, 1949
Winding up of Banking Companies: Section 38 to 44
Sections 38 to 44 of the Act lay down the provisions for winding up of a banking com­
pany. The RBI may apply for the winding up of a banking company if,
(i) It fails to comply with the requirements as to minimum Paid-up capital and re­serves as
laid down in Section 11, or
(ii) Is disentitled to carry on the banking business for want of license under Section 22, or
(iii) It has been prohibited from receiving fresh deposits by the Central Government or
the Reserve Bank, or
(iv) It has failed to comply with any requirement of the Act, and continues to do so even
after the Reserve Bank calls upon it to do so,
(v) The Reserve Bank thinks that a compromise or arrangement sanctioned by the court
cannot be worked satisfactorily, or
(vi) The Reserve Bank thinks that according to the returns furnished by the company it is
unable to pay its debts or its continuance is prejudicial to the interests of the depositors.
The banking company cannot be voluntarily wound up unless the Reserve Bank certi­fies
that it is able to pay its debts in full.

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 Provisions of Banking Regulation Act, 1949
Amalgamation of Banking Companies: Section 44A
The procedures for amalgamation of banking companies are given
under this section. As per this section the scheme of amalgamation
(i.e., the terms and conditions of amalgam­ation) is to be approved by a
majority – 2/3 of the total voting ratios – of the shareholders in a
general meeting.
The unwilling shareholders are entitled to receive the value of their
shares as may be determined by the RBI. The RBI has to sanction the
scheme of amalgamation after the shareholders’ approval.
The assets and liabilities are transferred to the acquiring bank
according to the directions of RBI mentioned in the sanction order.
The RBI issues order for the dissolution of the first bank on a
specified date.

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 AML AND KYC POLICY

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 Introduction
Banks were advised to follow certain customer identification
procedure for opening of accounts and monitoring
transactions of a suspicious nature.
The Prevention of Money Laundering Act (PMLA), 2002 is
an Act of the Parliament of India enacted in January, 2003.
The Act has come into force w.e.f. 1st July, 2005.
KYC Guideline revisited on recommendations made by the
Financial Action Task Force (FATF) on Anti Money
Laundering (AML) standards and on Combating the
Financing of Terrorism (CFT).
PMLA (Amendment) Act, 2012 as passed by Lok Sabha on
29/11/2012 has come into force w.e.f. 15th February 2013.

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 Definition as per PMLA 2002
Sec.3 of PML Act defines ‘money laundering’ as:
“whosoever directly or indirectly attempts to indulge
or knowingly assists or knowingly is a party or is
actually involved in any process or activity connected
with the proceeds of crime and projecting it as
untainted property shall be guilty of the offence of
money-laundering”.

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 Punishment for Money Laundering
Punishment for non-adherence of the Act would be
rigorous imprisonment for not less than 3 years but up
to 7 years.
But in case of offences done under Narcotic Drugs and
Psychotropic Substance Act 1985 the maximum
punishment may extend to 10 years.

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 Objective of Anti-Money Laundering
Policy
To prevent banks from being used, intentionally or
unintentionally, by criminals for Money Laundering
activities or terrorist activities.
 To enable banks to know/ understand their customer
and their financial dealings better.
To put in place a proper control mechanism for
detecting and reporting suspicious transaction.
It will also enhance fraud Prevention.
To ensure compliance with guidelines issued by the
regulators including FIU-IND & RBI.

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 Obligations Under PMLA 2002
Appointment of Principal Officers and designated
Director,
 Maintaining record of prescribed transactions,
 Furnishing information of transaction to the specified
authority,
Verifying & maintaining record of the identity of its
clients,
 Preserving records for 5 years from the date of each
transactions between bank & clients or for 5 years after
business relationship ended.

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 Money Laundering Risks
Bank is exposed to the following risks:
Reputational Risk: Risk of loss due to severe impact on bank’s
reputation which is most valuable asset of the organization.
Compliance Risk: Risk of loss due to failure to comply with key
regulations governing the bank’s operations.
Operational Risk: The risk of direct or indirect loss resulting from
inadequate or failed internal processes, people and systems or from
external events.
Legal Risk: Risk of loss due to any legal action the bank or its staff
may face due to failure to comply with the law resulting in adverse
judgments, unenforceable contracts, fines and penalties, generating
losses, increased expenses for an institutions or even closure of
such institutions. 

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 Way of Money Laundering
Money laundering generally refers to ‘washing’ of the
proceeds or profits generated from:
(i) Drug trafficking
(ii) Arms, antique, gold smuggling
(iii) Prostitution rings
(iv) Financial frauds
(v) Corruption, or
(vi) Illegal sale of wild life products and other specified
predicate offences. 

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 Indicators of Money Laundering
Turn over in dormant account;
Receipt/payment of large sums of cash;
Reluctance to provide normal information;
Depositing high value third party cheques;
Large credits from abroad;
Employees leading lavish life style;
Hawala Transaction.

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 Combating the financing of Terrorism
(CFT) measures
Money to fund terrorist activities moves through the
global financial system via wire transfers and in and
out of personal and business accounts.
 It can sit in the accounts of illegitimate charities and
be laundered through buying and selling securities and
other commodities, or purchasing and cashing out
insurance policies.
 Before opening of the new account branches should
ensure the name is not listed in:- I. Al-Qaida sanction
list II. 1988 sanction list N.B.:- Banks are regularly
putting in KRISH MENU updated list.
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 KYC Standards
The key elements of policy are as under :
CAP ( Customer Acceptance Policy )
Risk management
CIP ( Customer Identification Procedure )
Monitoring of transactions 

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 Customer Acceptance Policy not to Open
accounts of following persons
Anonymous /Fictitious/Benami Names and with
Criminal Background.
Branch should prepare a profile for each new customer
based on risk categorization Risk categorization should
be reviewed once in a 6 months.
Occupation code field made Mandatory in the system.
No account should be opened where bank is unable to
apply due diligence measures. Bank can close those a/c
where customer is not co-operating in submission of
documents ( decided by DZM or AGM after giving
notice to customer). 
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 Partial Freezing /Closure of NON-KYC
compliance account
In the case of non-compliance of KYC guideline account, RBI
advised the bank to take the following steps:
Initially, a notice of 3 moths should be given for KYC
compliance,
It should be followed reminder for further 3 months,
Thereafter, Partial freeze the debit and allowing credit only,
 If partial freeze continue for 6 months and accounts are still
non- KYC complaint, both credit and debit freeze and may be
close the account.
Closure of account shall be approved by Branch Manager.
 Reason for partial freeze and closure should be communicated
to account holder.

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 Customer Acceptance Policy
Bank have introduced a Customer Profile Sheet (CPS) which is
required to be obtained at account opening time. Indicative
parameters of CPS are:
a) Constitution: Individual, Proprietorship, Partnership, Society,
public/private limited company, Trust etc,
b) Product Subscription: Salary A/c, Business, NRI etc
c) Nationality
d) Social status
e) Financial status, Volume of turn over etc
f) Nature of business
g) Activity engaged
h) Clients and their geographical location 

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 Customer Risk Rating/Categorization

Low Risk category: (Full KYC in10 years)

1. Salaried employed whose salary structure is well
defined, Pensioners, benefit recipients.
2.People belonging to lower economic strata of society
showing small balances.
3.Govt. department and govt. owned companies,
Regulators, Statutory Bodies etc.
4.Customer with a long term and active business
relationship.
5. Customer other than High & Medium risk.

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 Customer Risk Rating/Categorization

Medium Risk Customer: (Full KYC in 8 years)

1. NBFC,
2. Builders,
3. Stock Brokers.

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 Customer Risk Rating/Categorization
High Risk Customer: (Full KYC in2years)
1. Non resident customer,
2. HNI, Non-face to face customer,
3. Trust, Charities, NGOs, Sleeping Partner firms, Investment
Company,
4. Donation receiving organization, Religious institution,
5. Shopping malls, Jewelers, Petrol pump, Liquor stores,
6. Antique dealers, Arms dealer, Agent, Brokers, Bullion dealers,
7. Politically Exposed Persons of foreign origin,
8. Customer with dubious reputation etc,
9. Companies having close family share holding etc.
10. Person living in High Risk Countries 

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 Officially Valid KYC Document
Officially valid KYC document”:- The below mentioned six
officially valid documents will serve the purpose for both
identification of customer and also the address proof of customer.
1.Passport (within validity),
2.Driving License (within validity),
3.PAN Card ( Only Identity proof),
4.Voter’s Identity Card,
5.Job Card issued by NREGA,
6.Letter issued by UIDAI – Aadhaar number . NB:- If the customer
is providing the Passport, the full detail of the passport to be
captured mandatorily in the Finacle system/CUMM along with
customer nationality of all NRI/PIO or Domestic customer. 

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 FRAUD IN THE BANKING SECTOR

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 Introduction
Banks are an essential part of the Indian economy.
While the primary responsibility for preventing frauds
lies with banks themselves.
Banks are dealing with public's money and hence it is
imperative that employees should exercise due care
and diligence in handling the transactions in banks.
 The RBI has been advising banks from time to time
about the major fraud prone areas and the safeguards
necessary for prevention of frauds.

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 Definition of fraud
 Fraud can loosely be defined as “any behaviour by which
one person intends to gain a dishonest advantage over
another“ fraud, under section 17 of the Indian contract act,
1872,
 RBI not defined the term “fraud” in its guidelines on frauds
which reads as under.
“A deliberate act of omission or commission by any person,
carried out in the course of a banking transaction or in the
books of accounts maintained manually or under computer
system in banks, resulting into wrongful gain to any person
for A temporary period or otherwise, with or without any
monetary loss to the bank”.

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 Number of frauds cases reported by RBI regulated
entities (No. of cases in absolute terms and amount
involved in Rs. crore)
Bank frauds worth more than Rs 1.85 lakh crore were reported in the
year ended June 2020 compared with over Rs 71,500 crore in the
previous fiscal, according to the RBI’s annual report for 2019-20.
 “Frauds have been predominantly occurring in the loan portfolio
(advances category), both in terms of number and value. There was a
concentration of large value frauds, with the top 50 credit-related
frauds constituting 76% of the total amount reported as frauds during
2019-20,” the annual report said.
 Public sector banks—that witnessed a 234% year-on-year rise in fraud
cases—accounted for 80% of the total such reported instances. Private
banks, which reported a more than 500% rise, formed over 18% of the
total fraud cases.

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 Types of frauds

 Account opening fraud: this involves a deposit and

cashing of fraudulent cheques.
Cheque kiting: is a method where by a depositor
utilizes the time required for cheques to dear to obtain
an unauthorized loan without any interest charge.
Cheque fraud: most common cases of this kind of
fraud are through stolen cheques and forged
signatures.
Counterfeit securities: documents, securities, bonds
and certificate could be forged, duplicated, adjusted or
altered and presented for loan collection.
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 Computer fraud: hacking, tampering with a diskette to
gain access to unauthorized areas and give credit to an
account for which the funds were not originally intended.
 Loan fraud: when funds are lent to a non-borrowing
customer or a borrowing customer that has exceeded his
credit limit.
Money laundering fraud: this is a means to conceal the
existence, source or use of illegal obtained money by
converting the cash into untraceable transactions in
banks.
 Money transfer fraud: alteration of a genuine Funds
transfer request. e.g Mail, telephone, electronic process,
telex.

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 Telex Fraud: The messages that are passed through
telex in form of codes could be altered to divert the
funds to another account
 Letters of Credit: Most common in international
trading, these are instruments used across borders ads
can be forged, altered, adjusted and take longer to
identify.
 Advanced Fees Fraud: Popularly known as ‘419’,
advanced fees fraud may involve agent with an offer of
a business proposition which would lead to access
often for a long term.

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 Category of funds
Technology related
The Technology related fraud around 65% 10 of the
total fraud cases reported by banks. (covering frauds
committed through /at internet banking channel, ATMs
and other alternate payment channels like
credit/debit/prepaid cards)
Banks are adopt newer service delivery platforms like
mobile, internet and social media, for enhanced
efficiency and cost-cutting.
 Banks’ customers have become tech savvy and started
using online banking services and products. .

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 KYC related (mainly in deposit accounts)
KYC (Know Your Customer) is a framework for banks
which enables them to know / understand the customers
and their financial dealings to be able to serve them better.
 RBI has advised banks to make the KYC procedures
mandatory while opening and operating the accounts.
 Issued the KYC guidelines under section 35 (A) of the
banking regulation act, 1949.
For this purpose, the fraudsters generally use deposit
accounts in banks with lax KYC drills.
Therefore, customers to guard against such temptations
for easy money but should also ensure that deposit
accounts maintained with them are fully KYC compliant.

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 Advances related
Frauds related to the advances portfolio accounts for the largest Share of the total amount

involved in frauds in the banking sector. (Involving amount of Rs. 50 crore and above)

Another point that public sector banks account for a substantial chunk of the total amount

involved in such cases.

Declaration of frauds by various banks in cases of consortium/ multiple financing we have on

occasions observed more than 12– 15 months lag in declaration.

The large value advance related frauds, which pose a significant challenge to all stakeholders,

are mainly concentrated in the public sector banks. Majority of the credit related frauds are on

account of deficient appraisal system, poor post disbursement supervision and inadequate.

Reserve bank has also advised banks to audit periodically so that cases of multiple financing

may be detected in the initial stages itself.

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 Guidelines for Reporting Frauds to
POLICE/CBI
Private Sector Banks/Foreign banks (operating in India)
 While reporting the frauds, banks are required to ensure that,
besides the necessity of recovering the amount expeditiously, the
guilty persons do not get unpunished.
 Cases that are required to be referred to State Police include:-
a) Cases of fraud involving an amount of Rs. 1.00 lakh and above
committed by outsiders on their own and/or with the connivance
of bank staff/officers.
b) Cases of fraud involving amount exceeding Rs. 10,000/-
committed by bank employees.
c) Fraud cases involving amounts of Rs 1.00 crore and above should
also be reported to the Serious Fraud Investigation Office (SFIO),
GOI,

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 Public Sector Banks
Cases to be referred to CBI
a) Cases of fraud involving amount of Rs. 1.00 crore and
above upto Rs. 7.50 crore:-
• Where staff involvement is prima facie evident –
CBI (Anti Corruption Branch).
• Where staff involvement is prima facie not
evident- CBI (Economic Offences Wing)
b) All cases involving more than Rs.7.50 crore -
Banking Security and Fraud Cell of the respective
centres, which is specialized cell of the Economic
Offences Wing of the CBI for major bank fraud cases.

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 Cases to be referred to Local Police

58
 Reporting cases of theft, burglary, dacoity
and bank robberies
Occurrence of any bank robberies, dacoities, thefts and
burglaries are required to be reported immediately by
Fax/e-mail to RBI, Department of Banking
Supervision, Central Office and Regional Office,
Security Adviser, and Ministry of Finance of Economic
Affairs (Banking Division), GOI with details of modus
operandi and other information as required in FMR-4.
Banks are also required to submit a quarterly
consolidated statement (FMR-4) to RBI Central
Office/RO within 15 days of the end of the quarter it
relates.

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 CASH RESERVE RATIO
What Is CRR?
Cash Reserve Ratio (CRR) is the percentage of total deposits in the form of
cash, which a commercial bank has to keep as reserves in the form of cash
with the RBI.
The banks are not allowed to use that money, kept with RBI, for economic and
commercial purposes. It is a tool used by the Central Bank of India to regulate
the liquidity in the economy and control the flow of money in the country.
CRR Example
You deposit say Rs 1000 in your bank. Then Bank receives Rs 1000 and has
to put some percentage of it with RBI. If the prevailing CRR is 6% then they
will have to deposit Rs 60 with RBI and they are left with Rs.940. 
Your bank can not use this Rs 60 for its commercial activities like lending or
investment purpose. This Rs.60 is deposited in current account with RBI.

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 STATUTORY LIQUIDITY RATIO
What is SLR?
Statutory Liquidity Ratio (SLR) is a percentage of Net Time and Demand
Liabilities kept by the bank in the form of liquid assets like government approved
securities (bonds), Gold, cash etc.
It is used to maintain the stability of banks through limiting the credit facility
offered to its customers.
The banks hold more than the required SLR and the purpose of maintaining the
SLR is to hold a certain amount of money in the form of liquid assets, so as to
fulfill the demand of the depositors when arises.
SLR Example
You deposit say Rs 1000 in your bank. Then Bank receives Rs 1000 and has to put
some percentage of it with RBI as SLR. If the prevailing SLR is 20% then they will
have to invest Rs 200 in Government securities.
Meeting Both CRR and SLR Requirements
To meet both CRR and SLR requirements, bank have to set aside Rs 260 (Rs 60 +
Rs 200). Thus, after meeting both CRR and SLR requirements, bank is left Rs.740
with it for lending the money as Individual or Corporate loan.

61
 CAMELS RATING -OVERVIEW
The concept was initially adopted in 1979 by the
Federal Financial Institutions Examination Council
(FFIEC) under the name Uniform Financial
Institutions Rating System (UFIRS).

62
 CAMELS RATING OF BANKS
Definition: CAMELS Rating is the rating system
wherein the bank regulators or examiners (generally the
officers trained by RBI), evaluates an overall
performance of the banks and determine their strengths
and weaknesses.
CAMELS Rating is based on the financial statements of
the banks, Viz. Profit and loss account, balance sheet
and on-site examination by the bank regulators.
 In this Rating system, the officers rate the banks on a
scale from 1 to 5, where 1 is the best and 5 is the worst.
The parameters on the basis of which the ratings are
done are represented by an acronym “CAMELS”.

63
 CAMELS RATING OF BANKS
CAMELS is an international rating system used by
regulatory banking authorities to rate financial
institutions, according to the six factors represented by
its acronym. The CAMELS acronym stands for
"Capital adequacy, Asset quality, Management,
Earnings, Liquidity, and Sensitivity."

64
 CAMELS RATING OF BANKS

65
 CAMELS RATING FRAMEWORK
Capital Adequacy
- Capital adequacy focusses on the total position of bank
capital.
 It assures the depositors that they are protected from
the potential shocks of losses that a bank incurs.
 Financial managers maintain company’s adequate
level of capitalization by following it. It is the key
parameter of maintaining adequate levels of
capitalization.

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 Asset Quality
 Asset quality determines the robustness of financial
institutions against loss of value in the assets.
 All commercial banks shows the concentration of loans and
advances in total assets.
 The high concentration of loan and advances indicates
vulnerability of assets to credit risk, especially since the
portion of non-performing assets is significant.
Management Soundness
 It is also depends on compliance with set norm, planning
ability; react to changing situation, technical competence,
leadership and administrative quality.
 A sound management is the most important pre-requisite for
the strength and growth of any financial institution.

67
 Earnings and profitability
-It is the prime sources of increasing capital of any
financial institution.
-Strong earnings and profitability profile of a bank
reflect its ability to support present and future operations.
-Increased earning ensure adequate capital and adequate
capital can absorb all losses and give shareholder
adequate dividends.
Liquidity
 An adequate liquidity position refers to a situation,
where an institution can obtain sufficient funds, either
by increasing liabilities or by converting its assets
quickly at a reasonable cost.
68
 It access in terms of asset and liability management.
Liquidity indicators measured as percentage of
demand and time liabilities (excluding interbank
items) of the banks.
It means that the percentage of demand and time
liabilities gets a bank as per its liquid assets.
Sensitivity to Market Risk
-The sensitivity to market risk is evaluated from changes
in market prices, notably interest rates; exchange rates,
commodity prices and equity prices adversely affect a
bank’s earnings and capital.

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 CAMELS REPORTING - PROCESS

70
 BASEL NORMS
What are Basel norms?
Basel norms or Basel accords are the international
banking regulations issued by the Basel Committee
on Banking Supervision.
The Basel norms is an effort to coordinate banking
regulations across the globe, with the goal of
strengthening the international banking system.
It is the set of the agreement by the Basel
committee of Banking Supervision which focuses on
the risks to banks and the financial system.

71
 What is the Basel committee on Banking Supervision?

The Basel Committee on Banking Supervision (BCBS)  is the primary

global standard setter for the prudential regulation of banks and
provides a forum for regular cooperation on banking supervisory matters
for the central banks of different countries.
It was established by the Central Bank governors of the Group of
Ten countries in 1974.
The committee expanded its membership in 2009 and then again in
2014. The BCBS now has 45 members from 28
Jurisdictions, consisting of Central Banks and authorities with
responsibility of banking regulation.
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.

72
 Why these norms?

 Banks lend to different types of borrowers and each

carries its own risk.
They lend the deposits of the public as well as money
raised from the market i.e, equity and debt.
This exposes the bank to a variety of risks of
default and as a result they fall at times.
Therefore, Banks have to keep aside a certain percentage
of capital as security against the risk of non – recovery.
The Basel committee has produced norms called Basel
Norms for Banking to tackle this risk.

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 Why the name Basel?

Basel is a city in Switzerland.

It is the headquarters of the 
Bureau of International Settlement (BIS), which
fosters cooperation among central banks with a
common goal of financial stability and common
standards of banking regulations.
It was founded in 1930.
The Basel Committee on Banking Supervision is
housed in the BIS offices in Basel, Switzerland.

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 What are these norms?
The Basel Committee has issued three sets of regulations which are known
as Basel-I, II, and III.
Basel-I
 It was introduced in 1988.
 It focused almost entirely on credit risk.
 Credit risk is the possibility of a loss resulting from a borrower's failure to
repay a loan or meet contractual obligations. Traditionally, it refers to the risk
that a lender may not receive the owed principal and interest.
 It defined capital and structure of risk weights for banks.
 The minimum capital requirement was fixed at 8% of risk weighted assets
(RWA).
 RWA means assets with different risk profiles.
 For example, an asset backed by collateral would carry lesser risks as
compared to personal loans, which have no collateral.
 India adopted Basel-I guidelines in 1999.

75
 Basel-II In 2004, Basel II guidelines were published by BCBS.
These were the refined and reformed versions of Basel I accord.
The guidelines were based on three parameters, which the
committee calls it as pillars.
 Capital Adequacy Requirements: Banks should maintain a
minimum capital adequacy requirement of 8% of risk assets
 Supervisory Review: According to this, banks were needed to
develop and use better risk management techniques in monitoring
and managing all the three types of risks that a bank faces, viz.
credit, market and operational risks.
 Market Discipline: This needs increased disclosure requirements.
Banks need to mandatorily disclose their CAR, risk exposure, etc to
the central bank.
Basel II norms in India and overseas are yet to be fully
implemented though India follows these norms.

76
 Basel III In 2010, Basel III guidelines were released.
These guidelines were introduced in response to the
financial crisis of 2008.
A need was felt to further strengthen the system as
banks in the developed economies were under-
capitalized, over-leveraged and had a greater reliance
on short-term funding.
It was also felt that the quantity and quality of capital
under Basel II were deemed insufficient to contain any
further risk.

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 SARFAESI ACT
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest (Sarfaesi) Act of 2002.
Banks utilize Sarfaesi Act as an effective tool for bad loans (Non
Performing Asset) recovery.
The Sarfaesi Act is effective only against secured loans where banks
can enforce the underlying security.
Following are the main objectives of the Sarfaesi Act.

 Provides the legal framework for securitization activities in India.

 It gives the procedures for the transfer of NPAs to asset reconstruction
companies for the reconstruction of the assets.
 Enforces the security interest without Court’s intervention.
 Gives powers to banks and financial institutions to take over the immovable
property that is pledged to enforce the recovery of debt.

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 Major feature of Sarfaesi is that it promotes the setting up of asset
reconstruction companies (ARCs) and asset securitization companies
(SCs) to deal with NPAs accumulated with the banks and financial institutions.
The Act provides three alternative methods for recovery of non-performing
assets, namely:

Securitisation

Securitization
is the practice of pooling together various types of debt
instruments (assets) such as mortgages and other consumer loans and
selling them as bonds to investors.
Asset Reconstruction

Asset reconstruction is the activity of converting a bad or non-performing

asset into performing asset with the help of Asset reconstruction companies.

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 Enforcement of Security without the intervention of
the Court.
If the borrower defaults, the bank may enforce security
interests by:

Take possession of the security;

Sale or lease or assign the right over the security;
Appoint Manager to manage the security;
Ask any debtors of the borrower to pay any sum due to
the borrower.

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 BANKING OMBUDSMAN
An official appointed to investigate individual’s
complaint against maladministration especially that of
public authorities.
The Banking Ombudsman Scheme enables an
expeditious and inexpensive forum to bank customers
for resolution of complaints relating to certain services
rendered by banks.

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 JURISDICATION OF BANKING
OMBUDSMAN
Applies to whole India (including Jammu and
Kashmir)
Banking Ombudsman have jurisdiction over
- All commercial banks (scheduled and non
scheduled, public and private)
- Regional Rural Banks
- Scheduled primary co-operative banks
- NBFC

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 VISION
To be a visible and credible system of dispute
resolution mechanism for common persons utilizing
banking services Vision

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 GOALS
To ensure redressal of grievances of users of banking services
in an inexpensive, expeditious and fair manner that will
provide impetus to improved customer services in the banking
sector on a continuous basis
To provide feedback/suggestions to Reserve Bank of India
towards framing appropriate and timely guidelines to banks to
improve the level of customer service and to strengthen their
internal grievance redressal systems
To enhance the awareness of the Banking Ombudsman Scheme
To facilitate quick and fair (non-discriminatory) redressal of
grievances through use of IT systems, comprehensive and
easily accessible database and enhanced capabilities.

84
 APPOINTMENT AND TENURE
The Reserve Bank may appoint one or more of its
officers in the rank of Chief General Manager or
General Manager to be known as the banking
ombudsmen
They carry out the functions entrusted to them by or
under the scheme
 This appointment may be made for a period not
exceeding three years at a time 

85
 QUALIFICATION
The Banking Ombudsman shall be a person of repute experience in
the field of
• Law
• Banking
• Financial services
• Public administration or
• Management sectors
• If such person is a civil servant he should be in the rank of joint
secretary or above in the Government of India and
• Incase of such person being from banking sector, he should had
the experience of working as a whole time Director in a public
sector or equivalent position

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 Territorial Jurisdiction and Location of Office • The Reserve
Bank shall specify the territorial limits to which the authority of
each of the banking ombudsman shall extend • The office of the
banking ombudsman will be located at such places as may be
specified by the Reserve Bank
Sittings The banking ombudsman may hold sittings at such places
within his area of jurisdiction as may be considered necessary and
proper by him, in respect of a complaint or reference before him
Secretariat
• The Reserve Bank shall depute such number of its
officers and other staff to the office of the banking
ombudsman as considered necessary to function as the secretariat
of the banking ombudsman.
• The cost of the secretariat will be borne by the
Reserve Bank.

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 GENERAL POWERS OF BANKING OMBUDSMAN

To receive complaints relating to banking services

To consider such complaints relating to the
deficiencies in the banking and other services and
facilitate their satisfaction or settlement by agreement
through conciliation and mediation between the bank
and the aggrieved parties or by passing an award in
accordance with the scheme

88
 POWERS TO CALL FOR INFORMATION
Banking Ombudsman may require the bank against
whom the complaint is made or any other bank
concerned with the complaint to provide any
information or furnish certified copy of any document
relating to the complaint which is or alleged to be in its
possession
The Banking Ombudsman shall maintain
confidentiality of such information

89
 GROUNDS ON WHICH THE BANKING
OMBUDSMAN CAN RECEIVE AND CONSIDER
COMPLAINTS 

90
 DEFICIENCY IN SERVICES
(including internet banking)
 Non-payment or inordinate delay in the payment or
collection of cheques, drafts, bills etc
 Delay in payment of inward remittances
 Delay / failure of issuing drafts / pay orders / bankers
cheque / banking facility
 Delay and failure in providing necessary banking
services and products like debit cards,

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 Complaints of accounts operated by NRI
Refusal in opening the deposit account and levying additional charges for
the products without informing the customer
Non Adherence to the RBI guidelines in the matter of credit and debit
cards
 Delay in disbursing of pension
Refusal / delay in accepting payment towards taxes
Delay / refusal in servicing or redemption of government securities
Refusal / delay in closing of accounts
Non-adherence to the fair practices code as adopted by the bank or non-
adherence to the provisions of the Code of Bank s Commitments to
Customers issued by Banking Codes and Standards Board of India and as
adopted by the bank
Non-observance of RBI guidelines on engagement of recovery agents by
bank
 Any other matter relating to the violation of the directives issued by the
RBI in relation to banking or other services

92
  Non-adherence to the fair practices code as adopted
by the bank or non-adherence to the provisions of the
Code of Bank Commitments to Customers issued by
Banking Codes and Standards Board of India and as
adopted by the bank
 Non-observance of RBI guidelines on engagement of
recovery agents by bank
 Any other matter relating to the violation of the
directives issued by the RBI in relation to banking or
other services

93
 DEFICIENCY IN SERVICES
(loans and advances)
Non – compliance of interest rates as per guidelines
from RBI
Delays in sanction, disbursement or non- observance
of prescribed time schedule for disposal of loan
applications
 Non-acceptance of loan application without furnishing
valid reasons
Non-observance of any other directions or instructions
of the RBI from time to time.

94
 CASE STUDY
CASE 1 The complainant was having a Saving Bank
Account with the opposite party bank. Being an
employee of TCS, his salary and other allowances
were being directly credited to his account with the
bank. He alleged that the bank had issued a cheque-
book without his knowledge to someone else and had
passed cheque which were not drawn by him. The total
amount so fraudulently withdrawn from his account
amounted to Rs.977,000/-. A police complaint was also
filed.

95
 CASE 2 The complainant, when he tried to withdraw
cash through ATM, there was power supply failure and
he could not withdraw cash whereas his account was
debited by Rs. 600/-. The complainant reported the
matter to the bank. But in- spite of his request and
telephonic talk the bank did not take any action and
replied that he might have withdrawn the cash as per
the list of transactions available with them. 

96
 REDRESSAL OF GRIEVANCES
PROCEDURE FOR REDRESSAL OF GRIEVANCE
• Any person who has a grievance against a bank on
any one or more of the grounds mentioned in Clause 8 of
the Scheme may, himself or through his authorized
representative (other than an advocate), make a
complaint to the Banking Ombudsman within whose
jurisdiction the branch or office of the bank complained
against is located
• The complainant shall file along with the complaint,
copies of the documents, if any, which he proposes to
rely upon.
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 A complaint made through electronic means shall also be
accepted by the Banking Ombudsman.
 The Banking Ombudsman shall also entertain
complaints covered by this Scheme received by
Central Government or Reserve Bank and forwarded
to him for disposal.
 The application generates unique complaint ID
 Automatic acknowledgement generated on tracking of
complaints
RBI and Finance ministry can also monitor the status
of the complaints

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 No Complaint To Banking Shall Lie
Unless
 The complainant had, before making a complaint to
the Banking Ombudsman, made a written
representation to the bank and the bank had rejected
the complaint.
The complainant had not received any reply within a
period of one month after the bank received his
representation.
The complaint is made not later than one year after the
complainant has received the reply of the bank to his
representation or, where no reply is received.

99
 SETTLEMENT OF COMPLAINT BY
AGREEMENT
 As soon as it may be practicable to do, the Banking
Ombudsman shall send a copy of the complaint to the
branch or office of the bank named in the complaint
For the purpose of promoting a settlement of the
complaint, the Banking Ombudsman may follow such
procedure as he may consider just and proper .

100
 AWARDS BY THE BANKING
OMBUDSMAN
 The Banking Ombudsman shall take into account
aspect while passing Award.
The Award passed shall contain the direction/s, if any,
to the bank for specific performance of its obligations
and in addition to or otherwise, the amount, if any, to
be paid by the bank to the complainant by way of
compensation for any loss suffered by the
complainant.
The Banking Ombudsman shall not have the power to
pass an award directing payment of an amount which
is more than the actual loss suffered by the
complainant.
101
  In the case of complaints, arising out of credit card
operations, the Banking Ombudsman may also award
compensation not exceeding Rs 1 lakh to the
Complainant
A copy of the Award shall be sent to the complainant
and the bank
An award shall lapse and be of no effect unless the
complainant furnishes to the bank concerned within a
period of 30 days from the date of receipt of copy of
the Award

102
 REJECTION OF COMPLAINTS
The Banking Ombudsman may reject a complaint at
any stage if it appears to him that the complaint made
is :
• Not on the grounds of complaint referred to in
clause
8 or
• Beyond the pecuniary jurisdiction of Banking
Ombudsman or Rejection of Complaint 

103
 FACTS TO KNOW
The Banking Ombudsman Scheme was introduced under Section 35 A of
the Banking Regulation Act,1949 by RBI with effect from 1995.
The Banking Ombudsman scheme was first introduced in India in 1995
and it was revised in 2002.
Current Banking Ombudsman Scheme introduced in 2006.
From 2002 until 2006 around 36000 complaints have been dealt by the
Banking Ombudsman.
Banking Ombudsman is appointed by Reserve Bank of India.
Banking Ombudsman is a senior official appointed by RBI. He handle and
redress customer complaints against deficiency in certain banking services.
The offices of Banking Ombudsman is mostly situated at state capitals
Around 21 Banking Ombudsman have been appointed.
All Scheduled Commercial Banks, Regional Rural Banks and Scheduled
Primary Co-operative Banks are covered under the Banking Ombudsman
Scheme.

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