PARA BANKING

• Shraddha Damania• Mihir Mehta• Charmi Morakhia• Vikas Mehta• Noman Agashiwala

GROUP 3

• What is ‘Para Banking’?It provides a framework of rules/regulations/instructions to the Scheduled Commercial Banks for undertaking certain financial services or para-banking activities as permitted by RBI.

• What is ‘Universal Banking’?Universal Banking is a superstore for financial products under one roof. Corporate can get loans and avail of other handy services, while can deposit and borrow. It includes not only services related to savings and loans but also investments.

• Relationship between Para-Banking & Universal Banking?

PARA BANKING AND UNIVERSAL BANKING

PARA BANKING

Most of the rationales for regulating banks fall into broad categories:

• Subsidiary Companies• Equipment leasing, Hire purchase business and Factoring

services • Banks undertaking PD (Primary Dealer) business • Mutual Fund Business• Insurance business• Underwriting of Corporate Shares and Debentures & bonds of

Public Sector Undertakings• ‘Safety Net’ Schemes

What Is Merchant Banking?A merchant bank deals with the commercial banking needs of

a)international finance, b)long term company loans, and c) stock underwriting

Commercial Banking

Retail Banking Merchant Banking

UNDERWRITING OF CORPORATE SHARES & DEBENTURES

• The statutory provision contained in Section 19(2) & (3) of the Banking Regulation Act, 1949 regarding holding of shares in any company as pledgee / mortgagee or absolute owner, should be strictly adhered to.

• The banks have to ensure that underwriting commitments should comply with the ceiling prescribed for the banks’ exposure to the capital markets.

I. Ensure that the portfolio is diversifiedII. Sub-underwritingIII. Carefully evaluate the proposals• Banks should not underwrite issue of Commercial Paper by any Company or

Primary Dealers

• Banks should not extend Revolving Underwriting Facility to short term Floating

Rate Notes/Bonds or debentures issued by corporate entities.

UNDERWRITING OF CORPORATE SHARES & DEBENTURES (CONTINUE)

• An annual review covering the underwriting operations taken up during the year, with company-wise details of such operations, the shares/debentures devolved on the banks, the loss (or expected) from unloading the devolved shares/debentures indicating the face-value and market value thereof, the commission earned, etc. may be placed before their Boards of Directors within 2 months of the close of the fiscal year.

• Banks/Merchant banking subsidiaries of banks undertaking underwriting activities are also required to comply with the guidelines contained in the SEBI (Underwriters) Rules and Regulations, 1993, and those issued from time to time.

UNDERWRITING OF BONDS OF PUBLIC SECTOR UNDERTAKINGS

1. Banks should subject the proposals for underwriting to proper scrutiny having regard to all the relevant factors and accept such commitments only on well-reasoned commercial considerations with the approval of the appropriate authority.

2. The banks should formulate their own internal guidelines as approved by their Boards of Directors on investments in and underwriting of PSU bonds, including norms to ensure that excessive investment in any single PSU is avoided.

3. Banks should undertake an annual review of the underwriting operations relating to bonds of the public sector undertakings, with PSU-wise details of such operations, bonds devolved on the banks, the loss (or expected loss) from unloading the devolved bonds indicating the face-value and market value thereof, the commission earned, etc. and place the same before their Boards of Directors within two months from the close of the fiscal year.

GUIDELINES FOR 'SAFETY NET' SCHEMES

• Under such schemes, large exposures are assumed by way of commitments to buy the relative securities from the original investors at any time during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price.

• In some cases, such schemes were offered without any request from the company whose issues are supported under the schemes.

• Apparently, there was no undertaking in such cases from the issuers to buy the securities. There is also no income commensurate with the risk of loss built into these schemes, as the investor will take recourse to the facilities offered under the schemes only when the market value of the securities falls below the pre-determined price.

Investment ceiling in financial service companies.

As pledgee or a mortgagee

30 per cent of the paid-up share capital of that company . OR 30 per cent of its own paid-up share capital and reserves.

In a subsidiary company, financial institutions, stocks & other exchanges. 10 per cent of the bank’s paid-up share capital and reserves. 20 per cent of the bank’s paid-up share capital and reserves.

Investments which are classified as 'Held for Trading' category.

Banks participation in the equity subject to RBI approval.

Equipment leasing, Hire purchase business and Factoring services.

a)Factoring

Types of Factoring

•Maturity Factoring – Maintains sales ledger.

•Finance Factoring – Advances Funds against produce.

•Discount Factoring – Advances between 70 to 85%.

b) Leasing

• Finance Leasing :The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease.

• Operating Leasing :The leasing company will lease the equipment, expecting to sell it secondhand.

c) Hire purchase agreementAfter all the payments have been made, the business customer becomes the owner of the equipment

Para banking Guidelines for Leasing, HP & Factoring

a)Forming of subsidiaries.

b)Departmentally in existing organization.

• Skilled personnel & adequate infrastructural facilities.

• Risk weight of 100%.

• Single Borrower & Group Borrower 15% of capital funds or up to 20% for infrastructure Projects.

• Group Borrower- 40% & 50 % respectively

• Balanced portfolio vis-à-vis aggregate credit - 10 %.

• Approval of the Boards to avoid asset liability mismatch.

• Equipment leasing companies & NBFCs.

• Income recorded as per AS-19 leases.

• Changes in income recognition and provisioning for loans/advances be implemented.

OTHER REQUIREMENTS

MUTUAL FUND BUSINESS

• Approval

• Compliance

• Bank-sponsored mutual funds

TERMS AND CONDITIONS FOR MARKETING MUTUAL FUND

• Banks should only act as an agent of the customers.

• Banks should not acquire units of mutual funds from the secondary market.

• Banks cannot buy back units of mutual funds from their customers.

• Proposal to extend any credit facility to individuals against the security of units of mutual funds.

• Banks holding custody of mutual fund units on behalf of their customers.

MONEY MARKET MUTUAL FUNDS

TERMS AND CONDITIONS TO OFFERCHEQUE WRITING FACILITIES TO INVESTORS

• Commercial arrangement

• In the nature of a drawing account

• Pre-funding of the drawing account

PARA BANKING:- PRIMARY DEALERSHIP

•Meaning

•Business Sense

ELIGIBILITY CRITERIA

• Owned Capital of Rs 1000 crores

• Minimum CAR of 9 %

• Net NPA of less than 3 %

PRUDENTIAL NORMS

• Investment will be counted as a part of SLR.

• Separate SGL for their PD Subsidiaries with minimum balance of Rs 100 crores.

• Investment valuation of PD Portfolio.

• A proper MIS has to be maintained.

PRIMARY DEALERS IN INDIA

1. ABN AMRO BANK2. KOTAK MAHINDRA BANK3. BANK OF BARODA4. HDFC BANK LTD5. HSBC BANK LTD6. JP MORGAN CHASE BANK7. CITI BANK LTD8. CANARA BANK9. CORPRATION BANK LTD

PARA BANKING NORMS FOR INSURANCE(BANCASSURANCE)

• Meaning and My Experience• Business Scope

Revenue from Non Core Activity.

Risk Free.

Better Utilization of Infrastructure.

Synergies (Insurance & Banking).

RBI NORMS FOR INSURANCE BUSINESS BY BANKS

• Joint Venture or Subsidiary

• Application Approval

• Employee Qualification

CURRENT SCENARIO

• SubsidiariesEg:- SBI LIFE INSURANCE LTD

• Tie up with insurance companiesEg:- ICICI PRUDENTIAL , HDFC STANDARD, KOTAK OLD MUTUAL

• Group of banks forming a subsidaryEg:- CANARA HSBC ORIENTAL BANK OF COMMERCE LIFE INSURANCE

NEWS

POST-2011, BANK BOOKS TO CARRY REAL NUMBERS

Bank will have to value assets on current rather than on historic cost.

Banks will have to adopt the international financial reporting standards (IFRS) by 2011.

State bank of India has already taken the initiative to shift from the current Indian standard of accounting to IFRS.

STANCHART TO HIRE 850 PEOPLE FOR PRIORITY BANKING

RRBs embrace core banking solutions In step with RBI's direction to implement 100% core banking solutions (CBS) by September 2011, United Bank of India (UBI)-sponsored regional rural banks in four states have started working on their IT-systems.

ICICI Bank to focus on home, car loans, says CEO

IDBI Bank-led consortium of lenders, have raised $ 1.1 bn loan for national carrier Air India to purchase aircraft.

SUUTI eyes Rs 7K cr from sale of 17% in Axis Bank

The government has made the first move to use the surplus funds of commercial banks to meet its short-term cash needs

RBI allows cash withdrawal from merchant banker terminals

IDBI Bank lowers interest rates on deposit, auto loans

IndusInd Bank raises US$ 100 million through Qualified Institutional Placement (QIP)

Housing Development Finance Corp, India's top mortgage lender, said on Tuesday it planned to raise Rs 40 billion ($820 million) through two- and three-year bonds.

Banks want curbs on free ATM use

IDBI Bank revives plan to sell mortgage subsidiary

India’s top 12 banks log 55% jump in Q1 profit: CARE

SBI launches 'My Home' campaign for home loans

Retired teachers, Traders can make to Banks Business Correspondent list.

JPMorgan profits a strong sign for banking sector.

State-rescued Royal Bank of Scotland reported a five-fold jump in bad debts.

Australia and New Zealand Banking Group Ltd. said on Tuesday it had agreed to buy some Asian businesses of the Royal Bank of Scotland in a $550 million deal.

BIBLOGRAPHY

• PARA BANKING NORMS BY RBI (CIRCULAR)• www.rbi.co.in• www.dfhi.co.in• AXIS BANK ANNUAL REPORT 20010-11• ECONOMIC TIMES• MINT • INDIAINFOLINE NEWSLETTER