sample accounts

Sure Success Series

Accounting

&

Finance for

Bankers ( As per NEW UPDATED SYALLABUS For

JAIIB/ Diploma in Banking & Finance

Examination)

By: Vaibhav Awasthi

The content of this book has been developed keeping in view courseware for the

Second paper of Accounting & Finance for Bankers of JAIIB.

An attempt has been made to cover fully the syllabus prescribed for each

module/subject and the presentation of topics may not always be in the same

sequence as given in the syllabus. Candidates are also expected to take note of all

the latest developments relating to the subjects covered in the syllabus by referring

to RBI circulars, financial papers, economic journals, latest books and publications in

the subjects concerned.

Although due care has been taken in publishing this study material, yet the possibility

of errors, omissions and/or discrepancies cannot be ruled out.

We welcome suggestion for improving the book and its contents. You may write back

to us at [email protected]

All rights reserved. No part of this publication may be reproduced or transmitted, in any

form or by any means, without permission. Any person who does any unauthorized act in

relation to this publication may be liable to criminal proceedings and civil claim for

damages.

This book is meant for educational and learning purpose. The author of this book has taken all reasonable care to ensure

that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any

manner whatsoever.

About the Author:

Vaibhav Awasthi, has experience of 10 years in Banking. He has done his graduation

from Kanpur University and MBA (Finance) from Delhi. He also holds the distinction of

being part of maiden batch of Certified Banking Compliance Professional conducted

by IIBF.

He has been mentoring students for JAIIB/CAIIB since last 8 years and presently

works in middle management of leading Public Sector Bank.

To the thought

Jodi Tor Dak Shune Keu Na Ashe Tobe Ekla Cholo Re

Module A

Business Mathematics

& Finance

Money has time value. As time passes it earns interest. First amongst it is simple

interest

SI =

Where SI = Simple Interest; P = Principal; R = Rate of Interest and T = Time period

Another concept is compound interest; Compound interest means you start earning

interest on the interest portion also.

A= (1 + ) ; where r is rate of interest and n is the time period. Please note that

this formula is used if compounding is done annually, if compounding is to be done

semiannually or quarterly for any period rate would be divided by that period and

time be multiplied. Let us understand this through an example

Illustration: Calculate value of 2000, at 5 % ROI if interest is compounded (i)

annually (ii) semiannually (iii) quarterly (iv) monthly

i) A = 2000 * (1 + 0.05)1 = Rs2100

ii) A= 2000 * (1 + 0.025)2 = Rs2101.25 (ROI divided by 2 and time multiplied by 2)

iii) A = 2000* (1 + 0.0125)4 = Rs2101.89 (ROI divided by 4 and time multiplied by 4)

iv) A = 2000* (1 + 0.0042)12 = Rs2102.32 (ROI divided by 12 and time multiplied by

12)

Thus as number of times compounding increases, amount increases.

Calculation of annuities

Annuity means series of equal payments. Suppose you start a RD and deposit and

Rs2000 monthly that is a form of annuity where series of amount i.e. Rs2000 is

involved.

Another example is you pay Rs 50000 per year in the form of rent for next 10 years.

This is another type of annuity.

What you need to keep in mind that series of equal should be involved to qualify it as

an annuity.

Now there are two concepts- Ordinary annuity and Annuity due. If cash flows occur

at the end of the period it is called ordinary annuity and if they occur at the start of

the period it is called annuity due. So if you pay 50,000 at the end of every year it will

be ordinary annuity but if you pay 50,000 at the beginning of every year it will be

annuity due.

Unit -1 Calculation of Interest and annuities

Future Value of ordinary annuity:

Understand the concept of future value and present value. For example, if you are

investing Rs 50,000 each year, at the end of every year, for next 5 years at 10 %

rate of interest what amount you will get at the end of the 5th year?

Using the above formula we will get the answer of above questions

FV = 50,000 (+.)

. = Rs3,05,255

So if you invest Rs50, 000 total amount invested will be Rs50, 000 and interest

earned on that will be Rs 55,255.

Question 1: If you deposit Rs16, 000 per year for 12 years (each deposit is made at

the end of each year) in an account that pays an annual interest rate of 14%, what

will your account be worth at the end of 12 years?

Question 2. How much will an ordinary annuity of Rs 650 per year be worth in eight

years at an annual interest rate of 8 percent?

a. Rs4,800.27 b. Rs6,366.10 c. Rs6,913.79 d. Rs6,822.79

Question 3: How much must you deposit at the end of each year in an account that

pays an annual interest rate of 20 percent, if at the end of 5 years you want

Rs10,000 in the account?

a. Rs1,500 b. Rs1,250.66 c. Rs1,393.47 d. Rs1,343.72

Question 4: You plan to accumulate Rs 450,000 over a period of 12 years by

making equal annual deposits in an account that pays an annual interest rate of 9%

(assume all payments will occur at the end of each year). What amount must you

deposit each year to reach your goal? (Answer in approx.)

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Sinking Fund method:

This is not a new or complex topic but actually calculation of future value of annuity only. Suppose you have to purchase a new house after 10 years which will cost you around Rs 10.00 lakh. One way is you open an account and save Rs 1 lakh every year so after 10 years you will have Rs 10 lakh (not counting the interest factor)

Bonds are debt instruments. They show indebtedness. To understand it simply lets

say a company ABC Limited wants to borrow Rs 1 lakh for 3 years from the market

i.e. from common public. One way to do is by issuing bonds of Rs 1000 each. In this

way 100 bonds will be floated in the market. But why will someone pay Rs 1000 and

get it blocked for 3 years? Simple he must be paid something for it i.e. interest. The

interest paid on these bonds is called coupon. ABC decides coupon will be 8 %. So

by investing in this bond what will an investor get? He will get Rs 80 during first year

(coupon payment) Rs 80 during second year (coupon payment of next year) and Rs

1080 during third and last year (coupon payment along with repayment of principal

amount). Thus an investor would get total Rs 1240 in 3 years.

So would you invest in this bond? Answer lies in many things one of the most

important being what is the rate of interest in market offered by other such bonds.

And this market rate of interest is called market yield. How this market yield affects

bond prices is the most important learning outcome of this chapter.

Suppose market yield is 7 %. This means if you invest your money it will grow at 7 %

but if you invest your money in this bond it will grow at 8 % i.e. more than market rate

of interest. From this we can start finding the price of a bond. A bond which is giving

more than others how much should it be valued?

Value of bond or for that matter any financial instrument depends upon its cash flow.

How much it is paying back. From above we saw that it was paying back Rs 1240.

But those 1240 will come in 3 years, how much that money is valued now should be

the price of the bond. For seeing how much bond is valued, the cash flow should be

discounted. Discounted means their present value which is simply the cash flow

divided by market rate of interest.

So value of bond will be 80

1.07 +

80

(1.07)2 +

1080

(1.07)3

= 74.77 + 69.87 + 881.60 = Rs 1026.24


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Yield to Maturity

Yield to maturity is the discount rate which makes the cash flow of the bond equal to

its present market value.

Suppose present value of bond is Rs 1100. Face value is Rs 1000 and coupon rate

is 9 % and term of bond is 3 years. What is the YTM of this bond? When question

Unit 2 Calculation of YTM

asked is what is YTM, you are expected to find out the market yield which will make

the cash flow of the bond equal to its present market value in the present value equal

to Rs 1000.

1100 = 90

(1+

100) +

90

(1+ /100)2 +

1090

(1+/100)3

In the above question we need to find this r. Remember there is no direct formula to

solve this. Only procedure for calculating YTM is trial and error. Assume a rate of

interest and find the value. If value comes less than market value increase discount

rate, if it is more than market value reduce rate of interest.

( Note for candidates: During examination if question is asked to find YTM, avoid

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Module B

Principles of Book

Keeping

Qualitative characteristics of Accounting : To make accounting information decision

useful, it should possess the following qualitative characteristics.

Reliability Understandability Relevance Comparability

Generally Accepted Accounting Principles (GAAP)

In order to maintain uniformity and consistency in accounting records, certain rules

or principles have been developed which are generally accepted by the accounting

profession. These rules are called by different names such as principles, concepts,

conventions, postulates, assumptions and modifying principles.

Basic Accounting Concepts

(i) Business entity : The concept of business entity assumes that business has a

distinct and separate entity from its owners. It means that for the purposes of

accounting, the business and its owners are to be treated as two separate entities.

Keeping this in view, when a person brings in some money as capital into his

business, in accounting records, it is treated as liability of the business to the owner.

The accounting records are made in the book of accounts from the point of

view of the business unit and not that of the owner. The personal assets and

(ii) Money measurement: The concept of money measurement states that only

those transactions and happenings in an organisation which can be expressed in

terms of money such as sale of goods or payment of expenses or receipt of income,

etc. are to be recorded in the book of accounts. All such transactions or happenings

which cannot be expressed in monetary terms, for example, the appointment of a

manager, capabilities of its human resources or creativity of its research

department or image of the organisation among people in general do not find a place

in the accounting records of a firm.

(iii) Going concern: The concept of going concern assumes that a business firm

would continue to carry out its operations indefinitely, i.e. for a fairly long period

of time and would not be liquidated in the foreseeable future. This is an important

assumption of accounting as it provides the very basis for showing the value of

assets in the balance sheet.

(iv) Accounting period: Accounting period refers to the span of time at the end of

which the financial statements of an enterprise are prepared, to know whether

it has earned profits or incurred losses during that period and what exactly is

the position of its assets and liabilities at the end of that period.

(v) Cost concept: The cost concept requires that all assets are recorded in the

book of accounts at their purchase price, which includes cost of acquisition,

transportation, installation and making the asset ready to use.

Unit 7 Basic accounting Procedures


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1) Which of the following is not regarded as the fundamental concept that is

identified by IAS-1

A) The going concern concept

B) The separate entity concept

C) The prudence concept

D) Actual concept

2)Using "lower of cost and net realisable value" for the purpose of inventory

valuation is the implementation of which of the following concepts?

A) The going concern concept

B) The septate entity concept

C) The prudence concept

D) Matching concept

3)The concept of separate entity is applicable to which of following types of

businesses?

A) Sole proprietorship

B) Corporation

C) Partnership

D) All of them

4) Is Prudence concept allows a business to build substantially higher reserves or

provisions than that is actually required?

A) Yes

B) No

C) To some extent

D) It depends on the type of business


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Practice Questions -1

In this unit we will see how business records various transactions which it makes.

Illustration 1: Kaynat started business of selling televisions. She purchases the

televisions from two dealers

(i) ABC enterprises (ii) DEF enterprises

She sells the televisions to three big customers

(a) XYZ (b) ZZZ (c) YYY

So if Kaynat is doing this business, daily she will be involved in many transactions.

On a typical day her transactions may look like this

(i) Purchase 50 TV sets from ABC

(ii) Paid salary to the staff

(iii) Paid electricity charge

(iv) Sold 10 TVs to XYZ

(v) Sold 20 TVs to ZZZ

(vi) Paid bank interest

So how will she keep tab of all these transactions? One way is to maintain a diary,

this diary known as Journal (a French word means a diary recording events). So

Kaynat will record all these transactions in a diary. Now suppose daily she indulges

in all these transactions, how she will keep record of how much TVs have been sold,

how much purchased, how much rent paid or wages paid?

So to ease this process she will make a register for all the heads (e.g. salary,

electricity, XYZ a/c, ZZZ a/c) this register is what it is called Ledger.

Now you understand the concept of Journal and Ledger? While journal is the original

book of entry, ledger is made for each and every account and after posting an entry

into a ledger same is transferred to a ledger.

However, there are rules for how to write entry into the ledger. Foremost amongst is

to classify all the accounts.

Remember that all the accounts can be classified into three:

(i) Real account- includes things which can be seen and touched examples.

Land, building ,machinery, stocks, cash etc

(ii) Nominal account- includes all expenses and gains. For e.g. discount

paid, rent paid, commission received

(iii) Personal account- includes all accounts dealing with person. For e.g.

Debtors, creditors, capital a/c.

Unit 8- Maintenance of Cash/Subsidiary book and ledger


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Lets understand through example

(a) Ram started business with cash

First of all we need to find out the accounts which are involved. How to find it?

Simply translate the English. It means Ram started and brought cash. Thus

two accounts are Ram and Cash. Ram is a person and thus personal

account. Rule is debit the receiver credit the giver. Here ram is giving Rs

10000 to the business thus he is a giver and needs to be credited. Similarly

for cash account, cash is a real account, principle is debit what comes in. here

cash is coming in the business and thus cash account needs to be debited.

Here it is

Cash a/c.. Dr 10,000

To Rams Capital a/c

(b) Purchased furniture worth Rs 5000 for the business

Again start from identifying the account. Simply translated it means furniture

cam in the business and cash was paid for it. So two accounts involved here

are Furniture and cash. Both are real assets as they can be touched and

seen. So how to apply the rule of real account? Furniture is coming in so it

should be debited and cash is going account so it should be credited. Thus

entry is

Furniture a/c . Dr Rs 10000

To Cash Rs 10000

(c) Purchased goods worth Rs 2000

Here goods are purchased. Remember one thing Furniture was an asset.

Assets are always represented in their name in the books of account. Goods

are something which a traders deal in and thus they are represented by

goods. Here we need to remember these goods are either purchased or sold

and thus purchase and sales accounts are shown in the book. For this entry it

means goods are coming in and cash has been paid. Goods are real account,

cash also real account so entry is

Purchases a/c . Dr Rs 2000

To cash a/c Rs 2000


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Test Your Understanding

Q1. Soraj Mart furnishes the following information:

1.4.2005 Business started with cash Rs. 1,50,000.

1.4.2005 Goods purchased form Manisha Rs. 36,000.

1.4.2005 Stationery purchased for cash Rs. 2,200.

2.4.2005 Open a bank account with SBI for Rs. 35,000.

2.4.2005 Goods sold to Priya for Rs. 16,000.

3.4.2005 Received a cheque of Rs. 16,000 from Priya.

5.4.2005 Sold goods to Nidhi Rs. 14,000.

08.4.2005 Nidhi pays Rs. 14,000 cash.

10.4.2005 Purchased goods for Rs. 20,000 on credit from Ritu.

14.4.2005 Insurance paid by cheque Rs. 6,000.

18.4.2005 Paid rent Rs. 2,000.

20.4.2005 Goods costing Rs. 1,500 given as charity.

24.4.2005 Purchased office furniture for Rs. 11,200.

29.4.2005 Cash withdrawn for household purposes Rs. 5000.

30.4.2005 Interest received cash Rs.1,200.

30.4.2005 Cash sales Rs.2,300.

30.4.2005 Commission paid Rs. 3,000 by cheque.

30.4.2005 Telephone bill paid by cheque Rs. 2,000.

30.4.2005 Payment of salaries in cash Rs. 12,000.


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1)The closing balance of petty cash book is considered as

A) Liability

B) Asset

C) Expenses

D) Income

2) Payment of rent expenses is recorded on which side of cash book?

A) Receipts

B) Payments

C) Income

D) Expense

Practice Set - I

Module C

Final Accounts

The transactions of a business enterprise for the accounting period are first recorded

in the books of original entry, then posted therefrom into the ledger and lastly tested

as to their arithmetical accuracy with the help of trial balance. After the preparation of

the trial balance, every businessman is interested in knowing about two more facts.

They are : (i) Whether he

has earned a profit or suffered a loss during the period covered by the trial balance,

and (ii) Where does he stand now? In other words, what is his financial position?

For the above said purposes, the businessman prepares financial statements for his

business i.e. he prepares the Trading and Profit and Loss Account and Balance

Sheet at the end of the accounting period. These financial statements are popularly

known as final accounts.

The preparation of financial statements depends upon whether the business concern

is a trading concern or manufacturing concern. If the business concern is a trading

concern, it has to prepare the following accounts along with the

Balance Sheet:

(i) Trading Account; and

(ii) Profit and Loss Account.

But, if the business concern is a manufacturing concern, it has to Prepare the

following accounts along with the Balance Sheet:

(i) Manufacturing Account;

(ii) Trading Account ; and

(iii) Profit and Loss Account.

Basically, two types of statements are prepared namely "Income Statement" and

'Position Statement". The Income Statement is generally known as Profit and Loss

Account. This Profit and Loss Account is further sub-divided either into three parts or

two parts according to the nature of the business. As stated above, if the concern is

a manufacturing one, the

Profit and Loss Account is divided into three sub-sections viz, Manufacturing

Account, Trading Account and Profit and Loss Account.

On the other hand, if it is a trading concern, then this account is divided into two sub-

sections, namely Trading Account and Profit and Loss Account. The second

statement i.e. the "Position Statement" which is popularly known as the "Balance

Sheet" is prepared by every type of business concern.

The Balance Sheet is a statement which shows the position of the assets, liabilities

and capital in money terms, of an accounting entity as on a given date. A Balance

Sheet is a formal representation of the accounting equation indicating that the assets

are always equal, in value, to the liabilities plus capital.

Unit 14 Preparation of final accounts

Trading Account is prepared to know the Gross Profit or Gross Loss. Profit and Loss

Account discloses net profit or net loss of the business. Balance sheet shows the

financial position of the business on a given date.

For preparing final accounts, certain accounts representing incomes or expenses are

closed either by transferring to Trading Account or Profit and Loss Account. Any

Account which cannot find a place in any of these two accounts goes to the Balance

Sheet.

TRADING ACCOUNT

After the preparation of trial balance, the next step is to prepare Trading Account.

Trading Account is one of the financial statements which shows the result of buying

and selling of goods and/or services during an accounting period. The main objective

of preparing the Trading Account is to ascertain gross profit or gross loss during the

accounting period. Gross Profit is said to have been made when the sale proceeds

exceed the cost of goods sold. Conversely, when sale proceeds are less than the

cost of goods sold, gross loss is incurred.

For the purpose of calculating cost of goods sold, we have to take into consideration

opening stock, purchases, direct expenses on purchasing or manufacturing the

goods and closing stock. The balance of this account i.e. gross profit or gross loss is

transferred to the Profit and Loss Account.

Format of Trading Account

A Trading Account is prepared in "T" form just like every other account. Though it is

an account, yet it is not exactly an ordinary ledger account. It is one of the accounts

which are prepared only once in an accounting period to ascertain the gross profit or

gross loss of the business as it is prepared once in a year, columns for date and

journal folio are not provided. While preparing a Trading Account, an important point

that must be kept in mind is that a closing journal entry is to be recorded in the

journal proper. At the end of every accounting period, items of revenue and direct

expenses are closed by transferring their respective balances to the Trading

Account. The format of a Trading Account and the usually appearing entries therein are

shown below

Balancing of Trading Account

After recording the relevant items of various accounts in the respective sides of the

Trading Account, the balance is calculated to ascertain Gross Profit or Gross Loss. If

the total of the credit side is more than that of the debit side, the excess represents

Gross Profit. Conversely, if the total the debit side is more than that of the credit side,

the excess

represents Gross Loss. Gross Profit is transferred to the credit side of the Profit and

Loss Account and Gross loss to the debit side of the Profit and Loss Account.

Closing Entries for Trading Account

The journal entries necessary to transfer opening stock, purchases, sales and

returns to the Trading Account are called closing entries, as they serve to close

these accounts. These are as follows:

1. For transfer of opening stock, purchases and direct expenses to Trading A/c

Trading A/c Dr.

To Stock (Opening) A/c

To Purchases A/c

To Direct Expenses A/c

(Being opening stock, purchases and direct expenses transferred to Trading

Account)

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CLASSIFICATION OF RATIOS

Ratios can be classified into five broad groups : (i) Liquidity ratios (ii) Activity ratios

(iii) Leverage/Capital structure ratios (iv) Coverage ratios (v) Profitability ratios.

Liquidity Ratios : Liquidity refers to the ability of a firm to meet its current

obligations as and when they become due. The importance of adequate liquidity in

the sense of the ability of a firm to meet current/short-term obligations when they

become due for payment can hardly be overstressed. The ratios which indicate the

liquidity of a firm are (i) net working capital, (ii) current ratio, (iii) acid test/quick ratio

1. Net Working Capital : The first measurement of liquidity of a firm is to compute its

Net Working capital (NWC). NWC is really not a ratio, it is frequently employed as a

measure of a company's liquidity position. NWC represents the excess of current

assets over current liabilities. A firm should have sufficient NWC in order to be able

to meet the claims of the creditors and the day-to-day needs of business.

NWC = Total Current Assets Total Current Liabilities

Illustration 1. : The following data has been given in respect of two general

insurance firms. Calculate their NWC and comment upon the liquidity position.

Company X Company Y

Total Current Assets Rs. 2,80,000 Rs. 1,30,000

Total Current Liabilities Rs. 2,20,000 Rs. 1,10,000

Solution :

NWC = TCATCL

Company X : Rs. 2,80,000Rs. 2,20,000 = Rs. 60,000.

Company Y : Rs. 1,30,000Rs. 1,10,000 = Rs. 20,000.

X company has three times NWC in comparison to Y company, hence it is more

liquid. However, the size of NWC alone is not an appropriate measure of the liquidity

position of a firm. The composition of current assets is also important in this respect.

2. Current Ratio : Current ratio is the most common ratio for measuring liquidity.

Being related to working capital analysis, it is also called the working capital ratio.

The current ratio is the ratio of total current assets to total current liabilities.

Current Ratio = Current Assets

Current Liabilities

If the result is greater than 1, the firm presumably has sufficient current assets to

meet its current liabilities. A ratio of 2:1 (two times current assets of current liabilities)

is considered satisfactory as a rule of thumb. Thus, a good current ratio, in a way,

provides a margin of safety to the creditors.

3. Acid-Test/Quick Ratio: The term quick assets refers to current assets which can

be converted into cash immediately or at a short notice without diminution of value.

Included in this category of current assets are (i) cash and bank balances; (ii) short-

Unit 15 Ratio Analysis

term marketable securities and (iii) debtors/receivables. Thus, the current assets

which are excluded are: prepaid expenses and inventory. The exclusion of inventory

is based on the reasoning that it is not easily and readily convertible into cash.

Prepaid expenses by their very nature are not available to pay off current debts. An

acid-test ratio of 1:1 or greater is recommended.

Illustration 1 : From the following information regarding current assets and current

liabilities of a firm, comment upon the liquidity of the concern :

Current Assets: Rs.

Cash 50,000

Debtors 20,000

Bills Receivables 15,000

Stock 35,000

Investment in Govt. Securities 25,000

Prepaid Expenses 10,000

Current Liabilities:

Trade Creditors 27,000

Bills Payable 12,000

Outstanding Expenses 5,000

Provision for Taxation 18,000

Bank Overdraft 10,000

Solution :

(1) Current Ratio = 2.15 : 1 (2) Quick Ratio = 1.53: 1

Illustration 2

The current ratio is 2:1. State giving reasons which of the following

transactions would improve, reduce and not change the current ratio:

( a ) Repayment of current liability;

( b ) Purchased goods on credit;

( c ) Sale of an office typewriter (Book value Rs. 4,000) for Rs. 3,000 only;

( d ) Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000;

( e ) Payment of dividend.

Solution

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5. Book Value Per Share

Book Value per share = Equity shareholders funds

No. of Equity Shares

Equity shareholder funds refer to Shareholders Funds Preference Share Capital.

6. Dividend Payout Ratio

This refers to the proportion of earning that are distributed against the shareholders.

It is calculated as

Dividend Payout Ratio = Dividend per Share

Earnings per Share

7. Price Earning Ratio

The ratio is defined as

P/E Ratio = Market price of a Share

Earnings per share

Numerical

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Module D

Banking Operations

The term banking is defined as per Sec 5(i) (b), as acceptance of deposits of money

from the public for the purpose of lending and/or investment. Such deposits can be

repayable on demand or otherwise and withdrawable by means of cheque, drafts,

order or otherwise.

Sec 5 (i)(c) defines a banking company as any company which handles the

business ofbanking. Licence to bank is granted under Sec 22 of the BR act by RBI.

Permitted businesses of Bank are:

The forms of business permissible under Section 6(1) of the Banking Regulation

Act, apart from banking

(i) borrowing raising money (ii) lending (iii) bill discounting negotiating (iv) L/C

(v)Foreign Exchange (vi) buying and selling bonds (vii) safe deposit vaults (viii)

banker to govt. (ix) Guarantee business (x) acquire and manage building for its

own use (xi) undertake the administration of estates as executor, trustee (xii)

any other business specified by central govt.

Banks have also been permitted to undertake para banking activities. and can undertake certain eligible financial services or para-banking activities either departmentally or by setting up subsidiaries. Banks may form a subsidiary company for undertaking the types of businesses which a banking company is otherwise permitted to undertake, with prior approval of Reserve Bank of India.

Certain para banking activities include

1. Equipment Leasing, Hire Purchase and Factoring Services Businesses 2. Primary Dealership Business 3. Underwriting of Corporate Shares and Debentures 4. Underwriting of Bonds of Public Sector Undertakings 5. Retailing of Government Securities 6. Mutual Fund Business 7. Money Market Mutual Funds 8. Cheque Writing Facility for Investors of MMMFs 9. Insurance Business 10. Pension Fund Management by Banks 11. Referral Services

Outsourcing in Banks: Outsourcing' is defined as a bank's use of a third party (either an affiliated entity within a corporate group or an entity that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the bank, now or in the future.

Scope of RBI Guidelines:

i. Risk Management practices for outsourced Financial Services ii. Outsourcing Policy

Unit 20 Banking operations

iii. Role of the Board and Senior Management iv. Evaluation of the Risks v. Evaluating the Capability of the Service Provider vi. The Outsourcing Agreement vii. Confidentiality and Security viii. Code of Conduct for DSA/ DMA/ Recovery Agents ix. Business Continuity and Management of Disaster Recovery Plan x. Monitoring and Control of Outsourced Activities xi. Redressal of Grievances related to Outsourced services xii. OFF-SHORE OUTSOURCING OF FINANCIAL SERVICES

Activities not to be Outsourced : Bank cannot outsource core management functions including Internal Audit, Compliance function and decision-making functions like determining compliance with KYC norms for opening deposit accounts, according sanction for loans (including retail loans) and management of investment portfolio.

Risks with outsourcing: Operational Risk Arising due to technology failure, fraud, error, inadequate financial capacity to fulfil obligations and/or provide remedies.

Need for clear operating instructions in Bank: Banks are engaged in complex transactions involving huge cash handling and transfers. Often these transactions take place at varied branch locations and through electronic mode and with use of new technologies. All this require presence of clear instructions and rules for smooth operations

Manuals are in nature of guide based on same legal framework and bring in one place important aspects of banking functions at one place for reference. It should be updated regularly to keep it relevant. It contains details about opening of accounts, handling cash, clearing ,loans and advances, remittances, KYC etc.

There are 4 elements of KYC Policy

(A) Customer Acceptance Policy ( CAP ) : It means who can be accepted as

customers:

No account is opened in anonymous or fictitious/ benami name(s);

Decide on acceptance criteria for each category of business

Accept customers after verifying their identity

Strive not to

It is important to bear in mind that the adoption of customer acceptance policy

and its implementation should not become too restrictive and must not result in

denial of banking services to general public, especially to those, who are

financially or socially disadvantaged.

(B) Customer Identification Procedure (CIP )once it is decided who can be

accepted as customer, next step is how to identify that customer

(C) Monitoring of Transactions :Ongoing monitoring is an essential element of

effective KYC procedures. Branches can effectively control and reduce their risk

only if they have an understanding of the normal and reasonable activity of the

customer so that they have the means of identifying transactions that fall outside

the regular pattern of activity. However, the extent of monitoring will depend on

the risk sensitivity of the account.

Cash transaction of Rs. 10.00 lac and above: Branches are required to record and report all individual cash deposits and withdrawals of Rs. 10.00 lac and above in deposits, cash credit and overdraft accounts etc.

(D) Risk Management

The banks KYC policies and procedures covers management oversight, systems

and controls, segregation of duties, training and other related matters. For

ensuring effective implementation of the banks KYC polices and procedures, the

Branch Managers shall explicitly allocate responsibilities within the branch. The

Branch Manager shall authorize the opening of all new accounts. However, in

case of branches with business of Rs.50 crore or above, where there is usually

another senior Officer next below the Branch Manager heading the Accounts

Department may authorize the opening of new accounts. The branches shall

prepare risk profiles of all their existing and new customers and apply Anti Money

Laundering measures keeping in view the risks involved in a transaction, account

or banking/business relationship.

Unit 21 Operational Aspects of KYC Customer service

The risk to the customer shall be assigned on the following basis:

i. Low Risk (Level I):

The illustrative examples of low risk customers could be salaried employees

whose salary structures are well defined, people belonging to lower economic

strata of the society whose accounts show small balances and low turnover,

Government Departments and Government owned companies, regulators and

statutory bodies etc. In such cases, only the basic requirements of verifying the

identity and location of the customer shall be met.

ii. Medium Risk (Level II):

Customers that are likely to pose a higher than average risk to the bank may be

categorized as medium or high risk depending on customers background, nature

and location of activity, country of origin, sources of funds and his client profile etc;

such as:

a) Persons in business/industry or trading activity where the area of his residence

or place of business has a scope or history of unlawful trading/business activity.

b) Where the client profile of the person/s opening the account, according to the

perception of the branch is uncertain and/or doubtful/dubious.

iii. High Risk (Level III):

The branches may apply enhanced due diligence measures based on the risk

assessment, thereby requiring intensive due diligence for higher risk customers,

especially those for whom the sources of funds are not clear. The examples of

customers requiring higher due diligence may include

a) Non Resident Customers,

b) High Net worth individuals

c) Trusts, charities, NGOs and organizations receiving donations,

d) Companies having close family shareholding or beneficial ownership

e) Firms with sleeping partners

f) Politically Exposed Persons (PEPs) of foreign origin

g) Non-face to face customers, and

h) Those with dubious reputation as per public information available, etc.

The persons requiring very high level of monitoring may be categorized as Level

IV.

Recent Simplified measures by RBI

1. Single document for proof of identity and proof of address

There is now no requirement of submitting two separate documents for proof of identity and proof of address. If the officially valid document submitted for opening a

bank account has both, identity and address of the person, there is no need for submitting any other documentary proof.

Officially valid documents (OVDs) for KYC purpose include: Passport, driving licence, voters ID card, PAN card, Aadhaar letter issued by UIDAI and Job Card issued by NREGA signed by a State Government official.

To further ease the process, the information containing personal details like name, address, age, gender, etc., and photographs made available from UIDAI as a result of e-KYC process can also be treated as an Officially Valid Document.

************ END OF FREE PREVIEW*****************

This was a sample preview. The book has been prepared keeping in

view the updated syllabus of JAIIB from May 2015 onwards and efforts

have been made to incorporate all the new topics which have been

added in the revised syllabus.

The book is written in concise format and in simple language to enable

students from all back ground to grasp it easily.

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