Compliance function


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The presentation provides an understanding on importance of compliance function in the Banking industry, which is highly regulated.

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  • Human Resource may be defined as the total knowledge, skills, creative abilities, talents and aptitudes of an organisation’s work force.
  • 7 Subsidiaries -State Bank of Bikaner and Jaipur, State Bank of Indore, State Bank of Hyderabad, State Bank of Mysore, State bank of Patiala, State Bank of Travancore and State bank of Saurashtra.
  • (a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scripts and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller'scheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling, of foreign exchange including foreign bank notes; the acquiring holding, issuing on commission, underwriting and dealing in stock, funds, shares debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities; (b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a 1[managing agent or secretary and treasurer] of a company; (c) contracting for public and private loans and negotiating and issuing the same; (d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; (e) carrying on and transacting every kind of guarantee and indemnity business; (f) managing, selling and realizing any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; (g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (h) undertaking and executing trusts; undertaking the administration of estates as executor, trustee or otherwise; (j) establishing and supporting or aiding in the establishment and support of association., institutions, funds, trusts and conveniences calculated to benefit employees or ex‑employees of the company or the dependents or connectionsof such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys forcharitable or benevolent objects or for any exhibition or for any public, general or useful object; (k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; (m) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of nature enumerated or described in this sub‑section; (n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (o) any other forms of business which the Central Government may by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.
  • Sec 17 (1) of Banking Regulation Act every banking company incorporated in India has to transfer 20% of its profit to its reserve fund each year before declaring dividends. Sep 20, 2006 – Prior approval of RBI is needed for any appropriation from statutory reserve or any other reserve.
  • Sec 17 (1) of Banking Regulation Act every banking company incorporated in India has to transfer 20% of its profit to its reserve fund each year before declaring dividends. Sep 20, 2006 – Prior approval of RBI is needed for any appropriation from statutory reserve or any other reserve.
  • Compliance function

    1. 1. General Banking and Compliance Function Atul Kela
    2. 2.  Banking Industry in India is highly regulated and is governed by various regulations. Indian banks, the dominant financial intermediaries have to abide by these regulations The Business Compliance functions play a key role in maintaining and improving the corporate governance standards within the Bank To fulfill the core values of the Bank within the regulatory ambit, a detailed understanding of the „General Banking and Compliance Function‟ is essential. The training therefore shall help the participants in a two pronged way as under:  Get insights into the regulations functioning and various practices that are central and specific to banking.  Optimally utilize the training experience for implementing the same in their respective business areas.
    3. 3. Management Perspective Human capital is increasingly regarded as one of the major drivers of productivity, economic growth and competitive advantage. In the increased competitive scenario and complexity of Banking functions, developing the human resource has become of key ingredient for survival of Bank. A learned employee can retain customers and increase business & market share through proper behavior and good public relations
    4. 4. Attitude towards training How is that related to what I do? “I‟m good at my job and anyway, I have no time” “I suppose that‟s my weekends shot for months!”
    5. 5. Why training?The sharing of information through training is ourmost valuable tool to develop our most valuableasset… Employees
    6. 6. How do Employees Learn the Best?“Tell me and I forget, teach me and Iremember, involve me and I learn”- Benjamin Franklin
    7. 7. Objective of this training Overview of Banking in India  Types of Banking Institutions  Key characteristic of different Banking institutions General Banking  Definition of Banking and Banking Company  Understanding of accounting framework of Banks  Banking terminologies Regulatory Framework  Principal enactments  Important Regulatory guidelines Compliance Function  Significance of Compliance function  Compliance process and procedure
    8. 8. Overview of Banking in IndiaThere are four types of Banking institutions in India: Regional rural banks Co-operative banks Development banks (more commonly known as „term lending institutions) Commercial banks
    9. 9. Overview of Banking in India (contd)Key characteristic of Banking institutions Type of Bank Characteristic Regional Rural Bank They are formed for specifically lending to business like farmers, agricultural marketing societies, co-operative farming societies, small entrepreneurs, etc. Each RRB has a public sector bank as its ‘sponsor bank’. Capital in each bank is contributed by the Central government , the sponsor bank and state government in proportion of 50, 35 and 15 percent respectively. Co-operative bank These are banks in co-operative sector which cater primarily to the credit needs of the farming and allied sectors. Co- operative banks include central, state , primary (Urban) co- operative banks. They operate within a specific geographic jurisdiction as determined by its bye – laws. They lend money only to its members or to registered societies Development Bank These banks were started with objective of providing only long term finance for development purpose.
    10. 10. Overview of Banking in India (contd)Commercial banks can be divided into types based on their ownership Public Sector banks Comprises State Bank of India, its Seven Subsidiaries and nationalised banks. Majority of Stake in State bank of India is of Government of India Private Sector banks Ownership is in private hands. They are three types:  Indian Scheduled Commercial bank other than public sector banks (Scheduled Commercial bank means banks included in Second Schedule to the Reserve Bank of India Act 1934)  Non - scheduled banks  Indian branches on banks incorporated outside India, commonly referred to as „foreign banks‟.
    11. 11. General BankingDefinition of BankingBanking means the accepting, for the purpose of lending or investment, ofdeposits of money from the public, repayable on demand or otherwise, andwithdrawal by cheque, draft, or otherwise;(Section 5(b) of Banking Regulation Act, 1949)Definition of Banking CompanyBanking Company means company which transacts the business of banking inIndia.(Section 5(c) of Banking Regulation Act, 1949)Two Essential Criteria:1) Accepting deposits of money from public2) For purpose of Lending or investment
    12. 12. General Banking (contd)Other forms of business by banking companyIn addition to the business of banking, banking company may engage in any oneor more of the forms of business prescribed in Section 6 sub section (1) ofBanking Regulation Act, 1949Section 6 sub section (2) of Banking Regulation Act, 1949 prohibits a bankingcompany to engage in any form of business other than those referred to inSection 6 sub section (1)Other forms of business includes discounting bills of exchange, issuing letter ofcredit, travellers cheque, buying and selling of foreign exchange, acting as agentfor government authority etc.
    13. 13. Accounting frameworkSources of Funds Cost Deposits from Public  Interest Payable (Expense) Borrowings from Other  Interest Payable (Expense)financial institutions / RBI  Dividend Paid (Appropriation of Net Capital (Owner) Income)Application of Funds Income Lending (Advances)  Interest Receivable and Fee (Income) Investments  Dividend / Interest Receivable (Income) Deposits with other  Interest Receivable (Income)financial institutions / RBI  Fixed Assets  Depreciation (Non cash expenses – utilized for creation of fixed asset in future)
    14. 14. Accounting framework (contd)Cost / Expenditure Interest Expense (on Deposits and Borrowings) Operating Expenses  Employee Salaries  Rent  Printing and Stationery  Administrative expenses  Other Expenses (Directors fees, auditors fees etc)Income Interest and Divided Income (on Advances and Investments) Other Income  Commission and brokerage  Profit on sale of investments & fixed assets  Profit on foreign exchange transactions  Miscellaneous income
    15. 15. Accounting framework (contd) Provisions and Contingencies Provision on Assets (Standard Assets, Non performing Assets, restructured assets) Provision for tax (Income tax, wealth tax, fringe benefit tax) Other provision and contingencies Surplus (Income minus Cost minus Provisions and contingencies) Appropriated  Statutory reserves  Dividend to Shareholders  Balance if any is transferred to Reserves
    16. 16. Banking TerminologyKey Rates Brief DescriptionRepo Rate It is the rate at which banks borrow money from the RBI for short period by selling their securities (financial assets) to the central bank with an agreement to repurchase it at a future date at predetermined price.Reverse Repo Rate It is the rate of interest at which the RBI borrows funds from other banks for a short duration. The banks deposit their short term excess funds with the central bank and earn interest on it.Bank Rate It is the rate at which banks borrow money from RBI without any sale of securities. It is generally for a longer period of time.
    17. 17. Banking Terminology (contd)Mandatory Ratios Brief DescriptionCash Reserve Ratio (CRR) Banks are required to maintain a percentage of their deposits as cash and can use only the remaining amount for lending/investment. This minimum percentage which is determined by the RBI is known as CRR.Statutory Liquidity Ratio Apart from keeping a portion of deposits with the(SLR) RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called SLRCapital Adequacy Ratio It is the ratio of qualifying capital to risk adjusted(CAR) (or weighted) assets. The RBI has set the minimum CAR at 9% for all banks. The ratio ensures that the bank do not expand their business without having adequate capital.
    18. 18. Banking Terminology (contd)Other ratios Brief DescriptionNet Interest Margin NIM is a measure of the difference between the interest(NIM) income and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. it is calculated as a percentage of interest bearing assets.Current Account and It is the ratio of deposits in the current and savingsSaving Account (CASA) accounts to its total deposits. A high ratio means that the bank is getting money at low cost, since no interest is paid on the current accounts and the interest paid on savings account is usually low.Credit to deposit Ratio This ratio indicates how much of the advances lent by banks is done through deposits. It is the proportion of loan-assets created from the deposits received. The ratio reflects the ability of the bank to make optimal use of the available resources.
    19. 19. Banking Terminology (contd)Asset Quality Ratios Brief DescriptionNon Performing asset An NPA are those assets for which interest is overdue forratio (NPA) more than 90 days (or 3 months). Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period end from gross NPAs. Higher ratio reflects rising bad quality of loansProvision coverage It is a measure that indicates the extent to which theratio bank has provided against the troubled part of its loan portfolio. A high ratio suggests that additional provisions to be made by the bank in the coming years would be relatively low (if gross non-performing assets do not rise at a faster clip).Return on Asset Ratio Returns on asset (ROA) ratio is the net income (profits) generated by the bank on its total assets (including fixed assets). The higher the proportion of average earnings assets, the better would be the resulting returns on total assets.
    20. 20. Regulatory frameworkPrincipal enactments governing the functioning of various type ofbanks are : Banking Regulation Act, 1949 Reserve Bank of India Act, 1934 Foreign Exchange Management Act, 1999 Companies Act, 1956 Prevention of Money laundering Act, 2002 Banking Companies ( Acquisition and Transfer of Undertakings) Act, 1970 Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002 Credit Information Companies Regulation Act, 2005 Income Tax Act, 1961 Service Tax Act, 1994
    21. 21. Regulatory framework (contd)Important Regulatory guidelines Sources of Funds Important Regulatory Guidelines Deposits from Public  Master Circular of instructions relating to deposits held in FCNR (B) Accounts  Master Circular on Non-Resident Ordinary Rupee (NRO) Account [FEMA Regulation]  Master Circular on Remittance Facilities for Non- Resident Indians / Persons of Indian Origin / Foreign Nationals [ FEMA Regulation]  Master Circular on NRO Account [FEMA Regulation]  Master Circular on KYC Norms Borrowings from Other  Master Circular on Call/Notice Money Market Operations  Master Circular - Guidelines for Issue of Certificates of financial institutions / RBI Deposit  Master Circular - Guidelines for Issue of Commercial Paper Capital (Owner)  Sec 11, 12 and 13 of Banking Regulation Act  Master Circular - Capital Adequacy
    22. 22. Regulatory framework (contd)Application of Funds Important Regulatory GuidelinesLending (Advances)  Section 20 and 21 of Banking Regulation Act  Master Circular - Loans and Advances – Statutory Restrictions  Master Circular – Housing finance  Master Circular – Exposure Norms  Master Circular – Lending to Micro, Small & Medium Enterprises (MSME ) Sector  Master Circular – Lending to Priority Sector  Master Circular – Prudential Norms on Income Recognition, Asset classification and provisioning pertaining to advances  Master Circular – Bank Finance to NBFC  Master Circular – Willful defaultersInvestments  Master Circular – Prudential Norms for classification , valuation and operation of investment portfolio by banks  Master Circular on CRR and SLR  Sec 24 of Banking regulation Act [SLR]Deposits with other financial  Master Circular on Call/Notice Money Market Operationsinstitutions / RBI
    23. 23. Regulatory framework (contd)Cost / Income Important Regulatory GuidelinesInterest Expense (on  Master Circular - Interest Rates on Rupee Deposits held in Domestic, Ordinary NRO, NRE accountsDeposits and Borrowings)Interest and Divided  Master Circular - Interest Rates on Advances  Master Circular – Prudential Norms on Income Recognition,Income (on Advances and Asset classification and provisioning pertaining to advancesInvestments)Other Income / Expenses  Master Circular – Para Banking Activity  Service Tax ActProvisions and  Master Circular – Prudential Norms on Income Recognition, Asset classification and provisioning pertaining to advancesContingencies  Income Tax Act , 1961. - Provision on Assets - Provision for taxAppropriation  Sec 17 of Banking Regulation Act Statutory reserves  RBI Circular dated September 20, 2006 Dividend to Shareholders
    24. 24. Regulatory framework (contd)Other General Important Regulatory Guidelines Master Circular - Disclosure in Financial Statements - Notes to Accounts Master Circular on Customer Service in Banks Master Circular on External Commercial Borrowings and Trade Credits Master Circular on Acquisition and Transfer of Immovable Property in India by NRIs/PIOs/Foreign Nationals of Non- Indian Origin Guidelines on Fair Practices Code for Lenders Code of Banks Commitment to Customer [IBA] Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks
    25. 25. Compliance functionWho has to ensure compliance with all the statutory provisionscontained in various legislations?RBI has issued circular dated April 20, 2007 on „Compliancefunctions in banks‟ which states:The Compliance Function has to ensure strict observance of allstatutory provisions contained in various legislations and also eachbanks internal policies. [Introduction Para]Compliance function in banks is one of the key elements in thebanks‟ corporate governance structure. [Preamble]
    26. 26. Compliance function (contd)Significance of Compliance function Identifying the level of compliance risk in each business line, products and processes and issue instructions to operational functionaries / formulate proposals for mitigation of such risk. The compliance risks in all new products and processes is thoroughly analyzed and appropriate risk mitigants by way of necessary checks and balances are placed before launching. Dissemination of new instructions / guidelines issued by the regulatory authorities across the Bank to ensure that the business and functional units operate within the boundaries set by regulators. Reference point for the banks staff for seeking clarifications/ interpretations of various regulatory and statutory guidelines
    27. 27. Compliance function (contd)What is Compliance risk? Compliance risk is defined as “the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities” [Para 2.1]Who is responsible to manage Compliance risk? The Board would be responsible for ensuring that an appropriate compliance policy is in place in the bank to manage compliance risk and also overseeing its implementation. [Para 3.1]Reporting of Compliance failures Instances of all material compliance failures which may attract significant risk of legal or regulatory sanctions, financial loss or loss of reputation should be reported to the Board/ACB/Board Committee promptly. [Para 7.4] Non-compliance with any regulatory guidelines and administrative actions initiated against the bank and or corrective steps taken to avoid recurrence of the lapses should be disclosed in the annual report of the banks. [Para 6.13]
    28. 28. Compliance function (contd)Compliance Process and Procedure The Board of Bank has established Compliance Department for implementations of the Compliance function and ensuring that operating and business units comply with regulatory guidelines. The Compliance department has appointed Nodal Compliance Officers within each operating and business units for implementations of the Compliance function. The Compliance department of Bank also perform the following critical function:  Monitoring and identification of suspicious transactions as per Prevention of Money Laundering Act, 2002  Fraud Monitoring and reporting  Managing the risk associated with outsourcing of the activities of the Bank