PARA BANKING

GROUP 3

• Shraddha Damania
• Mihir Mehta
• Charmi Morakhia
• Vikas Mehta
• Noman Agashiwala
 PARA BANKING AND UNIVERSAL BANKING

• 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
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
 Commercial
Banking

Retail Banking Merchant

Banking

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
 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 diversified
II. Sub-underwriting
III. 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 agreement

After 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

 OTHER REQUIREMENTS

• 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.
 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 OFFER
CHEQUE 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 BANK

2. KOTAK MAHINDRA BANK
3. BANK OF BARODA
4. HDFC BANK LTD
5. HSBC BANK LTD
6. JP MORGAN CHASE BANK
7. CITI BANK LTD
8. CANARA BANK
9. 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
• Subsidiaries
Eg:- SBI LIFE INSURANCE LTD

• Tie up with insurance companies

Eg:- ICICI PRUDENTIAL , HDFC STANDARD, KOTAK OLD MUTUAL

• Group of banks forming a subsidary

Eg:- 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