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 admin@jaiibcaiib.co.in

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.

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.

To the thought
Jodi Tor Dak Shune Keu Na Ashe Tobe Ekla Cholo Re

Module A
Business Mathematics
& Finance

Unit -1 Calculation of Interest and annuities

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.

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)

Unit 2 Calculation of YTM

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

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

Unit 7 Basic accounting Procedures

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.

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Practice Questions -1
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)
B)
C)
D)

Sole proprietorship
Corporation
Partnership
All of them

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

provisions than that is actually required?
A)
B)
C)
D)

Yes
No
To some extent
It depends on the type of business

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Unit 8- Maintenance of Cash/Subsidiary book and ledger

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)
(ii)
(iii)

Real account- includes things which can be seen and touched examples.
Land, building ,machinery, stocks, cash etc
Nominal account- includes all expenses and gains. For e.g. discount
paid, rent paid, commission received
Personal account- includes all accounts dealing with person. For e.g.
Debtors, creditors, capital a/c.

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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
1.4.2005
1.4.2005
2.4.2005
2.4.2005
3.4.2005
5.4.2005
08.4.2005
10.4.2005
14.4.2005
18.4.2005
20.4.2005
24.4.2005
29.4.2005
30.4.2005
30.4.2005
30.4.2005
30.4.2005
30.4.2005

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

Goods purchased form
Manisha Rs. 36,000.
Stationery purchased for cash Rs. 2,200.
Open a bank account with SBI for Rs. 35,000.
Goods sold to Priya for Rs. 16,000.
Received a cheque of Rs. 16,000 from Priya.
Sold goods to Nidhi Rs. 14,000.
Nidhi pays Rs. 14,000 cash.
Purchased goods for Rs. 20,000 on credit from Ritu.
Insurance paid by cheque Rs. 6,000.
Paid rent Rs. 2,000.
Goods costing Rs. 1,500
given as charity.
Purchased office furniture for Rs. 11,200.
Cash withdrawn for household purposes Rs. 5000.
Interest received cash Rs.1,200.
Cash sales Rs.2,300.
Commission paid Rs. 3,000 by cheque.
Telephone bill paid by cheque Rs. 2,000.
Payment of salaries in cash Rs. 12,000.

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Practice Set - I
1)The closing balance of petty cash book is considered as
A)
B)
C)
D)

Liability
Asset
Expenses
Income

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

A)
B)
C)
D)

Receipts
Payments
Income
Expense

Module C
Final Accounts

Unit 14 Preparation of 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 subsections, 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.

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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Unit 15 Ratio Analysis

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-

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
Bills Payable
Outstanding Expenses
Provision for Taxation
Bank Overdraft
Solution :
(1) Current Ratio = 2.15 : 1

27,000
12,000
5,000
18,000
10,000
(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

Unit 20 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 va ults (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.
ii.

Risk Management practices for outsourced Financial Services

Outsourcing Policy

iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.

Role of the Board and Senior Management

Evaluation of the Risks
Evaluating the Capability of the Service Provider
The Outsourcing Agreement
Confidentiality and Security
Code of Conduct for DSA/ DMA/ Recovery Agents
Business Continuity and Management of Disaster Recovery Plan
Monitoring and Control of Outsourced Activities
Redressal of Grievances related to Outsourced services
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.

Unit 21 Operational Aspects of KYC Customer service

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.

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
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added in the revised syllabus.
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