PPB Module A: Unit 1 & 2

PPB Module A: Unit 1 & 2

Unit 1: Banker-Customer Relationship

Banking

• According to Section 5(b) of the Banking Regulation Act 1949, the term “Banking” means accepting for the purpose of lending or investment of deposits of money received from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
• A firm consisting of not more than ten partners or a company incorporated under Indian Companies Act, 1956 can be bank, a banker or a banking company. Under section 5(c) of the Banking Regulation Act, “Banking Company” means any company that transacts the business of banking in India.
• Section 7(1) of the Banking Regulation Act prohibits use of the words ‘banker’ or ‘banking’ or ‘banking company’ by a company other than a banking company. Section 7(2) of the said Act further prohibits the use of such words by an individual or a group of individual or a firm.
• Banker: According to Section 3 of the Negotiable Instrument act the term “banker” Includes any person acting as a Banker.

Banker customer relationship

• A trustee is a person or firm that holds and administers property or assets for the benefit of a third party. Trustees are required to make decisions in the beneficiary’s best interests and have a fiduciary responsibility to them, meaning they act in the best interests of the beneficiaries to manage their assets.
• As per the section 148 of the Indian Contract Act, 1872, a bailment is a contract where one person delivers goods to another person for some purpose. The person delivering the goods is the Bailor and the person receiving the goods is the Bailee.
• A banker acts as an agent of his customer and performs a number of agency functions like, he buys or sells securities on behalf of his customer, collects check/cheques on his behalf and makes payment of various dues of his customer.
• when a customer hires a safe deposit locker from the bank, the relation between the bank and the customer is lessor and lessee. The bank is the lessor (licensor) and the hirer of safe deposit locker is the lessee (licensee/tenant).

Deposit Products

• Demand deposits: It includes current, saving (CASA), overdue deposits and Unclaimed Deposits. Payable on demand, low interest rate or no interest.
• Time Deposit: Time Deposits from 7 days to 120 months period with or without reinvestment plans. High Interest rates, which vary according to period.
• Hybrid deposits or flexi deposits: combine the features of demand and term deposits. These deposits are introduced in recent times by some banks to meet customers’ financial needs and convenience and are known by different names in different banks.
• NRI (Non-Resident Indian): An Indian citizen who resides outside India for employment, business, or other purposes. Defined by the Foreign Exchange Management Act (FEMA): If you stay outside India for more than 182 days in a financial year, you are considered an NRI. NRIs often need special banking facilities to manage money between India and abroad.

Service to customers and Investors

• Merchant banking: It can be defined as a skill-oriented professional service provided by merchant banks to their clients, concerning their financial needs, for adequate consideration, in the form of fee.
• Merchant Banks offers a range of financial and consultancy services, to the customers, which are related to Marketing and underwriting of the new issue, Merger and acquisition related services, Advisory services, for raising funds, Management of customer security, Investment banking, Portfolio Services, Insurance Services etc.
• Merchant Banker: Any person, indulged in issue management business by making arrangements with respect to trade and subscription of securities or by playing the role of manager/consultant or by providing advisory services, is known as a merchant banker. In India, the functions of the merchant bankers are governed by the Securities and Exchange Board of India (SEBI) Regulations, 1992.
• Lease financing: When the owner of assets (lessee) ready to provide their assets to another person in exchange of that lessor provides some agreed payment. In this way, the lessor leases the assets for a period of time on rent and lessee gets funds from the lessor. The periodical payment made by the lessee to the lessor is called the lease rental. Under lease financing, the lessee is given the right to use the asset but the ownership lies with the lessor and at the end of the lease contract, the asset is returned to the lessor or an option is given to the lessee either to purchase the asset or to renew the lease agreement.
• Plastic money: They come in several forms such as debit cards, credit cards, store cards and pre-paid cash cards. The plastic cards began to be used widely after 1970 when the specific standards were set for a magnetic strip. In 1981, the concept of Credit cards was introduced in India. Main types of plastic cards are charge card, visa & master card, debit cards, ATM cards.
• Remittance services: For facilitating funds transfers, traditionally banks were providing services in the form of Demand Drafts (DD), Banker’s Cheques (BC)/ Pay Orders (PO), Mail Transfers (MT) and Telegraphic Transfers (TT). Now with adoption of core banking system, transfer products have become technology. National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS), Immediate Payment Service (IMPS), Unified Payment Interface (UPI) Transfers, Aadhaar Enabled Payment System (AePS), National Automated Clearing House (NACH) etc.
• Banks also act as distribution points for several government schemes such as, Public Provident Fund (PPF), National Pension Scheme (NPS), Capital Gains Account Scheme 1988 (CGAS), Senior Citizens Savings Scheme (SCSS), Sukanya Samriddhi Account Scheme, 2019, RBI Bonds, Sovereign Gold Bond Scheme (SGB), Atal Pension Yojana, Pradhan Mantri Vaya Vandana Yojana (PMVVY), PMSBY/PMJJBY.
• Third party products: For banks, it is an additional source of revenue. Customers get financial services at one place. Some of the major third-party products are: Demat Accounts, Trading Account, Three-in-One Account: Linked Demat Account – Trading Account – Savings/ Current Account, Mutal Funds, Life Insurance Policy, Health Insurance Policy, Vehicle Insurance, House Insurance etc.

Unit 2: KYC and AML guidelines

Prevention of Money Laundering Act,2002 (PMLA)

• The offence of money laundering has been defined in Section 3 of the Prevention of Money Laundering Act,2002 (PMLA) as “whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering”.
• Stages of Money laundering: (1) Placement: Placement is the first stage in the money laundering process. It refers to the physical disposal of proceeds of criminal activity. (2) Layering: refers to the separation of illicit proceeds from their sources by creating complex layers of financial transactions. Layering conceals the audit trial and provides anonymity. (3) Integration: The third phase is integration, which means placing laundered proceeds into the legitimate economy as normal funds.
• The main objectives of PML are to prevent criminal elements from using the financial system for money laundering activities, to prevent spread of criminal activities in society, to safeguard the economy from financial crimes, to prevent terrorists from gaining access to financial resources.
• Stages of Financing of Terrorism: Raising, Moving, Storing and Using.
• 45 of PMLA stipulates that all offences under the PMLA are to be deemed to be cognizable and non-bailable offences. Sec. 4 of PMLA stipulates the punishment for money laundering offence, which is rigorous imprisonment for not less than 3 years but up to 7 years and fine as per the gravity of the offence. In cases connected with offences under the Narcotics Drugs and Psychotropic Substances Act the imprisonment may extend up to maximum 10 years.
• Money Laundering – Risk Perception: Financial products and services are designed to provide quick, convenient and efficient modes for dealing with funds for different purposes. These are abused by the criminals for money laundering and financing of terrorism, by disguising or misrepresenting their true identities, profiles and purposes. Thus, the primary source of ML/FT risks is the customers.
• To Mitigate Money Laundering Risk: Banks are required to take appropriate measures for the following purposes: To know/understand the customers and their financial dealings better, to detect and report suspicious activities to FIU-Ind as per the laid down procedures, to comply with applicable laws and regulatory guidelines, to adequately train the staff in KYC/AML procedures.

Know Your Customer Policy

• KYC Norms Sec. 2(ha) of the PMLA defines customer as ‘client’ as follows: ‘“client” means a person who is engaged in a financial transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the transaction or activity, is acting;’ This definition has been adopted by RBI in Master Direction – Know Your Customer (KYC) Direction, 2016 for defining ‘Customer’.
• According to KYC norms, A customer not just the person in whose name the dealings are carried out with the bank, but also those who actually act for such person. Also, it covers not only the account holders and those having continued relationship, but also those who avail of any service on one-off basis. Besides, in case of entities availing services – their beneficial owners and in case of accounts maintained by Professional Intermediaries for their clients – beneficiaries of the transactions, are also considered as customer.
• Risk Management: Banks are required to apply a Risk Based Approach (RBA) for mitigation and management of the identified risk and should have Board approved policies, controls and procedures in this regard.
• Risk management are through- Risk Assessment: Banks should undertake assessment of and take effective measures to mitigate the ML/TF risks from customers, products/ services, regions/ countries where its offices are located, delivery channels, and the transactions undertaken by their customers. Customer Risk Categorisation: Customers are classified into three risk categories namely high, medium and low, based on the risk perception of the bank. Parameters of risk perception are clearly defined in terms of the nature of business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc. Role of Other Functions: For effective risk management, an appropriate framework covering proper management oversight, systems, controls and other related matters is required. The bank’s internal audit team undertakes independent evaluation of the compliance with KYC/ AML Policy, including legal and regulatory requirements. Introduction of New Technologies: like Smart Cards/Mobile Wallet/ Net Banking/ Mobile Banking/RTGS/ NEFT/IMPS etc. Staff Hiring and Training: Bank staff, are potentially of high inherent risk by virtue of their access to the bank’s systems, their role in conducting the bank’s business and the powers exercised by them.
• Financial Action Task Force (FATF): Established in 1989 by G7 countries, HQ: Paris, France. Objective is to develop policies to combat money laundering (ML), terrorist financing (TF), and proliferation financing. India became a member in 2010. Total 39 members. FATF Sets international standards for AML/CFT (Anti-Money Laundering / Combating Financing of Terrorism), conducts peer reviews (mutual evaluations) of member countries. Issues recommendations (40 FATF Recommendations) – global benchmark for AML/CFT. Identifies high-risk jurisdictions (Grey List= Countries under increased monitoring (deficiencies in AML/CFT but committed to improvement) & Black List= Countries with serious deficiencies, non-cooperative (e.g., North Korea, Iran).
• FATF issues Statements of countries that do not or insufficiently apply the FATF Recommendations, once in every four months.
• Correspondent Banks: Correspondent banking can be defined, in general terms as an arrangement under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services to those respondent banks. Correspondent banking is the lifeline of global financial transactions and hence crucial for international trade, travel and tourism. At the same time, it also has inherent in its activity and nature risk of abuse by criminals for money laundering and terrorism financing. Due to different level and nature of AML/ CFT regimes in various countries correspondent banks are exposed to the ML/FT risks to each other. Banks are therefore required to follow certain norms in establishing and maintaining ‘correspondent relationships.
• The Foreign Account Tax Compliance Act (FATCA) is tax information reporting regime, which requires Financial Institutions (FIs) to identify their U.S. accounts through enhanced due diligence reviews and report them periodically to the U.S. Income Tax Rules require banks and financial institutions to submit prescribed reports to the Income Tax Dept. in respect of the accounts of such customers who are taxable in the USA (for FATCA) and any other foreign country (for CRS).
• Reporting obligations: Banks are required to furnish to FIU-IND reports pertaining to transactions of prescribed type and value at prescribed frequency. Following four reports are required to be submitted for each calendar month by the 15th of the following month.

Besides, Banks are required to report Suspicious Transactions Report (STR) to FIU-IND any suspicious transaction noticed by them, within 7 days of establishing suspicion. This is the key report for FIU-IND to enable it to provide useful intelligence to the law enforcement agencies.

A transaction is considered as suspicious as, it appears to satisfy a reasonable doubt that it may involve proceeds of an offence specified in the Schedule to PMLA, i.e. likely to be for money laundering, or appears to be made in circumstances of unusual or unjustified complexity, or appears to have no economic rationale or bonafide purpose, a reasonable doubt that it may involve financing of the activities relating to terrorism.

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NEGOTIABLE INSTRUMENTS- MEANING & TYPES
TYPES OF ACCOUNTS
TYPES OF BANKING IN INDIA
TYPES OF CARDS