JAIIB PPB Principles and Practices of Banking Short Notes Part 2

JAIIB PPB Principles and Practices of Banking Short Notes Part 2

IIBF conducts JAIIB Exams, one of the flagship courses offered by it, twice in a year. It is conducted in May & November every year. This course has 3 subjects and PPB or Principles & Practices of Banking is one.

Principles & Practices of Banking has 5 modules which is further divided into units.

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1. Principles & Practices of Banking A – Indian Financial System

B – Functions of Banks

C – Banking Technology

D – Support Services – Marketing of Banking services or Products

E – Ethics in Bank & Financial Institutions

To check out the detailed syllabus of JAIIB- PPB, AFB & LRAB click here.


JAIIB PPB Principles and Practices of Banking Short Notes Part 1


  1. Capital market: Market for long-term debt & equity shares (both are issued and traded).
  2. Types of capital market: Primary and Secondary. 

In Primary market: Securities (shares, bonds, debentures) are offered to the public for subscription, for raising capital or fund.

In Secondary market: Securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Secondary market comprises equity markets & debt markets.

Read Also:- JAIIB AFB Notes – Accounting & Finance for Banking Short Notes Part 1

  1. Corporatization: Process of conversion of the organizational structure of the Stock Exchange from a non-corporate to a corporate structure.
  2. Demutualization: the transition process of a Stock Exchange from a mutually owned association to a shareholders-owned company.
  3. FII Investment in Stock Exchange in India: can be up to 49%.
  4. A single investor’s Investment in Stock Exchange in India: can be upto 5%.
  5. Broker: He/she is registered with SEBI & is a member of a recognized Stock Exchange and is permitted to do trading of different Stock Exchanges.
  6. Government securities: Coupon bearing instruments which are issued by RBI on behalf of GOI. Government securities have maturity dates ranging from < 1 year to > 30 year.
  7. Debentures: bonds issued by a company (unsecured debt). They have fixed rate of interest usually payable half-yearly, on specific dates & the principal amount repayable on a particular date on redemption of debenture. 
  8. Bonds: Negotiable certificates that are usually unsecured & issued by GOI. In coupon bonds, interest maybe paid biannually, in zero-coupon bonds, interest is paid at the maturity.
  9. Commercial papers: Borrowings of a company from the market. These money market instruments that are issued for 90 days.
  10. Treasury bills: Securities issued by RBI on Government of India’s behalf for 91 days.
  11. IPO: Issue of fresh securities or an offer for sale of existing securities or both for the first time to the public by an unlisted company.
  12. FPO: Issue of fresh securities or an offer for sale to the public through an offer document by an already listed company.
  13. Rights Issue: When a listed company issues fresh securities to its existing shareholders as on a recorded date.
  14. A private placement: An issue of shares or convertible security by a company to a selected group of persons under section 81 of the Companies Act 1956.
  15. File a draft offer document with SEBI: Any company making a public issue or a listed company making a Right Issue of a value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The observation period is only 3 months.
  16. DIP: Disclosure and Investor Protection guidelines.
  17. Offer document: Prospectus (in case of public issue).
  18. Offer document: An offer for sale and letter of offer (in case of a Right Issue).
  19. Offer documents: These are filed with Registrar of Companies (RoC) and Stock Exchanges.
  20. A draft offer document: The offer document in a draft stage. They are filed with SEBI.
  21. The period of filing draft offer document: At least 21 days prior to that of offer document.
  22. RHP (Red Herring Prospectus): A prospectus which doesn’t have details of either price of no. of shares being offered or the issue amount. But the no. of shares and the upper and lower price bands are disclosed.
  23. In case of FPO, the RHP can be filed with RoC without the price band. The price band is notified 1 day prior to the opening of the issue by way of an advertisement.
  24. In book-built issue, price can’t be determined until the bidding process is completed.
  25. In a book-built issue allocation: RII: NII: QIP::35: 15: 50 (or may be 60:10:30). Where RII – Retail Individual Investors, NII – Non-Institutional Investors & QIP – Qualified Institutional Placement.
  26. Retail individual investor: An investor who applies/bids for securities of or for a value not more than Rs. 1 lacs.
  27. BRLM: Merchant bankers possessing a valid SEBI registration in accordance with the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a BRLM (Book running Lead Manager).
  28. QIB (Qualified Institutional Buyer): Investors who have expertise & financial muscle to evaluate and invest in capital market. 

Examples of QIB: mutual fund, scheduled commercial banks, FII registered with SEBI, insurance companies registered with IRDA, PF with a minimum corpus of Rs 25 crore etc. These entities are not required to be register with SEBI as QIB.


  1. Mutual fund (MF): Mechanism for pooling resources from the public by the issue of units to them and then investing the funds in securities.
  2. Mutual fund set up: It is in the form of a trust and is registered with SEBI.
  3. Unit holders: Investor in mutual fund.
  4. NAV: Performance of a particular scheme of a MF.
  5. NAV per unit: Market value of securities of a scheme, less the expenses incurred on the scheme divided by the total no. of units of the scheme on any particular date.
  6. Open Ended Scheme: The scheme that’s available for subscription and repurchase on a continuous basis. 
  7. Close Ended Scheme: The scheme that’s available for subscription only during a specified period. It usually has a maturity period 3-10 years.
  8. Growth scheme or equity-oriented scheme: It’s an investment in equities (higher risks).
  9. Income scheme/debt-oriented scheme: Investment in fixed income securities such as bonds, government securities, corporate debentures and money market instruments.
  10. Balanced plan invest both in equities and fixed income securities (debt instruments) in 40-60%.
  11. Money market or liquid fund is am investment in (safer short-term instruments) treasury bills, certificates of deposit, commercial paper and interbank call money, government securities, etc.
  12. Gilt funds invest in government securities.
  13. Repurchase or redemption price: The price or NAV at which an open-ended scheme redeems or purchases its units from the unit holders.


  1. Factoring: A service that is connected with the financing & collection of account receivables in domestic as well as international trade.
  2. Forfaiting: Means of finance (credit) an exporter of goods avails from an intermediary known as the forfaiter against the export receivables but without the obligation to repay the credit. It’s used in international trade.
  3. Off balance sheet items: The items in the books of a bank which aren’t mentioned in the balance sheet. These are not assets/liabilities but may get converted into assets/liabilities upon happening of certain events. That is the reason why off balance-sheet items are aka contingent liabilities.
  4. Bank Guarantee: A contract either to perform the promise or discharge the liability of a 3rd person in case of his/her default.
  5. There are 3 persons in case of a Bank Guarantee: 1. the guarantor/surety, 2. Principal debtor, and 3. the creditor/beneficiary.
  6. Bank Guarantee = contingent liability.
  7. A Letter of Credit: An undertaking given by the buyer’s bank on behalf of the buyer to the seller, stipulating that if specified documents are presented within a stipulated date, the bank establishing the credit will pay the amount of the bill drawn in terms of such LC.
  8. There are 4 persons in case of a LC – 1. buyer, 2. opening bank/branch, 3. seller, and 4. negotiating bank/branch.
  9. A forward exchange contract: A firm contract b/w the bank and its customers for the purchase or sale of a specified quantity of a stated foreign currency at a pre-determined rate. On the due date when the contract is executed, the transaction will be at the contracted rate of exchange instead of the rate then prevailing, thus it is method of protecting oneself against exchange rate fluctuations.
  10. FRA (Forward Rate Agreement) and IRS (Interest Rate Swap): Such instruments that have the ability provide effective hedge against interest rate risks.
  11. FRA: A financial contract b/w 2 parties to exchange interest payments for a notional principal amount on the settlement date for a specified period from start date to maturity date.
  12. IRS: A financial contract b/w 2 parties exchanging or swapping a stream of interest payments for a notional principal amount on multiple occasions during a specified period. These involve exchange of fixed to floating or floating to floating interest rate.


  1. Credit risk: Possibility of losses associated with the reduction in the credit quality of borrowers or counterparties. Credit risk forms can be – direct lending, Bank Guarantee, Letter of Credit, securities trading businesses, treasury operations, cross border exposure, etc.
  2. Market risk: It’s the risk that arises from adverse changes in market variables. Market risk forms are – liquidity risk, interest rate risk, commodity price risk, foreign exchange rate (forex) risk, equity price risk, etc.
  3. Operational risk (also known as legal risk/ administrative risk/ settlement/ payment risk) arises from human or technical errors.
  4. Under the Basel I accord, only the credit risk element was considered and the minimum capital requirement of capital funds was fixed at 8 percent of the T. risk weighted assets.
  5. CRAR: In India, banks are required to maintain a minimum capital to risk weighted asset ratio of 9 %.
  6. Basel II has three pillars
  • Minimum capital requirements
  • Supervisory review process
  • Market discipline
  1. The capital base of the bank consists of the following 3 types of capital requirements: Tier 1, Tier 2 & Tier 3.
  2. The total of Tier 2 (supplementary) elements will be limited to a maximum of 100 percent of the total of Tier 1 capital.
  3. Subordinated term debt will be limited to a maximum of 50 percent of Tier 1 capital.
  4. Tier 3 capital will be limited to 250 percent of a bank’s Tier 1 capital that’s required to support market risk.
  5. Shareholder’s equity and retained earnings: It consists of Tier 1 capital while supplementary refers to Tier 2 capital.
  6. The sum of total of Tier 2 and Tier 3 capital should not exceed the total of Tier 1 capital.


  1. Alliance: A mutually agreement of commercial collaboration b/w 2 to more organizations where they agree to co-operate in the operation of a business activity. However, they remain independent entities.
  2. Merger/amalgamation: Its combination of 2 or more companies into a single company, where one company survives with its name or a combined new name, & other loses its existence.
  3. Consolidation: Combination of 2 existing companies into a new where old companies lose their existence and a new one is created either with a same or different name.
  4. Acquisition or takeover: Acquiring a controlling stake in the ownership of a company by another entity. This is done by buying the share capital of another company.



  1. CIBIL: A composite credit bureau that contains the credit history of both commercial & consumer borrowers.
  2. CIBIL provides: Credit history of borrowers to its members in the form of credit information reports (CIRs) to assist borrowers in their loan appraisal process.
  3. Fair Practice Code for lenders as also IBA’s Code for Collection of dues and repossession of security: In the matter of recovery of dues, banks / NBFCs may ensure that they, as also their agents, adhere to the extant instructions on Fair Practice Code for lenders as also IBA’s Code for Collection of dues and repossession of security. In case they have their own code for collection of dues it should, at the minimum, incorporate all the terms of IBA’s Code.
  4. Customer confidentiality: In particular, in regard to appointment of 3rd party agencies for debt collection, it’s essential that such agents refrain from action that could damage the reputation & integrity of the bank or NBFC and that they observe strict customer confidentiality.
  5. All letters issued by recovery agents: all letters must contain the name & address of a responsible senior officer of the bank that is issuing card whom the customer can contact at his location.
  6. Intimidation or harassment: Banks / NBFCs / their agents should not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the credit card holders’ family members, referees and friends, making threatening and anonymous calls or making false and misleading representations.
  7. The Banking Codes and Standards Board of India (BCSBI) was set up on 18th February 2006 as a collaborative effort of RBI and Banks, on the lines of a similar set up in UK to oversee the “Banking Code”, a voluntary Code, evolved by the British Bankers Association (BBA), which is adopted by all banks in UK.
  8. The proposal for setting up the BCSBI was based on the recommendation made by the Committee on Procedures and Performance Audit on Public Services (Tarapore Committee).
  9. BCSBI provides valuable protection for customers on a day-to-day basis as also in the times of financial difficulty.
  10. The code applicability: Its applicable on savings deposits & current accounts, card products and services, loans and overdrafts and payment services including foreign exchange.
  11. BCSBI ‘s member banks would put in place the following grievance redressal mechanism in their banks: 
    1. Help desk / Helpline at the branch
    2. Code Compliance Officer at each Controlling office (above branch level).
    3. Display at each branch name & contact number (Code Compliance Officer).
    4. Display Name & address (Banking Ombudsman).

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