Important topics of PPB: Principles and Practices of Banking is the first paper of IIBF JAIIB. As the name suggests, this paper deals with the practices of banking along with its principles. This paper in overall can be considered as moderate. Learn the top 5 important topics of PPB paper of JAIIB here.
Table of Contents
Important Topics of PPB
- Priority sector advances
- Non Performing Assets
- KYC norms
- Factoring & Forfeiting
- Risk Management
Priority sector advances – Important Topic of PPB
National Credit Council – In July 1968, the Government of India emphasized that commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture and small scale industries.
The description of the priority sectors was later formalized in 1972 on the basis of the report submitted by the informal study group on statistics relating to advances to the priority sectors constituted by the Reserve Bank in May 1971.
Based on the recommendations of the working group on the modalities of implementation of priority sector lending and the twenty point economic programme by banks, all commercial banks were advised to achieve the target of priority sector lending at 40 percent of the aggregate bank advances by 1985
Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. Since then, there have been several changes in the scope of priority sector lending and the targets and sub-targets applicable to various bank groups. You can start your preparation for PPB with Priority sector advances as it is one of the Important topics of PPB.
Non Performing Assets
By definition, Non Performing Assets(NPA) is a loan for which the principal amount as well as the interest amount remains overdue for a period of 90 days. While 90 days of nonpayment is the standard, the amount of elapsed time may be shorter or longer depending on the terms and conditions of each loan. The conditions that are kept for the loan to become an NPA are mentioned on the signed agreement at the time of agreement signing.
You can include NPA under top 5 important topics of PPB. For every banker knowing NPA is really essential as it has a direct effect on the Indian Economy.
Impact of NPA’s
There are many adverse effects of the NPA’s on the Indian Economy. NPA’s are basically the fund that was to be put in use for other projects that just vanished in a blink of an eye. Few impacts are as follows:
- Banks have to improvise their interest rates in order to generate more funds that are needed for balancing the market capital. Their profit margins also suffer because of this.
- Depreciation in funds causes the banks to stress their feasibility and there is less money available for funding of other major projects.
- This scenario often results in unemployment as well.
- NPAs related cases add more pressure to already pending cases with the judiciary.
- This NPA also hampers the need of genuine borrowers and borrowers with good credit scores. They cannot fulfill their requirements due to non-availability of the funds.
- Shareholders also pull off their hands when there is high NPA against the firm.
What is KYC?
KYC stands for “Know your Customer” and refers to the identification of customers. It entails making sensible efforts to ascertain the true identity and beneficial ownership of accounts, the source of cash, the type of the customer’s business, and the rationality of account transactions about the customer’s business, etc. All of these allow banks to handle their risks prudently. The KYC criteria were designed to prevent criminals from using banks for money laundering, whether on purpose or unintentionally.
Definition of Customer
KYC policy defines a Customer as:
- a person who maintains an account or/and a commercial relationship with the bank
- someone who keeps an account for someone else’s benefit (i.e. the beneficial owner)
- a person who benefits from the transactions carried out by financial intermediaries, like CAs, Stock Brokers, Solicitors etc. as permitted by law
- a person or entity who is directly or indirectly involved in a financial transaction that poses significant reputational or other risks to a bank, like making a wire transfer or issuing a large-value demand draft, etc.
Banks should design their Know Your Customer (KYC) policies by incorporating the following four elements:
- Customer Acceptance Policy (CAP)
- Customer Identification Procedures (CIP)
- Monitoring of Transactions
- Risk Management
Factoring & Forfeiting
Factoring and Forfeiting is a topic that never fails to appear in the JAIIB exam. Hence Important topics of PPB include Factoring and Forfeiting. Factoring is a service that is concerned with the financing and collection of account receivables in domestic and international trade. It is an ongoing arrangement between the client and factor (usually a bank or a financial institution), where invoices raised on open account sales of goods and services are regularly assigned to ‘the factor’ for financing, collection and sales ledger administration.
The buyer and the seller usually have long-term relationships. The client sells invoiced receivables at a discount to the factor to raise finance for working capital requirement. The factor may or may not accept the incumbent credit risk. Factoring enables companies to sell their outstanding book debts for cash.
Forfeiting is a means of finance (credit) an exporter of goods avails from an intermediary called the forfaiter against the export receivables but without the obligation to repay the credit.
Forfeiting is used for international trade transactions. In fact, it is the discounting of trade receivables such as drafts drawn under letters of credit, bills of exchange, promissory notes, or other freely negotiable instruments on a ‘no recourse’ basis, (i.e. without recourse The exporter in case the importer fails to pay on the due date).
Some bankers define forfaiting as medium-term capital goods financing, by means of selling a bill of exchange, at a discount, to a third party who is the forfaiter. This third party collects the payment from an essentially overseas customer, through a collateral bank(s), thus, assuming the underlying responsibility of exporters and simultaneously providing trade finance for importers by converting a short-term loan to a medium-term one
Under top 5 important topics for JAIIB you can include Risk Management for sure! Risk management is a topic that appears consistently in each JAIIB exam.
What is Risk Identification? – Risk and Basic Risk Management Framework JAIIB
The process of detecting and analyzing hazards to an organization’s operations and employees is known as risk identification. For example, identifying IT security risks such as malware and ransomware, accidents, natural catastrophes, and other potentially detrimental occurrences that might interrupt corporate operations are all examples of risk identification. Companies that have strong risk management plans are more likely to be able to mitigate the effect of risks when and if they materialize.
What are risk measures?
Risk measurements are statistical predictors of investment risk and volatility in the past, and they are also important components of current portfolio theory (MPT). MPT is a typical financial and academic tool for evaluating a company’s or a stock fund’s performance in relation to its benchmark index.
These are top 5 important topics of PPB paper in JAIIB. Knowing these topics may help you in your exams. You can read whole priority list of JAIIB AFB and PPB paper here. JAIIB November exam is to be held from 12th November. We hope you started your preparation! Happy Learning and Happy Preparation.
A few recommended Reads
A. There are three papers in the JAIIB exam which are Principles and Practices of Banking, Accounting and Finance for Bankers, and Legal and Regulatory Aspects of Banking. But anyhow the papers are going to change from year 2023.
A. JAIIB can be attempted by the candidates within 2 years or 4 consecutive attempts.
A. A candidate who wishes to appear for the JAIIB exam must be registered as an ordinary member of the IIBF, He/She must have passed their 10+2 Boards or any other equivalent exams and must be working in any Bank or financial institute.
A. JAIIB Exam is conducted two times in a year, once in the month of May and another in November.
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