Banking system In India

Muralidhar Prasad
Associate Professor (Banking and Finance)
Classification of Banks
1. Classification on the basis of Ownership
Private Banks
Public Banks
2. Classification on the basis of function
Commercial Banks SBI, ICICI, HDFC, PNB, AXIS
Industrial / Development Banks IDBI, SIDBI, IFCI,
ICICI
Agriculture Banks - NABARD
Saving Banks Only Account in India
Exchange Banks Thomas Cook
Central Banks RBI, Bank of England, Federal Reserve
Definition
A Bank is an Institution whose debts
(bank deposits) are widely accepted
in settlement of other peoples debts
to each other R.S. Sayers

A Bank is an establishment which
makes to individuals such advances of
money as may be required and safely
made , and to which individuals
entrust money when not required by
them for use Prof. Kinley


Definition
5.(1)(b) - Banking means accepting for the
purpose of lending or investment of deposits of
money from the public
Repayable on demand or otherwise and
withdrawal by cheque , draft order or otherwise
5.(1).(c) Banking Company means any company
which transacts the business of banking
System of Banking
1. Branch Banking
2. Unit Banking
3. Chain Banking
4. Investment Banking
5. Mixed Banking
6. Universal Banking
7. Virtual Banking
8. Retail Banking
9. Wholesale Banking
10. Offshore Banking


2007 2008 2009 2010 2011 2012 2013
(1) (2) (3) (4) (5) (6) (7)
State Bank of India and its Associates 14691 15870 16940 18392 19341 20260 21315
Nationalised Banks 37437 39287 41027 43675 46461 50729 54528
Public Sector Banks 52128 55157 57967 62067 65802 70989 75843
Old Private Sector Banks 4840 4725 4955 5276 5093 5678 6290

New Private Sector Banks 2599 3638 4336 5243 7009 8298 9718
Private Sector Banks 7439 8363 9291 10519 12102 13976 16008
Foreign Banks 272 279 295 310 318 323 334
Regional Rural Banks 14810 15054 15484 15776 16267 17032 17564
Local Area Banks 48 48 48 49 54 57 62

All Commercial Banks 74697 78901 83085 88721 94543 102377 109811
Notes :1. Data include ' Administrative Offices'.
2. Nationalized Banks include " IDBI Bank Ltd".
3. Data in respect of 2013 are provisional.
Bank Group
Source : Master Office File (MOF) System, Department of Statistics and Information Management, Reserve Bank of India, as on
October 05, 2013. MOF data are dynamic in nature. It is updated based on information as received from Banks.
As on March 31
TABLE 1.1 : OFFICES OF COMMERCIAL BANKS IN INDIA - 2007 TO 2013
Commercial Banking
Functions of a Commercial Bank
Primary Function
Secondary Function
Other Services
Teller
Credit card
Debit card
ATM

8
Commercial Banking
Commercial Banks are Joint stock companies Profit
making is the objective
The resources are mainly Deposits ( Current and
Savings)
Demand and Time Liabilities
Commercial Banks do various services
Agency Services
General Utility Services

9
Agency Service
Investment Services
Cheque / Bills collection
Stock Purchasing Primary & Secondary
Utility Services
Subscription , Premia and Rent Payments
Correspondent Banking
Executor and Trustee Services


10
General Utility Services
Bankers Drafts , Travelers Cheques and Letters of Credit
Multicity cheques, Payable at Par Cheques
Any Branch Banking
Mobile Banking
Cash Management Service
Safe Custody of Valuables
Safety Lockers
Credit (Kisan, LUCC) ,Debit ,ATM Cards
NEFT / RTGS
Factoring Services
Clearing House Services
Tax collections

11
Commercial Principles
Profitability
Safety
Liquidity
Identification and Traceability



12
Banking Operations
Employment of Funds
Cash In Hand
Money at Call and Short notice
Bills Discounted
Investments
Loans and Advances
13
Credit Creation
Deposits Cheque Facility
Loan Sanction Cash Credit
Bank Buying of Security Cheque Payment
Deposit Loans 90%
Over drafts
Limitation of Credit Creation
Credit Multiplier
Total credit created = Original deposit x Credit multiplier co-
efficient.

Credit multiplier co-efficient = 1/CRR i.e if CRR is 10% then
1/10% = 1/
10/100
= 10

Total Credit created = 1000 x 10 = 10000

If CRR rises to 20%, the credit created will be
1/20
/100 = 100/20 = 5

So 1000 x 5 = Rs.5000/-

It is clear, that the amount of credit created depends upon the cash
reserve ratio. Higher the CRR, lesser will be the credit created and
vice versa.

Credit Creation - Limitations
Credit creation depends upon the amount of deposits.

There exists an inverse relation between credit creation and cash reserve ratio. During inflation the CRR will
be high to reduce credit.

Banking habits of the people are well developed, it will lead to expansion of credit.

Loans are sanctioned by banks against some security. If enough securities are available, then credit creation
will be more and vice versa.

If all the commercial banks, follows a uniform policy regarding CRR, this credit creation would be smooth.

If the liquidity preference of the people is high, the credit creation will be less and vice versa.

If business conditions are bright then demand for credit will be more.

Customers should be willing to borrow from the banks to facilitates credit creation.

Credit control policy of the Central Bank, for example during the depression, the RBI encourages the
commercial banks to expand credit.

Bank Licensing Policy - 2013
Eligible Promoters: Entities / groups in the private
sector, entities in public sector and Non-Banking
Financial Companies (NBFCs) shall be eligible to set up
a bank through a wholly-owned Non-Operative
Financial Holding Company (NOFHC).

(ii) Fit and Proper criteria: Entities / groups should
have a past record of sound credentials and integrity,
be financially sound with a successful track record of
10 years. For this purpose, RBI may seek feedback from
other regulators and enforcement and investigative
agencies.

Ref :www.rbi.org.in
Bank Licensing Policy - 2013
Minimum voting equity capital requirements for
banks and shareholding by NOFHC:
The initial minimum paid-up voting equity capital for a
bank shall be Rs. 5 billion.
The NOFHC shall initially hold a minimum of 40 per
cent of the paid-up voting equity capital of the bank
which shall be locked in for a period of five years
and which shall be brought down to 15 per cent within
12 years.
The bank shall get its shares listed on the stock
exchanges within three years of the commencement of
business by the bank.

Bank Licensing Policy - 2013
Foreign shareholding in the bank: The
aggregate non-resident shareholding in the
new bank shall not exceed 49% for the first 5
years after which it will be as per the extant
policy
Bank Licensing Policy - 2013
Other conditions for the bank :
The Board of the bank should have a majority of
independent Directors.
The bank shall open at least 25 per cent of its
branches in unbanked rural centres (population upto
9,999 as per the latest census)
The bank shall comply with the priority sector
lending targets and sub-targets as applicable to the
existing domestic banks.
Any non-compliance of terms and conditions will
attract penal measures including cancellation of
license of the bank.