Banking System in India

Chapter 5

DEFINITION OF BANKING
Accepting, for the purpose of lending or investment of deposit, of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. - Banking Company- any company which transacts the business of banking in India. (they follow withdrawal by cheque, draft, order etc.- Payment Mechanism)

Indigenous bankers
Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. combine trading and other business with money lending. Vary in size from petty lenders to substantial Shroffs Act as money changers and finance internal trade through hundis (internal bills of exchange) Indigenous banking is usually family owned business employing own working capital At one point it was estimated that IBs met about 90% of the financial requirements of rural India

BANKING SYSTEM IN INDIA

ORGANISED BANKS IN INDIARBI
SCHEDULED BANKS (285) NON-SCHEDULED BANKS (4)

COMMERCIAL BANKS

CO-OPERATIVE BANKS

PRIVATE SECTOR BANKS-25

PUBLIC SECTOR BANKS-27

URBAN CO-OPERATIVE BANKS-52

STATE CO-OPERATIVE BANKS- 27

FOREIGN BANKS-29

REGIONAL RURAL BANKS- 96

SCHEDULED BANK:
 

Must be carrying on a business of banking in India Must have paid-up capital and reserve of an aggregate value of not less than Rs.5 lakh(100cr.for New) It must satisfy RBI- not in a manner detrimental to the interest of depositor Not entitled to facility of borrowing & rediscounting

NON SCHEDULED BANK:



Co-operative Banks
CENTRAL CO-OPERATIVE BANK- 369

PRIMARY AGRICULTURAL CO-OPERACTIVE CREDIT SOCIEY

DISTRICT CENTRAL CO-OPERATIVE BANKS

STATE CO-OPERATIVE BANK -31

SCHEDULED COMMERCIAL BANKS

PUBLIC SECTOR BANKS
 

SBI & Associates (SBI Act, 1955) Nationalised Banks (1969-1980)

PRIVATE SECTOR BANKS:

 

Post Reform Period 24 banks in pvt. Sector Banks Initial minimum paid up capital from Rs.100 to Rs.200 crore.

REGIONAL RURAL BANKS

Bank with local knowledge and familiarity Organizational ability to mobilize deposits, access to money market and modernized outlook CAPITAL- Authorised-1 cr.- paid up-50laks-50% subscribed by Central Govt.-15%State Govt. 35% by Sponsor Bank

FOREIGN BANKS: Registered outside Indiato operate in India the minimum capital requirement of US $25 million, spread over 3 branches, that is, US$ 10million for the 1st and 2nd bank respectively and US$5million for the 3rd branch


The no. of licenses fixed is 12 per year both for new and expansion by existing banks

Progress of banking in India

Nationalization of banks in 1969: 14 banks were nationalized Branch expansion: Increased from 8260 in 1969 to 75177 in 2008 Population served per branch has come down from 64000 to 16000 A rural branch office serves 15 to 25 villages within a radius of 16 kms However, at present only 32,180 villages out of 5 lakh have been covered

Progress of banking in India

Deposit mobilization:
  

1951-1971 (20 years)- 700% or 7 times 1971-1991 (20 years)- 3260% or 32.6 times 1991- 2006 (18 years)- 1600% or 16 times

Expansion of bank credit: Growing at 20-30% p.a. thanks to rapid growth in industrial and agricultural output

Progress of banking in India

Diversification in banking: Banking has moved from deposit and lending to
      

Merchant banking and underwriting Mutual funds Retail banking ATMs Internet banking Venture capital funds Factoring

Commercial Banks
Functions
Accepting Deposits Providing loans and advances Collecting and dealing with negotiable instruments Issuing letter of credit Dealing in foreign exchange Issuing, underwriting and dealing in government securities, shares, debentures & other security& investment Providing safe deposit vaults Doing agency business Giving guarantees Merchant business

Non Performing Asset (NPA) (For Loans & Advances)

Standard Assets: are those which are not NPA as they are regular and performing and there are no adverse features Sub-Standard Assets: are those which are NPAs for a period Not exceeding Two Years Doubtful Assets: are those non-performing assets which remain as such for a period, Exceeding 2 years Loss Assets: are those NPAs where 100% loss has been identified but not yet written off in the books of accounts

Capital Adequacy Norms (8%)

Tier I Capital:
1. 2.

3.

Paid-up Capital Statutory and other disclosed free reserves including share premium Capital reserves

Capital Adequacy Norms

Tier II capital consists: 1. Undisclosed reserves & cumulative perpetual preference shares 2. Revaluation Reserves at a discount of 25% 3. Surplus provisions/loss reserves subject to a maximum of 1.25% weighted Risk Assets 4. Hybrid Debt Capital instrument 5. Subordinated Debt

Capital Adequacy Formula

Capital Adequacy=Capital Funds * 100 Weighted Risk Assets

MANAGEMENT
Board of Directors:
Atleast 51% of Board of Directors of a Banking Company must consist of persons who have specialized knowledge & should not be proprietors of any trading, commercial or industrial concern.

Wholetime Chairman:
  

Not be adjudicated insolvent Not be convicted for criminal offence Be a managing agent or take remuneration in the form of commission or of a share in the profits of company or whose remuneration is excessive in the opinion of RBI

RESERVE BANK OF INDIA

CENTRAL BANKING AND ITS FUNCTIONS

Origin of RBI
In 1921, 3 Presidency Banks were amalgamated to form the Imperial Bank of India Existence in 1st April,1935 under RBI Act 1934. Setting up of such institution was based on recommendation of Hilton Young Commission in the year 1926.

CONSTITUTION OF RBI
CAPITAL Rs.5 crore 5lakh fully paid up shares of Rs.100 each Rs. 2.2 lakhs subscribed by the Central Government Nationalization of RBI in 1st January,1949, entire share capital was acquired by Central Government

MANAGEMENT
CENTRAL BOARD OF DIRECTORS COMPRISING OF 20 MEMBERS:
 

 

1 GOVERNOR & 4 DEPUTY GOVERNORS APPOINTED BY CENTRAL GOVERNMENT 4 DIRECTORS NOMINATED BY CENTRAL GOVERNMENT ONE FROM EACH LOCAL BOARD 10 DIRECTORS NOMINATED BY CENTRAL GOVERNMENT 1 GOVERNMENT OFFICIAL NOMINATED BY CENTRAL GOVERNMENT

LOCAL BOARD
FOR EACH REGIOANAL AREAS OF THE COUNTRY THERE IS LOCAL BOARD:
   

WESTERN MUMBAI (Head Quarters) EASTERN KOLKOTA NORTHERN- NEW DELHI SOUTHERN- CHENNAI

Functions: 1)Advising the Central Board 2) Performing other duties delegated by Central Board

FUNCTIONS OF THE RBI

1) MONOPOLY OF NOTE ISSUE- THROUGH I) ISSUE DEPARTMENT
 

II) BANKING DEPARTMENT MAINTAINS 18 ISSUE OFFICES; AND NETWORK OF 4301 CURRENCY CHEST AND 4027 SMALL COIN DEPOSITS BASIS I) PROPORTIONAL RESERVE SYSTEM 40% to consist of coins, bullions, securities BULLIONS - MINIMUM RESERVE SYSTEM- SINCE 1957- Rs.515cr.of assets- of which- Rs.400cr. In foreign securities and Rs.115cr. in gold coins & bullions

 

FUNCTIONS CONTD.
BANKER TO GOVERNMENT
 

ISSUE OF NEW LOANS & TREASURY BILLS WAYS & MEANS OF ADVANCES

ADVISER TO GOVERNMENT CONTROLLER OF CREDIT EXCHANGE CONTROL AUTHORITY BANKERS BANK & LENDER OF LAST RESORT BANK OF SETTLEMENT & CLEARANCE PROMOTER OF FINANCIAL SYSTEM SUPERVISING FUNCTION

INSTRUMENTS OF CREDIT CONTROL

GENERAL OR QUANTITATIVE
  

BANK RATE OR THE DISCOUNT RATE POLICY OPEN MARKET VARIATIONS VARIABLE RESERVE RATIO (CRR, SLR, NLR) MINIMUM MARGIN FOR LENDING AGAINST SPECIFIC SECURITIES CEILING ON THE AMOUNT OF CREDIT FOR CERTAIN PURPOSE (Credit Authorization Scheme) DISCRIMINATORY RATES OF INTEREST ON CERTAIN TYPES OF ADVANCES

SELECTIVE CREDIT CONTROL

  

MORAL SUASION

CRR- CASH RESERVE RATIO-5.5% The Scheduled commercial banks are required to maintain a minimum cash balance with the Reserve Bank at the close of business on any day. SLR- STATUTORY LIQUIDITY RATIO-24% Commercial banks have to maintain liquid assets in cash, gold and unencumbered Government securities amounting to not less than 20% of the total demand and time liabilities.

MONETARY POLICY AND RECESSION

BANK RATE MARKET RATE CREDIT OFFTAKE MONEY SUPPLY EXCESS DEMAND PRICES RECESSION (6%- BANK RATE; 5.5%- REPO RATE)

FINANCIAL INCLUSION
Financial inclusion is delivery of banking services at affordable cost to the vast sections of disadvantaged and low income groups Measures: 1. Make no-frills Account 2. Adopt one district in each state for 100% financial inclusion 3. Credit Card facility involving credit upto Rs.25000 without security 4. Printed materials made available to retail customers in the concerned regional language 5. Know Your Customers (KYC) procedure simplified for low income group people

STRENGTHS OF MERGING ENTITIES

INCEPTION AT THE SAME TIME NEW GENERATION PRIVATE BANKS GEOGRAPHIC FIT HDFC Bank :
       

asset size of Rs. 131,439 crore as of the third quarter of 2007-08, 1,100 branches 21,477 employees NPA 0.4% Rs. 25,404 crore 390 branches 7,500 employees NPA 1.7%

CBoP Bank :

Both have had mergers in past CPoB has higher share of retail (60%) in its total loan portfolio than HDFC Bank (51%).
Economies of scale and retail lending will get a big boost

CBoP adds about 20% in terms of balance sheet Both understand consumer and retail banking Both have been on a technology platform

Mergers in Indian Banking Industry

Indian Economy growing at 8% Banking Industry growing at 22% 2009 RBI will open up Indian Banking Industry Need many more banks, especially in the rural and semi-urban areas More than 50% of the population does not have banking accounts Hardly 20 Indian banks are found in top 1000 banks of the world Therefore, future has to see many mergers in the Indian Banking Industry

ELECTRONIC BANKING

POPULAR ELECTRONIC DELIVERY CHANNELS

1. 2. 3. 4.

ATMs SMART CARD TELE BANKING INTERNET BANKING

ATM
It is a novel cash dispenser They are user friendly and have mass acceptability I reaches out to large customer base at low cost Now banks have started to outsource and share ATMs to reduce cost ATM also dispenses railway tickets, movie tickets etc. It is now used also as a marketing tool to target the masses ATMs with finger print scanning technology may become operative in future making it more convenient and cost effective

SMART CARDS
Its a chip based card which will store a monetary value It is more secure than a ATM, Debit & Credit Cards It recognises signature & voices Doesn't necessitate the use of PIN When transaction is made using the card, the value is debited and the balance automatically comes down

FACETS OF E-BANKING
1. 2. 3. 4.

Customer- to- Bank E-Banking Bank- to- Bank E-Banking Electronic Central Banking Intranet Procurement

E-Banking Transactions
Account Enquiry Fund Transfer Payment of Electricity, Water, Telephone Bills Online payment for transactions actually performed through Internet Request for issuance of cheque book, draft etc. Statement of Accounts Access to latest schemes Access to rates of interest & other service charges

Electronic Cheque
It is electronic image of a paper cheque It is generated, written and signed in a secured manner using digital signature which has been legally recognised. Digital signature is compulsory There should be minimum safety standards like asymmetric crypto system

MChq Product
In countries like Japan & other Asian Countries Working: all vital personal information is stored in a magnetic strip & then loaded on to the sim card in a secured format Existing sim card has to be replaced with 128 bit encryphon key which offers a higher degree of safety than the existing sim card. While shopping one only gives phone no. to merchant, who would then send on a special mobile phone an sms to the server of the mobile service provider. The customer will get inturn an sms asking him to confirm payment The customer will have to enter his persoanlised PIN number as an added security measure and send back an sms confirming the amount to be paid . The merchant and the customer will then get an sms confirming the completion of transaction. The exchange normally happens within a minute