Banking Systemin 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 INDIAORGANISED

BANKS IN INDIA-RBI

SCHEDULED BANKS(285)

NON-SCHEDULED BANKS (4)

COMMERCIAL BANKS

CO-OPERATIVE BANKS

URBAN CO-OPERATIVE

BANKS-52

STATE CO-OPERATIVE

BANKS- 27

PRIVATE SECTORBANKS-25

PUBLIC SECTOR BANKS-27

FOREIGN BANKS-29REGIONAL 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

NON SCHEDULED BANK: Not entitled to facility of borrowing &

rediscounting

Co-operative Banks

CENTRAL CO-OPERATIVE

BANK- 369

PRIMARY AGRICULTURAL CO-OPERACTIVE CREDIT SOCIEY

DISTRICT CENTRAL

CO-OPERATIVEBANKS

STATECO-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 India- to 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

71177 in 2006 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 (11 years)- 1100% or 11 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 BanksFunctions 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. Paid-up Capital

2. Statutory and other disclosed free reserves including share premium

3. Capital reserves

Capital Adequacy NormsTier 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

CREDIT CREATION DEPOSITS

PRIMARY DEPOSITS DERIVATIVE DEPOSITS

MULTIPLE CREATION OF CREDIT

LOANS & ADVANCES MONEY AT CALL & SHORT NOTICE DISCOUNTING OF BILLS INVESTMENTS

MAXIMUM EXPANSION OF LOANS & DEPOSITS

BANK DEPOSIT RETAINED AS RESERVE LENT

1ST 10,000.00 2,000.00 8,000.00

2ND 8,000.00 1,600.00 6,400.00

3RD 6,400.00 1,280.00 5,120.00

4TH 5,120.00 1,024.00 4,096.00

5TH 4,096.00 819.20 3,276.80

6TH 3,276.80 655.36 2,621.44

7TH 2,621.44 524.29 2,097.15

8TH 2,097.15 419.43 1,677.68

9TH 1,677.68 335.54 1,342.14

10TH 1,342.14 268.43 1,073.70

TOTAL 44,631.21 8,926.25 35,704.92

ADDIT.L 5,368.79 1,073.15 4,295.08

GRAND TOTAL

50,000 10,000.00 40,000.00

DEPOSIT MULTIPLIER & CREDIT CREATION FORMULA

K= 1/r

K= Deposit multiplier

r= ratio of cash reserve to deposit

LIMITATIONS OF CREDIT CREATION

ADEQUATE CASH RESERVE AVAILABILITY OF SECURITIES QUANTITY OF MONEY IN CIRCULATION ATTITUDE OF PEOPLE POLICY OF THE CENTRAL BANK NATURE OF BUSINESS CONDITIONS LEAKAGES BEHAVIOUR OF OTHER BANKS USE OF CHEQUE

RESERVE BANK OF INDIACENTRAL 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 BANKER’S 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)

SELECTIVE CREDIT CONTROL 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 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 INCLUSIONFinancial 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

inclusion3. Credit Card facility involving credit upto Rs.25000

without security4. Printed materials made available to retail customers in

the concerned regional language5. ‘Know Your Customers’ (KYC) procedure simplified

for low income group people

MERGERS & ACQUISITIONSIN

BANKING INDUSTRY

Approval of MergerRBI approved of the merger of HDFC Bank Ltd.

And Centurion Bank of Punjab Ltd. As on May 23, 2008.

All Branches of Centurion Bank of Punjab shall function as branches of HDFC Bank from that date.

Balance Sheet of the combined entity will be at Rs.1,63,000 cr.

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%

CBoP Bank : Rs. 25,404 crore 390 branches 7,500 employees NPA 1.7%

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 CHANNELS1. ATMs

2. SMART CARD

3. TELE BANKING

4. 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 It’s 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-BANKING1. Customer- to- Bank E-Banking

2. Bank- to- Bank E-Banking

3. Electronic Central Banking

4. 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