Commercial Banking.ppt

7/27/2019 Commercial Banking.ppt

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Ram Krishna Khatiwada


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The banking sector is the lifeline of anymodern economy

It is one of the important financial pillars ofthe financial system

It plays a vital role in the success/failure of aneconomy

Banks are one of the oldest financialintermediaries in the financial system

They play an important role in the mobilizationof deposits and disbursement of credit tovarious sectors of the economy


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The banking system is the fuel injection systemwhich spurs economic efficiency by mobilizingsavings and allocating them to high returninvestment

Research confirms that countries with a well-developed banking system grow faster than thosethan a weaker one

The banking system reflects the economic healthof the country

The strength of economy of any country basicallyhinges on the strength and efficiency of thefinancial system


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Which depends on a sound and solvent bankingsystem

A sound banking system efficiently deploysmobilized savings in productive sectors and a

solvent banking system ensures that the bank iscapable of meeting its obligation to the depositors The banking sector is dominant in India as it

accounts for more than half the assets of thefinancial sector

Section 5(1) b of the Banking Regulation Actdefines banking as the accepting, for the purposeof lending or investment, of deposits of moneyfrom


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The public, repayable on demand or otherwise andwithdraw able by cheque, draft, order or otherwise

Section 5(1) defines banking company as anycompany which transacts the business of banking

in India However, the acceptance of deposits by companies

for the purpose of financing their own business isnot regarded as banking within the meaning of theact

The essential characteristics of the bankingbusiness as defined in Section 5(b) of the BankingRegulation Act are as follows:


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Acceptance of deposits from the public

For the purpose of lending or investment

Repayable on demand or otherwise, and

Withdrawable by means of any instrument whether acheque or otherwise

Two important functions of the commercial bankemerge: acceptance of deposits and lending of funds

Banks have borrowed and lent money to business,trade, and people, charging interest on loans andpaying interest on deposits- these two activities arethe core activities of banking


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Deposits are the main source of funds forcommercial banks

The amount mobilized as deposits is then lent in theform of advances

The higher the amount of deposits mobilized, the

higher is the amount of funds lent The growth of deposits depends upon savings Savings held in the form of currency or gold andjewellery are unproductive

For economic growth to take place, it is essential that

these savings are mobilized and channelized forcapital formation which in turn accelerates economicgrowth


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Banks are important financial intermediariesbetween savers and borrowers

Banks mobilize savings by accepting deposits

Deposits may be categorized into (i) demand

deposits and (ii) time deposits Demand deposits are deposits which can be

withdrawn without notice and they can be repaidon demand

Current accounts and saving accounts are classifiedas demand deposits


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Time deposits are deposits which are repayableafter a fixed date or after a fixed period of notice

Fixed deposits, recurring/cumulative deposits,miscellaneous deposits, are classified as time

deposits A significant portion of funds is contributed by

deposits which account for more than 80%liabilities of scheduled commercial banks


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Banks are a special type of financial intermediarieswhich not only accept and deploy large amounts ofuncollateralized deposits but also leverage suchfunds through credit creation

Banks are creators of credit The creation of credit is important function of a

bank and this function distinguishes banks fromthe non-banking institutions

Banks create deposits in the process of their

lending operations When the bank mobilizes savings, it lends the

amount that remains after providing for reserves


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The amount lent is either deposited in the same bankor in some other bank

For instance, when a bank extends overdraft facilityor discounts a bill of exchange, the bank first of allcredits this amount in the account of the customerwho creates a deposit

The bank after keeping aside a certain portion of thisdeposit in the form of reserves, lends this amount

This process continues and repeats in all the banksor in the banking system as a whole

This leads to the creation of credit which in turn

increases the liabilities and assets in the bankingsystem


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Commercial banks mobilize savings from the surplus-spending sector and lend these funds to the deficit spendingsector

They facilitate not only flow of funds but flow of goods andservices from producers to consumers through this function

of lending Commercial banks facilitate the financial activities of not only

the private sector but also of the government

Funds are lent in the form of cash credit, overdraft, and loansystem

Banks discount bills of exchange and give guarantees

Loans and advances form around 50% of the aggregatedeposits of SCBs


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Besides the primary functions of mobilizingdeposits and lending funds, banks provide a rangeof ancillary services, including transfer of funds,collection, foreign exchange, safe deposit locker,gift cheques, and merchant banking

Banks provide a wide variety of banking andancillary services

Banks are distinct entities as they fiduciaryresponsibility, are highly leveraged and the future

of any one bank can threaten the integrity of thepayments system which is the backbone of anymodern economy


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Banking Companies (Acquisition) Act, 1970 whichis known as the Bank Nationalization Act, and theBank Regulation Act, 1949, govern nationalizedbanks while the State Bank of India Act, 1955, and

the seven associate banks of the State Bank of Indiaare governed by the State Bank of India (SubsidiaryBanks) Act, 1959

Private banks are covered under the BankingRegulation Act, 1949


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Scheduled commercial banks are those included in thesecond schedule of the Reserve Bank of India Act, 1934

RBI in turn includes only those banks in this schedulewhich satisfy the criteria laid down vide section 42 (60 of

the Act. Being a part of the second schedule confers some benefits

to the bank in terms of access to accommodation by RBIduring the times of liquidity constraints. At the same time,however, this status also subjects the bank certain

conditions and obligation towards the reserve regulationsof RBI.

Commercial banks can be classified into four categories:public sector banks, private sector banks, foreign banks inIndia, and regional rural banks


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Currently, India has 96 scheduled commercialbanks (SCBs) - 27 public sector banks (that is withthe Government of India holding a stake), 31private banks (these do not have government

stake) and 38 foreign banks . They have a combined network of over 53,000

branches and 49,000 ATMs. According to a reportby ICRA Limited, a rating agency, the public sectorbanks hold over 75 percent of total assets of thebanking industry, with the private and foreignbanks holding 18.2% and 6.5% respectively
http://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Automated_teller_machinehttp://en.wikipedia.org/wiki/Automated_teller_machinehttp://en.wikipedia.org/wiki/Government_of_India


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Public sector banks are banks in which thegovernment has a major holding Not less than 51% of the paid-up share capital will beheld by the Central Govt. All 27 nationalized banks are PSBs.

These can be classified into two groups: (i)the State Bank of India and its associates and(ii) nationalized banks


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State Bank of IndiaState Bank of Bikaner and JaipurState Bank of TravancoreAndhra BankAllahabad Bank

Bank of BarodaBank of IndiaBank of MaharashtraCanara BankCentral Bank of IndiaCorporation Bank

Dena BankIndian Overseas BankIndian BankOriental Bank of CommercePunjab National Bank


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The State Bank of India was initially known asthe Imperial Bank

The Imperial Bank was formed in 1921 by theamalgamation of three presidency banks- theBank of Bengal, the Bank of Bombay and the

Bank of Madras These presidency banks were created as a

charter to deal in bills of exchange payable inIndia and were an integral part of the Indian

Treasury They were taken over by the Imperial Bank of

India as going concerns under a speciallegislation in 1920


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The Imperial Bank acted as a banker to thegovernment until the establishment of the RBI in1935

Later on, it was authorised to act as the sole agent

of the RBI in places where the latter did not have itsown branches

The Imperial Bank was nationalised under the StateBank of India Act, 1955, which was passed on 8

May 1955 The State Bank of India came into existence on 1July 1955


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This marked the beginning of the first phase ofnationalisation of banks

The main objective of nationalisation wasextending banking facilities on a large scale,

particularly in the rural and semi-urban areas The other objectives for which the bank was

established were as follows:

To promote agricultural finance and to remedy the

defects in the system of agricultural finance To help the Reserve Bank in its credit policies


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To help the government to pursue the broad economicpolicies

The State Bank of India has seven subsidiaries: 1. State Bank of India

2. State Bank of Bikaner and Jaipur

3. State Bank of Hyderabad4. State Bank of Indore5. State Bank of Mysore6. State Bank of Patiala7. State Bank of Saurashtra

The State Bank of India holds the dominant market positionamong all Indian Banks

It is the worlds largest commercial bank in terms ofbranch network with a staggering 14,000 branches and 51foreign branches


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In 1969, fourteen big Indian joint stock banks inthe private sector was nationalised

The nationalisation was effected by an ordinancewhich was later replaced by an act of parliament,

known as the Banking Companies (Acquisition andTransfer of Undertakings) Act, 1970

This was the second phase of nationalisation

Six commercial banks in the private sector with

deposits over Rs 200 crore were nationalised on 15August 1980- the third phase of nationalisation

In all 28 banks were nationalised from 1955-1980


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The main objectives of nationalization were towiden the branch network of banks particularly inthe rural and semi-urban areas which in turn wouldhelp in grater mobilization of savings and flow of

credit to neglected sectors such as agriculture, andsmall-scale industries

With the amendment to the Banking CompaniesAct, public sector banks are now allowed to accessthe capital market to raise funds

This has led to a dilution of the shareholding of thegovernment


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Public sector banks have an edge over privatesector banks in terms of size, geographical reachand access to low-cost deposits

Huge size enables them to cater to the large creditneeds of corporate

Geographical reach through a large number ofbranches increases their access to low-costdeposits and lowers the portfolio risk throughdiversification

The access to low-cost deposits enables them to

lend to the corporate at competitive rates Low-cost deposits are current account and savingsaccount deposits


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Current account deposits earn no interest andhence are the cheapest and the most volatilesource of funds for a bank

Savings account deposits are more stable than

current account deposits but carry a higher interestof 3.5%

The nationalized banks are a dominant segment incommercial banking

The bulk of the banking business in the country isin the public sector


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Public sector banks have expanded theirbranch network and catered to the socio-economic needs of a large mass of thepopulation, especially the weaker section and

in the rural areas Public sector banks dominate with 75 per

cent of deposits and 71 per cent of advancesin the industry


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Banks set up under the guidelines of RBI other thannationalized banks. Have to follow all the directions, instructions,guidelines from the RBI.

Vysya Bank Ltd UTI Bank Ltd Indusind Bank Ltd ICICI Banking Corporation

Bank Ltd Global Trust Bank Ltd HDFC Bank Ltd Centurion Bank Ltd Bank of Punjab Ltd


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Joint stock banks incorporated abroad havingbranches in India are foreign banks.

New foreign banks are allowed to conduct businessin India taking into consideration the financialsoundness of the bank, international and homecountry ranking, international presence, andeconomic and political relations between the twocountries

Standard Chartered Bank is the undisputed leader

among the foreign banks with assets of over Rs30,000 crore followed by Citibank which is adistant second


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Stanchart has a network of about 80 brancheswhich is fairly big compared to other foreignbanks

Foreign Banks such as Standard Chartered,

Citibank and ABN Amro have a strongpresence in the metros and most big cities ofIndia


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ABN-AMRO Bank N.V.Abu Dhabi Commercial Bank Ltd.American Express Bank Ltd.Barclays Bank PLCBNP ParibasCitibank N.A.DBS Bank LtdDeutsche Bank AGHSBC Ltd.Standard Chartered BankState Bank of Mauritius Ltd.


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A new category of scheduled banks came intoexistence in 1975 when 6 regional rural banks(RRBs) came into existence under the RegionalRural Banks Ordinance, 1975

This ordinance was promulgated by theGovernment of India on 26 September 1975

The ordinance was subsequently replaced by theRegional Rural Banks Act, 1976

Although cooperative and commercial banksachieved a high reach and disbursement of credit,there existed a vast gap in the area of rural credit


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In order to fill up this bank, a new set up of banks,namely, RRBs was established

RRBs were set up as institutions which combine thelocal fee and familiarity with rural problems, whichthe cooperatives possess and the degree of business

organization, ability to mobilize deposits, access tocentral money markets, and modernized outlookwhich commercial banks have

The major objective of setting up RRBs was to developthe rural economy by providing for the purpose ofdevelopment of agriculture, trade, commerce,industry and other productive activities in the ruralareas, credit and other facilities,


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Particularly to the small and marginal farmers,agricultural laborers, artisans, and smallentrepreneurs

Each RRB is sponsored by a public sector bank,

which provides assistance in the form ofsubscription to its share capital, managerial andfinancial assistance, and help in the recruitmentand training of personnel

Every RRB is authorized to carry on and transact thebusiness of banking as defined in Section (5b) andSection 6(1) of the Banking Regulation Act


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The RBI can grant assistance to RRBs by way ofloans and advances from the National AgriculturalCredit (Stabilization) Fund under Sections 46A and46B

The massive expansion of their branch network

enabled them to exploit them to expand bankingactivities in the unbanked areas and mobilize ruralsavings

Although RRBs are spread over all the States, theyhave a major presence in seven States, viz, AndhraPradesh, Uttar Pradesh, Bihar, Karnataka, MadhyaPradesh, Maharashtra, and Rajasthan, which havethe highest number of RRBs


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RRBs are at par with scheduled commercial bankswith respect to priority sector lending, investmentavenues, credit discipline, and transparency

RRBs have carved out a niche for themselves in

terms of geographical coverage, clientele outreach,business volume, and contributions for thedevelopment of the rural economy

But these RRBs are characterized by lowproductivity, high transaction costs, negativemargins, low recovery rates and high non-performing assets

Documents

Commercial Banking.ppt