My Ifs Notes

8/8/2019 My Ifs Notes

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INDIAN

FINANCIALSYSTEM


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FINANCE

The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read

about Money and banking in Economics, about Monetary Theory and Practice and about "Public

Finance". But finance exactly is not money; it is the source of providing funds for a particular

activity. Thus public finance does not mean the money with the Government, but it refers to

sources of raising revenue for the activities and functions of a Government. Here some of the

definitions of the word finance both as a source and as an activity i.e. as a noun and a verb.

The American Heritage Dictionaryofthe EnglishLanguage, Fourth Edition definestheterm asunder-

1:"The science of the management of money and other assets.

2: "The management of money, banking, investments, and credit.

3: "finances monetary resources; funds, especially those of a government or

corporate body"

4: "The supplying of funds or capital."

Financeasafunction (i.e. verb)is defined bythesameDictionaryasunder-

1:"To provide or raise the funds or capital for": financed a new car2: "To supply funds to":

financing a daughter through law school.3: "To furnish credit to".

Another English Dictionary, "Word Net 1.6, 1997Princeton University definestheterm asunder-

1:"the commercial activity of providing funds and capital"2: "the branch of economics that

studies the management of money and otherAssets"3: "the management of money and credit and banking and investments"

Thesame dictionaryalso definestheterm asafunctioninSimilar wordsasunder-

1: "obtain or provide money for;" " Can we finance the addition to ourHome?"

2:"sell or provide on credit


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All definitions listed above refer to finance as a source of funding an activity. In this respect

providing or securing finance by itself is a distinct activity or function, which results in Financial

Management, Financial Services and Financial Institutions. Finance therefore represents there

sources by way funds needed for a particular activity. We thus speak of finance' only in relation

to a proposed activity. Finance goes with commerce, business, banking etc. Finance is also

referred to as "Funds" or Capital", when referring to the financial needs of a corporate body.

When we study finance as a subject for generalizing its profile and attributes, we distinguish

between 'personal finance" and "corporate finance" i.e. resources needed personally by an

individual for his family and individual needs and resources needed by a business organization to

carry on its functions intended for the achievement of its corporate goals

FinancialSystem

An institutional framework existing in a country to enable financial

transactions

Three main parts

Financialassets (loans, deposits,bonds,equities,etc.)

Financialinstitutions (banks, mutualfunds,insurancecompanies,etc.)

Financial markets (money market,capital market,forex market,etc.)

Regulationisanotheraspectofthefinancialsystem (RBI,SEBI, IRDA,

FMC)


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EVOLUTION, GROWTH & FUNCTIONS OF INDIAN FINANCIAL SYSTEM

INDIAN FINANCIAL SYSTEM WAS CHARACTERISED BY:

ABSENCE OF ORGANISED CAPITAL MARKET

DEPENDENCE OF INDUSTRIES & OTHER USERS ON INTERNAL

SOURCES.

RARE CASES OF PUBLIC ISSUES OF CAPITAL FOR EXPANSION &

MODERNISATION.

FEW FINANCIAL INSTITUTIONS & PLAYERS IN THE MARKET.

AWKWARD & VERY STRICT CONDITIONS FOR LOAN ASSISTANCE TO

COMPANIES.

NATIONALISATION OF BANKS IN 1969 WAS A MAJOR STEP TO ENSURE

THAT TIMELY AND ADEQUATE CREDIT SUPPORT WAS AVAILABLE.

GRANT OF CREDIT TO AGRICULTURAL & SMALL INDUSTRIES BY EXPANSION

OF RURAL BANKING PROVED TO BE A BOON OFFERED BY THE NEW POLICY.

THE INDIAN FINANCIAL SYSTEM HAS MADE COMMANDABLE PROGRESS IN

EXTENDING ITS GEOGRAPHIC SPREAD & FUNCTIONAL REACH. THE SUDDEN

BRST OF ACTIVITIES OF BANKING SYSTEM HAS BEEN A MAJOR FACTOR INPROMOTING FINANCIAL INTERMEDIATION IN THE ECONOMY & GROWTH OF

FINANCIAL SAVINGS.

INDIAN MONEY MARKET CONSISTS OF FORMAL & INFORMAL SEGMENTS.

THE FORMAL MARKET COMPRISES OF RBI, VARIOUS COMMERCIAL BANKS,

COOPERATIVE BANKS, UTI ETC. INFORMAL MARKET CONSISTS OF

CHITFUNDS, NIDHIS, INDEGENOUS BANKERS ETC. THE MONEY MARKET

INSTRUMENTS INCLUDES TREASURY BILLS, COMMERCIAL PAPERS ETC

MONEY MARKET HAS GAINED GREATER STRENGTH WITH THE RECENTWORLD WIDE LIBERISATION OF MONETARY & TRADE POLICIES. WITH THE

ARRIVAL OF WTO & REMOVAL OF ARTIFICIAL BARRIERS AMONG

COUNTRIES BOOSTING FREE FLOW OF GOODS & SERVICES, CAPITAL

MARKETS HAVE GROWN MULTIFOLD & THE POTENCIAL OF FUTURE IS EVEN

MORE LARGER. WITH THE INCREASING INDUSTRIAL & TRADE ACTIVITIES


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AFTER LIBERALISATION,THE DEMAND FOR CAPITAL MOBILISATION FROM

THE MARKET HAS CROSSED ALL ESTIMATES & GIVING RISE TO MANY

INNOVATIONS & REFORMS.

THE MARKET PLAYERS IN THE INDIAN CAPITAL MARKET ESSENTIALLY

CONSISTS OF VARIETY OF INVESTORS FROM DIFFERENT SECTORS, SUCH

AS: SMALL INVESTORS, BANKS, MUTUAL FUNDS, COMPANIES, And

FINANCIAL INSTITUTIONS & SO ON.

THE INVESTORS ARE EXPECTED TO ENQUIRE & INFORM THEMSELVES

ABOUT THE STRENGTHS & WEAKNESSES OF DIFFERENT INSTRUMENTS &

THE INSTITUTIONS IN WHICH THEY INVEST OR PLANNING TO INVEST.

THEY SHOULD ALSO BE FAMILIAR WITH THE PREVAILING RULES &

REGULATIONS OF THE COUNTRY APPLICABLE TO SUCH INVESTMENTS &

INSTITUTIONS .THE CONCEPT OF SAFETY, LIQUIDITY & PROFITABILITY OFTHE INVESTMENT SHOULD BE CLEAR BEFORE THE INVESTOR MAKES ANY

DECISSION TO INVEST.

Role/ Functions of Financial System

o Saving Functiono Liquidity Functiono Payment Functiono Risk Functiono Policy Function

A financial system performs the following functions:

* It serves as a link between savers and investors. It helps in

utilizing the mobilized savings of scattered savers in more

efficient and effective manner. It channelizes flow of saving intoproductive investment.

* It assists in the selection of the projects to be financed and also

reviews the performance of such projects periodically.

* It provides payment mechanism for exchange of goods and

services.


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* It provides a mechanism for the transfer of resources across

geographic boundaries.

* It provides a mechanism for managing and controlling the risk

involved in mobilizing savings and allocating credit.

* It promotes the process of capital formation by bringing

together the supply of saving and the demand for investible

funds.

* It helps in lowering the cost of transaction and increase returns.

Reduce cost motives people to save more.

* It provides you detailed information to the operators/ players in

the market such as individuals, business houses, Governments

etc.

EVERY MODERN ECONOMY IS BASED ON A SOUND

FINANCIAL SYSTEM. THEPRINCIPAL AIM OF FINANCIAL

SYSTEM IS TO TRANSFORM SURPLUS INCOME & SAVINGS

INTO INVESTMENTS.


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The word "system", in the term "financial system", implies a set of complex and

closely connected or interlined institutions, agents, practices, markets, transactions,

claims, and liabilities in the economy. The financial system is concerned about

money, credit and finance-the three terms are intimately related yet are somewhat

different from each other.

Indian financial system consists of financial market, financial instruments and

financial intermediation. These are briefly discussed below,

FINANCIAL MARKET

FINANCIAL INSTRUMENTS

FINANCIAL INTERMEDIATION


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FINANCIAL MARKET

FINANCIAL MARKETS PROVIDE CHANNELS FOR ALLOCATION OF SAVINGS TO INVESTMENT. ITIS A MARKET WHERE FINANCIAL ASSETS ARE CREATED OR TRANSFERRED THROUGH BUYING

& SELLING OF FINANCIAL ASSETS.

Defined as the market in which financial assets are created or transferred.

These assets represent a claim to the payment of a sum of money sometime in the

future and/or periodic payment in the form of interest or dividend.

Money Market- for short-term funds (less than a year)

Organized (Banks)

Unorganized (money lenders, chit funds, etc.)

Capital Market- for long-term funds

Primary Issues Market

Stock Market

Bond Market

FINANCIAL

MARKET

MONEY

MARKET

CAPITAL

MARKET

PRIMARY

MARKET

SECONDARY

MARKET

FOREX

MARKET

CREDIT

MARKET


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1 MONEY MARKET :

IT REFERS TO THE MARKET, WHERE BORROWERS & LENDERS EXCHANGE

SHORT TERM FUNDS TO SOLVE THEIR LIQUIDITY NEEDS. FUNDS ARE

AVAILABLE IN THIS MARKET FOR PERIODS RANGING FROM A SINGLE DAY

UPTO A YEAR. THE FINANCIAL CLAIMS HERE HAVE LOW RISK, HIGH LIQUIDITY& MATURITIES UNDER ONE YEAR.

1. CAPITAL MARKET :

THE CAPITAL MARKET IS DESIGNED TO FINANCE THE LONG TERM

INVESTMENTS. THE TRANSACTIONS TAKING PLACE IN THIS MARKET WILL BE

FOR PERIODS OVER A YEAR.

AGAIN THE CAPITAL MARKET CAN BE CLASSIFIED ON THE BASIS OF CLAIMS

REPRESENTING NEW ISSUES OR OUTSTANDING ISSUES AS PRIMARY &

SECONDARY

PRIMARY MARKET :

IT IS THE MARKET WHICH PROVIDES THE CHANNEL FOR SALE OF NEW

ISSUES. RESOURCES ARE REQUIRED FOR BOTH NEW AS WELL AS EXISTING

PROJECTS WITH A VIEW TO EXPANSION, MODERNISATION, DIVERSIFICATION &

UPGRADATION. IT IS THE MARKET WHERE RESOURCES ARE MOBILISED BY

COMPANIES THROUGH ISSUE OF NEW SECURITIES.

SECONDARY MARKET :

A MARKET WHERE INVESTORS TRADE OUTSTANDING SECURITIES/ ISSUES IS

CALLED SECONDARY MARKET. SECONDARY MARKET COMPRISES OF STOCK

EXCHANGES, WHICH PROVIDE PLATFORM FOR PURCHASE & SALE OF

SECURITIES BY INVESTORS, WHERE THE TRADING IS ACCESSIBLE ONLY

THROUGH BROKERS & TRADING IS CONFIED ONLY TO STOCK EXCHANGES

The most important distinction between the two:

The difference in the period of maturity


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Primary Markets Secondary Markets

When companies need financial

resources for its expansion, they borrow

money from investors through issue ofsecurities.

The place where such securities are traded

by these investors is known as the

secondary market.

Securities issued

a) Preference Shares

b) Equity Shares

c) Debentures

Securities like Preference Shares and

Debentures cannot be traded in the

secondary market.

Equity shares is issued by the under

writers and merchant bankers on behalf

of the company.

Equity shares are tradable through a

private broker or a brokerage house.

People who apply for these securities

are:

a) High net worth individual

b) Retail investors

c) Employees

d) Financial Institutions

e) Mutual Fund Houses

f) Banks

Securities that are traded are traded by the

retail investors.

One time activity by the company. Helps in mobilizing the funds for the

investors in the short run.


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FOREX MARKET:

THIS MARKET DEALS WITH THE MULTICURRENCY REQUIREMENTS, WHICH

ARE MET BY THE EXCHANGE OF CURRENCIES. DEPENDING ON THEEXCHANGE RATE THAT IS APPLICABLE, THE TRANSFER OF FUNDS TAKES

PLACE IN THIS MARKET. THIS IS ONE OF THE MOST DEVELOPED &

INTEGRATED MARKET ACROSS THE GLOBE.

CREDIT MARKET:

IT IS A PLACE WHERE BANKS, FINANCIAL INSTITUTIONS & NBFCS RENDER

SHORT, MEDIUM & LONG TERM LOANS TO CORPORATE & INDIVIDUALS

Money market

Main Function

To channelize savings into short term productive investments like working

capital.

Organized Money Market

Call money market

Bill Market

Treasury bills

Commercial bills

Bank loans (short-term)

Organized money market comprises RBI, banks (commercial and co-operative)

Purpose of the money market

Banks borrow in the money market to:

Fill the gaps or temporary mismatch of funds

To meet the CRR and SLR mandatory requirements as stipulated by the central

bank


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To meet sudden demand for funds arising out of large outflows (like advance tax

payments)

Call money market serves the role of equilibrating the short-term liquidity position

of the banks

1. MONEY MARKET INSTRUMENTS :

THE MONEY MARKET IS A MARKET FOR SHORT TERM MONEY & FINANCIAL

ASSETS THAT ARE CLOSER SUBSTITUTES OF MONEY. HERE THE TERM SHORT

TERM MEANS GENERALLY A PERIOD UPTO ONE YEAR & CLOSER

SUBSTITUTES OF MONEY MEANS ANY ASSET WHICH CAN BE QUICKLY

CONVERTED INTO MONEY WITH MINIMUM TRANSACTION COST.

THE IMPORTANT MONEY MARKET INSTRUMENTS ARE:

Instruments in Money Market

Call money market

Treasury bills market

Markets for commercial paper

Certificate of deposits

Bills of Exchange

Money market mutual funds

Promissory Note


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CALL/NOTICE MONEY:

IT IS THE MONEY BORROWED OR LENT ON DEMAND FOR A VERY SHORT PERIOD.

WHEN MONEY IS BORROWED OR LENT FOR A DAY, IT IS KNOWN AS CALL/ OVERNIGHTMONEY. HOLIDAYS & SUNDAYS ARE EXCLUDED HERE. THUS MONEY BORROWED ON A

DAY & REPAID ON THE NEXT WORKING DAY IS CALL MONEY. BUT WHEN MONEY LENT

OR BORROWED FOR MORE THAN A DAY & UPTO 14 DAYS, IT IS NOTICE MONEY.

Call Money Market Participants

Those who can both borrow and lend in the market RBI (through LAF), banks

and primary dealers

Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were

allowed in the call money market only on the lenders side

These were phased out and call money market is now a pure inter-bank market

(since August 2005)

Bill Market.

TREASURY BILL :

IT IS A SHORT TERM BORROWING INSTRUMENT OF THE UNION GOVT. IT IS

AN IOU I.e. ACKNOWLEDGEMENT OF DEBT OF THE GOVT. TO PAY A STATED

SUM OF AFTER EXPIRY OF STATED PERIOD FROM THE DATE OFISSUE.(LESS THAN 1 YEAR).

Treasury Bill market- Also called the T-Bill market

These bills are short-term liabilities (91-day, 182-day, 364-day) of the

Government of India

It is an IOU of the government, a promise to pay the stated amount after expiry of

the stated period from the date of issue

They are issued at discount to the face value and at the end of maturity the facevalue is paid

The rate of discount and the corresponding issue price are determined at each

auction

RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364-day T-

Bills on a fortnightly basis on behalf of the central government


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COMMERCIALPAPERS :

IT REPRESENTS SHORT TERM UNSECURED PROMISORY NOTES ISSUED

BY FIRMS THAT ARE GENERALLY CONSIDERED TO BE FINANCIALLY

STRONG. COMMERCIAL PAPERS USUALLY HAVE A MATURITY PERIOD OF

90 - 180 DAYS. IT IS GENERALLY SOLD AT DISCOUNT & REDEEMED ATPAR.

IT IS EITHER DIRECTLY PLACED WITH THE INVESTORS OR SOLD

THROUGH DEALERS. BUT IT DOES NOT PRESENTLY HAVE A WELL

DEVELOPED SECONDARY MARKET IN INDIA.

Certificates of Deposit

CDs are short-term borrowings in the form of UPN issued by all scheduled banks

and are freely transferable by endorsement and delivery.

Introduced in 1989

Maturity of not less than 7 days and maximum up to a year. FIs are allowed to

issue CDs for a period between 1 year and up to 3 years

Subject to payment of stamp duty under the Indian Stamp Act, 1899

Issued to individuals, corporations, trusts, funds and associations

They are issued at a discount rate freely determined by the market/investors

TERM MONEY :

INTER BANK MARKET FOR DEPOSITS OF MATURITY BEYOND 14 DAYS IS

REFERRED TO AS THE TERM MONEY MARKET

Collateralized Borrowing and Lending Obligation (CBLO)

Operationalised as money market instruments by the CCIL in 2003

Follows an anonymous, order-driven and online trading system

On the lenders side main participants are mutual funds, insurance companies.

Major borrowers are nationalised banks, PDs and non-financial companies

The average daily turnover in the CBLO segment increased from Rs. 515 crore

(2003-04) to Rs. 32, 390 crore (2006-07)


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Market Repos

Repo (repurchase agreement) instruments enable collateralised short-term

borrowing through the selling of debt instruments

A security is sold with an agreement to repurchase it at a pre-determined dateand rate

Reverse repo is a mirror image of repo and reflects the acquisition of a security

with a simultaneous commitment to resell

Average daily turnover of repo transactions (other than the Reserve Bank)

increased from Rs.11,311 crore during April 2001 to Rs. 42,252 crore in June

2006

Money Market Instruments

Money market instruments are those which have maturity period of less than one

year.

The most active part of the money market is the market for overnight call and term

money between banks and institutions and repo transactions

Call money/repo are very short-term money market products

Certificates of Deposit

Commercial Paper

Inter-bank participation certificates

Inter-bank term money

Treasury Bills

Bill rediscounting

Call/notice/term money

CBLO

Market Repo


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Promissory Note

Referred as note payable in accounting

It is a contract detailing the terms of a promise by one party (the maker) to pay a

sum ofmoney to the other (the payee).

The obligation may arise from the repayment of a loan or from another form ofdebt.

For example, in the sale of a business, the purchase price might be a combination of an

immediate cash payment and one or more promissory notes for the balance

The Indian Capital Market

Provided resources needed by medium and large scale industries.

Purpose for these resources

Expansion

Capacity Expansion

Investments

Mergers and Acquisitions

Deals in long term instruments and sources of funds

Market for long-term capital. Demand comes from the industrial,

service sector and government

Supply comes from individuals, corporates, banks, financial

institutions, etc.

Can be classified into:

Gilt-edged market

Industrial securities market (new issues and stock market)


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Main Activity

Functioning as an institutional mechanism to channelize funds from those

who save to those who needed for productive purpose. Provides

opportunities to various class of individuals and entities

Development Financial Institutions

Industrial Finance Corporation of India (IFCI)

State Finance Corporations (SFCs)

Industrial Development Finance Corporation (IDFC)

Financial Intermediaries

Merchant Banks

Mutual Funds

Leasing Companies

Venture Capital Companies

C

AP

ITAL

MARKE

T INSTRUME

NTS :

THE CAPITAL MARKET GENERALLY CONSISTS OF THE FOLLOWING

LONG TERM PERIOD i.e. MORE THAN 1 YEAR PERIOD. THE MAJOR

FINANCIAL INSTRUMENTS USED FOR A CAPITAL MARKET ARE :


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HYBRID INSTRUMENTS: HYBRID INSTRUMENTS HAVE BOTH THE

FEATURES OF EQUITY & DEBENTURE. THIS KIND OF INSTRUMENT IS

CALLED AS HYBRID INSTRUMENTS. EXAMPLES ARE: CONVERTIBLE

DEBENTURES WARRANTS, ETC.

Industrial Securities Market

Refers to the market for shares and debentures of old and new companies

New Issues Market- also known as the primary market- refers to raising of new

capital in the form of shares and debentures

Stock Market- also known as the secondary market. Deals with securities already

issued by companies

FINANCIAL INTERMEDIATION

WHEN THE BORROWER OF THE FUNDS APPROACHES THE FINANCIAL MARKET

TO RAISE FUNDS, ADEQUATE INFORMATION OF ISSUE, ISSUER & THE

SECURITY SHOULD BE PROVIDED. SO THERE SHOULD BE A PROPER CHANNEL

TO ENSURE SUCH TRANSFER WITHIN THE FINANCIAL SYSTEM. FOR THIS

PURPOSE FINANCIAL INTERMEDIARIES CAME INTO EXISTENCE.

IN INDIA FINANCIAL INTERMEDIATION IN THE ORGANISED SECTOR IS

CONDUCTED BY VARIOUS INSTITUTIONS UNDER THE VIGILANCE OF R.B.I. IN

THE INITIAL STAGE THE ROLE OF INTERMEDIARIES WAS MOSTLY RELATED TO

ENSURE TRANSFER OF FUNDS FROM THE LENDER TO THE BORROWER. THIS

SERVICE WAS OFFERED BY BANKS, INANCIAL INSTITUTIONS, BROKERS &

DEALERS. HOWEVER, AS THE FINANCIAL SYSTEM WIDENED ALONG WITH THE

DEVELOPMENTS TAKING PLACE IN THE FINANCIAL MARKETS, THE SCOPE OF

ITS OPERATION TOO WIDENED


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SOME OF THE IMPORTANT INTERMEDIARIES OPERATING IN THE FINANCIAL

MARKETS INCLUDE:

INVESTMENT BANKERS

STOCK EXCHANGES

MUTUAL FUNDS

FINANCIAL ADVISORS

FINANCIALCONSULTANTS

PRIMARY DEALERS, ETC.

Mutual Funds- Promote savings and mobilise funds which are invested in the stock

market and bond market

Indirect source of finance to companies

Pool funds of savers and invest in the stock market/bond market

Their instruments at savers end are called units

Offer many types of schemes: growth fund, income fund, balanced fund Regulated by SEBI

Merchant banking- manage and underwrite new issues, undertake syndication of

credit, advise corporate clients on fund raising

Subject to regulation by SEBI and RBI

SEBI regulates them on issue activity and portfolio management of their business.

RBI supervises those merchant banks which are subsidiaries or affiliates of

commercial banks

Have to adopt stipulated capital adequacy norms and abide by a code of conduct

There are other financial intermediaries such as NBFCs,Venture Capital Funds, Hire and Leasing Companies, etc.


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Financial assets/instruments

Enable channelizing funds from surplus units to deficit units

There are instruments for savers such as deposits, equities, mutual

fund units, etc.

There are instruments for borrowers such as loans, overdrafts, etc.

Like businesses, governments too raise funds through issuing of

bonds, Treasury bills, etc.

Instruments like PPF, KVP, etc. are available to savers who wish to

lend money to the government

Financial Institutions

Includes institutions and mechanisms which

Affect generation of savings by the community

Mobilization of savings

Effective distribution of savings

Institutions are banks, insurance companies, mutual funds- promote/mobilise

savings

Individual investors, industrial and trading companies- borrowers

List of All India Financial Institutions

Industrial Development Bank of India (IDBI)

Industrial Finance Corporation of India (IFCI)

Export - Import Bank of India (Exim Bank) Industrial Reconstruction Bank of India (IRBI) now (Industrial Investment Bank of India)

National Bank for Agriculture and Rural Development (NABARD)

Small Industries Development Bank of India (SIDBI)

National Housing Bank (NHB)

Life Insurance Corporation of India (LIC)


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General Insurance Corporation of India (GIC)

Risk Capital and Technology Finance Corporation Ltd. (RCTC)

Technology Development and Information Company of India Ltd.(TDICI)

Tourism Finance Corporation of India Ltd. (TFCI)

Shipping Credit and Investment Company of India Ltd. (SCICI) Discount and Finance House of India Ltd. (DFHI)

Securities Trading Corporation of India Ltd. (STCI)

Power Finance Corporation Ltd.

Rural Electrification Corporation Ltd.

Indian Railways Finance Corporation Ltd.

Infrastructure Development Finance Co. Ltd.

Housing and Urban Development Corporation Ltd. (HUDCO)

Indian Renewable Energy Development Agency Ltd. (IREDA)

Types of financial Institutions

1. Banking

2. Non-Banking

Banking

Banking Company as a company which transacts the business of banking in India. It

defines banking as, accepting for the purpose of lending or investment of deposit money

from the public, repayable on demand or otherwise and withdraw able by cheque draft ,

order or otherwise

A bank as an institution dealing in money and credit. It safeguard of the savings

of the public and gives loans and advances

Indian Banking institutions can be classified into two categories :

1. Organized

2. Unorganized


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Organized sector

Central Bank (Reserve Bank of India)

Commercial banks (222)

Co-operative banks

Organized Banks can be classified as:

Scheduled (Second Schedule of RBI Act, 1934) - 218

Non-Scheduled - 4

Scheduled banks can be classified as:

Public Sector Banks (28)

Private Sector Banks (Old and New) (27)

Foreign Banks (29)

Regional Rural Banks (133)

Unorganized banks

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


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RBI and indigenous bankers

Methods employed by the indigenous bankers are traditional with vernacular

system of accounting.

RBI suggested that bankers give up their trading and commission business andswitch over to the western system of accounting.

It also suggested that these bankers should develop the deposit side of their

business

Ambiguous character of the hundi should stop

Some of them should play the role of discount houses (buy and sell bills of

exchange)

IB should have their accounts audited by certified chartered accountants

Submit their accounts to RBI periodically

As against these obligations the RBI promised to provide them with privileges

offered to commercial banks including

Being entitled to borrow from and rediscount bills with RBI

The IBs declined to accept the restrictions as well as compensation from the RBI

Therefore, the IBs remain out of RBIs purview

Development Oriented Banking

Historically, close association between banks and some traditional industries-

cotton textiles in the west, jute textiles in the east

Banking has not been mere acceptance of deposits and lending money; included

development banking

Lead Bank Scheme- opening bank offices in all important localities

Providing credit for development of the district

Mobilising savings in the district. Service area approach


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Progress of banking in India

Nationalisation of banks in 1969: 14 banks were nationalised

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 of16 kms

However, at present only 32,180 villages out of 5 lakh have been covered

Deposit mobilisation:

1951-1971 (20 years)- 700% or 7 times

1971-1991 (20 years)- 3260% or 32.6 times

1991- 2006 (11 years)- 1100% or11 times

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

industrial and agricultural output

Development oriented banking: priority sector lending

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


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Profitability of Banks

Reforms have shifted the focus of banks from being development oriented to

being commercially viable

Prior to reforms banks were not profitable and in fact made losses for thefollowing reasons:

Declining interest income

Increasing cost of operations

Declining interest income was for the following reasons:

High proportion of deposits impounded for CRR and SLR, earning

relatively low interest rates

System of directed lending

Political interference- leading to huge NPAs

Rising costs of operations for banks was because of several reasons: economic

and political

Uneconomic branch expansion

Heavy recruitment of employees

Growing indiscipline and inefficiency of staff due to trade union activities

Low productivity

Declining interest income and rising cost of operations of banks led to low

profitability in the 90s

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My Ifs Notes