BANKING & WEALTH MANAGEMENT
Evolution of Banking
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of theReserve Bank of India Act, 1934. The Indian Banking Regulation Act 1949 was formulated to governthe financial sector.In 1921 the presidency Banks of Bengal, Bombay and Madras with their 70 branches were merged in1921 to form the Imperial Bank of India. During the First 5 year plan in 1951, an act was passed inParliament in May 1955 nationalizing the Imperial Bank and the State Bank of India was constitutedon 1 July 1955During the period 1906-1911, several Commercial banks such as BOI, Central Bank of India, BoB,Bank of Mysore etc were established which were all Joint Stock Banks
Definition of a Bank
Indian Banking Regulation Act (1949) defines Banking as the Acceptance of money for the purpose of lending or investment, from deposits received from the public, repayable on demand or otherwisewithdrawable by cheques, drafts or order to otherwise (Standing Instructions, ECS).
Nationalization of Banks
First only State Bank of India (SBI) was nationalized in July 1955 under the SBI Act of 1955.Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960.
In 1969, Mrs. Indira Gandhi the then prime minister nationalized 14 banks then. These banks weremostly owned by businessmen and even managed by them.
y
Central Bank of India
y
Bank of Maharashtra
y
Dena Bank
y
Punjab National Bank
y
Syndicate Bank
y
Canara Bank
y
Indian Bank
y
Indian Overseas Bank
y
Bank of Baroda
y
U
nion Bank
y
Allahabad Bank
y
U
nited Bank of India
y
U
CO Bank
y
Bank of India 1980 : Nationalisation of seven more banks with deposits over 200 crores.
Problems: Nationalized banks had job guarantee so employee efficiency very low, indiscipline and high absenteeism, trade union problems etc. Compare with present banks
TYPE OF BANKS AND THEIR FUNCTIONS
1.
Central Bank2.
State Bank of India3.
Scheduled and Non Scheduled Banks4.
Co operative Banking5.
Retail Banking6.
Private Banking7.
Investment Banking8.
Corporate Banking
1. CENTRAL BANK: RBI
1.A Central bank has the sole right of note issuance i.e. legal tender currency2.It should be the channel, and the sole channel for the output and intake of legal tender currency.3.It should be the holder of all the government balances, and the holder of all the reserves of theother banks and branches of banks in the country.4. It should be the agent , so to speak, through which the financial operations, at home and abroad,of the government would be performed.5. Based on its Monetary Policy It should further be the duty of the central bank to effect so far as itcould , suitable contraction and suitable expansion on money supply, aiminggenerally at stability,bby using the following tools: OMO- Open Market Operation, sterilization, CRR, SLR, Bank Rate etc-
(
Discussed in class, notes given)
6. When necessary, it should be the ultimate source from which emergency credit might be obtainedin the form of rediscounting approved bills, or advances on approved short term securities orgovernment papers. Lender of last resort/ Banker to Banks7. It does not deal directly with the public. It indirectly helps agriculture, industry by augmentingresources of other banks, channeled through agencies such NABARD, SIDBI, NHB ie priority sectortargets8. Maintains the foreign exchange reserves and gold reserves for the country
(
Discussed in class-notes given)
9. Clearing House of Commercial Banks
(
Discussed in class-notes given)
10. Rediscounting bills for scheduled banks
(
Discussed in class-notes given)
11. Moral Suasion- Mild persuasion to banks and financial institutions to follow RBI requirementsbased on market situations
2. STATE BANK OF INDIA
The State Bank of India acts as an agent of the Reserve Bank of India and performs the followingfunctions:(1) Borrows money:- The Bank borrows money from the public by accepting deposits such as currentaccount deposits, fixed deposits and demand deposits.(2) Lends money:- It lends money to merchants , industries and manufacturers. It also lends tofarmers and co-operative institutions. It lends mostly on the security of easily realizable commoditieslike rice, wheat, cotton, oil-seeds, cloth, gold and government securities. The Bank can lend againstagricultural bills upto a maximum period of fifteen months and incase of other bills upto a maximumperiod of six months.(3) Bankers Bank:-The State Bank of India acts as the bankers bank. In discharging thisresponsibility, the bank provides loans to commercial bank when required and also rediscount theirbill.(4) It also acts as the clearing house of the commercial bank where RBI doesnot have its branches(CLEARING F
U
NCTIONS DISC
U
SSED IN CLASS). SBI and its Associate banks are responsible for
clearing: SBBJ State Bank of Bikaner & Jaipur, SBH State Bank of Hyderabad, SBM State Bank of Mysore, SBIN State Bank of Indore, SBP State Bank of Patiala, SBT State Bank of Travancore.(4) Governments Bank:- The State Bank of India also acts as the agent of the Reserve Bank of India.As an agent, the State Bank of India maintains the treasuries of the State Government. The Bank alsomanages the debts (buying or selling of Bonds and Treasury Bills) floated by the State Governments.(5) Remittance:- The State Bank of India facilitates remittance of money from one place to another.It also helps in the transfer on the funds of the State and Central Government.(6) Functions as Central Bank:- The State Bank of India performs the functions of a Central Bankwhere RBI does not have its presence.(7) Subsidiary service functions:- The State Bank performs various subsidiary services also. It collectschecks, drafts, bill of exchange, dividends interest, salaries and pensions on behalf of its customers..It receives valuables and documents for safe custody and maintains safe deposit vaults
3. SCHEDULED AND NON SCHEDULED BANKSIn the RBI ACT OF 1934, all banks listed in the second schedule is known as Scheduled banks
All Scheduled bank operations are under strict surveillance of RBI. All nationalised banks, mostprivate sector banks, foreign banks are scheduled. Most cooperative banks are non- scheduled (notsubjected to strict financial discipline).Advantages of scheduled banks:1. RBI can rediscount the bills already discounted by them2.Their drafts, bank guarantee, letter of credit accepted in all government offices3.RBI acts as lender of last resort4. All government accounts and transaction get routed through them5. More account holders and lesser interest payment towards deposits as compared to nonscheduled banks
4. COOPERATIVE BANKING
Definition by Paul Lambert: It is an enterprise formed and directed by an association of users,applying within itself the rules of democracy and directly intended to serve both its own membersand the community as a whole. It is a voluntary concern with equitable participation and controlamong all concerned.1.It is organized by those who themselves need credit2. Runs as a democracy: Run by Board of Director elected on the basis of one vote per memberCosmos, Saraswat, SuvarnaSahakarietc1.
Rural Co-operative banks
: predominantly agriculture credit banks-short, medium and long termto agriculture, handicraft, cottage industries. Issues: Recovery, problem of valuing land, livestock,perishable agricultural commodities, improper title of property as security, limited resources andfund shortage, high Non performing Assets, chances of financial mis-management by themanagement itself (corruption).
2.Urban Co-operative banks:
Formed formeeting the credit requirement of the urban lower middleclass which larger banks do not wish to lend due to high cost of advancing and recovery. Nor dothese people have large incomes or large assets to offer as security. Membership open to traders,merchant, professionals etc who have to contribute to share capital. They have their own funds(paid up share capital) and borrowed funds (deposits from public and borrowing from other banks)
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