INDIAN BANKING SYSTEM

BRCM COLLEGE OF BUSINESS ADMINISTRATION

Name: Desai Krishna Devani Parth M Dholakiya sapna Roll no: 24 25 26

Division: 1st, TY BBA

Semester: 5th

Topic: BANKING INDUSTRY

Submitted to: Mr. Jayesh desai Mr. Pratik Patel

Submitted on: 23th September, 2011

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BANKING IN INDIA
Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcuttain June 1806. A couple of decades later, foreign banks like CreditLyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. Currently (2011), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. Thestated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

The Modern Banking Functions are Fund based and Non-Fund based functions. These functions of a bank are those in which banks extend various services to their customers or add their commitments to certain transactions undertaken by their clients and charge their fees/ commissions for the services

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rendered by them / their commitments added to the transactions undertaken by the clients. The activities popularly known as Non-fund facilities provided by Banks.

INTRODUCTION
Definition of the Bank:-Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. Banks are important players of the market and offer services as loans and funds. Banking was originated in 18th century First bank were General Bank of India and Bank of Hindustan, now defunct. Punjab National Bank and Bank of India was the only private bank in 1906. Allahabad bank first fully India owned bank in 1865.

Bank of Bengal

Bank of Bombay

Imperial Bank of India

State Bank of India

Bank of Madras

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TYPES OF BANKING
Commercial bank has two meanings:
o

Commercial bank is the term used for a normal bank to distinguish it from an investment bank. (After the great depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital markets activities. This separation is no longer mandatory.)

Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking). It is the most successful department of banking.

Community development bank are regulated banks that provide financial services and credit to underserved markets or populations.

Private banks manage the assets of high net worth individuals. Offshore banks are banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.

Savings banks accept savings deposits. Postal savings banks are savings banks associated with national postal systems.

There are some examples of banks in India: Private sector bank HDFC, ICICI, Axis bank, Yes bank, Kotak Mahindra bank, Bank of Rajasthan Rural bank United bank of India, Syndicate bank, National bank for agriculture and rural development (NABARD) Commercial bank State Bank, Central Bank, Punjab National Bank, HSBC, ICICI, HDFC etc.

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Retail bank BOB, PNB Universal bank Deutsche bank

Does repo rate affect on Banking?

Last week the Reserve Bank of India (RBI), for the 11th time in 17 months, hiked the repo rate to 8 per cent in an effort to rein in inflation. Here's a look at what the repo rate is, how the RBI manages it to control inflation and how it could affect you. REPO, THE POLICY RATE Repo rate is the rate at which the banks borrow short-term funds from the RBI. It is a secured nature of borrowing similar to a loan against fixed deposits availed by individuals during emergencies. Until March 10, banks were able to borrow funds from RBI's repo window at 4.25 per cent, way below the current 8 per cent. Banks are mandated to invest around a quarter of their overall deposit (and borrowings) inflows into government securities. Only the excess over the mandated investment in government securities can be used to borrow funds from repo window. Generally, this kind of borrowing is of last resort as banks' core borrowing has to come from more traditional sources such as deposits. However, liquidity (money availability) in the financial system has been scarce for quite some time given the paltry rates banks were offering depositors. Therefore, the repo window has been used extensively by banks during these times (tight liquidity scenario). INTEREST RATES So how does repo rate affect the interest rates in the banking system? RBI raises repo rate to increase the overall cost of funds in the banking system. Higher costs will keep in check the demand for funds. So as demand slows, demand pull inflation will also slow. In a tight liquidity scenario, repo rate acts as a base rate (or minimum rate) at which the banks can borrow funds. A rise of 3.75 per cent (from 4.25 per cent to 8 per cent) in minimum rate of borrowing will naturally increase the rates at which they have to borrow elsewhere. For instance, if the availability of funds is scarce, and banks are not able to borrow at repo rate, they may have to increase the deposits rates upwards to attract depositors. From the time repo rate uptrend began, the deposit rates of banks have gone up by more than 2 per cent on various maturities. Hence, any rate hike in repo rate increases the probability of higher deposit rates, which is good news for depositors. IMPACT ON BORROWERS AND INVESTORS If you are already a borrower or are looking to borrow from a bank, then the rate hike could add to your costs. For instance, many banks have hiked the loans rates by 5

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more than 2.5 per cent over the last one year period which in turn would lead to higher instalments for borrowers. To put this in perspective, a hike of 2.5 per cent in interest rate on a 10 lakh-15 year loan would mean increase in EMI outgo of about Rs 1,600. Ssectors such as automobiles, consumer durables and realty are the most vulnerable in the scenario where policy rate hikes push the interest rates. Rising rates would not only reduce the demand for these companies' products, they will also affect their earnings in terms of rising interest costs. Rising rates would also impact companies with higher leverage. Besides, there is a possibility that more money gets allocated to debt than equities given the risk-return tradeoffs. This however will also mean good return opportunities for investors who prefer bank fixed deposits.

RBI repo rate - Indian central banks interest rate

RBI - Reserve Bank of India The Reserve Bank of India (RBI) is the Indian central bank. The RBIs most important goal is to maintain monetary stability - moderate and stable inflation - in India. For an overview of current inflation in India, click here or here forcurrent inflation by country. The RBI uses monetary policy to maintain price stability and an adequate flow of credit. Rates which the Indian central bank uses for this are the bank rate, repo rate, reverse repo rate and the cash reserve ratio. Reducing inflation has been one of the most important goals for some time. Other important tasks of the Reserve Bank of India are:

to maintain the populations confidence in the system, to safeguard the interests of those who have entrusted their money and to supply cost-effective banking systems to the population; to manage foreign currency controls: facilitating exports, imports and international payment traffic and developing and maintaining the trade in foreign currencies in India; issuing money (the rupee) and adequately ensuring a high quality money supply; providing loans to commercial banks in order to maintain or grow the Gross National Product (GNP); acting as the governments banker; acting as the banks banker.

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RBI Repo rate or key short term lending rate When reference is made to the Indian interest rate this often refers to the repo rate, also called the key short term lending rate. If banks are short of funds they can borrow rupees from the Reserve Bank of India (RBI) at the repo rate, the interest rate with a 1 day maturity. If the central bank of India wants to put more money into circulation, then the RBI will lower the repo rate. The reverse repo rate is the interest rate that banks receive if they deposit money with the central bank. This reverse repo rate is always lower than the repo rate. Increases or decreases in the repo and reverse repo rate have an effect on the interest rate on banking products such as loans, mortgages and savings.

Bank credit up 20% from last year

Mumbai, Sept. 21: Bank credit increased to Rs 40,74,295crore during the fortnight ended September 9, a rise of Rs 29,433 crore from Rs 40,44,861 in the previous fortnight ended August 26, 2011. Over the same period last year, the increase in credit was to the tune of Rs 6,90,889crore, or 20 per cent. As on September 10, 2010, bank credit was Rs 33,83,406crore. According to bankers, demand for credit is sluggish and the credit off-take is more do to with corporates utilising loans that were sanctioned earlier. There has been a clear slowdown in investment demand. There are hardly any new projects coming up due to both rise in interest rates and cost of inputs. Companies such as steel and infrastructure which were earlier large consumers of credit are suffering, said Mr S. S. Mundra, Executive Director, Union Bank of India.

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Banks are now attracting job aspirants by the droves

Coimbatore, Sept. 21: There seem to be far more people in queue for bank jobs than the vacancy position. Going by what Mr V. P. Iswardas, Chief Executive, Catholic Syrian Bank, and MrShyamSrinivasan, Managing Director and Chief Executive of Aluva-headquartered Federal Bank, say, one is bound to think that the lure for bank jobs is back again. While applicants might yearn for a career in the banking industry, the way in, bankers say, might not be easy if the applicant fails to make an earnest attempt. MrIswardas, speaking to Business Line recently, said the bank received 26,000 applications for 300 vacancies (including 230 probationary officers and 70 clerical positions). Written test These applicants are to take the written test on September 25. The examination is being conducted by IBPS (Institute of Banking and Personnel Selection); and would be followed by interview and screening of those who clear the written test. We are expecting the successful ones to join the bank by mid-January 2012, he said. MrSrinivasan said that Federal Bank is looking to hire only at the entry level. It had outsourced the job to IBPS. Around 45,000 candidates took the test, of which, only 2,000 cleared the written examination and were called for interview. After further filtering, we issued offer letters to 500 successful candidates, he said. While stating that hiring has been an ongoing process in banks, MrSrinivasan said that Federal Bank hired 600 candidates at the entry level during the current year and proposed to add another 400 before the end of the current fiscal. We will be adding 1,500 personnel between now and March 2013. Our manpower requirement assumes importance considering that around 1,000 are to retire in the next 12-24 months. Industry insiders say that getting the right person for the right job is becoming a tough proposition, be it the IT services sector or banking.

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Reserve Bank of India Central Bank and superme monetary authority

Scheduled Banks

Commercial Banks

Co-Operative Banks

Foreign Banks (40)

Regional Rural Bank (196)

Urban Cooperatives (52)

State Cooperatives (16)

Public Sector Banks (27)

Private Sector Bank (30)

Old (22)

New (8)

State Bank of India & Associate Banks (8)

Other Nationalised Banks (19)

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Reserve Banks of India:Establishment The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.

INDIAN FINANCIAL SERVICES SECTOR SWOT ANALYSIS

Strengths:
Proven asset quality resilience in past downturns Proven management teams, track record Stable industry dynamics Well-established regulatory framework

Stable/low NPL formation rates

Weaknesses:
Continued crowding out effect from govt budget deficit, combined with accelerating private sector credit demands Ownership restrictions

Constraints on state-owned banks' micro reforms, including HR, staff cut, branch cut constraints

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Opportunities:
Improving secular GDP growth prospects Establishment of special economic zones likely to promote further industrialization Years, if not decades, of catch-up economics low per capita income, educated workforce Rapid financial deepening, i.e. loan growth as multiple of nominal GDP growth Rising consumer spending, consumer credit business Rising corporate capex, investments

M&A optionality

Threats:
"Running on empty" in terms of liquidity Tightening in global liquidity may trickle down to India Potentially hawkish RBI stance on inflation/monetary policy Potential rise in long bond \ yields, MTM risk for banks

Potential for valuation pullback, should earnings delivery disappoint expectations

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BIBLIOGRAPHY
WEBSITES :-

http://www.global-rates.com

BOOK :Kazmi Azhar, Business Policy & Strategic Management, 2nd Edition, Tata McGraw Hill Publishing Company Limited, New Delhi, 2000.

MAGAZINE :-

Business World. Capital Market.

NEWS PAPER :-

The hindu business line

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