Professional Documents
Culture Documents
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INDIAN BANKING SYSTEM
Not long ago, an account holder had to wait for hours at the bank
counters for getting a draft or for withdrawing his own money. Today, he
has a choice. Gone are days when the most efficient bank transferred
money from one branch to other in two days. Now it is simple as instant
messaging or dial a pizza. Money has become the order of the day.
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After 1991, under the chairmanship of M Narasimham, a
committee was set up by his name which worked for the liberalization of
banking practices. The country is flooded with foreign banks and their
ATM stations. Efforts are being put to give a satisfactory service to
customers. Phone banking and net banking is introduced. The entire
system became more convenient and swift. Time is given more
importance than money. This resulted that Indian banking is growing at
an astonishing rate, with Assets expected to reach US$1 trillion by 2010.
KINDS OF BANKS
Financial requirements in a modern economy are of a diverse
nature, distinctive variety and large magnitude. Hence, different types of
banks have been instituted to cater to the varying needs of the
community. Banks in the organized sector may, however, be classified in
to the following major forms:
o Commercial banks
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o Co-operative banks
o Specialized banks
o Central bank
• COMMERCIAL BANKS
Commercial banks are joint stock companies dealing in money and
credit. In India, however there is a mixed banking system, prior to July
1969, all the commercial banks-73 scheduled and 26 non-scheduled
banks, except the state bank of India and its subsidiaries-were under the
control of private sector. On July 19, 1969, however, 14 major
commercial banks with deposits of over 50 Corers were nationalized. In
April 1980, another six commercial banks of high standing were taken
over by the government.
At present, there are 20 nationalized banks plus the state bank of
India and its 7 subsidiaries constituting public sector banking which
controls over 90 per cent of the banking business in the country.
• CO-OPERATIVE BANKS
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• SPECIALIZED BANKS
• CENTRAL BANK
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India’s central bank is the Reserve Bank of India established in
1935. A central bank is usually state owned but it may also be a private
organization. For instance, the Reserve Bank of India (RBI), was started
as a shareholders’ organization in 1935, however, it was nationalized
after independence, in 1949. It is free from parliamentary control.
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o DEREGULATION
o NEW RULES
As a result, the market place has been redefined with new rules of
the game. Banks are transforming to universal banking, adding new
channels with lucrative pricing and freebees to offer. Natural fall out of
this has led to a series of innovative product offerings catering to various
customer segments, specifically retail credit.
o EFFICIENCY
o MISALLIGNED MINDSET
o COMPETENCE GAP
Placing the right skill at the right place will determine success. The
competency gap needs to be addressed simultaneously otherwise there
will be missed opportunities. The focus of people will be on doing work
but not providing solutions, on escalating problems rather than solving
them and on disposing customers instead of using the opportunity to cross
sell.
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o Making aggressive forays in the retail advances segment of
home and personal loans
o Implementing organization wide initiatives involving people,
process and technology to reduce the fixed costs and the cost
per transaction
o Focusing on fee based income to compensate for squeezed
spread, (e.g. CMS, trade services)
o Innovating Products to capture customer ‘mind share’ to
begin with and later the wallet share
o Improving the asset quality as per Basel II norms
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INDIAN ECONOMY
As a new Indian middle class has developed around the wealth that
the IT and BPO industries have brought to the country, a new consumer
base has developed. International companies are also expanding their
operations in India to service this massive growth opportunity. The same
thing has followed by international banks that are entering in Indian
market and pulling their huge investments in Indian economy. This is
helping to accelerate the growth of Indian economy.
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MICRO ECONOMIC POINT OF VIEW
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ECONOMIC SYSTEMS
o Market Economy
o Planned Economy
o Mixed Economy
MARKET ECONOMY
PLANNED ECONOMY
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decisions related to the production, distribution, commodity and service
prices, are all made by the government. The planned economy is
government directed, and market forces have very little say in such an
economy. This type of economy lacks the kind of flexibility that is
present a market economy, and because of this, the planned economy
reacts slower to changes in consumer needs and fluctuating patterns of
supply and demand. On the other hand, a planned economy aims at using
all available resources for developing production instead of allotting the
resources for advertising or marketing.
MIXED ECONOMY
Cash reserve Ratio (CRR) is the amount of funds that the banks
have to keep with RBI. If RBI decides to increase the percent of this, the
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available amount with the banks comes down. RBI is using this method
(increase of CRR rate), to drain out the excessive money from the banks.
The amount of which shall not be less than three per cent of the total of
the Net Demand and Time Liabilities (NDTL) in India, on a fortnightly
basis and RBI is empowered to increase the said rate of CRR to such
higher rate not exceeding twenty percent of the Net Demand and Time
Liabilities (NDTL) under the RBI Act, 1934.
o In cash,
Or
o In gold valued at a price not exceeding the current market
price,
Or
o In unencumbered approved securities valued at a price as
specified by the RBI from time to time.
REPO RATE
Repo rate, also known as the official bank rate, is the discounted
rate at which a central bank repurchases government securities. The
central bank makes this transaction with commercial banks to reduce
some of the short-term liquidity in the system. The repo rate is dependent
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on the level of money supply that the bank chooses to fix in the monetary
scheme of things. Repo rate is short for repurchase rate. The entity
borrowing the security is often referred to as the buyer, while the lender
of the securities is referred to as the seller. The central bank has the power
to lower the repo rates while expanding the money supply in the country.
This enables the banks to exchange their government security holdings
for cash. In contrast, when the central bank decides to reduce the money
supply, it implements a rise in the repo rates. At times, the central bank of
the nation makes a decision regarding the money supply level and the
repo rate is determined by the market.
The securities that are being evaluated and sold are transacted at
the current market price plus any interest that has accrued. When the sale
is concluded, the securities are subsequently resold at a predetermined
price. This price is comprised of the original market price and interest,
and the pre-agreed interest rate, which is the repo rate.
BANK RATE
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o Bank rate on real estate loan
INTERBANK RATE
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The monetary value of all the finished goods and services produced
within a country's borders in a specific time period, though GDP is
usually calculated on an annual basis. It includes all of private and
public consumption, government outlays, investments and exports less
imports that occur within a defined territory.
GDP = C + G + I + NX
Where:
"NX" is the nation's total net exports, calculated as total exports minus
total imports. (NX = Exports - Imports)
INFLATION
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to an increase in the supply of currency or credit relative to the
availability of goods and services, resulting in higher prices. Therefore,
inflation can be measured in terms of percentages. The percentage
increase in the price index, as a rate per cent per unit of time, which is
usually in years. The two basic price indexes are used when measuring
inflation, the producer price index (PPI) and the consumer price index
(CPI) which is also known as the cost of living index number.
DEFLATION
DISINFLATION
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REFLATION
STAGFLATION
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Foreign Institutional Investors (FIIs), Non-Resident Indians
(NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the
primary and secondary capital markets in India through the portfolio
investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire
shares/debentures of Indian companies through the stock exchanges in
India.
The ceiling for overall investment for FIIs is 24 per cent of the paid
up capital of the Indian company and 10 per cent for NRIs/PIOs. The
limit is 20 per cent of the paid up capital in the case of public sector
banks, including the State Bank of India.
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ROLE OF BANKS IN DEVELOPING OF
ECONOMY
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Banks play a very useful and dynamic role in the economic life of
every modern state. A study of the economic history of western country
shows that without the evolution of commercial banks in the 18th and
19th centuries, the industrial revolution would not have taken place in
Europe. The economic importance of commercial banks to developing
countries may be viewed thus:
Above all view we can see in briefly, which are given below:
ENCOURAGING INNOVATION
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manner in which bank credit is allocated and utilized in the process of
economic growth. Bank credit enables entrepreneurs to innovate and
invest, and thus uplift economic activity and progress.
MONETSATION
Banks are the manufactures of money and they allow many to play
its role freely in the economy. Banks monetize debts and also assist the
backward subsistence sector of the rural economy by extending their
branches in to the rural areas. They must be replaced by the modern
commercial bank’s branches.
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RESERVE BANK OF INDIA AS A
REGULATORY INSTITUTION IN INDIAN
ECONOMY
The RBI was established under the Reserve Bank of India Act,
1934 on April 1, 1935 as a private shareholders' bank but since its
nationalization in 1949, is fully owned by the Government of India. The
Preamble of the Reserve Bank describes the basic functions as 'to regulate
the issue of Bank notes and keeping of reserves with a view to securing
monetary stability in India and generally, to operate the currency and
credit system of the country to its advantage'. The twin objectives of
monetary policy in India have evolved over the years as those of
maintaining price stability and ensuring adequate flow of credit to
facilitate the growth process. The relative emphasis between the twin
objectives is modulated as per the prevailing circumstances and is
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articulated in the policy statements by the Reserve Bank from time to
time. Consideration of macro-economic and financial stability is also
subsumed in the mandate. The Reserve Bank is also entrusted with the
management of foreign exchange reserves (which include gold holding
also), which are reflected in its balance sheet.
MAIN FUNCTIONS
o MONITORY AUTHORITY
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Prescribes broad parameters of banking operations within which
the country’s banking and financial system functions. Their main
objective is to maintain public confidence in the system, protect
depositors’ interest and provide cost-effective banking services to the
public.
o DEVELOPMENTAL ROLE
o RELATED FUNCTIONS
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There are also some of the relating functions to the above
mentioned main functions. They are such as Banker to the Government,
Banker to banks etc….
SUPERVISORY FUNCTIONS
The Reserve Bank act, 1934 and the Banking Regulation act, 1949
have given the RBI wide powers of supervision and control over
commercial and co-operative banks, relating to licensing and
establishments, branch expansion, liquidity of their asset, management
and methods of working, amalgamation, reconstruction, and liquidation.
The RBI is authorized to carry out periodical inspections of banks
and to call for returns and necessary information from them. The
supervisory functions of the RBI have helped a great deal in improving
the standard of banking in India to develop on sound lines and to improve
the methods of their operation.
PROMOTIONAL FUNCTIONS
With economic growth assuming a new urgency since
Independence, the range of the Reserve Bank’s functions has steadily
widened. The bank now performs a variety of developmental and
promotional functions, which, at one time were regarded as outside the
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normal scope of central banking. The RBI was asked to promote banking
habit, extend banking facilities to rural and semi-urban areas, and
establish and promote new specialized financing agencies.
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o FALL IN SAVINGS RATIO
The savings ratio is the % of income that is saved not spent. A fall
in the savings ratio implies that consumer spending is increasing; often
this is financed through increased borrowing.
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a significant impact on increasing interest repayments. Also,
higher rates will not be increasing incomes from savings as
much.
BALANCE OF PAYMENT
o INFLATION
o GLOBAL RECESSION
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It appears that Europe, Japan and the US are entering into
recession. Falling house prices, crisis in the financial system, and lower
confidence could lead to a sharp downturn, with the worst still to come.
Many argue that India’s growth is not so dependent on growth in the
West. However, the Indian stock markets have been hit by the global
crisis. India’s growing service sector and manufacturing sector would be
adversely impacted by a global downturn.
o DEPRICIATING INR
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IMPACT OF ECONOMIC PROBLEMS ON
INDIAN FINANCIALS
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curtail consumption, which would impact economic growth adversely.
Further higher rates will not only impact the profitability of Indian
corporate but also impact IRRs of various proposed capex projects. This
coupled with elections next year could lead to some postponement of
capex plans of corporate, leading to negative impact on demand for
credit.
Higher rates have particularly impacted retail loan growth. As can
be seen in the exhibit below, retail loan growth has slowed down
significantly from 26.5% in FY07 to ~13% in FY08. SLR Ratio of the
system has started rising since mid FY08 and currently stands at 28.7%.
Given the expected negative impact on credit growth.
During the past 18 months, CRR has increased by 400 bps to 9.0%
currently and RBI has also discontinued with interest payment on CRR
balances. Every 50 bps hike in CRR generally negatively impacts
margins by ~5 bps. Till June’08, most of the banks had restrained from
hiking lending rates despite significant monetary tightening. However on
account of recent measures by RBI, banks have resorted to hiking PLRs
in July/August by 50-150 bps to preserve their margins.
In fact in an environment, where liquidity is tight, interest rates are
at elevated levels and risk premiums have increased, the banks tend to
regain the pricing power. This would not only help the banks to
adequately price in risks but also help protect their margins. Apart from
hiking PLRs, banks are also resorting to reprising (in fact right-pricing)
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the loans that were sanctioned well below PLRs. Significant portion of
fixed rate loans would also get re-priced over the period of 12-18 months.
Higher lending rates are expected to impact credit quality for the
banking system. The extent of the impact on credit quality would also be
bank specific given the loan mix (retail vs. corporate), proportion of
unsecured lending, credit profile of corporate loan book and industry wise
exposure. Indian banks’ fundamentals are relatively resilient with better
risk management systems, dramatically improved asset quality, stronger
recovery mechanisms (legal provisions) and with adequate capitalization
and provisioning.
Even Certain sectors (like real estate, airlines industry) might feel
the stress due to the changing macro environment and rise in interest
rates. Many companies where crude forms a key raw material component
are expected to get hit more severely. Similarly, sectors like real estate
and SMEs, which are interest rate sensitive, would face higher
delinquencies if interest rates strengthen further by 100-200 bps.
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NECESSARY INITIATIVES TAKEN BY RBI &
MINISTRY OF FINANCE TO TACKLE
ECONOMIC PROBLEMS
With the introduction of the Five year plans, the need for
appropriate adjustment in monetary and fiscal policies to suit the pace
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and pattern of planned development became imperative. The monitory
policy since 1952 emphasized the twin aims of the economic policy of
the government:
This policy of RBI since the First plan period was termed broadly
as one of controlled expansion, i.e.; a policy of “adequate financing of
economic growth and at the same time the time ensuring reasonable price
stability”. Expansion of currency and credit was essential to meet the
increased demand for investment funds in an economy like India which
had embarked on rapid economic development. Accordingly, RBI helped
the economy to expand via expansion of money and credit and attempted
to check in rise in prices by the use of selective controls.
PRICE STABILITY
MONITORY TARGETTING
INTEREST RATE POLICY
RESTRUCTURING OF MONEY MARKET
REGULATION OF FOREIGN EXCHANGE MARKET
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o Raising bank rates
o Open market operations and
o Variable reserve ratio
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there is inflation in an economy, monetary restraints can, in conjunction
with other measures, play a useful role in controlling inflation.
• FISCAL POLICY
• DIRECT MEASURES
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Direct controls refer to the regulatory measures undertaken to
convert an open inflation into a repressed one. Such regulatory measures
involve the use of direct control on prices and rationing of scarce goods.
The function of price control is a fix a legal ceiling, beyond which prices
of particular goods may not increase. When ceiling prices are fixed and
enforced, it means prices are not allowed to rise further and so, inflation
is suppressed. Under price control, producers cannot raise the price
beyond a specified level, even though there may be a pressure of
excessive demand forcing it up.
In times of the severe scarcity of certain goods, particularly, food
grains, government may have to enforce rationing, along with price
control. The main function of rationing is to divert consumption from
those commodities whose supply needs to be restricted for some special
reasons; such as, to make the commodity more available to a larger
number of households. Therefore, rationing becomes essential when
necessities, such as food grains, are relatively scarce. Rationing has the
effect of limiting the variety of quantity of goods available for the good
cause of price stability and distributive impartiality.
Another control measure that was suggested is the control of wages
as it often becomes necessary in order to stop a wage-price spiral. During
galloping inflation, it may be necessary to apply a wage-profit freeze.
Ceilings on wages and profits keep down disposable income and,
therefore the total effective demand for goods and services. On the other
hand, restrictions on imports may also help to increase supplies of
essential commodities and ease the inflationary pressure. However, this is
possible only to a limited extent, depending upon the balance of
payments situation. Similarly, exports may also be reduced in an effort to
increase the availability of the domestic supply of essential commodities
so that inflation is eased.
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In general, monetary and fiscal controls may be used to repress
excess demand but direct controls can be more useful when they are
applied to specific scarcity areas. As a result, anti-inflationary policies
should involve varied programmes and cannot exclusively depend on a
particular type of measure only.
HDFC Bank’s ‘Net Safe’ card is a one-time use card with a limit
that’s specified, taken from Tendon’s credit or debit card. Even if Tandon
fails to utilize the full amount within 24 hours of creating the card, the
card simply dies and the unspent amount in the temporary card reverts to
his original credit or debit card. Welcome to one of the myriad ways in
which bankers have been trying to innovate. They’re bringing ATMs,
cash and even foreign exchange to their customers’ doorsteps. Indeed,
innovation has become the hottest banking game in town.
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Want to buy a house but don’t want to go through the hassles of
haggling with brokers and the mounds of paperwork? Not to worry. Your
bank will tackle all this. It’s ready to come every step of the way for you
to buy a house. Standard Chartered, for instance, has property advisors to
guide a customer through the entire process of selecting and buying a
house. They also lend a hand with the cumbersome documentation
formalities and the registration.
Don’t fret if you’ve already bought your house or car – you can do
other things with both. You can leverage your new house or car these
days with banks like ICICI Bank and Stanchart ready to extend loans
against either, till it’s about five years old. Loans are available to all car
owners for almost all brands of cars manufactured in India that are up to
five years old.
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banking hours, seven days of the week, in major cities. Not to be outdone,
some of the other private banks have also done this too. HDFC Bank
even has a 24-hour branch at Mumbai’s international airport.
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innovating to develop new business models to access untapped
opportunities.
Through these scenarios, we can paint a picture of the events and
outcomes that will be the consequence of the actions of policy makers
and bank managements. These actions will have dramatically different
outcomes; the costs of inaction or insufficient action will be high.
Specifically, at one extreme, the sector could account for over 7.7 per
cent of GDP with over Rs.. 7,500 billion in market cap, while at the other
it could account for just 3.3 per cent of GDP with a market cap of Rs.
2,400 billion. Banking sector intermediation, as measured by total loans
as a percentage of GDP, could grow marginally from its current levels of
~30 per cent to ~45 per cent or grow significantly to over 100 per cent of
GDP. In all of this, the sector could generate employment to the tune of
1.5 million compared to 0.9 million. Today availability of capital would
be a key factor — the banking sector will require as much as Rs. 600
billion (US$ 14 billion) in capital to fund growth in advances, non-
performing loan (NPL) write offs and investments in IT and human
capital up gradation to reach the high-performing scenario. Three
scenarios can be defined to characterize these outcomes:
o HIGH PERFORMANCE
o EVOLUTION
o STAGNATION
The term “policy makers”, refers to the Ministry of Finance and the
RBI and includes the other relevant government and regulatory entities
for the banking sector. The coordinated efforts between the various
entities are required to enable positive action. This will spur on the
performance of the sector. The policy makers need to make coordinated
efforts on six fronts:
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• Help shape a superior industry structure in a phased manner
through “managed consolidation” and by enabling capital
availability. This would create 3-4 global sized banks controlling
35-45 per cent of the market in India; 6-8 national banks
controlling 20-25 per cent of the market; 4-6 foreign banks with
15-20 per cent share in the market, and the rest being specialist
players (geographical or product/ segment focused).
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• Enable labor reforms, focusing on enriching human capital, to help
public sector and old private banks become competitive.
• New private banks could reach the next level of their growth in the
Indian banking sector by continuing to innovate and develop
differentiated business models to profitably serve segments like the
rural/low income and affluent/ HNI segments; actively adopting
acquisitions as a means to grow and reaching the next level of
performance in their service platforms. Attracting, developing and
retaining more leadership capacity would be key to achieving this
and would pose the biggest challenge.
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• Foreign banks committed to making a play in India will need to
adopt alternative approaches to win the “race for the customer” and
build a value-creating customer franchise in advance of regulations
potentially opening up post 2009. At the same time, they should
stay in the game for potential acquisition opportunities as and when
they appear in the near term. Maintaining a fundamentally long-
term value-creation mindset will be their greatest challenge.
CONCLUSION
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Financial sector also faces lots of problems but it should develop
certain strategies to come out of these problems which is very important
for healthy growth of economy.
BIBLIOGRAPHY
V.K. BHALLA
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INTRODUC TION TO ECONOMIC ANALYSIS
R. PRESTON MCAFEE
D.M.MITHANI
P.N.VARSHNEW
MONEYCONTROL.COM
MONEYPORE.COM
RBI.ORG.IN
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