Bank Management

CIA 1

SUBMITTED BY,
PIYUSH JAIN, 1902452
YASH MEENA, 1920463
NIKHIL KUMAR, 1920419
 Introduction to banking system

What Is a Banking?
Banking is a business of accepting deposits and lending money. It is carried out by financial
intermediaries, which performs the functions of safeguarding deposits and providing loans to
the public.
In other words, Banking means accepting for the purpose of lending or investment of deposits
of money from public repayable on demand and can be withdrawn by cheque, draft order and
so on.

What Is a Banking System?

A banking system is a group or network of institutions that provide financial services for us.
These institutions are responsible for operating a payment system, providing loans, taking
deposits, and helping with investments, or in other words, Banking System is a principal
mechanism through which the money supply of the country is created and controlled.

Functions
Banking systems perform several different functions, depending on the network of
institutions. For example, payment and loan functions at commercial banks allow us to
deposit funds and use our checking accounts and debit cards to pay our bills or make
purchases. They can also help us finance our cars and homes.
By comparison, central banks or systems distribute currency and establish money-related
policies. Investment banks or systems conduct trades or deal with capital markets.
Many banks are profit-seeking entities with stockholders. They obtain profits by charging
more interest for loans and paying less interest on deposits.

Banking system in India

In India, banks are playing a crucial role in socio-economic progress of the country after
independence. The banking sector is dominant in India as it accounts for more than half the
assets of the financial sector. Indian banks have been going through a fascinating phase
through rapid changes brought about by financial sector reforms, which are being
implemented in a phased manner. In India the banks and banking have been divided in
different groups. Each group has their own benefits and limitations in their operations. They
have their own dedicated target market. Some are concentrated their work in rural sector
while others in both rural as well as urban. The banking system plays an important role in
promoting economic growth not only by channelling savings into investments but also by
improving allocative efficiency of resources. An efficient banking system is now regarded as
a necessary pre-condition for growth.
STRUCTURE OF BANKING SYSTEM IN INDIA
Banks can generally be classified into various sub-categories as follows:

PUBLIC SECTOR BANKS IN INDIA

o The State Bank Group and Nationalized banks: Is a group of 27 banks
o Has the largest number of branches in metro/ urban/rural areas throughout the
country
o Contributes to about 75% of the total deposits
o Contributes about 70% of total advances of all commercial banks in India.
o Most have a very large branch network spread over all parts of the country
o Have a Large deposits and assets base
o Perform all kinds of core and modern banking functions

SCHEDULED BANKS:
o These are banks which are listed in the second schedule of the Reserve Bank
of India Act, 1934
o These banks are required to maintain certain amounts with RBI and, in return,
they enjoy the facility of financial accommodation and remittance facilities at
concessionary rates from RBI
o State Co-operative Banks
o Commercial Banks

The banking system of India consists of the central bank (Reserve Bank of India - RBI),
commercial banks, cooperative banks and development banks (development finance
institutions). These institutions, which provide a meeting ground for the savers and the
investors, form the core of India’s financial sector. Through mobilization of resources and
their better allocation, banks play an important role in the development process of
underdeveloped countries.
THE FINANCIAL SECTOR IN INDIA
The Indian banking sector has witnessed wide ranging changes under the influence of the
financial sector reforms initiated during the early 1990s. The approach to such reforms in
India has been one of gradual and non-disruptive progress through a consultative process.
The emphasis has been on deregulation and opening up the banking sector to market forces.
The Reserve Bank has been consistently working towards the establishment of an enabling
regulatory framework with prompt and effective supervision as well as the development of
technological and institutional infrastructure.
Financial Sector in India consists of three main segments:
1. Financial institutions -banks, mutual funds, insurance companies
2. Financial markets -money market, debt market, capital market, forex market
3. Financial products -loans, deposits, bonds, equities

BANKING SYSTEM IN LUXEMBOURG

Luxembourg is an international financial centre located at the heart of Europe. The financial
sector includes various banking business models, from international private and wealth
management, retail banking, corporate finance to fund services and depositary banking. As
well as the key industries, Luxembourg boasts a unique and complete financial eco system,
comprising the whole range of services and skills necessary to support and develop the
industry as a whole: market infrastructures, law firms, consultants, education and training, IT
partners and FinTech firms.
Because of this comprehensive eco system, Luxembourg is globally recognised as an
international financial hub. It has the highest banking internationalisation rate in Europe
(94% of banks are foreign, with more than one third of banks coming from outside the
European Union. These banks operate on a cross-border basis, using the EU passport for
financial services throughout Europe, particularly in private banking, corporate banking and
asset servicing.

STRUCTURE OF BANKING SYSTEM IN LUXEMBOURG

A Luxembourg credit institution must be a legal entity incorporated under Luxembourg law
in the form of a public law institution, a public limited liability company, a corporate
partnership limited by shares or a cooperative society.
As of 2 January 2020, the Luxembourg banking sector was composed of 129 banks,
including:
• 83 universal banks;
• two banks issuing mortgage bonds;
• 13 branches of third country credit institutions; and
• 31 branches of credit institutions established in the European Union.
Corporate banking, private banking, investment funds servicing and custody are the main
business areas for banks in Luxembourg.

THE FINANCIAL SECTOR IN LUXEMBOURG

Financial activities in Luxembourg rank as the most international-minded of all countries in
the Benelux region. Take for instance, the number of banks in the country. At the end of
2019, only eight of the 129 banks located in the Grand Duchy were from Luxembourg itself,
and approximately 64 percent of clients in private banking in Luxembourg came from other
European countries or neighbouring ones such as Belgium, France and Germany. The country
is an attractive place for both foreign investments and private clients. In the most recent
Global Financial Centre’s Index, Luxembourg was ranked as having the sixth most
competitive financial centre in Europe after London, Zürich, Frankfurt, Paris and Geneva.
Luxembourg's three traditional strengths involve its activities in investment funds, banking,
and insurance.
Banking in Luxembourg has long been core to the economy, with banks attracting many
international investors. The country’s focus on financial services has transformed many of its
banking institutions into investment banks that require a certain investment amount to open
an account (€50,000–100,000), and only a small proportion of Luxembourg’s banks cater to
retail banking for individuals.
Despite the country’s small size, there are currently 136 banks in Luxembourg, of which
some 30% are branches of international banks. There are 68 bank branches per 100,000
people in Luxembourg, which is among the highest anywhere in the world.
The Banque Centrale du Luxembourg is the national central bank. The regulator for banking
and financial services is the Commission de Surveillance du Secteur Financier (CSSF). Most
banks in Luxembourg belong to the Luxembourg Bankers Association.
 Luxembourg and Indian Banking Industry

Luxembourg provides an operational hub for many international financial institutions.

Luxembourg has been able to build a unique ecosystem for the banking industry, which knits
together various service providers including investment services, FinTechs, family
offices, wealth planning, real estate management and philanthropy; as well as third-party
management companies, international listing and post-trade services – all this with the
infrastructure and regulatory expertise needed for the success of the industry. For non-EU
banking groups Luxembourg is a key gateway to the EU. Institutions from the US, Canada,
Switzerland, Latin America and Asia, benefit from a passport for their products and services,
providing access to the EU Single Market.

The banking system of our country is divided into commercial banks (public banks & private
banks), cooperative banks, regional rural banks, etc. One of the key reasons that brought-up
the evolution of the Indian banking sector is the ‘Nationalization of Banks’.

Efficiency of commercial banks in India: A DEA approach- Article review

In the above mentioned article, the author Mani, Mukta (2016) made an effort to study the
efficiency of commercial banks in India. The purpose of this paper was to study the efficiency
of commercial banks operating in India. Data Envelopment Analysis (DEA) technique has
been applied. Data had been gleaned from the annual reports of banks on input variables
namely Capital, Total assets, Advances, Number of employees and Cost to income ratio and
the output variables namely Return on assets, Interest spread, Non-interest income, Deposits to
advances ratio and percentage decrease in non-performing assets. The study covers a period of
four years from 2009-2010 and 2012-2013. Results indicated an overall level of inefficiency in
commercial banks at 47%. In India, foreign banks are the most efficient while private Banks
operate at a higher level of efficiency compared with public banks
 (Fig.1.1)

In the above given fig 1.1, we can see the growth of Luxemburg banking sector. KPMG
reported their total banking income and expenses average for the past 5 years.
It can be noted that, the total expenses have trended upwards over the last five years. The
reason for this increase varies according to the financial institution type and its respective
business model. The banking performance indicators section gives a more detailed
breakdown of how and why total operating costs have changed for each respective banks’
category.

Luxembourg Banking Sector Analysis by, Anne-Laure & Bontis, Nick. (2013) in their
journal, “Intellectual capital and performance within the banking sector of Luxembourg
and Belgium. Journal of Intellectual Capital.”

The researcher has explained on how Luxembourg Banking system manages risk process and
exposures to related parties. They have reduced number of Circulars dealing with aspects of
risk management and condense and update them. And by limiting maturity mismatches
between intra-group assets and intra-group liabilities. Increasing the supervisory focus on the
responsibility and accountability of the local banks’ management regarding counterparty and
liquidity risks originating from large intra-group exposures and ensure that intra-group
lending is done under arms’ length basis. Address lending to related parties by a specific
regulation and use the entire range of corrective powers.
Other key areas Luxembourg’s financial lending institutions are focusing on to improve are,
1. Objectives, independence, powers, transparency, and cooperation
2. Licensing criteria
3. . Country and transfer risks
4. Capital adequacy
5. Credit risk
6. Large exposure limit

Wealth Management in India

In a journal article published by Madhani, Dr. Pankaj. (2011) on “Wealth Management:

Emerging Opportunities in India
The journal throws light on what are the strategic plans the country has undertaking in order
to manage wealth and maximize it. In India, effective wealth management strategy has
successfully managed the impact of inflation and tax structure on redeemed assets at
maturity. Wealth management is about investment strategy. And, with so many wealth
management instruments available on the market. The key areas the country’s private and
public commercial banks are working are-
• Goals, return objectives and risk tolerance.
• Availability of opportunities in country of residence.
• Wealth management time horizon.
• Present and future need for liquidity.
• Current lifestyle requirements.
• Exclusive needs and circumstances.
• Unique position to factor in the effects of inflation as well as income taxes.
Banking Structure in Luxembourg

(For third country institutions) Credit institutions from a third country which are not
established in Luxembourg, but which occasionally and temporarily come to Luxembourg in
order, among other things, to collect deposits and other repayable funds from the public and
to provide any other service subject to the Banking Act, must obtain authorisation. Obtaining
authorisation requires that the credit institution from the third country be subject to equivalent
authorisation and supervisory rules as those of the Banking Act in its home jurisdiction.

Specific conditions apply where a third country credit institution intends to provide
investment services in Luxembourg. If the third country credit institution intends to provide
investment services to eligible counterparties and to professional clients within the meaning
of Section A of Annex III of the Banking Act (i.e., professional clients per se, which are
certain types of entities that are considered to be professional clients by virtue of the Banking
Act), it may establish a branch in Luxembourg that is subject to the same licensing
requirements as Luxembourg law credit institutions and investment firms.
 Comparative analysis
Basis Luxembourg India
Introduction The Luxembourg is a India is a diversified
financial sector oriented country which have
country where 86% of its different sectors
GDP is comprised of contributing in GDP, the
financial sector. The contribution of banking
financial sector here is sector in Indian GDP is
specialized in cross about 7.7%.
border fund
administration.
Regulatory authority of Banking The national authorities Reserve Bank of India is
sector responsible for the the central bank of the
regulation and country. It acts nerve
supervision of the centre of the Indian
banking sector in financial system. It
Luxembourg are the regulates all institutions
CSSF and the Central that are connected with
Bank of savings and capital
Luxembourg(BCL), allocation. Commercial
which are placed under banks and non-banking
the authority of Ministry financial institutions
of Finance. (NBFC) are two major set
of institutions that come
under the regulation of
RBI.
Regulatory development relating Luxembourg legislator fintech has caused
to fintech took bold decisions of significant disruption in
digitalisation of banking payments and lending in
and financial activities India. There has been
incorporating block changes in laws
chain allowing the use of particularly around KYC,
electronic mechanism of had increased regulatory
holding and circulation burden and cost of
of securities and operations for non-bank
deposits. fintech players. Taking all
these in consideration,
regulators permitted
fintech players to utilise
certain modes of digital
KYC. The UPI are the
most used on the payment
 landscape. As for block
chain, 15 banks have
come together to process
inland letters of credit.
Customer satisfaction Here, the banking system The major problem with
have incorporated customer satisfaction in
digitalisation in the Indian banks in
customer experience inattentiveness of bank
dimension. The local staff with bad behaviour.
banks have moved all the There are sometime
steps online, enabling shortage of cash in ATMs
clients to receive and other problems. The
approval for loan in just customer satisfaction in
24 hours. This has Indian banking sector is
resulted in cost reduction less as compared to
and improved Luxembourg.
operational efficiency.
Capitalisation There can be some The capital adequacy
adverse situations where ratio of Indian bank is
banks face potential around 14.3% while the
crisis in terms of international norms for
shortage of funds and CRAR is 8%. The RBI
other financial threats. has mandated Indian
Luxembourg is banking banks to keep minimum
sectors based country CRAR of 9%. Keeping
and have sufficient funds all this in mind, Indian
to face any potential banks are also well
challenge with CET1 capitalised and exceptions
ratio of 24.4% and are always there like yes
solvency ratio of 25.2%, bank. But in comparison
all the information to Luxembourg, Indian
explains that the banking banks are certainly less
sector have a high level capitalised.
of capitalisation.
Sustainable finance It is the pioneer in Indian banking industry
establishing sustainable has responded relatively
finance in collaboration slowly to sustainability
with UNEP FI. And this issues. The public sector
initiative is guided on banks are more involved
numbers of principles in addressing the social
like private/public dimensions of
governance, consistency sustainability through
etc. various microfinance
schemes, gender-specific
loan schemes, community
development programme,
etc., whereas the private
sector banks in India have
adopted relatively more
comprehensive approach.
Major types of banks National retail bank, The major types of banks
international bank, in India are cooperative,
investment banks and commercial, regional
online & mobile banks. rural banks, specialized
banks, small finance and
payment banks.
Employment In 2019, approx. 26000 As per observation there
people were employed in are half a million people
banking sector out of employed in banking
total population of 6.14 sector in India.
lac.
Uniqueness High Level of Liquidity. India is a developing
Too many international country and many people
clients mean high level still don’t have their bank
of deposits which result accounts. Government
in smooth cash flow. policy are supporting
banking sector in order to
expand their customer
base. Hence there is huge
customer still untapped.
The uniqueness of Indian
banking system is its
large number of banking
services to the roots.
References: -

1) Madhani, Dr. Pankaj. (2011). Wealth Management: Emerging Opportunities. Pankaj M

Madhani.

2) Mani, Mukta. (2016). Efficiency of commercial banks in India: A DEA approach. 24. 151-
170.

3) Anne-Laure & Bontis, Nick. (2013). Intellectual capital and performance within the
banking sector of Luxembourg and Belgium. Journal of Intellectual Capital. 14.
10.1108/14691931311323896.

4) https://www.luxembourgforfinance.com/en/financial-centre/banking/

5) Mittal, R.K. and Suneja, D. (2017), “The problem of rising non-performing assets in
banking sector in India: comparative analysis of public and private sector
banks”, International Journal of Management, IT and Engineering, Vol. 7 No. 7, pp. 384-398.