Domestic Regulatory Body

CRR: -

Currently 4%

Tool for RBI to control money supply and therefore Inflation (common myth: to control solvency of
Bank).

CRR = x%(NDTL)

NDTL = Net Demand and Time Liability

Banks need to parks CRR with RBI

Interest paid on these CRR deposits is 0%

CRR Increases

Banks needs more money to park with RBI therefore they want to increase deposits

Deposit Rates Increases

Money supply Decreases

Purchasing Power & Inflation Decreases

CRR Increases

Loans Decreases

Money supply decrease

Purchasing Power & Inflation Decrease

In reality

CRR increase

Banks decreases Interest Rate but economy and lifestyle is more western where increase in interest
rate by 0.5%, its not much of a effect as there are many other sources of investments with better
return. Therefore, there is no increase in Deposits hence not decreasing money supply.
 SLR:

SLR 18%

SLR = 18%(NDTL)

Purpose of this is solvency of bank

3 ways: -

Cash, Gold, RBI securities

LAF: Liquid Adjustment Facility

Tools are: Repo and Rev. Repo

This is voluntary. Repo: 4%, Rev. Repo:

Repo: Rate at which RBI LENDS to retail and Commercial banks for short term

Rev Repo: Rate at which Banks LENDS to RBI

Marginal Standing Facility Rate: -

Temporary loan which RBI gives as a last resort to banks

MSF: Amount of loans which bank gives is 2% of deposit at an interest at 4%

Liquidity hierarchy of a bank

1. PR: Probability Ratio (money which banks keeps for their themselves and their users)
2. SLR
3. Raise Capital Bonds/ Equity (Public opening)
4. Call money (Borrow money from other banks)
5. LAF
6. MSF
7. Overseas Borrowing, Fixed Income Market, Capital Market

Money Market: -

Type of Debt/Fixed Income Market

Interest is low

Close substitute of cash

Prominent instruments: -

Treasury Bills (Issued by RBI, subscribed by REtial and commercial bank; tenure 3-6 months)

Call Money (Issued by bank to bank, tenure 1 day-14 days

Certificate of Deposit (Issued by bank to retail people, when bank needs money; tenure 6-9-12
months)

Commercial Paper (Issued by Corporate to other corporate and banks, when corporate needs
money; tenure 6-9-12 months)

Categorization & Structure

1. Public Sector Banks {Others (BOI, BOB, etc.), SBI} 12 banks

a. Backed by GOI.
b. Huge Distribution Network.
c. Not target driven.
d. Profit maximization is not the final target
e. High NPA, Low service
2. Private Sector Banks: - 22 banks
a. Formed due to privatization in 1990s
b. Not backed by GOI
c. Service Standards
d. Professionalism
e. Target Driven (mis selling, cross selling)
3. MNCs 46 banks (HSBC, Standard Charter)
a. Registered in foreign country, licensed by RBI
b. Very less distribution network
c. Not interested in mass network
d. Interest in Super HNI
e. Money through Forex ,Remittances ,etc.
f. Huge charges
g. Provides you state of art products
h. Global business and tra
4. Co – Op
a. High political Interest of promotors
b. RBI has less power
c. Most power with Registrar of Cooperative Bank
d. Non credible are customers due to high interest rates
e. High Deposit Rates, but risky
f. Industry specific bank
g. Private Owners
5. Regional Rural Bank: -
a. Important for financial Inclusion
b. They are in deep interior of the country
c. Not privately owned, Owned by GOI
d. Can’t sustain individually, can’t create profits
e. Attached to a larger PSBs for survival
6. New Age Banks
a. Not complete Banks (part banks)
b. Includes payment wallets (paytm ,etc)
Total of of RRB and Co-op are more than 100

These are the problem of Indian Banking System