Structure of Banking in India

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Definition of a Bank

A bank is a financial institution which performs the deposit and lending function. A bank allows a person with
excess money (Saver) to deposit his money in the bank and earns an interest rate. Similarly, the bank lends to a
person who needs money (investor/borrower) at an interest rate. Thus, the banks act as an intermediary
between the saver and the borrower.

The bank usually takes a deposit from the public at a much lower rate called deposit rate and lends the money
to the borrower at a higher interest rate called lending rate.

The difference between the deposit and lending rate is called ‘net interest spread’, and the interest spread
constitutes the banks income.

Essential Features/functions of the Bank

Important Functions of Bank

There are two types of functions of banks:

1. Primary functions – being primary are also called banking functions.

2. Secondary Functions

Both the types of functions of bank are explained below in detail:

Primary Functions of Bank

All banks have to perform two major primary functions namely:

1. Accepting of deposits

2. Granting of loans and advances

Accepting of Deposits

A very basic yet important function of all the commercial banks is mobilising public funds, providing safe
custody of savings and interest on the savings to depositors. Bank accepts different types of deposits from the
public such as:

1. Saving Deposits: encourages saving habits among the public. It is suitable for salary and wage earners.
The rate of interest is low. There is no restriction on the number and amount of withdrawals. The
account for saving deposits can be opened in a single name or in joint names. The depositors just need
to maintain minimum balance which varies across different banks. Also, Bank provides ATM cum debit
card, cheque book, and Internet banking facility. Candidates can know about the Types of Cheques at
the linked page.

2. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure. No withdrawal
money during this period allowed. In case depositors withdraw before maturity, banks levy a penalty for
 premature withdrawal. As a lump-sum amount is paid at one time for a specific period, the rate of
interest is high but varies with the period of deposit.

3. Current Deposits: They are opened by businessmen. The account holders get an overdraft facility on this
account. These deposits act as a short term loan to meet urgent needs. Bank charges a high-interest rate
along with the charges for overdraft facility in order to maintain a reserve for unknown demands for the
overdraft.

4. Recurring Deposits: A certain sum of money is deposited in the bank at a regular interval. Money can be
withdrawn only after the expiry of a certain period. A higher rate of interest is paid on recurring deposits
as it provides a benefit of compounded rate of interest and enables depositors to collect a big sum of
money. This type of account is operated by salaried persons and petty traders.

Granting of Loans & Advances

The deposits accepted from the public are utilised by the banks to advance loans to the businesses and
individuals to meet their uncertainties. Bank charges a higher rate of interest on loans and advances than what
it pays on deposits. The difference between the lending interest rate and interest rate for deposits is bank
profit.

Bank offers the following types of Loans and Advances:

1. Bank Overdraft: This facility is for current account holders. It allows holders to withdraw money
anytime more than available in bank balance but up to the provided limit. An overdraft facility is granted
against collateral security. The interest for overdraft is paid only on the borrowed amount for the period
for which the loan is taken.

2. Cash Credits: a short term loan facility up to a specific limit fixed in advance. Banks allow the customer
to take a loan against a mortgage of certain property (tangible assets and / guarantees). Cash credit is
given to any type of account holders and also to those who do not have an account with a bank. Interest
is charged on the amount withdrawn in excess of the limit. Through cash credit, a larger amount of loan
is sanctioned than that of overdraft for a longer period.

3. Loans: Banks lend money to the customer for short term or medium periods of say 1 to 5 years against
tangible assets. Nowadays, banks do lend money for the long term. The borrower repays the money
either in a lump-sum amount or in the form of instalments spread over a pre-decided time period. Bank
charges interest on the actual amount of loan sanctioned, whether withdrawn or not. The interest rate
is lower than overdrafts and cash credits facilities.

4. Discounting the Bill of Exchange: It is a type of short term loan, where the seller discounts the bill from
the bank for some fees. The bank advances money by discounting or purchasing the bills of exchange. It
pays the bill amount to the drawer(seller) on behalf of the drawee (buyer) by deducting usual discount
charges. On maturity, the bank presents the bill to the drawee or acceptor to collect the bill amount.

Secondary Functions of Bank

Like Primary Functions of Bank, the secondary functions are also classified into two parts:
 1. Agency functions

2. Utility Functions

Agency Functions of Bank

Banks are the agents for their customers, hence it has to perform various agency functions as mentioned
below:

Transfer of Funds: Transfering of funds from one branch/place to another.

Periodic Collections: Collecting dividend, salary, pension, and similar periodic collections on the clients’ behalf.

Periodic Payments: Making periodic payments of rents, electricity bills, etc on behalf of the client.

Collection of Cheques: Like collecting money from the bills of exchanges, the bank collects the money of the
cheques through the clearing section of its customers.

Portfolio Management: Banks manage the portfolio of their clients. It undertakes the activity to purchase and
sell the shares and debentures of the clients and debits or credits the account.

Other Agency Functions: Under this bank act as a representative of its clients for other institutions. It acts as an
executor, trustee, administrators, advisers, etc. of the client.

Utility Functions of Bank

 Issuing letters of credit, traveller’s cheque, etc.

 Undertaking safe custody of valuables, important documents, and securities by providing safe deposit
vaults or lockers.
 Providing customers with facilities of foreign exchange dealings
 Underwriting of shares and debentures
 Dealing in foreign exchanges
 Social Welfare programmes
 Project reports
 Standing guarantee on behalf of its customers, etc.
Structure of Banking in India

The existing banking structure in India evolved over several decades, is elaborate and has been serving the
credit and banking services needs of the economy. There are multiple layers in today’s banking structure to
cater to the specific and varied requirements of different customers and borrowers. The structure of
banking in India played a major role in the mobilization of savings and promoting economic development. In
the post-financial sector reforms (1991) phase, the performance and strength of the banking structure
improved perceptibly. Financial soundness of the Indian commercial banking system compares favorably
with most of the advanced and emerging countries.

A bank is a financial institution that provides banking and other financial services to their customers. A bank
is generally understood as an institution which provides fundamental banking services such as accepting
deposits and providing loans. There are also nonbanking institutions that provide certain banking services
without meeting the legal definition of a bank. Banks are a subset of the financial services industry.

Indian banking industry has been divided into two parts, organized and unorganized sectors. The organized
sector consists of Reserve Bank of India, Commercial Banks and Cooperative Banks, and Specialized
Financial Institutions (IDBI, ICICI, IFC etc).
1. Reserve banks of India.

2. Indian Scheduled Commercial Banks.

a. State Bank of India and its associate banks.

b. Twenty nationalized banks.
c. Regional rural banks.
d. Other scheduled commercial banks.

3. Foreign Banks
4. Non-scheduled banks.
5. Co-operative banks.

Origin of Banking in India

Banking in India is indeed as old as the Himalayas. But, the banking functions became an effective force only
after the first decade of 20th century. Banking is an ancient business in India with some of oldest references
in the writings of Manu. Bankers played an important role during the Mogul period. During the early part of
East India Company era, agency houses were involved in banking. Modern banking (i.e. in the form of joint-
stock companies) may be said to have had its beginnings in India as far back as in 1786, with the
establishment of the General Bank of India.

Banking System

The structure of banking system differs from country to country depending upon their economic conditions,
political structure, and financial system. Banks can be classified on the basis of the volume of
operations, business pattern and areas of operations. They are termed as a system of banking. The
commonly identified systems are:

Unit Banking
Unit banking is originated and developed in the U.S.A. In this system, small independent banks are
functioning in a limited area or in a single town . It has its own board of directors and stockholders. It is also
called as “localized Banking”.

Branch Banking

The Banking system of England originally offered an example of the branch banking system, where each
commercial bank has a network of branches spread throughout the country.

Correspondent Banking

The correspondent banking system is developed to remove the difficulties in the unit banking system. The
smaller banks deposit their cash reserve with bigger banks.

Therefore, correspondent banks are intermediaries through which all unit banks are linked with bigger
banks in financial centers. Through correspondent banking, a bank can carry-out business transactions in
another place where it does not have a branch.

Group Banking

Group Banking is the system in which two or more independently incorporated banks are brought under the
control of a holding company. The holding company may or may not be a banking company. Under group
banking, the individual banks may be unit banks, or banks operating branches or a combination of the two.

Pure Banking and Mixed Banking

On the basis of lending operations of the bank, banking is classified into:

(a) Pure Banking
(b) Mixed Banking

(a) Pure Banking: Under pure Banking, the commercial banks give only short-term loans to industry, trade,
and commerce. They specialize in short-term finance only. This type Of banking is popular in U.K.

(b) Mixed Banking: Mixed banking is that system of banking under which the commercial banks perform the
dual function of commercial banking and investment banking. Commercial banks usually offer both short-
term as well as medium-term loans. The German banking system is the best example of mixed Banking.

Relationship Banking

It refers to the efforts of a bank to promote personal contacts and to keep continuous touch with customers
who are very valuable to the bank. In order to retain such profitable accounts with the bank or to attract
new accounts, it is necessary for the bank to serve their needs by maintaining a close relationship with such
customers.
 Narrow Banking

A bank may be concentrating only on the collection of deposits and lend or invest the money within a
particular region or certain chosen activity like investing the funds only in Government Securities. This type
of restricted minimum banking activity is referred to as ‘Narrow Banking’.

Universal Banking

As Narrow Banking refers to restricted and limited banking activity Universal Banking refers to broad-based
and comprehensive banking activities.

Regional Banking

In order to provide adequate and timely credits to small borrowers in rural and semi-urban areas, Central
Government set up Regional Banks, known as Regional Rural Banks all over India jointly with State
Governments and some Commercial Banks.

Local Area Banks

With a view to bringing about a competitive environment and to overcome the deficiencies of Regional
Banks, Government has permitted the establishment of one type of regional banks in rural and semi-urban
centers under private sector known as “Local Area Banks”.

Wholesale Banking

Wholesale or corporate banking refers to dealing with limited large-sized customers. Instead of maintaining
thousands of small accounts and incurring huge transaction costs, under wholesale banking, the banks deal
with large customers and keep only large accounts. These are mainly corporate customer.

Private Banking

Private or Personal Banking is banking with people — rich individuals instead of banking with corporate
clients. It attends to the need of individual customers, their preferences and the products or services
needed by them. This may include all-around personal services like maintaining accounts, loans, foreign
currency requirements, investment guidance, etc.

Retail Banking

Retail banking is a major form of commercial banking but mainly targeted to consumers rather than
corporate clients. It is the method of banks’ approach to the customers for sale of their products.

Important Functions of RBI (Reserve Bank of India)

Being a central bank of India, RBI serves a critical role in regulating the financial transactions in the country.
Some of the important functions of RBI are listed below:

 Issue of Bank Notes

  Banker to the Government
 Custodian of the Cash Reserves of Commercial Banks
 Custodian of country’s forex reserves
 Lender of last resort
 Controller of credit

The Issuer of Bank Notes

The most important function of RBI is the issuance of currency notes and coins, except the one rupee note and
coin which are issued by the Ministry of Finance. All other notes bear the signature of the RBI Governor.
However, the agency of distribution of all notes and coins issued by the Government of India is the Reserve
Bank of India.

Banker to the Government

Another chief function of RBI is that it takes care of the banking needs of the government, which includes
maintaining & operating the deposit accounts of the government, collecting the receipts of funds, and making
payments on behalf of the Government of India. It also represents the Indian Government, as a member of the
International Monetary Fund and the World Bank.

Custodian of Cash Reserves of Commercial Banks

Commercial banks are required to maintain the cash reserves at a rate decided by the RBI in its monetary
policy.

Custodian of Foreign Exchange Reserve

Another of the important functions of RBI is maintaining a reserve of foreign currencies that enables the RBI to
deal with any crisis situation.

Lender of the Last Resort

Often regarded as the banker of banks, the RBI acts as a parent to all commercial banks in India. Thus, it
becomes the lender of the last resort for all banks when they are in a crisis situation. RBI helps them by lending
money, although at higher RoI, to sail through the tide of financial difficulties.

Controller of Credit

RBI controls the credit created by the commercial banks in India, in accordance with the economic priorities of
the government of India. RBI uses quantitative and qualitative methods to control and regulate the flow of
money in the market. These are implemented by announcing monetary policies at regular intervals. The
monetary policy involves the management of interest rates and money supply. The central bank of India tweaks
the money supply to achieve objectives such as liquidity, inflation, and consumption.

Financial Intermediation
The process of taking funds from the depositor and then lending them out to a borrower is known as Financial
Intermediation. Through the process of Financial Intermediation, banks transform assets into liabilities. Thus,
promoting economic growth by channelling funds from those who have surplus money to those who do not
have desired money to carry out productive investment.

The bank also acts as a risk mitigator by allowing savers to deposit their money safely (reducing the risk of theft,
robbery) and also earns interest on the same deposit. Bank provides services like saving account deposits and
demand deposits which allow savers to withdraw money on an immediate basis thus, providing liquidity (which
is as good as holding cash) with security.

How Banks promote economic growth?

Principal Provisions of Banking Regulation Act: 11 Provisions

The following points highlight the eleven provisions of banking regulation act. They are:
(1) Prohibition of Trading (2) Non-Banking Assets (3) Management (4) Minimum Capital and Reserves (5) Capital
Structure (6) Payment of Commission, Brokerage etc. (7) Reserve Fund/Statutory Reserve (8) Cash Reserve (9)
Liquidity Norms (10) Restrictions on Loans and Advances and (11) Accounts and Audit .

Banking Regulation Act Provision # 1. Prohibition of Trading (Sec. 8):

According to Sec. 8 of the Banking Regulation Act, a banking company cannot directly or indirectly deal in
buying or selling or bartering of goods.
But it may, however, buy, sell or barter the transactions relating to bills of exchange received for collection or
negotiation.

Banking Regulation Act Provision # 2. Non-Banking Assets (Sec. 9):

According to Sec. 9 “A banking company cannot hold any immovable property, howsoever acquired, except for
its own use, for any period exceeding seven years from the date of acquisition thereof. The company is
permitted, within the period of seven years, to deal or trade in any such property for facilitating its disposal”. Of
course, the Reserve Bank of India may, in the interest of depositors, extend the period of seven years by any
period not exceeding five years.
Banking Regulation Act Provision # 3. Management (Sec. 10):

Sec. 10(a) states that not less than 51% of the total number of members of the Board of Directors of a banking
company shall consist of persons who have special knowledge or practical experience in one or more of the
following fields:
(a) Accountancy; (b) Agriculture and Rural Economy; (c) Banking; (d) Cooperation; (e) Economics; (f) Finance; (g)
Law; (h) Small Scale Industry.
The Section also states that at least not less than two directors should have special knowledge or practical
experience relating to agriculture and rural economy and cooperation. Sec. 10(b)(1) further states that every
banking company shall have one of its directors as Chairman of its Board of Directors.

Banking Regulation Act Provision # 4. Minimum Capital and Reserves (Sec. 11):

Sec. 11 of the Banking Regulation Act, 1949, provides that no banking company shall commence or carry on
business in India, unless it has minimum paid-up capital and reserve of such aggregate value as is noted below:

(a) Foreign Banking Companies:

In case of banking company incorporated outside India, its paid-up capital and reserve shall not be less than Rs.
15 lakhs and, if it has a place of business in Mumbai or Kolkata or in both, Rs. 20 lakhs. It must deposit and keep
with the R.B.I, either in Cash or in unencumbered approved securities (i) the amount as required above, and (ii)
after the expiry of each calendar year, an amount equal to 20% of its profits for the year in respect of its Indian
business.

(b) Indian Banking Companies:

In case of an Indian banking company, the sum of its paid-up capital and reserves shall not be less than the
amount stated below:

(i) If it has places of business in more than one State, Rs. 5 lakhs, and if any such place of business is in Mumbai
or Kolkata or in both, Rs. 10 lakhs.

(ii) If it has all its places of business in one State, none of which is in Mumbai or Kolkata, Rs. 1 lakh in respect of
its principal place of business plus Rs. 10,000 in respect of each of its other places of business in the same
district in which it has its principal place of business plus Rs. 25,000 in respect of each place of business
elsewhere in the State. No such banking company shall be required to have paid-up capital and reserves
exceeding Rs. 5 lakhs and no such banking company which has only one place of business shall be required to
have paid-up capital and reserves exceeding Rs. 50,000.

In case of any such banking company which commences business for the first time after 16th September 1962,
the amount of its paid-up capital shall not be less than Rs. 5 lakhs.

(c) The voting right of any shareholder shall not exceed 5% of the total voting right of all the shareholders of the
company.

Banking Regulation Act Provision # 6. Payment of Commission, Brokerage etc. (Sec. 13):
According to Sec. 13, a banking company is not permitted to pay directly or indirectly by way of commission,
brokerage, discount or remuneration on issues of its shares in excess of 2% of the paid-up value of such shares.

Payment of Dividend:

According to Sec. 15, no banking company shall pay any dividend on its shares until all its capital expenses
(including preliminary expenses, organisation expenses, share selling commission, brokerage, amount of losses
incurred and other items of expenditure not represented by tangible assets) have been completely written-off.

But a Banking Company need not:

(a) write-off depreciation in the value of its investments in approved securities in any case where such
depreciation has not actually been capitalised or otherwise accounted for a loss;

(b) write-off depreciation in the value of its investments in shares, debentures or bonds (other than approved
securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the
auditor;

(c) write-off bad debts in any case where adequate provision for such debts has been made to the satisfaction
of the auditors of the banking company.

Floating Charges:

A floating charge on the undertaking or any property of a banking company can be created only if RBI certifies
in writing that it is not detrimental to the interest of depositors — Sec. 14A. Similarly, any charge created by a
banking company on unpaid capital is invalid — Sec. 14.

Banking Regulation Act Provision # 7. Reserve Fund/Statutory Reserve (Sec. 17):

According to Sec. 17, every banking company incorporated in India shall, before declaring a dividend, transfer a
sum equal to 20% of the net profits of each year (as disclosed by its Profit and Loss Account) to a reserve fund.
The Central Government may, however, on the recommendation of RBI, exempt it from this requirement for a
specified period.

The exemption is granted if its existing reserve fund together with Share Premium Account is not less than its
paid-up capital. If it appropriates any sum from the reserve fund or the share premium account, it shall, within
21 days from the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstances
relating to such appropriation.

Banking Regulation Act Provision # 8. Cash Reserve (Sec. 18):

Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if Indian, maintain in India, by way of
a cash reserve in Cash, with itself or in current account with the Reserve Bank or the State Bank of India or any
other bank notified by the Central Government in this behalf, a sum equal to at least 3% of its time and demand
liabilities in India.
The Reserve Bank has the power to regulate the percentage also between 3% and 15% (in case of Scheduled
Banks). Besides the above, they are to maintain a minimum of 25% of its total time and demand liabilities in
cash, gold or unencumbered approved securities. But every banking company’s asset in India should not be less
than 75% of its time and demand liabilities in India at the close of last Friday of every quarter.

Banking Regulation Act Provision # 9. Liquidity Norms (Sec. 24):

According to Sec. 24 of the Act, banking companies must maintain sufficient liquid assets in the normal course
of business. The section states that every banking company has to maintain in cash, gold or unencumbered
approved securities, an amount not less than 20% of its demand and time liabilities in India. This percentage
may be changed by the RBI from time to time according to economic circumstances of the country. This is in
addition to the average daily balance maintained by a bank.

Banking Regulation Act Provision # 10. Restrictions on Loans and Advances (Sec. 20):

After the Amendment of the Act, 1968, a bank cannot:

(i) grant loans or advances on the security of its own shares, and

(i i) grant or agree to grant a loan or advance to or on behalf of:

(a) any of its directors;

(b) any firm in which any of its directors is interested as partner, manager or guarantor;

(c) any company of which any of its directors is a director, manager, employee or guarantor, or in which he
holds substantial interest; or

(d) any individual in respect of whom any of its directors is a partner or guarantor.

Note: (ii)(c) does not apply to subsidiaries of the banking company, registered under Sec. 25 of the Companies
Act or a Government Company.

Banking Regulation Act Provision # 11. Accounts and Audit (Sec. 29 to 34A):

The above Sections of the Banking Regulation Act deal with the accounts and audit. Every banking company,
incorporated in India, at the end of financial year expiring a period of 12 months as the Central Government
may by notification in the Official Gazette specified, must prepare a Balance Sheet and a Profit and Loss
Account as on the last working day of that year or according to the Third Schedule or as circumstances permit.

At the same time, every banking company, which is incorporated outside India, is required to prepare a Balance
Sheet and also a Profit and Loss Account relating to its branch in India also. We know that Form A of the Third
Schedule deals with form of Balance Sheet and Form B of the Third Schedule deals with form of Profit and Loss
Account.
It is interesting to note that a new set of forms have been prescribed for Balance Sheet and Profit and Loss
Account of the banking company and RBI has also issued guidelines to follow the new forms with effect from
31st March 1992.

According to Sec. 30 of the Banking Regulation Act, the Balance Sheet and Profit and Loss Account should be
prepared according to Sec. 29 and the same must be audited by a qualified person known as auditor. It is
needless to mention here that every banking company must take previous permission from RBI before
appointing, re-appointing or removing any auditor.

RBI also can order special audit for public interest of depositors. Moreover, every banking company must have
to furnish their copies of accounts and Balance Sheet prepared according to Sec. 29 along with the auditors’
report to the RBI and also the Registrar of Companies within three months from the end of the accounting
period.

The Regulations That Govern Banking in India

The banking system in India is regulated by the Reserve Bank of India (RBI), through the provisions of the
Banking Regulation Act, 1949. Some important aspects of the regulations that govern banking in this country, as
well as RBI circulars that relate to banking in India, will be explored below.

Exposure limits

Lending to a single borrower is limited to 15% of the bank’s capital funds (tier 1 and tier 2 capital), which may
be extended to 20% in the case of infrastructure projects. For group borrowers, lending is limited to 30% of the
bank’s capital funds, with an option to extend it to 40% for infrastructure projects. The lending limits can be
extended by a further 5% with the approval of the bank's board of directors. Lending includes both fund-based
and non-fund-based exposure.

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

Banks in India are required to keep a minimum of 4% of their net demand and time liabilities (NDTL) in the form
of cash with the RBI. These currently earn no interest. The CRR needs to be maintained on a fortnightly basis,
while the daily maintenance needs to be at least 95% of the required reserves. In case of default on daily
maintenance, the penalty is 3% above the bank rate applied on the number of days of default multiplied by the
amount by which the amount falls short of the prescribed level.

Over and above the CRR, a minimum of 22% and a maximum of 40% of NDTL, which is known as the SLR, needs
to be maintained in the form of gold, cash or certain approved securities. The excess SLR holdings can be used
to borrow under the Marginal Standing Facility (MSF) on an overnight basis from the RBI. The interest charged
under MSF is higher than the repo rate by 100 bps, and the amount that can be borrowed is limited to 2% of
NDTL. (To learn more about how interest rates are determined, particularly in the U.S., consider reading more
about who determines interest rates.)
Provisioning

Non-performing assets (NPA) are classified under 3 categories: substandard, doubtful and loss. An asset
becomes non-performing if there have been no interest or principal payments for more than 90 days in the
case of a term loan. Substandard assets are those assets with NPA status for less than 12 months, at the end of
which they are categorized as doubtful assets. A loss asset is one for which the bank or auditor expects
no repayment or recovery and is generally written off the books.

For substandard assets, it is required that a provision of 15% of the outstanding loan amount for secured loans
and 25% of the outstanding loan amount for unsecured loans be made. For doubtful assets, provisioning for the
secured part of the loan varies from 25% of the outstanding loan for NPAs that have been in existence for less
than one year, to 40% for NPAs in existence between one and three years, to 100% for NPA’s with a duration of
more than three years, while for the unsecured part it is 100%.

Provisioning is also required on standard assets. Provisioning for agriculture and small and medium enterprises
is 0.25% and for commercial real estate it is 1% (0.75% for housing), while it is 0.4% for the remaining sectors.
Provisioning for standard assets cannot be deducted from gross NPA’s to arrive at net NPA’s. Additional
provisioning over and above the standard provisioning is required for loans given to companies that have
unhedged foreign exchange exposure.

Priority sector lending

The priority sector broadly consists of micro and small enterprises, and initiatives related to agriculture,
education, housing and lending to low-earning or less privileged groups (classified as "weaker sections"). The
lending target of 40% of adjusted net bank credit (ANBC) (outstanding bank credit minus certain bills and non-
SLR bonds) – or the credit equivalent amount of off-balance-sheet exposure (sum of current credit exposure +
potential future credit exposure that is calculated using a credit conversion factor), whichever is higher – has
been set for domestic commercial banks and foreign banks with greater than 20 branches, while a target of
32% exists for foreign banks with less than 20 branches.

The amount that is disbursed as loans to the agriculture sector should either be the credit equivalent of off-
balance-sheet exposure, or 18% of ANBC – whichever of the two figures is higher. Of the amount that is loaned
to micro-enterprises and small businesses, 40% should be advanced to those enterprises with equipment that
has a maximum value of 200,000 rupees, and plant and machinery valued at a maximum of half a million
rupees, while 20% of the total amount lent is to be advanced to micro-enterprises with plant and machinery
ranging in value from just above 500,000 rupees to a maximum of a million rupees and equipment with a value
above 200,000 rupees but not more than 250,000 rupees.

The total value of loans given to weaker sections should either be 10% of ANBC or the credit equivalent amount
of off-balance sheet exposure, whichever is higher. Weaker sections include specific castes and tribes that have
been assigned that categorization, including small farmers. There are no specific targets for foreign banks with
less than 20 branches.

The private banks in India until now have been reluctant to directly lend to farmers and other weaker sections.
One of the main reasons is the disproportionately higher amount of NPA’s from priority sector loans, with some
estimates indicating it to be 60% of the total NPAs. They achieve their targets by buying out loans and
securitized portfolios from other non-banking finance corporations (NBFC) and investing in the Rural
Infrastructure Development Fund (RIDF) to meet their quota.

New bank license norms

The new guidelines state that the groups applying for a license should have a successful track record of at least
10 years and the bank should be operated through a non-operative financial holding company (NOFHC) wholly
owned by the promoters. The minimum paid-up voting equity capital has to be five billion rupees, with the
NOFHC holding at least 40% of it and gradually bringing it down to 15% over 12 years. The shares have to be
listed within three years of the start of the bank’s operations.

The foreign shareholding is limited to 49% for the first five years of its operation, after which RBI approval
would be needed to increase the stake to a maximum of 74%. The board of the bank should have a majority of
independent directors and it would have to comply with the priority sector lending targets discussed earlier.
The NOFHC and the bank are prohibited from holding any securities issued by the promoter group and the bank
is prohibited from holding any financial securities held by the NOFHC. The new regulations also stipulate that
25% of the branches should be opened in previously unbanked rural areas.

Willful defaulters

A willful default takes place when a loan isn’t repaid even though resources are available, or if the money lent is
used for purposes other than the designated purpose, or if a property secured for a loan is sold off without the
bank's knowledge or approval. In case a company within a group defaults and the other group companies that
have given guarantees fail to honor their guarantees, the entire group can be termed as a willful defaulter.

Willful defaulters (including the directors) have no access to funding, and criminal proceedings may be initiated
against them. The RBI recently changed the regulations to include non-group companies under the willful
defaulter tag as well if they fail to honor a guarantee given to another company outside the group.

Trends in Banking

In recent years, the Indian economic environment has seen a lot of changes because of reforms and measures
taken by the banks. The largest change is seen in the financial sector where the banking sector is the largest
player to notice this change. So, the banking sector is strong enough to withstand any sort of pressure and
competition. Thus, these trends in banking have been very visible in the last few years.

India, now, has a fairly stable banking sector with different classes of banks contributing to it. Thus, these
include foreign banks, public banks, private sector banks, and others. Reserve Bank of India is head of all these
banks.
Indian Banking Sector

Indian banking sector can be majorly divided into three sections.

Phase I – This is from 1786 to 1969 and it was the initial phase of the banking. So, in this phase, many small
banks were set up.

Phase II – This phase can be considered from 1969 to 1991 where regularization, nationalization, and growth of
banks comes into the picture.

Phase III – This phase is from 1991 onwards and it consists of liberalization and it’s after effects.

Trends in Banking

In recent years, there have been many changes in the banking industry. These trends in banking have made the
whole process of banking very easy. These trends include the following:

RTGS – Real Time Gross Settlement

RTGS was introduced in India in March 2004. It is a system through which a bank receives instruction in the
form of electronic for transferring the funds from one bank account to the other bank accounts.

As the name suggests, the transfer of funds between the accounts takes place in ‘real time’. The RTGS system is
kept running and maintained by the RBI.

So, it is operated by the RBI who provides it the faster and efficient way to transfer the funds while facilitating
the various financial operations.

Thus, the money send under this system is instantaneous and the beneficiary gets the money within two hours.
E-cheques

This technology has been developed in the US which will replace the conventional paper cheques in India. Thus,
to include this method of E-cheque and make it mandatory, a negotiable instruments act has been included in
the amendment.

Electronic Clearing Service

ECS is an electronic system that is used to make the payments and receipts that are in bulk. The payments need
to be similar in nature which can be smaller in amount and repetitive in nature.

Thus, this facility is specifically beneficial to government agencies and companies that make or receive large
bulk payments.

EFT – Electoral Funds Transfer

This is a system to transfer the money from one’s bank account to other accounts.

So, in this system, the concerning party that wants to make the payment instructs the bank and make a cash
payment or authorizes the bank to transfer the funds directly.

So, the sender should provide the bank with the complete details like the name of the receiver, account type,
account number of the respective bank, city name, branch name, and other details to the bank.

Thus it will ensure that the amount reaches the beneficiaries account quickly and correctly.

ATM – Automatic Teller Machine

This is the most popular method in India to withdraw the money. The customers can enable this service to
withdraw the money 24 by 7.

It allows the customers to perform all day to day bank activities without interacting with any humans.
Furthermore, these facilities are also used for the payment of funds, utility bills, etc.

The other trends in the banking sector include a point of sale terminal, telebanking, and electronic data
interchange.

Innovation means something new or something which had not been done before. The same goes for banking
section as well. There are many sections in banks which are going through or have gone through innovation in
recent past. They are no longer restricted to age-old (traditional) methods. Thus, to increase the business
avenues and capture the new market banks are resorting to innovation. This term innovative banking is being in
use a lot nowadays.

Innovative Banking
There are many types of banking facilities that the banks have started in recent years. These are the following
types of innovative banking used by the banks these days:

Mobile Banking

Mobile banking has been a revolution in the past few years. It has completely changed the way banking systems
are working. Thus, it is a system that allows customers to perform many types of financial related services
through a smartphone.

These include services like ATM locations, bill payment alert, inter or intrabank payments, bill payments, and
many more. So, services are available at the fingertips of every person.

Internet Banking

Internet coverage in the last few years has increased drastically. This service is online banking, web banking, or
virtual banking.

Thus, this banking service allows its users to execute and perform any financial transaction or service with the
help of the Internet. The banking facilities are provided traditionally at a local bank outlet.

This includes bill payments, a deposit of money, borrowing of money, and other services are all available at one
place. This service happens with the use of the Internet facility. In India, ICICI Bank was the first bank to avail it’s
customers the facility of Internet banking.

When the financial crisis happened in 2008, many banks in the world were hit hard. Although the crisis was to
the USA, globally its effects were felt. This summary the fact that everyone is now dependent on international
banking.

International Banking

When we think about international banking, there are three facts that we have to keep in mind. They are cross-
border lending, foreign claims, breakdown of assets geographically. Cross border lending is related to lending if
non-affiliated entities abroad.

These entities have relatively fallen to local lending through branches or subsidiaries of foreign. Like a loan
through a subsidiary of a foreign bank to a household or a firm. Thus, cross border lending becomes important.
Also, in 2007, cross border lending constituted about one third more than the local claims in 2007. While in
2013 both of them were equal.

Effects of Regulatory Changes on Banks

Through regression analysis, it is suggested that the regulatory changes have contributed to a sizeable extent in
cross-border claims to GDP. Also, the dependent variable here is the growth rate. While the explanatory
variables include changes in the regulation of international operations.

Thus, the conclusion is such that other control variables and exclusion of eurozone countries treat them as a
single country. The results are further confirmed by the supervisory power indices and capital regulation in
2003 and 2006.

Implications Required for Financial Stability

The shift from cross-border lending to local can reduce the sensitivity of total inflows to global financial shocks.
Thus, countries that receive more cross-border loans gets exposed to global shocks. Also, when they are hit by
domestic shocks they cannot enjoy a diversification benefit.

Because of domestic shocks, domestic credit falls in countries that receive huge cross-border claims. Also, this
finding relates to other work pointing in the financial stability risks. These risks are associated with wholesale
bank funding.

Thus, to counter this domestic crisis threat, lending by foreign subsidiaries locally plays a huge role. Also, this is
related to the finding that is consistent with the reports that subsidiaries are more stable than cross-border
lending.

Foreign banks that are in a better position to capitalize parent banks react less procyclically. Similarly, parent
banks with large stable funding resources also react less. This happens during the global crisis as well as
domestic.

There is no banking model that can reduce global shocks. It is better to closely monitor foreign currency and
cross-border lending. Also, more cooperation is required among the national supervisors.