Semester IV

Course on Banking
Overview of Financial System, Products
&
Nature of Services of Commercial Banks

Sessions : 1-4
Indian Financial Sector
Ministry of Finance

Reserve Bank of India SEBI

Insurance
Regulatory & Specific areas
Development of interest
Authority

Insurance (Life & FIs /TLi Banks NBFI Capital Markets,

Non-life) Mutual Funds
Re-Insurance

•Term Loan Lending

Institutions Scheduled Commercial Cooperative Banks •Stock Exchanges
•Sectoral Institutions Banks •Merchant Banker
•Urban Cooperative Banks
•Public Sector •Underwriters
•State level Institutions` •State Cooperative Banks •Stock Brokers
•Private Sector •FIIs
•Others
•Foreign banks •Retail Investors
Financial Institutions
Commercial Banks have been providing financial services for meeting credit
requirement as well as offering ancillary financial services like demand & time
deposits to individuals, business houses, organisations and other quasi
banking services.
Banks & Financial Institutions
Banks are also termed as Financial Institutions. Generally speaking Financial
Institutions are considered as Term Lending Institutions
Financial institutions are of two types:
 Depository
 Non-depository
 Depository firms are banks and credit unions that pay interest on
deposits and then lend money in the form of interest-earning assets
 Non-depository firms offer pension funds, life and property/ casualty
insurance policies and retirement income in exchange for receiving
premiums payments or contributions to retirement accounts from their
clients
Financial Markets

Key components Financial Markets:

a. The Money Market

b. The Equity /Capital Market
c. Over-the-Counter Markets
d. The Foreign-Exchange Market
e. The Commodity Markets
f. Cryptocurrency Markets
g. The Mortgage Market
h. The Derivative Market
i. The Insurance Market
Role of Financial Markets

Why Financial Markets:

 Financial Markets exist for several reasons, but the most
fundamental function is to allow for the efficient allocation of capital
and assets in an economy.
 By allowing a free market for the flow of capital, financial obligations,
and money the financial markets make the global economy run more
smoothly while also allowing investors to participate in capital gains
over time.
Why Are Financial Markets Important?
 Without financial markets, capital could not be allocated efficiently,
and economic activity such as commerce & trade, investment, and
growth opportunities would be greatly diminished.
Financial Markets

The Money Markets

 Money markets trade in products with highly liquid form and are
characterized by a high degree of safety and a relatively low return in
interest.
 At the wholesale level, the money markets involve large-volume
trades between institutions and traders.
 At the retail level, they include money market mutual funds bought
by individual investors and money market accounts opened by bank
customers. Individuals may also invest in the money markets by
buying short-term Certificate of Deposits (CDs), Bonds, Treasury bills,
among others.
Financial Markets
The Capital /Stock /Equity Market:
 These are venues where companies list their shares and they are
bought and sold by traders and investors.
 These markets are used by companies to raise capital via an initial
public offering (IPO), with shares subsequently traded among various
buyers and sellers in what is known as a Secondary Market.
 Stocks may be traded on listed exchanges, such as the BSE, NSE, New
York Stock Exchange (NYSE) or NASDAQ.
 Most trading in stocks is done via regulated exchanges, and these
play an important role in the economy as both a gauge of the overall
health in the economy as well as providing capital gains and dividend
income to investors.
 Typical participants in a stock market include (both retail and
institutional) investors and traders, as well as Market Makers (MMs)
and specialists who maintain liquidity and provide two-sided
markets.
 Brokers are third parties that facilitate trades between buyers and
sellers but who do not take an actual position in a stock.
Financial Markets

The Over-the-Counter Markets (OTC)

 An OTC market is a decentralized market as it does not have physical
locations, and trading is conducted electronically in which market
participants trade securities directly between two parties without a
broker.
 While OTC markets may handle trading in certain stocks (e.g., smaller
or riskier companies that do not meet the listing criteria of
exchanges).
 Certain derivatives markets, however, are exclusively OTC, and so
make up an important segment of the financial markets.
 Broadly speaking, OTC markets and the transactions that occur on
them are far less regulated, less liquid, and more opaque.
Financial Markets

Foreign Exchange (Forex) Market

 The Forex market in which participants can buy, sell, hedge, and
speculate on the exchange rates between pair of currencies.
 The forex market is the most liquid market in the world, as cash is
the most liquid of assets. The currency market handles more than $5
trillion in daily transactions, which is more than the futures and
equity markets combined.
 As with the OTC markets, the forex market is also decentralized and
consists of a global network of computers and brokers from around
the world.
 The forex market is made up of banks, commercial companies,
central banks, investment management firms, hedge funds, and
retail forex brokers and investors.
Financial Institutions (FIs /TLIs)
FIs /TLIs are divided in two categories
1. Regulatory Institutions
The regulators are assigned with the job of governing all the divisions of the Indian
financial system. They are responsible for maintaining the transparency for the
national interest in the operations of the institutions under their supervision. They
are:
 Reserve Bank of India (RBI)
 Securities and Exchange Board of India (SEBI)
 Pension Fund Regulatory and Development Authority (PFRDA)
 Forward Markets Commission (FMC)
 Insurance Regulatory and Development Authority (IRDA)
2. Financial Institutions giving only Term Loans
Industrial Reconstruction Bank of India (IRBI), now (Industrial Investment Bank
of India), IFCI, IIFCL, IDFC, IL & FS, HDFC, EXIM Bank, SIDBI, NABARD, LIC, GIC,
Shipping Credit and Investment Corporation of India, HUDCO & NHB
Financial Institutions (FI)
FIs are Developmental Financing Lending Agencies
Financial Institutions

Term Lending Institution Sectoral Institutions State level Institutions

Key Players Key Players Key Players

• Infrastructure Development • Export Import Bank of India • State Finance Corporation

Finance Corporation of (EXIM) (SFC)
India (IDFC) • Power Finance Corporation • State Industrial Development
• Small Industries Development (PFC) Corporation (SIDC) like IPICOL
Bank of India (SIDBI) • HDFC
• IFCI • HUDCO
• REC
Non Banking Financial Institutions
NBFI is a company registered under the Companies Act, 1956 engaged in the
business of loans and advances, acquisition of shares /stocks /bonds
/debentures /securities issued by Government or local authority or other
marketable securities like leasing, hire-purchase, insurance business, chit
business. It does not include any institution whose principal business is that of
agriculture activity, industrial activity, purchase or sale of any goods (other
than securities) or providing any services and sale/purchase/construction of
immovable property.

NBFI lend money, make investments and hence their activities are akin to that of
banks. However there are a few differences as given below:
 NBFI cannot accept demand deposits
 NBFIs do not form part of the payment and settlement system and cannot
issue cheques drawn on itself
 Deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of banks
Financial Markets
The Commodities Markets
 The Intercontinental Exchange (ICE). Commodities Markets are venues
where producers and consumers meet to exchange physical commodities
such as agricultural products (e.g., corn, livestock, soybeans), energy
products (oil, gas, carbon credits), precious metals (gold, silver, platinum),
or soft commodities (such as cotton, coffee, and sugar).
 These are known as spot commodities markets, where physical goods are
exchanged for money.
 The bulk of trading in these commodities, however, takes place on
derivatives markets that utilize spot commodities as the underlying assets.
 Forwards, futures, and options on commodities are exchanged both OTC
and on listed exchanges around the world such as:

a. Multi Commodity Exchange of India (MCX), Mumbai.

b. National Commodity and Derivatives Exchange of India (NCDEX), Mumbai.
c. National Multi Commodity Exchange (NMCE), Ahmedabad.
d. Indian Commodity Exchange (ICEX), New Delhi.
e. ACE Derivatives & Commodity Exchange Limited, Mumbai.
f. Iran Mercantile Exchange (IME)
g. The Chicago Mercantile Exchange(CME)
Financial Markets
The Cryptocurrency Markets
 The past several years have seen the introduction and rise of
cryptocurrencies such as Bitcoins and Ethereum, decentralized digital
assets that are based on Blockchain technology.
Today, hundreds of cryptocurrency tokens are available and trade
globally across a patchwork of independent online Crypto Exchanges.
 These exchanges host digital wallets for traders to swap one
cryptocurrency for another, or for fiat monies such as dollars or
euros.
 Because the majority of crypto exchanges are centralized platforms,
users are susceptible to hacks or fraud.
 Decentralized exchanges are also available that operate without any
central authority.
 These exchanges allow direct peer-to-peer (P2P) trading of digital
currencies without the need for an actual exchange authority to
facilitate the transactions.
 Futures and options trading are also available on major
cryptocurrencies.
Financial Markets
Mortgage Market
The term mortgage refers to a loan used to purchase or maintain
a home, land or other types of real estate. Mortgage Market can
be:
 Primary Mortgage Market
 Secondary Mortgage Market

 The Primary Mortgage market is the market where borrowers

can obtain a mortgage loan from a primary lender like Banks,
mortgage brokers, mortgage bankers and credit.
 The secondary mortgage market is the market for the sale of
securities or bonds collateralized by the value of mortgage
loans.
Financial Markets
Derivatives Markets
 A derivative is a contract between two or more parties whose value
is based on an agreed-upon underlying financial asset (like a security)
or set of assets (like an index).
 Derivatives are secondary securities whose value is solely derived
from the value of the primary security that they are linked to. In and
of itself a derivative is worthless.
 Rather than trading stocks directly, a derivatives market trades in
futures and option contracts, and other advanced financial products,
that derive their value from underlying instruments like bonds,
commodities, currencies, interest rates, market indexes, and stocks.
 Futures markets are where futures contracts are listed and traded.
Both futures and options exchanges may list contracts on various
asset classes, such as equities, fixed-income securities, commodities,
and so on.
Financial Markets

The Insurance Market

The insurance market is simply the "buying and selling of insurance."
Consumers or groups buy insurance for risk management from insurers
offering coverage for specific risks.
8 characteristics that typically emerge during a hard insurance market:
1. Combined ratios are up; return on equity is down
2. Sustained and significant rate increases
3. Increased reinsurance costs
4. Reduced capacity
5. Reduction in the number of new market entrants
6. Growth of risk transfer options
7. More mergers and acquisitions in the distribution channel
8. Loss portfolio transfers
Financial Regulators

In India, the financial system is regulated with the help of

independent regulators, associated with the field of insurance,
banking, commodity market, and capital market and also the field
of pension funds.
 Ministry of Finance
 Ministry of Corporate Affairs
 Central Board of Direct Taxes (CBDT)
 Central Board of Excise & Customs (CBEC)
 Reserve Banks of India (RBI)
 Securities and Exchange Board of India (SEBI)
 Pension Fund Regulatory and Development Authority (PFRDA)
 Forward Markets Commission (FMC)
 Insurance Regulatory and Development Authority (IRDA)
 BANK FOR WHOM & WHY
What is a bank?
A Bank deals in money in the same way as a businessman deals in goods.
Banks are business enterprises which deal in money, financial instruments
and provide financial services for a price called interest, discount,
commission etc.

“Banking is the business of accepting for the purpose of lending or

investment, of deposits of money from the public repayable on demand or
otherwise and withdraw-able by cheque, draft, and order or otherwise.”
Banking Regulation Act, 1949.

What is Commercial Bank?

Commercial Banks are those banks which perform all kinds of banking
functions such as accepting deposits, advancing loans, credit creation, and
agency functions. They are also called joint stock banks because they are
organized in the same manner as joint stock companies.
 TYPES OF BANK
One way of classification
 Commercial Banks
 Merchant Banks
 Investment Banks

Other Methods of Classification

 Scheduled and Non-Scheduled banks.
 Scheduled Banks (Commercial Banks & Cooperative Banks)
 Non-Scheduled banks
Banks with a reserve capital of less than 5 lakh rupees qualify
as non-scheduled banks. Unlike scheduled banks, they are not
entitled to borrow from the RBI for normal banking purposes,
except, in emergency or “abnormal circumstances." Jammu &
Kashmir Bank is an example of a non-scheduled commercial
bank.
 TYPES OF BANK
Difference Between Scheduled Banks (SB) and Non-Scheduled Banks (NSB)

BASIS FOR
SCHEDULED BANKS NON-SCHEDULED BANKS
COMPARISON
Meaning SB is a banking corporation whose NSBs are the banks which do not
minimum paid up capital is Rs. 5 comply with the rules specified by the
lakhs and does not harm the RBI, or say the banks which do not
interest of the depositors. come under the category of SB.
Second Listed in the second schedule. Not-listed in the second schedule.
Schedule
CRR Maintained with RBI. Maintained with themselves.
Borrowing SB are allowed to borrow money NSB are not allowed to borrow money
from RBI for regular banking from RBI for regular banking purposes.
purposes.
Returns To be submitted periodically. No such provision of submitting
periodic returns.
Members of It can become a member of It cannot become member of clearing
clearing clearing house. house.
house
Commercial Banks
Scheduled Commercial Banks dominate the industry capturing around 90% of
the total banking assets. Scheduled Cooperative Banks accounts for the balance.
Scheduled Commercial Banks
Commercial Banks /Scheduled
Commercial Banks

Public Sector Banks Private Sector Banks Co-Op Banks Foreign Banks

1. Local Area Bank

2. Small Finance Bank
Nationalized Banks Regional Rural Banks 3. Payment Bank
Universal Bank
Universal Banks offers a wide range of banking and financial services
(like insurance, development banking, investment banking,
commercial banking, and other financial services) in comparison to
traditional banking institutions.
 In simple terms, they offer all three services that is retail banking,
investment banking, and wholesale banking.
 Universal Banking system offers services like asset management,
deposits, payment processing, investment advisory, loan
underwriting, securities transactions, financial analysis, merchant
banking, factoring, mutual funds, credit cards, auto loans, insurance,
housing finance, retail loans, financial analysis, etc.
 Universal banks are a type of advanced commercial bank that offers
an exclusive range of services under one roof.
 They are updated versions of commercial banks but not all
commercial banks are universal banks.
Universal Bank
Advantages of Universal Banking
 Customers’/ Investors’ faith
 Optimum utilization of resources
 Other benefits- Such banks even offer other advantages like
diversification of risks, easy marketing, and offers a huge
range of services and that too under one roof.

Disadvantages of Universal Banking

 Monopoly: Universal banks enjoy a monopoly in the market
as these are larger banking institutions. This monopoly
power can even impact the economic development of the
overall nation.
 Different rules: They offer a variety of services. The services
that are offered by such banks may differ from bank to bank
and as a result of this, the rules and regulations applied to
these banks will also completely different.
Small Finance Banks (SFB)
Regulations
The small finance banks shall be registered as a public limited company under
the Companies Act, 2013. It will be licensed under Section 22 of the Banking
Regulation Act, 1949. The Small Finance Banks in India are governed by the
provisions of the:
 Banking Regulation Act, 1949.
 Reserve Bank of India Act, 1934.
 Foreign Exchange Management Act, 1999
 Deposit Insurance and Credit Guarantee Corporation Act, 1961
 Payments and Settlements Act,2007
 Credit Information Companies (Regulation) Act,2005
 Other relevant Statutes and the Directives, Prudential Regulations and other
Guidelines/ Instructions issued by RBI and other regulators from time to
time.
 SFB will be given scheduled bank status once they commence their
operations, and found suitable as per Section 42 (6) (a) of the Reserve Bank
of India Act, 1934.
Small Finance Banks (SFB)
Objectives
 To further financial inclusion by provision of savings vehicles.
 Provide financial services to the people who are not being served by
other banks
 Supply of credit to small business units
 Small and marginal farmers
 Micro and small industries
 Other unorganised sector entities, through high technology-low cost
operations.
 Acceptance of deposits and lending.
Small Finance Banks
Functions:
 Acceptance of all type of deposits and lending loans to unbanked
areas of our country.
 Maintenance of Cash Reserve Ratio and Statutory Liquidity Ratio.
 The basic objective for the setting up of SFBs are to provide credit
facilities to small business units, small farmers, micro and small
industries, and unorganized sectors and reform to improve financial
inclusion in the country.
 It also provides loans to the priority sector and motivates people to
save their excess funds.
 SFBs can provide financial services like mutual funds, insurance, and
pension products but with the prior approval of RBI.
Small Finance Banks
Eligible promoters
 Resident individuals /professionals with 10 years of experience in
banking and finance.
 Companies and societies owned and controlled by residents will be
eligible to set up small finance banks.
 Existing Non Banking Finance Companies (NBFC), Micro Finance
Institutions (MFI) and Local Area Banks (LAB) that are owned and
controlled by residents can also opt for conversion into small finance
banks.
 Promoter /promoter groups should be ‘fit and proper’ with a sound
track record of professional experience or of running their businesses
for at least a period of five years in order to be eligible to promote
small finance banks.
Small Finance Banks
Procedure for RBI decisions
 An External Advisory Committee (EAC) comprising eminent
professionals like bankers, chartered accountants, finance
professionals, etc., will evaluate the applications.
 The decision to issue an in-principle approval for setting up of a bank
will be taken by the Reserve Bank.
 The Reserve Bank’s decision in this regard will be final.
 The validity of the in-principle approval issued by the Reserve Bank
will be eighteen months.
 The names of applicants for bank licences will be placed on the
Reserve Bank’s website.
Small Finance Banks
Prudential norms
 The small finance bank will be subject to all prudential norms and
regulations of RBI as applicable to existing commercial banks including
requirement of maintenance of Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR). No forbearance would be provided for
complying with the statutory provisions.
 The small finance banks will be required to extend 75 per cent of its
Adjusted Net Bank Credit (ANBC) to the sectors eligible for
classification as priority sector lending (PSL) by the Reserve Bank.
 At least 50 per cent of its loan portfolio should constitute loans and
advances of up to Rs. 25 lakh.
Small Finance Banks
Capital requirement
 The minimum paid-up equity capital for small finance banks shall
be Rs. 200 crore.
Promoter's Contribution
 The promoter’s minimum contribution of 40 percent of paid-up equity
capital shall be locked in for a period of five years from the date of
commencement of business of the bank.
 If the initial shareholding by the promoter in the bank is in excess of
40 percent, it should be brought down to 40 percent within a period
of five years.
 Then the promoter’s stake should be brought down to 30 percent of
the paid-up equity capital of the bank within a period of 10 years, and
to 26 percent within 12 years from the date of commencement of
business of the bank.
Small Finance Banks
Foreign shareholding
 The foreign shareholding in the small finance bank would be as per
the Foreign Direct Investment (FDI) policy for private sector banks as
amended from time to time.
 Following the current FDI policy, the aggregate foreign investment in a
private sector bank from all sources will be allowed up to a maximum
of 74 percent of the paid-up capital of the bank.
 At all times, at least 26 percent of the paid-up capital will have to be
held by residents.
 In the case of Foreign Institutional Investors (FIIs) / Foreign Portfolio
Investors (FPIs), individual FII / FPI holding is restricted to below 10
percent of the total paid-up capital, the aggregate limit for all FIIs /FPIs
/ Qualified Foreign Investors (QFIs) cannot exceed 24 percent of the
total paid-up capital, which can be raised to 49 percent of the total
paid-up capital by the bank concerned through a resolution by its
Board of Directors followed by a special resolution to that effect by its
General Body.
Small Finance Banks
Transition path
 If the small finance bank aspires to transit into a universal bank, such
transition will not be automatic, but would be subject to fulfilling
minimum paid-up capital / net worth requirement as applicable to
universal banks.
 Its satisfactory performance as a small finance bank for a minimum
period of five years and the outcome of RBI’s due diligence exercise.
On transition into a universal bank, it will be subjected to all the
norms including Non-Operative Financial Holding Company (NOFHC)
structure as applicable to universal banks.
 Small Finance Banks
Difference Between Bank & Small Finance Banks
Particulars Bank
Loan Commercial Bank can offer
loans to all the customers
Revenue Commercial Bank can earn
revenue by loans and
transaction charges
Branches Commercial Bank can open
branches anywhere within
the country
Who can As per guidelines issued by
Promote RBI
Credit Cards Can Issue
Small Finance Bank
SFB should provide 75% of the loans to the
priority sectors.
The main source of income for SFB is by
lending services to the target customers
It should focus on the rural areas for the first
three years of establishment.
Individuals/professionals having 10 years of
experience in finance, NBFCs, microfinance
companies, local area banks, etc.
Can Issue

Debit Cards Can Issue Debit and ATM Card Can Issue Debit and ATM Card

Target Not restricted to any region MSME, Small Farmers, Small Businessman,
customers Unorganized Workers, etc.
Small Finance Banks
Operational SFBs in India
Some of the operational Small Finance Banks in India are as
follows.
1. A U Small Finance Bank
2. Capital Small Finance Bank
3. Equitas Small Finance Bank.
4. ESAF Small Finance Bank.
5. Fincare Small Finance Bank.
6. Janalakshmi Small Finance Bank
7. North East Small Finance Bank
8. Sivalik Small Finance Bank
9. Suryoday Small Finance Bank.
10. Utkarsh Small Finance Bank
11. Ujjivan Small Finance Bank
Payments Banks
In September 2013, the RBI constituted a committee headed by Dr Nachiket
Mor to study 'Comprehensive financial services for small businesses and low
income households'.
Objective
 To further financial inclusion
 Providing small savings accounts
 Payments/remittance services to migrant labour workforce, low income
households, small businesses, other unorganised sector entities and other
users.
Capital requirement
 The minimum paid-up equity capital for payments banks shall be Rs. 100
crore.
 In case of payments banks, the RBI set a leverage ratio of 3%
a. In case of full service banks the concept of leverage ratio is taken from the
Basel III guidelines, which is 3%.
b. However, the Indian regulator has set the leverage ratio for banks at 4.5%.
Payments Banks
Scope of activities
 Acceptance of demand deposits.
 Payments bank will initially be restricted to holding a maximum balance of
Rs. 100,000 per individual customer.
 Issuance of ATM/debit cards.
 Payments banks, however, cannot issue credit cards.
 Payments and remittance services through various channels.
 Business Correspondents (BC) of another bank, subject to the Reserve Bank
guidelines on BCs.
 Distribution of non-risk sharing simple financial products like mutual fund
units and insurance products, etc.
Promoter's contribution
 The promoter's minimum initial contribution to the paid-up equity capital
of such payments bank shall at least be 40 per cent for the first five years
from the commencement of its business.
Payments Banks
Eligible promoters:
 Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities
such as individuals / professionals; Non-Banking Finance Companies (NBFCs),
corporate Business Correspondents(BCs), mobile telephone companies,
super-market chains, companies, real sector cooperatives; that are owned
and controlled by residents; and public sector entities may apply to set up
payments banks.
 A promoter/promoter group can have a joint venture with an existing
scheduled commercial bank to set up a payments bank. However, scheduled
commercial bank can take equity stake in a payments bank to the extent
permitted under Section 19 (2) of the Banking Regulation Act, 1949.
 Promoter/promoter groups should be ‘fit and proper’ with a sound track
record of professional experience or running their businesses for at least a
period of five years in order to be eligible to promote payments banks.
Foreign shareholding:
 The foreign shareholding in the payments bank would be as per the Foreign
Direct Investment (FDI) policy for private sector banks as amended from time to
time.
Payments Banks
Deployment of funds
 The payments bank cannot undertake lending activities.
 Apart from amounts maintained as CRR with the RBI on its DTL, it will be
required to invest minimum 75 per cent of its "demand deposit balances" in
SLR eligible Government securities/treasury bills with maturity up to one
year and hold maximum 25 per cent in current and time /fixed deposits
with other scheduled commercial banks for operational purposes and
liquidity management.
Procedure for RBI decisions
 An External Advisory Committee (EAC) comprising eminent professionals like
bankers, chartered accountants, finance professionals, etc., will evaluate the
applications.
 The decision to issue an in-principle approval for setting up of a bank will be taken
by the Reserve Bank. The Reserve Bank’s decision in this regard will be final.
 The validity of the in-principle approval issued by the Reserve Bank will be eighteen
months.
 The names of applicants for bank licences will be placed on the Reserve Bank
website.
Payments Banks
Other conditions
 The operations of the bank should be fully networked and technology driven
from the beginning, conforming to generally accepted standards and norms.
 The bank should have a high powered Customer Grievances Cell to handle
customer complaints.

List of operating Payment Banks in India

 Airtel Payments Bank Ltd.
 India Post Payments Bank Ltd.
 Fino Payments Bank Ltd.
 Paytm Payments Bank Ltd.
 Jio Payments Bank Ltd.
 NSDL Payments Bank Limited.
 Owned Fund & Net Owned Fund
Owned Fund is the aggregate of the paid-up equity capital and
free reserves as disclosed in the latest balance sheet of the
company after deducting there from accumulated balance of
loss, deferred revenue expenditure and other intangible assets.

Net Owned Fund: Paid up capital plus Reserve and Surplus

(excluding revaluation reserve) plus Long term liabilities (to be
paid after one year) deduct the following -- Trading investment-
Fictitious assets (like preliminary expenditure).

The amount of investments of such company in shares of its subsidiaries,

companies in the same group and all other NBFCs and the book value of
debentures, bonds, outstanding loans and advances made to and deposits
with subsidiaries and companies in the same group is arrived at. The amount
thus calculated, to the extent it exceeds 10% of the owned fund, is reduced
from the amount of owned fund to arrive at 'Net Owned Fund'.
Functions of Reserve Bank of India (RBI)
RBI working as a bank of government and as banker of scheduled
commercial banks, etc. It also works for overall economic growth of
the country. RBI was established in 1935 with the provision of Reserve
Bank of India Act, 1934.

Main Functions
 Monetary Authority.
 Issuer of Currency.
 Banker and Debt Manager to Government.
 Banker's bank and supervisor.
 Regulator of the Banking System.
 Manager of Foreign Exchange.
 Regulator and Supervisor of the Payment and Settlement Systems.
 Developmental Role.
Nationalization of Banks
Rationale of Nationalization of Banks:
1. March towards Socialism
2. Channelize the bank finance to plan - priority sectors
3. Greater mobilisation of deposits
4. Support to agriculture
5. Provide banking facility in rural and sub-urban areas
6. Greater control by the Reserve Bank of India
7. Greater Stability of banking structure
8. Better service conditions to staff
9. Sought to end the monopoly control of big industrialists upon the
banking system
10. Implementation of new schemes like Village Adoption Scheme,
Lead Bank Scheme etc…
Indian Banking Sector: Overview
Positive outcomes
 Transformation from class banking to mass banking
 Banks played a major part in social sector initiatives like poverty
alleviation programmes
 Mobilisation of deposits
 Better Governance & Control

Negative outcomes
 Banks profitability decreased due to high CRR and SLR
 Because of PSL (priority sector landing) left with little funds to make profits
 Large number branches led to overstaffing led to economically un-unviable
 Number of bad loans and NPA's increased
 Banks were used by political class by announcing loan waiver schemes.
 Loan Melas were organised in order to meet PSL targets
 Customer service effected
Indian Banking Sector: Overview
 More than 140 Commercial Banks in India of which:
12 PSU Banks, 22 Scheduled Private Sector Banks, 11 Small Finance
Banks, 6 Payment Banks, 56 Regional Rural Banks, 46 Scheduled Foreign
Banks
 Operating with more than 1,20, 000 Branches
 Nearly 65 % of branches are in rural /semi-urban areas
 Bulk of Commercial Bank Finance is for short-term working
capital needs of industry, trade, agriculture & personal segment.
Foray into project finance also.
 Banks support growth in the economy by financing productive
sectors
Indian Banking Sector: Statutory Requirement

Present Rates (as on 22.11.2022)

 CRR: 4.5%

 SLR: 18.00 %

 Repo Rate: 5.90 %

 Reverse Repo Rate: 3.35 %

 Marginal Standing Facility (MSF) Rate: 6.15 %

 Bank Rate: 6.15 %

 Base Rate: 8.10 % - 8.80 %

 MCLR: 7.05 % - 8.05 % (Overnight)

Indian Banking Sector: Statutory Requirement

Why CRR?
 CRR is the portion of deposits that the banks have to maintain with
the Central Bank to reduce liquidity in banking system.

Why SLR?
 SLR in form of cash, gold and risk free Government securities etc.
SLR restricts the bank's leverage in pumping more money into the
economy.

Thus CRR controls liquidity in banking system while SLR regulates

credit growth in the country.
Indian Banking Sector: Statutory Requirement

 Bank Rate is the rate charged by the central bank for lending
funds to commercial banks. Bank rates influence lending rates
of commercial banks. Higher bank rate will translate to higher
lending rates by the banks. In order to curb liquidity, the
central bank can resort to raising the bank rate and vice
versa.
 Repo Rate is the rate at which the central bank of a country
(Reserve Bank of India in case of India) lends money to
commercial banks in the event of any shortfall of funds. Repo
rate is used by monetary authorities to control inflation. In
the event of inflation, central banks increase repo rate as this
acts as a disincentive for banks to borrow from the central
bank. This ultimately reduces the money supply in the
economy and thus helps in arresting inflation.
Indian Banking Sector: Statutory Requirement

 Marginal Standing Facility (MSF) rate refers to the rate at

which the scheduled banks can borrow funds overnight from
RBI against government securities. MSF is a very short term
borrowing scheme for scheduled commercial banks.

 But in case some banks don't have excess SLR securities they
can still draw down on their holding of SLR securities and
borrow from the Reserve Bank of India at the MSF
rate (repo rate +1%). Repo rate is considered as the
policy rate as repo is the widely used instrument between
banks and RBI.
Indian Banking Sector: Statutory Requirement
 Reverse Repo Rate is the rate at which the central bank of a
country (Reserve Bank of India in case of India) borrows
money from commercial banks within the country.
 It is a monetary policy instrument which can be used to
control the money supply in the country. An increase in the
reverse repo rate will decrease the money supply and vice-
versa, other things remaining constant.
 An increase in reverse repo rate means that commercial banks
will get more incentives to park their funds with the RBI,
thereby decreasing the supply of money in the market.
 The central bank takes the contrary position in the event of a
fall in inflationary pressures.
Repo and reverse repo rates form a part of the liquidity
adjustment facility (LAF).
Indian Banking Sector: Statutory Requirement
Difference between Repo Rate and Bank Rate
 Loan vs. Securities: Bank Rate usually deals with loans,
whereas, Repo or Repurchase Rate deals with the securities.
 The Bank Rate is charged to Commercial Banks against the
loan issued to them by Central Banks (RBI), whereas,
the Repo or Repurchase Rate is charged for repurchasing
the securities.
 Bank Rate charged by RBI on commercial banks for long
terms borrowings
 Repo Rate (Repurchasing Rate): Rate charged by RBI on
banks for short term loans/ borrowings.
 Bank rate would be always higher than Repo Rate
Indian Banking Sector: Statutory Requirement

Base Rate: RBI sets a minimum rate below which banks in India are
not allowed to lend to their customers. This minimum rate is called
the Base Rate in banking terms. It is the minimum rate of interest
the banks are permitted to charge their customers.

Marginal Cost of Funds based Lending Rate (MCLR):

RBI made changes to the existing Base Rate system. They have
introduced Marginal Cost of Funds based Lending Rate or MCLR
which is a new methodology to set the lending rates for
commercial banks. Previously, banks used to lend as per the Base
Rate fixed by The RBI.
Indian Banking Sector: Statutory Requirement

Marginal Cost of Funds based Lending Rate (MCLR):

 RBI made Marginal Cost of Funds based Lending Rate (MCLR) is the
minimum lending rate below which a bank is not permitted to lend.
 MCLR replaced the earlier base rate system to determine the lending
rates for commercial banks.
 RBI implemented MCLR on 1 April 2016 to determine rates of
interests for loans.
 These guidelines help ensure availability of bank credit an interest
rates which are fair to the borrowers as well as the banks.
 MCLR is a tenor-linked internal benchmark, which means the rate is
determined internally by the bank depending on the period left for
the repayment of a loan
 MCLR is closely linked to the actual deposit rates and is calculated
based on four components: the marginal cost of funds, negative carry
on account of cash reserve ratio, operating costs and tenor premium.
 Indian Banking Sector: Statutory Requirement
Comparison of Bank Rate & MSF rate

BASIS FOR
BANK RATE MSF RATE
COMPARISON

Meaning Bank Rate is a discount rate at which the MSF Rate is a rate at which the
commercial banks and the financial commercial banks borrow funds overnight
institutions borrows loan from the from the central bank.
central bank.

Eligibility All commercial banks and financial All Scheduled Commercial Banks (SCBs)
institutions. having their current account and
Subsidiary General Ledger (SGL) with RBI.

Applicable from 1900 2011

Pledging Security The loan can be raised without pledging The loan is given against security within
the securities. the limits of SLR and up to a certain
percentage of NDTL.
Liquid Adjustment Facility (LAF)
LAF is a facility extended by the RBI to the scheduled commercial
banks (excluding RRBs) and primary dealers:
 To avail of liquidity in case of requirement (against the collateral of
Government securities including State Government securities)
 To park excess funds with the RBI.

Basically LAF enables liquidity management on a day to day basis.

 Liquidity adjustment facility (LAF) is a monetary policy tool which

allows banks to borrow money through repurchase agreements or
repos.
 LAF is used to aid banks in adjusting the day to day mismatches in
liquidity (frictional liquidity deficit /surplus).
 LAF is conducted at a fixed time on a daily basis on all working days in
Mumbai (excluding Saturdays).
Indian Banking Sector: Statutory Requirement
Exposure Norms of banks
 15 percent of capital funds in case of a single borrower
 40 percent of capital funds in the case of a borrower group
 20 percent provided the additional credit exposure is on account of
extension of credit to infrastructure projects
 50 percent of capital funds in the case of a borrower group on
account of extension of credit to infrastructure projects

The capital funds for the purpose will comprise of Tier I and Tier II
capital as defined under capital adequacy standards
 Tier 1 capital consists of shareholders' equity and retained earnings.
 Tier 2 capital includes revaluation reserves.
hybrid capital instruments and subordinated term debt, general
loan-loss reserves, and undisclosed reserves
Banking Sector after reforms

 20 years of economic and financial sector reforms have

strengthened the banking sector
 Widespread branch network, varied client base
 Recapitalization has bolstered bank balance sheets
 Public confidence in PSBs
 Risk averseness: Limited exposure to risky sectors
 Investment in retail branches in an earlier era has given PSBs
competitive advantage of access to stable & low cost deposits

But the large staff strength, age profile, Government regulations

(on loss making branches, CVC) and slow pace of change in PSBs
could be a hindrance to dynamic growth in today’s fast paced
world.
Financial System in India
Legislative Bodies
Ministry of Finance is the apex body in India which over looks the Indian
financial system

Regulators
 Reserve Bank of India (RBI), the central banking and monetary authority in
India, is the central regulatory and supervisory authority for the Indian
banking system. It has direct jurisdiction above the money, debt and
foreign exchange markets.
 Securities & Exchange Board of India (SEBI), the regulatory body of capital
markets in India, acts as a watchdog and safeguards the interests of
investors.
 Insurance Regulatory & Development Authority (IRDA) is the regulatory
body for the insurance (life & non-life) and re-insurance business
 Pension Fund Regulatory & Development Authority (PFRDA) regulates
pension funds
Importance of Indian Financial Sector
 Robust financial system

 Well established institutions (both PSU & Private players)

 Strong supervisory system

 Progressive integration of financial markets (Banking, insurance, mutual

funds, securities, commodities)
 High competition marked by innovation

 High technology absorption

 Rediscovery of the Indian customer

 21st century customer driving innovations in banking

 Banking plus financial services becoming the new offerings

 Continuous innovation
Banking Terminology
 SARFESIA(The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Int. Act)
 DRT
 NI Act
 Bill of Exchange
 Bill of Lading
 UCPDC
 DP Note
 Hypothecation & Pledge
Structure of a Bank

 Corporate Office
 Local Head Office
 Zonal Office
 Regional Office
 Branch (SBU)
Summary
 RBI is the regulator overseeing the Financial Services Industry
 The prime intermediaries in the Financial Services Industry are
Scheduled Commercial Banks, Financial Institutions, NBFC’s and
Insurance Companies
 Among the lending agencies, the Banking Industry constitutes over
80% of the advances. FI constitute 12% and the share, which is
gradually reducing. There is a strong movement of The FI towards
conversion of Banks
 The Scheduled Commercial banks include SBI and Associates,
Nationalised banks, Other Scheduled Commercial Banks ( which
include the private sector banks), Foreign Banks and Regional Rural
banks.
 SBI and Nationalised banks constitute close to 75% of the overall
Banking business.
Summary
 The Banking Industry has been growing at 15%. The advances segment
has been growing at over 18%.
 Deposits is the largest external source of funds for Banks.
 However foreign bank dependence on the same is lower than the Indian
Banks
 Foreign banks have outperformed the Indian banks with superior
spreads, higher fee based income.
 The Return on Assets of Foreign Banks have consistently been better
than the Industry
Thank You