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INDIAN BANKING

SYSTEM
AND
BASIC BANKING
CONCEPTS
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EVOLUTION OF BANKING STRUCTURE


IN INDIA
At the time of Independence - banking
structure dominated by domestic scheduled
commercial banks. Non-scheduled banks,
constituted a small share
First task before RBI after independence develop sound structure on contemporary lines
Safety nets to depositors from RBI
Need for separate banking structure
Commercial banks not tuned to needs and
requirements of SME and marginal farmers, cooperatives lacked resources.
Need of combining local feel and familiarity of
rural problems characteristic of co-operatives and
professionalism and large resource base of
commercial banks.
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INDIA BANKING SYSTEM STRUCTURE


SCHEDULED BANKS
SCH. COMMERCIAL
BANKS
PUBLIC SEC
BANKS
PVT. SECTOR
BANKS
NATIONALIZED
BANKS

SCH. COOP. BANKS

SCH. URBAN
COOP BANK
FOREIGN BANKS

SCH. URBAN
COOP BANK
RURAL REGIONAL
BANKS

SBI & ITS


OLD PVT. NEW PVT.
ASSOCIATES BANKS
BANKS
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RESERVE BANK OF INDIA


ACT 1934

Established - April 1, 1935


Ownership- originally privately, Nationalized
1949
Central Office
Governor sits and policies are formulated
initially established in Calcutta; permanently
moved to Mumbai in 1937
Preamble
"... to regulate the issue of Bank Notes and
keeping of reserves with a view to securing
monetary stability in India and generally to
operate the currency and credit system of the
country to its advantage
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MAIN FUNCTIONS
Regulator and supervisor of financial
system
Monetary Authority
Banker to the Government
Monopoly of Note Issue (other than
Rupee One notes and coins and
subsidiary coins)
Manager of Foreign Exchange
Developmental role
Related Functions

FINANCIAL SUPERVISION

Performed by RBI under guidance of Board for


Financial Supervision (BFS)
Constituted in November 1994; Committee of
the Central Board of Directors
Objective
consolidated supervision of financial sector
- commercial banks, FIs, and NBFCs
Constitution
Chairman - Governor
Vice-Chairman - Dy Governor in charge of
banking regulation and supervision
Co-opted Directors from Central Board - 4
Term 2 years and is.
Ex-officio members - Dy Governors
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Financial Supervision- BFS (Contd.)


Audit Sub-Committee
Dy Governor is Chairman and 2 Directors as
members
upgrading quality of statutory audit and internal
audit functions in Banks and FIs
Functions
bank inspections; off-site surveillance,
strengthening of role of statutory auditors ;
strengthening of internal defences of supervised
institutions; legal issues in bank frauds; divergence
in assessments of NPA and supervisory rating
model
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RBI CHANGING SCENARIO

REAL TIME GROSS SETTLEMENT (RTGS) SYSTEM IN compliance with Basle Core Principles for
Systemically Important Payment Systems of BIS
INdianFInancialNETwork INFINET a `one-of-akind initiative for sharing IT expensive resources
`ANYWHERE BANKING THROUGH CBS, ANYTIME
BANKING -National Financial Switch for
interconnecting ATMs
IMPROVING CG- set up through fit and proper
criteria
INTEGRATED RISK MANAGEMENT SYSTEMS
NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT)
SYSTEM and NATIONAL ELECTRONIC CLEARING
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SERVICE (NECS).

BANKING SECTOR REFORMS

Several committees constituted to resolve


problems of Commercial Banking in India, two
most important area) Narasimham Committee I (1991)- aimed
at bringing operational flexibility and
functional autonomy so as to enhance
efficiency, productivity and profitability
b) Narasimham Committee II (1998)bringing structural changes so as to
strengthen banking system to make it
more stable
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MAJOR RECOMMENDATIONS

NARISHIMAM COMMITTEE REPORT I


Four-tier hierarchy for banking structure - three to

four large banks with SBI at top


Parity in treatment of Private sector banks with

Public sector banks


Follow BIS/Basel norms
Lifting of ban - setting new banks in Private sector
Liberal Governmental policies for expansion of

foreign bank branches and rationalization of foreign


operations of Indian banks

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Major Recommendations (Contd.)


Progressively bring down - Statutory Liquidity Ratio

(SLR) and Cash Reserve Ratio (CRR)


Tighten prudential norms for the commercial banks
Deregulate interest rates
Redefine priority sector - to comprise SME and

marginal farmers, and EWS


Increase competition in lending between DFIs and

banks
Disinvest in PS banks
Each public sector bank - set up at least one RBS and
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treated at par with RRBs

Major Recommendations (Contd.)


Narasimham Committee Report II
Merger of strong PS banks and closure of

some weaker banks


Amicable golden handshake scheme for

surplus banking sector staff


Setting up ARC to tackle NPAs in banks
Enhancement of capital adequacy norms
Healthy competition between PS banks

and private sector banks essential.


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MEASURES UNDERTAKEN

Competition Enhancing Measures


Operational autonomy and reduction
of public ownership in PS Banks
Transparent entry norms
Banks allowed to diversify product
portfolio and business activities
Roadmap for foreign banks for M &A
of private sector banks and NBFCs
Instructions and guidelines on
ownership and governance in private
sector banks
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Measures enhancing role of


market forces
Disbanding administered interest rates and
enhanced transparency and disclosure norms
Facilitation of improved payments and
settlement mechanism
Dematerialization and securitization of assets
developed
Prudential measures
Introduction of international best practices
norms on Capital to Risk Asset Ratio
(CRAR), Accounting
Strengthening Risk management
mechanisms
Higher graded provisioning for NPAs
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Implementation of Basel II

Institutional and legal measures

Setting up of DRT, ARC, Lok-Adalat, CCIL and


CIBIL
Enactment of Securitization and Reconstruction of
Financial Assets and Enforcement of Securities
Interest Act 2002,

Supervisory measures

Establishment of Board of Financial Supervision


as apex supervisory authority
Strengthening CG, Audit, enhance due diligence, fit
and proper test for directors.
Strengthening of

Technology related measures

Introduction of Negotiated Dealing System (NDS)


for screen based trading in Govt. securities and Real
Time Gross Settlement System (RTGS)
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BANKING CONCEPTS

PLR or prime lending rate - rate of interest at which


banks lend to their credit-worthy or favoured
customers.
It is treated as a benchmark rate for most retail and
term loans.
influenced by RBIs policy rates the repo rate and
cash reserve ratio
Deposit Rates - Interest rate paid on deposit accounts
by commercial banks and other FIs
Bank rate - rate of interest which RBI charges on loans
and advances that it extends to commercial banks and
other financial intermediaries. Changes in the bank
rate are often used by RBI to control money supply
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Repo Rate - rate at which banks borrow from RBI. A


reduction in repo rate will help banks to get money at
a cheaper rate.
Reverse Repo rate - rate at which RBI borrows
money from banks. An increase in Reverse repo rate
can cause banks to transfer more funds to RBI due
to this attractive interest rates. It can cause the
money to be drawn out of the banking system.
Due to this fine tuning of RBI using its tools of CRR,
Bank Rate, Repo Rate and Reverse Repo rate our
banks adjust their lending or investment rates for
common man.
Difference between Bank Rate and Repo Rate
While repo rate - applicable to short-term loans and
used for controlling amount of money in market,
bank rate - a long-term measure and governed by
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long-term monetary policies

STATUTORY LIQUIDITY RATIO (SLR)

OBJECTIVE
1) To restrict expansion of bank credit.
2) To augment investment of the banks in
Government securities.
3) To ensure solvency of banks.
Commonly used to contain inflation and fuel

a)
b)
c)

growth, by increasing or decreasing it respectively

MAINTAINED IN THE FORM OF :


Cash
Gold marked to market
Unencumbered approved securities or Gilts valued at a price as specified by RBI
CURRENT SLR 24%
SLR RATE = Total Demand/Time Liabilities x
100%
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CASH RESERVE RATIO (CRR)

OBJECTIVE

Banks required to hold a certain proportion of their


deposits in the form of cash, deposited with
RBI/currency chests, considered as equivalent to
holding cash with themselves
This minimum ratio (that is the part of the total
deposits to be held as cash) is stipulated by RBI - CRR or
Cash Reserve Ratio
Also known as - Cash Asset Ratio or Liquidity Ratio

PURPOSE
Higher the ratio (i.e. CRR), lower is amount that
banks will be able to use for lending and investment.
EXISTING CRR
5% (w.e.f. 2nd Jan 2009)
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