Ba n kin g Se c t o r in In d ia

By Vasudha Lalit (Roll # 09) Mandar Lalit (Roll # 10)

Agenda
• His t o ry • Bu s in e s s En viro n m e n t • Re s e rve Ba n k o f In d ia • Na t io n a liza t io n , Pro s & Co n s • NCR a n d Re fo rm s • SWOT An a lys is • Ch a lle n g e s • Fu t u re Pro s p e c t s

What are the top most banks of India?

Top Most Banks in India

HISTORY

History of Indian Banking Sector
• Banking in India originated way back in 1786

• First banks were General bank of India and Bank of Hindustan • • Oldest bank into existence in India is State Bank of India

Pre-Independence Era

BUSINESS ENVIRONMENT

External Factors

Ru le s a n d Re g u la t io n s o f RBI Le g a l Fra m e wo rk

Ba n ks

Co n s u m e r Be h a vio r

Indian Banking Structure

Reserve Bank Of India (RBI)
The Reserve Bank of India performs the function of financial supervision under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.

Ob je c t ive
Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.

Cu rre n t Fo c u s
Supervision of financial institutions Consolidated accounting Legal issues in bank frauds Divergence in assessments of non-performing assets and Supervisory rating model for banks.

RBI - Functions
Mo n e t a ry Au t h o rit y:
―Formulates, implements and monitors the monetary policy. ―Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors. ü

Regulator and supervisor of the financial system:
―Prescribes broad parameters of banking operations within which the country's banking and financial system functions. ―Objective: maintain public confidence in the system, protect depositors' interest and provide costeffective banking services to the public. ü

Manager of Foreign Exchange :
―Manages the Foreign Exchange Management Act, 1999. ―Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. 

Issuer of currency:
―Issues and exchanges or destroys currency and coins not fit for circulation. ―Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality. 

Related Functions :
―Banker to the Government: performs merchant banking function for the central and the state

Legal Framework
Umbrella Acts :
―Reserve Bank of India Act, 1934: governs the Reserve Bank functions ―Banking Regulation Act, 1949: governs the financial sector

Acts governing specific functions:
―Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market ―Securities Contract (Regulation) Act, 1956: Regulates government securities market ―Indian Coinage Act, 1906:Governs currency and coins ―Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999: Governs trade and foreign exchange market

Acts governing Banking Operations:
―Companies Act, 1956:Governs banks as companies ―Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks ―Bankers' Books Evidence Act ―Banking Secrecy Act ―Negotiable Instruments Act, 1881

Acts governing Individual Institutions:
―State Bank of India Act, 1954 ―The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 ―The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 ―National Bank for Agriculture and Rural Development Act ―National Housing Bank Act ―Deposit Insurance and Credit Guarantee Corporation Act

REFORMS

What is Nationalisation?

Nationalization is the act of taking an industry or assets into the public ownership of a national  government or state.

Nationalisation !!!

• Government nationalised 14 largest commercial banks in 1969 • • Another 6 next largest in 1980

Rationale Behind Nationalisation
• Commercial banks had facilitated the concentration of economic power in the hands of few – Monopoly

• Banks did not pay attention to priority sector – credit needs of farmers, small industries

• Resources of bank were misused for benefits of directors and their private sector companies

• Bank credit was not made according to five year plan
 

In short, Banks were not working for development of nation

Nationalization – Pros
• Branch Expansion
– Banks started opening branches in rural areas – Post nationalization, 800% increase in no. of branches

Deposit Mobilization
– Banks contributed to the development of banking habit among common people through sustained publicity, extensive branch banking and relatively prompt service

Expansion of Bank Credit
– Banks started mobilising deposites to facilitate increasing demand for credit from agricultural and industrial sector –

Diversification
– Merchant Banking and underwriting – Mutual Funds and Retail Banking

Nationalization – Cons
• Despite impressive quantitative achievements, productivity and efficiency of systems suffered

• Portfolio quality badly deteriorated

• Profitability eroded • • PSBs and FIs became weak, some were making losses YoY

Narasimham Committee Report 1991
• SLR which was initially at 25% was raised to 30% and then to 38.5% • Rate of interest received on govt. securities was much less than market rates • Known as Tax on the banking system • At the same time CRR was hiked up to 15% • All in all 53.5% cash was with RBI • Govt. used this liquidity to fund its own expenditure mainly for paying govt employee salaries

Banking Regulation Act 1949
• Maintenance of adequate liquid assets in the form of
– Cash – Gold – Government securities – Government guaranteed securities

Equal to not less than 25% of their total demand and time deposit liabilities

Primarily known as SLR

Reforms based on NCR
• • • • • • • • • • • • • • • • SLR reduced from 38.5% to 25% CRR reduced from 15% to 5.75% as of today Decontrolled interest slabs Prudential norms on NPAs Capital adequacy norms Access to capital markets

Freedom of operations to increase competitive edge New private sector banks allowed

SWOT Analysis -Strengths
• Strong growth , good asset quality , higher profitability as compared to other banks in the region

• Bank lending playing significant role in GDP growth

• Reach to corner of the country through vast networking, no. of branches and ATMs

• Policy makers made favourable changes to strengthen this sector

• Indian banks are considered to have clean, strong and transparent balance sheets as compared to other banks in the regions

SWOT Analysis -Weakness
• PSBs need to focus more on sales and marketing, service operations and risk management

• Old private sector banks also need to strengthen their skill level and operational levels

• Government has refused to dilute its 51% stake in PSBs

• Bank penetration is limited to few customer segments and geographies

• Poor infrastructure

• Restrictive labour laws

SWOT Analysis - Opportunities
• Rapid growth in Indian economy is fuelling demand • Growth driven by new products and services focusing different segments • Enhanced service levels to the consumer • Liberalization of ECB norms • Expansion through mergers and amalgamations • Reach out to Bharat

SWOT Analysis -Threats
• Failure of some weak banks • Rise in inflation rates; in turn increase in interest rates • Increase in foreign players pose threat to PSBs and private banks

Challenges
• Interest rate risk • NPAs • Competition in retail banking • Customer retention • Urge to merge • Shrinking margins

Future Prospects
• Overseas expansion

• Technology integration with general functioning of banks

• Consolidation

• Development of effective risk management systems

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Thank You