Why Financial Institute Needed?

 Exploitation by money lenders

 Borrower is squeezed for repayment
with high interest rate.
 Further loans ensure the borrower can
never pay principal.
 Borrower loses collateral, ready for
new loan.
Indian banking sector:
Overview
contd….
 222 commercial banks in India
(133 RRBs).
 Operating with 68681 branches
(March-06).
 Nearly 70%of branches are located in
rural/semi rural area.
 Commercial bank finance for short term
working capital.
 Bank are supporting growth in the economy
by financing productive sector.
 History of Indian Banking sector:-
Phase-I
 General bank in 1786
 Bank of Hindustan & Bengal bank.
 East India company established Bank of Bengal(1809),Bank
of Bombay(1840),Bank of Madras(1843) as independent
units and called them as Presidency Bank.
 These three bank were amalgamated in 1920 and imperial
bank of India was established.
contd….

 Allahabad bank-1856
 Punjab National bank-1894
 Bank of India, central bank of India, bank of
Baroda, canara bank, Indian bank, central bank
of India, bank of Baroda, Indian bank etc were
set up between 1906-1913.
Development after-1990
Phase-II
 1955 nationalized Imperial bank.
 Formed State Bank Of India(S.B.I) as principal agent
of R.B.I and to handle banking transaction of the
union and state government.
 The nationalization of banks in India took place in
1969 by Mrs. Indira Gandhi the then prime minister. It
nationalized 14 banks then.
 Nationalisation of Seven State Banks of India (formed
subsidiary) took place on 19th July, 1960.
cont’d…Phase-III

 1991, under the chairmanship of M Narasimham,

a committee was set up by his name which
worked for the liberalization of banking practices.

 The country is flooded with foreign banks and

their ATM stations. Efforts are being put to give a
satisfactory service to customers. Phone banking
and net banking is introduced. The entire system
became more convenient and swift. Time is given
more importance than money.
 RESERVE BANK OF INDIA
(CENTRAL BANK OF INDIA)

History
 The Reserve Bank of India was set up on the basis of
the recommendations of the Hilton Young Commission
The Reserve Bank of India Act, 1934 (II of 1934)
provides the statutory basis of the functioning of the
Bank, which commenced operations on April 1, 1935.
FUNCTION OF CENTRAL BANK
 Bank of Issue
 Banker to Government
 Bankers' Bank and Lender of the Last Resort
 Controller of Credit
 Custodian of Foreign Reserves
 Supervisory functions
 Promotional functions
 QUANTITATIVE
TOOLS

1)BANK RATE (current rate:-6%)

Rate at which Central bank rediscounts the
security presented by financial institute.
Demand Rate of Bank Rate situation
For fund Interest
inflation

deflation
 contd….

 2)Open market operation.

buying and selling of securities by central bank in the
money market to influence the volume of cash
reserve with commercial banks.

Central financial situation liquidity

bank institute
Buyer seller depression injection
Seller buyer inflation absorption
contd….

3) Cash reserve ratio (current rate:-5%)

Commercial bank keep certain minimum cash reserve
with R.B.I.

CRR Commercial bank

25% 100
- 25
75
contd….
 S.L.R (statutory liquidity requirement)
(current rate:-25%)
Bank are forced to invest in certain government
security.
Situation S.L.R Bank
Inflation 30% 100-30=70
Depreciation 20% 100-20=80
 QUALITATIVE MEASURE

 CREDIT MARGIN
 CEILING ON CREDIT
 RATIONING OF CREDIT
 Narsimham Committee Report

 Reduction in SLR & CRR:

in SLR-1991 38.5%
1999 25%
in CRR-1991 15%
2001 5.5%
o Deregulation of interest rates:
The government deregulated interest rate in 1998 on all term
deposits of maturity of over 30 days.
o Capital Adequacy ratio:
in March 2000=8%
in April 2000 =9%
in March 2002 =10%
td….
 Prudential Norms:
100% provision for all non-performing assets.
atleast 30% provision against doubtful and
baddebts.
o Freedom of operation: The commercial banks have
been given freedom to set up new branches.
o Revised format of B/s and P/L account.
o Permission to public sector banks to raise capital:
The banks were permitted to raise capital upto 49%
through public issue.
ntd….

 Redefinition of priority sector.

 Effective supervision and rating of banks.
 Enactment of securitization and reconstruction
of financial asset and Enforcement of Security
Interest Act,2002.
 Prompt Corrective Action Scheme.
 contd…. Phase-II(1998)
 Capital Adequacy
 Asset quality
 System & methods
 Industry structure
 Regulation & supervision
 Legal amendment