Course Code:19BFS507A

Investment Banking and financial Services

Financial institutions

Course Leader:
Ms. Reshma K.J
reshma.ms.mc@msruas.ac.in
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 Session Objectives
At the end of Session Students will be able to :
 Discuss the theoretical basis of banking operations
 Explain the structure banking assets and liabilities

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 Session Contents

 Commercial Banks
 Theoretical basis of banking operations- Special role of banks
 Banking assets and liabilities
 Depositories, Non Performing Assets (NPA) securitization
 Trade practices of banks-letter of credit and guarantees
 Relevance of banks to economy
 Risks and controls of banks

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 Banking in India

• Prior to introduction of banking people used to keep their money in

post offices or in piggy bank and lend money from sahukars .

• In year 1930, government started direct intervention and led to the

birth of banking system in India

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 Banking in India (contd..)

Banking is "accepting, for the purpose of lending or investment of

deposits of money from the public, repayable on demand or
otherwise and with drawable by cheques, draft, order or
otherwise"

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 Phases in Banking

Banking in India has evolved through four distinct phases:

• Foundation phase
• Expansion phase
• Consolidation phase

• Reforms phase

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 Foundation Phase

• Foundation phase can be considered to cover 1950s and 1960s till

the nationalization of banks in 1969
• The focus during this period was to lay the foundation for a sound
banking system in the country

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 Foundation Phase (Contd..)

• This phase witnessed the development of necessary legislative

framework for facilitating re-organization and consolidation of the
banking system
• A major development was transformation of Imperial Bank of India
into State Bank of India in 1955
• and nationalization of 14 major private banks during 1969

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 Expansion Phase

• Expansion phase had begun in mid-60s but gained momentum after

nationalization of banks and continued till 1984
• A determined effort was made to make banking facilities available
to the masses
• Branch network of the banks was widened at a very fast pace
covering the rural and semi-urban population, which had no access
to banking

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 Expansion Phase (Contd..)

• Most importantly, credit flows were guided towards the priority

sectors
• This weakened the lines of supervision and affected the quality of
assets of banks and pressurized their profitability

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 Consolidation Phase

• The phase started in 1985 when a series of policy initiatives were

taken by RBI which saw marked slowdown in the branch expansion
• Attention was paid to improving house-keeping, customer service,
credit management, staff productivity and profitability of banks

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 Reforms Phase

• Reforms phase post 1991

• Paved the way for extensive financial sector reforms
 Brought deregulation of interest rates

 more competition and technological changes

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 Reforms Phase (Contd..)

• The Narsimham Committee report suggested wide ranging reforms

for the banking sector in 1992 to introduce internationally accepted
banking practices
• The amendment of Banking Regulation Act in 1993 saw the entry of
new private sector banks

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 Liberalization

• It covered the areas of interest rates deregulation and directed

credit rules
• Statutory preemption and entry deregulation for both domestic and
foreign banks, Lowering CRR and SRR Interest rate liberalization
• Do away with entry barriers

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 Bank
Financial institution which safeguard money in one place

Features of Bank:
 Dealings with Money
 Acceptance of Deposits

 Provides advance
 Payment and withdrawal

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 Banking

• Banking Segment in India functions under the umbrella of Reserve

Bank of India - the regulatory, central bank
• This segment broadly consists of:
 Co-operative Banks
 Commercial Banks

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 Types of Banks

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 Co-operative Banks

• Role in rural financing continues to be important

• Their business in the urban areas also has increased
• There is sharp increase in the number of primary co-operative
banks

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 Co-operative Banks (Contd..)

While the co-operative banks in rural areas mainly finance agricultural

based activities including:
• Farming
• Cattle and Milk

• Hatchery and Personal finance

• Personal finance
• Small scale industries

• Self-employment driven activities

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 Co-operative Banks (Contd..)

• Co-operative banks in urban areas mainly finance various

categories of people for self-employment, industries, small scale
units, home finance, consumer finance, personal finance, etc
• Example of co-operative banks - Saraswat Co-operative Bank and
Jankalyan Sahakari Bank

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 Categories of Co-operative Banks

There are two main categories of the co-operative banks:

• Short term lending oriented co-operative Banks: Within this
category there are three sub categories of banks
1. State co-operative banks
2. District co-operative banks
3. Primary Agricultural co-operative societies

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 Primary Credit Societies (PCS)
• Primary credit society is at the bottom of the three-tier structure of
co-operative banks
• The society normally comes in contact with the farmers and makes
only a few members living within the area of the society
• Here individuals of a particular area meet together inspired by
sentiment of co-operation
• Every member has to pay his share in the share capital
• The price of a share is nominal

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 Primary Credit Societies (PCS)

• The main aim of forming this organisation is to make the farmers

free from the fatal grip of local lenders and releasing them from
their exploitation and providing the credit at cheaper rates of
interest

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 Central (District) Co-operative Banks
• The central co-operative bank is a link joining state co-operative
bank with the primary credit society
• For making the provision of the monetary aid to primary credit
societies and through them to the needy farmers the district co-
operative banks were established at the district level
• The central co-operative banks are of two types: 1) Pure type
district banks 2) Mixed type district banks

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 State Co-operative Banks

• State co-operative bank means the principal society in a state which

is registered under the Government Societies Act, 1912
• Any other law in force in India related to co-operative societies in
the state
• This bank especially co-ordinates the activities of district co-
operative banks and controls them and give them required
guidance

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 State Co-operative Banks

• The state co-operative banks are of two types:

• 1) Pure state banks 2) Mixed state banks

• Pure State Banks: It is a federation of central co-operative banks
only
• Mixed State Banks: It is a federation of both central co-operative
banks as well as individual members

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 Central (District) Co-operative Banks

• Pure type district banks: If the membership of the banks is of co-

operative organizations only are called pure district types
• Mixed type district banks: If the membership of the banks open To
co-operative organisations as well as to individuals is called mixed
type district banks.

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 Categories of Co-operative Banks

• Long term lending oriented co-operative banks: within the second

category there are Land development banks at:
1. State level
2. District level
3. Village level

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 Commercial Banks

• An institution which accepts deposits, makes business

loans, and offers related services
• Commercial banks also allow for a variety of deposit
accounts, such as checking, savings, and time deposit

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 Commercial Bank (Contd..)

• These institutions are run to make a profit and owned by a group of

individuals, yet some may be members of the Federal Reserve
System
• While commercial banks offer services to individuals, they are
primarily concerned with receiving deposits and lending to
businesses

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 Commercial Bank (Contd..)
The commercial banking structure in India consists of:
• Scheduled Commercial Banks

Scheduled commercial Banks constitute those banks which have been

included in the Second Schedule of Reserve Bank of India (RBI) Act,
1934
• Unscheduled Banks

Unscheduled banks are those banks which are not defined in the
scheduled second of the RBI act 1934

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 Difference between Commercial and Cooperative
Banks
Commercial Banks
• Offers banking services to individuals
and businesses is known as a
commercial bank
• Large
• Motive of operation Profit
• Accepting deposits from public and
granting loans to individuals and
businesses
Faculty of Management and Commerce
Cooperative Banks
• set up to provide finance to
agriculturists, rural industries and to
trade and industry of urban areas 
• Small
• Motive of operation Service
• Accepting deposits from members
and the public, and granting loans to
farmers and small businessmen
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©. Ramaiah University of Applied Sciences
 Scheduled Commercial Banks in India

Scheduled Banks in India constitute those banks which have been

included in the Second Schedule of Reserve bank of India (RBI) Act,
1934.
RBI in turn includes only those banks in this schedule which satisfy
the criteria laid down vide section 42 (6) (a) of the Act

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 Unscheduled Banks in India

"Non-scheduled bank in India" means a banking company as defined

in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of

1949), which is not a scheduled bank"

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 Classification of Commercial Banks
Commercial bank sector can broadly be classified into:
• Public sector
• Private sector
• Foreign banks

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 Scheduled Banks in India (Public Sector)

• State Bank of India • State Bank of Travancore

• State Bank of Bikaner and • Andhra Bank

Jaipur • Allahabad Bank
• State Bank of Hyderabad • Bank of Baroda
• State Bank of Indore • Bank of India
• State Bank of Mysore
• State Bank of Saurashtra

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 Scheduled Banks in India (Public Sector)

• Bank of Maharashtra • Oriental Bank of Commerce

• Canara Bank • Punjab National Bank

• Central Bank of India • Punjab and Sind Bank

• Corporation Bank • Syndicate Bank

• Dena Bank • Union Bank of India

• Indian Overseas Bank • United Bank of India

• Indian Bank • UCO Bank

• Oriental Bank of Commerce • Vijaya Bank

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 Scheduled Banks in India (Private Sector)

• HDFC Bank Ltd

• Bank of Punjab Ltd
• IDBI Bank Ltd

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 Scheduled Foreign Banks in India

• American Express Bank Ltd.

• ANZ Gridlays Bank Plc.
• Bank of American
• Bank of Tokyo Ltd.

• Banquc Nationale de Paris

• Barclays Bank Plc

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 Scheduled Foreign Banks in India (Contd..)

• Citi Bank N.C.

• Deutsche Bank A.G.
• Hongkong and Shanghai Banking Corporation
• Standard Chartered Bank

• The Chase Manhattan Bank Ltd.

• Dresdner Bank AG

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 Non Performing Assets (NPA’s)

 A Non-performing asset (NPA) is defined as a credit facility in

respect of which the interest and/or installment of Bond finance
principal has remained ‘past due’ for a specified period of time
 NPA is used by financial institutions that refer to loans that are in
jeopardy of default

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 Non Performing Assets (Contd..)

Non-performing asset (NPA)is a loan or an advance where:

• Interest and/or installment of principal remain overdue for a period
of more than 90 days in respect of a term loan
• The account remains ‘out of order’ for a period of more than 90
days, in respect of an Overdraft/Cash Credit (OD/CC),
• The bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted

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 NPA of Listed banks

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 Non Performing Assets (Contd..)
• Interest and/or installment of principal remains overdue for two
harvest seasons but for a period not exceeding two half years in the
case of an advance granted for agricultural purposes
• Any amount to be received remains overdue for a period of more
than 90 days in respect of other accounts

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 Bankers Letter of Credit and Guarantees
• Bank Guarantees and LCs are financial instruments often used in
inland or international
• Trade when suppliers or vendors do not have established business
relationships with their counterparts
• A letter of credit is a bank’s DIRECT undertaking to the supplier
(called the beneficiary) to pay
• When a letter of credit is in use, the issuing bank does not wait for
the buyer to default, and for the seller to invoke the undertaking

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 Risk in Banking Sector

Equity Risk Trading Risk

Market Risk
Interest Rate Risk
Gap Risk
Currency Risk

Commodity Risk

Transaction Risk Counterparty Risk

Credit Risk
Financial Portfolio Issuer Risk
Concentration Risk
Risks Liquidity Risk

Operational Risk

Regulatory Risk

Human Factor
Risk

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 Types of Risk
Credit Risk
• Failure to repay the loan

• Credit risk is calculated based on the borrowers ability to pay

• Credit Risk on a customer loan, lender looks at 5 C’s
• Credit history, Capacity to repay, Capital, loan condition and
associated collateral

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 Types of Risk

Operational Risk
• Failure of internal process in the banks
• Centralized computer failure
• Originates due to failure in core banking solution

• Failure of internal audit process

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 Types of Risk

Market Risk
• Reduction in the price of shares
• Duet to movement sometimes banks goes down

Ex: The share price of ABC bank is Rs 90 per share om 1st Jan 2019 the
share price falls to Rs 70

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 Types of Risk

Systematic Risk
• Risk caused by external factors
• Beyond the control of banks
• The risk that is unpredicted and cannot be avoided completely

Ex: Strike in Banks

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 Types of Risk

Liquidity loss :
• Availability of cash risk due to rising NPA
• Banks fear to give credit
• Results in less flow of cash in the market

• Results in less liquidity

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 Types of Risk

Funding liquidity Risk

• Banks are unable to pay debts
• When they are due
• Cannot meet the demand of customers to withdraw their deposits

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 Types of Risk

Business Risk
• Inability to generate profits at its target level
• Business risk is the most common type of risk prevailing in the
banking sector now a days
Reputational Risk
• Risk arises from a negative public opinion
• Due to frauds or scams

• Inability of the banks to control its operational risk

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Summary

• Prior to introduction of banking people used to keep their money in

post offices or in piggy bank and lend money from sahukars
• Banking is "accepting, for the purpose of lending or investment of
deposits of money from the public, repayable on demand
• Banking in India has evolved through four distinct phases. Phases
are ,foundation phase , expansion phase , consolidation phase and
reforms phase

55
Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Summary (Contd..)

• Banking Segment in India functions under the umbrella of Reserve

Bank of India
• This segment broadly consists of Co-operative Banks and
Commercial Banks
• Co-operative Banks business in the urban areas also has increased
phenomenally in recent years

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Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
 Summary (Contd..)

• The commercial banking structure in India consists of Scheduled Commercial

Banks and Unscheduled Commercial Banks
• Commercial bank sector can broadly be classified into Public sector ,Private and
Foreign banks
• A Non-performing asset (NPA) is defined as a credit facility in respect of which
the interest and/or installment of Bond finance principal has remained ‘past due’
for a specified period of time

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 Summary (Contd..)

• Bank Guarantees and LCs are financial instruments often

used in inland or international
• A letter of credit is a bank’s DIRECT undertaking to the
supplier to pay

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