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COMMERCIAL BANKING IN INDIA

AGENDA
Commercial Banks - Introduction Banking Industry in India Sharing of Banking Business Liabilities of Banks Assets of Banks Liquidity in Banks Non-Performing Assets (NPA¶s) Various Rates

Commercial Banks
Financial Intermediaries ± Intermediate
between savers and investors.

Profit making entities. Undertakes borrowing and lending of money. Forex Trading ± Selling and buying of
foreign exchange in accordance with the stipulations of FEMA. Insurance business is also undertaken by some of the commercial banks. Social Responsibilities ± Certain targets are given to Nationalised banks for Rural and Agricultural Sector.

Money Creation
Fractional Reserve Banking (Multiplier Effect)

Bank
A B XX Z

Deposit
100 80 XX 1

Reserve (Assume Lending reserve ratio is 20%)
20 16 XX 1 80 64 XX 1

Total

500

Total amount will be equal to the multiple of original amount & reciprocal of the required reserve ratio.

Banking Industry in India Reserve Bank of India Scheduled Banks Non Scheduled Banks State Coop. Banks Commercial Banks Indian Foreign Public Sector Banks Private Sector Banks SBI & Its Subsidiaries Other Nationalised Banks Regional Rural Banks .

Classification of Banks. Scheduled Banks: When the name of a bank is included in the Second Schedule to the RBI Act. that they are not detrimental to the interests of the depositors. 2. 5 lacs. . The bank must be either ± ‡ a State Cooperative Bank OR ‡ a Company defined in the Companies Act 1956 OR ‡ Notified by the Central Govt. RBI should be satisfied about the affairs of the bank. Non Scheduled Bank: A bank whose name is not included in the Second Schedule is a Non Scheduled Bank. OR ‡ A corporation or company incorporated outside India. RBI¶s power to include the name of the bank in Second Schedule is on the following basis: 1.. 3. Paid-up capital and reserves should not be less than Rs.. it is known as a Scheduled Bank.

. Scheduled Bank Non ± Scheduled Bank Eligible for availing the facility No such facility available.Classification of Banks. Enjoys the goodwill of patron No such goodwill. of RBI in the society. . maintaining the statutory reserves with RBI. of accommodation from Reserve Bank of India. To fulfill the obligation of No such obligation..

 Nationalised banks are entrusted with the financial transactions such as paying.  Have to follow all the directions.  All 27 nationalised banks are PSB¶s. remitting money and bullion on behalf of State Govt.Classification of Banks. instructions. Private Sector Banks:  Banks set up under the guidelines of RBI other than nationalised banks.  RBI may entrust them any other business to be undertaken. . guidelines from the RBI. Public Sector Banks:  Not less than 51% of the paid-up share capital will be held by the Central Govt. collecting.. Foreign Banks: Joint stock banks incorporated abroad having branches in India are foreign banks. and Central Govt..

C.G. Sector Banks: State Bank of India State Bank of Bikaner and Jaipur State Bank of Travancore Andhra Bank Allahabad Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Overseas Bank Indian Bank Oriental Bank of Commerce Punjab National Bank Vysya Bank Ltd UTI Bank Ltd Indusind Bank Ltd ICICI Banking Corporation Bank Ltd Global Trust Bank Ltd HDFC Bank Ltd Centurion Bank Ltd Bank of Punjab Ltd IDBI Bank Ltd Scheduled Foreign Banks: American Express Bank Ltd.. ..Banking Industry in India.. ANZ Gridlays Bank Plc. Banquc Nationale de Paris Barclays Bank Plc Citi Bank N. Scheduled Public Sector Banks: Scheduled Pvt. Bank of America NT & SA Bank of Tokyo Ltd. Deutsche Bank A.

Distribution of Banking Business .

e tor Banks ubli e tor Banks 4 8 .4 4. 4. . . 84. Ter s 8. . .8 84.4 . .Distribution of Banking Business De osits attern in . 8 4.4 oreign Banks t. 8 8 . . . . .

8.Distribution of Banking Business en ings attern in . 8. 4. 8 84. Ter s . . 4. e tor Banks ubli e tor Banks 8 4 . . 4. . oreign Banks t. .4 . 8.8 . 8 8 . . . 8 . .

Distribution of Banking Business are in ter s of B ran es ubi e tor Banks t e tor Banks oreign Banks .

Liabilities of Banks .

Liabilities of Banks Deposits Demand Term Call Current Saving Other Liabilities .

 No interest is payable by bank on these deposits.  Interest is payable by the bank on these deposits.  Clean/secured overdraft can also be availed. Call Deposits:  Accepted from fellow bankers. Saving Deposits:  The maximum amount and number of withdrawals is restricted. . Term Deposits:  Amount can be withdrawn only after the maturity period.  Pre-mature withdrawal is allowed together with some penalty.  Repayable on demand.Liabilities of Banks Current Deposits:  No restrictions on the amount and number of withdrawals.  Carry an interest charge.

7 : The portion of deposits freely drawn upon.7 : The portion of deposits freely withdrawable. (average of monthly minimum balance on which interest is credited.) Impact: in Time Deposits in Demand Deposits and Money Supply.0 . Post-16. .0 .Liabilities of Banks Saving Deposits: How much amount is Demand Liability and How much amount is Time Liability? Pre-16.

Structure 100% 80% 60% 40% 20% 0% 50 28 25 34 56 16 16 25 24 22 26 19 50 54 55 eposits i erms 58 61 64 25 17 22 17 Fi ed eposits Savi eposits Current eposits 24 12 1951 1961 1969 1976 1986 1990 1995 2002  Savings deposits have maintained a steady trend.  Current deposits have been on declining trend.  ecline in current deposits has been compensated by increase in Fi ed eposits. .

. Interest rates also influence the composition of bank deposits:  Bank deposit rates were relatively low than rate of return on other assets.Factors affecting Composition of Deposits: Increase in the number of branches in the hitherto unbanked areas and introduction of new deposit schemes. The growth of banking habits have caused the increase in saving and fixed deposit in rural areas. Inflow of deposits from Non-Resident Indians (NRI¶s).  Government policy to offer higher rate on short term deposits.

 Till 1990 this borrowing varied between 2 to 5% of the total liabilities.Other Liabilities: Includes demand and time deposits from other banks. . Borrowings from RBI.  Presently this borrowing from RBI is negligible. NABARD etc.  Borrowings from RBI suggests the self sufficiency of the bank to operate within its own resources. Borrowings from other financial institutions like IDBI.

Banking Assets .

Investment securities.Banking Assets: Cash in hand and balances with RBI. Assets in Banking System. in Government and other approved . Note: Banks are allowed to invest 5% of their incremental deposits in corporate shares and convertible debentures. Bank Credit.

in hand and with other banks is determined by RBI. Larger the cash balances.Banking Assets: Cash in hand and balances with RBI: Minimum cash balances required to be maintained with RBI. because cash is a non-earning asset. higher the safety and liquidity but lower the profitability. .

Interest rate is very low. Given to very sound borrowers. discount houses and to other commercial banks. dealers in commercial bills. hence safe. These loans can be recovered on demand or on a very short notice. .Banking Assets: Assets in Banking System: Money at call and short notice: These are the loans given generally to stock brokers.

Banking Assets: Investment by Banks: Important considerations while determining the investment policy of the banks: Maintenance of adequate liquidity is important because: Confidence of depositors is of utmost importance. Banks avoid speculative transactions and invest mostly in safe securities. Banks deal with other peoples money. Total earnings should be more than the interest they pay and other expenses they incur so as to generate adequate profits. that they will able to withdraw their deposits without fear of default by bank. .

credit to agriculture. . Social considerations have to be fulfilled by the banks in terms of branch expansions. Other statutory regulations such as CRR and SLR. small scale industries and other priority sectors.Banking Assets: Investment by Banks: Important considerations while determining the investment policy of the banks: Some of the assets should be shiftable or transferable to other banks for acquiring cash in case of emergency.

‡ Held for Trading (HFT): Securities acquired with an intention of selling to take advantage of short term price/interest rate movement. HTM will be carried at the acquisition cost and not required to be marked to market. The category of investment has to be decided by bank at the time of acquisition. ‡Available for Sale (AFS): Securities other than HTM & HFT.Banking Assets: Banks Investment Norms: RBI has issued following guidelines on categorisation and valuation of bank¶s investment portfolio: Entire investments to be classified under three categories: ‡ Held to Maturity (HTM): Securities acquired with an intention to be held till the maturity of the investment. .

Banking Assets: Banks Investment Norms: HTM investments will not exceed 25 % of the entire investments excluding following: ‡ Recapitalisation Bonds. ‡ Investments in subsidiaries and joint ventures. HFT investment should be revalued at market price atleast monthly intervals. Banks can categories the investment in HFT & AFS as per their own will. Profit/loss on sale of HTM investment is required to be taken in to P&L account before being taken to Capital Reserve Account. at . ‡ Investments in debentures deemed as advance.

Banking Assets: Banks Investment Norms: AFS need to be marked to market at the Quarter-end. Shifting from HFT to AFS is generally not allowed. Shifting from AFS to HFT may be done with the approval of Board/Committee of Board. Shifting of investment from/to HTM may be done with the approval of Board once a year. . else they are to be transferred to AFS category. HFT investment should be sold with in 90 days of acquisition. Market price of the scrip available from the quotes on the stock exchange or RBI price list would serve as the market value.

Banks have been advised to maintain a 5% ³Investment Fluctuation Reserve´ with respect to HFT and AFS investments. Profit/loss on sale of HFT & AFS investment to be taken to P&L account. ‡ Market value. the value would be the lowest of following: ‡ Acquisition cost. ‡ Book value. .Banking Assets: Banks Investment Norms: While shifting of investment from any of the category to any other category.

Banking Assets: Bank Credit: Types of bank credit: Loans ‡ Demand ‡ Term Cash Credit Overdrafts Short-term Bills .

on which the borrower is supposed to pay interest for the whole year.Banking Assets: Bank Credit: Demand Loans: Meaning: Loan payable on demand. . Term Loans: Amounts sanctioned with a specific repayment schedule to finance the acquisition of assets of capital nature. On rest of the cash credit the borrower is supposed to pay interest only on the utilised part.  Core portion of cash credit.  Financial accommodation granted by SBI to commercial and cooperative banks. Industry gets the highest share of Term Loans from the banks.

.Banking Assets: Bank Credit: Cash Credit & Overdrafts  Running accounts from which the borrower can withdraw funds as and when required up to the limit sanctioned.  Working capital requirement financing.  For overdraft accounts the security would be immovable property or any other security.  For cash credit accounts the security would be stocks.  Interest is charged on the outstanding amount borrowed.

Highly negotiable and hence easily marketable. Eligible security for rediscounting with RBI. Generally maturity period is 90 days. . Good rate of interest is available.Banking Assets: Bank Credit: Short-term Bills: Includes commercial bills and promissory notes.

Liquidity in Banks .

the scheduled banks are required to maintain with RBI specified % of their Net Demand and Time Liability in the form of cash reserve. Banks have flexibility of maintaining only 0% of their CRR requirement on a daily basis. Such % could vary between 3 to 15% till June 06. after that date no restriction on RBI. Inter bank term liabilities of maturity of 15 days or more are not to be considered in Net Demand and Time Liability.Factors affecting Liquidity of Banks: Statutory Requirement: CRR & SLR Cash Reserve Ratio (CRR): Under section 2 of RBI Act. so long as average fortnightly deposits total upto 100%. .

Prescribed forms:  Cash in hand. the scheduled banks are required to hold cash in prescribed forms at RBI specified % of their Net Demand and Time Liability.  Balance in current account with other banks. SBI and its subsidiaries. Presently SLR is 25 %.Factors affecting Liquidity of Banks: Statutory Requirement: SLR Statutory Liquidity Ratio (SLR): Under section 2 of RBI Act. .  Gold and unencumbered approved securities.

however during depression the banks would be required to maintain larger liquidity. General Economic Activity: During business boom lesser liquidity would be required. Presently interest would not be paid above the floor rate of 3%. .Factors affecting Liquidity of Banks: Interest on cash balance maintained with RBI under CRR: Such rates keeps on changing as prescribed by the RBI. would be required to keep a higher cash balance. Nature of Investments: Banks having investments in assets and securities which can not be converted into cash at a short notice.

Factors affecting Liquidity of Banks: Nature of customers: If the customers are indulged in seasonal business than during such seasons greater liquidity would be required. if major customers are farmers than during harvest season more funds would be required by that bank/branches. Nature of Deposits: Banks having more time deposits require less liquidity as compare to banks having mainly current accounts. Efficient Money Market: Presence of efficient money market. Such as. so that investments can be easily converted cash. . liquidity requirement of banks would be lower.

Non-Performing Assets .

The bill remains overdue for a period of more than 90 days in case of a bill purchased and discounted. Any amount to be received for a period of more than 90 days in respect of other accounts.Non Performing Assets (NPA¶s): Meaning: An advance where: Interest and/or installment of principal remain over due for a period of more than 90 days in respect of a Term Loan. Interest and/or installment of principal remain overdue for two harvest seasons but for a period not exceeding two half years in case of an advance granted for agricultural purposes. The account remain out of order for a period of more than 90 days in respect of an CC/OD. .

Doubt full Asset: Age of NPA is exceeding 1 months. Loss Asset: A NPA identified as such by the bank itself or by Internal/External auditors of the bank. but has not been written off.Non Performing Assets (NPA¶s): Classification: Sub-Standard Asset: Age of NPA is less than or equal to 1 months. . Gross & Net NPA: Aggregate amount of NPA¶s without adjusting the provision against them is known as Gross NPA & provision adjusted amount is known as Net NPA.

Sub-Standard Asset: 10% of the amount of NPA.Non Performing Assets (NPA¶s): Provisioning against NPA¶s: Standard Asset: 0.  100% of the unsecured portion.  50% of the secured portion more than 3 years.  30% of the secured portion till one to three years. Doubt full Asset:  20% of the secured portion of NPA till one year. .25 %.

Various Rates .

Prime Lending Rate: The minimum rate at which the commercial bank lends money to its customers. Repo Rate: The rate at which the banks borrow short-term funds from RBI.Various Rates: Bank Rate: The rate of interest at which RBI lends money to other banks. Reverse Repo Rate: The rate at which the banks park their short-term surplus funds in the RBI. . Inter-bank Term Money: Inter-bank market for deposits of maturity beyond 1 days and upto 3 months is referred to as the Term Money Market. Now the banks can declare their own PLR.

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