You are on page 1of 39

Banking System in India

Chapter 5

DEFINITION OF BANKING
³Accepting, for the purpose of lending or investment of deposit, of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.´ - Banking Company- ³any company which transacts the business of banking in India.´ (they follow withdrawal by cheque, draft, order etc.- Payment Mechanism)

Indigenous bankers
Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. combine trading and other business with money lending. Vary in size from petty lenders to substantial Shroffs Act as money changers and finance internal trade through hundis (internal bills of exchange) Indigenous banking is usually family owned business employing own working capital At one point it was estimated that IBs met about 90% of the financial requirements of rural India

BANKING SYSTEM IN INDIA ORGANISED BANKS IN INDIARBI SCHEDULED BANKS (285) NON-SCHEDULED BANKS (4) COMMERCIAL BANKS CO-OPERATIVE BANKS PRIVATE SECTOR BANKS-25 PUBLIC SECTOR BANKS-27 URBAN CO-OPERATIVE BANKS-52 STATE CO-OPERATIVE BANKS.27 FOREIGN BANKS-29 REGIONAL RURAL BANKS.96 .

not in a manner detrimental to the interest of depositor Not entitled to facility of borrowing & rediscounting NON SCHEDULED BANK:  .for New) It must satisfy RBI.5 lakh(100cr.SCHEDULED BANK:    Must be carrying on a business of banking in India Must have paid-up capital and reserve of an aggregate value of not less than Rs.

369 PRIMARY AGRICULTURAL CO-OPERACTIVE CREDIT SOCIEY DISTRICT CENTRAL CO-OPERATIVE BANKS STATE CO-OPERATIVE BANK -31 .Co-operative Banks CENTRAL CO-OPERATIVE BANK.

Sector Banks Initial minimum paid up capital from Rs.SCHEDULED COMMERCIAL BANKS PUBLIC SECTOR BANKS   SBI & Associates (SBI Act. .100 to Rs.200 crore. 1955) Nationalised Banks (1969-1980) PRIVATE SECTOR BANKS:   Post Reform Period 24 banks in pvt.

paid up-50laks-50% subscribed by Central Govt. access to money market and modernized outlook CAPITAL.Authorised-1 cr. ± 35% by Sponsor Bank .-15%State Govt..REGIONAL RURAL BANKS Bank with local knowledge and familiarity Organizational ability to mobilize deposits.

FOREIGN BANKS: Registered outside Indiato operate in India the minimum capital requirement of US $25 million. that is. of licenses fixed is 12 per year both for new and expansion by existing banks . US$ 10million for the 1st and 2nd bank respectively and US$5million for the 3rd branch  The no. spread over 3 branches.

at present only 32.Progress of banking in India Nationalization of banks in 1969: 14 banks were nationalized Branch expansion: Increased from 8260 in 1969 to 75177 in 2008 Population served per branch has come down from 64000 to 16000 A rural branch office serves 15 to 25 villages within a radius of 16 kms However.180 villages out of 5 lakh have been covered .

thanks to rapid growth in industrial and agricultural output .1600% or 16 times Expansion of bank credit: Growing at 20-30% p.a.3260% or 32.6 times 1991.2006 (18 years).700% or 7 times 1971-1991 (20 years).Progress of banking in India Deposit mobilization:    1951-1971 (20 years).

Progress of banking in India Diversification in banking: Banking has moved from deposit and lending to        Merchant banking and underwriting Mutual funds Retail banking ATMs Internet banking Venture capital funds Factoring .

underwriting and dealing in government securities.Commercial Banks Functions Accepting Deposits Providing loans and advances Collecting and dealing with negotiable instruments Issuing letter of credit Dealing in foreign exchange Issuing. shares. debentures & other security& investment Providing safe deposit vaults Doing agency business Giving guarantees Merchant business .

Exceeding 2 years Loss Assets: are those NPAs where 100% loss has been identified but not yet written off in the books of accounts .Non Performing Asset (NPA) (For Loans & Advances) Standard Assets: are those which are not NPA as they are regular and performing and there are no adverse features Sub-Standard Assets: are those which are NPAs for a period Not exceeding Two Years Doubtful Assets: are those non-performing assets which remain as such for a period.

2. Paid-up Capital Statutory and other disclosed free reserves including share premium Capital reserves .Capital Adequacy Norms (8%) Tier I Capital: 1. 3.

Revaluation Reserves at a discount of 25% 3. Subordinated Debt .25% weighted Risk Assets 4. Surplus provisions/loss reserves subject to a maximum of 1. Undisclosed reserves & cumulative perpetual preference shares 2. Hybrid Debt Capital instrument 5.Capital Adequacy Norms Tier II capital consists: 1.

Capital Adequacy Formula Capital Adequacy=Capital Funds * 100 Weighted Risk Assets .

commercial or industrial concern. Wholetime Chairman:    Not be adjudicated insolvent Not be convicted for criminal offence Be a managing agent or take remuneration in the form of commission or of a share in the profits of company or whose remuneration is excessive in the opinion of RBI .MANAGEMENT Board of Directors: Atleast 51% of Board of Directors of a Banking Company must consist of persons who have specialized knowledge & should not be proprietors of any trading.

RESERVE BANK OF INDIA CENTRAL BANKING AND ITS FUNCTIONS .

3 Presidency Banks were amalgamated to form the Imperial Bank of India Existence in 1st April.Origin of RBI In 1921. .1935 under RBI Act 1934. Setting up of such institution was based on recommendation of Hilton Young Commission in the year 1926.

100 each Rs. 2.1949.2 lakhs subscribed by the Central Government Nationalization of RBI in 1st January.5 crore 5lakh fully paid up shares of Rs. entire share capital was acquired by Central Government .CONSTITUTION OF RBI CAPITAL ± Rs.

MANAGEMENT CENTRAL BOARD OF DIRECTORS COMPRISING OF 20 MEMBERS:     1 GOVERNOR & 4 DEPUTY GOVERNORS APPOINTED BY CENTRAL GOVERNMENT 4 DIRECTORS NOMINATED BY CENTRAL GOVERNMENT ONE FROM EACH LOCAL BOARD 10 DIRECTORS NOMINATED BY CENTRAL GOVERNMENT 1 GOVERNMENT OFFICIAL NOMINATED BY CENTRAL GOVERNMENT .

LOCAL BOARD FOR EACH REGIOANAL AREAS OF THE COUNTRY THERE IS LOCAL BOARD:     WESTERN ± MUMBAI (Head Quarters) EASTERN ± KOLKOTA NORTHERN.CHENNAI Functions: 1)Advising the Central Board 2) Performing other duties delegated by Central Board .NEW DELHI SOUTHERN.

Rs.FUNCTIONS OF THE RBI 1) MONOPOLY OF NOTE ISSUE.Rs. bullions. securities BULLIONS .515cr.400cr. In foreign securities and Rs.MINIMUM RESERVE SYSTEM.of which.of assets. in gold coins & bullions   .SINCE 1957. AND NETWORK OF 4301 CURRENCY CHEST AND 4027 SMALL COIN DEPOSITS BASIS ± I) PROPORTIONAL RESERVE SYSTEM ± 40% to consist of coins.THROUGH I) ISSUE DEPARTMENT   II) BANKING DEPARTMENT MAINTAINS 18 ISSUE OFFICES.115cr.

« BANKER TO GOVERNMENT   ISSUE OF NEW LOANS & TREASURY BILLS WAYS & MEANS OF ADVANCES ADVISER TO GOVERNMENT CONTROLLER OF CREDIT EXCHANGE CONTROL AUTHORITY BANKER¶S BANK & LENDER OF LAST RESORT BANK OF SETTLEMENT & CLEARANCE PROMOTER OF FINANCIAL SYSTEM SUPERVISING FUNCTION .FUNCTIONS CONTD.

SLR. NLR) MINIMUM MARGIN FOR LENDING AGAINST SPECIFIC SECURITIES CEILING ON THE AMOUNT OF CREDIT FOR CERTAIN PURPOSE (Credit Authorization Scheme) DISCRIMINATORY RATES OF INTEREST ON CERTAIN TYPES OF ADVANCES SELECTIVE CREDIT CONTROL    MORAL SUASION .INSTRUMENTS OF CREDIT CONTROL GENERAL OR QUANTITATIVE    BANK RATE OR THE DISCOUNT RATE POLICY OPEN MARKET VARIATIONS VARIABLE RESERVE RATIO (CRR.

STATUTORY LIQUIDITY RATIO-24% Commercial banks have to maintain liquid assets in cash.CRR.5% The Scheduled commercial banks are required to maintain a minimum cash balance with the Reserve Bank at the close of business on any day. . gold and unencumbered Government securities amounting to not less than 20% of the total demand and time liabilities. SLR.CASH RESERVE RATIO-5.

5%. 5.MONETARY POLICY AND RECESSION BANK RATE MARKET RATE CREDIT OFFTAKE MONEY SUPPLY EXCESS DEMAND PRICES RECESSION (6%.BANK RATE.REPO RATE) .

µKnow Your Customers¶ (KYC) procedure simplified for low income group people .FINANCIAL INCLUSION Financial inclusion is delivery of banking services at affordable cost to the vast sections of disadvantaged and low income groups Measures: 1. Adopt one district in each state for 100% financial inclusion 3. Make µno-frills Account¶ 2. Credit Card facility involving credit upto Rs.25000 without security 4. Printed materials made available to retail customers in the concerned regional language 5.

Economies of scale and retail lending will get a big boost CBoP adds about 20% in terms of balance sheet Both understand consumer and retail banking Both have been on a technology platform .404 crore 390 branches 7.439 crore as of the third quarter of 2007-08.500 employees NPA 1.100 branches 21.7% CBoP Bank : Both have had mergers in past CPoB has higher share of retail (60%) in its total loan portfolio than HDFC Bank (51%). 25. 1.477 employees NPA 0. 131.4% Rs.STRENGTHS OF MERGING ENTITIES INCEPTION AT THE SAME TIME NEW GENERATION PRIVATE BANKS GEOGRAPHIC FIT HDFC Bank :         asset size of Rs.

Mergers in Indian Banking Industry Indian Economy growing at 8% Banking Industry growing at 22% 2009 RBI will open up Indian Banking Industry Need many more banks. future has to see many mergers in the Indian Banking Industry . especially in the rural and semi-urban areas More than 50% of the population does not have banking accounts Hardly 20 Indian banks are found in top 1000 banks of the world Therefore.

ELECTRONIC BANKING .

3. 2. 4.POPULAR ELECTRONIC DELIVERY CHANNELS 1. ATMs SMART CARD TELE BANKING INTERNET BANKING .

movie tickets etc. It is now used also as a marketing tool to target the masses ATMs with finger print scanning technology may become operative in future making it more convenient and cost effective .ATM It is a novel cash dispenser They are user friendly and have mass acceptability I reaches out to large customer base at low cost Now banks have started to outsource and share ATMs to reduce cost ATM also dispenses railway tickets.

the value is debited and the balance automatically comes down .SMART CARDS It¶s a chip based card which will store a monetary value It is more secure than a ATM. Debit & Credit Cards It recognises signature & voices Doesn't necessitate the use of PIN When transaction is made using the card.

4.Bank E-Banking Electronic Central Banking Intranet Procurement .Bank E-Banking Bank. 3.to.FACETS OF E-BANKING 1.to. Customer. 2.

E-Banking Transactions Account Enquiry Fund Transfer Payment of Electricity. Statement of Accounts Access to latest schemes Access to rates of interest & other service charges . draft etc. Water. Telephone Bills Online payment for transactions actually performed through Internet Request for issuance of cheque book.

Digital signature is compulsory There should be minimum safety standards like asymmetric crypto system .Electronic Cheque It is electronic image of a paper cheque It is generated. written and signed in a secured manner using digital signature which has been legally recognised.

to merchant. The customer will get inturn an sms asking him to confirm payment The customer will have to enter his persoanlised PIN number as an added security measure and send back an sms confirming the amount to be paid . The exchange normally happens within a minute . The merchant and the customer will then get an sms confirming the completion of transaction.MChq Product In countries like Japan & other Asian Countries Working: all vital personal information is stored in a magnetic strip & then loaded on to the sim card in a secured format Existing sim card has to be replaced with 128 bit encryphon key which offers a higher degree of safety than the existing sim card. who would then send on a special mobile phone an sms to the server of the mobile service provider. While shopping one only gives phone no.