2 IntroductionDefinition of banking – functions of bank - Working of Banks-broad conceptsStructure of Banking Industry(SBI, PSBs, Pvt. Banks, Foreign Banks, RRB’S, Cooperative Banks)Services offered by BanksBank Finance for Industries – Working capital facilities, their estimation in terms of Tandon Committee’s second method; Types of W,C, facilities: Cash Credit (Hyp), Cash Credit(Pledge), Advance against bills, bills/ cheque Purchase facility – Term loans/ Project Finance – Non fund based facilities like LC, LG, etc. – Facilities for import/ export
3 BANKINGAccording to Sec 5(b) of the Banking Regulation Act 1949, Banking means Accepting , 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 means any company which transacts the business of banking in India. No Co. can carry on the business of banking in India unless it uses as part of its name at least one word Bank , Banker or Banking
4 Permitted Banking Activities Under Section 6(1) of the Banking Regulation Act 1949The borrowing, raising or taking up of money, the lending or advancing of money either upon or without security.The drawing, making, accepting,discounting,buying,selling,collecting and dealing in bills of exchange , Promissory notes , coupons , Drafts, Railways Receipt, warrants, debentures, certificates and other instruments and securities whether transferable or negotiable or not.The granting and issuing of LC, TCThe buying , selling and dealing in bullion,The buying and selling of foreign exchangeThe receiving of all kind of bonds or valuable, on deposit or for safe custody .
5 The proving of safe deposit vaults The collecting and transmitting of money and securitiesActing as agentContracting for public and private loan and negotiating and issuing the sameUndertaking and executing trustUndertaking the administration of estates as executor, trusteeManaging, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claim
6 Features of BankingDealing in Money: The bank accept deposit from the public and advancing them as loan to the needy people. The deposit may be of different types- current, fixed, saving etc. based on various terms and condition.Deposit must be withdrawable: the deposit made by the public can be withdrawable by cheque, draft and otherwise, i.e. the banks issue and pay cheques. The deposits are usually withdrawable on demand.Dealing with credit: the banks are the institution that can create credit, i.e. creation of additional money for lending. Thus “ creation of credit “ is the unique feature of banking.Commercial in nature: since all of the banking functions are carried on with the aim of making profit.Nature of agent: besides the basic functions of accepting deposit and lending money as loan, bank possess the character of an agent because of their various agency services.
7 Evolution of Payments System Precious metals like gold and silver (commodity money)Paper currencyChecksElectronic means of paymentElectronic money: Debit cards, Stored-value cards, Smart cards, E-cash
9 Progress of banking in India Nationalisation of banks in 1969: 14 banks were nationalisedBranch expansion: Increased from 8260 in 1969 to in 2006Population served per branch has come down from to 16000A rural branch office serves 15 to 25 villages within a radius of 16 kmsHowever, at present only 32,180 villages out of 5 lakh have been covered
10 Deposit mobilisation: (20 years)- 700% or 7 times(20 years)- 3260% or 32.6 times(11 years)- 1100% or 11 times( 5 years) -700% or 7 timesExpansion of bank credit: Growing at 20-30% p.a. due to rapid growth in industrial and agricultural outputDevelopment oriented banking: priority sector lending
11 Progress of banking in India Diversification in banking: Banking has moved from deposit and lending toMerchant banking and underwritingMutual fundsRetail bankingATMsMobile BankingInternet bankingVenture capital funds
12 Profitability of Banks Reforms have shifted the focus of banks from being development oriented to being commercially viablePrior to reforms banks were not profitable and in fact made losses for the following reasons:Declining interest incomeIncreasing cost of operations
13 Profitability of banks (2) Declining interest income was for the following reasons:High proportion of deposits impounded for CRR and SLR, earning relatively low interest ratesPolitical interference- leading to huge NPAsRising costs of operations for banks was because of several reasons: economic and political
14 Profitability of Banks (3) As per the Narasimham Committee (1991) the reasons for rising costs of banks were:Uneconomic branch expansionHeavy recruitment of employeesGrowing indiscipline and inefficiency of staff due to trade union activitiesLow productivityDeclining interest income and rising cost of operations of banks led to low profitability in the 90s
18 Reserve Bank of India Commercial Banks Regional Rural Banks Cooperative BanksPrivate Sector BanksPublic Sector BanksState Cooperative BanksCentral/District Cooperative BanksIndian BanksForeign BanksPrimary Credit SocietiesState bank GroupNationalised BanksOld BanksState Bank of IndiaNew BanksSubsidiary BanksLocal Area Banks
19 Structure of RBIThe organization of RBI can be divided into three parts:1) Central Board of Directors.2) Local Boards3) Offices of RBI
20 Central Board of Directors : The organization and management of RBI is vested on the Central Board of Directors. It is responsible for the management of RBI.Central Board of Directors consist of 20 members. It is constituted as follows. a)One Governor: it is the highest authority of RBI. He is appointed by the Government of India for a term of 5 years. He can be re-appointed for another term. b)Four Deputy Governors: Four deputy Governors are nominated by Central Govt. for a term of 5 years c)Fifteen Directors :Other fifteen members of the Central Board are appointed by the Central Government. Out of these , four directors,one each from the four local Boards are nominated by the Government separately by the Central Government.
21 Ten directors nominated by the Central Government are among the experts of commerce, industries, finance, economics and cooperation. The finance secretary of the Government of India is also nominated as Govt. officer in the board. Ten directors are nominated for a period of 4 years. The Governor acts as the Chief Executive officer and Chairman of the Central Board of Directors. In his absence a deputy Governor nominated by the Governor, acts as the Chairman of the Central Board. The deputy governors and government’s officer nominee are not entitled to vote at the meetings of the Board. The Governor and four deputy Governors are full time officers of the Bank.
22 Local Boards :Besides the central board, there are local boards for four regional areas of the country with their head-quarters at Mumbai, Kolkata, Chennai, and New Delhi. Local Boards consist of five members each, appointed by the central Government for a term of 4 years to represent territorial and economic interests and the interests of co-operatives and indigenous banks. The function of the local boards is to advise the central board on general and specific issues referred to them and to perform duties which the central board delegates.
23 Offices of RBI:The Head office of the bank is situated in Mumbai and the offices of local boards are situated in Delhi, Kolkata and Chennai. In order to maintain the smooth working of banking system, RBI has opened local offices or branches in Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna, Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The RBI can open its offices with the permission of the Government of India. In places where there are no offices of the bank, it is represented by the state Bank of India and its associate banks as the agents of RBI.
24 SCHEDULED AND NON SCHEDULED BANKS In the RBI ACT OF 1934, all banks listed in the second schedule is known as Scheduled banksIts paid up capital and reserve are not less than Rs 5 Lakhs.All Scheduled bank operations are under strict surveillance of RBI.All nationalised banks, most private sector banks, foreign banks are scheduled.Most cooperative banks are non- scheduled (not subjected to strict financial discipline).
25 Advantages of scheduled banks: A) Advantages of scheduled banks: A). RBI can rediscount the bills already discounted by them B). Their drafts, bank guarantee, letter of credit accepted in all government offices C). RBI acts as lender of last resort D). All government accounts and transaction through them E). More account holders and lesser interest payment towards deposits as compared to non scheduled banks
26 Non Schedule Banks:Small size institutions which restrict their activities to local areas.Paid up capital and reserves less than Rs 5 LakhsCan not deal in foreign exchangeAfter nationalization of banks almost all unscheduled banks weeded out.
27 Licensed BanksNo Bank can carry on the business of banking unless it hold a license granted by RBIProvisions regarding License are contained in Section 22 of the Banking Regulation Act 1949A license granted if RBI satisfied that the bank has the capacity to pay its depositors as and when they demand.License can be cancelled at any time if RBI not satisfied with the working of bank.
28 Public Sector Banks51% ownership with government PSUs include SBI, its subsidiaries and nationalized banks.Old setup therefore capital assets are moreBranches are more including those in rural areasNumber of employees is highGovernment control is moreNPA are much higher due to government interference
29 Private Sector BanksBank shall be listed as a public limited company under the Companies Act 1956.it will be governed by the provisions of Reserve bank of India Act and Banking Regulation Act.The minimum paid-up capital shall be Rs 100 Crore with promoter’s contribution being 25% or 20% in case of paid up capital is more than Rs 100 CroreThe share of banks should be listed on stock exchangeBranch licensing shall be governed by existing policy whereby banks are free to open any branches without prior approval of RBI subject to satisfactory capital adequacy and prudential accounting norms.
30 Bank shall have to observe priority sector lending targets as applicable to other banks. They are not allowed to setup a subsidiary or mutual funds in in first three years of establishment.
31 Revised guidelines issued by the RBI in Jan 2001. The major changes are:Minimum paid-up capital for a new bank should be Rs. 200 which shall be increased to Rs 300 crore in subsequent 3 yr. after establishment of businessA non banking financial company may convert in to a commercial bank. If it satisfies the criteria.A large industrial house should not promote any new bankPreference would be given to promoters with expertise of financing priority areas.
32 Public Sector Bank Vs Pvt. Sector Banks Both public and private sector banks are integral to Indianbanking system and operate under the RBI’s regulations .Ownership and functioning differ hugely.
33 Foreign BanksIn order to operate in india, the foreign banks have to obtain alicense from the Reserve Bank of India. For Granting The license, The following factors are considered:Financial soundness of the bankInternational and home country ratingEconomic and political relationsMin Capital Requirement USD 25 mn
34 Regional Rural BanksRegional Rural Banks were setup by the government of india under the Regional Rural Bank Act 1976 with the specific purpose of providing credit and other facilities to the small and marginal farmers, agriculture laborers , small entrepreneurs in rural area 196 RRBs in india 29 RRBs have negative net worth of 1800 crore Approx branches Operating in 518 districts of 26 states
35 Structure:RRBs have jointly setup by the Government of India, state Gov.and sponsor commercial Bank.Capital Requirement Rs 5 Crore( 50% Central Gov. , 15% State Gov. and 35% by the sponsor bank)Managerial assistance provided by the sponsor bank.Chairman is to be appointed by sponsor bank in consultation with NABARD.9 board of director headed by a chairmanRBI allowed to accept foreign currency deposit
36 Cooperative banksCooperative banks are a part of the set of institution( RBI, RRB,NABARD & Commercial Banks), which are engaged in financingrural & agricultural development.Cooperative Banks carried on No profit No Loss basis.Organized and managed on principal of cooperation, self help and mutual help.Government sponsored and supportedRange of services narrow than the commercial banksToo much dependence on RBI, NABARD & the governmentMultiple regulation and control authorities .
37 Services Offered By Banks The services offered by commercial banks can be classified in toServices to DepositorsServices to Borrowers for providing credit to themOther Services
38 The traditional services mainly related to Maintenance of different types of deposit accountsGrant advance through cash credit, overdraft and loanPurchasing discounting billsCollection of cheques, bills and other instrumentsIssue of performance and financial guaranteeRemittanceProvision of facilities of safe deposit and safe custodyPurchase and sale of securities
39 Personal Loan schemeLoan ParticipationSchemes for financing small industrial unitsSchemes for financing of agricultureFinancing of road transport operators, other small borrowersCredit transfer systemCollection/payment of certain periodical receipts/payments on behalf of customersCredit CardsTravelers ChequesGift ChequesLock box and night safe servicesServices after usual banking hoursOther services
41 The primary function of a commercial bank is that of a broker and dealer in society’s money. Bank mobilize a large fraction of the liquid saving of the nation , and allocate them successfully and productively to those who need it. The major portion of bank’s funds is employed by way of loans and advances from wherein banks earn interest, discounts and conversion fees.
42 Principles of Sound Lending Safety & SecurityProfitabilitySocial ResponsibilityRiskPurposeLiquidity
44 Construction of Shares Commercial BanksWorking CapitalTerm LoanMedium TermLong TermCash CreditPledgeInstallment CreditEquity LoanHypothecationIndustrial EstateOver DraftConstruction of SharesPurchasedDiscountedBillsMachineryExport FinancingPre-ShipmentPost-shipment
45 Cash Credit is the most favored method for availing credit in India. Under this system the banker fixes a cash credit limit on anannual basis, and the customer is at liberty to withdraw anyamount as and when he need.The bank fixes the cash credit limit of the borrower after studying the financial capacity, projected sales and past utilization of such limitsThe borrower has to provide security of tangible assets ( in the form of pledge or hypothecation) or guarantees.Interest is charged only on actual amount withdrawn
46 Pledge is the bailment of goods as security for the payment of debt or performance of a promise.The goods can be pledge by the owner, a joint owner, a mercantile agent.The banker can retain the goods for the payment of the debt, for any interest or expensesIn case of non-payment, the banker has the right to sell the goods and recover the amount of loan along with the interest and expenses.The right is not limited by the law of limitation.Banker must take good care of goods and return them after the payment is made along with accretion.
47 HypothecationHypothecation is the practice where a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral, but it is "hypothetically" controlled by the creditor in that they have the right to seize possession if the borrower defaults. A common example occurs when consumers enter into a mortgage agreement, where their house becomes collateral until the mortgage loan is paid off.
48 An overdraft is a short term credit facility. It is given to a current account holder, by which he is allowed to withdraw more moneyfrom his account then what is actually stands to his credit.For granting an OD limit, the banker may insists on either a collateral security or grant it on the personal security of the borrower.Interest is charged on the actual amount utilized and for the period that it is utilized
49 Short term facility for providing working capital is through BillsShort term facility for providing working capital is throughdiscounting and purchasing of bills.Banker deduct certain amount from the face value as discountBills are considered highly liquid security
50 Term LoanLoan can be broadly be categorised on the basis of the period sanctioned or on the basis of purpose of the loan. On the basis of period , they can be short term loan , medium term loan & Long term loan or a bridge loan Composite or consumption loans depends on their purpose.
51 Short Term Loan are loans which are granted for a period not exceeding one year. These are advances to meet the working capital requirements, against security of movable assets like goods, share, debentures etc. Medium and long term loan are usually called term loan. These loans are extended for periods ranging from one year to about ten year on the security of existing industrial assets or the assets purchased with the loan. Term loans are used for purchase of capital assets, for expansion, modernisation or diversification. Bridge Loans are essentially short term loans that are granted pending disbursement of sanctioned term loans.
52 Composite loans is taken for buying capital assets as well as for meeting working capital requirements. Consumption Loan is for consumption purpose like education, medical needs and automobiles.
54 Pre-shipment or Packing Credit Pre-shipment or Packing Credit implies the financial assistance provided to exporters prior to shipment of goods. It is essentially working capital made available for financing / purchasing/processing/manufacturing/transporting/warehousing of goods meant for export. All cost are eligible for being financed under packing credit
55 The viability of proposal, the integrity of the borrower and the capacity of the exporter to execute he order must be carefully examined.The export contract should be valid and contain all detail.The exporter should have complied with the exchange control regulation.The commodity to be export should be allowed for export.Export should not be in the caution list of RBISeparate account should be opened for each packing credit except when running account facility is allowedPacking credit advances are generally granted on secured basis only.Pre-shipment finance is granted for 180 days. In case bank approves, it can be extended for another 90 days.
56 Post-shipment Finance Post-shipment finance facility is granted to bridge the gap between the shipment of goods and the realization of proceeds.
57 The export document should be submitted within 21days from the date of export. These documents, e.g. invoice, packing list, weight list, insurance certificate or original bills of lading should not be inconsistent with each otherThe insurance policy should be adequate and properly signed, dated and stamped.Bill of lading should also be properly signed, dated and stamped and in case of alteration , should be properly authenticated.
58 Letter of CreditLetters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each part personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.
59 Revolving Letter of Credit: Revolving Letter of Credit is used when the delivery of goods is in form of partial/ multiple shipments. Revolving Letter of Credit keeps on revolving and is not restricted to a single transaction. Revolving Letter of Credit (LC) can be utilized for subsequent business transactions over a period of time on a continuous basis to the extent of limit sanctioned. The seller/buyer does not have to go to the bank for sanction of fresh limits every time he gets a new order for executing the same.
60 Back to Back Letter of Credit: A Letter of Credit (LC) is a mode of making payments for trade transactions. An Letter of Credit is a highly popular payment mode because it allows an importer or buyer to make secure payments to the exporter or seller. Back to Back Letter of Credit, one Irrevocable Letter of Credit facilitates the seller to obtain another Letter of Credit.
61 Revocable Letter of Credit: Revocable Letter of Credit means the payment against this L/C can be revoked by the issuing bank. The buyer may either amend the Letter of Credit or cancel it without the approval of the seller. The payment against Revocable Letter of Credit is not for sure and hence this type of Letter of Credit is not commonly used. The Seller has meager chances to get loan against Revocable LC
62 Irrevocable Letter of Credit: Irrevocable Letter of Credit cannot be cancelled. This seller is Assured of payment for his supply of goods/services provided all terms and conditions of L/C are conformed to. This mode of payment is generally used in international trade transactions. As the payment against this Irrevocable Letter of Credit is Guaranteed by the issuing bank and the holder of this Irrevocable Letter of Credit (seller) can borrow short term finance from any other bank or lending institution at a very low rate of interest and within a very short time.