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Banking System in India
Chapter 5
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DEFINITION OF BANKING “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- “any company which transacts the business of banking in India.” (they follow withdrawal by cheque, draft, order etc.- Payment Mechanism)
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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
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BANKING SYSTEM IN INDIA
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SCHEDULED BANK: NON 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.5 lakh(100cr.-for New) It must satisfy RBI- not in a manner detrimental to the interest of depositor NON SCHEDULED BANK: Not entitled to facility of borrowing & rediscounting
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Co-operative Banks
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SCHEDULED COMMERCIAL BANKS
PUBLIC SECTOR BANKS SBI & Associates (SBI Act, 1955) Nationalised Banks ( ) PRIVATE SECTOR BANKS: Post Reform Period 24 banks in pvt. Sector Banks Initial minimum paid up capital from Rs.100 to Rs.200 crore.
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REGIONAL RURAL BANKS Bank with local knowledge and familiarity
Organizational ability to mobilize deposits, access to money market and modernized outlook CAPITAL- Authorised-1 cr.- paid up-50laks- -50% subscribed by Central Govt.-15%State Govt. – 35% by Sponsor Bank
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FOREIGN BANKS: Registered outside India- to operate in India the minimum capital requirement of US $25 million, spread over 3 branches, that is, US$ 10million for the 1st and 2nd bank respectively and US$5million for the 3rd branch The no. of licenses fixed is 12 per year both for new and expansion by existing banks
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Progress of banking in India
Nationalization of banks in 1969: 14 banks were nationalized Branch expansion: Increased from 8260 in 1969 to in 2006 Population served per branch has come down from to 16000 A rural branch office serves 15 to 25 villages within a radius of 16 kms However, at present only 32,180 villages out of 5 lakh have been covered
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Progress of banking in India
Deposit mobilization: (20 years)- 700% or 7 times (20 years)- 3260% or 32.6 times (11 years)- 1100% or 11 times Expansion of bank credit: Growing at 20-30% p.a. thanks to rapid growth in industrial and agricultural output
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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
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Commercial Banks Functions Accepting Deposits
Providing loans and advances Collecting and dealing with negotiable instruments Issuing letter of credit Dealing in foreign exchange Issuing, underwriting and dealing in government securities, shares, debentures & other security& investment Providing safe deposit vaults Doing agency business Giving guarantees Merchant business
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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, Exceeding 2 years Loss Assets: are those NPAs where 100% loss has been identified but not yet written off in the books of accounts
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Capital Adequacy Norms (8%)
Tier I Capital: Paid-up Capital Statutory and other disclosed free reserves including share premium Capital reserves
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Capital Adequacy Norms
Tier II capital consists: Undisclosed reserves & cumulative perpetual preference shares Revaluation Reserves at a discount of 25% Surplus provisions/loss reserves subject to a maximum of 1.25% weighted Risk Assets Hybrid Debt Capital instrument Subordinated Debt
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Capital Adequacy Formula
Capital Adequacy=Capital Funds * 100 Weighted Risk Assets
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MANAGEMENT Board of Directors: Wholetime Chairman:
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, 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
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CREDIT CREATION DEPOSITS PRIMARY DEPOSITS DERIVATIVE DEPOSITS
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MULTIPLE CREATION OF CREDIT
LOANS & ADVANCES MONEY AT CALL & SHORT NOTICE DISCOUNTING OF BILLS INVESTMENTS
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MAXIMUM EXPANSION OF LOANS & DEPOSITS
BANK DEPOSIT RETAINED AS RESERVE LENT 1ST 10,000.00 2,000.00 8,000.00 2ND 1,600.00 6,400.00 3RD 1,280.00 5,120.00 4TH 1,024.00 4,096.00 5TH 819.20 3,276.80 6TH 655.36 2,621.44 7TH 524.29 2,097.15 8TH 419.43 1,677.68 9TH 335.54 1,342.14 10TH 268.43 1,073.70 TOTAL 44,631.21 8,926.25 35,704.92 ADDIT.L 5,368.79 1,073.15 4,295.08 GRAND TOTAL 50,000 40,000.00
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DEPOSIT MULTIPLIER & CREDIT CREATION FORMULA
K= 1/r K= Deposit multiplier r= ratio of cash reserve to deposit
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LIMITATIONS OF CREDIT CREATION
ADEQUATE CASH RESERVE AVAILABILITY OF SECURITIES QUANTITY OF MONEY IN CIRCULATION ATTITUDE OF PEOPLE POLICY OF THE CENTRAL BANK NATURE OF BUSINESS CONDITIONS LEAKAGES BEHAVIOUR OF OTHER BANKS USE OF CHEQUE
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CENTRAL BANKING AND ITS FUNCTIONS
RESERVE BANK OF INDIA CENTRAL BANKING AND ITS FUNCTIONS
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Origin of RBI In 1921, 3 Presidency Banks were amalgamated to form the Imperial Bank of India Existence in 1st April,1935 under RBI Act Setting up of such institution was based on recommendation of Hilton Young Commission in the year 1926.
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CONSTITUTION OF RBI CAPITAL – Rs.5 crore
5lakh fully paid up shares of Rs.100 each Rs. 2.2 lakhs subscribed by the Central Government Nationalization of RBI in 1st January,1949, entire share capital was acquired by Central Government
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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
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LOCAL BOARD FOR EACH REGIOANAL AREAS OF THE COUNTRY THERE IS LOCAL BOARD: WESTERN – MUMBAI (Head Quarters) EASTERN – KOLKOTA NORTHERN- NEW DELHI SOUTHERN- CHENNAI Functions: 1)Advising the Central Board 2) Performing other duties delegated by Central Board
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FUNCTIONS OF THE RBI 1) MONOPOLY OF NOTE ISSUE- THROUGH
I) ISSUE DEPARTMENT II) BANKING DEPARTMENT MAINTAINS 18 ISSUE OFFICES; AND NETWORK OF 4301 CURRENCY CHEST AND 4027 SMALL COIN DEPOSITS BASIS – I) PROPORTIONAL RESERVE SYSTEM – 40% to consist of coins, bullions, securities BULLIONS - MINIMUM RESERVE SYSTEM- SINCE Rs.515cr.of assets- of which- Rs.400cr. In foreign securities and Rs.115cr. in gold coins & bullions
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FUNCTIONS CONTD. … BANKER TO GOVERNMENT ADVISER 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
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INSTRUMENTS OF CREDIT CONTROL
GENERAL OR QUANTITATIVE BANK RATE OR THE DISCOUNT RATE POLICY OPEN MARKET VARIATIONS VARIABLE RESERVE RATIO (CRR, SLR, NLR) SELECTIVE CREDIT CONTROL 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 MORAL SUASION
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CRR- CASH RESERVE RATIO-5.5%
The Scheduled commercial banks are required to maintain a minimum cash balance with the Reserve Bank at the close of business on any day. SLR- STATUTORY LIQUIDITY RATIO-24% Commercial banks have to maintain liquid assets in cash, gold and unencumbered Government securities amounting to not less than 20% of the total demand and time liabilities.
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MONETARY POLICY AND RECESSION
BANK RATE MARKET RATE CREDIT OFFTAKE MONEY SUPPLY EXCESS DEMAND PRICES RECESSION (6%- BANK RATE; 5.5%- REPO RATE)
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FINANCIAL INCLUSION Financial inclusion is delivery of banking services at affordable cost to the vast sections of disadvantaged and low income groups Measures: Make ‘no-frills Account’ Adopt one district in each state for 100% financial inclusion Credit Card facility involving credit upto Rs without security Printed materials made available to retail customers in the concerned regional language ‘Know Your Customers’ (KYC) procedure simplified for low income group people
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MERGERS & ACQUISITIONS
IN BANKING INDUSTRY
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Approval of Merger RBI approved of the merger of HDFC Bank Ltd. And Centurion Bank of Punjab Ltd. As on May 23, 2008. All Branches of Centurion Bank of Punjab shall function as branches of HDFC Bank from that date. Balance Sheet of the combined entity will be at Rs.1,63,000 cr.
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STRENGTHS OF MERGING ENTITIES
INCEPTION AT THE SAME TIME NEW GENERATION PRIVATE BANKS GEOGRAPHIC FIT HDFC Bank : asset size of Rs. 131,439 crore as of the third quarter of , 1,100 branches 21,477 employees NPA 0.4% CBoP Bank : Rs. 25,404 crore 390 branches 7,500 employees NPA 1.7% Both have had mergers in past CPoB has higher share of retail (60%) in its total loan portfolio than HDFC Bank (51%). 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
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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, 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, future has to see many mergers in the Indian Banking Industry
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ELECTRONIC BANKING
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POPULAR ELECTRONIC DELIVERY CHANNELS
ATMs SMART CARD TELE BANKING INTERNET BANKING
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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, 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
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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, the value is debited and the balance automatically comes down
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FACETS OF E-BANKING Customer- to- Bank E-Banking
Bank- to- Bank E-Banking Electronic Central Banking Intranet Procurement
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E-Banking Transactions
Account Enquiry Fund Transfer Payment of Electricity, Water, Telephone Bills Online payment for transactions actually performed through Internet Request for issuance of cheque book, draft etc. Statement of Accounts Access to latest schemes Access to rates of interest & other service charges
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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. Digital signature is compulsory There should be minimum safety standards like asymmetric crypto system
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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. While shopping one only gives phone no. to merchant, who would then send on a special mobile phone an sms to the server of the mobile service provider. 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 merchant and the customer will then get an sms confirming the completion of transaction. The exchange normally happens within a minute
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