1. Banking System in India
Chapter 5

2. 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)

3. 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

4. BANKING SYSTEM IN INDIA

5. 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

6. Co-operative Banks

7. 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.

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

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

16. 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

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

18. 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

19. CREDIT CREATION
DEPOSITS
PRIMARY DEPOSITS
DERIVATIVE DEPOSITS

20. MULTIPLE CREATION OF CREDIT
LOANS & ADVANCES
MONEY AT CALL & SHORT NOTICE
DISCOUNTING OF BILLS
INVESTMENTS

21. 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

22. DEPOSIT MULTIPLIER & CREDIT CREATION FORMULA
K= 1/r
K= Deposit multiplier
r= ratio of cash reserve to deposit

23. 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

24. CENTRAL BANKING AND ITS FUNCTIONS
RESERVE BANK OF INDIA
CENTRAL BANKING AND ITS FUNCTIONS

25. 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.

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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.

33. MONETARY POLICY AND RECESSION
BANK RATE
MARKET RATE
CREDIT OFFTAKE
MONEY SUPPLY
EXCESS DEMAND
PRICES
RECESSION
(6%- BANK RATE; 5.5%- REPO RATE)

34. 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

35. MERGERS & ACQUISITIONSIN
BANKING INDUSTRY

36. 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.

37. 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

38. 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

39. ELECTRONIC BANKING

40. POPULAR ELECTRONIC DELIVERY CHANNELS
ATMs
SMART CARD
TELE BANKING
INTERNET BANKING

41. 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

42. 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

43. FACETS OF E-BANKING Customer- to- Bank E-Banking
Bank- to- Bank E-Banking
Electronic Central Banking
Intranet Procurement

44. 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

45. 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

46. 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