Banking and FinancialInstitutionsBy: Abbas vattoliAsst: ProfessorDept of CommerceAmal College Nilambur
Syllabus
Origin of the term Bank• Italian word – ‘banco’• Latin word – ‘bancus’• Greek word – ‘banque’• French word – ‘banque’     ...
Definition• Sec 5(1)(c ) of indian Banking regulation Act  1949 defines• The term banking company as any company  which tr...
• In sec 6 various activities included in banking  are listed such as lending, borrowing, accepting  and discounting of bi...
Evolution of banking• Banking existed in babylonia as early as in 2000  BC• Temples were used a place for money lending• B...
Ancestors of modern banks• Merchant banks- traders become financiaers• Money lenders- only lends money• Goldsmiths- for sa...
Role and Importance of Banks•   Deposit mobilization•   Granting of credit•   Creation of credit•   Channalize funds into ...
Acts relating to banks• Banking [Regulation] Act, 1949• Deposit Insurance Corporation Act, 1961• Industrial Development Ba...
Classification of banksbased on functions• Commercial banks or deposit banks• Industrial banks or investment banks• Agricu...
Nature of commercial banking• They are the intermediaries between lenders and  borrowers• They are not merely purveyors of...
Commercial banking principles•   Profitability•   Liquidity•   Security of safety•   Principle of social responsibility of...
Functions of commercial banksPrimary functions• Accepting deposits• Lending money• Investment of funds• Creation of moeny
Type of deposits account• Current Accounts-by business people, numerous  transactions, no interest, overdraft facility• Sa...
Type of advances•   Loans•   Overdrafts•   Cash credits•   Discounting of bills
Subsidiary or secondary functionsAgency services( as an agent of the customer)• Collection of money• Making of payments• ...
 General Utility serivices• Safe custody of valuables(accepting valuables for safe  custody or hiring out safe deposit lo...
New lines of activities of commercialbanks•   Rendering of merchant banking services•   Underwriting of shares and debentu...
Classification of commercial banksOn the basis of lending practices• Pure banking – lend only for short period to  indust...
Classification of commercial banksOn the basis of structure of commercial banking• Group banking – a group of banks separ...
• Correspondent banking – Unit banks in small towns  are linked with big correspondent banks situated in  nearby bigger to...
Other systems of commercial banking• Universal banking – a commercial bank offers a  wide variety of banking and financial...
Functions of Central bank Issuing currency notes• Principle of Note issue –• Currency principle(100% gold backing) and  b...
• Maximum fiduciary system• Proportional fiduciary system (since 1956 india  is on this system)• Minimum reserve system
acting as a banker to the state or governmentCentral bank as the bankers bankController of creditActing as the custodi...
Credit control• Credit control means regulating  credit(expansion and contraction) according to  the requirements of the e...
Objectives credit control/monetarypolicy•   Internal price stability•   Economic stability•   Full employment•   Economic ...
Methods of credit controlQuantitative of general methods• Bank rate policy – bank rate or discount rate is  the official ...
• Variable cash reserve ratio(CRR)• Variation of statutory liquidity ratio(SLR)
Current ratesPolicy rates• Bank rate- 9%• Repo rate- 8%• Reverse repo- 7%Reserve ratios• CRR- 4.5%• SLR- 23%Lending/ De...
Qualitative or selective credit control• Which control the quality or uses of credit. In  other words it encourages credit...
Types of qualitative credit contol• Fixation of margin requirement on secured loans• Regulation of consumer credit• Contro...
History of development of indianbanking system• Banking in the form of money lending was in  existance during vedic period...
• Bank of hindustan, the first bank in india started  by britishers in 1770.• Presidency bank of bengal 1806• Presidency b...
• Imperial bank was formed in 1921 through the  presidency banks of bengal bombay and madras• RBI was established in 1 st ...
• Today there are 27 public sector banks• 30 private sector scheduled commercial banks• 2 private sector non scheduled com...
Non performing aseets• NPA is an asset which ceases to generate income  for the bank. It mean an advance or credit  facili...
Impact of NPA• They do not generate income• They enhance the administrative, legal and  recovery costs of loans• They redu...
Early indicators of NPA• Financial warning signal – default in repayment,  falling profits, rising level of bad debts, dec...
• Managerial warning signal- poor financial  control, frequent change in ownership,  undertaking of undu risks, window dre...
Factors responsible for NPAInternal factors• Diversion of funds by the borrowers• Delay and consequent increase in cost o...
Techniques for managing NPA•   Ensure that loans are diversified across sectors•   Loans are granted to credit worthy borr...
Banking legislations in india• The Negotiable instruments Act 1881• The banking regulation act 1949• The reserve bank of i...
Banking ombudsman scheme• A banking ombudsman is a person appointed by  the reserve bank of india to redress customer  com...
E Banking• E banking means conduct of banking operations  through electronic means of devices, such as  computers, telepho...
Credit cardA credit card is an instrument which provides  instantaneous credit facilities to its holder to  purchase good...
Electronic Fund Transfer• It is a scheme of RBI introuduced in 1996.• It helps banks to offer their customers money  tran...
NABARD• National Bank for Agriculture and Rural  Development• an apex Development Bank for promotion and  development of a...
NABARDs Roles and Functions• Credit Functions-planning, dispensation and  monitoring of credit• Developmental and Promotio...
NABARD’s Initiatives• SHG Bank linkage programme started as a pilot project  in 1992 with 500 SHGs• Farmers Clubs• Rural I...
Rural banking• Rural banking and micro finance are needed for  sustainable development• Rural banks focus on agriculture• ...
Banking sector reforms in india• The NarasimhamCommittee laid the foundation  for the reformation of the Indian bankingsec...
• Rationalisation of Foreign Operations in india• Special Tribunals and Asset Reconstruction  Fund• Restructuring of Weak ...
Capital Adequacy Ratio• The Committee on Banking Regulations and Supervisory  Practices (Basel Committee) had released the...
Basel Norms• Basel is a city in Switzerland. It is the headquarters  of Bureau of International Settlement (BIS)• Currentl...
Industrial Development Bank ofIndia (IDBI)• established in July 01, 1964 a subsidiary of RBI• the apex institute to financ...
• Direct assistance is provided by way of project  loans, underwriting of and direct subscription to  industrial securitie...
Industrial Finance Corporation ofIndia (IFCI)• established in 1948 under an Act of Parliament• the first Development Finan...
State Financial Corporations• A Central Industrial Finance corporation was set  up under the industrial Financecorporation...
Unit Trust of India• created by the UTI Act 1963• For more than two decades it remained the sole  vehicle for investment i...
Small Industries Development Bankof India (SIDBI)• set up on April 2, 1990 under an Act of Indian  Parliament• Principal F...
Thank you        • abbasvattoli@yahoo.com      • www.dcamal.wordpress.com
Banking and Financial Institutions (as per UGC NET syllabus)
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Banking and Financial Institutions (as per UGC NET syllabus)

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a power point presentation on banking and financial institutions convering origin and history of banking in india, commercial banking classification and functions, investment banking role and initiatives, NPA warning signals and mannagement of NPA, NABARD and its rural banking innovations.

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Banking and Financial Institutions (as per UGC NET syllabus)

  1. 1. Banking and FinancialInstitutionsBy: Abbas vattoliAsst: ProfessorDept of CommerceAmal College Nilambur
  2. 2. Syllabus
  3. 3. Origin of the term Bank• Italian word – ‘banco’• Latin word – ‘bancus’• Greek word – ‘banque’• French word – ‘banque’ Which mean bench• German word – ‘banc’ or ‘banck’ which means a joint stock fund.
  4. 4. Definition• Sec 5(1)(c ) of indian Banking regulation Act 1949 defines• The term banking company as any company which transacts the business of banking in india.• Sec 5(1) (b) defines the term banking as accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise.
  5. 5. • In sec 6 various activities included in banking are listed such as lending, borrowing, accepting and discounting of bills, dealing in foreign currency, deposit lockers, trasfer of money,etc• Sec 8 prohibits a bank from buying and selling goods• Sec 9 prohibits from holding immovable property
  6. 6. Evolution of banking• Banking existed in babylonia as early as in 2000 BC• Temples were used a place for money lending• Banking confined money lending• Bank of england established in 1694• In india banking was in existance during vedic period• Modern banks emerged only during industrial revolution(1750 to 1850 )
  7. 7. Ancestors of modern banks• Merchant banks- traders become financiaers• Money lenders- only lends money• Goldsmiths- for safe keeping of valuables and money
  8. 8. Role and Importance of Banks• Deposit mobilization• Granting of credit• Creation of credit• Channalize funds into productive investments• Provision of finance to the government• Protecting the funds of depositors• Provision of remittance facilities• Provision of medium of exchange• Discharge of social responsibility• Innovative services
  9. 9. Acts relating to banks• Banking [Regulation] Act, 1949• Deposit Insurance Corporation Act, 1961• Industrial Development Bank of India Act, 19• Export-Import Bank of India Act, 1981• Industrial Reconstruction Bank of India Act, 1984• National Housing Bank Act, 1987• Regional Rural Banks Act, 1976• Reserve Bank of India Act, 1934• Small Industries Development Bank of India Act, 1989• State Bank of India Act, 1955
  10. 10. Classification of banksbased on functions• Commercial banks or deposit banks• Industrial banks or investment banks• Agricultural banks-(agricultural co operative banks and land mortgage or development banks)• Exchange banks(export/import)• Savings banks (small savings- not found in india)• Central banks( banker’s bank)
  11. 11. Nature of commercial banking• They are the intermediaries between lenders and borrowers• They are not merely purveyors of money , but also manufacturers of money• It renders variety of services to the depositors and general public• They are the oldest banking institution and hold lien share in the total banking operation
  12. 12. Commercial banking principles• Profitability• Liquidity• Security of safety• Principle of social responsibility of social good• Purpose of advances• Mass banking
  13. 13. Functions of commercial banksPrimary functions• Accepting deposits• Lending money• Investment of funds• Creation of moeny
  14. 14. Type of deposits account• Current Accounts-by business people, numerous transactions, no interest, overdraft facility• Savings bank account- for promoting savings among people, low rate of interest, restrictions on no and size withdrawals.• Fixed deposits account- fixed amt for fixed period at fixed interest. Time liability and get high interest.• Recurring deposits account
  15. 15. Type of advances• Loans• Overdrafts• Cash credits• Discounting of bills
  16. 16. Subsidiary or secondary functionsAgency services( as an agent of the customer)• Collection of money• Making of payments• Purchase and sale of securities• Advising customers regarding stock exchange investments• Arranging for remittances of funds(Bank draft, mail transfers, telegraphic transfer)• Acting as trustee, executor, administrator or attorney of customers• Serving as correspondents and representatives of customers
  17. 17.  General Utility serivices• Safe custody of valuables(accepting valuables for safe custody or hiring out safe deposit lockers)• Dealing in foreign exchange business (export finance, import credit, deffered payment guarantee, forward contracts, issue of solvency certificates, letter of introduction, provision of trade information)• Issue of travelers letter of credit, circular note, travelers cheques• Acting as refereee• Collecting information about other business men for customers
  18. 18. New lines of activities of commercialbanks• Rendering of merchant banking services• Underwriting of shares and debentures• Factoring services• Lease financing• Housing finance• Issue of credit and debit cards• Consultancy services• Setting up of mutual funds
  19. 19. Classification of commercial banksOn the basis of lending practices• Pure banking – lend only for short period to industries and commerce• Investment banking – provide medium and long term funds to industries and commerce• Mixed banking – provides both short term and long term finance to industries and commerce
  20. 20. Classification of commercial banksOn the basis of structure of commercial banking• Group banking – a group of banks separately incorporated are brought under the control of a holding company. It was popular in USA during 1930s• Chain banking – a number of separately incorporated banks are brought under common control by a device other than holding company. (inter locking of directors)
  21. 21. • Correspondent banking – Unit banks in small towns are linked with big correspondent banks situated in nearby bigger towns so the correspondent banks are the intermediaries through which all the unit banks are linked with the banks in the very important financial centers• Branch banking – an individual bank carries on banking business with a network of branches• Unit banking – an individual bank carries on banking business through a single office or through few offices
  22. 22. Other systems of commercial banking• Universal banking – a commercial bank offers a wide variety of banking and financial services beyond those offered by a traditional bank.• Narrow banking – a bank which provides only limited banking activities in a particular region
  23. 23. Functions of Central bank Issuing currency notes• Principle of Note issue –• Currency principle(100% gold backing) and banking principle• Systems of note issue –• Fixed fiduciary system (central bank can issue notes up to a limit call fiduciary limit with out any gold backing.
  24. 24. • Maximum fiduciary system• Proportional fiduciary system (since 1956 india is on this system)• Minimum reserve system
  25. 25. acting as a banker to the state or governmentCentral bank as the bankers bankController of creditActing as the custodian of the nations gold and foreign exchanges reservesDevelopmental functions of central bank
  26. 26. Credit control• Credit control means regulating credit(expansion and contraction) according to the requirements of the economy• channelizing the credit into productive uses
  27. 27. Objectives credit control/monetarypolicy• Internal price stability• Economic stability• Full employment• Economic growth• Stability in money market• Stability of foreign exchange rates• International economic equilibrium
  28. 28. Methods of credit controlQuantitative of general methods• Bank rate policy – bank rate or discount rate is the official minimum rate at which the central bank rediscounts eligible bills of exchange offered by commercial banks and other financial institutions.(lending rate of the CB)• Open market operation – purchase and sale of govt securities in the open market
  29. 29. • Variable cash reserve ratio(CRR)• Variation of statutory liquidity ratio(SLR)
  30. 30. Current ratesPolicy rates• Bank rate- 9%• Repo rate- 8%• Reverse repo- 7%Reserve ratios• CRR- 4.5%• SLR- 23%Lending/ Deposit rates• Base rate – 10 -10.5%• Deposit rate – 8- 9.5
  31. 31. Qualitative or selective credit control• Which control the quality or uses of credit. In other words it encourages credit to essential uses and discourages credit to non essential uses•
  32. 32. Types of qualitative credit contol• Fixation of margin requirement on secured loans• Regulation of consumer credit• Control of bank advances through directives• Rationing of credit – central bank limit the total amount of loans or specific catogories loans granted by commercial banks• Moral suasion (persuade)• Direct Action (punishment against violating banks)• Publicity(educating and influencing public openion)
  33. 33. History of development of indianbanking system• Banking in the form of money lending was in existance during vedic period• During pre independence period banking was mainly carried out by• Indigenous bankers and money lenders• Indigenous bankers are individuals or firms dealing in hundies and some times accepts deposits• Money lenders are persons who lend their own money mainly for consumption.
  34. 34. • Bank of hindustan, the first bank in india started by britishers in 1770.• Presidency bank of bengal 1806• Presidency bank of bombay 1840• Presidency bank of madras 1846• The first joint stock bank in india is Oudh commercial bank in 1881 followed by PNB 1895
  35. 35. • Imperial bank was formed in 1921 through the presidency banks of bengal bombay and madras• RBI was established in 1 st april 1935Post independence• RBI nationalised 1st jan 1949• The banking regulation act 1949 passed• The imperial bank nationalised and converted into state bank of india in 11th july 1955• 14 major banks were nationalized I on 19th jul 1969 and 6 more banks in 15th april 1980• Several RRBs and developmental banks established
  36. 36. • Today there are 27 public sector banks• 30 private sector scheduled commercial banks• 2 private sector non scheduled commercial banks• 31 foreign banks• 196 Regional rural banks
  37. 37. Non performing aseets• NPA is an asset which ceases to generate income for the bank. It mean an advance or credit facility in respect of which the interest or installment of principal remains overdue for a period of more than 90 days with effect from 31st march 2004.
  38. 38. Impact of NPA• They do not generate income• They enhance the administrative, legal and recovery costs of loans• They reduce profitability of the lending bank• They affect banks credibility and image• They adversely affect decision making for fresh loans
  39. 39. Early indicators of NPA• Financial warning signal – default in repayment, falling profits, rising level of bad debts, decliainign sales• Operational warning signal- under utilisation of capacity, frequent labour problems, over stocking• Banking warning signals- frequent requests for further loans, delay in payment of interest or install ment due, reduction in transactions, dishonour of cheques, opeing account with other banks, etc
  40. 40. • Managerial warning signal- poor financial control, frequent change in ownership, undertaking of undu risks, window dressing• External warning signal – economic recession, change in govt policies, new competition
  41. 41. Factors responsible for NPAInternal factors• Diversion of funds by the borrowers• Delay and consequent increase in cost of the project• Business failureExternal factors• Recession• Shortage of input/power• Rise in prices of inputs
  42. 42. Techniques for managing NPA• Ensure that loans are diversified across sectors• Loans are granted to credit worthy borrowers• Improving its monitoring system• React to early warning signals• Knowing clients profile thoroughly• Adapting credit rating system•
  43. 43. Banking legislations in india• The Negotiable instruments Act 1881• The banking regulation act 1949• The reserve bank of india act 1934
  44. 44. Banking ombudsman scheme• A banking ombudsman is a person appointed by the reserve bank of india to redress customer complaints against certain deficiencies in banking services• It is to resolve and settle complaints relating to the provisions of banking services
  45. 45. E Banking• E banking means conduct of banking operations through electronic means of devices, such as computers, telephones, mobile phones, ATMs, etcForms of e banking• Internet banking• Mobile banking• Telephone banking• Home banking
  46. 46. Credit cardA credit card is an instrument which provides instantaneous credit facilities to its holder to purchase goods or services from business establishments enrolled as members of the credit card systemDebit cardsIt also a payment card. It is used to obtain cash, goods or services automatically deviting the payments to the card holders bank account instantly upto the credit balance which exists in the customers bank accoun
  47. 47. Electronic Fund Transfer• It is a scheme of RBI introuduced in 1996.• It helps banks to offer their customers money transfer service from one account to another account of a bank branch both intercity and intra city and also from one account of one bank to another account of another bank in the same city or different cities
  48. 48. NABARD• National Bank for Agriculture and Rural Development• an apex Development Bank for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts• Established in 12 july, 1982, by an Act of Parliament
  49. 49. NABARDs Roles and Functions• Credit Functions-planning, dispensation and monitoring of credit• Developmental and Promotional Functions- helping RRBs and co operative banks for growth• Supervisory Functions- in respect of cooperative banks and Regional Rural Banks• Role in Training
  50. 50. NABARD’s Initiatives• SHG Bank linkage programme started as a pilot project in 1992 with 500 SHGs• Farmers Clubs• Rural Infrastructure Development Fund (RIDF)• Watershed Development 1999-2000• Rural Innovation Fund in association with Swiss Agency for Development and Cooperation (SDC)• agreements for co-financing with 14 commercial banks 2006-07• Kisan Credit Card• NABARD Consultancy Services (Nabcons)• NABARD Financial Services Limited, [NABFINS]
  51. 51. Rural banking• Rural banking and micro finance are needed for sustainable development• Rural banks focus on agriculture• SBI the largest bank catering to rural banking• Rural economy constitutes about 50% of GDP• Financial inclusion or inclusive development• Section 54 of the RBI Act• establishment of Regional Rural Banks in 1975• informal debt markets account for 70 to 80 per cent of debt transactions
  52. 52. Banking sector reforms in india• The NarasimhamCommittee laid the foundation for the reformation of the Indian bankingsector.• Constituted in 1991, the Committee submitted two reports, in1992 and 1998• The main recommendations of the Committee were• Reduction of SLR and CRR• Minimum Capital AdequacyRatio• Prudential Norms• Disclosure Norms
  53. 53. • Rationalisation of Foreign Operations in india• Special Tribunals and Asset Reconstruction Fund• Restructuring of Weak Banks• Reduction of Government Stake in PSBs• Deregulation on Interest Rates
  54. 54. Capital Adequacy Ratio• The Committee on Banking Regulations and Supervisory Practices (Basel Committee) had released the guidelines on capital measures and capital standards in July 1988• In India it has been implement-ed by RBI w.e.f. 1.4.92• Minimum requirements of capital fund in India: * Existing Banks 09 % * New Private Sector Banks 10 % * Banks undertaking Insurance business 10 % * Local Area Banks 15%• Capital Fund has two tiers - Tier I capital and Tier II
  55. 55. Basel Norms• Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement (BIS)• Currently there are 27 member nations in the committee.• Basel guidelines refer to broad supervisory standards formulated by this group of central banks• India adopted Basel 1 guidelines in 1999.• In June ’04, Basel II guidelines were published by BCBS• In 2010, Basel III guidelines were released
  56. 56. Industrial Development Bank ofIndia (IDBI)• established in July 01, 1964 a subsidiary of RBI• the apex institute to finance the industries and it also coordinates with the other banks for financing• In 1976 it was converted as the autonomous body• It become IDBI ltd October 01, 2004• The merger with idbi bank ltd became effective from April 02, 2005• the new name idbi bank ltd became effective
  57. 57. • Direct assistance is provided by way of project loans, underwriting of and direct subscription to industrial securities, soft loans, technical refund loans, etc• indirect assistance is in the form of refinance facilities to industrial concerns
  58. 58. Industrial Finance Corporation ofIndia (IFCI)• established in 1948 under an Act of Parliament• the first Development Financial Institution in the country to cater to the long-term finance needs of the industrial sector• Converted to Joint-Stock Company 1993• Products and services include• Financial Products• Project Development• Corporate Advisory services• Nodal Agency for Sugar Development Fund
  59. 59. State Financial Corporations• A Central Industrial Finance corporation was set up under the industrial Financecorporations Act, 1948 in order to provide medium and long term credit to industrialundertakings which fall outside normal activities of commercial banks• State financial Corporations Act 1951 was passed in the parliament• There are 18 SFCs in india• Kerala Financial Corporation (KFC)
  60. 60. Unit Trust of India• created by the UTI Act 1963• For more than two decades it remained the sole vehicle for investment in the capital market by the Indian citizens• In mid- 1980s public sector banks were allowed to open mutual funds• its flagship and largest scheme was US 64
  61. 61. Small Industries Development Bankof India (SIDBI)• set up on April 2, 1990 under an Act of Indian Parliament• Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector• Wholly owned subsidary of idbi• an e-platform ‘NTREES Promoted by SIDBI & NSE,• NTREES will facilitate discounting of MSME
  62. 62. Thank you • abbasvattoli@yahoo.com • www.dcamal.wordpress.com

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