Chapter 06 indian banking systemPresentation Transcript
INDIAN BANKING SYSTEM AND BASIC BANKING CONCEPTS
EVOLUTION OF BANKING STRUCTURE IN INDIA
At the time of Independence - banking structure dominated by domestic scheduled commercial banks. Non-scheduled banks, constituted a small share
First task before RBI after independence - develop sound structure on contemporary lines
Safety nets to depositors from RBI
Need for separate banking structure –
Commercial banks not tuned to needs and requirements of SME and marginal farmers, co-operatives lacked resources.
Need of combining local feel and familiarity of rural problems characteristic of co-operatives and professionalism and large resource base of commercial banks.
INDIA BANKING SYSTEM – STRUCTURE SCHEDULED BANKS SCH. COMMERCIAL BANKS SCH. COOP. BANKS PUBLIC SEC BANKS PVT. SECTOR BANKS FOREIGN BANKS RURAL REGIONAL BANKS NATIONALIZED BANKS SBI & ITS ASSOCIATES OLD PVT. BANKS NEW PVT. BANKS SCH. URBAN COOP BANK SCH. URBAN COOP BANK
Established - April 1, 1935
Ownership - originally privately, Nationalized 1949
Central Office –
Governor sits and policies are formulated
initially established in Calcutta; permanently moved to Mumbai in 1937
"... to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage
RESERVE BANK OF INDIA ACT 1934
Regulator and supervisor of financial system
Banker to the Government
Monopoly of Note Issue (other than Rupee One notes and coins and subsidiary coins)
Manager of Foreign Exchange
Performed by RBI under guidance of Board for Financial Supervision (BFS)
Constituted in November 1994; Committee of the Central Board of Directors
consolidated supervision of financial sector - commercial banks, FIs, and NBFCs
Chairman - Governor
Vice-Chairman - Dy Governor in charge of banking regulation and supervision
Co-opted Directors from Central Board - 4
Term – 2 years and is.
Ex-officio members - Dy Governors
Financial Supervision- BFS (Contd.)
Dy Governor is Chairman and 2 Directors as members
upgrading quality of statutory audit and internal audit functions in Banks and FIs
bank inspections; off-site surveillance, strengthening of role of statutory auditors ; strengthening of internal defences of supervised institutions; legal issues in bank frauds; divergence in assessments of NPA and supervisory rating model
RBI – CHANGING SCENARIO
REAL TIME GROSS SETTLEMENT (RTGS) SYSTEM - IN compliance with Basle Core Principles for Systemically Important Payment Systems of BIS
INdianFInancialNETwork –INFINET – a ‘ ` one-of-a-kind’ initiative for sharing IT expensive resources
` ANYWHERE BANKING’ THROUGH CBS, ‘ANYTIME BANKING’ -National Financial Switch for interconnecting ATMs
IMPROVING CG- set up through “fit and proper” criteria
INTEGRATED RISK MANAGEMENT SYSTEMS
NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT) SYSTEM and NATIONAL ELECTRONIC CLEARING SERVICE (NECS).
BANKING SECTOR REFORMS
Several committees constituted to resolve problems of Commercial Banking in India, two most important are-
a) Narasimham Committee I (1991)- aimed at bringing “ operational flexibility ” and “ functional autonomy ” so as to enhance efficiency, productivity and profitability
b) Narasimham Committee II (1998)- bringing structural changes so as to strengthen banking system to make it more stable
NARISHIMAM COMMITTEE REPORT I
Four-tier hierarchy for banking structure - three to four large banks with SBI at top
Parity in treatment of Private sector banks with Public sector banks
Follow BIS/Basel norms
Lifting of ban - setting new banks in Private sector
Liberal Governmental policies for expansion of foreign bank branches and rationalization of foreign operations of Indian banks
Major Recommendations (Contd.)
Progressively bring down - Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)
Tighten prudential norms for the commercial banks
Deregulate interest rates
Redefine priority sector - to comprise SME and marginal farmers, and EWS
Increase competition in lending between DFIs and banks
Disinvest in PS banks
Each public sector bank - set up at least one RBS and treated at par with RRBs
Major Recommendations (Contd.)
Narasimham Committee Report II
Merger of strong PS banks and closure of some weaker banks
Amicable golden handshake scheme for surplus banking sector staff
Setting up ARC to tackle NPAs in banks
Enhancement of capital adequacy norms
Healthy competition between PS banks and private sector banks essential.
Competition Enhancing Measures
Operational autonomy and reduction of public ownership in PS Banks
Transparent entry norms
Banks allowed to diversify product portfolio and business activities
Roadmap for foreign banks for M &A of private sector banks and NBFCs
Instructions and guidelines on ownership and governance in private sector banks
Measures enhancing role of
Disbanding administered interest rates and enhanced transparency and disclosure norms
Facilitation of improved payments and settlement mechanism
Dematerialization and securitization of assets developed
Introduction of international best practices norms on Capital to Risk Asset Ratio (CRAR), Accounting
Strengthening Risk management mechanisms
Higher graded provisioning for NPAs
Implementation of Basel II
Institutional and legal measures
Setting up of DRT, ARC , Lok-Adalat, CCIL and CIBIL
Enactment of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002,
Establishment of Board of Financial Supervision as apex supervisory authority
Strengthening CG , Audit, enhance due diligence, fit and proper test for directors.
Technology related measures
Introduction of Negotiated Dealing System (NDS) for screen based trading in Govt. securities and Real Time Gross Settlement System (RTGS)
PLR or prime lending rate - rate of interest at which banks lend to their credit-worthy or favoured customers.
It is treated as a benchmark rate for most retail and term loans.
influenced by RBI’s policy rates — the repo rate and cash reserve ratio
Deposit Rates - Interest rate paid on deposit accounts by commercial banks and other FIs
Bank rate - rate of interest which RBI charges on loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by RBI to control money supply
Repo Rate - rate at which banks borrow from RBI. A reduction in repo rate will help banks to get money at a cheaper rate.
Reverse Repo rate - rate at which RBI borrows money from banks. An increase in Reverse repo rate can cause banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system. Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man.
Difference between Bank Rate and Repo Rate
While repo rate - applicable to short-term loans and used for controlling amount of money in market, bank rate - a long-term measure and governed by long-term monetary policies
STATUTORY LIQUIDITY RATIO (SLR)
To restrict expansion of bank credit.
To augment investment of the banks in Government securities.
To ensure solvency of banks.
Commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively
MAINTAINED IN THE FORM OF :
Gold – marked to market
Unencumbered approved securities or Gilts - valued at a price as specified by RBI
CURRENT SLR – 24%
SLR RATE = Total Demand/Time Liabilities x 100%
CASH RESERVE RATIO (CRR)
Banks required to hold a certain proportion of their deposits in the form of cash, deposited with RBI/currency chests, considered as equivalent to holding cash with themselves
This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by RBI - CRR or Cash Reserve Ratio
Also known as - Cash Asset Ratio or Liquidity Ratio
Higher the ratio (i.e. CRR), lower is amount that banks will be able to use for lending and investment .