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INTRODUCTION TO
INDIAN BANKING
SYSTEM
W
H
A
TISBANK?
• It derived from the “Italian” word “Banco” which means “bench” over
which transaction is happened in ancient time.
• It is the market place for the exchange of “money” & “bills”.
• Bank is a chain between the people who save money and people who
use these savings.
Definition of‘Bank’
• As per Sec.5 (b) of the Banking Regulations Act 1949 “Bank” means
accepting, for the purpose of lending or investment, of deposits of
money from the public repayable on demand or otherwise and
withdrawal by cheque, draft, order or otherwise.
• Bank is a chain between the people who save money and
people who use these savings.
Banker is onewhich
Accepting of deposits
Lending or investing(Purpose)
From Public
Payable on demand or otherwise
Withdrawal of deposits by cheque, draft
etc.
Who is a‘Customer’?
• Maintaining any type of a/c.
• Submission of a/c opening form fulfilling KYC
requirements.
• Customer of specific branch only.
• There should be some kind of continuity.
• Financial Transactions.
A deposit shouldbe
• Deposits of money, not of goods or financial assets.
• Deposits from public at large, not only from the share holders of bank.
• Deposits repayable on demand and withdrawal by cheque.
• Deposits for lending not for bank’s own purpose.
Hence, to follow the status of bank, an institution has to perform both
functions
simultaneously i.e. accepting deposits and lending to general public.
Bankers have threeAncestors:
• Goldsmith
• Money
Lenders
• Merchants
B
A
N
K
I
N
GT
E
R
M
S
Banking Terms
Deposit Rate PLR Rate
CRR Rate
Banking Terms
SLR Rate Bank Rate
Repo Rate
Banking Terms
Reverse Repo Rate
CurrentStatistics
S.No Rates As on June 2017
1 Repo Rate 6.25 %
2 Reverse Repo Rate 6.00 %
3 Cash Reserve Ratio 4.00 %
4 Statutory Liquidity Ratio 20.00 %
5 Bank Rate 6.50 %
6 Deposit Rate Saving 4.00%, Fixed Deposit
6.25-
6.90 %
7 Prime Lending Rate 9.10-9.60 %
Liabilities of all scheduledbank
2011-12 2012-13
Capital 8% 10.4%
Reserve & Surplus 20.8% 17.2%
Deposits(Deman
d, saving and
term deposits)
14.9% 15.1%
Borrowings 24.9% 19.8%
Other liabilities
&
Provisions
8.6% 2.2%
Assets of all scheduledbanks
Items 2011-12 2012-13
Cash and Balances
with RBI
-18.5% 0.4%
Money at Call &
Short
Notice
32.4% 37.5%
Investments 16.1% 17.0%
Loans & Advances 18.1% 15.9%
Fixed Assets 4.8% 11.3%
Other Assets 27.9% -9.5%
Portfoliomanagement
• The art of selecting the right investment
policy for the individuals in terms of
minimum risk and maximum return is
called as portfolio management.
• An individual who understands the client’s
financial needs and designs a suitable
investment plan as per his income and risk
taking abilities is called a portfolio
managers.
Portfolio Managementin Banking Terms
• Prudentmanagement of bank’s assets and liabilities to
seek an optimum combination of Liquidity, safety and
profitability.
The objective of portfolio management is
• Liquidity
• Safety
• Profitability
Roleof banking in Economicdevelopment
1. Mobilization of savings
2. Creation of Credit and increase in production
3. Promotion to export business
4. Social Banking
5. Reasonable price stability
6. Promotion of entrepreneurship
7. Development of Money Market and Capital Market
8. Increasing the facility of training and education
1. Mobilization of Savings: Commercial banks are agencies, who collects
savings of the community (from individuals, business houses, public
trusts). To attract such savings banks give certain offers like interest on
deposits, free or cheap remittance of funds, safe custody of valuable,
etc. banks accept savings in
different ways like, saving deposits, fixed deposits, current account
and
recurring account.
2. Creation of Credit and Increase in Production: collected savings of the
people is being converted into credit and banks adds to the money
supply. Credit expansion provides more funds to businessmen and
agriculturists which can help them in increasing production. Increased
production will contribute to economic development. Increased credit
facilities will help industrialists to develop their industry. It also helps poor
in acquiring homes.
3. Promotion to Export Business: EXIM bank will help the producers to
expand their exports and they will earn higher foreign exchange. Bank
also provide finance for Export and Import business.
4. Social Banking: Under this head, bank provides credits to certain important
sectors of the economy and to weaker section of the society and help in
achieving the goals of economic development with social justice. The
advances are given to the poorer with differential interest rate policy.
Assistance to priority sectors like agriculture, small scale industries and
cottage industries, export sector, educated unemployed and self employed is
also given.
5. Reasonable Price Stability: In the situation of inflation, people use to create
artificial scarcity of the goods to avail the advantage in price rise. Bank can
help in controlling the prices by not providing credits to the traders under
such situation. Naturally the traders have to put the stock for sale, which will
avoid the scarcity and price rise.
6. Promotion of Entrepreneurship: Banks are providing long term credits to
new entrepreneurs at differential interest rates. This will help them in
manufacturing new product which can attract customers and may capture
market. The merchant banking services of some banks may also provide
guidelines to the establishment of new projects regarding the site-selection,
project report, licensing activities, provision of credits, marketing, technical
and managerial services.
7. Development of Money Market and Capital Market: Monet market and
capital market also plays an important role in the economic development
of the country. Banks have significant contribution in the development of
money market and capital market recently. Banks also provide merchant
services to the constituents of the capital market as an agent. It also acts
as an intermediaries between the money market and the capital market
and savers and investors.
8. Increasing the facility of Training and Education: the problem of
establishment of Firm, Industry, company or any institution is not solved
by the funds only but it is necessary that the institution must have
qualified managerial staff too. For this purpose the staff should be made
conversant with the affairs of the institution. Training and education
provision must also be made in advance. For this purpose bank can
provide services of merchant banking as well as loans.
Constituentsof Banking Systemin India
A. Reserve Bank of India
B. State Bank of India and its seven associate
Banks
C. Commercial Banks
1. Scheduled and Non-scheduled Banks
2. Public and Private Sector Banks
3. Indian Banks and Foreign Banks
D. Regional Rural Banks
E. Co-operative Banks
F. Development Banks
1. Industrial Development Banks
2. Agricultural Development Banks
G. Import Export Bank of India (EXIM)
H. National Housing Bank
A. RESERVE BANK OF INDIA
• RBI Act was resolved in 1934
• Bank started its functions on 1st April 1935
• In 1949, in accordance with Reserve Bank (Transfer to Public Ownership) Act, 1948,
RBI was
nationalized and all shares were purchased by Government of India.
• RBI is managed by Central Board of Directors consisting of 20 Directors.
• Functions of RBI:
1. Issue of currency notes
2. Banker to the Government and Banks
3. Agent and advisor to Government and Banks
4. Credit controller
5. Managing Foreign Exchange
6. Promoting Agricultural and Industrial Development
B. STATE BANK OF INDIA AND ITS SEVEN ASSOCIATE BANKS
• SBI was established on 1st July 1955. (State bank of India Act,
1955) by taking over the assets and liabilitiesof Imperial
Bank of India,
(through amalgamation of three presidency banks of
Madras,
Bombay and Bengal) which was established in 1921.
• In 1959, seven banks were taken over as subsidiaries to SBI
known as Associate banks now.
• SBI is the biggest Commercial bank in Public sector banks.
• Total number of branches of SBI and its associate banks are
more than 24000 which is more than 20% of all branches of
commercial banks in India.
C. COMMERCIAL BANKS
1. Scheduled and Non-scheduled Banks:
• Scheduled banks are those which are entered in the second schedule of
Reserve Bank of India Act, 1934 and
• Having a paid up capital and reserves of an aggregate value of not less than
25 lakhs.
• Which satisfy the reserve bank that their affairs are carried out in the interest
of depositors.
• It must be a joint stock company registered under Indian Companies Act, 1956
or any
Act in force at the time of registration.
• Requires to maintain certain percentage of cash reserve with RBI.
• In return, Scheduled banks receive concessional remittance and borrowing
facility from RBI.
• On 21st May 2014 there were 90 Scheduled Banks in India.
• Non-scheduled Banks are those which are not included in the second
schedule of Reserve Bank of India Act 1934 and have paid up capital of
less than 25 lakhs.
• It is subject to statutory cash reserve requirement which is to be kept by
bank itself and not with the RBI.
• Non-scheduled banks are not entitled to get any
kind of loans, Advances of remittance facility from
Reserve Bank of India.
• At present there are 9 Non-scheduled banks in Indi.
2. Public and Private Sector
Banks:
• Public Banks:
• These banks are government undertaking banks.
• Public banks came into existence with the Nationalization of banks in
India in 1st July 1955.
• On 19th July 1969 14 banks were Nationalized.
• On 15th April 1980 six more banks were Nationalized.
• Regional Rural banks are also sponsored by Nationalized banks.
• At present there are 27 nationalized banks.
• Total number of public sector banks are 196.
• Public banks occupy a large portion of public deposits (75%) and Loans
(71%).
• After nationalization in 1969 and 1980, no banks were allowed to be
established in private sector. But afterwards, Narsimha Committed
recommended the requirement of Private banks to increase the level of
competition.
Continue….
• In 1993, government allowed establishment of Private banks provided
they confirm to minimum start-up capital and other requirements.
• At present there are 22 private sector banks.
• Foreign investment up to 74% of paid up capital is also permitted now.
• As the result of foreign participation there has been a remarkable
improvement in corporate governance, risk management and
administrative efficiency of these banks.
• They have introduced innovative products and have provided superior
services.
• Due to declining profits of the public banks affected by private banks,
Banking companies (Acquisition and Transfer of Undertakings)
Amendment Act 1994 was passed to allow public banks to increase
capital by selling shares to public and NRIs up to 49%.
3. Indian Banks and Foreign
Banks:
• The Indian banks are those which have been incorporated in Indian and so
have their head offices in India.
• Foreign banks are those which have been incorporated in foreign countries
and have their head offices outside India.
• The bulk of Indian banking business is in the lands of the Indian commercial
banks, both public sector and private sector banks.
• On 31st march 2011, there were 39 foreign banks from 19 countries operating
in India with 280 branches. (the standard chartered bank with highest
branches-81)
• Foreign banks can operate in any one of the three channels; branches, wholly
owned subsidiary and subsidiary with aggregate foreign investment up to a
maximum 74% in a private bank.
• Foreign banks compete mainly with the Indian Private banks, not with the
public sector banks, though their growth rate is not as high as that of the
Indian Private banks.
• As against 228 branches of foreign banks in India, Indian banks have only 112
branches overseas.
D. Regional Rural Banks:
• In 1972, Saraiya commission recommended the need for the establishment
of Regional Rural banks.
• Narsimha committee also stressed the need for such banks.
• In 1975, government decided to set up such 50 banks in different parts of
the country amongst which 5 banks were started October 2 1975.
• The main objective of these bank is to provide productive credit to the
weaker section of the rural area so as to enable them to increase their
productivity and income and thereby make them self sufficient.
• The idea is to provide credit facilities to this class so as to develop
agriculture,
small scale and cottage industries, trade commerce and other
productive
activities in the rural area.
• These banks are working as complementary to the co-operative banks with
357 RRBs in March 2011.
Continue….
• The area of operation of Regional Rural Bank is limited to a specific region
comprising of one or two district of a state.
• These banks grants direct loans and advances only to small and marginal
farmers, rural artisans and farm labourers and other weaker section with
limited resources for productive purposes.
• The lending rate of these banks should not be higher than those of co-
operative
societies.
• In June 2001, there were 196 such banks with 14456 branches. In recent
years it has been observed that only 44 RRBs are earning profits and the
rest 152 banks had shown losses.
E. Co-operative Banks:
• Co-operativebanks came into existencewith the enactment of Co-
operative
Societies Act 1904, which allowed the formation of co-operative
credit
institutions.
• It acts in the manner to commercial banks but to mobilize the savings of the
local population.
• The co-operative activities are being observed by RBI in urban areas and
NABARD in the rural areas.
• In co-operative banking structure in India, there are
1. State Co-operative Banks (Apex
institution)
2. Central co-operative Banks
3. Primary Agricultural.
F. Development Banks:
• It is a multipurpose bank with the objective of;
 It provides long term and medium term credits to industrial undertakings
 Discovers investment projects
 Undertakes the preparation of project reports
 Provides technical advice and managerial services and
 Assists the management of the industrial units.
• There is a network of development banks in India at all India and State
levels.
• Besides development banks for financing industrial undertakings,
development banks for providing finance for agriculture, export and
housing have been established in India.
F.1: Industrial Development Banks: Under which
there are;
1. Industrial Finance Corporation (IFC)
2. State Financial Corporations (SFCs)
3. Industrial Development Bank of India (IDBI)
4. Industrial Credit and Investment Corporation of India (ICICI)
5. Industrial Reconstruction Corporation of India (IRBI)
6. Small Industries Development Bank of India (SIDBI)
F.2: Agricultural Development Banks:
• Short term, medium term and long term credits for agricultural purpose are
being rooted trough co-operative banks and Land development banks.
• In 1963, RBI set up the Agricultural Refinance and Development Corporation
to provide
refinancesupport to banks for financingland development,horticulture,
dairy
development, etc.
• The RBI felt the need for an agency at the national level that will provide all
types of credit to various sectors in rural economy for the integrated way of
rural development.
G. Export-Import Bank of India (EXIM):
• The Export and Import Bank of India was established on 1st January 1982
to take over the operations of International finance wing of IDBI.
• This EXIM bank provides financial assistance to exporters and importers
and it provides refinance facilities to the commercial banks and other
financial institutions against their export-import finance activities.
H. National Housing Bank:
• National Housing Bank was set up on 9th July 1988 as an apex institution to
mobilize resources for housing sector and to promote housing finance
institution, both on regional and local levels.
• The NHB was set up with an initial share of Rs. 100 crore, entirely
subscribed by RBI. It was raised to 150 crore on 7th sept1989 and 250
crore in march 1992.
• The bank is authorized to raise funds by:
i. Issue of bonds and debentures,
ii. Borrowing from central government and other approved institutions of
the central government,
iii. Acceptance of long term deposits,
iv. Short term accommodation from RBI,
v. Borrowings in foreign currencies from banks of financial institutions in
India and abroad.
Functional Classification of Banks
1. Commercial
banks
2. Industrial Banks
3. Exchange Banks
4. Agricultural
Banks
5. Saving Banks
6. Central Bank
1. Commercial Banks:
• Commercial banks are sometimes also referred to as ‘deposit banks’ as
their main function is to accept deposits from the public and to lend them
to those who requires it.
• These banks finance the internal trade and commerce of the country by
providing short term loans.
• they also advance in same cases medium term loans to industries.
Discounting of bills of exchange is also done by these banks.
• Functions of Commercial Banks:
1. To receive deposits from the public:
• Commercial banks do not just protects the savings of the people but
also provides a cheap and convenient method of transferring funds
from one place to another through the use of cheques, bank drafts, etc.
it performs an important function of mobilizing the scattered savings of
the people by accepting these savings as deposits.
• These deposits can be; Demand deposits – can be withdrawn by the
depositor at any time, and depositors receive little or no interest on it;
Fixed deposits – also known as time deposits, can be withdrawn after
the expiry of certain time period only, depositors receives fairly higher
amount of interest on such deposits; Saving deposits – to encourage
people to save and to cultivate a habit of thrift, can be withdrawn any
time and depositors get 4 to 6% of interest from banks on such
deposits.
2. To make Loans and Advances:
• Commercial banks grants advances to traders, businessmen and
industrialists.
• As all the amount of deposits received by the bank will be withdrawn at
any point of time but only a part of it needed to be kept in hand.
Therefore, the remaining deposits are being used by the bank so as to
earn profits and mobilize the savings in the economy.
• Loans and advances could be granted through;
• Loans against tangible securities (gold, stock and shares,
immovable properties, etc.)
• Facilities of discounting bills of exchange and other commercial papers.
• Facility of overdraft to current account holders.
3. To make Investments:
• Commercial banks invest their funds by purchasing shares and
debentures of the industrial concerns and also investing and
government securities.
• They help the new industrial companies in raising the necessary share
capital by subscribing for themselves a part of the share capital and
also stand as a guarantee for the same to inspire public confidence.
• Through investments, commercial banks adds to the process of capital
formation.
4. To provide a cheap and Convenient medium of exchange:
• Though convenient remittance facilities like cheques and bank drafts
commercial banks greatly facilitates the transfer of funds from one place
to another place.
5. To Finance foreign trade:
• Along with financing the internal trade business of the country, banks
also undertake to finance the foreign trade by accepting or collecting
foreign bill of exchange drawn by the customer and by transacting
other foreign business.
6. To provide Agency services:
• Paying cheques, bills, dividends, subscription and insurance premium.
• Sell and purchase of shares and securities for their customers through
the stock broker.
• They provide safety vaults to the customers to keep theirs valuables
safe.
• Acting as trustees or executors of wills or an administrator of family
trusts.
• They supply information and advice to their customer as regards
investment.
7. To provide Miscellaneous Services:
• Acts as an custodian of valuables of customers in lockers.
• Progress of Commercial banks in
India:
1. Increase in the number of scheduled
banks
2. Increase in number of bank branches
3. Growth of the bank deposits
4. Expansion of bank credit
5. Change in the structure of bank credit
2. Industrial Banks:
• Industrial banks are those banks which specialize in financingthe
long term requirements of the industries.
• These banks accept the long term deposits from the public and grants
loans to industries.
• They also buy and sell the shares and debentures of the industrial
enterprises.
• It is bridge between capital user and capital saver.
• The Industrial Development Bank of India is working if India since 1964.
• Its aim is to provide long term finance to industries.
• Some of the commercial banks have also shown interest in Industrial
financing activities in India recently.
3. Exchange Banks:
• The main function of the Exchange bank is to finance the foreign trade for
the country.
• For this purpose they buy or sell foreign currencies,rather title to
foreign currencies in the form of bill of exchange, drafts, telegraphic
transfers, etc.
• India has no separate Exchange banks of its own.
• All the exchange banks in India were owned by foreigners in pre-
independence
period.
• Now some of our commercial banks, besides their normal functions,
also undertake foreign exchange business.
D. Agricultural Banks:
• Agricultural banks provide both short term and long term finance to
agricultural sector. Short term advances are to meet the current
expenditures like purchase of seeds, fertilizers, tools and equipment,
payment of wages to farm workers.
• Long term loans and advances are for such purposes like purchase
and
improvement of land, purchase of heavy machinery, constructing a tube well,
etc.
• Short term advances to agricultural sector are being
provided by cooperative
banks while long term advances are being granted mortgage banks
and cooperative land development banks.
E. Saving Banks:
• These banks provides facilities to the people of middle and low income
groups to save money.
• Its main aim is to encourage the people to cultivate the habit of saving.
• In some of the countries these saving banks are special institutions
established for this purpose.
• In India we do not have such special saving banks, but commercial banks
encourages the individuals to save by helping them to open saving
accounts, fixed deposits, cumulative deposits, etc.
• Of course, post offices also undertakes to open saving accounts but they
can not be regarded as Saving Banks.
G. Central Bank:
• In almost every country there is a central bank which does the task of
issuing currency notes, and controls and supervises the activities of the
commercial banks.
• It is a bankers bank and acts as a lender of last report to all the commercial
banks of the country.
• It is also a banker to the government and acts as an agent and advisor to it.
• In most of the countries central bank is a nationalized institution.
• The Reserve Bank of India is the central bank, which acts as the apex
institution in Indian Money market.
Weaknesses of the Banking System
1. Inadequate Banking Facilities:
• India is still one of the Under Banked Country of the world. The development
of banking facilities is still too inadequate in relation to the size and population
of the country.
• The average population per bank office in India at the end of June 2011 was
14000 as against 4000 in England and Canada, 7000 in USA and 5000 in
Germany.
2. Regional Imbalances:
• A study reveals that the commercial banks have remained confined mainly to
the relatively developed and industrialized states of Western and Southern
India while the poor and backward states have derived less benefits.
• Even in the Eastern region , West Bengal alone accounted for more than 50%
of the new branches opened.
• Thus there are severe regional disparities in banking development which need
to be corrected.
3. Slow Deposit Mobilization in Rural
Areas:
• It has been found that a substantial increase in bank deposits has come
mainly from the urban areas.
• According to one estimate rural deposits account for hardly 25% of the total
bank deposits.
4. Diversion of Rural Deposits to Urban Centers:
• Another matter of serious concern is the diversion of rural deposits to urban
areas.
• One reason for this, perhaps is lack of adequate bankable and creditworthy
development projects in the rural areas.
5. Defects of Rural Credit:
a) In the rural areas, major beneficiaries of the expansion of bank credit have
been the large and affluent farmers. Small and marginal farmers have
derived relatively less benefit of bank credit.
b) Lack of up to date records, competition from private lending agencies, small
and fragmented holdings, small size of marketable surplus, etc are the
specific difficulties in providing credit to the poor farmers.
c) There is lack of efficient and effective system to supervise the end use of
credit.
d) There has been a high proportion of overdue because of poor recovery of
loans.
6. Low Efficiency:
• It has been the general experience that the quality of customer service of
the public sector banks has deteriorated in the post-nationalization period.
• Staff indiscipline and lack of devotion, to duty are rather a common
phenomenon.
• Red tapism, inordinate delays, corruption, malpractices, neglect of duty,
impolite and discourteous behavior towards customers, lack of initiative and
failure to take quick decisions have all impaired the smooth working of
public sector banks.
7. Low Profitability:
• The profitability of public sector banks, by and large, has been found to be
low as compared to private sector banks and foreign banks.
• 27 public sector banks had shown a net profit of about 44901 crores in 2011.
Old Indian private banks, new private banks and foreign banks had shown a
net profit of 25432 crores, which is comparatively good.
8. Political
Interference:
• Political interference in the banking operations particularly in case of public
sector
banks has been held responsible for wide spread default.
• The Agricultural Credit Review Committee had observed in 1989 that
commercial banks in India are over controlled, overregulated and over
managed by the central government as the co-operative banks are by the
state government.
• The committee had noted that in respect of rural loans, a large number of
beneficiaries are identified not by banks or even by government agencies but
by the functionaries of the political parties.
Banking Sector Reforms
• During deep Economic Crises in 1991, India decided to introduce
economic reforms and banking sector reforms were the part of this
package. In November 1991 a committee on Financial System under the
Chairmanship of M. Narshimha, Submitted its report.
• A committee on Banking Sector Reforms in April 1998 also submitted a
report favouring Banking Reforms for India.
• Following are the Banking Sector Reforms in India:
1. Prudential Regulation and
Supervision:
• Prudential norms have been started by RBI in order to impart professionalism in
commercial banks. The purpose of prudential norms include proper disclosure of
income, classification of assets and provision for Bad debts so as to ensure hat
the books of commercial banks reflect the accurate and correct picture of
financial position.
• Prudential norms required banks to make 100% provision for all Non-performing
Assets (NPAs). Funding for this purpose was placed at Rs. 10,000 crores
phased over 2 years.
2. Reduction in SLR and CRR:
• The high SLR and CRR reduced the profits of the banks. The SLR has been
reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with
banks for allocation to agriculture, industry, trade etc.
• The Cash Reserve Ratio (CRR) is the cash ratio of a banks total deposits to be
maintained with RBI. The CRR has been brought down from 15% in 1991 to
4.1% in June 2003. The purpose is to release the funds locked up with RBI.
3. Deregulation of Interest
Rates:
• The Narasimhan Committee advocated that interest rates should be allowed to
be determined by market forces. Since 1992, interest rates has become much
simpler and freer.
a) Scheduled Commercial banks have now the freedom to set interest rates
on their
deposits subject to minimum floor rates and maximum ceiling rates.
b) Interest rate on domestic term deposits has been decontrolled.
c) The prime lending rate of SBI and other banks on general advances of over
Rs. 2 lakhs has been reduced.
d) Rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled.
e) The interest rates on deposits and advances of all Co-operative banks have
been
deregulated subject to a minimum lending rate of 13%.
4. Freedom to raise Equity Capital from the Market Amendments:
• The Banking Companies (Acquisation and Transfer of Undertakings) Act was
amended to enable the banks to raise capital through public issues. This is
subject to provision that the holding of Central Government would not fall
below 51% of paid- up-capital. SBI has already raised substantial amount of
funds through equity and bonds.
5. Changes in Branch Licensing
Policy:
• Scheduled Commercial Banks are given freedom to open new branches
and upgrade extension counters, after attaining capital adequacy ratio and
prudential accounting norms. The banks are also permitted to close non-
viable branches other than in rural areas.
6. Entry of Private Sector Banks:
• Now banking is open to private sector. New private sector banks have
already started functioning. These new private sector banks are allowed
to raise capital contribution from foreign institutional investors up to 20%
and from NRIs up to 40%. This has led to increased competition.
7. Merger of Loss-making Banks with Profit Making banks and
Amalgamation of Banks:
Problems and challenges for Banking System
in India:
• Challenges faced by Indian Banks: The banking sector in India has
made quick strides in restructuring & aligning itself to the new gung ho
business environment. One of the major challenges that Indian banks are
facing today is how to cope with competitive forces in order to strengthen
their balance sheet. Nowadays, banks are whimpering with the burden of
Non Performing Assets. It is truly felt that these debts, if not recovered,
will eat into the very vitals of banks.
1. High transaction costs: High transaction cost of carrying non-
performing assets in the books is the major concern of the Indian bank.
The development led to strains in the operational efficiency & the
accumulation of non-performing assets in loan portfolios.
2. Revolution of Information Technology: Banks in India are subject
to great pressures to perform or else their very survival would be in
jeopardy. The application of Information Technology & e-banking is
becoming the order of the day with the banking system directing
towards virtual banking.
3. Timely technological upgradation: In order to face competition, it
is indispensable for Indian banks to soak up the technology &
upgrade their services.
4. Intense Competition: The Reserve Bank of India & Indian Government
kept banking industry unbolted for the participants of foreign banks and
private sector banks. The foreign banks were also allowed to set up
shop in India. Many new players have entered the market such as
foreign banks, private banks, non - banking finance companies, etc. For
growth and survival in the environment of cut throat competition banks
have to follow the prompt and resourceful customer service, which calls
for suitable customer centric policies & customer friendly procedures.
• The areas which might imperil security in e-banking
can be:
a) Credit risk
b) Liquidity, market risks, interest rate risk
c) Legal risk
• Opportunities of Banking industry:
a) A growing economy
b) Banking deregulation
c) Increased client borrowing
d) An increase in the number of banks
e) An increase in the money supply
f) Low government-set credit rates
g) Larger customer checking account balances
Bank Statistics in India:
Sr
No
.
Type of Bank No. of
Branch
es
1. State bank and its Associate Banks 19194
2. Nationalized Banks 48822
3. New Private Sector Banks 8103
4. Old private Sector Banks 5448
5. Foreign Banks 321
6. Regional Rural Banks 16719
7. Total 98607
Number of Bank Branches in India as on 31st march 2012

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Banking system.pptx

  • 2. W H A TISBANK? • It derived from the “Italian” word “Banco” which means “bench” over which transaction is happened in ancient time. • It is the market place for the exchange of “money” & “bills”. • Bank is a chain between the people who save money and people who use these savings.
  • 3. Definition of‘Bank’ • As per Sec.5 (b) of the Banking Regulations Act 1949 “Bank” means accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. • Bank is a chain between the people who save money and people who use these savings.
  • 4. Banker is onewhich Accepting of deposits Lending or investing(Purpose) From Public Payable on demand or otherwise Withdrawal of deposits by cheque, draft etc.
  • 5. Who is a‘Customer’? • Maintaining any type of a/c. • Submission of a/c opening form fulfilling KYC requirements. • Customer of specific branch only. • There should be some kind of continuity. • Financial Transactions.
  • 6. A deposit shouldbe • Deposits of money, not of goods or financial assets. • Deposits from public at large, not only from the share holders of bank. • Deposits repayable on demand and withdrawal by cheque. • Deposits for lending not for bank’s own purpose. Hence, to follow the status of bank, an institution has to perform both functions simultaneously i.e. accepting deposits and lending to general public.
  • 7.
  • 8. Bankers have threeAncestors: • Goldsmith • Money Lenders • Merchants
  • 9. B A N K I N GT E R M S Banking Terms Deposit Rate PLR Rate CRR Rate Banking Terms SLR Rate Bank Rate Repo Rate Banking Terms Reverse Repo Rate
  • 10. CurrentStatistics S.No Rates As on June 2017 1 Repo Rate 6.25 % 2 Reverse Repo Rate 6.00 % 3 Cash Reserve Ratio 4.00 % 4 Statutory Liquidity Ratio 20.00 % 5 Bank Rate 6.50 % 6 Deposit Rate Saving 4.00%, Fixed Deposit 6.25- 6.90 % 7 Prime Lending Rate 9.10-9.60 %
  • 11. Liabilities of all scheduledbank 2011-12 2012-13 Capital 8% 10.4% Reserve & Surplus 20.8% 17.2% Deposits(Deman d, saving and term deposits) 14.9% 15.1% Borrowings 24.9% 19.8% Other liabilities & Provisions 8.6% 2.2%
  • 12. Assets of all scheduledbanks Items 2011-12 2012-13 Cash and Balances with RBI -18.5% 0.4% Money at Call & Short Notice 32.4% 37.5% Investments 16.1% 17.0% Loans & Advances 18.1% 15.9% Fixed Assets 4.8% 11.3% Other Assets 27.9% -9.5%
  • 13. Portfoliomanagement • The art of selecting the right investment policy for the individuals in terms of minimum risk and maximum return is called as portfolio management. • An individual who understands the client’s financial needs and designs a suitable investment plan as per his income and risk taking abilities is called a portfolio managers.
  • 14. Portfolio Managementin Banking Terms • Prudentmanagement of bank’s assets and liabilities to seek an optimum combination of Liquidity, safety and profitability. The objective of portfolio management is • Liquidity • Safety • Profitability
  • 15. Roleof banking in Economicdevelopment 1. Mobilization of savings 2. Creation of Credit and increase in production 3. Promotion to export business 4. Social Banking 5. Reasonable price stability 6. Promotion of entrepreneurship 7. Development of Money Market and Capital Market 8. Increasing the facility of training and education
  • 16. 1. Mobilization of Savings: Commercial banks are agencies, who collects savings of the community (from individuals, business houses, public trusts). To attract such savings banks give certain offers like interest on deposits, free or cheap remittance of funds, safe custody of valuable, etc. banks accept savings in different ways like, saving deposits, fixed deposits, current account and recurring account. 2. Creation of Credit and Increase in Production: collected savings of the people is being converted into credit and banks adds to the money supply. Credit expansion provides more funds to businessmen and agriculturists which can help them in increasing production. Increased production will contribute to economic development. Increased credit facilities will help industrialists to develop their industry. It also helps poor in acquiring homes. 3. Promotion to Export Business: EXIM bank will help the producers to expand their exports and they will earn higher foreign exchange. Bank also provide finance for Export and Import business.
  • 17. 4. Social Banking: Under this head, bank provides credits to certain important sectors of the economy and to weaker section of the society and help in achieving the goals of economic development with social justice. The advances are given to the poorer with differential interest rate policy. Assistance to priority sectors like agriculture, small scale industries and cottage industries, export sector, educated unemployed and self employed is also given. 5. Reasonable Price Stability: In the situation of inflation, people use to create artificial scarcity of the goods to avail the advantage in price rise. Bank can help in controlling the prices by not providing credits to the traders under such situation. Naturally the traders have to put the stock for sale, which will avoid the scarcity and price rise. 6. Promotion of Entrepreneurship: Banks are providing long term credits to new entrepreneurs at differential interest rates. This will help them in manufacturing new product which can attract customers and may capture market. The merchant banking services of some banks may also provide guidelines to the establishment of new projects regarding the site-selection, project report, licensing activities, provision of credits, marketing, technical and managerial services.
  • 18. 7. Development of Money Market and Capital Market: Monet market and capital market also plays an important role in the economic development of the country. Banks have significant contribution in the development of money market and capital market recently. Banks also provide merchant services to the constituents of the capital market as an agent. It also acts as an intermediaries between the money market and the capital market and savers and investors. 8. Increasing the facility of Training and Education: the problem of establishment of Firm, Industry, company or any institution is not solved by the funds only but it is necessary that the institution must have qualified managerial staff too. For this purpose the staff should be made conversant with the affairs of the institution. Training and education provision must also be made in advance. For this purpose bank can provide services of merchant banking as well as loans.
  • 19. Constituentsof Banking Systemin India A. Reserve Bank of India B. State Bank of India and its seven associate Banks C. Commercial Banks 1. Scheduled and Non-scheduled Banks 2. Public and Private Sector Banks 3. Indian Banks and Foreign Banks D. Regional Rural Banks E. Co-operative Banks F. Development Banks 1. Industrial Development Banks 2. Agricultural Development Banks G. Import Export Bank of India (EXIM) H. National Housing Bank
  • 20. A. RESERVE BANK OF INDIA • RBI Act was resolved in 1934 • Bank started its functions on 1st April 1935 • In 1949, in accordance with Reserve Bank (Transfer to Public Ownership) Act, 1948, RBI was nationalized and all shares were purchased by Government of India. • RBI is managed by Central Board of Directors consisting of 20 Directors. • Functions of RBI: 1. Issue of currency notes 2. Banker to the Government and Banks 3. Agent and advisor to Government and Banks 4. Credit controller 5. Managing Foreign Exchange 6. Promoting Agricultural and Industrial Development
  • 21. B. STATE BANK OF INDIA AND ITS SEVEN ASSOCIATE BANKS • SBI was established on 1st July 1955. (State bank of India Act, 1955) by taking over the assets and liabilitiesof Imperial Bank of India, (through amalgamation of three presidency banks of Madras, Bombay and Bengal) which was established in 1921. • In 1959, seven banks were taken over as subsidiaries to SBI known as Associate banks now. • SBI is the biggest Commercial bank in Public sector banks. • Total number of branches of SBI and its associate banks are more than 24000 which is more than 20% of all branches of commercial banks in India.
  • 22. C. COMMERCIAL BANKS 1. Scheduled and Non-scheduled Banks: • Scheduled banks are those which are entered in the second schedule of Reserve Bank of India Act, 1934 and • Having a paid up capital and reserves of an aggregate value of not less than 25 lakhs. • Which satisfy the reserve bank that their affairs are carried out in the interest of depositors. • It must be a joint stock company registered under Indian Companies Act, 1956 or any Act in force at the time of registration. • Requires to maintain certain percentage of cash reserve with RBI. • In return, Scheduled banks receive concessional remittance and borrowing facility from RBI. • On 21st May 2014 there were 90 Scheduled Banks in India.
  • 23. • Non-scheduled Banks are those which are not included in the second schedule of Reserve Bank of India Act 1934 and have paid up capital of less than 25 lakhs. • It is subject to statutory cash reserve requirement which is to be kept by bank itself and not with the RBI. • Non-scheduled banks are not entitled to get any kind of loans, Advances of remittance facility from Reserve Bank of India. • At present there are 9 Non-scheduled banks in Indi.
  • 24. 2. Public and Private Sector Banks: • Public Banks: • These banks are government undertaking banks. • Public banks came into existence with the Nationalization of banks in India in 1st July 1955. • On 19th July 1969 14 banks were Nationalized. • On 15th April 1980 six more banks were Nationalized. • Regional Rural banks are also sponsored by Nationalized banks. • At present there are 27 nationalized banks. • Total number of public sector banks are 196. • Public banks occupy a large portion of public deposits (75%) and Loans (71%). • After nationalization in 1969 and 1980, no banks were allowed to be established in private sector. But afterwards, Narsimha Committed recommended the requirement of Private banks to increase the level of competition.
  • 25. Continue…. • In 1993, government allowed establishment of Private banks provided they confirm to minimum start-up capital and other requirements. • At present there are 22 private sector banks. • Foreign investment up to 74% of paid up capital is also permitted now. • As the result of foreign participation there has been a remarkable improvement in corporate governance, risk management and administrative efficiency of these banks. • They have introduced innovative products and have provided superior services. • Due to declining profits of the public banks affected by private banks, Banking companies (Acquisition and Transfer of Undertakings) Amendment Act 1994 was passed to allow public banks to increase capital by selling shares to public and NRIs up to 49%.
  • 26. 3. Indian Banks and Foreign Banks: • The Indian banks are those which have been incorporated in Indian and so have their head offices in India. • Foreign banks are those which have been incorporated in foreign countries and have their head offices outside India. • The bulk of Indian banking business is in the lands of the Indian commercial banks, both public sector and private sector banks. • On 31st march 2011, there were 39 foreign banks from 19 countries operating in India with 280 branches. (the standard chartered bank with highest branches-81) • Foreign banks can operate in any one of the three channels; branches, wholly owned subsidiary and subsidiary with aggregate foreign investment up to a maximum 74% in a private bank. • Foreign banks compete mainly with the Indian Private banks, not with the public sector banks, though their growth rate is not as high as that of the Indian Private banks. • As against 228 branches of foreign banks in India, Indian banks have only 112 branches overseas.
  • 27. D. Regional Rural Banks: • In 1972, Saraiya commission recommended the need for the establishment of Regional Rural banks. • Narsimha committee also stressed the need for such banks. • In 1975, government decided to set up such 50 banks in different parts of the country amongst which 5 banks were started October 2 1975. • The main objective of these bank is to provide productive credit to the weaker section of the rural area so as to enable them to increase their productivity and income and thereby make them self sufficient. • The idea is to provide credit facilities to this class so as to develop agriculture, small scale and cottage industries, trade commerce and other productive activities in the rural area. • These banks are working as complementary to the co-operative banks with 357 RRBs in March 2011.
  • 28. Continue…. • The area of operation of Regional Rural Bank is limited to a specific region comprising of one or two district of a state. • These banks grants direct loans and advances only to small and marginal farmers, rural artisans and farm labourers and other weaker section with limited resources for productive purposes. • The lending rate of these banks should not be higher than those of co- operative societies. • In June 2001, there were 196 such banks with 14456 branches. In recent years it has been observed that only 44 RRBs are earning profits and the rest 152 banks had shown losses.
  • 29. E. Co-operative Banks: • Co-operativebanks came into existencewith the enactment of Co- operative Societies Act 1904, which allowed the formation of co-operative credit institutions. • It acts in the manner to commercial banks but to mobilize the savings of the local population. • The co-operative activities are being observed by RBI in urban areas and NABARD in the rural areas. • In co-operative banking structure in India, there are 1. State Co-operative Banks (Apex institution) 2. Central co-operative Banks 3. Primary Agricultural.
  • 30. F. Development Banks: • It is a multipurpose bank with the objective of;  It provides long term and medium term credits to industrial undertakings  Discovers investment projects  Undertakes the preparation of project reports  Provides technical advice and managerial services and  Assists the management of the industrial units. • There is a network of development banks in India at all India and State levels. • Besides development banks for financing industrial undertakings, development banks for providing finance for agriculture, export and housing have been established in India.
  • 31. F.1: Industrial Development Banks: Under which there are; 1. Industrial Finance Corporation (IFC) 2. State Financial Corporations (SFCs) 3. Industrial Development Bank of India (IDBI) 4. Industrial Credit and Investment Corporation of India (ICICI) 5. Industrial Reconstruction Corporation of India (IRBI) 6. Small Industries Development Bank of India (SIDBI) F.2: Agricultural Development Banks: • Short term, medium term and long term credits for agricultural purpose are being rooted trough co-operative banks and Land development banks. • In 1963, RBI set up the Agricultural Refinance and Development Corporation to provide refinancesupport to banks for financingland development,horticulture, dairy development, etc. • The RBI felt the need for an agency at the national level that will provide all types of credit to various sectors in rural economy for the integrated way of rural development.
  • 32. G. Export-Import Bank of India (EXIM): • The Export and Import Bank of India was established on 1st January 1982 to take over the operations of International finance wing of IDBI. • This EXIM bank provides financial assistance to exporters and importers and it provides refinance facilities to the commercial banks and other financial institutions against their export-import finance activities.
  • 33. H. National Housing Bank: • National Housing Bank was set up on 9th July 1988 as an apex institution to mobilize resources for housing sector and to promote housing finance institution, both on regional and local levels. • The NHB was set up with an initial share of Rs. 100 crore, entirely subscribed by RBI. It was raised to 150 crore on 7th sept1989 and 250 crore in march 1992. • The bank is authorized to raise funds by: i. Issue of bonds and debentures, ii. Borrowing from central government and other approved institutions of the central government, iii. Acceptance of long term deposits, iv. Short term accommodation from RBI, v. Borrowings in foreign currencies from banks of financial institutions in India and abroad.
  • 34. Functional Classification of Banks 1. Commercial banks 2. Industrial Banks 3. Exchange Banks 4. Agricultural Banks 5. Saving Banks 6. Central Bank
  • 35. 1. Commercial Banks: • Commercial banks are sometimes also referred to as ‘deposit banks’ as their main function is to accept deposits from the public and to lend them to those who requires it. • These banks finance the internal trade and commerce of the country by providing short term loans. • they also advance in same cases medium term loans to industries. Discounting of bills of exchange is also done by these banks.
  • 36. • Functions of Commercial Banks: 1. To receive deposits from the public: • Commercial banks do not just protects the savings of the people but also provides a cheap and convenient method of transferring funds from one place to another through the use of cheques, bank drafts, etc. it performs an important function of mobilizing the scattered savings of the people by accepting these savings as deposits. • These deposits can be; Demand deposits – can be withdrawn by the depositor at any time, and depositors receive little or no interest on it; Fixed deposits – also known as time deposits, can be withdrawn after the expiry of certain time period only, depositors receives fairly higher amount of interest on such deposits; Saving deposits – to encourage people to save and to cultivate a habit of thrift, can be withdrawn any time and depositors get 4 to 6% of interest from banks on such deposits.
  • 37. 2. To make Loans and Advances: • Commercial banks grants advances to traders, businessmen and industrialists. • As all the amount of deposits received by the bank will be withdrawn at any point of time but only a part of it needed to be kept in hand. Therefore, the remaining deposits are being used by the bank so as to earn profits and mobilize the savings in the economy. • Loans and advances could be granted through; • Loans against tangible securities (gold, stock and shares, immovable properties, etc.) • Facilities of discounting bills of exchange and other commercial papers. • Facility of overdraft to current account holders.
  • 38. 3. To make Investments: • Commercial banks invest their funds by purchasing shares and debentures of the industrial concerns and also investing and government securities. • They help the new industrial companies in raising the necessary share capital by subscribing for themselves a part of the share capital and also stand as a guarantee for the same to inspire public confidence. • Through investments, commercial banks adds to the process of capital formation. 4. To provide a cheap and Convenient medium of exchange: • Though convenient remittance facilities like cheques and bank drafts commercial banks greatly facilitates the transfer of funds from one place to another place.
  • 39. 5. To Finance foreign trade: • Along with financing the internal trade business of the country, banks also undertake to finance the foreign trade by accepting or collecting foreign bill of exchange drawn by the customer and by transacting other foreign business. 6. To provide Agency services: • Paying cheques, bills, dividends, subscription and insurance premium. • Sell and purchase of shares and securities for their customers through the stock broker. • They provide safety vaults to the customers to keep theirs valuables safe. • Acting as trustees or executors of wills or an administrator of family trusts. • They supply information and advice to their customer as regards investment. 7. To provide Miscellaneous Services: • Acts as an custodian of valuables of customers in lockers.
  • 40. • Progress of Commercial banks in India: 1. Increase in the number of scheduled banks 2. Increase in number of bank branches 3. Growth of the bank deposits 4. Expansion of bank credit 5. Change in the structure of bank credit
  • 41. 2. Industrial Banks: • Industrial banks are those banks which specialize in financingthe long term requirements of the industries. • These banks accept the long term deposits from the public and grants loans to industries. • They also buy and sell the shares and debentures of the industrial enterprises. • It is bridge between capital user and capital saver. • The Industrial Development Bank of India is working if India since 1964. • Its aim is to provide long term finance to industries. • Some of the commercial banks have also shown interest in Industrial financing activities in India recently.
  • 42. 3. Exchange Banks: • The main function of the Exchange bank is to finance the foreign trade for the country. • For this purpose they buy or sell foreign currencies,rather title to foreign currencies in the form of bill of exchange, drafts, telegraphic transfers, etc. • India has no separate Exchange banks of its own. • All the exchange banks in India were owned by foreigners in pre- independence period. • Now some of our commercial banks, besides their normal functions, also undertake foreign exchange business.
  • 43. D. Agricultural Banks: • Agricultural banks provide both short term and long term finance to agricultural sector. Short term advances are to meet the current expenditures like purchase of seeds, fertilizers, tools and equipment, payment of wages to farm workers. • Long term loans and advances are for such purposes like purchase and improvement of land, purchase of heavy machinery, constructing a tube well, etc. • Short term advances to agricultural sector are being provided by cooperative banks while long term advances are being granted mortgage banks and cooperative land development banks.
  • 44. E. Saving Banks: • These banks provides facilities to the people of middle and low income groups to save money. • Its main aim is to encourage the people to cultivate the habit of saving. • In some of the countries these saving banks are special institutions established for this purpose. • In India we do not have such special saving banks, but commercial banks encourages the individuals to save by helping them to open saving accounts, fixed deposits, cumulative deposits, etc. • Of course, post offices also undertakes to open saving accounts but they can not be regarded as Saving Banks.
  • 45. G. Central Bank: • In almost every country there is a central bank which does the task of issuing currency notes, and controls and supervises the activities of the commercial banks. • It is a bankers bank and acts as a lender of last report to all the commercial banks of the country. • It is also a banker to the government and acts as an agent and advisor to it. • In most of the countries central bank is a nationalized institution. • The Reserve Bank of India is the central bank, which acts as the apex institution in Indian Money market.
  • 46. Weaknesses of the Banking System 1. Inadequate Banking Facilities: • India is still one of the Under Banked Country of the world. The development of banking facilities is still too inadequate in relation to the size and population of the country. • The average population per bank office in India at the end of June 2011 was 14000 as against 4000 in England and Canada, 7000 in USA and 5000 in Germany. 2. Regional Imbalances: • A study reveals that the commercial banks have remained confined mainly to the relatively developed and industrialized states of Western and Southern India while the poor and backward states have derived less benefits. • Even in the Eastern region , West Bengal alone accounted for more than 50% of the new branches opened. • Thus there are severe regional disparities in banking development which need to be corrected.
  • 47. 3. Slow Deposit Mobilization in Rural Areas: • It has been found that a substantial increase in bank deposits has come mainly from the urban areas. • According to one estimate rural deposits account for hardly 25% of the total bank deposits. 4. Diversion of Rural Deposits to Urban Centers: • Another matter of serious concern is the diversion of rural deposits to urban areas. • One reason for this, perhaps is lack of adequate bankable and creditworthy development projects in the rural areas. 5. Defects of Rural Credit: a) In the rural areas, major beneficiaries of the expansion of bank credit have been the large and affluent farmers. Small and marginal farmers have derived relatively less benefit of bank credit. b) Lack of up to date records, competition from private lending agencies, small and fragmented holdings, small size of marketable surplus, etc are the specific difficulties in providing credit to the poor farmers.
  • 48. c) There is lack of efficient and effective system to supervise the end use of credit. d) There has been a high proportion of overdue because of poor recovery of loans. 6. Low Efficiency: • It has been the general experience that the quality of customer service of the public sector banks has deteriorated in the post-nationalization period. • Staff indiscipline and lack of devotion, to duty are rather a common phenomenon. • Red tapism, inordinate delays, corruption, malpractices, neglect of duty, impolite and discourteous behavior towards customers, lack of initiative and failure to take quick decisions have all impaired the smooth working of public sector banks. 7. Low Profitability: • The profitability of public sector banks, by and large, has been found to be low as compared to private sector banks and foreign banks. • 27 public sector banks had shown a net profit of about 44901 crores in 2011. Old Indian private banks, new private banks and foreign banks had shown a net profit of 25432 crores, which is comparatively good.
  • 49. 8. Political Interference: • Political interference in the banking operations particularly in case of public sector banks has been held responsible for wide spread default. • The Agricultural Credit Review Committee had observed in 1989 that commercial banks in India are over controlled, overregulated and over managed by the central government as the co-operative banks are by the state government. • The committee had noted that in respect of rural loans, a large number of beneficiaries are identified not by banks or even by government agencies but by the functionaries of the political parties.
  • 50. Banking Sector Reforms • During deep Economic Crises in 1991, India decided to introduce economic reforms and banking sector reforms were the part of this package. In November 1991 a committee on Financial System under the Chairmanship of M. Narshimha, Submitted its report. • A committee on Banking Sector Reforms in April 1998 also submitted a report favouring Banking Reforms for India. • Following are the Banking Sector Reforms in India:
  • 51. 1. Prudential Regulation and Supervision: • Prudential norms have been started by RBI in order to impart professionalism in commercial banks. The purpose of prudential norms include proper disclosure of income, classification of assets and provision for Bad debts so as to ensure hat the books of commercial banks reflect the accurate and correct picture of financial position. • Prudential norms required banks to make 100% provision for all Non-performing Assets (NPAs). Funding for this purpose was placed at Rs. 10,000 crores phased over 2 years. 2. Reduction in SLR and CRR: • The high SLR and CRR reduced the profits of the banks. The SLR has been reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with banks for allocation to agriculture, industry, trade etc. • The Cash Reserve Ratio (CRR) is the cash ratio of a banks total deposits to be maintained with RBI. The CRR has been brought down from 15% in 1991 to 4.1% in June 2003. The purpose is to release the funds locked up with RBI.
  • 52. 3. Deregulation of Interest Rates: • The Narasimhan Committee advocated that interest rates should be allowed to be determined by market forces. Since 1992, interest rates has become much simpler and freer. a) Scheduled Commercial banks have now the freedom to set interest rates on their deposits subject to minimum floor rates and maximum ceiling rates. b) Interest rate on domestic term deposits has been decontrolled. c) The prime lending rate of SBI and other banks on general advances of over Rs. 2 lakhs has been reduced. d) Rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled. e) The interest rates on deposits and advances of all Co-operative banks have been deregulated subject to a minimum lending rate of 13%. 4. Freedom to raise Equity Capital from the Market Amendments: • The Banking Companies (Acquisation and Transfer of Undertakings) Act was amended to enable the banks to raise capital through public issues. This is subject to provision that the holding of Central Government would not fall below 51% of paid- up-capital. SBI has already raised substantial amount of funds through equity and bonds.
  • 53. 5. Changes in Branch Licensing Policy: • Scheduled Commercial Banks are given freedom to open new branches and upgrade extension counters, after attaining capital adequacy ratio and prudential accounting norms. The banks are also permitted to close non- viable branches other than in rural areas. 6. Entry of Private Sector Banks: • Now banking is open to private sector. New private sector banks have already started functioning. These new private sector banks are allowed to raise capital contribution from foreign institutional investors up to 20% and from NRIs up to 40%. This has led to increased competition. 7. Merger of Loss-making Banks with Profit Making banks and Amalgamation of Banks:
  • 54. Problems and challenges for Banking System in India: • Challenges faced by Indian Banks: The banking sector in India has made quick strides in restructuring & aligning itself to the new gung ho business environment. One of the major challenges that Indian banks are facing today is how to cope with competitive forces in order to strengthen their balance sheet. Nowadays, banks are whimpering with the burden of Non Performing Assets. It is truly felt that these debts, if not recovered, will eat into the very vitals of banks. 1. High transaction costs: High transaction cost of carrying non- performing assets in the books is the major concern of the Indian bank. The development led to strains in the operational efficiency & the accumulation of non-performing assets in loan portfolios.
  • 55. 2. Revolution of Information Technology: Banks in India are subject to great pressures to perform or else their very survival would be in jeopardy. The application of Information Technology & e-banking is becoming the order of the day with the banking system directing towards virtual banking. 3. Timely technological upgradation: In order to face competition, it is indispensable for Indian banks to soak up the technology & upgrade their services. 4. Intense Competition: The Reserve Bank of India & Indian Government kept banking industry unbolted for the participants of foreign banks and private sector banks. The foreign banks were also allowed to set up shop in India. Many new players have entered the market such as foreign banks, private banks, non - banking finance companies, etc. For growth and survival in the environment of cut throat competition banks have to follow the prompt and resourceful customer service, which calls for suitable customer centric policies & customer friendly procedures.
  • 56. • The areas which might imperil security in e-banking can be: a) Credit risk b) Liquidity, market risks, interest rate risk c) Legal risk • Opportunities of Banking industry: a) A growing economy b) Banking deregulation c) Increased client borrowing d) An increase in the number of banks e) An increase in the money supply f) Low government-set credit rates g) Larger customer checking account balances
  • 57. Bank Statistics in India: Sr No . Type of Bank No. of Branch es 1. State bank and its Associate Banks 19194 2. Nationalized Banks 48822 3. New Private Sector Banks 8103 4. Old private Sector Banks 5448 5. Foreign Banks 321 6. Regional Rural Banks 16719 7. Total 98607 Number of Bank Branches in India as on 31st march 2012