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What is banking? 
Basic Definition: A system of trading money which: provides a 
safe place to save excess cash, known as deposits. 
supplies liquidity to the economy by loaning this money out to 
help businesses grow and to allow consumers to purchase 
consumer products, homes, cars etc. 
Section 5 (b) of the Banking Regulation Act 1949 defines 
“Banking” as “Accepting for the purpose of lending and 
investment, deposits of money from the public repayable on 
demand or otherwise and withdraw able by cheque, draft, 
order or otherwise” No definition of banking can be 
comprehensive enough in the present context
What are banks? 
Institutions which deals in money and credit. An 
intermediary, which handles other people’s money 
both for their advantage and to its own profits. A 
financial institution that links the flow of funds from 
savers to the users. Plays an important role in the 
economy of any country as they hold the saving of 
the public.
Banking in India
Objectives 
 To make an account of evolution of 
present day banking in India 
 To evaluate the interventions of state 
in banking sector over years and 
 To appraise the entry of foreign banks
They said 
 "More and more these days I 
find myself pondering how to 
reconcile my net income with 
my gross habits." 
John Nelson. 
 "If you owe the bank $100 
that's your problem. If you owe 
the bank $100 million, that's 
the bank's problem." 
JP Getty. 
 "We didn't actually overspend 
our budget. The allocation 
simply fell short of our 
expenditure." 
Keith Davis. 
 "Anyone who lives within their 
means suffers from a lack of 
imagination." 
Oscar Wilde.
Evolutionary Phases 
 Indigenous Reign 
 Direct Intervention 
of the State 
 Liberalization 
 Transition 
 Entry of Foreign 
Banks
Phase I: Indigenous banks 
 Vedas and the 
Manusmriti: 
 Kautalya’s Arthashastra: 
Suggested Maximum 
and Minimum Interest 
rate 
 Kautalya, Yajnyavalkya 
and Manu 
recommended 15 per 
cent interest per annum 
on capital. 
 British rule almost wiped 
out these tribes by 
bringing European 
Banks from urban 
 They moved to villages. 
They survive even today.
How did Sahukar lend? 
 Borrower is known 
 Very little documentation 
 Sahukar usually a bad 
guy 
 Exorbitant rates of 
interests 
 Compounded Shorter 
Intervals 
 Records Tampered 
 Mostly Mortgaged 
lending on Land, 
Properties, Jewels etc 
 Most cases poor 
borrowers surrendered 
their properties.
Phase II: Direct Intervention 
 Government Interventions 
began in 1930s 
 The Reserve Bank which is 
the Central Bank was 
created in 1935 by passing 
RBI Act 1934. 
 The RBI is the sole 
authority for 
◦ issuing bank notes and 
◦ the supervisory body for 
banking operations in India . 
◦ Supervising exchange 
control and banking 
regulations, and 
◦ administers the government's 
monetary policy. 
◦ granting licenses for new 
bank branches.
Intervention: Nationalization 
 In the wake of the Swadeshi 
Movement, a number of banks 
with Indian management were 
established in the country 
namely, 
◦ Punjab National Bank Ltd, Bank 
of India Ltd, Canara Bank Ltd, 
Indian Bank Ltd, the Bank of 
Baroda Ltd, the Central Bank of 
India Ltd. 
 In 1955, Govt. nationalized 
Imperial Bank of India with 
extensive banking facilities on 
a large scale especially in 
rural and semi-urban areas. 
 It formed State Bank of India 
to act as the principal agent of 
RBI and to handle banking 
transactions
Intervention: Nationalization 
 On July 19, 1969, 14 
major banks nationalized 
and 
 in 15th April 1980 six 
more commercial 
 80% of the banking 
segment in India under 
Government ownership 
in 1990. 
 the branches of the 
public sector bank India 
rose to approximately 
800% in deposits and 
advances took a huge 
jump by 11,000%.
Effect of Nationalization 
 the focus of lending 
 priority sectors were 
agriculture, small-scale 
industry, retail 
trade, small business 
and small transport 
operators 
 poverty alleviation and 
employment 
generation programs. 
 the success of green 
revolution and the 
increase of aggregate 
food grain production
Other sides of 
Nationalization 
 Borrowings and lending restricted, not on 
business line 
 Deterioration of Banker-customers 
relationship 
 Poor Services 
 Employees Strikes 
 No Healthy competition among banks 
 Mounting hidden NPAs
Phase III - Liberalization 
 Constitution of Narasimham 
committee and its report on 
Banking reforms in 1991. 
 It covered the areas of interest 
rate deregulation & directed credit 
rules, 
 Statutory preemptions and entry 
deregulation for both domestic 
and foreign banks. 
 Lowering of the CRR and SLR 
 Interest rate liberalization 
 Do away with Entry barriers. By 
March 2004, the new private 
sector banks and the foreign 
banks share shared almost 20% 
of total assets 
 Prudential Norms act against 
NPAs
Phase IV: Transition 
 Most Indian banks lagging 
behind the areas of customer 
funds transfer and clearing 
systems. 
 Over-staffed and not able to 
compete with new generation 
private banks 
 While these new banks and 
foreign banks still face 
restrictions in their activities. 
 New banks are well-capitalized, 
 Use modern equipment and 
 Attract high-caliber 
employees. Indian banks were 
given time to 
 Indian Banks to strengthen 
their balance sheets, 
consolidate and overall 
become more robust, so that 
they could compete.
Phase V: Entry of Foreign 
Banks 
 Two of domestic banks in 
India have turned like Foreign 
Banks. About 74 per cent of 
holdings of ICICI and HDFC 
bank are in the hands of 
foreigners. 
 Phase II of roadmap foreign 
banks may be permitted to 
have overall investment of 74 
per cent in the private banks 
of India in April 2009 
 New banks to be in India 
◦ Royal Bank of Scotland 
◦ Switzerland's UBS 
◦ US-based GE Capital 
◦ Credit Suisse Group 
◦ Industrial and Commercial Bank 
of China 
 Areas of Concentration are 
Risk Management, 
customizing the products and 
Value creation.
Types of banks in India 
 Central Bank: The Reserve Bank of India is the 
central Bank that is fully owned by the 
Government 
 Public Sector Banks: State Bank Group, 
Regional rural banks 
 Private Sector Banks: Foreign Banks, 
Scheduled and Non- Scheduled Banks 
 Co-operative Sector: State Co-operative 
Banks, Central Co-operative Banks, Primary 
Agriculture Credit Societies 
 Development Banks/Financial Institutions: 
IDBI, NABARD
Commercial Banking 
INTRODUCTION 
Commercial banks are type of financial institutions that 
lends money and provides transactional, savings, and 
money market accounts and that accepts time deposits. 
Commercial banking play very important role in economy by 
mobilizing savings from various sectors.
INDIAN BANKING SYSTEM
Public Sector Banks 
A Public Sector bank is one in which, the Government of India 
holds a majority stake. It is as good as the government 
running the bank. Since the public decide on who runs the 
government, these banks that are fully/partially owned by the 
government are called public sector banks. The public sector 
commercial banking started with setting up of State bank of 
India in 1955. 
Public Sector Banks (Nationalised banks): 
State Bank of India (SBI) 
Canara Bank 
Indian overseas bank 
Dena Bank 
Oriental Bank of Commerce
Private sector banks 
 Banks which are owned by individuals corporations 
and not by government or cooperative societies fall 
into this category. Private banks use the word 
‘limited’ after their names. 
 Private Sector Banks: 
 HDFC Bank 
 ICICI Bank 
 Federal Bank 
 ING Vysya Bank 
 Axis Bank (formerly UTI Bank)
Regional rural banks(RRB’s) 
 The Government of India set up Regional Rural Banks 
(RRBs) on 
October 2, 1975 which were sponsored by Syndicate Bank, 
State 
Bank of India, Punjab National Bank, United Commercial 
Bank and United Bank of India. Capital share being 50% by 
the central government, 15% by the state government and 
35% by the scheduled bank. The objective was to provide 
credit and other facilities to small and marginal farmers and 
agricultural labourers.
CO-OPERATIVE BANKS 
 A co-operative bank is a financial entity which belongs to its 
members, who are at the same time the owners and the 
customers of their bank. Co-operative banks are often 
created by persons belonging to the same local or 
professional community or sharing a common interest. Co-operative 
banks are playing an important role in small towns 
and villages. 
 List of Co-operative bank 
 Ahmedabad Mercantile Co-Op Bank Ltd. 
 Kalupur Commercial Coop.Bank Ltd. 
 Madhavpura Mercantile Co-Op Bank Ltd. 
 Mehsana Urban Co-Op Bank Ltd. 
 Nutan Nagarik Sahakari Bank Ltd
National Bank For agricultural and rural 
development (NABARD) 
 NABARD was set up through an Act of the Indian Parliament 
on 12 July 1982 as an apex development bank for agriculture 
and rural development. 
 NABARD is an apex DevelopmentBank that facilitates credit 
flow for promotion and development ofagriculture, small-scale 
industries, cottage and village industries, handicrafts and 
other rural crafts.
Foreign banks 
 Foreign banks are those banks which are registered or 
incorporated outside India. They have their office or branch in 
India. The globalisation of Indian economy will encourage the 
presence of more foreign banks. 
 Some of the foreign banks have successfully introduced 
latest technologies in the banking practices in India. This has 
made the banking business in the country more smooth and 
interesting for the customers. 
 List of foreign banks in India 
 ABN AMRO 
 Citibank India 
 HSBC (Hongkong & Shanghai Banking Corporation) 
 Standard Chartered Bank
Commercial banking – primary 
and secondary functions 
Primary functions 
 Accepting deposits 
 Granting loans and advances 
Secondary functions 
 Issuing letters of credit, travellers cheques 
 Undertaking safe custody of valuables, important documents, 
and securities by providing safe deposit vaults or lockers 
 Providing customers with facilities of foreign exchange 
 Transferring money from one place to another; and from one 
branch to another branch of the bank. Collecting and 
supplying business information. Issuing demand drafts and 
pay orders 
 Providing reports on the credit worthiness of customers.
Role of Commercial Banks 
 Providing documentary and standby letters of credit (trade 
finance), guarantees, performance bonds, securities 
underwriting commitments and other forms of off-balance 
sheet exposures 
 Safekeeping of documents and other items in safe deposit 
boxes 
 Currency exchange 
 Issue of banknotes (promissory notes issued by a banker and 
payable to bearer on demand) Processing of payments by 
way of telegraphic transfer, EFTPOS, internet banking or 
other means Issuing bank drafts and bank cheques 
 Accepting money on term deposit Lending money by way of 
overdraft, installment loan or otherwise 
 Credit intermediation 
 Credit quality improvement
Credit Creation 
Credit creation is considered to be the main function of 
commercial banks these days. “Credit creation refers to the 
power of commercial banks to expand secondary deposits 
either through the process of making loans or through 
investment in securities”.
Basic concepts used in the 
process of credit creation 
1. Bank deposits 
2. Business Institutions 
3. Cash Reserve Ratio 
4. Excess Reserves 
5. Credit Multiplier
Process of Credit Creation 
 Single Bank System 
 Multiple Bank System
Limitations of credit creation 
 Cash Reserve Ratio 
 Amount of Primary Deposits 
 Banking Habits of the People 
 Credit Policy of the Central Bank 
 Policy of other banks 
 Nature of Securities or Availability of Good 
Borrowers 
 Commercial and Industrial Condition
Services rendered by banks 
Banks offer the following services to account holders at their 
specified branches 
 multi-city / Payable at Par (PAP) cheque facility 
 anywhere banking facility 
 trade services 
 phone banking facility 
 internet banking facility 
 credit card 
 debit/ATM card 
 mobile banking and Real Time Gross Settlement (RTGS) 
 Locker facilities
Clearing Procedure 
 Bank Clearing house: The clearing house is a voluntary 
association of banks under the management of a bank where 
the settlement accounts are maintained. Wherever Reserve 
Bank of India has its office (and a banking department), the 
clearing house is managed by it. In the absence of an office 
of the Reserve Bank, the clearing house is managed by the 
State Bank of India, its associate banks and in a few cases by 
public sector banks. 
 In India there are about 1050 cheques clearing houses. 
These clearing houses clear and settle transactions relating 
to various types of paper based instruments like cheques, 
drafts, payment orders, interest / dividend warrants, etc.
Introduction to banking
Clearing Process 
The clearing process begins with the deposit of a 
cheque/other clearing instruments referred above in a bank. 
The bank arranges the cheques submitted to it for clearing 
bank wise and presents it in the clearing house to other 
banks. When there are more than one bank branch for a bank 
in the clearing area, they would have a coordinating branch/ 
service branch to take care of presenting the cheques to the 
clearing house. 
Upon receipt of the cheques/other instruments, they are 
passed for payment if the funds are available and the banker 
is satisfied about the genuineness of the instrument. The 
cheques that are unpaid are returned to the presenting bank 
through another clearing called the Return Clearing. The 
realization of the funds occurs after the completion of return 
clearing and by the absence of an unpaid cheque
Settlement of Funds: The settlement of funds in clearing 
occurs at several levels. The aggregate amount or value of 
cheques presented by a bank on other banks represents the 
claim by that bank on other banks. Similar claims are made 
by all the banks on every other bank in the clearing. 
A net settlement is arrived at the clearing house and the debit 
or credit position of the bank is determined. These are 
booked in their current accounts maintained by the settling 
bank. This represents the inter- bank settlement. The 
settlement of funds between the service branch and the 
branch concerned represents the transfer of funds to the 
branch level. The payment process is completed only when 
the funds are debited from the drawer’s account and credited 
to the payee’s account. This occurs after the completion of 
the return clearing mentioned earlier
Modern technology in banking 
 Information technology is one of the most important 
facilitators for the transformation of the Indian banking 
industry in terms of its transactions processing as well as for 
various other internal systems and processes.The various 
technological platforms used by banks for the conduct of their 
day to day operations, their manner of reporting and the way 
in which interbank transactions and clea 
 The process of computerisation marked the beginning of all 
technological initiatives in the banking industry. 
Computerisation of bank branches had started with 
installation of simple computers to automate the functioning 
of branches, especially at high traffic branches. Thereafter, 
Total Branch Automation was in use, which did not involve 
bank level branch networking, ring is affected has evolved 
substantially over the years.
Core banking 
Networking of branches are now undertaken to ensure better 
customer service. Core Banking Solutions (CBS) is the 
networking of the branches of a bank, so as to enable the 
customers to operate their accounts from any bank branch, 
regardless of which branch he opened the account with. The 
networking of branches under CBS enables centralized data 
management and aids in the implementation of internet and 
mobile banking. Besides, CBS helps in bringing the complete 
operations of banks under a single technological platform. 
CBS implementation in the Indian banking industry is still 
underway. The vast geographical spread of the branches in 
the country is the primary reason for the inability of banks to 
attain complete CBS implementation.
ATM 
 ATMs were introduced to the Indian banking industry in the 
early 1990s initiated by foreign banks. Most foreign banks 
and some private sector players suffered from a serious 
handicap at that time- lack of a strong branch network. ATM 
technology was used as a means to partially overcome this 
handicap by reaching out to the customers at a lower initial 
and transaction costs and offering hassle free services. Since 
then, innovations in ATM technology have come a long way 
and customer receptiveness has also increased manifold. 
Public sector banks have also now entered the race for 
expansion of ATM networks. Development of ATM networks is 
not only leveraged for lowering the transaction costs, but also 
as an effective marketing channel resource.
Electronic fund transfer 
system 
There are various types of electronic clearing systems 
functioning in the retail payments area in the country. Some of 
them are ECS, NEFT etc. 
Electronic Clearing Service (ECS) is a retail payment 
system that can be used to make bulk payments / receipts of 
a similar nature especially where each individual payment is 
of a repetitive nature and of relatively smaller amount. This 
facility is meant for companies and government departments 
to make/receive large volumes of payments rather than for 
funds transfers by individuals. The ECS facility is available in 
47 centers across India operated by RBI at places where it 
manages the clearing houses and by SBI and its associates 
in other centers. The ECS is further divided into two types – 
ECS (Credit) to make bulk payments to individuals/vendors 
and ECS (Debit) to receive bulk utility payments from 
individuals
National Electronic Funds Transfer (NEFT) system:- is a 
nationwide funds transfer system to facilitate transfer of funds 
from any bank branch to any other bank branch. This is typically 
for individual / single payments. The system uses the concept of 
centralized accounting system and the bank’s account that is 
sending or receiving the funds transfer instructions, gets 
operated at one center, viz. Mumbai only. The individual 
branches participating in NEFT could be located anywhere 
across the country. The beneficiary gets the credit on the same 
Day or the next Day depending on the time of settlement. NEFT 
operates on a deferred net settlement (DNS) basis which settles 
transactions in batches. Presently it is settled in six batches the 
last one being 1600 hrs. on a weekday and 3 batches with the 
last one being 1200hrs on a Saturday. To participate in NEFT the 
participating banks branch needs to have IFSC code 
Indian Financial System Code (IFSC) is an alpha numeric code 
designed to uniquely identify the bank-branches in India. This is 
11 digit code with first 4 characters representing the banks code, 
the next character reserved as control character (Presently 0 
appears in the fifth position) and remaining 6 characters to 
identify the branch. The MICR code has 9 digits to identify the 
bank-branch.
Real Time Gross Settlement(RTGS) 
It is a large value funds transfer system whereby financial 
intermediaries can settle interbank transfers for their own 
account as well as for their customers on a “real time” and on 
“gross” basis. The system effects final settlement of interbank 
funds transfers on a continuous, transaction- by-transaction 
basis throughout the processing day(RTGS business hours). 
The RTGS system is primarily for large value transactions. 
The minimum amount to be remitted through RTGS is Rs.1 
lakh. There is no upper ceiling for RTGS transactions. On a 
typical day, RTGS handles about 14000 transactions a day 
for an approximate value of Rs.1,50,000 crore 
While RTGS remittance would be credited to a beneficiary’s 
account by maximum time lag of two hours, NEFT transaction 
depending on the timing of the transfer will be transferred the 
same day or the next day and in both the cases when the 
transfer has not happened the money would be returned to 
payer’s account
Internet Banking 
Internet banking in India began taking roots only from the early 
2000s. Internet banking services are offered in three levels. The first 
level is of a bank’s informational website, wherein only queries are 
handled; the second level includes Simple Transactional Websites, 
which enables customers to give instructions, online applications 
and balance enquiries. Under Simple Transactional Websites, no 
fund based transactions are allowed to be conducted. Internet 
banking in India has reached level three, offering Fully Transactional 
Websites, which allow for fund transfers and various value added 
services. 
Internet banking poses high operational, security and legal risks. 
This has restrained the development of internet banking in India. 
The guidelines governing internet banking operations in India covers 
a number of technological, security related and legal issues to be 
addressed in relation to internet banking. According to the earlier 
guidelines, all internet banking services had to be denominated in 
local currency, but now, even foreign exchange services, for the 
permitted underlying transactions, can be offered through internet 
banking.
Phone Banking and Mobile Banking 
Phone and mobile banking are a fairly recent phenomenon for the 
Indian banking industry. There exist operative guidelines and 
restrictions on the type and quantum of transactions that can be 
undertaken via this route. Phone banking channels function through 
an Interactive Voice Response System (IVRS) or tele-banking 
executives of the banks. 
The transactions are limited to balance enquiries, transaction 
enquiries, stop payment instructions on cheques and funds transfers 
of small amounts (per transaction limit of Rs 2500, overall cap of Rs 
5000 per day per customer). According to the draft guidelines on 
mobile banking, only banks which are licensed and supervised in 
India and have a physical presence in India re allowed to offer 
mobile banking services. Besides, only rupee based services can be 
offered. Mobile banking services are to be restricted to bank account 
and credit card account holders which are KYC and AMC compliant.
THANK YOU

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Introduction to banking

  • 1. What is banking? Basic Definition: A system of trading money which: provides a safe place to save excess cash, known as deposits. supplies liquidity to the economy by loaning this money out to help businesses grow and to allow consumers to purchase consumer products, homes, cars etc. Section 5 (b) of the Banking Regulation Act 1949 defines “Banking” as “Accepting for the purpose of lending and investment, deposits of money from the public repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise” No definition of banking can be comprehensive enough in the present context
  • 2. What are banks? Institutions which deals in money and credit. An intermediary, which handles other people’s money both for their advantage and to its own profits. A financial institution that links the flow of funds from savers to the users. Plays an important role in the economy of any country as they hold the saving of the public.
  • 4. Objectives  To make an account of evolution of present day banking in India  To evaluate the interventions of state in banking sector over years and  To appraise the entry of foreign banks
  • 5. They said  "More and more these days I find myself pondering how to reconcile my net income with my gross habits." John Nelson.  "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." JP Getty.  "We didn't actually overspend our budget. The allocation simply fell short of our expenditure." Keith Davis.  "Anyone who lives within their means suffers from a lack of imagination." Oscar Wilde.
  • 6. Evolutionary Phases  Indigenous Reign  Direct Intervention of the State  Liberalization  Transition  Entry of Foreign Banks
  • 7. Phase I: Indigenous banks  Vedas and the Manusmriti:  Kautalya’s Arthashastra: Suggested Maximum and Minimum Interest rate  Kautalya, Yajnyavalkya and Manu recommended 15 per cent interest per annum on capital.  British rule almost wiped out these tribes by bringing European Banks from urban  They moved to villages. They survive even today.
  • 8. How did Sahukar lend?  Borrower is known  Very little documentation  Sahukar usually a bad guy  Exorbitant rates of interests  Compounded Shorter Intervals  Records Tampered  Mostly Mortgaged lending on Land, Properties, Jewels etc  Most cases poor borrowers surrendered their properties.
  • 9. Phase II: Direct Intervention  Government Interventions began in 1930s  The Reserve Bank which is the Central Bank was created in 1935 by passing RBI Act 1934.  The RBI is the sole authority for ◦ issuing bank notes and ◦ the supervisory body for banking operations in India . ◦ Supervising exchange control and banking regulations, and ◦ administers the government's monetary policy. ◦ granting licenses for new bank branches.
  • 10. Intervention: Nationalization  In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely, ◦ Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd.  In 1955, Govt. nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas.  It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions
  • 11. Intervention: Nationalization  On July 19, 1969, 14 major banks nationalized and  in 15th April 1980 six more commercial  80% of the banking segment in India under Government ownership in 1990.  the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.
  • 12. Effect of Nationalization  the focus of lending  priority sectors were agriculture, small-scale industry, retail trade, small business and small transport operators  poverty alleviation and employment generation programs.  the success of green revolution and the increase of aggregate food grain production
  • 13. Other sides of Nationalization  Borrowings and lending restricted, not on business line  Deterioration of Banker-customers relationship  Poor Services  Employees Strikes  No Healthy competition among banks  Mounting hidden NPAs
  • 14. Phase III - Liberalization  Constitution of Narasimham committee and its report on Banking reforms in 1991.  It covered the areas of interest rate deregulation & directed credit rules,  Statutory preemptions and entry deregulation for both domestic and foreign banks.  Lowering of the CRR and SLR  Interest rate liberalization  Do away with Entry barriers. By March 2004, the new private sector banks and the foreign banks share shared almost 20% of total assets  Prudential Norms act against NPAs
  • 15. Phase IV: Transition  Most Indian banks lagging behind the areas of customer funds transfer and clearing systems.  Over-staffed and not able to compete with new generation private banks  While these new banks and foreign banks still face restrictions in their activities.  New banks are well-capitalized,  Use modern equipment and  Attract high-caliber employees. Indian banks were given time to  Indian Banks to strengthen their balance sheets, consolidate and overall become more robust, so that they could compete.
  • 16. Phase V: Entry of Foreign Banks  Two of domestic banks in India have turned like Foreign Banks. About 74 per cent of holdings of ICICI and HDFC bank are in the hands of foreigners.  Phase II of roadmap foreign banks may be permitted to have overall investment of 74 per cent in the private banks of India in April 2009  New banks to be in India ◦ Royal Bank of Scotland ◦ Switzerland's UBS ◦ US-based GE Capital ◦ Credit Suisse Group ◦ Industrial and Commercial Bank of China  Areas of Concentration are Risk Management, customizing the products and Value creation.
  • 17. Types of banks in India  Central Bank: The Reserve Bank of India is the central Bank that is fully owned by the Government  Public Sector Banks: State Bank Group, Regional rural banks  Private Sector Banks: Foreign Banks, Scheduled and Non- Scheduled Banks  Co-operative Sector: State Co-operative Banks, Central Co-operative Banks, Primary Agriculture Credit Societies  Development Banks/Financial Institutions: IDBI, NABARD
  • 18. Commercial Banking INTRODUCTION Commercial banks are type of financial institutions that lends money and provides transactional, savings, and money market accounts and that accepts time deposits. Commercial banking play very important role in economy by mobilizing savings from various sectors.
  • 20. Public Sector Banks A Public Sector bank is one in which, the Government of India holds a majority stake. It is as good as the government running the bank. Since the public decide on who runs the government, these banks that are fully/partially owned by the government are called public sector banks. The public sector commercial banking started with setting up of State bank of India in 1955. Public Sector Banks (Nationalised banks): State Bank of India (SBI) Canara Bank Indian overseas bank Dena Bank Oriental Bank of Commerce
  • 21. Private sector banks  Banks which are owned by individuals corporations and not by government or cooperative societies fall into this category. Private banks use the word ‘limited’ after their names.  Private Sector Banks:  HDFC Bank  ICICI Bank  Federal Bank  ING Vysya Bank  Axis Bank (formerly UTI Bank)
  • 22. Regional rural banks(RRB’s)  The Government of India set up Regional Rural Banks (RRBs) on October 2, 1975 which were sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. Capital share being 50% by the central government, 15% by the state government and 35% by the scheduled bank. The objective was to provide credit and other facilities to small and marginal farmers and agricultural labourers.
  • 23. CO-OPERATIVE BANKS  A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks are playing an important role in small towns and villages.  List of Co-operative bank  Ahmedabad Mercantile Co-Op Bank Ltd.  Kalupur Commercial Coop.Bank Ltd.  Madhavpura Mercantile Co-Op Bank Ltd.  Mehsana Urban Co-Op Bank Ltd.  Nutan Nagarik Sahakari Bank Ltd
  • 24. National Bank For agricultural and rural development (NABARD)  NABARD was set up through an Act of the Indian Parliament on 12 July 1982 as an apex development bank for agriculture and rural development.  NABARD is an apex DevelopmentBank that facilitates credit flow for promotion and development ofagriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts.
  • 25. Foreign banks  Foreign banks are those banks which are registered or incorporated outside India. They have their office or branch in India. The globalisation of Indian economy will encourage the presence of more foreign banks.  Some of the foreign banks have successfully introduced latest technologies in the banking practices in India. This has made the banking business in the country more smooth and interesting for the customers.  List of foreign banks in India  ABN AMRO  Citibank India  HSBC (Hongkong & Shanghai Banking Corporation)  Standard Chartered Bank
  • 26. Commercial banking – primary and secondary functions Primary functions  Accepting deposits  Granting loans and advances Secondary functions  Issuing letters of credit, travellers cheques  Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers  Providing customers with facilities of foreign exchange  Transferring money from one place to another; and from one branch to another branch of the bank. Collecting and supplying business information. Issuing demand drafts and pay orders  Providing reports on the credit worthiness of customers.
  • 27. Role of Commercial Banks  Providing documentary and standby letters of credit (trade finance), guarantees, performance bonds, securities underwriting commitments and other forms of off-balance sheet exposures  Safekeeping of documents and other items in safe deposit boxes  Currency exchange  Issue of banknotes (promissory notes issued by a banker and payable to bearer on demand) Processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means Issuing bank drafts and bank cheques  Accepting money on term deposit Lending money by way of overdraft, installment loan or otherwise  Credit intermediation  Credit quality improvement
  • 28. Credit Creation Credit creation is considered to be the main function of commercial banks these days. “Credit creation refers to the power of commercial banks to expand secondary deposits either through the process of making loans or through investment in securities”.
  • 29. Basic concepts used in the process of credit creation 1. Bank deposits 2. Business Institutions 3. Cash Reserve Ratio 4. Excess Reserves 5. Credit Multiplier
  • 30. Process of Credit Creation  Single Bank System  Multiple Bank System
  • 31. Limitations of credit creation  Cash Reserve Ratio  Amount of Primary Deposits  Banking Habits of the People  Credit Policy of the Central Bank  Policy of other banks  Nature of Securities or Availability of Good Borrowers  Commercial and Industrial Condition
  • 32. Services rendered by banks Banks offer the following services to account holders at their specified branches  multi-city / Payable at Par (PAP) cheque facility  anywhere banking facility  trade services  phone banking facility  internet banking facility  credit card  debit/ATM card  mobile banking and Real Time Gross Settlement (RTGS)  Locker facilities
  • 33. Clearing Procedure  Bank Clearing house: The clearing house is a voluntary association of banks under the management of a bank where the settlement accounts are maintained. Wherever Reserve Bank of India has its office (and a banking department), the clearing house is managed by it. In the absence of an office of the Reserve Bank, the clearing house is managed by the State Bank of India, its associate banks and in a few cases by public sector banks.  In India there are about 1050 cheques clearing houses. These clearing houses clear and settle transactions relating to various types of paper based instruments like cheques, drafts, payment orders, interest / dividend warrants, etc.
  • 35. Clearing Process The clearing process begins with the deposit of a cheque/other clearing instruments referred above in a bank. The bank arranges the cheques submitted to it for clearing bank wise and presents it in the clearing house to other banks. When there are more than one bank branch for a bank in the clearing area, they would have a coordinating branch/ service branch to take care of presenting the cheques to the clearing house. Upon receipt of the cheques/other instruments, they are passed for payment if the funds are available and the banker is satisfied about the genuineness of the instrument. The cheques that are unpaid are returned to the presenting bank through another clearing called the Return Clearing. The realization of the funds occurs after the completion of return clearing and by the absence of an unpaid cheque
  • 36. Settlement of Funds: The settlement of funds in clearing occurs at several levels. The aggregate amount or value of cheques presented by a bank on other banks represents the claim by that bank on other banks. Similar claims are made by all the banks on every other bank in the clearing. A net settlement is arrived at the clearing house and the debit or credit position of the bank is determined. These are booked in their current accounts maintained by the settling bank. This represents the inter- bank settlement. The settlement of funds between the service branch and the branch concerned represents the transfer of funds to the branch level. The payment process is completed only when the funds are debited from the drawer’s account and credited to the payee’s account. This occurs after the completion of the return clearing mentioned earlier
  • 37. Modern technology in banking  Information technology is one of the most important facilitators for the transformation of the Indian banking industry in terms of its transactions processing as well as for various other internal systems and processes.The various technological platforms used by banks for the conduct of their day to day operations, their manner of reporting and the way in which interbank transactions and clea  The process of computerisation marked the beginning of all technological initiatives in the banking industry. Computerisation of bank branches had started with installation of simple computers to automate the functioning of branches, especially at high traffic branches. Thereafter, Total Branch Automation was in use, which did not involve bank level branch networking, ring is affected has evolved substantially over the years.
  • 38. Core banking Networking of branches are now undertaken to ensure better customer service. Core Banking Solutions (CBS) is the networking of the branches of a bank, so as to enable the customers to operate their accounts from any bank branch, regardless of which branch he opened the account with. The networking of branches under CBS enables centralized data management and aids in the implementation of internet and mobile banking. Besides, CBS helps in bringing the complete operations of banks under a single technological platform. CBS implementation in the Indian banking industry is still underway. The vast geographical spread of the branches in the country is the primary reason for the inability of banks to attain complete CBS implementation.
  • 39. ATM  ATMs were introduced to the Indian banking industry in the early 1990s initiated by foreign banks. Most foreign banks and some private sector players suffered from a serious handicap at that time- lack of a strong branch network. ATM technology was used as a means to partially overcome this handicap by reaching out to the customers at a lower initial and transaction costs and offering hassle free services. Since then, innovations in ATM technology have come a long way and customer receptiveness has also increased manifold. Public sector banks have also now entered the race for expansion of ATM networks. Development of ATM networks is not only leveraged for lowering the transaction costs, but also as an effective marketing channel resource.
  • 40. Electronic fund transfer system There are various types of electronic clearing systems functioning in the retail payments area in the country. Some of them are ECS, NEFT etc. Electronic Clearing Service (ECS) is a retail payment system that can be used to make bulk payments / receipts of a similar nature especially where each individual payment is of a repetitive nature and of relatively smaller amount. This facility is meant for companies and government departments to make/receive large volumes of payments rather than for funds transfers by individuals. The ECS facility is available in 47 centers across India operated by RBI at places where it manages the clearing houses and by SBI and its associates in other centers. The ECS is further divided into two types – ECS (Credit) to make bulk payments to individuals/vendors and ECS (Debit) to receive bulk utility payments from individuals
  • 41. National Electronic Funds Transfer (NEFT) system:- is a nationwide funds transfer system to facilitate transfer of funds from any bank branch to any other bank branch. This is typically for individual / single payments. The system uses the concept of centralized accounting system and the bank’s account that is sending or receiving the funds transfer instructions, gets operated at one center, viz. Mumbai only. The individual branches participating in NEFT could be located anywhere across the country. The beneficiary gets the credit on the same Day or the next Day depending on the time of settlement. NEFT operates on a deferred net settlement (DNS) basis which settles transactions in batches. Presently it is settled in six batches the last one being 1600 hrs. on a weekday and 3 batches with the last one being 1200hrs on a Saturday. To participate in NEFT the participating banks branch needs to have IFSC code Indian Financial System Code (IFSC) is an alpha numeric code designed to uniquely identify the bank-branches in India. This is 11 digit code with first 4 characters representing the banks code, the next character reserved as control character (Presently 0 appears in the fifth position) and remaining 6 characters to identify the branch. The MICR code has 9 digits to identify the bank-branch.
  • 42. Real Time Gross Settlement(RTGS) It is a large value funds transfer system whereby financial intermediaries can settle interbank transfers for their own account as well as for their customers on a “real time” and on “gross” basis. The system effects final settlement of interbank funds transfers on a continuous, transaction- by-transaction basis throughout the processing day(RTGS business hours). The RTGS system is primarily for large value transactions. The minimum amount to be remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions. On a typical day, RTGS handles about 14000 transactions a day for an approximate value of Rs.1,50,000 crore While RTGS remittance would be credited to a beneficiary’s account by maximum time lag of two hours, NEFT transaction depending on the timing of the transfer will be transferred the same day or the next day and in both the cases when the transfer has not happened the money would be returned to payer’s account
  • 43. Internet Banking Internet banking in India began taking roots only from the early 2000s. Internet banking services are offered in three levels. The first level is of a bank’s informational website, wherein only queries are handled; the second level includes Simple Transactional Websites, which enables customers to give instructions, online applications and balance enquiries. Under Simple Transactional Websites, no fund based transactions are allowed to be conducted. Internet banking in India has reached level three, offering Fully Transactional Websites, which allow for fund transfers and various value added services. Internet banking poses high operational, security and legal risks. This has restrained the development of internet banking in India. The guidelines governing internet banking operations in India covers a number of technological, security related and legal issues to be addressed in relation to internet banking. According to the earlier guidelines, all internet banking services had to be denominated in local currency, but now, even foreign exchange services, for the permitted underlying transactions, can be offered through internet banking.
  • 44. Phone Banking and Mobile Banking Phone and mobile banking are a fairly recent phenomenon for the Indian banking industry. There exist operative guidelines and restrictions on the type and quantum of transactions that can be undertaken via this route. Phone banking channels function through an Interactive Voice Response System (IVRS) or tele-banking executives of the banks. The transactions are limited to balance enquiries, transaction enquiries, stop payment instructions on cheques and funds transfers of small amounts (per transaction limit of Rs 2500, overall cap of Rs 5000 per day per customer). According to the draft guidelines on mobile banking, only banks which are licensed and supervised in India and have a physical presence in India re allowed to offer mobile banking services. Besides, only rupee based services can be offered. Mobile banking services are to be restricted to bank account and credit card account holders which are KYC and AMC compliant.