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Introduction • Definition of banking – functions of bank - Working of Banks-broad concepts • Structure of Banking Industry(SBI, PSBs, Pvt. Banks, Foreign Banks, RRB’S, Cooperative Banks) • Services offered by Banks • Bank Finance for Industries – Working capital facilities, their estimation in terms of Tandon Committee’s second method; Types of W,C, facilities: Cash Credit (Hyp), Cash Credit(Pledge), Advance against bills, bills/ cheque Purchase facility – Term loans/ Project Finance – Non fund based facilities like LC, LG, etc. – Facilities for import/ export
BANKING According to Sec 5(b) of the Banking Regulation Act 1949, Banking means Accepting , for the purpose of lending or investment, of deposit of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Banking Company means any company which transacts the business of banking in India. No Co. can carry on the business of banking in India unless it uses as part of its name at least one word Bank ,BankerorBanking
Permitted Banking Activities Under Section 6(1) of the Banking Regulation Act 1949 • The borrowing, raising or taking up of money, the lending or advancing of money either upon or without security. • The drawing, making, accepting,discounting,buying,selling,collecting and dealing in bills of exchange , Promissory notes , coupons , Drafts, Railways Receipt, warrants, debentures, certificates and other instruments and securities whether transferable or negotiable or not. • The granting and issuing of LC, TC • The buying , selling and dealing in bullion, • The buying and selling of foreign exchange • The receiving of all kind of bonds or valuable, on deposit or for safe custody .
The proving of safe deposit vaults • The collecting and transmitting of money and securities • Acting as agent • Contracting for public and private loan and negotiating and issuing the same • Undertaking and executing trust • Undertaking the administration of estates as executor, trustee • Managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claim
Features of Banking • Dealing in Money: The bank accept deposit from the public and advancing them as loan to the needy people. The deposit may be of different types- current, fixed, saving etc. based on various terms and condition. • Deposit must be withdrawable: the deposit made by the public can be withdrawable by cheque, draft and otherwise, i.e. the banks issue and pay cheques. The deposits are usually withdrawable on demand. • Dealing with credit: the banks are the institution that can create credit, i.e. creation of additional money for lending. Thus “ creation of credit “ is the unique feature of banking. • Commercial in nature: since all of the banking functions are carried on with the aim of making profit. • Nature of agent: besides the basic functions of accepting deposit and lending money as loan, bank possess the character of an agent because of their various agency services.
Evolution of Payments System • Precious metals like gold and silver (commodity money) • Paper currency • Checks • Electronic means of payment • Electronic money: Debit cards, Stored-value cards, Smart cards, E-cash
Progress of banking in India • Nationalisation of banks in 1969: 14 banks were nationalised • Branch expansion: Increased from 8260 in 1969 to 71177 in 2006 • Population served per branch has come down from 64000 to 16000 • A rural branch office serves 15 to 25 villages within a radius of 16 kms • However, at present only 32,180 villages out of 5 lakh have been covered
Deposit mobilisation: • 1951-1971 (20 years)- 700% or 7 times • 1971-1991 (20 years)- 3260% or 32.6 times • 1991- 2006 (11 years)- 1100% or 11 times • 2006-2010 ( 5 years) -700% or 7 times • Expansion of bank credit: Growing at 20-30% p.a. due to rapid growth in industrial and agricultural output • Development oriented banking: priority sector lending
Progress of banking in India • Diversification in banking: Banking has moved from deposit and lending to • Merchant banking and underwriting • Mutual funds • Retail banking • ATMs • Mobile Banking • Internet banking • Venture capital funds
Profitability of Banks • Reforms have shifted the focus of banks from being development oriented to being commercially viable • Prior to reforms banks were not profitable and in fact made losses for the following reasons: • Declining interest income • Increasing cost of operations
Profitability of banks (2) • Declining interest income was for the following reasons: • High proportion of deposits impounded for CRR and SLR, earning relatively low interest rates • Political interference- leading to huge NPAs • Rising costs of operations for banks was because of several reasons: economic and political
Profitability of Banks (3) • As per the Narasimham Committee (1991) the reasons for rising costs of banks were: • Uneconomic branch expansion • Heavy recruitment of employees • Growing indiscipline and inefficiency of staff due to trade union activities • Low productivity • Declining interest income and rising cost of operations of banks led to low profitability in the 90s
23-Dec-20065.25 • 6-Jan-20075.50 • 17-Feb-20075.75 • 3-Mar-20076.00 • 14-Apr-20076.25 • 28-Apr-20076.50 • 4-Aug-20077.00 • 10-Nov-20077.50 • 26-Apr-20087.75 • 10-May-20088.00 • 24-May-20088.25 • 5-Jul-20088.50 • 19-Jul-20088.75 • 30-Aug-20089.00 • 11-Oct-20087.50 • 11-Oct-20086.50 • 25-Oct-20086.00 • 8-Nov-20085.50 • 17-Jan-20095.00 • 13-Feb-20105.50 • 27-Feb-20105.75 • 24-Apr-20106.00
Reserve Bank of India Commercial Banks Regional Rural Banks Cooperative Banks Private Sector Banks Public Sector Banks State Cooperative Banks Central/District Cooperative Banks Indian Banks Foreign Banks Primary Credit Societies State bank Group Nationalised Banks Old Banks State Bank of India New Banks Subsidiary Banks Local Area Banks
Structure of RBI The organization of RBI can be divided into three parts: 1) Central Board of Directors. 2) Local Boards 3) Offices of RBI
Central Board of Directors : The organization and management of RBI is vested on the Central Board of Directors. It is responsible for the management of RBI.Central Board of Directors consist of 20 members. It is constituted as follows. a)One Governor: it is the highest authority of RBI. He is appointed by the Government of India for a term of 5 years. He can be re-appointed for another term. b)Four Deputy Governors: Four deputy Governors are nominated by Central Govt. for a term of 5 years c)Fifteen Directors :Other fifteen members of the Central Board are appointed by the Central Government. Out of these , four directors,one each from the four local Boards are nominated by the Government separately by the Central Government.
Ten directors nominated by the Central Government are among the experts of commerce,industries,finance,economics and cooperation. The finance secretary of the Government of India is also nominated as Govt. officer in the board. Ten directors are nominated for a period of 4 years. The Governor acts as the Chief Executive officer and Chairman of the Central Board of Directors. In his absence a deputy Governor nominated by the Governor, acts as the Chairman of the Central Board. The deputy governors and government’s officer nominee are not entitled to vote at the meetings of the Board. The Governor and four deputy Governors are full time officers of the Bank.
Local Boards : Besides the central board, there are local boards for four regional areas of the country with their head-quarters at Mumbai, Kolkata, Chennai, and New Delhi. Local Boards consist of five members each, appointed by the central Government for a term of 4 years to represent territorial and economic interests and the interests of co-operatives and indigenous banks. The function of the local boards is to advise the central board on general and specific issues referred to them and to perform duties which the central board delegates.
Offices of RBI: The Head office of the bank is situated in Mumbai and the offices of local boards are situated in Delhi, Kolkata and Chennai. In order to maintain the smooth working of banking system, RBI has opened local offices or branches in Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna, Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The RBI can open its offices with the permission of the Government of India. In places where there are no offices of the bank, it is represented by the state Bank of India and its associate banks as the agents of RBI.
RESERVE BANK OF INDIA • The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted for the need of following: • To regulate the issue of banknotes • To maintain reserves with a view to securing monetary stability and • To operate the credit and currency system of the country to its advantage.
RBI’s Major Functions • Supervisory & Regulatory • Promotional & Developmental • Refinance Activities
RBI’s Major Functions SUPERVISORY & REGULATORY
RBI’s Major Functions PROMOTIONAL & DEVELOPMENTAL
RBI’s Major Functions REFINANCE ACTIVITIES
SCHEDULED AND NON SCHEDULED BANKS • In the RBI ACT OF 1934, all banks listed in the second schedule is known as Scheduled banks • Its paid up capital and reserve are not less than Rs 5 Lakhs. • All Scheduled bank operations are under strict surveillance of RBI. • All nationalised banks, most private sector banks, foreign banks are scheduled. • Most cooperative banks are non- scheduled (not subjected to strict financial discipline).
Advantages of scheduled banks: A). RBI can rediscount the bills already discounted by themB). Their drafts, bank guarantee, letter of credit accepted in all government officesC). RBI acts as lender of last resortD). All government accounts and transaction through them E). More account holders and lesser interest payment towards deposits as compared to non scheduled banks
Non Schedule Banks: • Small size institutions which restrict their activities to local areas. • Paid up capital and reserves less than Rs 5 Lakhs • Can not deal in foreign exchange • After nationalization of banks almost all unscheduled banks weeded out.
Licensed Banks • No Bank can carry on the business of banking unless it hold a license granted by RBI • Provisions regarding License are contained in Section 22 of the Banking Regulation Act 1949 • A license granted if RBI satisfied that the bank has the capacity to pay its depositors as and when they demand. • License can be cancelled at any time if RBI not satisfied with the working of bank.
Public Sector Banks • 51% ownership with government PSUs include SBI, its subsidiaries and nationalized banks. • Old setup therefore capital assets are more • Branches are more including those in rural areas • Number of employees is high • Government control is more • NPA are much higher due to government interference
Private Sector Banks • Bank shall be listed as a public limited company under the Companies Act 1956.it will be governed by the provisions of Reserve bank of India Act and Banking Regulation Act. • The minimum paid-up capital shall be Rs 100 Crore with promoter’s contribution being 25% or 20% in case of paid up capital is more than Rs 100 Crore • The share of banks should be listed on stock exchange • Branch licensing shall be governed by existing policy whereby banks are free to open any branches without prior approval of RBI subject to satisfactory capital adequacy and prudential accounting norms.
Bank shall have to observe priority sector lending targets as applicable to other banks. • They are not allowed to setup a subsidiary or mutual funds in in first three years of establishment.
Revised guidelines issued by the RBI in Jan 2001. The major changes are: • Minimum paid-up capital for a new bank should be Rs. 200 which shall be increased to Rs 300 crore in subsequent 3 yr. after establishment of business • A non banking financial company may convert in to a commercial bank. If it satisfies the criteria. • A large industrial house should not promote any new bank • Preference would be given to promoters with expertise of financing priority areas.
Public Sector Bank Vs Pvt. Sector Banks • Both public and private sector banks are integral to Indian banking system and operate under the RBI’s regulations . • Ownership and functioning differ hugely.
Foreign Banks In order to operate in india, the foreign banks have to obtain a license from the Reserve Bank of India. For Granting The license , The following factors are considered: • Financial soundness of the bank • International and home country rating • Economic and political relations • Min Capital Requirement USD 25 mn
Regional Rural Banks Regional Rural Banks were setup by the government of india under the Regional Rural Bank Act 1976 with the specific purpose of providing credit and other facilities to the small and marginal farmers, agriculture laborers , small entrepreneurs in rural area 196 RRBs in india 29 RRBs have negative net worth of 1800 crore Approx 14519 branches Operating in 518 districts of 26 states
Structure: • RRBs have jointly setup by the Government of India, state Gov. • and sponsor commercial Bank. • Capital Requirement Rs 5 Crore ( 50% Central Gov. , 15% State Gov. and 35% by the sponsor bank) • Managerial assistance provided by the sponsor bank. • Chairman is to be appointed by sponsor bank in consultation with NABARD. • 9 board of director headed by a chairman • RBI allowed to accept foreign currency deposit
Cooperative banks Cooperative banks are a part of the set of institution( RBI, RRB, NABARD & Commercial Banks), which are engaged in financing rural & agricultural development. • Cooperative Banks carried on No profit No Loss basis. • Organized and managed on principal of cooperation, self help and mutual help. • Government sponsored and supported • Range of services narrow than the commercial banks • Too much dependence on RBI, NABARD & the government • Multiple regulation and control authorities .
Services Offered By Banks The services offered by commercial banks can be classified in to • Services to Depositors • Services to Borrowers for providing credit to them • Other Services
The traditional services mainly related to • Maintenance of different types of deposit accounts • Grant advance through cash credit, overdraft and loan • Purchasing discounting bills • Collection of cheques, bills and other instruments • Issue of performance and financial guarantee • Remittance • Provision of facilities of safe deposit and safe custody • Purchase and sale of securities
Personal Loan scheme • Loan Participation • Schemes for financing small industrial units • Schemes for financing of agriculture • Financing of road transport operators, other small borrowers • Credit transfer system • Collection/payment of certain periodical receipts/payments on behalf of customers • Credit Cards • Travelers Cheques • Gift Cheques • Lock box and night safe services • Services after usual banking hours • Other services
Financial Assistance provided by Banks
The primary function of a commercial bank is that of a broker and dealer in society’s money. Bank mobilize a large fraction of the liquid saving of the nation , and allocate them successfully and productively to those who need it. The major portion of bank’s funds is employed by way of loans and advances from wherein banks earn interest, discounts and conversion fees.
Commercial Banks Working Capital Term Loan Medium Term Long Term Cash Credit Pledge Installment Credit Equity Loan Hypothecation Industrial Estate Over Draft Construction of Shares Purchased Discounted Bills Machinery Export Financing Pre-Shipment Post-shipment