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COBK Session 1

Pradeepta Sethi
TAPMI
Why do we need banks ?

Market Frictions (Information, Transaction)

Financial Systems

Financial Functions

Channels: Capital Accumulation & TFP

Economic Growth
Evolution of banks
3,900 B.C. - Egypt adopted a banking service utilizing cows as
units of exchange
Money lending activity in India could be traced back to the Vedic
period, i.e., 2000 to 1400 BC.
Kautilyas Arthashastra dating back to 400 BC contained
references to creditors, lenders and lending rates.
Modern Banking has European origin
The word Bank is derived either from Old Italian Banca or Middle
French Banque both meaning a table or bench
A bench for keeping, lending, and exchanging of money or coins
in the market place by money lenders and money changers.
History of banking in India

Bank of Hindostan (1770 - 1832)

General Bank of India (1786 - 1791)

Bank of Calcutta (1806) - Bank of Bengal (1809)

Bank of Bombay (1840), Bank of Madras (1843)

Imperial Bank of India (1921)

Reserve Bank of India (1935)

Bank Nationalization (1969)


Definition of banks
Banking as accepting for the purpose of lending or
investment, of deposits of money from the public,
repayable on demand or otherwise and withdrawable by
cheque, draft, order otherwise.
The banking regulation act 1949 Sec 5(b)
3 primary activities of a commercial bank
l maintaining deposit accounts including current accounts,
l issue and pay cheques, and
l collect cheques for the bank's customers.
Primary functions of banks
Acceptance of deposits
l Current deposits, Savings deposits and Fixed deposits
Advancing loans
l Cash credit, Term loan, Overdraft, Bill discounting, Retail loan
Creation of credit
Clearing of cheques
Financing foreign trade
l Letters of Credit, EPC, PCFC etc.
Remittance of funds
Types of Commercial Banks

Scheduled Commercial Banks (SCBs)


l State Bank of India (SBI) - 1
l Nationalized banks - 20
l Private sector banks - 26
l Foreign banks - 43
l Regional rural banks (RRBs) - 47
Nonscheduled Commercial Banks
Commercial Banks

Both scheduled and nonscheduled commercial banks


are regulated under Banking Regulation Act, 1949.

Operate on a for profit basis.

Primarily engage in the acceptance of deposit and


extend loans to the general public, businesses and
the government.
Scheduled Banks

A bank which is listed in the 2nd Schedule of the Reserve


Bank of India Act, 1934.

Paid up capital and reserves not less than 5 lakhs.

The list includes State Bank of India, Nationalized Banks,


Foreign Banks, Regional Rural Banks & Other Scheduled
Commercial Banks (Private Banks).

Eligible for loans from the Reserve Bank of India at bank


rate & are also given membership to clearing houses.
Non-Scheduled Banks

Banks not under the 2nd schedule of R.B.I Act of 1934.

Paid up capital and reserves less than 5 lakhs.

They are not entitled to borrow from the RBI for normal
banking purposes, except, in emergency or abnormal
circumstances.

Nonscheduled state cooperative banks e.g. Delhi State


Cooperative Bank Ltd.

Non-scheduled urban cooperative banks e.g. Akhand


Anand Cooperative Bank Ltd., Surat.
Cooperative Banks

All banks registered under the Cooperative Societies


Act, 1912.

These banks run by an elected managing committee


with provisions of members rights and a set of
communally developed and approved by laws and
amendments.

Work on no profit, no loss basis.


Regional Rural Banks

Serve the rural areas and agricultural sectors with basic


banking and adequate financial services.

RRBs were set up to eliminate other unorganized


financial institutions like money lenders and
supplement the efforts of cooperative banks.

Commercial banks also sponsor RRBs e.g.


Maharashtra Gramin Bank (sponsored by the Bank of
Maharashtra)
Four tiers of banking system

First tier - 3 - 4 large Indian banks with domestic and


international presence along with branches of foreign
banks in India.

Second tier - Several mid-sized banking institutions


including niche banks with economy-wide presence.

Third tier - Old private sector banks, RRBs, and multi


state Urban Cooperative Banks.

Fourth tier - Small private local banks & cooperative


banks.
Banking systems

Universal Banking

Commercial banking || Investment banking

Branch banking || Unit Banking

Retail banking || Wholesale Banking


Recent developments

Deregulation of savings rates


l Deregulation from an earlier norm of 4% per annum to aid
product and price innovation in the long run.
l This is expected to push up the interest rates in the short
term, and especially on deposits of a high amount due to
intense competition.
l Higher interest rates imply higher costs for banks, and are
expected to affect their profitability.
l Costs are expected to rise for large scale borrowers as a
hike in interest rates might be accompanied with a
projected rise in loan rates.
Recent developments

New banking licenses


l RBI has eased the norms & granted 23 new banking
license - 2 Universal banks, 11 Payment banks & 10
small finance bank license.

l It will increase competition and reach of the banking


sector.

l Small banks will help in financial inclusion.

l on tap licensing of universal banks in the private sector.


Recent developments

Relaxation of branch authorization policy for tier II


cities
l The domestic banks do not need the RBI approval to set
up service offices, central processing centers and
administrative offices in the tier II cities, with a population
ranging between 50,000 to 99,999.

l The policy will spread the organized banking to the


remote areas of the country, and aid financial inclusion.
Recent developments

Subsidiary route for foreign banks


l New foreign players can conduct business through Wholly
owned Subsidiaries (WoS).

l It is promoting existing important foreign players to


incorporate themselves as Wholly owned Subsidiaries
(WoS) of foreign parent companies.

l This move is expected to benefit foreign players by


allowing them to expand their consumer base to semi
urban areas.
Recent developments

Relaxation of mobile payment guidelines


l RBI removed the cap of 50,000 for transactions through
mobile phones.

l This relaxation allowed banks to assess the involved risk,


and place their own limits while granting customers with
mobile banking facilities.

l Boost profitability by reducing transaction cost for banks.


Recent developments

Vision 2018
l Less-cash society
l Coverage wider access
l Convenience ease of use of products and processes
l Confidence integrity of systems, security of operations
l Convergence interoperability across service providers
l Cost cost effective services
Recent developments
Supervisory measures
l Asset Quality Review (AQR) - compared the quality of loan assets
against applicable Reserve Bank norms
l Central Repository of Information on Large Credits (CRILC) -
aggregate fund-based and non-fund based exposure of 50 million
and above
l Central Fraud Registry (CFR) - a web based searchable database of
frauds containing data for the last 13 years was made operational on
January 21, 2016
l Banking Regulation (Amendment) Ordinance, 2017 - initiate
insolvency resolution process in respect of a default, under the
provisions of the Insolvency and Bankruptcy Code, 2016 (IBC)
l Public Sector Asset Rehabilitation Agency (PARA)

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