Session:1

Overview of Banking
& Financial Services
VIVEK SAXENA
 Today's Agenda
• What is a Financial System?
• What is a Financial Institution?
• What is a Bank?
• Brief History of banking system in INDIA
• Common terminologies used in banks
What is a Financial System?

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“Financial System is a set of complex
and closely inter-mixed financial
institutions, markets, instruments,
services, practices, procedures and
so on.”

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So what is the Role of Financial
System in any Economy?

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The Basic Function:
It helps to mobilise financial surpluses of an
economy and transfer them to the areas of
financial deficit.

Savings Saving
Surplus deficit
Areas Areas
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But How does it take Place?

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 Financial System

Intermediary
(Banks/FIs)
Bo
rro
w
in
ns

Re
gs
t ur

p
ay
s
Re

m
sit

en
po

t
De

Payment for
Goods/Services
Savers Investors
(Business Houses/Govt.)
(General public)

Goods/Services

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1.Savings Function
2.Policy Function
3.Credit Function
4.Payment Function
5.Risk Function
6.Liquidity Function

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But What About the Mismatch??

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Structure??

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 Financial
System

Financial Financial Financial Financial

Institutions Markets Instruments Services

Regulatory Inter- Non- inter-

mediaries mediaries Others

Non-
Banking
Banking
 Financial Instruments
Enable channelizing funds from surplus units to
deficit units
– There are instruments for savers such as deposits,
equities, mutual fund units, etc.
– There are instruments for borrowers such as
loans, overdrafts, etc.
– For governments :bonds, Treasury bills, etc.
– Instruments like PPF, KVP, etc. are available to
savers who wish to lend money to the
government
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 Financial Services
Acceptance
Of Deposits
Credit
Leasing functions

Financial
Stock
Performance
Holding Guarantees

Financial
Services

Hire
Refinancing
Purchase

Discounting Merchant
Rediscounting Banking
Factoring

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Financial Markets

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Why Do we need A Market??

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Price Discovery

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 Market

Long Term (Capital Markets) Short Term (Money Markets)

Secondary market
Primary Market Mainly Debt

CP’s
Equity Debt CD’s
Issue Debentures
Cash Basis Derivative Call
Rights Bonds
T-bill
G-sec
Bonus
Futures Swaps Options
GDR’s

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 Classification of Financial Institutions

Intermediaries &
Non-Intermediaries
 Intermediaries
1. Banking:-
a) Reserve Bank of India.
b) Commercial Banks
c) Co-operative credit Societies.
d) Co-operative Banks.
e) Post-office Saving Banks.
 Non-Banking
a) Provident and Pension funds.
b) Small savings organisations.
c) Life Insurance Corporation
d) General Insurance Corporation
e) Unit Trust of India.
f) Mutual Funds.
g) Investment Trusts.
h) Finance Corporations.
i) Hire-purchase Finance companies.
j) Housing Development Finance Corporation (HDFC).
k) National Cooperative Bank of India (NCBI).
Difference between Banking and Non-
banking Institutions:-

Banks------Creators of credit.
Other-------Purveyors of credit.
Percentage Share of Different Financial Institutions in
total Financial Assets of all Financial Institutions
in 1996
In 2008
 Role of FIs in economic
development
The Financial institutions provide a variety of
financial products & services to fulfill the varied
needs of the commercial sector.
It provide assistance to new enterprises, small
& medium firms as well as to the industries
established in backward areas.
It helped in reducing regional disparities by
inducing widespread industrial development.
 National Level Institutions
1. All India Development Bank:-Provide
Institutional credit for promoting and
developing SSIs.e.g:-IDBI, IFCI, SIDBI, IIBI.
2. Specialised FIs.:-set up to serve the
increasing financial needs of commerce &
trade in the area of venture capital, credit
rating and leasing etc.
a) IFCI venture Capital funds ltd.
b) ICICI Venture funds ltd.
STATE LEVEL INSTITUTIONS:-They act as a catalyst for
promotion of investment and industrial development in the
respective States.
 SO WHAT IS A BANK???

TYPES OF BANKS


Retail banks


Wholesale banks


Universal Banks


Correspondent Banks
 History of Banking
Ancient Roman Empire: use of Stalls, Bancu,
Banco.
Babylonian times:1000 B.C., Places of Worships
and Temples
First official Bank: “Bank of Venice” in yr. 1157
Word “Bank” derived from
– French : Bancus, Banque
– Italian : Banco
vivek saxena, Asst. Prof. LSB,LPU 29
Origin of Banking in INDIA

vivek saxena, Asst. Prof. LSB,LPU 30

 Origin of Banking in INDIA
Vedic times: Rig Veda (varna:Division of Class)
Manu Smriti: Laws about money lending
Days of Buddha: Jatakas and Shresthis
Hundis

vivek saxena, Asst. Prof. LSB,LPU 31

 Modern History of Banks in INDIA
Phases of Indian Banking
Pre-Nationalisation Phase (1786-1969)
Post Nationalisation Phase (1969-1991)
Liberalisation Phase (After1992)

vivek saxena, Asst. Prof. LSB,LPU 32

Phases of Indian Banking
Pre-Independence Era(Before 1947)
Post Independence Era(1947-1991)
Liberalization Era(1992 onwards)

vivek saxena, Asst. Prof. LSB,LPU 33

 Pre Independence Period
Bank of Hindustan, set up in 1770, was the
earliest Indian Bank
General Bank of India in 1786
Presidency Banks viz., Bank of Bengal (1809),
Bank of Bombay(1840), Bank of Madras (1843)
– later amalgamated in 1920 to form
Imperial Bank of India(1921).
Imperial Bank of India was constituted as STATE
BANK OF INDIA (1955)
RBI was formed in 1935
vivek saxena, Asst. Prof. LSB,LPU 34
 Post Independence Period
Reserve Bank of India, India's central banking
authority, was nationalized
In 1949, the Banking Regulation Act was enacted
which empowered the Reserve Bank of India (RBI)
"to Regulate, Control, and Inspect the banks in
India."
July 19, 1969: 14 largest commercial banks
nationalised
A second dose of nationalisation of 6 more
commercial banks followed in 1980
Rapid Expansion of Bank branch network in India

vivek saxena, Asst. Prof. LSB,LPU 35

 Liberalization Period
Entry of New Generation Tech-Savvy Private
Sector Banks
Entry of Foreign Banks
Relaxation in the norms for Foreign Direct
Investment, where all Foreign Investors in banks
may be given voting rights, at present it has
gone up to 49%

vivek saxena, Asst. Prof. LSB,LPU 36

 Structure of Banking in INDIA

RBI

Development Banks
Public Sector Banks Private Sector Banks Cooperative Banks

vivek saxena, Asst. Prof. LSB,LPU 37

 Indian Banking System
Banks can be classified as:
– Scheduled (Second Schedule of RBI
Act, 1934) How many ??
– Non-Scheduled
Scheduled banks can be classified as:
– Public Sector Banks How many??
– Private Sector Banks (Old and New)
– Foreign Banks
What about Regional Rural Banks and
Co-operative banks??
vivek saxena, Asst. Prof. LSB,LPU 38
 Indigenous bankers
Shroffs, Seths, Sahukars, Mahajans, etc. combine
trading and other business with money lending.
Vary in size from Petty lenders to Substantial
shroffs
Act as money changers and finance internal trade
through hundis (internal bills of exchange)
Indigenous banking is usually family owned
business employing own working capital
At one point it was estimated that IBs met about
90% of the financial requirements of rural India
What about Financial Inclusion???
vivek saxena, Asst. Prof. LSB,LPU 39
 Progress of banking in India
Nationalisation of banks in 1969: 14 banks were
nationalised
Branch expansion: Increased from 8260 in 1969
to 71177 in 2009
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

vivek saxena, Asst. Prof. LSB,LPU 40

 Progress of banking in India
Deposit mobilization:
– 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
Expansion of bank credit: Growing at 20-30%
p.a. thanks to rapid growth in industrial and
agricultural output
Development oriented banking: priority sector
lending
vivek saxena, Asst. Prof. LSB,LPU 41
 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
– Internet banking
– Venture capital funds
– Factoring

vivek saxena, Asst. Prof. LSB,LPU 42

 Tasks to do….
how many private sector, public sector, SCBs and
RRBs are there in India?
how many branches?
SBI & associates?
depositing money in a bank lead to either increase
or decrease in money supply ?? Yes/no
Are banks dying ?
Do we need foreign banks?
Use RBI master circulars, SBI website
vivek saxena, Asst. Prof. LSB,LPU 43
 COMMON TERMINOLOGIES


Bank Rate


Repo Rate


Reverse Repo Rate


CRR


SLR


BPLR


Base Rate
 Rbi manual link

http://rbidocs.rbi.org.
in/rdocs/notification
/PDFs/55663.pdf
 Tasks to Do…
• Search about… Call Rate, Repo Rate, Reverse
Repo Rate, Bank Rate, PLR, SLR CRR etc.
• Internal Organization of a bank???
• Use Economic Times/ RBI website for
reference

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