INDIAN BANKING

SYSTEM
AND
BASIC BANKING
CONCEPTS
1
 EVOLUTION OF BANKING STRUCTURE
IN INDIA
• At the time of Independence - banking
structure dominated by domestic scheduled
commercial banks. Non-scheduled banks,
constituted a small share
• First task before RBI after independence -
develop sound structure on contemporary lines
• Safety nets to depositors from RBI
• Need for separate banking structure –
Commercial banks not tuned to needs and
requirements of SME and marginal farmers,
co-operatives lacked resources.
Need of combining local feel and familiarity of
rural problems characteristic of co-operatives
and professionalism and large resource base of
commercial banks. 2
 INDIA BANKING SYSTEM – STRUCTURE

SCHEDULED BANKS

SCH. COMMERCIAL SCH. COOP. BANKS

BANKS

SCH. URBAN SCH. URBAN

PUBLIC SEC COOP BANK COOP BANK
BANKS

PVT. SECTOR RURAL REGIONAL

FOREIGN BANKS
BANKS BANKS

SBI & ITS OLD PVT. NEW PVT.

NATIONALIZED
ASSOCIATES BANKS BANKS
BANKS
3
 RESERVE BANK OF INDIA
ACT 1934
• Established - April 1, 1935
• Ownership- originally privately, Nationalized
1949
• Central Office –
Governor sits and policies are formulated
initially established in Calcutta;
permanently moved to Mumbai in 1937
• Preamble
"... to regulate the issue of Bank Notes and
keeping of reserves with a view to securing
monetary stability in India and generally to
operate the currency and credit system of 4
the country to its advantage
 MAIN FUNCTIONS
• Regulator and supervisor of financial
system
• Monetary Authority
• Banker to the Government
• Monopoly of Note Issue (other than
Rupee One notes and coins and
subsidiary coins)
• Manager of Foreign Exchange
• Developmental role
• Related Functions
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 FINANCIAL SUPERVISION
• Performed by RBI under guidance of Board for
Financial Supervision (BFS)
• Constituted in November 1994; Committee of
the Central Board of Directors
• Objective
 consolidated supervision of financial sector
- commercial banks, FIs, and NBFCs
• Constitution
 Chairman - Governor
 Vice-Chairman - Dy Governor in charge of
banking regulation and supervision
 Co-opted Directors from Central Board - 4
 Term – 2 years and is.
 Ex-officio members - Dy Governors
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 Financial Supervision- BFS (Contd.)

• Audit Sub-Committee
Dy Governor is Chairman and 2 Directors as
members
upgrading quality of statutory audit and
internal audit functions in Banks and FIs
• Functions
bank inspections; off-site surveillance,
strengthening of role of statutory auditors ;
strengthening of internal defences of
supervised institutions; legal issues in bank
frauds; divergence in assessments of NPA and
supervisory rating model 7
 RBI – CHANGING SCENARIO
• REAL TIME GROSS SETTLEMENT (RTGS) SYSTEM
- IN compliance with Basle Core Principles for
Systemically Important Payment Systems of BIS
• INdianFInancialNETwork –INFINET – a ‗`one-of-a-
kind‘ initiative for sharing IT expensive resources
• `ANYWHERE BANKING’ THROUGH CBS, ‘ANYTIME
BANKING’ -National Financial Switch for
interconnecting ATMs
• IMPROVING CG- set up through ―fit and proper‖
criteria
• INTEGRATED RISK MANAGEMENT SYSTEMS
• NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT)
SYSTEM and NATIONAL ELECTRONIC CLEARING
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SERVICE (NECS).
 BANKING SECTOR REFORMS
• Several committees constituted to resolve
problems of Commercial Banking in India, two
most important are-
a) Narasimham Committee I (1991)- aimed
at bringing ―operational flexibility‖ and
―functional autonomy‖ so as to enhance
efficiency, productivity and profitability
b) Narasimham Committee II (1998)-
bringing structural changes so as to
strengthen banking system to make it
more stable
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 MAJOR RECOMMENDATIONS
NARISHIMAM COMMITTEE REPORT I

• Four-tier hierarchy for banking structure - three to

four large banks with SBI at top

• Parity in treatment of Private sector banks with

Public sector banks

• Follow BIS/Basel norms

• Lifting of ban - setting new banks in Private sector

• Liberal Governmental policies for expansion of

foreign bank branches and rationalization of foreign
operations of Indian banks 10
 Major Recommendations (Contd.)
• Progressively bring down - Statutory Liquidity Ratio
(SLR) and Cash Reserve Ratio (CRR)
• Tighten prudential norms for the commercial banks
• Deregulate interest rates
• Redefine priority sector - to comprise SME and
marginal farmers, and EWS
• Increase competition in lending between DFIs and
banks
• Disinvest in PS banks
• Each public sector bank - set up at least one RBS
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and treated at par with RRBs
 Major Recommendations (Contd.)
Narasimham Committee Report II
• Merger of strong PS banks and closure of
some weaker banks
• Amicable golden handshake scheme for
surplus banking sector staff
• Setting up ARC to tackle NPAs in banks
• Enhancement of capital adequacy norms
• Healthy competition between PS banks
and private sector banks essential.
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 MEASURES UNDERTAKEN
Competition Enhancing Measures
• Operational autonomy and reduction
of public ownership in PS Banks
• Transparent entry norms
• Banks allowed to diversify product
portfolio and business activities
• Roadmap for foreign banks for M &A
of private sector banks and NBFCs
• Instructions and guidelines on
ownership and governance in private
sector banks
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 Measures enhancing role of
market forces
• Disbanding administered interest rates and
enhanced transparency and disclosure norms
• Facilitation of improved payments and
settlement mechanism
• Dematerialization and securitization of
assets developed
Prudential measures
• Introduction of international best practices
norms on Capital to Risk Asset Ratio
(CRAR), Accounting
• Strengthening Risk management
mechanisms
• Higher graded provisioning for NPAs
• Implementation of Basel II 14
 Institutional and legal measures
• Setting up of DRT, ARC, Lok-Adalat, CCIL and
CIBIL
• Enactment of Securitization and Reconstruction of
Financial Assets and Enforcement of Securities
Interest Act 2002,
Supervisory measures
• Establishment of Board of Financial Supervision
as apex supervisory authority
• Strengthening CG, Audit, enhance due diligence, fit
and proper test for directors.
• Strengthening of
Technology related measures
• Introduction of Negotiated Dealing System (NDS)
for screen based trading in Govt. securities and Real
Time Gross Settlement System (RTGS) 15
 BANKING CONCEPTS
• PLR or prime lending rate - rate of interest at which
banks lend to their credit-worthy or favoured
customers.
 It is treated as a benchmark rate for most retail
and term loans.
 influenced by RBI‘s policy rates — the repo rate
and cash reserve ratio
• Deposit Rates - Interest rate paid on deposit
accounts by commercial banks and other FIs
• Bank rate - rate of interest which RBI charges on
loans and advances that it extends to commercial
banks and other financial intermediaries. Changes in
the bank rate are often used by RBI to control money
16
supply
• Repo Rate - rate at which banks borrow from RBI. A
reduction in repo rate will help banks to get money
at a cheaper rate.
• Reverse Repo rate - rate at which RBI borrows
money from banks. An increase in Reverse repo rate
can cause banks to transfer more funds to RBI due
to this attractive interest rates. It can cause the
money to be drawn out of the banking system.
Due to this fine tuning of RBI using its tools of CRR,
Bank Rate, Repo Rate and Reverse Repo rate our
banks adjust their lending or investment rates for
common man.
Difference between Bank Rate and Repo Rate
• While repo rate - applicable to short-term loans and
used for controlling amount of money in market,
bank rate - a long-term measure and governed by
long-term monetary policies 17
 STATUTORY LIQUIDITY RATIO (SLR)
• OBJECTIVE
1) To restrict expansion of bank credit.
2) To augment investment of the banks in
Government securities.
3) To ensure solvency of banks.
• Commonly used to contain inflation and fuel
growth, by increasing or decreasing it respectively
• MAINTAINED IN THE FORM OF :
a) Cash
b) Gold – marked to market
c) Unencumbered approved securities or Gilts -
valued at a price as specified by RBI
• CURRENT SLR – 24%
• SLR RATE = Total Demand/Time Liabilities18
x 100%
 CASH RESERVE RATIO (CRR)
• OBJECTIVE
 Banks required to hold a certain proportion of
their deposits in the form of cash, deposited
with RBI/currency chests, considered as
equivalent to holding cash with themselves
 This minimum ratio (that is the part of the
total deposits to be held as cash) is stipulated by
RBI - CRR or Cash Reserve Ratio
 Also known as - Cash Asset Ratio or Liquidity Ratio
• PURPOSE –
 Higher the ratio (i.e. CRR), lower is amount
that banks will be able to use for lending and
investment.
• EXISTING CRR 19
 5% (w.e.f. 2 Jan 2009)
nd