Banking is the lifeline and lifeblood of an economy. Banks are
the financial intermediaries. The Banking sector is dominant in India as it accounts for more than half of the assets of the financial sector. Definition Section 5(1) (b) of BR Act 1949 defines 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 or otherwise” Section 5(1) (c) of BR Act 1949 defines banking company as : “any company which transact the business of banking in India Accepting deposits by companies for the purpose of financing their own business if not regarded as banking within the meaning of the act. Thus essential characteristics of the banking business are: • Acceptance of deposits from the public • For the purpose of lending or investment • Repayable on demand or otherwise • Withdrawable by means of any instrument whether cheque or otherwise. Core Activity • Acceptance of deposits • Lending of funds Deposits are the main source of funds for commercial banks. • Demand Deposit • Time Deposits Demand deposits are deposits which can be withdrawn without notice and will be repaid on demand. Current account and Savings Bank Accounts are classified as demand deposits. Time deposits are deposits which are repayable after a fixed date or after a period of notice. FDs, recurring/cumulative deposits, cash certificates are classified as time deposits. Credit Creation Banks are financial intermediaries. They accept and deploy large amounts of uncollaterised deposits and also leverage funds through credit creation. Credit creation in turn increases the liabilities and assets in the banking system leading to an increase in the total amount of money in circulation. Lending Funds Lending money to individuals, private sector,, public sector and also to Govt in the form of: 1. Cash Credit 2. Ovderdraft 3. Bills discounting 4. Term Loans 5. Personal loans Ancilliary services Apart from the primary functions of mobilizing deposits and lending funds, banks provide wide variety of ancilliary services like remittance, collection of instruments, foreign exchange, safe deposit locker etc. Regulation of Banks in India Major Acts governing commercial banks in India which are exclusively enacted for Banks. • Banking Regulation Act 1949 • RBI Act 1934 • SBI Act 1955 • Banking Companies (Acquisition and Transfer of Undertaking) Act 1970- (for 14 banks nationalized on 19th July 1969 ) • Banking Companies (Acquisition and Transfer of Undertaking) Act 1980-(for 6 banks nationalized on 15th Apr 1980) The first phase of comprehensive reforms in the banking sector was undertaken in June 1992 by implementing the recommendations of the Narasimham Committee (I) (1991) in the financial system. The second Committee, The committee on Banking Sector Reforms commonly known as Narasimham committee II submitted its report in April 1998 recommending sweeping changes in Banking sector. Scheduled Commercial Banks (SCBs) SCBs are the banks which are included in the second schedule of Reserve Bank of India. In terms of ownership, commercial Banks are classified into 4 categories. 1. Public Sector Banks 2. Private Sector Banks 3. Foreign Banks 4. Regional Rural Banks Public Sector Banks includes SBI and nationalized Banks. Now 12 are there. Ist nationalization on 19.07.1969 and IInd nationalization on 15.04.1980. Private sector banks includes old and new private banks. Foreign investments in private sector Banks 74 per cent of the paid up capital of the bank (including FDI investments under portfolio investments scheme(PIS) by FIIs GDRs/ADRs provided there is no change of control and management. However FII investment limit cannot exceed 49 per cent within the aggregate foreign investment ceiling of 74 per cent of the paid up capital. At least 26 per cent of the paid up capital would have to be held by residents. In PSBs currently 20 per cent foreign investment is allowed under the government approval route. No individual entity can hold more than 10 per cent stake in a private sector bank. The cross holding among private sector banks is capped at 5 per cent. Voting right is capped at 5 per cent irrespective of the size of the holding of the investor Indian Banks abroad Indian Banks can function as • Branches • Joint Ventures • Subsidiaries • Representative offices Off-shore Banking Units (OBU) Indian Banks have been allowed to set up Off-shore banking units(OBU) in special Economic Zones(SEZ). These OBUs operate virtually as foreign branches in India. Off- shore banking refers to banking operations that cover only non- residents and excludes domestic banking. Its characteristics are: • Deal only in foreign currencies • CRR, SLR exempted • Lower taxes and levies • Restrictions on access to domestic money market • Excludes domestic banking First OBU opened by SBI in SEEPZ (Santacruz Electronics Export Processing Zone), Andheri, Mumbai in July 2003. ICICI bank, PNB, BOB, UBI and other banks have opened OBU in different SEZs Mobilisation, Lending and Investments of Funds Mobilisation of Funds Largest Source -- Deposits from various sources like Household sector, Corporate sector, financial institutions, NRIs, Govt etc. Certificate of Deposits are another short term deposits issued by banks. Deposits from NRIs tapped through NRE accounts and FCNR accounts. (another account NRO is also there for local remittance) Banks also raise short term funds by borrowing from call money market, repo market, inter-bank borrowing and also obtain refinance from EXIM Bank, NABARD etc. External Commercial Borrowing (ECB) is another source. Lead Bank scheme Implemented in 1969 – salient features are: • Administered by RBI as per the recommendations of Gadgil committee. • Enhancing the flow of bank finance to priority sectors and other sectors. • Co-ordinates the activities of banks and other developmental agencies in the district • SLBC/UTLBC is the apex level forum at state level / union territory for co-ordinating the activities. • District Collectors are also involved in the process Small Finance Banks: 10 such banks started during 2015/2016 Objective is Financial inclusion by: • Creating savings habits , Credit distribution to small and marginal farmers, small business units, micro and small industries as well as to other unorganized sector entities. SFBs are encouraged to lend to SHGs. Small Finance Banks undertake basic banking activities of acceptance of deposits and lending to the unserved and underserved sections. CRR and SLR are applicable. They will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to PSL. At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs.25 lakhs. Payment Banks 11 such banks started during 2015/2016. Financial inclusion by providing: • Small savings accounts and payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users. Activities: 1. Acceptance of demand deposits(only SB and current deposits) restricted to a maximum balance of Rs.1,00,000/ per individual customer 2. Issuance of ATM/Debit cards. No credit cards issue. Payment and remittance services through various channels. 3. BC of another bank, subject to the RBI guidelines on BCs. 4. Distribution of simple financial products like mutual fund units, insurance products etc. 5. Cannot undertake lending activities. 6. CRR to be maintained. 75% of its demand deposit balance in SLR/eligible govt securities/treasury bills with maturity upto 1 year and hold a maximum 25 per cent in current and time deposit with other scheduled banks for operational purpose and liquidity management.