Lending of funds

This is the major activity. Banks lends for:

• Agriculture
• Industries-MSME and large industries
• Infrastructure
• Household sector
• Sensitive sector
• NBFCs
• Factoring companies
• Exports
• PSL
Agriculture lending can be both short term and long term. It
can be direct and indirect loans to agriculture segment.
Priority sector lending
To ensure credit flow to the vital sectors of the economy PSL
introduced in Banking sector. All banks including foreign banks
should extend a minimum of 40 % of their ANBC to Priority
sector. This includes
• Agriculture
• MSMEs
• Service Enterprises
• Khadi and village Industries
• Incremental export credit-ceiling 2 per cent
• Education loan upto 10 lakhs
• Housing loans to individuals upto 28 lakhs in metropolitan
areas (project cost not exceeding 35 lakhs) and loans upto 20
lakhs in other areas (project cost not exceeding 25lakhs). For
repairs it is 5 lakhs and 2 lakhs respectively.
• Renewable Energy- Like solar based power generation up
to a limit of 5 crores
• Weaker sections – Small & marginal farmers,
 artisans,village & Cottage industries, SC/ST, SHG, Individual
women beneficiaries upto 1 lakh per borrower, persons
with disabilities, minority communities as may be notified
by the Govt. from time to time.
Target and sub-target
Total PSL – 40 per cent of ANBC
Agriculture -18 per cent. Out of this 8 per cent to Small and
Marginal farmers
Micro Enterprises – 7.50 per cent of ANBC
Weaker sections – 10 per cent of ANBC
Non-achievement of PSL : Any shortfall in lending to PSL has
to be contributed to RIDF with NABARD or similar funds with
NABARD/SIDBI/NHB/Micro Units Development and Refinance
Agency(MUDRA) as decided by RBI from time to time.
In April 2016, RBI introduced Priority sector Lending
Certificates for the purchase of these instruments by banks in
the event of any shortfall as mentioned above.
Sensitive Sectors
Banks’s exposure to real estate, capital market and
Commodities are termed as sensitive sectors.
Banks exposures to real estate includes commercial real
estate, shopping malls, office buildings, warehouses, hotels
and land acquisitions, development and construction.
Banks exposure to capital market includes loan against
shares, direct investment in equity and equity mutual funds,
advances against share/bonds/debentures etc.
Financing of NBFCs
Banks extend need based working capital facilities as well as
term loans to NBFCs registered with RBI and engaged in
equipment leasing, hire purchase, factoring and investment
activities. Banks also extend finance to NBFCs against second
hand assets financed by them.
Investment of banks
Investments mainly in two types of securities:
• Investment in SLR securities
 • Investment in non-SLR securities
Investments of banks in Govt securities and other approved
securities are categorized as SLR investments. As per Section
24 of BR Act 1949, SCBs are required to invest a prescribed
minimum of NDTL in Govt and other approved securities.
Current SLR is 18%.
The entire investment portfolio (both SLR and non SLR)
classified under 3 categories.
• Held to Maturity (HTM)
• Available for Sale(AFS)
• Held for Trading(HFT)
Available-for Sale- AFS do not have a maturity date, and they
are usually held for a longer period of time than trading
securities. These financial instruments are not actively managed
with the intention to sell to make short-term profits. Instead,
these securities are held and set by the Banks at some point.
Unlike trading securities, AFS are not purchased or sold actively
as trading securities, nor are they held for an indefinite period
of time to keep receiving returns on their investments. Instead,
these instruments are readily sold in a market by the
management. In short, these securities are retained for a longer
period, but may also be sold as per the management’s decision.
Held For trading—kept for a shorter period of time because the
management actively buy or sell them to make short-term gains
for these investments. They are generally held for a period of a
few hours or days, but it depends on the nature of the security
and the market where it is traded. These securities are usually
purchased with the intention to make profits in the short term.
Hence they are not held for a longer period of time.
Investments in Non-SLR securities
Non SLR securities of SCBs includes, Commercial Paper(CP),
units of mutual funds, shares & debentures of PSUs & private
corporate sector.
Banks investment in unlisted non-SLR securities should not
exceed 10 per cent of its total investment in non-SLR securities
as on March 31 of the previous year.
The majority of the banks non-SLR investments are in bonds
and debentures and commercial paper.
Technology in Banking
Basic computersation by PSBs was started in 1993.
Core Banking Solutions(CBS) provide ‘any time any where’
services to their customer. This enables the customers of banks
to undertake their transaction from any branch of a bank,
instead of being attached to a particular branch.
• ATM
• Netbanking,
• Mobile banking
• NEFT, RTGS,ECS etc
Transformed the Banks to a great extent. Accordingly banks
provided alternate banking channels for the customers.
Payment and Settlement System.
The Payment and Settlement System Act 2007 came into effect
on Aug 12, 2008. RBI is the authority which regulates and
supervise the system. Under the act, RBI has the powers to
authorize an entity to operate a payment system. Those
operated by non-banks such as the CCIL, card companies, other
payment system providers and all prospective organisations for
payments will be under the provisions of the system.
Payment and Settlement System comprises of a system of rules,
institutions and technology for transfer of funds from one entity
to another.
It constitutes the core of a well-functioning financial system as
the failure of a payment system may result in in systemic risk
thereby triggering bank runs. It plays an important role in the
implementation of monetary policy as it provides the means
through which monetary policy signals are transmitted. A well-
functioning payment system is a pre-requisite for
• proper conduct of monetary policy,
• efficient delivery of financial services and
• minimizing transaction costs

Broadly, two kinds of payment system in operation.

 • Retail Payment system
• Large value payment system
Retail Payment system includes
• paper payment system like cheque,draft(volume wise more but
value wise it is very less)
• electronic payment systems like ECS, NEFT and card
payment.
Cheque play an important role in retail payment system
Cheque Truncation system (CTS) introduced in Feb 2008, by
which physical movement of cheques to all payee bank
branches has been truncated or shortened. Clearing takes
place based on the validation of cheque images.
• ECS-Credit is used for direct credit such as salary, pension
payment, refund of initial public offering etc
• ECS-Debit for kdirect debit for direct debit such as
collection of bills(electricity,telephone etc), EMI, Insurance
premia etc.
National Financial Switch(NFS) network, operated by
National Payment corporation of India (NPCI) (earlier by
IDRBT-Institute for Development and Research in Banking Technology,
Hyderbad) enables inter-operability of the ATM cards issued
by any bank across the entire network.
NPCI
National Payments Corporation of India (NPCI), an umbrella
organisation for operating retail payments and settlement
systems in India, is an initiative of Reserve Bank of India (RBI)
and Indian Banks’ Association (IBA) under the provisions of the
Payment and Settlement Systems Act, 2007, for creating a
robust Payment & Settlement Infrastructure in India.
It has been incorporated as a “Not for Profit” Company under
the provisions of Section 8 of Companies Act 2013, with an
intention to provide infrastructure to the entire Banking system
in India for physical as well as electronic payment and
settlement systems. The Company is focused on bringing
innovations in the retail payment systems through the use of
technology for achieving greater efficiency in operations and
widening the reach of payment systems.
The ten core promoter banks are State Bank of India, Punjab
National Bank, Canara Bank, Bank of Baroda, Union Bank of
India, Bank of India, ICICI Bank, HDFC Bank, Citibank N. A. and
HSBC. In 2016 the shareholding was broad-based to 56 member
banks to include more banks representing all sectors.
Large value payment system
Consisting:
• Real Time Gross Settlement(RTGS)
• Govt Securities clearing
• Foreign Exchange clearing
Banks, primary dealers, the RBI and DICGC are the members of
RTGS system.
Clearing Corporation of India Limited (CCIL) clears and settles
inter-bank trades in Govt securities, secondary market outright
sales and repo transactions in govt securities, Foreign exchange
etc.
Diversification in Bank operations
PSBs diversified in to various non-traditional activities such as:
• Mutual funds
• Merchant Banking
• Venture capital funding
• Leasing
• Hire-purchase
• Factoring
Banks can undertake these activities either thru the subsidiaries
or/and branches. As a result, banks transformed themselves
into one-stop financial services shops.

Banks undertake merchant banking activities through their

subsidiaries. The first merchant banking subsidiary was set up
in 1987 by SBI known as SBI Capital Market. Merchant bankers
offer a range of service relating to issue management, loan
syndication, project counseling, working capital financing,
foreign currency loans, portfolio management etc. PSBs
subsidiaries dominate this area of financial services.
Banks have also set up subsidiaries of acting as primary dealers
for government securities. Subsidiaries such as SBI Factors and
Canbank Factors are leaders in factoring industry.
Banks have been permitted to enter into the insurance business
also in 2000. SBI has set up a life insurance and a non-life
insurance subsidiary. Few other banks also started insurance
subsidiaries.
SBI, LIC along with few other banks set up a clearing
corporation, CCIL in April 2001 for
• Clearing and settlement of Govt securities
• Foreign exchange transactions.
CCIL also acts as an intermediary for the RBI in the fixed
income(eg: bonds) and forex markets.
Any two banks undertaking a forex transaction have to route
the trade through CCIL which guarantees the transaction. Thus
the banks are saved the trouble of sending instructions to
correspondent branches across the world to take their
transactions further.
Loan syndication and consortium financing is another way of
financing corporates.
A loan syndication is headed by a managing bank that is
approached by the borrower to arrange credit. The managing
bank is generally responsible for negotiating conditions and
arranging the syndicate. In return, the borrower generally pays
the bank a fee.
In consortium financing several banks agree to jointly supervise
a single borrower with a common appraisal, documentation,
and follow-up.
Equity capital raised by PSBs
To strengthen the capital Adequacy ratios and to reduce the
holding of Govt, PSBs were allowed to raise capital from the
market. For this purpose, SBI Act 1955 and The Banking
Companies (Acquisition and Transfer of Undertakings) Act 1970
and 1980 were amended to allow banks to raise capital not
exceeding 49 per cent of their capital.
Banks normally issue shares by way of
1) Public Issues: Initial Public Offer and Follow on Public Offer
2) Private Placement :Preferential Issue and Qualified
Institutional Placement
3) Rights Issue and
4) Bonus Issue
SBI was the first PSB to tap the equity market in Dec 1993.
Later other PSBs were also had access to equity market.