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Banking For B Com Session 1-4 Banking Overview
Banking For B Com Session 1-4 Banking Overview
Banking For B Com Session 1-4 Banking Overview
Session: 1 to 2
BASIS FOR
SCHEDULED BANKS NON-SCHEDULED BANKS
COMPARISON
Meaning SB is a banking corporation whose NSBs are the banks which do not
minimum paid up capital is Rs. 5 comply with the rules specified by the
lakhs and does not harm the RBI, or say the banks which do not
interest of the depositors. come under the category of SB.
Second Listed in the second schedule. Not-listed in the second schedule.
Schedule
CRR Maintained with RBI. Maintained with themselves.
Borrowing SB are allowed to borrow money NSB are not allowed to borrow money
from RBI for regular banking from RBI for regular banking purposes.
purposes.
Returns To be submitted periodically. No such provision of submitting
periodic returns.
Members of It can become a member of It cannot become member of clearing
clearing clearing house. house.
house
Financial Institution
Commercial Banks have been providing financial services for meeting credit
requirement as well as offering ancillary financial services like demand & time
deposits to individuals, business houses, organisations and other quasi
banking services.
Banks & Financial Institutions
Banks are also termed as Financial Institutions. Generally speaking Financial
Institutions are considered as Term Lending Institutions
Financial institutions are of two types:
➢ Depository
➢ Non-depository
▪ Depository firms are banks and credit unions that pay interest on
deposits and then lend money in the form of interest-earning assets
▪ Non-deposit firms offer pension funds, life and property/ casualty
insurance policies and retirement income in exchange for receiving
premiums payments or contributions to retirement accounts from their
clients
Indian Financial Sector
Ministry of Finance
Public Sector Banks Private Sector Banks Co-Op Banks Foreign Banks
Financial Institutions
NBFI lend money, make investments and hence their activities are akin to that of
banks. However there are a few differences as given below:
➢ NBFI cannot accept demand deposits
➢ NBFIs do not form part of the payment and settlement system and cannot
issue cheques drawn on itself
➢ Deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of banks
Small Finance Banks (SFB)
Regulations
The small finance banks shall be registered as a public limited company under
the Companies Act, 2013. It will be licensed under Section 22 of the Banking
Regulation Act, 1949. The Small Finance Banks in India are governed by the
provisions of the:
➢ Banking Regulation Act, 1949.
➢ Reserve Bank of India Act, 1934.
➢ Foreign Exchange Management Act, 1999
➢ Deposit Insurance and Credit Guarantee Corporation Act, 1961
➢ Payments and Settlements Act,2007
➢ Credit Information Companies (Regulation) Act,2005
➢ Other relevant Statutes and the Directives, Prudential Regulations and other
Guidelines/ Instructions issued by RBI and other regulators from time to
time.
➢ SFB will be given scheduled bank status once they commence their
operations, and found suitable as per Section 42 (6) (a) of the Reserve Bank
of India Act, 1934.
Small Finance Banks (SFB)
Objectives
➢ To further financial inclusion by provision of savings vehicles.
➢ Provide financial services to the people who are not being served by
other banks
➢ Supply of credit to small business units
➢ Small and marginal farmers
➢ Micro and small industries
➢ Other unorganised sector entities, through high technology-low cost
operations.
➢ Acceptance of deposits and lending.
Small Finance Banks
Functions:
➢ Acceptance of all type of deposits and lending loans to unbanked
areas of our country.
➢ Maintenance of Cash Reserve Ratio and Statutory Liquidity Ratio.
➢ The basic objective for the setting up of SFBs are to provide credit
facilities to small business units, small farmers, micro and small
industries, and unorganized sectors and reform to improve financial
inclusion in the country.
➢ It also provides loans to the priority sector and motivates people to
save their excess funds.
➢ SFBs can provide financial services like mutual funds, insurance, and
pension products but with the prior approval of RBI.
Small Finance Banks
Eligible promoters
➢ Resident individuals /professionals with 10 years of experience in
banking and finance.
➢ Companies and societies owned and controlled by residents will be
eligible to set up small finance banks.
➢ Existing Non Banking Finance Companies (NBFC), Micro Finance
Institutions (MFI) and Local Area Banks (LAB) that are owned and
controlled by residents can also opt for conversion into small finance
banks.
➢ Promoter /promoter groups should be ‘fit and proper’ with a sound
track record of professional experience or of running their businesses
for at least a period of five years in order to be eligible to promote
small finance banks.
Small Finance Banks
Procedure for RBI decisions
➢ An External Advisory Committee (EAC) comprising eminent
professionals like bankers, chartered accountants, finance
professionals, etc., will evaluate the applications.
➢ The decision to issue an in-principle approval for setting up of a bank
will be taken by the Reserve Bank.
➢ The Reserve Bank’s decision in this regard will be final.
➢ The validity of the in-principle approval issued by the Reserve Bank
will be eighteen months.
➢ The names of applicants for bank licences will be placed on the
Reserve Bank’s website.
Small Finance Banks
Prudential norms
The small finance bank will be subject to all prudential norms and
regulations of RBI as applicable to existing commercial banks including
requirement of maintenance of Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR). No forbearance would be provided for
complying with the statutory provisions.
The small finance banks will be required to extend 75 per cent of its
Adjusted Net Bank Credit (ANBC) to the sectors eligible for
classification as priority sector lending (PSL) by the Reserve Bank.
At least 50 per cent of its loan portfolio should constitute loans and
advances of up to Rs. 25 lakh.
Small Finance Banks
Capital requirement
The minimum paid-up equity capital for small finance banks shall
be Rs. 200 crore.
Promoter's Contribution
The promoter’s minimum contribution of 40 percent of paid-up equity
capital shall be locked in for a period of five years from the date of
commencement of business of the bank.
If the initial shareholding by the promoter in the bank is in excess of
40 percent, it should be brought down to 40 percent within a period
of five years.
Then the promoter’s stake should be brought down to 30 percent of
the paid-up equity capital of the bank within a period of 10 years, and
to 26 percent within 12 years from the date of commencement of
business of the bank.
Small Finance Banks
Foreign shareholding
The foreign shareholding in the small finance bank would be as per
the Foreign Direct Investment (FDI) policy for private sector banks as
amended from time to time.
Following the current FDI policy, the aggregate foreign investment in a
private sector bank from all sources will be allowed up to a maximum
of 74 percent of the paid-up capital of the bank.
At all times, at least 26 percent of the paid-up capital will have to be
held by residents.
In the case of Foreign Institutional Investors (FIIs) / Foreign Portfolio
Investors (FPIs), individual FII / FPI holding is restricted to below 10
percent of the total paid-up capital, the aggregate limit for all FIIs /FPIs
/ Qualified Foreign Investors (QFIs) cannot exceed 24 percent of the
total paid-up capital, which can be raised to 49 percent of the total
paid-up capital by the bank concerned through a resolution by its
Board of Directors followed by a special resolution to that effect by its
General Body.
Small Finance Banks
Transition path
If the small finance bank aspires to transit into a universal bank, such
transition will not be automatic, but would be subject to fulfilling
minimum paid-up capital / net worth requirement as applicable to
universal banks.
Its satisfactory performance as a small finance bank for a minimum
period of five years and the outcome of RBI’s due diligence exercise.
On transition into a universal bank, it will be subjected to all the
norms including Non-Operative Financial Holding Company (NOFHC)
structure as applicable to universal banks.
Small Finance Banks
Difference Between Bank & Small Finance Banks
Particulars Bank Small Finance Bank
Loan Commercial Bank can offer SFB should provide 75% of the loans to the
loans to all the customers priority sectors.
Revenue Commercial Bank can earn The main source of income for SFB is by
revenue by loans and lending services to the target customers
transaction charges
Branches Commercial Bank can open It should focus on the rural areas for the first
branches anywhere within three years of establishment.
the country
Who can As per guidelines issued by Individuals/professionals having 10 years of
Promote RBI experience in finance, NBFCs, microfinance
companies, local area banks, etc.
Credit Cards Can Issue Can Issue
Debit Cards Can Issue Debit and ATM Card Can Issue Debit and ATM Card
Target Not restricted to any region MSME, Small Farmers, Small Businessman,
customers Unorganized Workers, etc.
Small Finance Banks
Operational SFBs in India
Some of the operational Small Finance Banks in India are as
follows.
1. A U Small Finance Bank
2. Capital Small Finance Bank
3. Equitas Small Finance Bank.
4. ESAF Small Finance Bank.
5. Fincare Small Finance Bank.
6. Janalakshmi Small Finance Bank
7. North East Small Finance Bank
8. Suryoday Small Finance Bank.
9. Utkarsh Small Finance Bank
10. Ujjivan Small Finance Bank
Payments Banks
In September 2013, the RBI constituted a committee headed by Dr Nachiket
Mor to study 'Comprehensive financial services for small businesses and low
income households'.
Objective
▪ To further financial inclusion
▪ Providing small savings accounts
▪ Payments/remittance services to migrant labour workforce, low income
households, small businesses, other unorganised sector entities and other
users.
Capital requirement
▪ The minimum paid-up equity capital for payments banks shall be Rs. 100
crore.
▪ In case of payments banks, the RBI set a leverage ratio of 3%
a. In case of full service banks the concept of leverage ratio is taken from the
Basel III guidelines, which is 3%.
b. However, the Indian regulator has set the leverage ratio for banks at 4.5%.
Payments Banks
Scope of activities
Acceptance of demand deposits.
Payments bank will initially be restricted to holding a maximum balance of
Rs. 100,000 per individual customer.
Issuance of ATM/debit cards.
Payments banks, however, cannot issue credit cards.
Payments and remittance services through various channels.
Business Correspondents (BC) of another bank, subject to the Reserve Bank
guidelines on BCs.
Distribution of non-risk sharing simple financial products like mutual fund
units and insurance products, etc.
Promoter's contribution
The promoter's minimum initial contribution to the paid-up equity capital
of such payments bank shall at least be 40 per cent for the first five years
from the commencement of its business.
Payments Banks
Eligible promoters:
Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities
such as individuals / professionals; Non-Banking Finance Companies (NBFCs),
corporate Business Correspondents(BCs), mobile telephone companies,
super-market chains, companies, real sector cooperatives; that are owned
and controlled by residents; and public sector entities may apply to set up
payments banks.
A promoter/promoter group can have a joint venture with an existing
scheduled commercial bank to set up a payments bank. However, scheduled
commercial bank can take equity stake in a payments bank to the extent
permitted under Section 19 (2) of the Banking Regulation Act, 1949.
Promoter/promoter groups should be ‘fit and proper’ with a sound track
record of professional experience or running their businesses for at least a
period of five years in order to be eligible to promote payments banks.
Foreign shareholding:
The foreign shareholding in the payments bank would be as per the Foreign
Direct Investment (FDI) policy for private sector banks as amended from time to
time.
Payments Banks
Deployment of funds
The payments bank cannot undertake lending activities.
Apart from amounts maintained as CRR with the RBI on its DTL, it will be
required to invest minimum 75 per cent of its "demand deposit balances" in
SLR eligible Government securities/treasury bills with maturity up to one
year and hold maximum 25 per cent in current and time /fixed deposits
with other scheduled commercial banks for operational purposes and
liquidity management.
Procedure for RBI decisions
An External Advisory Committee (EAC) comprising eminent professionals like
bankers, chartered accountants, finance professionals, etc., will evaluate the
applications.
The decision to issue an in-principle approval for setting up of a bank will be taken
by the Reserve Bank. The Reserve Bank’s decision in this regard will be final.
The validity of the in-principle approval issued by the Reserve Bank will be eighteen
months.
The names of applicants for bank licences will be placed on the Reserve Bank
website.
Payments Banks
Other conditions
The operations of the bank should be fully networked and technology driven
from the beginning, conforming to generally accepted standards and norms.
The bank should have a high powered Customer Grievances Cell to handle
customer complaints.
Main Functions
➢ Monetary Authority.
➢ Issuer of Currency.
➢ Banker and Debt Manager to Government.
➢ Banker's bank and supervisor.
➢ Regulator of the Banking System.
➢ Manager of Foreign Exchange.
➢ Regulator and Supervisor of the Payment and Settlement Systems.
➢ Developmental Role.
Nationalization of Banks
Rational of Nationalization of Banks:
1. March towards Socialism
2. Channelize the bank finance to plan - priority sectors
3. Greater mobilisation of deposits
4. Support to agriculture
5. Provide banking facility in rural and sub-urban areas
6. Greater control by the Reserve Bank of India
7. Greater Stability of banking structure
8. Better service conditions to staff
9. Sought to end the monopoly control of big industrialists upon the
banking system
10. Implementation of new schemes like Village Adoption Scheme,
Lead Bank Scheme etc…
Indian Banking Sector: Overview
Positive outcomes
➢ Transformation from class banking to mass banking
➢ Banks played a major part in social sector initiatives like poverty
alleviation programmes
➢ Mobilisation of deposits
➢ Better Governance & Control
Negative outcomes
➢ Banks profitability decreased due to high CRR and SLR
➢ Because of PSL (priority sector landing) left with little funds to make profits
➢ Large number branches led to overstaffing led to economically un-unviable
➢ Number of bad loans and NPA's increased
➢ Banks were used by political class by announcing loan waiver schemes.
➢ Loan Melas were organised in order to meet PSL targets
➢ Customer service effected
Indian Banking Sector: Overview
➢ More than 140 Commercial Banks in India of which:
12 PSU Banks, 22 Scheduled Private Sector Banks, 11 Small Finance
Banks, 6 Payment Banks, 43 Regional Rural Banks, 46 Scheduled Foreign
Banks
➢ Operating with more than 1,20, 000 Branches
➢ Nearly 65 % of branches are in rural /semi-urban areas
➢ Bulk of Commercial Bank Finance is for short-term working
capital needs of industry, trade, agriculture & personal segment.
Foray into project finance also.
➢ Banks support growth in the economy by financing productive
sectors
Indian Banking Sector: Statutory Requirement
Present Rates
➢ CRR: 4.950%
➢ SLR: 18.00 %
Why CRR?
➢ CRR is the portion of deposits that the banks have to maintain with
the Central Bank to reduce liquidity in banking system.
Why SLR?
➢ SLR in form of cash, gold and risk free Government securities etc.
SLR restricts the bank's leverage in pumping more money into the
economy.
➢ But in case some banks don't have excess SLR securities they
can still draw down on their holding of SLR securities and
borrow from the Reserve Bank of India at the MSF
rate (repo rate +1%). Repo rate is considered as the
policy rate as repo is the widely used instrument between
banks and RBI.
Indian Banking Sector: Statutory Requirement
➢ Reverse Repo Rate is the rate at which the central bank of a
country (Reserve Bank of India in case of India) borrows
money from commercial banks within the country.
➢ It is a monetary policy instrument which can be used to
control the money supply in the country. An increase in the
reverse repo rate will decrease the money supply and vice-
versa, other things remaining constant.
➢ An increase in reverse repo rate means that commercial banks
will get more incentives to park their funds with the RBI,
thereby decreasing the supply of money in the market.
➢ The central bank takes the contrary position in the event of a
fall in inflationary pressures.
Repo and reverse repo rates form a part of the liquidity
adjustment facility (LAF).
Indian Banking Sector: Statutory Requirement
Difference between Repo Rate and Bank Rate
➢ Loan vs. Securities: Bank Rate usually deals with loans,
whereas, Repo or Repurchase Rate deals with the securities.
➢ The Bank Rate is charged to Commercial Banks against the
loan issued to them by Central Banks (RBI), whereas,
the Repo or Repurchase Rate is charged for repurchasing
the securities.
➢ Bank Rate charged by RBI on commercial banks for long
terms borrowings
➢ Repo Rate (Repurchasing Rate): Rate charged by RBI on
banks for short term loans/ borrowings.
➢ Bank rate would be always higher than Repo Rate
Indian Banking Sector: Statutory Requirement
Base Rate: RBI sets a minimum rate below which banks in India are
not allowed to lend to their customers. This minimum rate is called
the Base Rate in banking terms. It is the minimum rate of interest
the banks are permitted to charge their customers.
i.e,
BASIS FOR
BANK RATE MSF RATE
COMPARISON
Meaning Bank Rate is a discount rate at which the MSF Rate is a rate at which the
commercial banks and the financial commercial banks borrow funds overnight
institutions borrows loan from the from the central bank.
central bank.
Eligibility All commercial banks and financial All Scheduled Commercial Banks (SCBs)
institutions. having their current account and
Subsidiary General Ledger (SGL) with RBI.
Pledging Security The loan can be raised without pledging The loan is given against security within
the securities. the limits of SLR and up to a certain
percentage of NDTL.
Liquid Adjustment Facility (LAF)
LAF is a facility extended by the RBI to the scheduled commercial
banks (excluding RRBs) and primary dealers:
▪ To avail of liquidity in case of requirement (against the collateral of
Government securities including State Government securities)
▪ To park excess funds with the RBI.
The capital funds for the purpose will comprise of Tier I and Tier II
capital as defined under capital adequacy standards
▪ Tier 1 capital consists of shareholders' equity and retained earnings.
▪ Tier 2 capital includes revaluation reserves.
hybrid capital instruments and subordinated term debt, general
loan-loss reserves, and undisclosed reserves
Banking Sector after reforms
▪ 20 years of economic and financial sector reforms have
strengthened the banking sector
▪ Widespread branch network, varied client base
▪ Recapitalization has bolstered bank balance sheets
▪ Public confidence in PSBs
▪ Risk averseness: Limited exposure to risky sectors
▪ Investment in retail branches in an earlier era has given PSBs
competitive advantage of access to stable & low cost deposits
Regulators
▪ Reserve Bank of India (RBI), the central banking and monetary authority in
India, is the central regulatory and supervisory authority for the Indian
banking system. It has direct jurisdiction above the money, debt and
foreign exchange markets.
▪ Securities & Exchange Board of India (SEBI), the regulatory body of capital
markets in India, acts as a watchdog and safeguards the interests of
investors.
▪ Insurance Regulatory & Development Authority (IRDA) is the regulatory
body for the insurance (life & non-life) and re-insurance business
▪ Pension Fund Regulatory & Development Authority (PFRDA) regulates
pension funds
Importance of Indian Financial Sector
▪ Robust financial system
▪ Continuous innovation
Banking Terminology
➢ SARFESI (The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Int. act)
➢ DRT
➢ NI Act
➢ Bill of Exchange
➢ Bill of Lading
➢ UCPDC
➢ DP Note
➢ Hypothecation & Pledge
Structure of a Bank
➢ Corporate Office
➢ Local Head Office
➢ Zonal Office
➢ Regional Office
➢ Branch (SBU)
Summary
➢ RBI is the regulator overseeing the Financial Services Industry
➢ The prime intermediaries in the Financial Services Industry are
Scheduled Commercial Banks, Financial Institutions, NBFC’s and
Insurance Companies
➢ Among the lending agencies, the Banking Industry constitutes over
80% of the advances. FI constitute 12% and the share, which is
gradually reducing. There is a strong movement of The FI towards
conversion of Banks
➢ The Scheduled Commercial banks include SBI and Associates,
Nationalised banks, Other Scheduled Commercial Banks ( which
include the private sector banks), Foreign Banks and Regional Rural
banks.
➢ SBI and Nationalised banks constitute close to 75% of the overall
Banking business.
Summary
➢ The Banking Industry has been growing at 15%. The advances segment
has been growing at over 18%.
➢ Deposits is the largest external source of funds for Banks.
➢ However foreign bank dependence on the same is lower than the Indian
Banks
➢ Foreign banks have outperformed the Indian banks with superior
spreads, higher fee based income.
➢ The Return on Assets of Foreign Banks have consistently been better
than the Industry
Thank You
Bank Rate v/s MSF Rate
▪ The bank rate is an interest rate at which the commercial banks can borrow
loan from RBI while MSF Rate is a facility in which the scheduled
commercial banks can borrow funds overnight from the central bank.
▪ All commercial banks and financial institutions are eligible for the availing
loan at bank rate from RBI whereas MSF Rate is available only to the
Scheduled Commercial Banks (SCBs) having their current account and
Subsidiary General Ledger (SGL) with the RBI.
▪ The Bank rate is effective since 1900 while MSF Rate was introduced in
2011.
▪ The major difference between the Bank rate and MSF Rate is that at Bank
rate the loan is not given by pledging securities, but in MSF, the loan is
given by pledging the government approved securities (specified criteria).
▪ Bank Rate is not the last resort for the banks while MSF Rate is the last
resort for commercial banks, which can borrow funds overnight.