Banks - A Broad Overview

Bank Type, Evolution, Business

Bank Two distinct category

Commercial Banks Basic business of financial intermediation for earning profit. Hence the term, commercial. Central Bank- Regulator of commercial bank and banker of government. Commercial banks have expanded into various finance related business and thus there is variety of commercial banks in the modern period.

Indian Banking System

Central Bank (Reserve Bank of India) Regulator of the banking system Commercial banks Works with profit motive Co-operative banks Works with social objective as well at local levels . Apart from that there are indigenous bankers and informal money lenders.

Indian Banking System

Banks can be classified as:
Scheduled (Second Schedule of RBI Act, 1934) Non-Scheduled

Scheduled banks can be classified as:

Public Sector Banks Private Sector Banks (Old and New) Foreign Banks Regional Rural Banks

Scheduled banks mean that their names are in the scheduled list of RBI.

Indian Banking System

Bank of Calcutta, established in 1806 was the first bank. It was renamed Bank of Bengal in 1809. Imperial bank of India was formed by amalgamating Bank of Calcutta, Bank of Bombay and Bank of Madras. Reserve Bank of India was established in 1935. Imperial bank of India was made State Bank of India in 1955 to promote rural banking. 14 banks were nationalised in 1969, followed by further nationalization of 6 banks in 1980. Banking sector was liberalized in 1991.

Fundamental Banking Business

Basic business is fund mobilization and using that fund for lending. Source of fund
Capital Current or demand deposit Savings account deposit Term / Time/Fixed deposit Pipeline fund draft receipt etc Borrowing in call money market Borrowing from central bank

Fundamental Banking Business

Use of fund
Loans and advances Purchase of bonds / SLR requirements in India Statutory Cash Reserves Excess cash reserve to meet withdrawal demand Foreign exchange balance

These are bank assets

Loans and advances

Bank Loans
Types of business loans Short term
Working capital loans Overdraft Credit Card Loans to other banks at call money market Term loans This is lending for fixed assets Consumers also get fixed loans Term loans are not payable on demand. These loans are repaid in installments.

Diversification of banking
Diversification in banking: Banking has moved from deposit and lending to
Merchant banking and underwriting Guarantee and letter of credit Remittances Mutual funds Retail banking Venture capital funds Factoring & leasing Foreign currency business

New developments
Technology has changed the banking service scenario. Now we have ATMs Anywhere banking Internet banking Outsourcing Credit & debit card Mobile banking CTS Collection

Indian and US banking

Indian banking follows relationship banking US system follows arms length banking In India borrowers approach the bank verify all documents and assess bankability of the project. The relation between banker and borrower is one of full trust and borrowers are to disclose all information to banks.

Arms length banking

In USA borrowers get the fund for investments by sale of bonds and banks buy such bonds. In this system, relationship between and banker and borrower is not as deep as in Indian system. Relationship banking is also practiced in Japan and Germany. In UK it is arms length banking. Relationship banking may lead to corruption.

US Banking
Arms length banking, global competition and integration of financial markets has made increasingly difficult for small investment or wholesale banks using relationship banking to survive. This led to wide spread mergers and takeovers. In USA banks also depend on sale of bonds for fund mobilization. Deposit mobilization has lost significance in USA.

US banking
The decline in traditional deposit and lending banking has led to transformation of global banking into investment banking. In USA in 1933 investment banking was separated from commercial banking through the 1933 Glass Steagall Act. This was a sequel to great depression of 1930s. However this separation is only partial.

Investment banking
Subsidiaries of bank holding companies were always allowed to deal in Treasury securities. the Glass-Steagall Act did not apply outside the US. American commercial banks engaged in the securities business overseas and U.S. securities firms (investment banks) had overseas subsidiaries engaged in commercial banking.

Repeal of G S Act
Finally, in 1999, the U.S. Congress passed the Financial Services Modernization Act (GrammLeach_Blilely), which removed the barriers between commercial banking and investment banking. The bill, probably the biggest change in the regulation of financial institutions in nearly 70 years, allowed for the creation of a "financial services holding company" that could engage in banking activities and securities underwriting.

Blurring lines
Each of the big banks at the top of the industry has its own distinctive mix of businesses; All have moved away from the traditional banking strategy of holding assets on the balance sheet. They securitise loans and sell them on in the capital markets, or syndicate them to other banks. This is blurring the distinction between bank as lender and bank as trader.

Dodd Frank Act

Dodd Frank Act was enacted in 2010 to introduce a new system of regulation of US financial system. Rules are now being framed to bring this regulation into reality. The basic aim is to protect the consumers of banking services. A major task is to separate banking from security trading.