Bank and Banking

Module I-Financial Services

08MBAFM324 &08MBAFM374
Definition and Scope of Banking
• Banking Regulation Act of India, 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 cheques, draft, order or
otherwise."
 Role of Central Bank
• Banking and Financial Regulator and
Supervisor
• Lender of Last Resort
• Issuer and Regulator of Currency
• Monetary and Exchange Control Authority
• Government Banker
 Central Bank-Reserve Bank of
India
• Established in 1935 and nationalized under
the RBI Act
• Purpose: “to regulate issue of Bank notes,
to keep the reserves with a view to
securing monetary stability in India and
generally to operate the currency and credit
system of the country to its advantage”.
Types of Banks and Banking
Structure-India
 Permissible Banking Activities
Under Negotiable Instruments Act of 1881, banks
permitted to undertake following activities:
 Deposits
 Loans
 Remittances-money transfer
 Trusteeship
 Financial Intermediation
 Collection (cheques) and fee business (Bill
discounting, factoring, underwriting, currency and
foreign exchange )
 Government Business-Pensions, PPF, Tax and Govt.
Dues collection
 Safe custody of customer’s valuables-Lockers
 Banker and Customer
Relationship
• Contractual Agreement
• Relationship of Creditor and Debtor
• Involves a mandatory opening of Account by
the Customer-Deposit Account or Current
Account
• Paying and Collecting Cheques
• Electronic Funds Transfer and Payments by
Plastic Cards (Credit/Debit) or Internet-through
Third Parties
Bank Obligations to Customers
• Usually laid down under Citizen’s Charter
• Clear and Transparent working -customer
provided detailed information of products,
charges levied and interest paid
• Know Your Customer (KYC) norms laid down
by RBI for opening a customer account-
Documents to be demanded
• Confidentiality
• PIN/Card Theft and other procedures
 DEPOSITS
• Demand deposits (DD)-withdrawable on demand
• Savings deposits- restrictions as to the number
and amount of withdrawals during any specified
period
• Term deposit (TD)- withdrawable only after the
expiry of the fixed period of the Deposit e.g., FD,
RD, Qtly & Monthly Income Certificates
• Notice Deposit- Type of TD but withdrawable on
giving at least one complete banking day’s notice
• Current Account-a form of DD – any number of
withdrawals allowed based on a specified limit or
the balance in the A/c
 LOANS

• Working Capital, Term loans and Bridge

loans
• Secured and Unsecured loans-Security or
Collateral-Mortgage, Hypothecation, Lien
or pledge, guarantee or personal security
• Unsecured Loans-Bank O/D, Corporate
Bonds, Credit Card Debt, Credit Facilities
or Lines of Credit and Personal Loans
 Types of Loans
• Term Loan
• Lines of Credit, Bill discounting and
Factoring
• Equipment Leasing
 Dun and Bradstreet Study on
FY08 Banking Developments
• During FY08, the total asset base of the 77
scheduled commercial banks (SCBs) was
equivalent to 91.8% of India’s GDP at current
market prices
• Close to 80% of the total assets of SCBs was
dominated by 22 large sized banks with a
balance sheet size of more than Rs 600 bn
each. These comprise of 16 Public Sector
Banks (PSBs), 3 Private Sector Banks and 3
Foreign Banks.
• In FY08, deposits and advances of Private
Sector Banks have outperformed those of
PSBs as well as Foreign Banks on the back
of some aggressive expansion over the last
couple of years. Deposits of Private Sector
Banks grew at a CAGR of 26% during
FY04 – FY08, as against an overall CAGR
growth of 20.5% by all SCBs. Advances of
Private Sector Banks grew at a CAGR of
32% as compared to a CAGR of 30.1% by
all SCBs for the same period.
• Public Sector Banks accounted for more
than 66% of the combined total income
(comprising of interest income and non-
interest income) of all SCBs. Interest
income, a major constituent of the total
income of banks grew at a CAGR of 21%
over the past four years. Fee based
income, a constituent of non interest
income increased sharply, growing at a
CAGR of 27% between FY04 – FY08 -
outperforming other segments of income
including interest income.
• Over the last couple of years, fee based
services have been an area of focus for
private banks, who have looked to increase
their presence in areas like investment
banking and M&A deals – services that were
especially lucrative in a high growth
economy like India. Fee based income of
Private Sector Banks grew at a CAGR of
45% between FY04 – FY08, outperforming
its foreign and public sector peers whose fee
based income grew at a CAGR of 35% and
18% respectively for the same period.
• Off balance sheet exposure of SCBs, increased
by a sharp 88.4% in FY08, indicating the sharpest
rise in recent years. Within this, the exposure to
forward exchange contracts rose by 94.6%,
driven by the frequent and sometimes severe
fluctuations in the currency market.
• Retail banking generated high business volumes
for both PSBs and private sector banks,
constituting the majority of their revenue. Retail
banking held a 41% share of the total revenue
generated by PSU banks while it was 36% for
private sector banks. For Foreign Banks that have
exposure to Retail Banking, the share was
approximately 36%.
Banking and Technology-Purpose
1. Communication and Connectivity- ATMs,
Credit/Debit Cards, Phone and Internet banking,
anytime anywhere banking
2. Business Process Reengineering-Electronic
Fund Transfer (EFT), Electronic clearing and
settlement of cheques through MICR, Real Time
Gross Settlement Systems (RTGS), Centralized Funds
Management System (CFMS) by RBI, Certification and
Digital Signatures, Reporting of Call/Notice Money
Market Transactions on a real time common platform
for all banks, Fis and dealers through a Negotiated
Dealing System (NDS) and Structured Financial
Messaging Solution (SFMS)-backbone for all message
based communication over the Indian Financial
Network (INFINET)
 Banking and Technology-
Products and Services
• Mobile Banking-Issues-security,
performance and optimal user experience
• SMS alerts and better and more secure
authentication for online payments-
 International Banking Services
• Services to NRI s
• Services to Corporates for facilitating
business abroad
 NRI BANKING AND TYPES OF
ACCOUNTS
NRO A/c.: The funds, credited to this account,
cannot be repatriated outside India in foreign
exchange, without prior permission of the
Reserve Bank of India. Interest, earned is
eligible for repatriation outside India, net of
Indian taxes. The remittance of interest (net of
taxes) will be permitted by the authorized dealer
who maintains the account, if the account holder
makes an application to the authorized dealer, in
the prescribed form. No RBI permission is
required for remittance of interest.
NRE A/c.: The funds, standing to the credit of this
account, as well as interest earned thereon, are
remittable outside India in free foreign
exchange, without permission of the RBI. The
interest income is not subject to Indian Income-
tax. Credits to the accounts should be in the
form of remittance in foreign exchange from
outside India, as well as other funds, which are
eligible to be remitted outside India, in free
foreign exchange. Funds, emanating from local
sources, are not eligible to be credited to these
accounts, unless these funds are otherwise
remittable outside India, in terms of the existing
Exchange Control Regulations.
FCNR A/c.: These accounts can be opened in four
foreign currencies: Pounds Sterling; US Dollars;
Japanese Yen; Euro. For the purpose of opening
an account, remittance in foreign exchange, in
the same currency, should be received in India.
The accounts can be opened only as fixed
deposits, with a minimum maturity of one year
and, a maximum maturity of three years. The
principal, as well as interest, earned on these
accounts, is remittable outside India, in the same
currency or, in other convertible currency, as
desired by the account holder. The interest,
earned on these deposits, is exempt from Indian
Income-tax.
 Banking for Facilitating
Corporate Business Abroad
• ECBs, Euro Loans or ADR /GDR, FCCB
and trade credits and guarantees in
foreign currency