Assignment 1 - Merger of Banks

Inorder to reduce competition amongst themselves and to consolidate

the banking sector a few mergers of banks have taken place in the past.
Now the government is contemplating privatisation. The banking industry
has thus moved in one full circle – private – nationalisation- private

In 800 to 1000 words, trace the journey of the banking industry during
these phases .
Debate No. 1 in session 3

• Why are we now thinking of privatising banks ? What are the

challenges and opportunities
Formal Sector
FORMAL
( Regulators at one end of the spectrum and the players at the other end)

Institutions Markets Instruments Services

Insurance & Housing

Banking
Banking Non banking Mutual Funds
Companies

The basic elements of a strong and well - functioning financial system are
strong legal and regulatory environment, stable money, sound banking system,
a well oiled information system, a well functioning securities market.
Role of a Bank

• Financial Intermediaries
• Financial Service providers
• First payment gateway ( demand deposits is a product and cheque honouring is a facility
only provided by banks)
Scheduled Commercial Banks
Banks which are included in the second schedule of RBI Act 1934 and which carry out the normal business of banking
such as accepting deposits, giving out loans and other banking services. Scheduled Commercial Banks can be further
divided into four groups:
Public Sector Banks
Private Banks
Foreign Banks
Regional Rural Banks
Cooperative Banks are not scheduled commercial banks and are registered under the Cooperative Societies Act as
cooperative credit institutions. They are regulated partly by RBI and partly by the respective state government

• In 1930, there were as many as 1258 banks registered under the Indian Companies Act, including loan companies and nidhis
• In 1947, their numbers had fallen to 82. In 1947 itself 38 banks had failed
Central Bank vs Commercial banks
• Central Bank performs a role of Banker to all Banks.
• The Central Bank is the apex institution of the financial and banking structure of the
nation while commercial banks are one of the many structures of the money
market.
• The Central bank is wholly owned by the government , while commercial banks
may be partly owned by government.
• The Central bank is a no-profit organization which implements the financial policies
of the government, whereas a commercial bank is a profit making organization.
• The Central Bank has the monopoly of note issue. It is the banker to the
government and does not involve itself in normal banking activities . The
commercial banks are bankers to the general public.
Central Bank vs Commercial banks

• The Central Bank is called the lender of last resort as it grants finance to commercial banks in
the form of rediscount facilities. The main functions of a commercial bank are accepting
deposits and lending to the general public.
• The Central Bank controls supply of money in the economy through its macro economic
policies, while commercial banks generate credit.
• The chief of the Central bank is designated as “GOVERNOR” while the chief of a commercial
banks is called a “MANAGING DIRECTOR ”
• The Central bank is the guardian of the foreign currency reserves of the country while
commercial banks deal in foreign currencies
• Each country will have only one central bank with its offices at major centers of the country,
while there are several commercial banks with hundreds of branches within and outside the
country.
Commercial banks vs NBFCs

• Banks are the financial institutions which are empowered by the government to do financial activities
like to accept a deposit, Grant credit, to manage withdrawals pay interest, to clear cheques, to provide
general services to the clients. Banks are the top organization which controls the whole financial
system of the country. Banks act as a financial mediator between the depositors and the borrowers.
Banks are responsible for the creating credit, mobilization of funds, safe and time bound transfer of
finance. Banks help in smooth functioning of the economy.

• NBFC is a company which is registered under the companies act, 1956 and it is under the control of
central bank (Reserve bank of India). NBFC is not a bank but it is engaged in a lending fund as well as
many other activities which are similar to banking like to provide loans and advances, credit facility,
saving and various schemes etc. NBFC also provides services to the business corporation like an
acquisition of shares, stocks, debentures, bonds, and securities issued by the government. It also
facilitates services like hire purchase, leasing, venture capital finance, housing finance, and insurance.
NBFCs do not accept deposits.
Public sector banks vs Private sector banks &
Public sector vs Nationalised banks

• Public sector banks are those where the government has controlling
interest whereas private sector banks do not have such government
participation

• Public sector banks include nationalised banks and SBI ( with all its
subsidiaries since merged as one)
Retail banking
• Mobilising deposits from and providing loan facilities to individuals
• Increasing competition from non banking and capital markets, post
the financial sector reforms, banks had to broad base to the retail
customers.
• With monthly incomes seeing an upward trend, banks consider the
retail market to have a huge potential
• Technology made inroads in banks and product differentiation with
minor tweaking became possible
• In this domain of banking, customer has become the king
Retail vs Corporate banking

• Retail banking is a part of banking that directly deal with consumers or

individuals. They deal with customers face to face.
• Retail banking is also referred to as Consumer banking or Personal
banking.
• It includes services like savings account, different types of loans
(schematic), mortgages, debit and credit card.
• For retail banking, customer deposit is the most important source of
fund. The profit in retail banking business is the interest margin on the
lender and borrower transaction.
Retail vs Corporate banking

• Corporate banking provide services to the business corporations and

business groups ( large, small and medium).
• The word ‘Corporate banking’ was first used in United States of
America to differentiate it from the investment banking.
• Corporate banking is also known as Business banking.
• In short corporate banking is a one type of segment that caters
service to the range of clients from big corporate firm to mid-scale
company.
Payments & Small Finance banks
• In order to re-engineer Indian Banking architecture and expand it to
pursue accelerated FI, RBI formed a high level committee on
Comprehensive Financial Services for small businesses and low
income households, headed by Dr. Nachiket Mor, which advocated
setting up of specialised, smaller and customised model of banks to
encourage the outreach program.
• Licenses for 11 Payment Banks and 10 Small Finance Banks were
given by RBI as a strategic policy initiative.
Payments & Small Finance banks
• Payment Banks can accept deposits but customer balance should not
exceed Rs.1 Lakh, they cannot give loans, can issue ATM/Debit card
but no credit cards, can distribute non-risk simple financial products
such as mutual funds and insurance products
• Small Finance Banks on the other hand can perform the basic services
of accepting deposits and lending, No restriction on the area of
operations and can distribute non-risk simple financial products such
as mutual funds and insurance products. At least 50% of its loan
portfolio should constitute loans and advances of upto Rs.25 Lakh.
Types of Customers
• Individuals
• Mandate holders (POA)
• Nominees (Banks ask their account holders to make nominations
which mean that they should nominate persons to whom the money lying in
their accounts should go in the event of their death)
• Minors ( banks can grant loans only at their risk)
• Illiterates/Deaf and Dumb/ Blind/ Aged persons ( banks have to exercise caution
while dealing with them as these persons are vulnerable to frauds being
committed on them )
• Joint account holders ( instructions on operations must be got in writing signed
by all partners and then follow those instructions to the T)
Types of Customers
• Executors (appointed by the person writing the will) and
Administrators (appointed by the court) -– Advisable to obtain the
mandate signed by all the executors/ administrators laying down the
manner in which the account has to be operated
• Proprietorship/ partnership/Corporates/HUF/ trusts/ Societies/
Associations/Clubs/ SLGs- should allow operations only as per the
mandate signed by all partners/ resolutions / Bye- laws
• Government Departments/ Municipal bodies-