ROLE OF COMMERCIAL BANKS IN

THE ECONOMY
What is a Bank?

Custodial
Remittances
services

Trade
Third party
Finance &
products
Forex

Cash Risk
Management Management
Bank is..

• A bank is a financial intermediary that receives deposits from the general public (including
demand deposits ) and lends it
• Forms part of payment and settlement system
• Deposit insurance facility available to depositors upto Rs 5 lakhs per depositor
• Other functions
Banking Sector

• Types of Banks : differentiated by nature of allowable activities, level of regulation.

• 21 Private sector banks,3 Local area banks,11 small finance banks,6 payments banks, 12
Public sector banks, 4 financial institutions,43 Regional rural banks,44 Foreign banks with
branches in India
• Co-operative banks : Multi state Cooperative banks under direct control of RBI. District
central co-operative banks and state cooperative banks under dual regulators. Primary
agricultural credit society(PACS) not under RBI purview.
• List of scheduled banks (other than co-operative) available on
https://www.rbi.org.in/scripts/banklinks.asp
Types of Banks

Public Sector (12) Private Sector (21) Foreign (46)

Others including
Regional Rural (43)
Small Finance (12) Payments (6)
, Local Area (3) ,
Cooperative
* Considering the progress made by Payment Banks (PBs) in furthering financial inclusion and with the objective of
giving more flexibility to the PBs, it has been decided to enhance the limit of maximum balance at the end of the day from
₹1 lakh to ₹2 lakh per individual customer of PBs with immediate effect (as on April 2021).

WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT &

03/25/2024 6
RESEARCH
BSE Sensex and India GDP
NIFTY and NSE Bank Index
BANKEX and Sensex
Banks Balance sheet and GDP

• IGN$IND Index
• INDPIAD Index
• INCMCRED Index
 Role of a bank in Indian Economy

• Capital Formation - Channelizing Funds for Productive Investment

• Creation of credit
• Regional and Sectorial Development
• Priority Sector Lending
• Increase liquidity
• Lending to Government
• Finance Trade
• Risk Management
• Remittance
 Sources and Application of Funds-Bank

Equity Loans

Deposits
Investments
Sources of Application of
Funds Funds
Borrowing Fixed Assets

Money Cash &

Market other assets
 Components of Sources of Funds

Equity Deposits Borrowings Money Market

• Retail & • Retail • RBI • Interbank
Corporates • Wholesale • Interbank • FI
• FDI & FII • Interbank • Retail
• Govt of India • Corporates
 Components of Application of Funds

Loans Investments Fixed assets Cash & others

• Priority • Govt • Property • Cash in hand
sector Securities • ATMs & ATM
• Retail • Bonds • Computers • Bal in
• Wholesale • Equities • Furniture & RBI/other
• others Fixtures banks
account
• Def Tax
assets
Income statement components-Bank

• Interest income
Net Interest income • - Interest expenses

• Treasury
Other Income • Commission, AMB, charges
• Payment to employees
- Operating Expenses • Rent, Repairs & Maintenance
• Outsourcing expenses
• NPA Provisions
- Provisions • Provision for standard assets
• Provision for Income tax
Net
Profit
after tax
 Banking reforms

• SLR / CRR
• CAR
• Abolition of Branch Licensing Policy
• Classification of Assets
• Disclosure Norms
• Deregulation of Interest Rates
• Setting up of ARCs , IBC
PSU banks Vs Private Banks

• Public sector banks hold around 66% of the total assets of the banking sector
• Private sector banks have better profitability than Public sector banks
• Profitability under pressure sue to tough competition from fintech; especially in retail
segment
• Increase in bank branches and ATMs (of private sector banks)
• Exposure of private sector banks to sensitive sectors like Real estate is lowering but still
higher than that of Public sector banks

• https://www.youtube.com/watch?v=Uf7Cz7Iy_Ko
• India’s Banking sector records highest profits in last 26 quarters
Subsidiaries

• Banks may form subsidiaries after getting prior approval of regulator for:
• Undertaking any business permitted for a banking company.
• Conducting such business as may be conducive in spreading banking.
• Transacting leasing business, HP business, factoring services or investing in shares of
equipment leasing companies.

03/25/2024 18
Obligation of a Banker

• Obligation to honor cheques – subject to conditions.

• Maintain secrecy about customers account.
• Liability for embezzlement by employee.

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WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH

Bankers’ Rights

• Right of general lien – implied pledge

• Right of set off
• Rules of Appropriation
• Right to charge interest, service charges, etc..

03/25/2024 20
WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH

Termination of Relationship

• When customer closes the account

• When bank closes the account
• When bank has express knowledge of death of customer
• When bank has express knowledge of lunacy /bankruptcy of the customer.
• Not affected by reason of
• Arrest of the customer
• Imprisonment of the customer
• Migration of customer to any foreign country.

03/25/2024 21
WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH

Different Types of Bank Customers

• Individual
• Illiterate person/ Lunatics
• Firms
• Companies
• Trusts
• Clubs
• Co-operative Societies

03/25/2024 22
 Key trends

DEPOSITS HAVE GROWN AT A

HIGHER PACE THAN ADVANCES(PSBS
GATHERING MORE DEPOSITS THAN
PVBS); EXCESSIVE PROFITABILITY.
LOW ECONOMIC ACTIVITY AND RISK
AVERSION CAUSING LOW CREDIT
GROWTH.
LENDING TO RETAIL SECTOR GNPA RATIO OF INDUSTRIES IS INCREASING CO-LENDING ISSUANCE OF GREEN BONDS &
INCREASING WHILE THAT TO HIGHEST WITH LARGE ACCOUNTS ARRANGEMENTS FOREIGN CURRENCY BONDS BY
INDUSTRY AND AGRICULTURE IS GOING BAD FROM FY 17-18. BANKS
SHOWING A DIP
 Key trends
Digital
Lending

IBC – dominant
source of recovery Use of
Mobile Digital
from NPAs Technology driven Payments

number of
frauds (around Use of AI &
ML
8,700 cases) and
Customer value of frauds Consolidation
centricity (around RS in Public
180,000 lkh crs sector banks
and Private
sector banks
Banks and fintechs

Use of technology to reduce

Increasing collaboration and costs and provide transparency,
competition between banks and flexibility and last mile financial
fintechs services to hinterland driving
fintechs

Digital lending, use of Regulatory sandbox mechanism

blockchain, application of AI and (recently for use of mobile
ML are the emerging areas of banking on feature phones ) will
influence for fintechs be a path breaking initiative.
Increase in digital payments
Increase in digital payments
Increase in digital Lending
Value of digital lending market in India from 2012 to 2018, with forecasts until 2023 (in
billion U.S. dollars)
Digital lending value in India 2012-2023

400
350
Fastest growing segment of
350 Fintech in India that grew from
nine billion dollars in 2012 to
Digital lending in billion U.S. dollars

300 270
110 billion dollars in 2019. It is
250 expected to grow to 350
200
200 billion dollars in 2023.
150 This area is extensively used
150
110 by fintech startups and
100 75 NBFCs.
58
46
50 23 33
9 14
0
2012 2013 2014 2015 2016 2017 2018 2019* 2020* 2021* 2022* 2023*
* * * *

Source(s): Inc42; BCG; TransUnion CIBIL Limited; ID 1202533, Statista

Some new terms related to Banking

• Neo Banking: Digital Banks with no physical presence, reducing infrastructure and
administrative costs and fostering innovation. In India, they are not allowed to function in
solo, they rely on bank partners to provide services For eg: Razorpay X,Jupiter, Niyo, Open.
Challenges include lack of trust, limited services, regulatory hurdles.
• Open banking: banking practice that will allow third party financial providers access to
financial data across the banking sector by use of application programming
interfaces(APIs). Account aggregator service allowed in India is a step in this direction.
Financial Inclusion

• Financial inclusion may be defined as the process of ensuring access to financial services
and timely and adequate credit where needed by vulnerable groups such as weaker
sections and low income groups at an affordable cost. (The Committee on Financial
Inclusion, Chairman: Dr. C. Rangarajan)
Facets of Financial inclusion
• Financial Inclusion, broadly defined, refers to universal access to a wide range of financial
services at a reasonable cost. These include not only banking products but also other
financial services such as insurance and equity products (The Committee on Financial
Sector Reforms, Chairman: Dr.Raghuram G. Rajan).
 PSL Categories

Micro, Small &

Agriculture Medium Export Credit Education
Enterprises

Social Renewable
Housing Others
Infrastructure energy
Priority Sector Advances Targets
Commercial Foreign Banks Regional Rural Small Finance
Banks 40% of Banks 75% of Banks 75% of
ANBC 40% of ANBC ANBC ANBC

Condition: Agriculture-
Agriculture Condition:
MSME, Social, 18%
18% Exports <=32%) Ren Eng<=15% SMF- 10%

Agriculture-
Micro 7.5% Agriculture-NA 18% Micro – 7.5%
SMF – 10%

Weaker 12% Micro- NA Micro – 7.5% Weaker – 12%

Weaker- NA Weaker- 15% https://rbidocs.rbi.org.in/rdocs/notification/PDFs/

MDPSL803EE903174E4C85AFA14C335A5B0909.PDF
 Capital Adequacy

Tier II capital (gone

The basic approach of Capital is divided into Tier I capital (going
concern capital), on
capital adequacy tiers according to the concern capital)
the other hand,
framework is that a characteristics/qualities consists mainly of share
consists of certain
bank should have of each qualifying capital and disclosed
reserves and certain
sufficient capital to instrument. For reserves and it is a
types of subordinated
provide a stable supervisory purposes bank’s highest quality
debt. The loss
resource to absorb any capital is split into two capital because it is
absorption capacity of
losses arising from the categories: Tier I and fully available to cover
Tier II capital is lower
risks in its business. Tier II. losses.
than that of Tier I
capital. 03/25/2024 33
 What is Capital Adequacy Ratio?

• Capital adequacy ratio is a measure to find out the proportion of banks capital, with respect
to the total risk-weighted assets of the bank.

03/25/2024 34
Changes in CAR

CAR increases Issue of Equity Increase in risky

capital activities
Issue of Tier I /II Increase in assets
Bonds Increase in

CAR Decreases
Contingent
liabilities

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Know Your Customer (KYC)

• KYC is a process by which banks obtain information about the identity and
address of the customers. This process helps to ensure that banks' services are
not misused. The KYC procedure is to be completed by the banks while opening
accounts and also periodically update the same.
• Objective of the KYC guidelines is to prevent banks being used, intentionally or
unintentionally by criminal elements for money laundering.

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 NPA : Non- Performing Asset

• Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term
loan,
• The account remains ‘out of order’ , in respect of an Overdraft/Cash Credit (OD/CC),
• The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
• The instalment of principal or interest thereon remains overdue for two crop seasons for short duration
crops,
• The instalment of principal or interest thereon remains overdue for one crop season for long duration crops,
• After 90 days the asset is classified as a “ Sub-Standard ” Asset for a period of 1 year.
• Thereafter the asset is classified as a “ Doubtful – 1” Asset for a period of 1 year.
• “ Doubtful – 2” Asset.
• “ Doubtful – 3” Asset.
• A Loss asset is one which is not recoverable.
 Implications of NPA classification

 Accrual basis of  Classify all  Liquidity

Income accounts of same challenges
recognition borrower as NPA  Blockage of capital
 Reversal of  Cash basis of  Reputational Risk
income income  Lower Profits,
receivables recognition ROA,ROI
 Provision for NPA
WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH

Stressed Assets

• Stressed Assets= NPAs + Restructured loans + Written Off Assets.

03/25/2024 39
Banking sector – latest trends

Latest trends in scheduled commercial banks

• Stiff competition from Fintech

• Covid induced higher risks- NPA expected to rise to 85 or 9% -CRISIL
• Expected to need more capital to face adversity
• Issuance of green bonds by AXIS bank
• Co-lending agreements
• Excessive Liquidity

Latest trends for Small finance Banks

• High proportion of unsecured loans

• Collection efforts under stress due to COVID pandemic
• Lower CASA base, dependent on borrowings and refinance
• In need to increase Provision coverage ratios
Banking sector – latest trends

Payment banks

• Many are yet to break even

• Lower interest rates and high initial infrastructure costs impacting profitability
• Generation of capital flows an issue

Co-operative banks

• Absence of secondary market for trading shares and one person –one vote
making mobilization of share capital an issue.
• Loan defaults and low capital base is the problem faced
Challenges ahead

Stiff competition from fintech

Cybersecurity risks increasing

Steeper NPAs post pandemic

Higher capital requirements to meet higher risks

Costs of technology adoption and compliance increasing

Additional reference links

• https://www.youtube.com/watch?v=BtnOBinKeKU - Rajeev Yadav Of Fincare Small Finance Bank Speaks

On Differentiating Factors With Commercial Banks – CNBC TV
THANK YOU