Banking Institution

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BANKING

INSTITUTION

Prepared byMohit Raval


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BANKING

A bank is a financial institution and a financial

intermediary that accepts deposits and channels those

deposits into lending activities, either directly by loaning or

indirectly through capital markets. A bank is the connection

between customers that have capital deficits and customerswith capital surpluses.

Banking in its modern sense evolved in the 14th century in the

rich cities of Renaissance Italy but in many ways was a

continuation of ideas and concepts of credit and lending that

had its roots in the ancient world. In the history of banking, a

number of banking dynasties have played a central role over

many centuries. The oldest existing bank was founded in 1472.


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Definition of Bank

The definition of a bank varies from country to country. See

the relevant country page (below) for more information.

Under English common law, a banker is defined as a person

who carries on the business of banking, which is specified as:

Conducting current accounts for his customers,

Paying cheques drawn on him/her, and

Collecting cheques for his/her customers.


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India cannot have a healthy economy without a sound and

effective banking system. The banking system should be hassle

free and able to meet the new challenges posed by

technology and other factors, both internal and external.

In the past three decades, India's banking system has earned

several outstanding achievements to its credit. The most

striking is its extensive reach. It is no longer confined to

metropolises or cities in India. In fact, Indian banking system

has reached even to the remote corners of the country. This is

one of the main aspects of India's growth story.


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HISTORY OF BANKING IN INDIA

The first bank in India, though conservative, was

established in 1786. From 1786 till today, the journey of

Indian Banking System can be segregated into three distinct

phases:

Early phase of Indian banks, from 1786 to 1969

Nationalization of banks and the banking sector reforms,

from 1969 to 1991

New phase of Indian banking system, with the reforms

after 1991


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Phase-1

The first bank in India, the General Bank of India, was set up in1786. Bank of Hindustan and Bengal Bank followed.

The East India Company established Bank of Bengal (1809),Bank of Bombay (1840), and Bank of Madras (1843) asindependent units and called them Presidency banks.

These three banks were amalgamated in 1920 and theImperial Bank of India, a bank of private shareholders, mostlyEuropeans, was established.

Allahabad Bank was established, exclusively by Indians, in

1865. Punjab National Bank was set up in 1894 withheadquarters in Lahore. Between 1906 and 1913, Bank ofIndia, Central Bank of India, Bank of Baroda, Canara Bank,Indian Bank, and Bank of Mysore were set up.

The Reserve Bank of India came in 1935.


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Phase-2

The government took major initiatives in banking sector reforms

after Independence. In 1955, it nationalized the Imperial Bank of

India and started offering extensive banking facilities, especially in

rural and semi-urban areas.

The government constituted the State Bank of India to act as the

principal agent of the RBI and to handle banking transactions of the

Union government and state governments all over the country.

Seven banks owned by the Princely states were nationalized in 1959

and they became subsidiaries of the State Bank of India. In 1969, 14

commercial banks in the country were nationalized.

In the second phase of banking sector reforms, seven more banks

were nationalized in 1980. With this, 80 percent of the banking

sector in India came under the government ownership


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Phase-3

This phase has introduced many more products and facilities

in the banking sector as part of the reforms process.

In 1991, under the chairmanship of M Narasimham, a

committee was set up, which worked for the liberalization of

banking practices. Now, the country is flooded with foreign banks and their ATM

stations. Efforts are being put to give a satisfactory service to

customers.

Phone banking and net banking are introduced. The entiresystem became more convenient and swift. Time is given

importance in all money transactions.


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THE BANKING STRUCTURE

IN INDIA


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THE BANKING STRUCTURE IN

INDIA The commercial banking structure in India consists of

scheduled commercial banks and unscheduled banks.

Scheduled banks constitute those banks that are included in

the Second Schedule of Reserve Bank of India (RBI) Act, 1934.

As on June 30, 1999, there were 300 scheduled banks in Indiahaving a total network of 64,918 branches

The scheduled commercial banks in India comprise State Bank

of India and its associates (5), nationalized banks (19), foreign

banks (45), private sector banks (32), co-operative banks, and

regional rural banks.


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Before the nationalization of Indian banks, the State Bank of

India (SBI) was the only nationalized bank, which was

nationalized on July 1, 1955, under the SBI Act of 1955. The

nationalization of seven State Bank subsidiaries took place in

1959. After the nationalization of banks in India, the branches of the

public sector banks rose to approximately 800 percent in

deposits and advances took a huge jump by 11,000 percent


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Nationalization Process

1955: Nationalization of State Bank of India

1959: Nationalization of SBI subsidiaries

1969: Nationalization of 14 major banks

1980: Nationalization of seven banks with deposits over Rs

200 crore


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Banks in India

In India, banks are segregated in different groups. Eachgroup has its own benefits and limitations in operations. Each hasits own dedicated target market. A few of them work in the ruralsector only while others in both rural as well as urban. Manybanks are catering in cities only. Some banks are of Indian origin

and some are foreign players.

Banks in India can be classified into:

Public Sector Banks

Private Sector Banks Co-operative Banks

Regional Rural Banks

Foreign Banks


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Public Sector Banks

Public Sector Banks (PSBs) are banks where a majority stake

(i.e. more than 50%) is held by a government. The shares of

these banks are listed on stock exchanges. There are a total of

26 PSBs in India.

i.e. RBI,SBI,PNB,BOB UCO bank etc.


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Private Sector Banks

All those banks where greater parts of stake or equity are held

by the private shareholders and not by government are called

"private-sector banks". These are the major players in

the banking sector as well as in expansion of the business

activities India. The present private-sector banks equippedwith all kinds of contemporary innovations, monetary tools

and techniques to handle the complexities are a result of the

evolutionary process over two centuries. They have a highly

developed organizational structure and are professionally

managed. Thus they have grown faster and stronger since pastfew years.

i.e. ICICI,HDFC,Axis Bank


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Co-operative Banks

Co-operative banking is retail and commercial banking

organized on a co-operative basis. Cooperative banking

institutions take deposits and lend money in most parts of the

world.

Co-operative banking, as discussed here, includes retailbanking carried out by credit unions, mutual savings

banks, building societies and co-operatives, as well as

commercial banking services provided by mutual

organizations (such as co-operative federations) to

cooperative businesses.

i.e. District Co-operative banks etc.


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Regional Rural Banks

History of Regional Rural Banks

Regional Rural Banks were established under the provisions ofan Ordinance passed on the 26th September 1975 and the RRB Act,1976 to provide sufficient banking and credit facility for agricultureand other rural sectors. These were set up on the recommendations of

Narsimhan Committee at the tenure of Indira Gandhi's governmentwith a view to include rural areas into economic mainstream since thattime about 70% of the Indian Population was of Rural Orientation. Thedevelopment process of RRBs started on 2 October 1975 with the withforming the first RRB Prathama Grameen Bank.

RRB are the banking organizations being operated in different statesof India. They have been created to serve the rural areas withbanking and financial services. However, RRB's may have branchesset up for urban operations and there area of operation may includeurban areas too.


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Foreign Banks

A type of foreign bank that is obligated to follow the

regulations of both the home and host countries. Because the

foreign branch banks' loan limits are based on the parent

bank's capital, foreign banks can provide more loans than

subsidiary banks. i.e. City Bank, HSBC bank.


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Indian BanksAssociation

(IBA) The Indian Banks Association (IBA) was formed on September

26, 1946, with 22 members. Today, IBA has more than 156

members, such as public sector banks, private sector banks,

foreign banks having offices in India, urban co-operative

banks, developmental financial institutions, federations,merchant banks, mutual funds, housing finance corporations,

etc.


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The IBA has the following functions.

Promote sound and progressive banking principles andpractices.

Render assistance and to provide common services tomembers.

Organize co-ordination and co-operation on procedural, legal,technical, administrative, and professional matters.

Collect, classify, and circulate statistical and other information.

Pool expertise towards common purposes such as costreduction, increased efficiency, productivity, and improving

systems, procedures, and banking practices. Project good public image of banking through publicity and

public relations.

Encourage sports and cultural activities among bankemployees.


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Banking Activities

Retail banking, dealing directly with individuals and small businesses

Business banking, providing services to mid-market businesses

Corporate banking, directed at large business entities

Private banking, providing wealth management services to high net

worth individuals Investment banking, activities in the financial markets, such as

"underwrite" (guarantee the sale of) stock and bond issues, trade

for their own accounts, make markets, and advise corporations on

capital market activities like mergers and acquisitions

Merchant banking is the private equity activity of investment banks Financial services, global financial institutions that engage in

multiple activities such as banking and insurance.


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Reserve Bank of India (RBI)

The central bank of the country is the Reserve Bank of India

(RBI). It was established in April 1935 with a share capital of

Rs.5 crore on the basis of the recommendations of the Hilton

Young Commission. The share capital was divided into fully

paid shares of Rs.100 each, which was entirely owned byprivate shareholders in the beginning. The government held

shares of nominal value of Rs.220,000.

The RBI commenced operation on April 1, 1935, under the

Reserve Bank of India Act, 1934. The Act (II of 1934) provides

the statutory basis of the functioning of the Bank.

The RBI was nationalized in the year 1949.


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The general superintendence and direction of the RBI is

entrusted with the 21-member-strong Central Board of

Directorsthe Governor(currently Raghuram Rajan), four

Deputy Governors, two Finance Ministry representative, ten

government-nominated directors to represent importantelements from India's economy, and four directors to

represent local boards headquartered at Mumbai, Kolkata,

Chennai and New Delhi. Each of these local boards consists of

five members who represent regional interests, as well as the

interests of co-operative and indigenous banks.


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The Bank was constituted to meet the following requirements:

Regulate the issue of currency notes

Maintain reserves with a view to securing monetary stability

Operate the credit and currency system of the country to its

advantage


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Functions of the RBI

The Reserve Bank of India Act of 1934 entrusts all the important

functions of a central bank with the Reserve Bank of India.

Bank of Issue

Banker to the Government

Bankers' Bank and Lender of the Last Resort

Controller of Credit

Custodian of Foreign Reserves

Supervisory Functions


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POLICY RATES AND RESERVE

RATIOS 1. Repo Rate

Repo rate is the rate at which our banks borrow rupees fromRBI. Whenever the banks have any shortage of funds they can borrowit from RBI. A reduction in the repo rate will help banks to get moneyat a cheaper rate. When the repo rate increases, borrowing from RBI

becomes more expensive.

2. Reverse Repo Rate

This is exact opposite of Repo rate. Reverse Repo rate is therate at which Reserve Bank of India (RBI) borrows money from banks.

RBI uses this tool when it feels there is too much money floating in thebanking system. Banks are always happy to lend money to RBI sincetheir money is in safe hands with a good interest. An increase inReverse repo rate can cause the banks to transfer more funds to RBIdue to this attractive interest rates.


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3. CRR Rate

Cash reserve Ratio (CRR) is the amount of funds that the bankshave to keep with RBI. If RBI decides to increase the per cent of this, theavailable amount with the banks comes down. RBI is using this method(increase of CRR rate), to drain out the excessive money from the banks.

4. SLR RateSLR (Statutory Liquidity Ratio) is the amount a commercial bank

needs to maintain in the form of cash, or gold or govt. approved securities(Bonds) before providing credit to its customers.

SLR rate is determined and maintained by the RBI (Reserve Bank of India)in order to control the expansion of bank credit. SLR is determined as the

percentage of total demand and percentage of time liabilities. TimeLiabilities are the liabilities a commercial bank liable to pay to thecustomers on their anytime demand. SLR is used to control inflation andpropel growth. Through SLR rate tuning the money supply in the systemcan be controlled efficiently.


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5. Bank Rate

Bank rate, also referred to as the discount rate, is the rate of

interest which a central bank charges on the loans and advances that it

extends to commercial banks and other financial intermediaries.

Changes in the bank rate are often used by central banks to control the

money supply.

6. Inflation

Inflation is as an increase in the price of bunch of Goods and

services that projects the Indian economy. An increase in inflationfigures occurs when there is an increase in the average level of prices

in Goods and services. Inflation happens when there are fewer Goods

and more buyers; this will result in increase in the price of Goods,

since there is more demand and less supply of the goods.


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7. Deflation

Deflation is the continuous decrease in prices of goods

and services. Deflation occurs when the inflation rate becomes

negative (below zero) and stays there for a longer period.


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Current Rate

Ratios and Rates

(Per cent)

Item/Week Ended 2012 2013

Aug. 24 Jul. 26 Aug. 2 Aug. 9 Aug. 16 Aug. 23

1 2 3 4 5 6

Ratios

Cash Reserve Ratio 4.75 4.00 4.00 4.00 4.00 4.00Statutory Liquidity Ratio 23.00 23.00 23.00 23.00 23.00 23.00

Rates

Policy Repo Rate 8.00 7.25 7.25 7.25 7.25 7.25

Reverse Repo Rate 7.00 6.25 6.25 6.25 6.25 6.25

Marginal Standing Facility (MSF) Rate 9.00 10.25 10.25 10.25 10.25 10.25

Bank Rate 9.00 10.25 10.25 10.25 10.25 10.25

Base Rate 9.75/10.50

9.70/10.25

9.70/10.25

9.70/10.25

9.70/10.25

9.70/10.25

Term Deposit Rate >1 Year 8.50/9.25 7.50/9.00 7.50/9.00 7.50/9.00 8.00/9.00 8.00/9.00

Savings Deposit Rate 4.00 4.00 4.00 4.00 4.00 4.00

Call Money Rate (Weighted Average) 7.93 8.33 9.45 9.30 10.18 10.21


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Date post:	14-Apr-2018
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Banking Institution

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