COMMERCIAL BANKS & INDUSTRIAL FINANCE:

THE EVOLVING ROLE

Financial System in India

Financial Sector includes three main segments viz.,

1) Financial Markets - Money Market, Debt Market, Capital Market, Forex Market

2) Financial Institutions - Banks, Mutual Funds, Insurance Companies etc.

3) Financial Products - Loans, Deposits, Bonds, Equities etc.

Financial Sector - Regulators

BANK: Meaning & Definition

• Bank is a financial intermediary between Money Savers and Money Seekers.

• Bank is engaged in the business of purchasing and selling of MONEY.

• Bank is a financial intermediary which accepts/takes deposits from public at large and make loans to different entities.

Banking in India

Banking in India is governed by Banking Regulation Act,1949 and RBI Act,1934

Banking in India is controlled /monitored by RBI and Govt. of India

Phase – 1: Phase of Banking Consolidation

• Three presidency banks were established in Calcutta

(1806) in Bombay (1840) and in Madras (1843)

• In the early part of 20th century, on account of the Swadeshi movement a number of join stock banks were established by Indians like Bank of India, Bank of Baroda and Central Bank of India.

• In 1921 the three presidency banks were merged and the IMPERIAL BANK OF INDIA was created.

• The Reserve Bank of India Act was passed in 1934 and the RBI came into existence in 1935 and RBI was nationalized in 1949.

Phase – 1: Phase of Banking Consolidation...

• The Banking Regulation Act,1949 gave wide powers to RBI to act as the REGULATOR FOR BANKS in India

• In 1955, State Bank of India became the successor to the Imperial Bank of India, under the State Bank of India Act, 1955.

• Credit Authorization Scheme (CAS) was launched in November 1965.

Phase – 2Phase of Innovative Banking (1964 – 1990)

• MAJOR ISSUES:• Social Control and Service

- Banking Coverage and Credit Gaps (Priority Sector Finance)- Agricultural Finance Corporation Ltd

• Organizational Changes• National Credit Council (1968)

– To assess the DD of bank credit from various sectors of economy

– To decide the priorities for grant of loans for various industries

– To coordinate the investment policies of comm. Banks in India

• LEAD BANK Scheme (1969)• Various committees were appointed by Govt. to improve the

banking sector performance:

A. Daheja Committee Report:

• Key Findings:• Industries were over – relying on bank credit• Industries using excess credit facilities• Poor Credit Appraisal by Banks

• Suggestions:• Effective Credit Appraisal Mechanism• Industries should keep minimum inventories• Availability of Credit to Priority Sector• New Bill Market Scheme (NBMS)

B. Tondon Committee Report

• Key Findings:• Rationing/Regulating of Bank Credit

• Suggestions:• MPBF Mechanisms• Credit Control Standards for Banks• Bank Credit to priority sector• Uniform distribution of credit across industries

Nationalization of Banks:(From Private to Govt. Ownership)

• In 1969, the Govt. of India NATIONALIZED 14 major commercial banks having deposits of Rs. 50 crore or more.

• In 1980, SIX more commercial banks were NATIONALIZED, with a deposit of Rs. 200 crore.

• The aim behind nationalization is to safeguard the Public Interest and Social Control.

Phase – 3Phase of Prudential Banking (1991)

• Banking Sector Reforms:

• Appointed “NARSIMHAM COMMITTEE – I” in 1991

MAJOR RECOMMENDATIONS:• On Directed Investments (CRR & SLR)

• SLR and CRR should be reduced to prudent levels

• On Directed Credit Programmes

• On Interest Rate Structure

• On Capital Adequacy Norms

• On Income Recognition, Asset Classification and Provisioning Requirements

“NARSIMHAM COMMITTEE – I” (1991)

• MAJOR RECOMMENDATIONS:• On Organisation Structure

Branch Licensing Universal Banking Service International Banking Expansion of RRBs (Regional Rural Banks) Banking Orgn. Structure (Thee tire & Four Tire)

• Free Entry to Foreign Banks• Free Entry for Private Sector Banks• Supervisory Authority

(Board of Financial Supervision setup under RBI)

NARSIMHAM COMMITTEE – IIMAJOR RECOMMENDATIONS (1998)

• CAPITAL ADEQUACY– Capital Adequacy should include “CREDIT RISK” & “MARKET RISK” – CRAR Should be increased from 8% to 10%.– The capital base of banks should meet International standards

• ASSET QUALITY, NPAs AND DIRECTED INVESTMENTS• PRUDENTIAL NORMS AND DISCLOSURE REQUIREMENTS– Banks Should Strictly comply the RBI Prudential Norms

• ASSET – LIABILITY MANAGEMENT

NARSIMHAM COMMITTEE – IIMAJOR RECOMMENDATIONS (1998)…

• SYSTEM AND METHODS IN BANKS– More Operational Freedom to Banks– More Concentration on RURAL BANKING– Technology Up-gradation– Human Resource Development

• INTERNAL SYSTEMS– Internal Audit and Inspection– Periodical Visits to Branch Offices – Simplification of documents and inter bank communication

process

NARSIMHAM COMMITTEE – IIMAJOR RECOMMENDATIONS (1998)…

• HUMAN RESOURCE MANAGEMENT– Free/Decentralized Recruitment– Training and Development Programmes for Employees– Flexibility to decide the “WAGE Structure”– VRS for employees

• TECHNOLOGY UPGRADATION– MIS– COMPUTERISATION– TELE BANKING

NARSIMHAM COMMITTEE – IIMAJOR RECOMMENDATIONS – Contd…

• STRUCTURAL ISSUES– No further NATIONALIZATION to be made– No distinction between ‘public’ and ‘private’ sector banks– Control of banking sector to be centralized – Emphasis upon ‘de-regulation’ of INT. RATE

• RURAL AND SMALL INDUSTRIAL CREDIT• Development of RRBs and Dist. Credit Co-op Banks• Assigning KEY role to NABARD for AGRI. Finance

Classification of Banks

Commercial Banks: DEPOSIT PRODUCTS

CERTIFICATE

FLEXI

RECURRING

FIXED

SAVINGS

CURRENT

DEPOSITS

Loan Products

BILLS FINANCE

TERMFINANCE

RETAIL FINANCE

OVERDRAFT

CASH CREDIT

LOANS&

ADVANCES

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