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COMMERCIAL BANKING
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BANKING
Under Banking Regulation Act,1949 ,
banking includes accepting deposits
f rom publ ic , for the pu rpose of lend ing
or investment; and repayable on demand
or o therw ise and w ithdrawable by check ,
draft, order or otherwise .
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UNIT BANKING
It consists of provision of banking services by a single
institution .The size as well as area of operation aresmall. The unit banks may have branches within a
limited area.
Merits: Adoption to local conditions
Mobilization of deposits and deploying them for local
needs
Developing a friendly image
Serves local needs in an effective manner
Local resources put to local use
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BRANCH BANKING
In branch banking system a typical commercial bank
is a large institution having a large number ofbranches scattered all over the country .
The branches may be located in the same city ,state oracross other states within the nation or overseas.
The branches are controlled from one locationreferred to as head office.
Merits:
Facilitates allocation or transfer of savings to the mostefficient use
Division of labour
Provision of remittance facilities
Spread of risks
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Leads to uniform structure of interest rates
Banks need not specialize in any particular areaor industry
Fosters trader-customer contacts across thenation as well as cross borders
Demerits: Absence of delegation of powers
Delays
Loss of initiative Lack of familiarity with local conditions and
special problems of the region
Local savings get transferred elsewhere
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RETAIL BANKING
It refers to the mobilization of deposits from individuals
and lending to small business and in retail loanmarkets .
It consists of large volumes of low value transactions.
It includes a comprehensive range of financialproducts viz., deposit products ,residential mortgage ,
credit cards , auto finance , personal loans ,consumer
durable loans ,loans against equity shares , loans for
subscribing to Initial Public Offers , debit cards , billpayment services , mutual funds , investment advisory
services.
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These products provide an opportunity for
banks to diversify the asset portfolio with high
profitability and relatively lower NPA s.
Net banking ,phone banking, mobile banking,
ATMs and bill payments are the new facilities
that the banks are using to lure the customers
and also to reduce their total operating cost.
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WHOLESALE BANKING
It refers to dealing with large customers often
multinational companies , government or government
enterprises .
The wholesale banks deal in large valued transactions, usually in small volumes .
They draw funds from and lend funds to business .
It also includes transactions which the banks conduct
with each other via inter bank markets separate from
customers .
It is domestic as well as international .
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The practices basic to wholesale banking are :
Interbank markets in domestic and foreigncurrencies
Issue of certificates of deposit in domestic and
foreign currencies Lending by means of term loans ( roll over
credits)
Wholesale banking practices such as loansyndication; rollover credits and floating rate of
loans have filtered through retail end .
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UNIVERSAL BANKING
Universal banks are considered as one-stop
financial supermarket offering broad range of
services .in a narrow sense, universal banking
denotes combination of banking and insurance
and investment activities .universal banks are
those banks that offer a wide range of financialservices , beyond commercial banking,
insurance and investment banking etc.
ICICI was the first bank to turn itself intouniversal bank.
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Merits :
Greater economic efficiency in the form of lower cost ,
higher out put
better productDemerits :
Chances of gaining monopoly , which would
have undesirable consequences on economicefficiency
Conflict of interest
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BANKING REGULATION ACT ,1949
License from RBI establish; expand; close;
shift .
Closer look over the over all management ofbanks appoint / terminate the chairman
Exercise control over advances given by banks
Can put restriction on any transaction Can inspect books of accounts
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RESERVE BANK OF INDIA ACT ,1934
Cash Reserve Ratio Sec 42
Every bank has to maintain an average daily balance with RBI3% to15 % of Net Demand and Time Liabilities.
The regulator fixes this rate taking into consideration:
Macro economic condition Money supply in the market
CRR earlier was 8.25 % , was brought down to 5% and nowa days it is 7 %.
CRR is maintained in the form of : Approved assets
Deposit with RBI
Cash balance in currency chest kept in bank- deemed to bedeposited in RBI
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Yield :
Apex bank provides a yield of 6% on CRRmaintained i.e.
No yield for first 3% CRR
6 % yield if CRR is greater than 3 %. This is payable quarterly
Penalty:
Incase of default a penalty is charged on CRRgenerally greater than bank rate.
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Statutory Liquidity Ratio Section 24 (2A)
In addition to CRR bank has to maintain statutory
reserve in the form of:
Cash
Gold Approved securities
Balance in the form of current account
This is to control money supply for credit purpose ;
increase bank investment in government in governmentsecurities ; ensure solvency of banks.
Earlier this SLR was 38.5 % and now a days it is
25 % of Net Demand and Time Liabilities.
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Yield : Investment in selected portfolio earns large
yields for the bank.
Penalty: Penalty is charged at the rate of 3% p.a. in case
of default .
5 % in case of continuous default.
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DEMAND LIABILITIES
Current deposit
Savings DepositMargin against LC/Guarantee
Recurring Deposit
Balance of cash credit account
TIME LIABILITIES
Fixed Deposits
Cash CertificateIndian Development Bonds
Staff security deposits
Net Demand and Time Liabilities
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Excludes :
Liabilities of overseas branches
Interbank liabilities
Non resident deposits Vostro account balance
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PRUDENTIAL NORMS
Income recognition not on accrual basis buton realization basis
Asset classification :
standard ;
sub standard till 12 months ;
doubtful after 12 months ;
Capital adequacy :desirable 10%of the risk
(credit risk) weighted assets as base capital
NPAs should be less than 3% of net advances
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Provision of bad debts for doubtful assets
Standard Assets: 1%
Sub Standard Assets: Secured -10%
Unsecured - 20%
Doubtful Assets:
Secured - up to 12 months - 20%
12-36 months - 30%
more than 36 months - 100%
Unsecured -100%
Loss Assets: value of security goes below10% of outstanding liabilities.
Provision required is 100%
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USE OF FUNDS
8.25% CRR
25% SLR
40% Priority Sector Lending :agriculture ,SSE, artisans ;self
employment
26.75% Others
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THE INDIAN BANKING SYSTEM
Public
Sector
Banks
Private
Sector
Banks
Cooperative
Banks
Development
Banks
SBI and its
7associates
*19 nationalizedbanks
*Regional Rural
banks sponsored by
Public sector banks
*New Generation
pvt Sector banks
*Foreign banks
*Scheduled
Cooperative Banks
*Non- scheduled
Banks
*Central CB
*State CB
*Primary
Agricultural
Societies
*Urban CB
* Industrial
Finance
Corporation of
India (IFCI)
*Industrial
Investment
Bank of India
(IIBI)
*SIDBI
*NABARD
*Exim Bank
*National
Housing
Bank (NHB)
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THE INDIAN BANKING SYSTEM
The banking system in India has three tiers :
scheduled commercial banks;
the regional rural banks and
the cooperative and special purpose banks .
There are approximately :
80 scheduled commercial banks Indian and foreign;
200 regional rural banks and
more than 350 central cooperative banks , 20 land development banks and
a number of primary agricultural credit societies .
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In terms of business, the public sector banks namely
the State Bank of India and the nationalized banks
dominate the banking sector.
Scheduled commercial banks constitute those
banks which have been included in the 2nd Schedule
of the RBI Act 1934.
These banks enjoy certain privileges such as:
free concessional remittances facilities
financial accommodation from RBI
minimum cash reserve ratio to be kept with RBI
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FUNCTIONS OF COMMERCIAL BANK
BASIC SERVICES
To change cash for bank deposits and bank
deposits for cash . The deposit with bank vary in terms of maturity
,interest payment ; cheque facility and
insurability. Demand Deposits / CurrentDeposit ; Time Deposit Savings and Fixed .
To transfer bank deposits between individuals
and /or companies
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To exchange deposits for bills of exchange,
government bonds ,the secured and unsecured
promises of trade and industrial units
Credit extended in the form of cash credit ;
overdraft; demand loans ;purchase or
discounting of commercial bills and instalment
or hire purchase credit.
To underwrite capital issues
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FINANCIALSERVICES
Advice in portfolio management /investmentcounseling
Facilitate merger and acquisition
Management and distribution of mutual funds Sell insurance products
FIDUCIARY SERVICES Manage employee pension
Act as trustees and manage the asset for
others
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MARKETISATION OF BANKING
The rapid expansion ofOff-Balance Sheet activities
of banks consisting of :
commitments (unused overdraft facilities and note
issuance facilities ) which may require banks toadvance funds and acquire a credit exposure at some
future date.
providing guarantees and bankers acceptances, this
substitutes banks credit rating for that of the borrowingfirm
( this remains an off-balance sheet exposure for the
bank as long as the acceptance is not discounted)
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entry of banks into forward contracts in the
markets in foreign exchange ,interest rates and
stock market
banks engaging in securities underwriting
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THANK YOU