Indian Banking System (1)

Indian Banking System

Presented By-Abhinandan Singh14810003MBA 2ND Year

Post Independence Banking

Pre Independence Banking

Narasimham Committee 1

Nationalization


Contents


Credit Information System

Payment Banks

Small Banks

01


Presidency Banks

New Features

Bank of Hindustan1770

1786 General Bank of India

1843

1806 Bank of Calcutta

1840 Bank of Bombay

Bank of Madras

• Limited Liability and Joint stock banks

• Issue of notes

• Deposit Banking

• Board of Directors 02


Presidency Banks

Business of Presidency Banks

• Discounting of bills of exchange or other negotiable private securities.

• Loans up to Rs. 1 lakh with a max payment period of 3 months. Interest rates could not be higher than 12%.

• Loans against opium, indigo, cotton, tea, sugar, jute and silk were also granted.

• Lending against shares of Banks, mortgage of houses, land or other property was forbidden.

1861 Paper Currency Act was passed.

• Circulation was of the new currency was assigned to presidency banks.03


Presidency Banks

1876

• Rapid branch expansion. By 1876, Bank of Bengal had 18 branches and Bank of Bombay and Madras had 15 each.

Presidency Bank Act

• Brought Banks under common law.

• Creation of reserve treasuries at Calcutta, Bombay and Madras.

• Checked the growth of branches.

1869 -1920

1869 HSBC in Bengal.

1881 Oudh Bank of India, set up in Faizabad.

1895 Punjab National Bank ,set up in Lahore.(First bank to be purely managed by Indians). 04


Presidency Banks

1934 Reserve bank of India act passed

• 1906 Bank of India(Bombay),Corporation Bank , Canara Bank(Mangalore).

• 1907 Indian Bank (Chennai).

• 1911 Central Bank of India (First bank to be completely owned by Indians).

• 94 Banks failed between 1913 and 1918 due to World War .

• Share capital of Rs. 5 crores. The share capital was divided into shares of Rs.100.

• Privately owned except nominal amount of Rs. 2,20,000 .

1921 • Presidency banks with 70 branches are merged to form Imperial Bank of India.

05

Post Independence Banking

1949

1955

1959

Reserve Bank was nationalized.

State Bank of India Act was passed in May 1955 and State Bank of India was constituted on 1 July 1955.

State Bank of India(Subsidiary banks) Act was passed on 10 September.

Nationalization

The Government of India issued an ordinance ('Banking Companies Acquisition and Transfer of Undertakings Ordinance, 1969') and the 14 largest commercial banks with effect from the midnight on 19 July 1969.These banks contained 85% of the bank deposits in the country.

06

Nationalization

Reasons

• Social Welfare

• Controlling Private Monopolies

• Expansion of Banking

• Reducing Regional Imbalance

• Priority Sector Lending

Source: RBI.org.in 07

Nationalization

Banks Nationalized

19 July 1969

1. Allahabad Bank 2. Bank of Baroda 3. Bank of India 4. Bank of Maharashtra 5. Canara Bank 6. Central Bank of India 7. Dena Bank 8. Indian Bank 9. Indian Overseas Bank 10. Punjab National Bank 11. Syndicate Bank 12. Union Bank 13. United Bank of India 14. UCO Bank

15 April 1980

1. Andhra Bank 2. Corporation Bank 3. New Bank Of India 4. Oriental Bank of Commerce 5. Punjab & Sindh Bank 6. Vijaya Bank

6 banks with deposits above Rs. 200 crores were nationalized. 1980

08

14 banks with deposits above Rs. 50 crores were nationalized. 1969


Banks were under looses due to1991

09

1. Declining interest income 2. Increasing cost of operations

Reasons for declining interest income:

1. High proportion of deposits impounded for CRR and SLR, earning relatively low interest rates.

2. System of directed lending .

3. Political interference leading to huge NPAs .

Narasimhan Committee (Committee on the Financial System – CFS) was appointed by Manmohan Singh on 14 August 1991.


Narasimham Committee Observations

10

• Directed Credit Program.

• Interest Rate Structure.

Recommendations

• Reduction in the SLR and CRR.

• Phasing out Directed Credit Program.

• Structural Reorganizations of the Banking sector.

Three to four big banks including SBI should be developed as international banks.


11

Eight to Ten Banks having nationwide presence should concentrate on the national and universal banking services.

Local banks should concentrate on region specific banking.

RRBs (Regional Rural Banks should focus on agriculture and rural financing.

No more nationalization.

Private and foreign banks should be allowed liberal entry in to India.

• Establishment of the ARF Tribunal.

• Removal of Dual control.

• Banking Autonomy.


12

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-090.00%5.00%

10.00%15.00%20.00%25.00%

SBIPNBCBI

July 20150.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%

SBIPNBICICIHDFCAXIS

GNPA as percentage of advances

Source: Quarterly report(Moneycontrol.com)Source: Statistical Tables Relating to Banks in India (1996-2010,RBI)


13

SLR and CRR over last two decades

Source:RBI

1990 1995 2000 2005 2010 20150

10

20

30

40

SLR

19901995

20002005

20102015

0

5

10

15

CRR


14

Recommendations

• Strengthening banks in India in the context of the CRAR

• Narrow Banking

• Bank ownership and recruitment practice

• Review of banking laws

• Creation of asset reconstruction funds or asset Reconstruction companies

• Asset Quality


15

Source:RBI,2014(Except Indian Nationalized and Private Banks). Source:2nd Schedule, Banking Regulation Act 1949( Nationalized and Private Banks)

Commercial Bank

16

• A commercial bank is a financial institution that is authorized by law to accept demand and time deposits which can be withdrawn by cheque,draft or otherwise and uses it to loan and invest with aim of earning profit.

Its Function can be divided in to two parts.

• To Accept Deposits (Current,Fixed and Saving).

• To Give Loan and Advances (Cash Credit, Demand Loans and Short Term Loans).

• Investment (Govt. securities and other approved securities).

Primary

Commercial Bank

17

• Agency functions a. Transfer of fundsb. Collection of dividends, interest on shares and debentures is made on behalf of its

customers.c. Payment of various items

d. Purchase and sale of shares and securitiese. Act as Trustee and Executor of Property of its customers on advice of its

customersf. Letter of References

• Performing general utility servicesa) Traveller’s chequesb) Locker facilityc) Underwriting securities issued by government, public or private bodiesd) Purchase and sale of foreign exchange currency

Secondary

Commercial Banks

18

Scheduled Banks

A scheduled bank is a bank which is listed in the 2nd Schedule of the Reserve Bank of India Act, 1934.

• All scheduled banks must maintain a reserve capital of Rs.5 lakhs in the Reserve Bank of India.

For Co-operative bank to be scheduled Deposits not less than Rs. 750 crore on a continuous basis for 1 year. Capital adequacy ratio of 12%, and continuous net profit for the previous

three years. NPA should be less than 5%.

• Eligible for loans from the Reserve Bank of India at bank rate. • Membership to clearing houses.

Benefits

Commercial Banks

19

Scheduled Banks

Public Sector Banks

Public Sector Banks are the banks in which majority stake (i.e. more than 50%) is held by a government.

• It includes SBI + 5 Associates + 19 Nationalized Banks + IDBI + Bhartiya Mahila Bank

• IDBI attained the status of a limited company viz(IDBI Ltd.), through Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003.

• The Reserve Bank of India, in 2004 incorporated IDBI as a scheduled bank under the RBI Act, 1934.

• The commercial banking arm, IDBI Bank, was merged into IDBI in 2005

• State Bank of India is the largest bank both in terms of market capitalization and assets followed by Bank of Baroda and Punjab National Bank.

Commercial Banks

20

Scheduled Banks

Public Sector Banks

19691. Allahabad Bank 2. Bank of Baroda 3. Bank of India 4. Bank of Maharashtra 5. Canara Bank 6. Central Bank of India 7. Dena Bank

1980

1. Andhra Bank 2. Corporation Bank 3. New Bank Of India 4. Oriental Bank of Commerce 5. Punjab & Sindh Bank 6. Vijaya Bank

State Bank of India1. State Bank of Bikaner & Jaipur2. State Bank of Hyderabad3. State Bank of Mysore4. State Bank of Patiala5. State Bank of Travancore

SBI and Associate Banks

Nationalized Banks

8. Indian Bank 9. Indian Overseas Bank 10. Punjab National Bank 11. Syndicate Bank 12. Union Bank 13. United Bank of India 14. UCO Bank

2004• IDBI Bank

2013• Bhartiya Mahila Bank

21

• Majority of share capital is held by private individuals and corporate.

• Catholic Syrian Bank• City Union Bank • Dhanlaxmi Bank • Federal Bank • Jammu & Kashmir Bank• Karnataka Bank • Karur Vysya Bank • Lakshmi Vilas Bank • Nainital Bank • South Indian Bank • Tamilnadu Mercantile Bank • RBL Bank

• Axis Bank • Bandhan Bank• DCB Bank • HDFC Bank• ICICI Bank • IDFC• IndusInd Bank• Kotak Mahindra Bank• Yes Bank

Old Private Sector Banks New Private Sector Banks

Commercial Banks

Scheduled Banks

Private Sector Banks

Indian Banks

Commercial Banks

22

Scheduled Banks


Foreign Banks

Banks that have their registered and head offices in a foreign country but operate their branches in India.

Minimum capital requirement

INR 5 billion

Minimum CRAR 10%

Priority sector lending targets

40% (For banks with 20 or more branches, those with with less than 20 have five year transition period )

Raising of funds in India

Permitted to raise non-equity INR resources, may list in three years

Branch licensing At par treatment with domestic banks with some ‘restricted’ sensitive areas

Requirements and Regulations for Foreign Banks

Commercial Banks

23

Scheduled Banks


Foreign Banks

Requirements and Regulations for Foreign Banks

Mergers and acquisitions Foreign banks WOS may be permitted based on permission.

Board of directors Minimum 50% Indian resident directors and minimum one third independent directors, minimum two-third non-executive directors.

Unbanked and rural branches

25% branches in unbanked, rural areas

Commercial Banks

24

Scheduled Banks


Foreign Banks

• 43 Foreign Banks from 26 countries operating as Branches,46 countries from 22 countries operating as representative offices.

An external commercial borrowing (ECB) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs.

• Focus on trade finance, external commercial borrowing, wholesale lending, investment banking and treasury activities.

Contribution of investment and fee income to revenues compared to domestic banks.

Source :Database on the Indian Economy,RBI.

Commercial Banks

25

Scheduled Banks


Foreign Banks

Foreign bank branches by population center

Source :Bank Branch Statestics,Database on the Indian Economy,RBI.

Commercial Banks

26

Scheduled Banks


Foreign Banks

Foreign banks’ share of banking asset and deposits

Source :Database on the Indian Economy,a profile of banks 2012-13,RBI.

Foreign Banks Public Sector Banks

Private Sector Bank

Number of Banks 43 26 20

Number of Branches 327 75779 16001

Share of Deposits 4% 77% 19%

Share of Assets 6% 74% 20%

• 11% of the total profit of Commercial Banks.

Commercial Banks

27

Scheduled Banks

Comparison of Assets as Percentage of Total Asset of Scheduled Commercial Banks(Excluding RRBs)

Source :Statistical Tables Relating To Banks In India,RBI(2014-2000).

2000 2005 2010 20140.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%

Perc

enta

ge o

f tot

al a

sset

Commercial Banks

28

Scheduled Banks

Asset of Banks as Percentage of Total Assets of Scheduled Commercial Banks (Excluding RRBs)

Series10.000%1.000%2.000%3.000%4.000%5.000%6.000%7.000%8.000%9.000%

10.000%11.000%12.000%13.000%14.000%15.000%16.000%17.000%18.000%19.000%20.000%

1.322% 1.202% 1.194%

5.423%4.483%

3.495%

6.015%5.228% 5.020%

16.347%

Citi Bank HongKong & Shanghai Bank Standard CharteredICIC Bank HDFC Bank Axis BankBOB BOI PnBSBI

Source :Bank Branch Statestics,Database on the Indian Economy,RBI.

Commercial Banks

29

Scheduled Banks

Public Sector Banks

Regional Rural Banks

• Established under the provisions of Ordinance passed on 26 September 1975 and the RRB Act.

• To develop the rural economy and to create a supplementary channel to the cooperative credit structure and enlarge institutional credit for the rural and agriculture sector.

The RRBs were owned by three entities with their respective shares as follows: • Central Government → 50% • State government → 15% • Sponsor bank → 35%

Commercial Banks

30

Scheduled Banks

Public Sector Banks


Expansion and Amalgamation

• 12606 branches by 1985.

• Khusrau Committee,1989(Agricultural Credit Review Committee) suggested to merge RRBs with sponsor banks.

Source : RBI

• States of Tripura, Nagaland, Manipur, Mizoram, Arunachal Pradesh and Meghalaya have state-level RRBs. Gujarat and Karnataka too have demanded formation of state level RRB.

Commercial Banks

31

Scheduled Banks

Public Sector Banks


Expansion and Amalgamation

• In 2005 based on Dr. Vyas Committee recommendations amalgamation of RRBs was started in 2005.

• RRBs were asked to have CRAR of at least 7% by 31 March 2011 and at least 9% from 31 March 2012 onwards.

• A fund of Rs. 100 crore to be set up each year for training and capacity building of the RRB staff.

Commercial Banks

32

Scheduled Banks

Public Sector Banks


The Regional Rural Banks (Amendment) Bill, 2015

• Sponsor banks is required to provide managerial and financial assistance for the first five years. The Bill removes the five year limit, thus allowing such assistance to continue beyond this duration.

• Authorized capital: The Act provides for the authorized capital of each RRB to be Rs. 5 crore. Authorized capital can not be reduced below Rs 25 lakh. The Bill raised the amount of authorized capital to Rs 2,000 crore with lower limit of Rs. 1 crore.

• Change in the limit of share holding by central government, state government or sponsor bank.

Commercial Banks

33

Scheduled Banks

Public Sector Banks


The Regional Rural Banks (Amendment) Bill, 2015

• Closure and balancing of books: The Bill changed the date od closure and balancing to March 31 to bring the Act in uniformity with the financial year.

• Directors elected by shareholders to be based on percentage equity share held by share holder .

• 635 Districts• 17856 Branches• GNPA 5.03• Profit Rs. 3281 Cr.• Assets Rs. 351295 Cr.

Current Status of RRBs

Source:RBI,2014.

Commercial Banks

34

Non Scheduled Banks

History

The Local Area Banks (LABs) are small private banks, conceived as low cost structures aimed to provide efficient and competitive financial intermediation services in a limited area of operation, i.e., primarily in rural and semi-urban areas, comprising three contiguous districts.

• Started in 1996,after announcement of then finance minister.

• 227 applications received by RBI.

• ‘in principle’ approvals for establishment of 10 LABs were issued and 3 applications are under examination.

• 5 banks were licensed under section 22 of Banking Regulation Act 1949. Of these, only 4 LABs are functioning at present. 1 application is pending.

Commercial Banks

35

Non Scheduled Banks

Criteria needed to apply for LAB

• Minimum start-up capital of Rs. 5 crore.

• The promoters of the bank may comprise of private individuals, corporate entities, trusts and societies.

• The promoters of these banks were required to bring in the entire minimum share capital up-front.

• Family among the promoter group could not hold equity of more than 40% of capital.

Current Scenario

• Financially successful but failed to serve its purpose.

• Allowed to open only 5-6 branches by permission of RBI.

Commercial Banks

36

Non Scheduled Banks

Bank Assets (INR Cr.)

Profit(INR Cr.)

Branches

Capital Local Area Bank(Jalandhar)

1139.8 14.22 38

Costal Local Area Bank(Vijaywada)

535.1 6.93 39

Krishna Bhima Samruddhi Local Area Bank(Mahabubnagar)

168.7 10.6 19

South Gujarat Local Area Bank NA NA NA

Source: Balance sheet of respective banks,2014.

Co-operative Banks

37

Urban Co-operative Banks

A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.

• Often created by people belonging to the same local or professional community or sharing a common interest.

• More than 200 million members.• 67% penetration in villages .• 46% of the total rural credit.

Urban Cooperative Banks (UCBs) are the banks which are registered as cooperative societies under the provisions of, either the State Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002.

Co-operative Banks

38

Urban Co-operative Banks

Duality of Control- Banking related functions (viz. licensing, area of operations, interest rates etc.) are governed by RBI and registration, management, audit and liquidation, etc. governed by State Governments as per the provisions of respective State Acts.

Deposits Rs. 276900 cr.Assets Rs. 337000 cr.

Source:RBI’s report on co-operative banks,2013.

Co-operative Banks

39

Rural Co-operative Banks

• Short term- Seasonal agricultural operations, primary weavers.• Long Term - Long term lending to cultivators by way of floatation of debentures

in vital areas such as Minor Irrigation, Farm Mechanization etc.

Source:RBI’s report on co-operative banks,2013.

Co-operative Banks

40


Short Term Lending Banks

State Co-operative Banks

SCBs are the apex institutions in the three-tier cooperative credit structure, operating at the state level.

• Every state has a state cooperative bank. SCB grants loans to District Central Cooperative Banks and regulates their activities.

• SCB gets loans from RBI.

• SCB acts as a link between RBI and District Central Cooperative Banks. Borrowings of SCBs are mainly from the Reserve Bank of India and the rest from state governments.

41

• The working area of these banks is limited to one district only.

Types

i. Cooperative Banking Unions whose membership is open only to cooperative societies. This exists in Punjab, Haryana, Rajasthan, Orissa and Kerala.

ii. Mixed Central Cooperative Banks whose membership is open to both individuals and cooperative societies.

• The duration of loans vary from one year to three years.

• DCCB plays a bridge role between the state cooperative banks and primary credit.

Co-operative Banks



District Central Co-operative Banks

42

Co-operative Banks



PACCS

• Primary Agricultural Cooperative Credit Society are village level institution which directly deals with rural people.

• It provides short term credit facilities to the agriculture sector. Minimum 10 persons of a village can form a primary credit society.

• The management of the society is under the control of an elected body. • The working capital of the primary credit societies, comes from their own funds,

deposits, borrowings and other sources.

43

Co-operative Banks


Long Term Lending Banks

SCARDBs and PCARDBs

• SCARDB -State Co-operative Agriculture and Rural Development Banks • PCARDB -Primary Co-operative Agriculture and Rural Development Banks

• The PCARDBs make long-term lending for schemes associated with increasing the agricultural output such as digging of bore-well, farming machinery etc.

• SCARDB is aimed at raising resources of for long term lending to cultivators by way of floatation of debentures in vital areas such as Land Development, Horticulture, Wasteland Development, Rural Housing, Rural Warehouses, Non-Farm Sector and Animal Husbandry.

44

Co-operative Banks

SCBs DCCBs PACBs SCARDBs PCARDBs

Assets(INR cr.) 1,47900 257300 165000 29400 26200

Profit(INR cr.) 500 1400 -2000 -200 -200

NPA(% of loan outstanding) 6.8 9.7 26.8 33.1 38.6

Source: RBI’s report on co-operative banks,2013.

Comparison of Co-operative Banks

45


Benefits

• Reduced cost of intermediation.

• Efficient pricing, target and monitoring of loans.

• Reduced credit defaults, reduced average interest rates.

• More capital for further credit growth.

• Objective and transparent scrutiny/processing of credit proposals.

• Monitoring of build-up of systemic of unregulated sectors.

• Disciplined and better credit behavior.


2000

2004

2005

Credit Information Bureau (India ) Limited.

46

Consumer Bureau 4 million .Currently 260 million records.

2006

2010

2011

Commercial Bureau 0.7 million records .Currently 12 million records.

Equifax and Experian.

High Mark Credit Information Services.

Credit Information Companies (Regulation) Act.


01

CIBIL

55%

10%

7%

5%

5% 5%5% 5% 3%

Share Holding PatternTransUnion International Inc 55%

ICICI Bank Ltd 10%

State Bank of India 7%

Indian Overseas Bank 5%

The Hongkong and Shanghai Banking Corporation 5%

Union Bank of India 5%

Bank of India 5%

Bank of Baroda 5%

Allahabad Bank 3%


48

CIBIL

Functioning

• Credit Information Report (CIR)

• CIBIL TransUnion Score

• Credit Information Report (CIR)

01


50

CIBIL

Factors Affecting CIBIL TransUnion Score

CIBIL TransUnion Score

• Ideal above 750

• NA or NH

• Late payment or defaults in the recent past.

• High utilization of credit limits.

• Percentage of unsecured loans.

• Credit hungry behavior.


51

CIBIL

CIBIL TransUnion Score 2.0

• Risk index score range for credit history of less than 6 months.

• Well defined NA/NH.

• Lower Score .

NA/NH interpretation

Individual has no credit history & it has not been reported.

Individual has credit history but none that is reported in the 24 months prior to enquiry.


52

Aditya Puri Committee Recommendations

On International Standards

• Free credit reports to each customer and customer’s views on disputed items in the credit information reports.

• Easier rectification through bank branch.

• Access to employers.

• More inclusive information covering utilities and criminal convictions.

Example - Tax statements, individual’s income and other personal financial information, utility payment records/telecom data, cheque bouncing, bankruptcies and court judgments.


53


On increasing coverage of credit information

• Membership of all commercial banks and financial institutions, including HFCs and SFCs .

• Allow co-operative banks and NBFCs with asset base of Rs. 100 crore.

• Consistency of data formats.

• Common Data Quality Index.

On data formats


54


On credit information report

• Common classification of Credit Scores.

• Details of co-borrower and guarantor.

• Data on property mortgages through CERSAI.

Payment Banks

55

Objective

Improve financial inclusion by

i. Small savings accounts .

ii. Payments/remittance services to migrant labor workforce, low income households, small businesses, other unorganized sector entities and other users.

Regulations and Requirements

• Minimum capital requirement is Rs. 100 crore.

• Minimum 40% promoter stake for the first five years.

• Foreign share holding as per FDI norms for private banks.

Payment Banks

56

• Voting right of any shareholder is capped at 10% and any acquisition of over than 5% will require approval of the RBI.

• Deposit per costumer should not exceed Rs. 1,00,000.

• 25 % of its branches must be in the unbanked rural area.

• The bank must use the term "payments bank" in its to differentiate it from other types of bank.

• 75 % of demand deposits in government securities/treasury bills with maturity up to one year .

• 25 % of demand deposits with other scheduled commercial banks.

Payment Banks

57

Scope of activities

• Acceptance of demand deposits.

• Issuance of ATM/debit cards.

• Bank Credit from another bank.

• Issuance of financial products like mutual fund units, insurance and pension products.

• Acceptance of utility bills.

Payment Banks

58

Potential

• Contribute to PMJDY.

• Payment Wallets.

• Last mile reach and easy deposits for low income group and daily wage earners.

• Rs. 14 trillion (Rs .14 lakh crore) per annum for credit needs.

Payment Banks

59

Entities that have received the license

Small Banks

60

Objective (RBI)

Financial inclusion by -

i. Provision of savings vehicles.

ii. Supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganized sector entities, through high technology-low cost operations.

Regulations and Requirements

• Minimum paid-up equity capital of Rs. 100 crore.

• Promoters – i. Resident individuals/professionals with 10 years of experience in banking and finance.

ii. Companies and societies owned and controlled by residents.

Small Banks

61

• Promoter's contribution should be at least 40 % ,can be brought down to 26 in 12 years.

• 75 % of its Adjusted Net Bank Credit (ANBC) to priority sector lending.

• At least 50 per cent of loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

• Maximum loan size and investment limit exposure to single/group should not exceed 15% of capital funds.

• For the first three years, 25 per cent of branches should be in unbanked rural areas.

RBI has received 72 applications. These will be evaluated by an external advisory committee headed by Usha Thorat (Ex Deputy Governor RBI).

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Indian Banking System (1)

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