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INDIAN BANKINGSYSTEM

ANDBASIC BANKING

CONCEPTS



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EVOLUTION OF BANKING STRUCTUREIN INDIA

• At the time of Independence - banking

structure dominated by domestic scheduledcommercial banks. Non-scheduled banks,constituted a small share

• First task before RBI after independence -develop sound structure on contemporary lines

• Safety nets to depositors from RBI • Need for separate banking structure –

Commercial banks not tuned to needs andrequirements of SME and marginal farmers,co-operatives lacked resources. Need of combining local feel and familiarity ofrural problems characteristic of co-operativesand professionalism and large resource base ofcommercial banks.



3

INDIA BANKING SYSTEM – STRUCTURE

SCHEDULED BANKS

SCH. COMMERCIALBANKS

SCH. COOP. BANKS

PUBLIC SECBANKS

PVT. SECTOR

BANKSFOREIGN BANKS RURAL REGIONAL

BANKS

NATIONALIZEDBANKS

SBI & ITSASSOCIATES

OLD PVT.BANKS

NEW PVT.BANKS

SCH. URBANCOOP BANK SCH. URBANCOOP BANK



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• Established - April 1, 1935 • Ownership - originally privately, Nationalized

1949• Central Office –

Governor sits and policies are formulatedinitially established in Calcutta;permanently moved to Mumbai in 1937

• Preamble

"... to regulate the issue of Bank Notes andkeeping of reserves with a view to securingmonetary stability in India and generally tooperate the currency and credit system ofthe country to its advantage

RESERVE BANK OF INDIA ACT 1934



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MAIN FUNCTIONS

• Regulator and supervisor of financialsystem• Monetary Authority• Banker to the Government• Monopoly of Note Issue (other than

Rupee One notes and coins andsubsidiary coins)

• Manager of Foreign Exchange• Developmental role• Related Functions



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FINANCIAL SUPERVISION • Performed by RBI under guidance of Board for

Financial Supervision (BFS) • Constituted in November 1994; Committee of

the Central Board of Directors • Objective

consolidated supervision of financial sector- commercial banks, FIs, and NBFCs

• ConstitutionChairman - GovernorVice-Chairman - Dy Governor in charge ofbanking regulation and supervisionCo-opted Directors from Central Board - 4

Term – 2 years and is.Ex-officio members - Dy Governors



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Financial Supervision- BFS (Contd.)

• Audit Sub-Committee Dy Governor is Chairman and 2 Directors asmembersupgrading quality of statutory audit and

internal audit functions in Banks and FIs• Functions

bank inspections; off-site surveillance,strengthening of role of statutory auditors ;strengthening of internal defences ofsupervised institutions; legal issues in bankfrauds; divergence in assessments of NPA and

supervisory rating model



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RBI – CHANGING SCENARIO• REAL TIME GROSS SETTLEMENT (RTGS) SYSTEM

- IN compliance with Basle Core Principles forSystemically Important Payment Systems of BIS

• INdianFInancialNETwork – INFINET – a ‗ ̀one-of-a-kind‘ initiative for sharing IT expensive resources

• `ANYWHERE BANKING’ THROUGH CBS, ‘ANYTIMEBANKING’ -National Financial Switch forinterconnecting ATMs

• IMPROVING CG- set up through ―fit and proper

criteria• INTEGRATED RISK MANAGEMENT SYSTEMS

• NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT) SYSTEM and NATIONAL ELECTRONIC CLEARINGSERVICE (NECS).



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BANKING SECTOR REFORMS• Several committees constituted to resolve

problems of Commercial Banking in India, twomost important are-

a) Narasimham Committee I (1991)- aimed

at bringing ― operational flexibility and―functional autonomy so as to enhanceefficiency, productivity and profitability

b) Narasimham Committee II (1998)-bringing structural changes so as tostrengthen banking system to make itmore stable



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MAJOR RECOMMENDATIONS

NARISHIMAM COMMITTEE REPORT I

• Four-tier hierarchy for banking structure - three to

four large banks with SBI at top

• Parity in treatment of Private sector banks with

Public sector banks

• Follow BIS/Basel norms

• Lifting of ban - setting new banks in Private sector• Liberal Governmental policies for expansion of

foreign bank branches and rationalization of foreign

operations of Indian banks



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Major Recommendations (Contd.)

• Progressively bring down - Statutory Liquidity Ratio

(SLR) and Cash Reserve Ratio (CRR)

• Tighten prudential norms for the commercial banks

• Deregulate interest rates

• Redefine priority sector - to comprise SME and

marginal farmers, and EWS

• Increase competition in lending between DFIs and

banks

• Disinvest in PS banks

• Each public sector bank - set up at least one RBSand treated at par with RRBs



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Major Recommendations (Contd.)Narasimham Committee Report II

• Merger of strong PS banks and closure ofsome weaker banks

• Amicable golden handshake scheme for

surplus banking sector staff

• Setting up ARC to tackle NPAs in banks

•Enhancement of capital adequacy norms

• Healthy competition between PS banks

and private sector banks essential.



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MEASURES UNDERTAKEN

Competition Enhancing Measures • Operational autonomy and reduction

of public ownership in PS Banks• Transparent entry norms

• Banks allowed to diversify product portfolio and business activities

• Roadmap for foreign banks for M &A

of private sector banks and NBFCs• Instructions and guidelines onownership and governance in privatesector banks



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Measures enhancing role ofmarket forces

• Disbanding administered interest rates and

enhanced transparency and disclosure norms• Facilitation of improved payments and

settlement mechanism • Dematerialization and securitization of

assets developedPrudential measures

• Introduction of international best practicesnorms on Capital to Risk Asset Ratio (CRAR), Accounting

• Strengthening Risk managementmechanisms

• Higher graded provisioning for NPAs• Implementation of Basel II



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Institutional and legal measures • Setting up of DRT, ARC , Lok-Adalat, CCIL and

CIBIL • Enactment of Securitization and Reconstruction of

Financial Assets and Enforcement of SecuritiesInterest Act 2002,

Supervisory measures

• Establishment of Board of Financial Supervision as apex supervisory authority

• Strengthening CG , Audit, enhance due diligence, fitand proper test for directors.

• Strengthening ofTechnology related measures

• Introduction of Negotiated Dealing System (NDS)for screen based trading in Govt. securities and Real

Time Gross Settlement System (RTGS)



16

BANKING CONCEPTS• PLR or prime lending rate - rate of interest at which

banks lend to their credit-worthy or favouredcustomers.

It is treated as a benchmark rate for most retailand term loans.

influenced by RBI‘s policy rates — the repo rateand cash reserve ratio

• Deposit Rates - Interest rate paid on depositaccounts by commercial banks and other FIs

• Bank rate - rate of interest which RBI charges onloans and advances that it extends to commercialbanks and other financial intermediaries. Changes inthe bank rate are often used by RBI to control moneysupply



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• Repo Rate - rate at which banks borrow from RBI. Areduction in repo rate will help banks to get moneyat a cheaper rate.

• Reverse Repo rate - rate at which RBI borrowsmoney from banks. An increase in Reverse repo ratecan cause banks to transfer more funds to RBI dueto this attractive interest rates. It can cause the

money to be drawn out of the banking system.Due to this fine tuning of RBI using its tools of CRR,Bank Rate, Repo Rate and Reverse Repo rate ourbanks adjust their lending or investment rates forcommon man.

Difference between Bank Rate and Repo Rate• While repo rate - applicable to short-term loans and

used for controlling amount of money in market,bank rate - a long-term measure and governed by

long-term monetary policies



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STATUTORY LIQUIDITY RATIO (SLR) • OBJECTIVE 1) To restrict expansion of bank credit.2) To augment investment of the banks in

Government securities.3) To ensure solvency of banks.• Commonly used to contain inflation and fuel

growth, by increasing or decreasing it respectively • MAINTAINED IN THE FORM OF :a) Cashb) Gold – marked to marketc) Unencumbered approved securities or Gilts -

valued at a price as specified by RBI• CURRENT SLR – 24%• SLR RATE = Total Demand/Time Liabilities

x 100%



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CASH RESERVE RATIO (CRR)• OBJECTIVE

Banks required to hold a certain proportion oftheir deposits in the form of cash, depositedwith RBI/currency chests, considered asequivalent to holding cash with themselves

This minimum ratio (that is the part of thetotal deposits to be held as cash) is stipulated byRBI - CRR or Cash Reserve RatioAlso known as - Cash Asset Ratio or Liquidity Ratio

• PURPOSE – Higher the ratio (i.e. CRR), lower is amountthat banks will be able to use for lending andinvestment .

•EXISTING CRR5% (w e f 2 nd Jan 2009)

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