Download - COMMERCIAL BANKING SYSTEM AN OVERVIEW
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
COMMERCIAL BANKING
SYSTEM AN OVERVIEWA PRESENTATION
BYCA. R.C.AGARWAL
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
COMMERCIAL BANKS
Importance
Most important financial institution ineconomy
Banks are financial-services firms
Principal source of credit
Provide cheque books, credit or debit cards,electronic funds transfer etc. facility foreffecting payments to creditors/suppliers
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
COMMERCIAL BANKS
Importance-CONT Provide consultancy for financial planning, project
planning
Provide financial information Provide consumer loans, working capital finance
Provide long term and short term loans
Help governments in fulfilling plan and socialobjectives
Success of banks depends on their ability toidentify financial services demanded by public
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The Different Kinds of Financial Service Firms
Calling Themselves Banks
Commercial Banks
Savings Banks
Cooperative Banks
Mortgage Banks
Community Banks
Money Center Banks
Investment Banks
Merchant Banks
International Banks
Wholesale Banks
Retail Banks
Limited Purpose Banks
Bankers Banks
Minority Banks
National Banks
State Banks
Insured Banks
Member Banks
Affiliated Banks
Virtual Banks
Fringe Banks
Universal Banks
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What is a Bank
Produce and sale professional management of publicfunds and perform many roles e.g.
Trust function
Credit function Investment planning function
Payments function
Savings function
Cash management function
Investment banking/underwriting function
Brokerage function
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Different roles played by banks
IntermediatorTransforming savings to credit to business and
others
Payments Making payments for goods and services on behalf
of customers
Guarantor Providing guarantee on behalf of customers
Issue letters of credit
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Different roles played by banks
Agency role
Manage and protect properties and
redeem securities on behalf of customers Policy role
Serve as conduit to government policies
to regulate growth of economyHelp government achieving its social
goals
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Services offered by banks historically
Accept savings/ term deposits
Provide business loans and advances
Discount commercial bills Carrying out currency exchanges
Safekeeping of valuables
Support government activities through credit
Finance under government schemes
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Recently introduced services
Consumer finance
Financial advice
Leasing finance
Venture capital loans Selling insurance products
Selling mutual fund products
Selling pension schemes and retirement plans
Security brokerage and investment services Merchant banking and issue related services
Portfolio management services
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Trends affecting banks
Service proliferation by adding new
services
Rising competition Deregulation
Rising fund costs
Customer sensitivity
Customer activism
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Trends affecting banks
Increasingly interest sensitive mix of funds
Technical revolution
Consolidation and geographical expansion Globalization of banking
Increased risk of failures and weakening of
deposit insurance schemes
New thinking to have small banks
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Functions of banking system
Collection of savings and
distribution for industrial
investment
Capital formation and
accelerating the economic growth
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Structure of Banking system in India
Government of India Regulatory body Scheduled/unscheduled banks
Public sector banks Old generation private sector banks New generation private sector banks-1991 Co-operative banks
Regional rural banks Local area banks-1997 Foreign banks
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Structure of Banking system in India
Financial Institutions
Micro-finance companies
Non-banking finance companies Co-operative credit societies
Money lenders
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INDIAN BANKING SYSTEM
Mainly there are three phases
Up to 19511951 to 1990
Early nineties onwards
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
PRE - 1951
Control of money lenders
No lawstotal private sector
No regulatory body Hardly any industrialization
Main concentration on traditional agriculture
Banking Industry had little access to outsidesavings
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
1951 to 1990
Private to public sector-
mixed economy Planned economic process-
First plan from 1951
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Main elements of commercial banks
Public ownership
Nationalisation
Reserve Bank of India (RBI)- 1948 State Bank of India (SBI)1956
14 major banks nationalised1969 with
deposits of 50 crore & above Nationalisation of 6 more banks - 1980
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Main elements of commercial banks
Strengthening of institutional structure
`Development banks
Instrument of state policy for planning
priorities
Development of backward regions
Industrial Finance Corp. of India (IFCI)1948
State Financial Corps (SFC)1951
Industrial Credit and Investment Corp of India(ICICI)- 1966
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Main elements of commercial banks
Strengthening of institutional structure `Development banks-cont
Industrial Development Bank of India (IDBI) -
1964State Industrial Development Corp. (SIDC)
State Industrial Investment Cop. (SIIC)
Small Industrial Development Bank of India(SIDBI)
National Bank for Agriculture and RuralDevelopment (NABARD) - 1982
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Commercial banks
Continued old way of deposit banking and ofshort term credit to trade and finance
Introduction of selective credit control (controlthrough quantum, rate of interest, margin etc.)
Started refinance based term lending andunderwriting of new issues
Started directly subscribing to shares anddebentures and lending against such securities
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Commercial banks
Provide finance to SSI, Exports & Agriculture
Credit Guarantee Scheme (CGS) - 1960 for SSI financeupto 75% of amount defaulted or guarantee amount
whichever lower, maximum 7.5 lacks for WC and 2.5lacks for TL
Export Credit & Guarantee Corp. (ECGC) Ltd.-1964
Agriculture Refinance Corp. - 1963 for refinance to
institutions & banks Extensive Branch expansion
Lead district and service area approach
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Nationalisation of banks 1969 & 1980
To serve better the needs of economy
To create job opportunities
To fulfill the objectives of plansTo provide banking service to maximum
population
Regulating the bank credit to priority andnon-priority sector
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Protection to customers
Foreign Exchange Regulation Act
(FERA)1973 -now converted to
Foreign Exchange ManagementAct (FEMA)
Banking regulationsCustomer service guidelines
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
POST NINETIES
New
Economicpolicy
1991
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Privatisation of Financial Institutions
IFCI to IFCI Ltd.
IDBI to IDBI Ltd. & to IDBI bank
ICICI to ICICI bank Number of private banks set up
Govt. holding in banks diluted by more
than 40%
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Reorganisation of
Institutional Structure
Setting up of universal banks
One stop bankingPSB Boards to have share
holder representatives
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Development in commercial banking
Demand for refinance has shrunk
from banks
Focus on Non fund basedfinanceCapital adequacy, assetclassification & provisioning norms
and accounting standards made
applicable to DFIs and FIs
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Development in commercial banking
Financial services such as Merchant banking, Project counseling,
Portfolio management, Credit syndication, New issue management, Mergers and acquisitions - advisors,
Corporate advisory services, Debenture trusteeship, Sponsorship of mutual funds etc.
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
Economic environment Statutory Liquidity Ratio (SLR) 38.5% , Cash Reserve
Ratio (CRR) 15% + 10% (incremental ratio) of netdemand & time liabilities (NDTL)
CRR now is 4.5% SLR is 23% Item / Week Ended 2007 2008 2009 2012
Sep. 7 Aug. 1 Sept. 5 Sept 22
Cash Reserve Ratio 7.00 8.75 9.00 4.5
Lower intt. on SLR and CRR Directed credit programmes to Priority sector Narsimham committee-I
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Growth of banking industry
Details 1951 19.7.69 1997 2012 Aug 31
No. of SCBs+Non-SCBs
(Exc.RRB) 92 85 101 171
RRB - - 196 86 Branches
(SCBs/Non-SCBs) 4,151 8,261 63,700 85,000
Deposits 919 5,540 5,07,533 63,40,420
Advances 727 3,813 2,82,702 47,22,600
Advance to priority Sec. 1,00,000 19,00,000
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Growth of banking industry
Total Reserves 31.8.2012 (US$ Mn.) 290,461.6
Foreign exchange 257,620.1
Gold 26,239.4 Others 6,602.1
Currency with the public (Crore) 10,67,030
Credit to Govt. (RBI & Banks) (Crores) 25,94,820
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Growth of banking industry
1951 1969 1995 2012
No of A/c credit 11,00,000 3,00,00,000
No. of A/cs deposit 18,00,000 36,00,00,000
% Demand deposits 67 50 35
% of fixed deposit 33 50 65
Credit deposit ratio 60% 75%
Cheques cleared No. 1341.87 ml.
Amount Rs. Billion 115,959.60
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Growth of banking industry
Type of banks 1969 1997 2011
Nationalised banks 14 19 19
SBI & Associates. 8 8 6 RRB 196 82
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
Directed credit
Scope of priority sector expended by including financeto SIDC, SFC, refinance to RRB and for Foreign and
new private sector banks investment in SIDBI bonds Heavy increase in branches, unprecedented growth in
deposits and advances mainly priority sector
Impressive progress in achieving social objectives
Heavy fall in productivity and profitability
High cost/exp. due to branch expansion in RU/SU
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
Interest rate structure All intt. rates of deposits deregulated
From 1997 Bank Rate (BR) linked to refinance
from RBI, penal intt. by RBI for shortfall inreserve
PLR system introduced
Base rate system introduced
Concessional ROI withdrawn from priority sectorexcluding Export & Agri. Concessional ROI toexport finance with interest subside from GOI
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
Capital adequacy norms 9% (capital to
risk weighted asset ratio)
Income recognition, Asset classification
and Provisioning norms
Introduced from 1992
Now NPA after 3 months Standard
sub standard
Doubtful
loss assets
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
Transparency of financial statements
Formats changed- to disclose breakup ofprovisions and percentage of net NPA to net
advances etc.
Tax treatment to provisions
Only write off are tax deductible.
5% of income and 10% of average aggregateadvances of rural branches permitted as deductiblegeneral provision
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
Board of Industrial Finance and Reconstruction (BIFR)
This has not been very successful experiment
Debt recovery tribunals-1993
8 recovery tribunals ONE appellate tribunal in Mumbai
Helped in the recovery of bad advances
Securitization Act
It has given extensive powers to banks to take possessionof assets and auction the same to recover the dues
Sale of NPA accounts in lots
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
Regional rural banks
Sponsored by PSBs- 196 banksnow to RRBs 82
Branch licensing procedure - liberalized 1994
Foreign banks
Allowed to open branches on reciprocalarrangement
Permitted to invest upto 20%, within overall 40%investment, in private sector banks
They are exempt from target credit in agri. finance
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
New private sector banks Since nineties new licenses started
A few banks e.g. Times bank, Global trust bank,
Punjab bank, Centurion bank of Punjab alreadyclosed / merged
Public issues of PSBs Most of the PSBs have come to capital market
minus Punjab & Sindh Bank United Bank of India has been permitted to come
with IPO
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
Supervisory authority RBI Board of Financial supervision (RBI) has been
setup
Appointment of CMD/EDs and Boardmembers
Appointment Committee has been setup with RBIGovernor as chairman
Recruitment & creation of posts Public sector banks covered in autonomy criteria
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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL
Commercial Banks
Narsimham Committee II - 1998
Appointed as a follow-up of 1992 recommendations and toexamine II generation reforms in terms of
action to be taken to strengthen the banking system streamlining procedures, upgrading technology and
HRD
structural changes in the system
Mutual Funds Bank subsidiaries sponsored
Many banks have started marketing the products
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LATEST DEVELOPMENTS
Indian economy more strong than many developedcountries
Conservative approach of RBI and Banks helped
China bank allowed to open branch in India Interest rates started moving upward side
Credit off-take slow
High inflation Problems in US economy
Problems in economy of European countries