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INDIAN BANKING INDIAN BANKING SYSTEMSYSTEM

ANDANDBASIC BANKING BASIC BANKING

CONCEPTSCONCEPTS

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EVOLUTION OF BANKING STRUCTURE EVOLUTION OF BANKING STRUCTURE IN INDIAIN INDIA

• At the time of Independence - banking structure dominated by domestic scheduled commercial 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 and

requirements of SME and marginal farmers, co-operatives lacked resources.

Need of combining local feel and familiarity of rural problems characteristic of co-operatives and professionalism and large resource base of commercial banks.

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INDIA BANKING SYSTEM – STRUCTUREINDIA BANKING SYSTEM – STRUCTURE

SCHEDULED BANKSSCHEDULED BANKS

SCH. COMMERCIAL BANKS

SCH. COOP. BANKS

PUBLIC SEC BANKS

PVT. SECTORBANKS

FOREIGN BANKSRURAL REGIONAL

BANKS

NATIONALIZED BANKS

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 formulated initially established in Calcutta; permanently

moved to Mumbai in 1937• Preamble

"... to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage

RESERVE BANK OF INDIARESERVE BANK OF INDIA ACT 1934ACT 1934

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MAIN FUNCTIONSMAIN FUNCTIONS

• Regulator and supervisor of financial system

• Monetary Authority • Banker to the Government• Monopoly of Note Issue (other than

Rupee One notes and coins and subsidiary coins)

• Manager of Foreign Exchange • Developmental role • Related Functions

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FINANCIAL SUPERVISIONFINANCIAL 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

• Constitution Chairman - Governor Vice-Chairman - Dy Governor in charge of

banking regulation and supervision Co-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 as

members upgrading quality of statutory audit and internal

audit functions in Banks and FIs• Functionsbank inspections; off-site surveillance,

strengthening of role of statutory auditors ; strengthening of internal defences of supervised institutions; legal issues in bank frauds; divergence in assessments of NPA and supervisory rating model

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

SYSTEM - IN compliance with Basle Core Principles for Systemically Important Payment Systems of BIS

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

• `ANYWHERE BANKING’ THROUGH CBS, ‘ANYTIME BANKING’ -National Financial Switch for interconnecting ATMs

• IMPROVING CG- set up through “fit and proper” criteria

• INTEGRATED RISK MANAGEMENT SYSTEMS

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

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BANKING SECTOR REFORMSBANKING SECTOR REFORMS• Several committees constituted to resolve

problems of Commercial Banking in India, two most important are-

a) Narasimham Committee I (1991)- aimed at bringing “operational flexibility” and “functional autonomy” so as to enhance efficiency, productivity and profitability

b) Narasimham Committee II (1998)- bringing structural changes so as to strengthen banking system to make it more stable

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MAJOR RECOMMENDATIONSMAJOR 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.)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 RBS and treated at par with RRBs

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Major Recommendations (Contd.)Major Recommendations (Contd.)Narasimham Committee Report II

• Merger of strong PS banks and closure of

some 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 UNDERTAKENMEASURES 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 on

ownership and governance in private sector banks

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Measures enhancing role of market forces

• Disbanding administered interest rates and enhanced transparency and disclosure norms

• Facilitation of improved payments and settlement mechanism

• Dematerialization and securitization of assets developed

Prudential measures • Introduction of international best practices

norms on Capital to Risk Asset Ratio (CRAR), Accounting

• Strengthening Risk management mechanisms

• 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 Securities Interest Act 2002,

Supervisory measures • Establishment of Board of Financial Supervision

as apex supervisory authority • Strengthening CG, Audit, enhance due diligence,

fit and proper test for directors. • Strengthening of

Technology related measures • Introduction of Negotiated Dealing System

(NDS) for screen based trading in Govt. securities and Real Time Gross Settlement System (RTGS)

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

which banks lend to their credit-worthy or favoured customers. It is treated as a benchmark rate for most retail

and term loans. influenced by RBI’s policy rates — the repo rate

and cash reserve ratio

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

• Bank rate - rate of interest which RBI charges on loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by RBI to control money supply

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

• Reverse Repo rate - rate at which RBI borrows money from banks. An increase in Reverse repo rate can cause banks to transfer more funds to RBI due to 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 our banks adjust their lending or investment rates for common 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 STATUTORY LIQUIDITY RATIO (SLR)(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 market c) 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)CASH RESERVE RATIO (CRR)• OBJECTIVE Banks required to hold a certain proportion of their

deposits in the form of cash, deposited with RBI/currency chests, considered as equivalent to holding cash with themselves

This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by RBI - CRR or Cash Reserve Ratio

Also known as - Cash Asset Ratio or Liquidity Ratio

• PURPOSE – Higher the ratio (i.e. CRR), lower is amount that

banks will be able to use for lending and investment.

• EXISTING CRR 5% (w.e.f. 2nd Jan 2009)