Commercial Banking in India - I

8/6/2019 Commercial Banking in India - I

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COMMERCIAL

BANKING IN INDIA


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AGENDA

Commercial Banks - Introduction

Banking Industry in India

Sharing of Banking Business

Liabilities of Banks

Assets of Banks

Liquidity in Banks

Non-Performing Assets (NPAs)Various Rates


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Commercial Banks Financial Intermediaries Intermediate

between savers and investors.

Profit making entities.

Undertakes borrowing and lending ofmoney.

Forex Trading Selling and buying of foreign exchange in accordance with thestipulations of FEMA.

Insurance business is also undertaken bysome of the commercial banks.

Social Responsibilities Certain targetsare given to Nationalised banks for Rural and

Agricultural Sector.


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Money Creation

Fractional Reserve Banking (Multiplier Effect)

Bank Deposit Reserve (Assume

reserve ratio is 20%)

Lending

A 100 20 80

B

80 16 64XX XX XX XX

Z 1 1 1

Total 500

Total amount will be equal to the multiple of original

amount & reciprocal of the required reserve ratio.


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Banking Industry in India

Reserve Bank

of India

Scheduled Banks

State Coop. Banks

Non ScheduledBanks

Commercial Banks

Indian Foreign

Public SectorBanks Private Sector Banks

SBI & Its SubsidiariesOther Nationalised

BanksRegional Rural

Banks


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Classification of Banks...

Scheduled Banks: When the name of a bank is included in

the Second Schedule to the RBI Act, it is known as aScheduled Bank.

RBIs power to include the name of the bank in Second

Schedule is on the following basis:

1. Paid-up capital and reserves should not be less than Rs.

5 lacs.

2. RBI should be satisfied about the affairs of the bank, that

they are not detrimental to the interests of the

depositors.

3. The bank must be either

a State Cooperative Bank OR

a Company defined in the Companies Act 1956 OR Notified by the Central Govt. OR

A corporation or company incorporated outside India.

Non Scheduled Bank: A bank whose name is not included inthe Second Schedule is a Non Scheduled Bank.


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Scheduled Bank Non Scheduled Bank

Eligible for availing the facility

of accommodation from

Reserve Bank of India.

No such facility available.

To fulfill the obligation of

maintaining the statutory

reserves with RBI.

No such obligation.

Enjoys the goodwill of patron

of RBI in the society.

No such goodwill.


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Foreign Banks: Joint stock banks incorporated abroad

having branches in India are foreign banks.Public Sector Banks:

Not less than 51% of the paid-up share capital will be

held by the Central Govt.

All 27 nationalised banks are PSBs.

Nationalised banks are entrusted with the financialtransactions such as paying, collecting, remitting money

and bullion on behalf of State Govt. and Central Govt.

RBI may entrust them any other business to be

undertaken.

Private Sector Banks: Banks set up under the guidelines of RBI other than

nationalised banks.

Have to follow all the directions, instructions, guidelines

from the RBI.


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Banking Industry in India....

Scheduled Public Sector Banks:

StateB

ank of IndiaState Bank ofBikaner and Jaipur

State Bank of Travancore

Andhra Bank

Allahabad Bank

Bank ofBaroda

B

ank of IndiaBank of Maharashtra

Canara Bank

Central Bank of India

Corporation Bank

Dena Bank

Indian Overseas Bank

Indian Bank

Oriental Bank of Commerce

Punjab National Bank

Scheduled Pvt. Sector Banks:

VysyaB

ank LtdUTI Bank Ltd

Indusind Bank Ltd

ICICI Banking Corporation Bank Ltd

Global Trust Bank Ltd

HDFC Bank Ltd

CenturionB

ank LtdBank of Punjab Ltd

IDBI Bank Ltd

Scheduled Foreign Banks:American Express Bank Ltd.

ANZ Gridlays Bank Plc.

Bank of America NT & SA

Bank of Tokyo Ltd.

Banquc Nationale de Paris

Barclays Bank Plc

Citi Bank N.C.

Deutsche Bank A.G.


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Distribution of Banking Business


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De osits attern in Ter s

8 .4 . . . 84.8 84.

. 4. 4. . . .4

. 4.4 . . .8.

4

8

8 8

oreign Banks

t. e tor Banks

ubli e tor Banks


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en ings attern in Ter s

. 8 .. . . 8 84.

. 8. .4 4. 4. 8. ..

8.4. . . .

.8

4

8

8 8

oreign Banks

t. e tor Banks

ubli e tor Banks


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are in ter s of Bran es

ubi e tor Banks

t e tor Banks

oreign Banks


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Deposits

Demand Term Call

Current Saving

Other Liabilities


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Current Deposits:

No restrictions on the amount and number of withdrawals. No interest is payable by bank on these deposits.

Clean/secured overdraft can also be availed.

Saving Deposits: The maximum amount and number of withdrawals is restricted.

Interest is payable by the bank on these deposits.

Term Deposits: Amount can be withdrawn only after the maturity period.

Pre-mature withdrawal is allowed together with some penalty.

Call Deposits: Accepted from fellow bankers.

Repayable on demand.

Carry an interest charge.


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Saving Deposits:How much amount is Demand Liability and How much amount is TimeLiability?

Pre-16.0 .7 :

The portion of deposits freely withdrawable.

Post-16.0 .7 :

The portion of deposits freely drawn upon.(average of monthly minimum balance on which interest is credited.)

Impact:in Time Deposits

in Demand Deposits and Money Supply.


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Structure eposits i erms

5028 25 22 19 17 17 12

16

1625

24 26 25 22 24

3456 50 54 55 58 61 64

0%

20%

40%

60%

80%

100%

1951 1961 1969 1976 1986 1990 1995 2002

Fi ed eposits

Savi eposits

Current eposits

Savingsdeposits havemaintainedasteady trend.

Currentdeposits have beenondecliningtrend.

ecline incurrentdeposits has beencompensated by increase

inFi ed eposits.


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Factors affecting Composition of Deposits:

Increase in the number of branches in the hithertounbanked areas and introduction of new deposit schemes.

The growth of banking habits have caused the increase

in saving and fixed deposit in rural areas.

Interest rates also influence the composition of bank

deposits:

Bank deposit rates were relatively low than rate of

return on other assets.

Government policy to offer higher rate on short term

deposits.

Inflow of deposits from Non-Resident Indians (NRIs).


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Other Liabilities:

Includes demand and time deposits from other banks.

Borrowings from RBI.

Borrowings from RBI suggests the self sufficiency

of the bank to operate within its own resources. Till 1990 this borrowing varied between 2 to 5% of

the total liabilities.

Presently this borrowing from RBI is negligible.

Borrowings from other financial institutions like IDBI,

NABARD etc.


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Banking Assets


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Banking Assets:

Cash in hand and balances with RBI.

Assets in Banking System.

Investment in Government and other approved

securities.

Bank Credit.

Note: Banks are allowed to invest 5% of their incremental deposits in

corporate shares and convertible debentures.


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Banking Assets:

Assets in Banking System:

Money at call and short notice:

These are the loans given generally to stock brokers, dealers in

commercial bills, discount houses and to other commercial

banks.

These loans can be recovered on demand or on a very short

notice.

Interest rate is very low.

Given to very sound borrowers, hence safe.


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Banking Assets:

Investment by Banks:

Important considerations while determining the investment policy of

the banks:

Some of the assets should be shiftable or transferable to other

banks for acquiring cash in case of emergency.

Social considerations have to be fulfilled by the banks in terms of

branch expansions, credit to agriculture, small scale industries and

other priority sectors.

Otherstatutory regulations such as CRR and SLR.


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Banking Assets:

Banks Investment Norms:

RBI has issued following guidelines on categorisation and valuation

of banks investment portfolio:

Entire investments to be classified under three categories:

Held to Maturity (HTM): Securities acquired with an intention tobe held till the maturity of the investment.

Held forTrading (HFT): Securities acquired with an intention of

selling to take advantage of short term price/interest rate

movement.

Available for Sale (AFS): Securities other than HTM & HFT.

The category of investment has to be decided by bank at the time

of acquisition.

HTM will be carried at the acquisition cost and not required to be

marked to market.


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Banking Assets:


HTM investments will not exceed 25 % of the entire investments

excluding following:

Recapitalisation Bonds.

Investments in subsidiaries and joint ventures.

Investments in debentures deemed as advance.

Profit/loss on sale of HTM investment is required to be taken in to

P&L account before being taken to Capital Reserve Account.

Banks can categories the investment in HFT & AFS as per their

own will.

HFT investment should be revalued at market price atleast at

monthly intervals.


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Banking Assets:


AFS need to be marked to market at the Quarter-end.

Market price of the scrip available from the quotes on the stock

exchange or RBI price list would serve as the market value.

HFT investment should be sold with in 90 days of acquisition, elsethey are to be transferred to AFS category.

Shifting of investment from/to HTM may be done with the approval

of Board once a year.

Shifting from AFS to HFT may be done with the approval of

Board/Committee of Board.

Shifting from HFT to AFS is generally not allowed.


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Banking Assets:


While shifting of investment from any of the category to any other

category, the value would be the lowest of following:

Acquisition cost.

Book value.

Market value.

Profit/loss on sale of HFT & AFS investment to be taken to P&Laccount.

Banks have been advised to maintain a 5% Investment Fluctuation

Reserve with respect to HFT and AFS investments.


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Banking Assets:

Bank Credit:

Demand Loans:

Meaning: Loan payable on demand.

Financial accommodation granted by SBI to commercial and

cooperative banks.

Core portion of cash credit, on which the borrower is supposed

to pay interest for the whole year. On rest of the cash credit the

borrower is supposed to pay interest only on the utilised part.

Term Loans: Amounts sanctioned with a specific repaymentschedule to finance the acquisition of assets of capital nature.

Industry gets the highest share ofTerm Loans from the banks.


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Banking Assets:

Bank Credit:

Cash Credit & Overdrafts

Running accounts from which the borrower can withdraw

funds as and when required up to the limit sanctioned.

Working capital requirement financing.

Interest is charged on the outstanding amount borrowed.

For cash credit accounts the security would be stocks.

For overdraft accounts the security would be immovableproperty or any other security.


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Banking Assets:

Bank Credit:

Short-term Bills:

Includes commercial bills and promissory notes.

Generally maturity period is 90 days.

Highly negotiable and hence easily marketable.

Good rate of interest is available.

Eligible security for rediscounting with RBI.


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Liquidity in Banks


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Factors affecting Liquidity of Banks:

Statutory Requirement:

CRR & SLR

Cash Reserve Ratio (CRR): Under section 2 of RBI Act, the

scheduled banks are required to maintain with RBI specified % of

their Net Demand and Time Liability in the form of cash reserve.

Such % could vary between 3 to 15% till June 06, after that date

no restriction on RBI.

Banks have flexibility of maintaining only 0% of their CRR

requirement on a daily basis, so long as average fortnightlydeposits total upto 100%.

Inter bank term liabilities of maturity of 15 days or more are not

to be considered in Net Demand and Time Liability.


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Statutory Requirement:

SLR

Statutory Liquidity Ratio (SLR): Under section 2 of RBI Act, the

scheduled banks are required to hold cash in prescribed forms at

RBI specified % of their Net Demand and Time Liability.

Presently SLR is 25 %.

Prescribed forms:

Cash in hand.

Balance in current account with other banks, SBI and itssubsidiaries.

Gold and unencumbered approved securities.


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Interest on cash balance maintained with RBI under

CRR:

Such rates keeps on changing as prescribed by the RBI.

Presently interest would not be paid above the floor rate of 3%.

General Economic Activity:During business boom lesser liquidity would be required,

however during depression the banks would be required to

maintain larger liquidity.

Nature of Investments:Banks having investments in assets and securities which can not

be converted into cash at a short notice, would be required to

keep a higher cash balance.


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Nature of customers:

If the customers are indulged in seasonal business than during

such seasons greater liquidity would be required.

Such as, if major customers are farmers than during harvest

season more funds would be required by that bank/branches.

Nature of Deposits:Banks having more time deposits require less liquidity as

compare to banks having mainly current accounts.

Efficient Money Market:Presence of efficient money market, so that investments can be

easily converted cash, liquidity requirement of banks would be

lower.


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Non Performing Assets (NPAs):

Meaning: An advance where:

Interest and/or installment of principal remain over due for a

period of more than 90 days in respect of a Term Loan;

The account remain out of orderfor a period of more than 90 days

in respect of an CC/OD;

The bill remains overdue for a period of more than 90 days in case

of a bill purchased and discounted;

Interest and/or installment of principal remain overdue for two

harvest seasons but for a period not exceeding two half years incase of an advance granted for agricultural purposes;

Any amount to be received for a period of more than 90 days in

respect of other accounts.


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Classification:

Sub-Standard Asset: Age of NPA is less than or equal to 1

months.

Doubt full Asset: Age of NPA is exceeding 1 months.

Loss Asset: A NPA identified as such by the bank itself or byInternal/External auditors of the bank, but has not been written off.

Gross & Net NPA:Aggregate amount of NPAs without adjusting the provision against

them is known as Gross NPA & provision adjusted amount is known

as Net NPA.


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Provisioning against NPAs:

Standard Asset: 0.25 %.

Sub-Standard Asset: 10% of the amount of NPA.

Doubt full Asset:

20% of the secured portion of NPA till one year.

30% of the secured portion till one to three years.

50% of the secured portion more than 3 years.

100% of the unsecured portion.


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Various Rates


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Various Rates:

Bank Rate:

The rate of interest at which RBI lends money to other banks.

Prime Lending Rate:The minimum rate at which the commercial bank lends money to its

customers. Now the banks can declare their own PLR.

Repo Rate:The rate at which the banks borrow short-term funds from RBI.

Reverse Repo Rate:The rate at which the banks park their short-term surplus funds in

the RBI.

Inter-bank Term Money:

Inter-bank market for deposits of maturity beyond 1 days and upto

3 months is referred to as the Term Money Market.


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UrTurn???


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THANKS

Commercial Banking in India - I

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