Banking sectorEvolution
New Bank licensesBanks vs NBFC
Financial intermediaries• Barter => Double coincidence of wants• Money => circular flow of income• Financial intermediaries• Banking institutions• Non-banking institutions
Evolution (Pre independence)Firangi Banks•Bombay, Bengal, Madras Presidency=> Imperial Bank’21 =>SBI’55•British Army, Bureaucrats
Swadeshi Banks•Allahabad Bank, PNB, BoB, Canara•Focus: Foreign trade, Merchants•Local=>Shroff, Moneylenders.
Financial inclusion _____.(high / low)
Evolution (Pre independence)
Birth of RBI: why?•By 30s: 1200+ banks•Only company law•30s Great depression =>defaults•’34 RBI
Evolution (Post-independence)•SBI, ICICI, PNB, BoB.•Focus: merchant, industrial houses•Branch increase YES•Rural penetration NO•Help in FYP achievement NO•Nexus of industrial houses vs banks.
SHARE-HOLDERSSHARE-HOLDERS
Board of DirectorsManaging DirectorBoard of DirectorsManaging Director
CEOExecutives
Staff
CEOExecutives
Staff
PROFITPROFIT
DIVIDENDDIVIDEND
Nationalization of Banks
Financial inclusion:•RRB•Cooperative banks•NABARD
’55 1 Imperial bank (SBI)’69 14 50 cr. deposit’80 6 200 cr. Andra, Vijaya, Oriental
Mock Question• Skip• Attempt• Mark n review
Mock Question (2013)
Q. In context of independent India's economy, which one of the following was the earlier event to take place?A.Nationalization of insurance companyB.Nationalization of state bank of IndiaC.Enactment of Banking regulation ActD.Introduction of first Five year plan.
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Mock Question (2009)Q. In context of independent India's economy, which one of the following was the earlier event to take place?A.Nationalization of insurance company: 55-56B.Nationalization of state bank of India: 55C.Enactment of Banking regulation Act: 49D.Introduction of first Five year plan: 51
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Nationalization of Banks: problems
•Administered interest rate•political interference, loan mela=>NPA=>Civil Court.•Trade union, VRS•high reserve requirement: CRR 15%, SLR 40%=> •hard to get loans for business=> BoP crisis
Nationalization: high reserve ratio (PSL)Deposit Examples
Time Deposit FDRDDemand Deposit CASANet Demand and Time Liabilities (NDTL)
+100 cr.
ReserveCRR (min 3%) (-) 15 [no profit]SLR (min 25%) (-) 40 [some profit]Money left with bank =45PSL (40%) =45 x 0.4=18Left for normal borrowers =45-18=27 cr.
Nationalization: high reserve ratio (before LPG)
Deposit Examples
Time Deposit FDRD
Demand Deposit CASA
Net Demand and Time Liabilities (NDTL)
+100 cr.
Reserve
CRR (min 3%) (-) 15 [no profit]
SLR (min 25%) (-) 40 [some profit]
Money left with bank =45
PSL (40%) =45 x 0.4=18
Left for normal borrowers =45-18=27 cr.
Consequences?1.High cost of credit2.low expansion => jobs, taxations, export ($$)3.SLR not lowered4.Government borrowing5.Fiscal deficit, BoP
1991: Narsimhan Committee I (GoI)•Deregulation of interest rate=>BPLR=>Base Rate.•PSL @normal interest rates=> interest subvention•Debt recovery tribunal => 1993 =>SARFAESI 2002•Liberate Branch expansion policy•Reduce CRR, SLR=>(15,40)=>(4,23)•NBFC regulatory framework•1992=>SBI shares sold. =>GoI ~60%•Private / foreign banks=> 93 =>01 =>13
Working
1.ICICI2.HDFC3.UTI=>Axis (07)4.IDBI5.Indus6.DCB
1.Global Trust Bank (2001 scam, OBC)
2.Bank of Punjab=>Centurion bank
3.Centurian Bank=>(HDFC)4.Times Bank (HDFC)
Bank license 1st Round (10 licenses)Closed
Guideline: 1993Operation: 1994-95
Guideline: 1993Operation: 1994-95
1998: Narsimhan Committee II (GoI)1. VRS2. Legal reforms for loan recovery. =>SARFAESI 20023. Computerization, electronic fund transfer, legal framework 4. Payment and Settlement Act=>Retail (ECS, NEFT, Card) +
Wholesale (RTGS)5. Permit new private /foreign banks.
Bank Licenses 2nd Round
1.Kotak Mahindra2.Yes Bank
Guideline: 2001Operation: 2003-04
Guideline: 2001Operation: 2003-04
1998: Narsimhan Committee II (GoI)
Before After1. Banks2. NBFI3. DFI (Development
Financial institutions)- ICICI, IDBI, IFCI etc.
1.Banks2.NBFI
New Bank Licenses
Private banks 90s-2001
Timeline of Bank License (2013)• Feb-July 2013: applications sought• 26=> Ambani, Birla, Bajaj, Tata, Muthoot, Indian post •Minus (TATA, Videocon)• +1 KC Land and finance ltd.• =25 left.
• RBI High level advisory Committee, Bimal Jalan
• Mahila Bank Sep’13 (public sector BUT NOT Bimal)
Timeline: Bimal Jalan Committee• Feb 2014: Report submitted•March 2014: EC permission sought•April 2014: In principle approval to two applicants:
Bandhan Fin. Service and IDFC
Timeline: Bimal Jalan Committee“in principle” approval•Within 18 months•Rs.1000 crore net worth•25% branches in unbanked rural areas. •Then license under Banking Regulation Act, 1949 [Sec.22(1)]
Bandhan Fin.Services
• West Bengal• Micro Finance Co.• Boss: Chandra Shekhar Ghosh• Presently borrows from (23%.).
But Bank license- can get CASA.• 1100 Cr., 45% branches in rural
• Infrastructure Development and Financial Corporation • Mumbai, NBFC• Boss: Rajiv Lall• Power project, infra. Loans• 2100 cr., but rural presence low.
Two winnersIDFC
India post: Bimal Jalan: consider separately with Govt. consultationKumar Mangalam Birla: Coal blockAnil Ambani: 2G case
Bharatiya Mahila Bank (2013-14)
• Budget 2013; 1000 crore Rs. (100% State Owned)• Nothing new: 80s Pak, Tanzania
2009• MBN Rao Panel blue print (Canara)• Sept. License. Indira Gandhi’s
b’day (November 19)• HQ Delhi but launched from
Mumbai due to model code of conduct.
Bharatiya Mahila Bank (2013)
•Usha Anantha-Subramanian •BoD=all women.•Staff, deposit= male + female; BoB, PNB deputation.•Loan => predominantly to women.• loans up to Rs 1 crore without
collateral
Bharatiya Mahila Bank (2013)
kitchen loans, education loans, small home-based catering businesses.
PSB 4%Bharatiya Mahila Bank
4.5%; (1 lakh+) 5%
Kotak 6%Yes Bank 8%
Bharatiya Mahila Bank (2013)
• Skill development, financial literacy among women. • Core Banking Software by FIS
(American Co.)•Most banks use Finacle by Infosys.Target 1.25% branches in unbanked rural
areas.2.By March 2014: 25 branches3.By 2020: 700+ branches; 60k cr
business
Mock Question
Who Among the following is the chairman of Bharatiya Mahila Bank?A.Arundhati BhattacharyaB.Aruna BahugunaC.Shikha SharmaD.Usha Ananthasubramanium
2TF
Correct Statements about Bharatiya Mahila Bank?A.Bharatiya Mahila Bank is owned by a consortium of Government of India, NABARD and financial institutions.B.For the first three years, Bharatiya Mahila bank will be exempted from CRR and SLR requirements.C.Both A and BD.Neither A nor B
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2TFCorrect Statements about Bharatiya Mahila Bank?A.Bharatiya Mahila Bank is owned by a consortium of Government of India, NABARD and financial institutions.B.For the first three years, Bharatiya Mahila bank will be exempted from CRR and SLR requirements.C.Both A and BD.Neither A nor B
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2TF: observe what is being asked?
Incorrect Statements about Bharatiya Mahila Bank?A.Bharatiya Mahila Bank is owned by a consortium of Government of India, NABARD and financial institutions.B.For the first three years, Bharatiya Mahila bank will be exempted from CRR and SLR requirements.C.Both A and BD.Neither A nor B
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Assertion reasoning(A) Bharatiya Mahila Bank will bring down the gender divide in financial inclusion. (R) Bharatiya Mahila bank will cater only female depositors and borrowers.OptionsA.Both the statements are individually true and Statement R is the correct explanation of Statement A.B.Both the statements are individually true but Statement R is not the correct explanation of Statement A.C.Statement A is true but Statement R is false.D.Statement A is false but Statement R is true.
Assertion reasoning
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3TFCorrect Statements about Bharatiya Mahila Bank?1.They offers higher interest rates to female depositors over male depositors.2.The loan interest rates in Bharatiya Mahila bank, are decided by government of India. 3.Government has provided the initial capital in this bank from Nirbhaya Fund.Correct statementsA.Only 1 and 3B.Only 2 and 3C.only 1 and 2D.None of Above
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3TF how to solve:
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Interview1. Bharatiya Mahila Bank is a mere symbolic exercise
for feel good publicity. Do you agree? Yes/No and Why?
Bharatiya Mahila Bank (2013)-Anti points•SBI, PNB, BoB better suited, Govt. already majority shareholder.•25% rural branching: duplication of effort.•Higher Staff deputation• In the first phase focus on state capitals and UT.•4.5%/5% interest – pan India presence.•Overall a Tokenism/symbol but not substance.
Bank vs NBFC
• Narsimhan:=Hybrid (Comm. Bank + Coop. soc.)• The Sponsor bank: HRM,
Training• All India…x; few district….yesProblems1.Deposit- low; NABARD depend.2.NPA, urbanization, Competition
from SCB.3.Solution : Amalgation [2005]
Central 50%State Government 15%Sponsor Bank 35%
RRB-1975
Examples1.Dena Gujarat Gramin Bank2.Andhra Pradesh Grameena Vikas Bank3.Vidharbha Kshetriya Gramin Bank4.Paschim Banga Gramin Bank
• State registrar: Cooperative society.• ’66: Banking regulation Act.• No-profit, no-loss; • one member one vote.• All India? Guj, MH, Andhra, TN.• SLR, CRR yes.• PSL: no. (only Sch.coom.B)• Problem: politicization, • scandals: Madhupura: Ketan
Parekh, Visnagar/Kalupur: NPA.
Classification1.Urban (women)2.Rural
1. State Cooperative Banks2. District: Central Cooperative
banks3. Village: PACS.
Land Development Bank:State cooperative; Long term 20-30
years.
Cooperative Banking
AIFI=> EXIM Bank (82)
•Export-Import Bank of India• loan/credit/finance to exporters and
importers.•promotes cross border trade and
investment•Boss: Government of India (100%)
AIFI=>NABARD (82)•National Bank for Agriculture and Rural Development•Regulatory authority: Coop + RRB• Financing to State cooperative banks (SCB), RRB, MFI
etc.• farmers, villagers, cottage/handicraft, self-help group
(SHG) get loans at reasonable interest rate.•Rural infra. Development fund (RIFD).•Boss: Govt. (99.3%) + RBI (0.7%)
AIFI=>NHB(88)•National Housing Bank• apex institution for housing finance in India• Finance to banks and NBFCs for housing projects•Boss: RBI (100%)
AIFI=>SIDBI (90)• Small industries development bank of India•micro, small and medium enterprises (MSME).•finance to State Industrial Development Corporation
(SIDC), State finance corporations and banks• SIDBI's SEDF= small enterprises development fund.
(Foreign banks will <20 branches, PSL• SBI, LIC, IDBI other public sector banks, insurance
companies etc.
AIFI All India Financial institutions
Fifth FI = Investment Bank of India (IIBI), gone in 2012
DFI/DB; Gone after Narsimhan II 1998
Mock Question
Mock Question 2007 (UPSC)The national housing bank (NHB) was setup in India as a wholly owned subsidiary of which of the following bank?A.State bank of IndiaB.Reserve Bank of IndiaC.ICICID.LIC
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Mock Question 2004Find Correct Statement(s)
A.NHB, the apex institution of housing finance in India, was setup as a wholly owned subsidiary of RBIB.Small industries development bank of India was established as a wholly owned subsidiary of the Industrial development bank of IndiaC.Both A and BD.Neither A nor B
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Mock Question 2004
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Next Questions
Mock QuestionWhich of the following grant(s) direct credit assistance to rural households? (2013)1.RRB2.NABARD3.Land development BanksChoice:A.Only 1 and 2B.Only 2C.Only 1 and 3D.1, 2 and 3.
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Mock Question
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NBFI: Type #2 PD• deal in "primary" market. directly buy G-sec via "auction".• Participate in OMO •Must get permission/license from RBI. •Morgan Stanley , Goldman Sachs, JP Morgan Chase, Standard
Chartered Bank, HSBC (Hongkong and Shanghai Banking Corpn. Ltd)• Even: SBI, BoB, Kotak Mahindra etc.
NBFI: Type #3 NBFC
NBFI: Type #3 NBFC= Not Banks
Bank "Non-Banking" Financial CompanyRBI gave them license under Banking regulation Act.
No. They take license under Company Act.
All supervised by RBI. NOT all. e.g. Insurance cos=IRDA; Merchant Banking Cos.=SEBI.
deposit from public1.time deposit (FDRD)2.demand deposits (CASA)
• They can accept Time deposit. (such NBFC are called Deposit taking NBFC)
• But They cannot accept demand deposits.
• Not part of Payment settlement, CTS.
NBFI: Type #3 NBFC= Not Banks
Bank "Non-Banking" Financial Company
4% CRR, 23% SLR
No.Only Deposit taking NBFC. 15% SLR.
40% PSL No.
Entry Capital requirement 500 Cr.
• 5 Cr. NBFC-MF• Others 2 cr.
NBFI: Type #3 NBFC= “Finance”
Bank "Non-Banking" Financial Company
Bank lends this "deposited" money to someone.
They also lend money to someone. (="Finance" Companies)
But cannot invest in sharemarket CAN. E.g MF, PF, Insurance Cos.
Base Rate system Depends•Gold Loans= risk factor (15%, 25%)•Not all directly lend.•Shares: dividend. TCS 4, Coal India 29.•Bonds: 8/12/16%
NBFI: Type #3 NBFC=> NPA
Bank "Non-Banking" Financial Company
SARFAESI, DRT Only Housing Finance Companies.
• Gold loan• Shares: last• Bonds: first.
NBFI→NBFC→ Source of fund?1. Borrow from banks2. Get finance from NABARD, National Housing
bank, SIDBI etc apex institutions3. External Commercial Borrowing (ECB).4. Some issue of bonds5. From clients: insurance, mutual funds.
Mock Question (2010)With reference to Non banking financial companies (NBFCs) in India,Consider following statements1.They cannot engage in the acquisition of securities issued by government.2.They cannot accept demand deposits like savings account.Find Correct statement(s)?A.Only 1B.Only 2C.Both 1 and 2D.Neither 1 nor 2
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Mock Question (2010)
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Mock Question (2010)
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LAF (Repo)
• Minimum 5 cr• All clients eligible1.Central & State Government2.Banks (commercial, regional
rural banks, cooperative banks)3.Non-banking financial
institutions.++---LIC, UTI invest in Government
Securities
• 1 cr.• Only scheduled commercial
banks can bid.
What’s the difference?MSF
Mock Question (2010)
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NBFI→NBFC→ClassificationType #1 Regulated by RBI
Asset Finance Company (AFC)
• loan to buy economically productive assets e.g. truck, tractor, pumpset, bulldozer, earthmover, etc.
• 2013: $200mn ECB, automatic window.• SREI Equipment Finance (WHITE LABEL ATM)
Infrastructure Finance Company
• Gives loan for infra. Projects.• Rural Electrification Company (REC)• Rajiv Gandhi Gramin Vidhyutikari (Power Ministry)• Rs.3,500 crore through tax-free bonds.
Infrastructure Debt Fund (IDF-NBFC)
Just like above, but they give very long term loans. Can even raise money from abroad.
Investment Cos.
• Invest in securities• Muthoot finance• L&T finance.
• Same. They too invest in securities• 90% of them invested in securities.• Investment long term (speculative,
aam junta…x)• Accept public funds, hence called
NBFC-D.• Cannot enter in insurance
business.• E.g. Tata Capital, Birla Capital• ECB borrowing permitted in Dec
2013.
NBFI→NBFC→RBI controlledCore Investment Cos
NBFI→NBFC→RBI controlled
Loan Company • Muthoot gold loan, Mannapuram Gold• LTV.
Factor Company • Factoring business• HSBC
Misc. Chit Fund • RBI + Registrar of Chit fund.
Residuary • --
RBI regulated
• AFC• Infra. Finance• IDF• Investment Co.• Core investment• Loan Company• Factor Company• Chit Fund, Misc.
• Insurance• MF, Stock Broker• Housing finance• Merchant Bank• VC• Nidhi• MFI
NBFI→NBFC→ClassificationOther than RBI
NBFI→NBFC→Classification (not regulated)Insurance companies
Take "premium" from you, invest It in shares/bonds.
LIC, Bajaj Allianz IRDA
Housing Finance Companies
They arrange money from variety of sources, lend it to home-loan seekers
DHFL, Muthoot Housing finance etc.
NHB
Stock Broker, MF
They help buying-selling of shares (of their clients).Earn commission/brokerage) in between.
1. Indiabulls2. Sherkhan3. Reliance
Money
SEBI
NBFI→NBFC→Classification (not regulated RBI)
Investment Banks
Merger, acquisition, Wealth Management; Merchant Banker: Underwriting
Kotak Mahindra, Citigroup,Bank of America
SEBI
Merchant Banking Companies
Underwriting, Corporate advising, They lend money to company via buying its "shares"
DSP Merrill Lynch, Morgan Stanley, Canara Bank, SBI capital (separate license)
SEBI
Venture Capital Fund
They finance start-up companies via equity.
IFCI, IDG SEBI
NBFI→NBFC→Classification (not regulated RBI)Nidhi One type of 'club'.
Borrow money from members, lend it among the members.mutual benefit funds
SOUTH MADRAS BENEFIT FUND ltd.
Department of Company affairs
Microfinance companies
Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)
1. SKS (Andhra), 2. Cashpor (UP), 3. Ujjivan
(Karnataka)
Department of Company affairs
BANDHAN
NBFI→NBFC→MFI• Department of company affairs.• Entry capital 5 cr.• Individual person not given loan above Rs.50000 [Nachi-Rs.1
lakh]• focus on poor people, women clients, SHG.• Loan without collateral.• Borrower given flexibility to decide EMI and repayment• Actual interest rate: 26%• SKS (Andhra), Cashpor (UP), Ujjivan (Karnataka), Bandhan
(Bengal)
RBI regulated
1. AFC2. Infra. Finance3. IDF (Infra. Debt Fund)4. Investment Co.5. Core investment6. Loan Company7. Factor Company8. Chit Fund, Misc.
1. Insurance2. MF, Stock Broker3. Housing finance4. Merchant Bank5. Venture capital6. Nidhi Companies/ Mutual
benefit companies7. MFI (Microfinance)
NBFI→NBFC→ClassificationOther than RBI
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