BANKING AND BANKING PRACTICES

BY: ROBBIN WILSON TOPPO () ANKITA GUPTA (33) SNEHA SUMAN (41) SNEHLATA SARAF (59)

Origin of bank
It existed several centuries ago Said to have originated in Mesopotamia (where Royal palaces &temples provided secure places for safe keeping of grains & other commodities . were regulated through the code of Hammurabi

 The first bank was found in GENOA in Italy in 1406 named as Banco di San Giorgio- Bank of St.George. However it was only in the 17th century that banks gained importance. The first modern bank was the Bank of Sweden (1656) Followed by Bank of England in (1694)

Banking in India
The largest commercial bank in the country is State Bank of India (SBI). Its

origins can be traced back to 1806, when Bank of Calcutta was constituted. It
was re-named Bank of Bengal in 1809. Bank of Bombay (created in 1840), Bank of Madras (created in 1843) and Bank of Bengal were amalgamated in 1921 to

form Imperial Bank of India. Until 1935 (when RBI commenced operations), the
Imperial Bank of India performed the functions of Central Bank as well as Commercial Bank

 In 1955, State Bank of India was constituted to take over the Imperial Bank of India. Later, 8 state associated banks (State Bank of Jaipur, State Bank of Bikaner, State Bank of Patiala, State Bank of Hyderabad, State Bank of Indore, State Bank of Mysore, State Bank of Travancore and State Bank of Saurashtra) were brought under SBI The reach of the banking network is a key determinant of banking services available for the economy. In order to ensure that banks focus on building that reach irrespective of profitability considerations, the Government of India went through two rounds of nationalization of banks: In 1969, 14 major Indian commercial banks (like Central Bank of India and Punjab National Bank) were nationalized (SBI, as seen earlier, was already under the control of RBI). 6 more banks (like Vijaya Bank and Corporation Bank) were nationalized in 1980.

 SBI, its subsidiaries, and the 20 nationalised banks are generally referred to as public sector banks. In order to enhance banking services for the rural sector, a framework of Regional Rural Banks came up in 1975. Ownership of these banks is split between three stakeholders viz. Central Government (50%), concerned State Government (15%) and the bank which sponsors the RRB(35%).

 Another vehicle for local reach is the Co-operative Banks, which have been in existence for over a century. They are registered under the Co-operative Societies Act, 1960 and regulated under the Banking Regulations Act, 1949 and Banking Laws (Co-operative Societies) Act,1956.

Types of banks

FUNCTIONS OF BANKS

FUNCTIONS

PAYMENT SYSTEM

FINANCIAL INTERMEDIATION

FINANCIAL SERVICES

1. PAYMENT SYSTEM-

Banks are at the core of the payments system in an economy. A payment refers to the means by which financial transactions are settled. A fundamental method by which banks help in settling the financial transaction process is by issuing and paying cheques issued on behalf of customers. Further, in modern banking, the payments system also involves electronic banking, wire transfers, settlement of credit card transactions, etc.

2. FINANCIAL INTERMEDIATION
The second principal function of a bank is to take different types of deposits from customers and then lend these funds to borrowers, in other words, financial intermediation. In financial terms, bank deposits represent the banks' liabilities, while loans disbursed and investments made by banks are their assets. Bank deposits serve the useful purpose of addressing the needs of depositors, who want to ensure liquidity, safety as well as returns in the form of interest. On the other hand, bank loans and investments made by banks play an important function in channelling funds into profitable as well as socially productive uses.

3. FINANCIAL SERVICES In addition to acting as financial intermediaries, banks today are increasingly involved with offering customers a wide variety of financial services including investment banking, insurance-related services, government-related business, foreign exchange businesses, wealth management services, etc. Income from providing such services improves a bank's profitability.

Banking and the Economy

Banks are a key constituent of the economy. They are a key vehicle through which RBI implements its monetary policy and exchange rate policy. Cash Reserve Ratio(CRR) Statutory Liquidity ratio(SLR) Repo and Reverse Repo Bank Rate Open Market operations

Scheduled Commercial Banks are required to maintain with RBI, an average cash balance, the amount of which shall not be less than 6% of the total of the Net Demand and Time Liabilities (NDTL) in India. Current CRR:- 4% NDTL(Net Demand and Time Liability) Demand Liabilities include all liabilities which are payable on demand and they include a. current deposits, b. demand liabilities portion of savings bank deposits, c. margins held against letters of credit/ guarantees, d. balances in overdue fixed deposits, e. cash certificates and cumulative/recurring deposits, f. outstanding Telegraphic Transfers (TTs), g. Mail Transfer (MTs), Demand Drafts (DDs), h. unclaimed deposits, i. credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand.

CRR

Statutory Liquidity Ratio (SLR)

All Scheduled Commercial Banks, in addition to CRR, are required to maintain in India, a) in cash, or b) in gold valued at a price not exceeding the current market price, or c) in unencumbered approved securities valued at a price as specified by the RBI from time to time. If RBI wants to tighten the monetary policy, it will raise the SLR. Such a measure would not be effective, if banks holding of SLR is higher than the statutory SLR rate. Lowering the SLR means that banks can sell some of their SLR securities to raise funds. It therefore tends to soften interest rates.

Repo Rate
Repo or repurchase option is a means of short-term borrowing, wherein banks sell approved government securities to RBI and get funds in exchange. In other words, in a repo transaction, RBI repurchases government securities from banks, depending on the level of money supply it decides to maintain in the country's monetary system. Repo rate is the discount rate at which banks borrow from RBI. Reduction in repo rate will help banks to get money at a cheaper rate, while increase in repo rate will make bank borrowings from RBI more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate

Reverse repo is the exact opposite of repo. In a reverse repo transaction, banks purchase government securities form RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest.

Thus, repo rate is always higher than the reverse repo rate.

Bank Rate
The interest rate at which a nation's central bank lends money to domestic banks. Often these loans are very short in duration. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity. Lower bank rates can help to expand the economy, when unemployment is high.

Repo Rate Vs. Bank Rate

Both Bank rate and Repo rate serve the same purpose for meeting the liquidity needs of the commercial banks. Both the rates are determined by the RBI in accordance with the money supply in the market.

Repo Rate

Bank Rate

There is sale of securities to RBI on an There is no such sale or repurchase of agreement to repurchase "it at a future securities. It takes place as merely lending date at predetermined price. of money to commercial banks at fixed rate.

BPLR and Base rate

BPLR ( Benchmark Prime Lending Rate):-It is the minimum interest rate on landings that commercial banks normally charge to their most creditworthy customers. Base Rate:-Base Rate has replaced the BPLR system with effect from July 1st 2010 The Base Rate is the minimum rate of a bank below which it cannot lend, except in cases allowed by RBI.

OPEN MARKET OPERATIONS

In countries where debt markets are well developed, the central banks can influence liquidity through open market operations. If they want to suck liquidity from the market, they will securities (or gold, foreign exchange etc.) to the market. When the market buys these assets, liquidity is transferred from the market to the coffers of the central bank. If a central bank wants to increase liquidity in the market, it will buy back securities (or gold, foreign exchange etc.) from the market. When it pays for the assets acquired, liquidity is released in the market.

Financial statements of Banks

Banks are key intermediaries in financial sector, and being companies are governed by Indian Companies Act. The financial statements are made according to specified format i.e. Schedule VI. The Accounting Standards Board of the Institute of Chartered Accountants of India formulates accounting standards, with a view to harmonize the accounting policies and practices.

 RBI being apex bank aligns the Indian banks with international standards. Also since banking companies are different from normal manufacturing companies direct application of ICAI standards were not possible in case of banking companies. Thus to eliminate gaps in compliance with accounting standards a working group was created whose recommendations were accepted by RBI.

 Also certain minimum disclosures are prescribed by RBI in the Notes to Account which are more than the normal minimum. The Balance sheet and Profit and loss account of bank has a special format given as follows:

Format of Balance Sheet

CY PY Rs.

CAPITAL AND LIABILITIES

SCHEDULE 1 2 3 4 5

Rs.

Capital Reserve and surplus Deposits Borrowings Other Liabilities and Provisions
Total

ASSETS

Cash and balance with RBI 6 Balances with bank and money at call and short notice 7 Investments 8 Advances 9 Fixed Assets 10 Other Assets 11 Total Contingent Liabilities 12

Format of P&L A/C

SCHEDULE CY PY

INCOME
Interest Earned Other Income Total 13 14

EXPENDITURE
Interest Expended Operating Expenses Provision and Contingencies Total P/L Net P/L for the year P/l brought forward Total 15 16

APPROPRIATIONS
Appropriations Transfer to statutory reserve CY Rs. PY Rs.

Transfer to other reserve

Transfer to Government/proposed dividend Balance carried over to Balance Sheet

Details Of Schedules
SCHEDULE 1-CAPITAL Authorized Capital Issued Capital Subscribed capital Called Capital Less: Calls unpaid Add: Forfeited shares
SCHEDULE2 RESERVES AND SURPLUS

Statutory Reserves Capital Reserve Share Premium Revenue and Other Reserves Balance in P/L Account

SCHEDULE3- DEPOSITS Demand Deposits

From Banks From Others

SCHEDULE 4 - BORROWINGS Borrowing in India

RBI Other Banks Other Institutions and agencies

Savings Bank Deposits Term Deposits

From Banks From Others

Borrowing outside India

SCHEDULE 5- OTHER LIABILITIES AND PROVISIONS

Bills Payable Inter Office Adjustments Interest Accrued Others (incl. Provisions)

SCHEDULE 6-CASH AND BALANCES WITH RBI

Cash in hand Balances with RBI In Current a/c In other a/c SCHEDULE 8-INVESTMENTS Investments in India in Government securities Other approved securities Shares Debentures and bonds Subsidiaries Others Investment outside India

SCHEDULE7- BALANCES WITH BANKS & MONEY AT CALL & SHORT NOTICE In India Balances with banks In current a/c In other deposit a/c Money at call and short notice With Banks With other Institutions Outside India

SCHEDULE9- ADVANCES
A.i. Bills purchased and discounted ii.Cash credits, O/D, and loan repayable on demand iii.Term loans B.i.Secured by tangible assets ii.Covered by bank /government guarantees iii.Unsecured C.i.Advances in India a. Priority sector b.Public sector c.Banks d.Others ii.Advances outside India

SCHEDULE 10- FIXED ASSETS

Premises Other fixed assets SCHEDULE 11-OTHER ASSETS Inter office adjustments Interest accrued Tax paid in advance/tax deducted at source Stationary and stamps Non banking assets acquired in satisfaction of claims Others

SCHEDULE12- CONTINGENT LIABILITIES

INTEREST EARNED
Interest/discount on advances/bills Income on investments Interest on balances with RBI and other inter bank funds Others SCHEDULE14- OTHER INCOME Commission, exchange and brokerage Profit on sale of Investments Profit on revaluation of Investments Profit on sale of land, building Profit on exchange transactions Income earned as dividends Miscellaneous Income

Claims against the bank not acknowledged as debts Liability for partly paid investments Liability on account of outstanding forward exchange contracts Guarantees given on behalf of constituents Acceptances ,endorsements and other obligations Other items for which the bank is contingently liable

SCHEDULE-15 INTEREST EXPENDED

SCHEDULE 16- OPERATING EXPENSES Payments to and provisions for employees Rent ,taxes, and lighting Printing and stationary Advertisement and publicity Depreciation on banks property Directors fees ,allowances and expenses Auditors fees and expenses Law charges Postage ,telephone ,etc. Repairs, maintenance Insurance Other expenditure

Interest on deposits Interest on reserve bank of India/inter-bank borrowings Others

FINANCIAL INCLUSION
Financial Inclusion is delivery of banking services at an affordable cost to the vast section of disadvantaged and low income group. Financial inclusion also means extending the banking habit among the less privileged in urban and rural India and weaning them away from unorganized money markets and moneylenders.

COMPONENTS OF FINANCIAL INCLUSION

Comprehensive financial inclusion can be achieved by providing all these services in a holistic manner.

PRODUCTS UNDER FINANCIAL INCLUSION

Following products are being offered to FI customers:
SB No frill accounts with inbuilt overdraft. Kisan Credit Cards up to Rs 1.00 lac without mortgage General Credit Cards up to Rs 25,000 without any collateral Other loans to start or run micro enterprises Remittance- intra-bank and inter-bank, through HHDs and Mobile Electronic benefit transfers (EBT) to NREGA, and social security payment beneficiaries Micro-insurance

FI METHEDOLOGY