Banking System in India: Sheetal Thomas

Banking System
In India
Sheetal Thomas
Types of banking services in
India
The Narasimham Committee
• 1990s India had traumatic moments
• Banks were burdened with large percentage of non-
performing loans
• Customer service had suffered and out-moded practices
were in vogue
• Overall re-hauling was needed for entire financial systems in
general and banking sector in particular
• The Narasimham Committee was set up to recommend
changes in financial system
Committee recommends
• Overall emphasis upon ‘de-regulation’
• No further nationalization to be adhered to
• No distinction between ‘public’ and ‘private’ sector banks
• Control of banking sector to be centralized (and not to be
divided between RBI and Dept. of Banking)
• SLR and CRR should be reduced to prudent levels
• Concessional lending to be phased out
• The capital base of banks should meet international standards
• The appointment of Chief Executive of the banks to be de-
politicized
Role of Commercial and Central
Bank
• Commercial bank
– There is no specific definition (although Banking
Regulation Act – defines banking)
– • The ‘banker’ is one who deals in ‘money’
– • Two essential functions of banking
• 1. Borrowing (accepting of deposits) of money;
and
• 2. Lending of money for needy purposes
– Besides these essential function a banking
company also performs
– Other agency and General utility functions
• “a commercial bank mobilizes the savings of the society. This
money is then provided to those who are in need of it by
granting overdrafts or fixed loans or by discounting bills of
exchange or promissory notes. In short, the primary function
of a commercial bank is that of a broker and a dealer in
money. By discharging this function efficiently and effectively,
a commercial bank renders a very valuable service to the
community by increasing the productive capacity of the
country and thereby accelerating the pace of economic
development. It gathers the small savings of the people, thus
reducing to the lowest limits the quantity of idle money…”
Unit Banking
• Unit banking refers to a single bank which renders services
and operates without any branches anywhere. This kind of
banking system is common in the USA. Restrictive branching
laws encourage large numbers of small, independently
owned state banks, and large multibank holding companies
owning numerous unit banks. Branching laws in most states
have been eased in the last several years, permitting
geographic expansion and branch banking .Unit banking
operate one full banking services.
Branch Banking
• Branch banking center or financial center refers to a single bank which operates
through various branches in a city or in diferent locations or out of the cities. This
kind of banking system is common in India. e.g. State Bank of India. It offers a
wide array of face to face service to its customers.Historically, branches were
housed in imposing buildings, often in a neoclassical architecture style. Today,
branches may also take the form of smaller offices within a larger complex, such
as a shopping mall.Services provided by a branch include cash withdrawals and
deposits from a demand account with a bank teller, financial advice through a
specialist, safe deposit box rentals, bureau de change, insurance sales (where it
is allowed by law), etc.
Branch Banking
• Followings are the main advantages of branch banking
• 1. Less Costly
Larger banks have the resources and system to deliver low cost, broadly based
services.
• 2. Diversification
A branch banking organization can diversify its sources and uses of funds among
various users. It can direct funds into a market requiring financing. Deposits are
received from the areas where lots of savings and loans are extended in those areas
where funds are scarce and interest rates are high.
• 3. Greater efficiency
Under branch banking system, the bank with a number of branches processes huge
financial resources and enjoys the benefits of large-scale operations. Highly trained and
experienced staff is appointed which increases the efficiency of the management.
Advantages
• 4. More Safer
A large banking system is generally safer. Fewer bank failures have occurred
among large banks.
• 5. Variety of services and low transaction costs

A greater variety of services and products become available to a broader
banking public. Since the bank branches are spread over the whole country,
it is easier and cheaper to transfer funds from one place to another.
• 6. Security against the risk of failure

The branch banking is less risky and greater capacity to handle risks. The
losses incurred by some branches may be offset by the profits earned by
other branches.
Disadvantages
• Duplication of banking facilities
• Unhealthy competition
• Delay in decision making
• Ineffective control over branches
• Lack of initiative
• Lack of personal contact
Universal banking
• Often referred to as ‘financial service supermarket’
• An universal bank offers entire (or often most of) financial
services within the bank or through its subsidiaries, like
– Commercial banking solutions
– Investment banking
– Other related financial services including
insurance
GROUP BANKING
• Form of Holding Company in which a management
group has control of several existing banks. Each
bank in the group has its own board of directors,
but the holding company coordinates the activities
of all banks in the group, and owns a majority of
capital stock in member banks.
CHAIN BANKING
• The banks which are located in different parts of
the country is under the control of a single person
or a group of persons through stock ownership or
otherwise, but not a holding company.
CORRESPONDENT BANKING
• This is an informal arrangement in which a bank
in a country maintains a deposit balance with
banks in foreign countries and looks to them for
services and assistance.
• These offices accept drafts, honor letters of credit,
provide credit information, and collect or pay
foreign funds from import or export transactions.
Deposit Banking System
• Receiving deposits and making advances for a
short period is known as deposit banking.
• No lock up of long-term advances
• They need to have high liquidity
Glass-Steagall Act 1933
• The modern concept of “Investment Bank” was
created in the Glass-Steagall act (Banking Act of
1933). Glass Steagall separated commercial
banks, investment banks, and insurance
companies.
• Carter Glass, Senator from Virginia, believed that
commercial banks securities operations had
contributed to the crash of 1929, that banks failed
because of their securities operations, and that
commercial banks used their knowledge as lenders
to do insider trading of securities.
Investment Banks
• Bulge bracket firms: First Boston, Goldman
Sachs, Merrill Lynch, Morgan Stanley,
Salomon Brothers, Lehman Brothers.
• Traditionally were often partnerships, but
partnership form is disappearing.
Investment banking
• An investment bank is a financial institution that
assists corporations and governments in raising
capital by underwriting and acting as the agent in
the issuance of securities. An investment bank also
assists companies involved in mergers and
acquisitions, derivatives, etc. Further it provides
ancillary services such as market making and the
trading of derivatives, fixed income, instruments,
foreign exchange, commodity, and equity
securities.
• Unlike commercial banks and retail banks,
investment banks do not take deposits.
• The Industrial Development Bank of India (IDBI) was established
in 1964 under an Act of Parliament. It was initially set up as a wholly
owned subsidiary of the Reserve Bank of India (RBI) with a mandate
of providing credit and other facilities for balanced industrial
development. In 1976, the ownership of IDBI was transferred to the
Government of India and it was accorded the status of principal
financial institution in the country for co-ordinating the working of
institutions, engaged in financing, promoting and developing
industry, and also assisting in the development of such institutions.
Following amendment to IDBI Act in October 1994 to permit public
ownership up to 49% of its issued capital, IDBI went in for a public
issue in July 1995. The shareholding of Government of India in IDBI
currently stands at 58.47%.
• Industrial Finance Corporation of India (IFCI)

IFCI, the first Development Finance Institution in India, was set up in
1948, as a Statutory Corporation, to pioneer institutional credit to
medium and large industries IFCI was also the first institution in the
financial sector to be converted into a Public Limited Company.
IFCI's record of performance has broadly run parallel to the course
of industrial and economic development of the nation. IFCI's
principal operations include - Project financing, Financial services &
Comprehensive corporate advisory services.
Merchant Banking
• A "Merchant Banker" could be defined as "An
organisation that acts as an intermediary between
the issuers and the ultimate purchasers of
securities in the primary security market“
• Merchant Banker has been defined under the

Securities & Exchange Board of India (Merchant
Bankers) Rules, 1992 as "any person who is
engaged in the business of issue management
either by making arrangements regarding selling,
buying or subscribing to securities as manager,
consultant, advisor or rendering corporate advisory
service in relation to such issue management".
• Merchant Banking, as a commercial activity, took shape in
India through the management of Public Issues of capital
and Loan Syndication. It was originated in 1969 with the
setting up of the Merchant Banking Division by ANZ
Grindlays Bank. The main service offered at that time to the
corporate enterprises by the merchant banks included the
management of public issues and some aspects of financial
consultancy. The early and mid-seventies witnessed a
boom in the growth of merchant banking organisations in
the country with various commercial banks, financial
institutions, broker's firms entering into the field of merchant
banking.

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Banking System

• 5. Variety of services and low transaction costs

• 6. Security against the risk of failure

• Industrial Finance Corporation of India (IFCI)

• Merchant Banker has been defined under the

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