COMMERCIAL BANKING

BANKING

Under Banking Regulation Act,1949 ,

“ banking includes accepting deposits
from public, for the purpose of lending
or investment; and repayable on demand
or otherwise and withdrawable by check ,
draft, order or otherwise .”
 THE INDIAN BANKING SYSTEM

Public Private Cooperative Development

Sector Sector Banks Banks
Banks Banks

* Industrial
• SBI and its *New Generation *Central CB Finance
5 associates private Sector Corporation of
banks *State CB India (IFCI)1948
*19 nationalized *ICICI 1956 )
banks * Old Generation *Urban CB * IDBI (1964)
Private Banks *Industrial
*Regional Rural *Primary Investment
banks sponsored by *Foreign banks Agricultural Bank of India
Public sector banks Societies (IIBI)1971
*Scheduled
Cooperative Banks *SIDBI 1990
*NABARD 1982
*Non- scheduled *Exim Bank 1982
Banks *National
Housing
Bank (NHB) 1988
 Structure of Commercial Banks :
• Public Sector Banks: SBI and its five associated banks
with 16260 branches.
• 19 nationalized banks with 39095 branches and 86
regional rural banks with15144 branches are the
public sector banks.
• Private Sector Banks: There are(15+7) 22 banks in the
private sector with 8965 branches. Private sector
banks have made rapid progress after the new
economic policy of 1991.
• Foreign Banks: There are 32 such Banks with 295
branches.
Private Sector commercial Banks in
India
• ICICI
• HDFC
• AXIS
• KOTAK MAHINDRA
• YES BANK
• INDUS IND
• ING VYSYA
 Foreign Banks in India
• Standard Chartered
• HSBC
• Citi Bank
• Royal Bank of Scotland
• Bank of Tokyo Mitsubishi
• Bank of America
 Nationalised Banks/ Public
Sector
• SBI and its subsidiaries
• PNB
• CANARA Bank
• BOI
• UNION BANK
• Central Bank
• BOB
• Indian Bank
• Dena Bank
• Syndicate Bank
• Oriental Bank of Commerce
• Corporation Bank
• Punjab & Sind Bank
• UCO Bank
• United Bank of India
• IDBI Bank ….
 Balance Sheet of a Bank
Liabilities Assets
• SB • Cash in hand
• CA • Bank Credit
• TD • Investment in government
• Call Money or other securities
• Inter Bank Deposit • Deposit with other bank
• RBI Borrowing
 Primary Functions

• Receiving Deposits
• Lending to Public
• Investment
• Creation of credit
 Receiving Deposits

• Demand Deposits: • Time Deposits:

-Current Account -Fixed Deposit
-Savings Bank -Cash Certificate
Account -Recurring deposit
-Auto- Sweep Facility
 Lending to Public
• Cash Credit
• Overdraft
• Demand Loan
• Term Loan
• Bills purchasing/ Discounting
• Packing credit
 Investment
• Treasury Bills
• Government Bonds
• Bonds of Public Sector Units
• Money Market Instruments
• Corporate Securities
• Equity of RRBs and Co-operatives
• SLR & Other Requirements
 Creation of Credit
• Add to money supply, Money Multiplier ,
Deposit multiplier
• Process of crediting the account of the
customer for the loan sanctioned
• Act of drawing cheques on the accounts
• Recipient or payee depositing the cheque
into his account
Secondary Functions- Agency
Services
• Collection of Income • Depository
& Instruments Participation
• Payments • Safe-Custody
• Purchase & Sale of Facilities
Securities • Tax Collection
• Investment
• Merchant Banking
Counselling
• Remittance of Funds
 General Utility Services

• Trustee, Attorney & • Underwriting

Administrator • Lease financing
• Safe Deposit • Publication
Lockers • Performance
• Travellers’ Cheques Guarantee
• Acting As Referees • Dealing in Foreign
• Letters of Credit Exchange
 Agency Services
• A customer may leave standing instructions with the banker for
payment of different sums to different institutions. Bank arranges
payment insurance premium, subscriptions to clubs and societies as
per the instruction of the customer. Banks charge a nominal amount of
charges for these services rendered.
• Bank collect dividend and interest on securities as per standing
instructions of the customers.
• Banks undertake purchase and sale of securities on behalf of
customers.
• It facilitates in transfer of fund from one bank to another.
• It helps in collection and payment of cheques, bills and promissory
notes.
• It acts as an executor or trustee because it facilitates in the
administration of a will.
Changing Role of Commercial Banks

• Housing Finance • Electronic Transfer

• Sale of Mutual of Funds: National
Fund Units level numbering of
• Bancassurance accounts, MICR
cheques, At Par
• Issue of Credit
Cheques, mobile
Cards/Smart Cards banking & Internet
• Issue of ATM/Debit Banking
Cards
 Electronic Banking

• ATMs • NEFT
• Tele-banking • RTGS
• Any-time Banking • Online Payment
• Any-where banking • Mobile Banking
• Shared Payment • Internet Banking
Network System
 FINANCIALSERVICES
• Advice in portfolio management /investment
counseling
• Facilitate merger and acquisition
• Management and distribution of mutual funds
• Sell insurance products

FIDUCIARY SERVICES
• Manage employee pension
• Act as trustees and manage the asset for
others
 Role of Commercial Banks in Economic
Development
• A well developed banking system is essential for the economic
development of any country. In a modern economy, banks are not
merely leaders in money and credit but leaders in the process of
economic growth.
• Capital Formation: Capital formation involves three stages: generation
of savings; mobilization of savings; channelisation of savings into
productive use. Commercial banks play a crucial role. They offer
incentives to savers mobilize savings through a wide network and
make the savings available to business houses for investment.

• Entrepreneurship Development: Commercial banks provide funds to

entrepreneurs and thereby promote entrepreneurship in the country.
• Utilization of latent resources: Banks make the funds available to the
needy.
 Role of Commercial Banks in
Economic Development
• Assist Priority Sector: They pay special attention to the priority
sector like agriculture, small scale industry, export sector and self
employed.
• Employment Generation: They provide jobs to a large number of
people. In addition they help in employment generation by boosting
industry and trade.
• Social Welfare: Banks provide loans for education and marriage of
children, house building etc.
• Implementation of Monetary Policy: A well developed banking
system helps the RBI to execute its monetary policy. The RBI
cannot regulate and control credit without the active cooperation of
banks
 Reforms in Banking Sector
• The GOI constituted a high level committee on financial
reforms under the chairmanship of Mr. M. Narasimhan, the
then Governor of the RBI which submitted its report on April
23, 1998. The recommendations of the Committee
were aimed at:
• To improve the financial health of banks.
• To correct and improve the macroeconomic policy setting
within which banks operate
• To ensure a degree of operational flexibility and internal
autonomy.
• To introduce greater degree of professionalism in banking
 Reforms cont..
• Interest rate deregulation.
• Adoption of prudential norms in terms of capital adequacy income
recognition, asset classification, provisioning etc.
• Reduction in lowering of reserve requirements (SLR and CRR),
thus releasing more lendable resources which banks can deploy
profitably
• Government equity in banks has been reduced and strong banks
have been allowed to access the capital market for raising
additional capital.
• Banks now enjoy greater operational freedom in terms of opening
of branches, and banks with a good track record of profitability
have greater flexibility in recruitment
 Reforms cont..

• New private sector banks have been set up and foreign

banks permitted to expand their operations in India including
through subsidiaries.
• New areas have been opened up for bank financing:
insurance, credit cards, infrastructure financing, leasing, gold
banking, etc
• New instruments have been introduced for greater flexibility
and better risk management like interest rate swaps, forward
rate agreements etc.
• Limits for investment in overseas markets by banks, mutual
funds and corporates have been liberalised.
 Reforms cont..
• Several new institutions have been set up including the
Clearing Corporation of India Ltd., Credit Information Bureau
India Ltd.
• Technology infrastructure for the payments and settlement
system in the country has been strengthened with electronic
funds transfer, Centralised Funds Management System etc
• Credit delivery mechanism has been reinforced to increase
the flow of credit to priority sectors through focus on micro
credit and Self Help Groups.
 Reforms cont..
• RBI guidelines have been issued for putting in place risk
management systems in banks. Risk Management
Committees in banks address credit risk, market risk and
operational risk. Banks have specialised committees to
measure and monitor various risks and have been upgrading
their risk management skills and systems.

• The limit for foreign direct investment in private banks has

been increased from 49% to 74%. In addition, the limit for
foreign institutional investment in private banks is 49%.
• Wide ranging reforms have been carried out in the area of
capital market. CDs are allowed in Dematerialised form only.
 BRANCH BANKING
In branch banking system a typical commercial bank
is a large institution having a large number of
branches scattered all over the country .
The branches may be located in the same city ,state or
across other states within the nation or overseas.
The branches are controlled from one location
referred to as head office.
Merits:
• Facilitates allocation or transfer of savings to the most
efficient use
• Division of labour
• Provision of remittance facilities
• Spread of risks
• Leads to uniform structure of interest rates
• Banks need not specialize in any particular
area or industry
• Fosters trader-customer contacts across the
nation as well as cross borders
Demerits:
• Delays
• Loss of initiative
• Lack of familiarity with local conditions and
special problems of the region
• Local savings get transferred elsewhere
 RETAIL BANKING
• It refers to the mobilization of deposits from individuals
and lending to small business and in retail loan
markets .
• It consists of large volumes of low value transactions.
• It includes a comprehensive range of financial
products viz., deposit products ,residential mortgage ,
credit cards , auto finance , personal loans ,consumer
durable loans ,loans against equity shares , loans for
subscribing to Initial Public Offers , debit cards , bill
payment services , mutual funds , investment advisory
services.
• These products provide an opportunity for
banks to diversify the asset portfolio with high
profitability and relatively lower NPA s.
• Net banking ,phone banking, mobile banking,
ATMs and bill payments are the new facilities
that the banks are using to lure the customers
and also to reduce their total operating cost.
 WHOLESALE BANKING

• It refers to dealing with large customers often

multinational companies , government or government
enterprises .
• The wholesale banks deal in large valued transactions
, usually in small volumes .
• They draw funds from and lend funds to business .
• It also includes transactions which the banks conduct
with each other via inter bank markets separate from
customers .
• It is domestic as well as international .
 The practices basic to wholesale banking are :
• Interbank markets in domestic and foreign
currencies
• Issue of certificates of deposit in domestic and
foreign currencies
• Lending by means of term loans ( roll over
credits)
• Wholesale banking practices such as loan
syndication; rollover credits and floating rate of
loans have filtered through retail end .
 UNIVERSAL BANKING
• Universal banks are considered as one-stop
financial supermarket offering broad range of
services .in a narrow sense, universal banking
denotes combination of banking and insurance
and investment activities .universal banks are
those banks that offer a wide range of financial
services , beyond commercial banking,
insurance and investment banking etc.
• ICICI was the first bank to turn itself into
universal bank.
 Merits :
• Greater economic efficiency in the form of :-
• lower cost ,
• higher out put
• better product
Demerits :
• Chances of gaining monopoly , which would
have undesirable consequences on economic
efficiency
• Conflict of interest
 BANKING REGULATION ACT ,1949

• License from RBI – establish; expand; close;

shift .
• Closer look over the over all management of
banks – appoint / terminate the chairman
• Exercise control over advances given by banks
• Can put restriction on any transaction
• Can inspect books of accounts
 RESERVE BANK OF INDIA ACT ,1934

Cash Reserve Ratio :- Sec 42

Every bank has to maintain an average daily balance with RBI
3% to15 % of Net Demand and Time Liabilities.

The regulator fixes this rate taking into consideration:

• Macro economic condition
• Money supply in the market

CRR is maintained in the form of :

• Deposit with RBI
• Cash balance in currency chest kept in bank- deemed to be
deposited in RBI
• Approved assets
 Yield :
• Apex bank provides a yield of 6% on CRR
maintained i.e.
• No yield for first 3% CRR
• 6 % yield if CRR is greater than 3 %.
• This is payable quarterly
Penalty:
• Incase of default a penalty is charged on CRR
generally greater than bank rate.
 Statutory Liquidity Ratio Section 24 (2A)

• In addition to CRR bank has to maintain statutory

reserve in the form of :
– Cash
– Gold
– Approved securities
– Balance in the form of current account
This is to control money supply for credit purpose ;
increase bank investment in government in government
securities ; ensure solvency of banks.
• SLR now a days is 25 % of Net Demand and
Time Liabilities.
 Yield :
• Investment in selected portfolio earns large
yields for the bank.
Penalty:
• Penalty is charged at the rate of 3% p.a. in
case of default .
• 5 % in case of continuous default.
 Net Demand and Time Liabilities

DEMAND LIABILITIES TIME LIABILITIES

Current deposit Fixed Deposits

Savings Deposit Cash Certificate
Margin against LC/Guarantee Indian Development Bonds
Balance of cash credit account Recurring Deposit
 Excludes :

• Liabilities of overseas branches

• Interbank liabilities
• Non resident deposits
• Vostro account balance
 PRUDENTIAL NORMS

• Income recognition not on accrual basis but

on realization basis
• Asset classification :
standard ;
sub standard – till 12 months ;
doubtful – after 12 months ;
• Capital adequacy :desirable 9% or more of the
risk (credit risk) weighted assets as base capital
• Provision of bad debts / assets
Standard Assets: 1%
Sub Standard Assets: Secured -10%
Unsecured - 20%
Doubtful Assets:
Secured - up to 12 months - 20%
12-36 months - 30%
more than 36 months - 100%
Unsecured -100%
• Loss Assets: value of security goes below 10%
of outstanding liabilities.
Provision required is 100%
 USE OF FUNDS

• 6% CRR
• 25% SLR
• 40% Priority Sector Lending :
agriculture ,SSE, artisans ;self
employed etc
• 29% Others
 THE INDIAN BANKING SYSTEM
The banking system in India has three tiers :
• scheduled commercial banks;
• the regional rural banks and
• the cooperative and special purpose banks .
There are approximately :
• more than 350 central cooperative banks
• 167 scheduled commercial banks and 4 non SCB
• 20 land development banks and
• a number of primary agricultural credit societies .
• 80369 bank branches in India
• In terms of business, the public sector banks namely
the State Bank of India and the nationalized banks
dominate the banking sector.

• Scheduled commercial banks constitute those

banks which have been included in the 2nd Schedule
of the RBI Act 1934.
These banks enjoy certain privileges such as:
• free concessional remittances facilities
• financial accommodation from RBI
• minimum cash reserve ratio to be kept with RBI
 Select Financial Parameters of
Scheduled Commercial Banks
http://www.rbi.org.in/scripts/PublicationsView.aspx?id=11900

• CRAR
• Net NPAs/Net Advances
• Interest Income/Working Funds
• Non-Interest Income/ Working Funds
• Operating Profit/Working Funds
• Return on Assets
• Business per employee
• Profit per employee
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