Banking in India

Banking in India

The Reserve Bank of India  was established on 1st April, 1935 and it was nationalized on 1st January, 1949.

The Finance Ministry issues Currency Notes and Coins of rupee one, all other Currency Notes are issued by the Reserve Bank of India.

The first bank of limited liability managed by Indians was Oudh Commercial bank founded in 1881. Subsequently, Punjab National Bank was established in 1894.

Swadeshi movement, which began in 1906, encouraged the formation of  a number of commercial banks.

The banking Companies Act was passed in February, 1949, which was subsequently amended to read as Banking Regulation Act,1949.

Commercial banks mobiles savings in urban areas and make them available to large and small industrial  and  trading units mainly for working capital requirements.

The India banking system consist of commercial banks, both in public and private sector, Regional Rural Banks (RRBs) and cooperative banks.

As on June 30, 2009, commercial Banking system in  India consisted of 171 scheduled commercial banks out of which 113 were in public sector, including 86 RRBs. The remaining 27 banks, other than RRBs, in the public sector, consisted of 19 nationalized banks, 7 banks in SBI group and IDBI bank Limited. Public sector banks (excluding RRBs)accounted for about 76.6% of the deposits of all scheduled commercial banks.

Commercial banks are broadly classified into nationalised  or public sector banks and private sector banks, with a few foreign banks. The public sector banks account for more than 92% of the entire banking business in India-occupying a dominant position in the commercial banking. the state Bank of India and its 7 associate banks  along with another 19 banks are the public sector banks.

Oudh Imperial bank was the first complete commercial Bank of India. The Imperial Bank was established  in  the year 1921 by merging three main presidency Banks. The largest bank-Imperial  Bank was nationalised  in 1955 on recommendation of gorewala  Committee and rechristened  as state bank of India .

In 1959, 7 regional banks were nationalised  and given the status of associate Banks of state Bank of India .

On 19th  July,1969,14 big commercial banks with deposits worth Rs.50 crores or more and on 15th April,1980, six other scheduled banks were nationalised, bringing total number of nationalised  banks of 27 (19+SBI+7SBI Associates).

Before the merger of new Bank of India in Punjab National bank (in 1993
) the total number of nationalised banks was 28(8* SBI and Associate +14 +6 ).

After the merger of ‘State bank of Saurashtra’ and ‘State bank of Indore’ in the state Bank of India, the number of associates of SBI has come to 6.

Lead bank Scheme

After the nationalisation  of 14 banks the lead bank scheme of the RBI was adopted in 1969 for branch expansion  programme  of banks.

Under the scheme, all the nationalized  banks and private banks were allotted specific distracts where they were asked to take the lead in surveying the scope of banking development particularly expansion of credit facilities.

Banking Reforms

On the recommendation of Narsimham Committee, a number of steps taken to improve functioning of banking sector.SLR and CRR were reduced.

Banks were given freedom to open new branches. Rapid computerisation  of banks was undertaken.

Banking ‘Ombudsmen Scheme’ started  functioning to expedite  inexpensive resolution of customer’s complaints.

Scheduled and Non-scheduled Banks

The scheduled banks are those which are entered in the second schedule of the RBI Act, 1934. These banks have a paid-up capital and reserves of an aggregate value of not less than RS.5 lakhs and satisfy the RBI that their affairs are carried out in the interest of their depositors.

All commercial banks (India and foreign), regional rural banks and state co-operative banks are scheduled banks. Non-scheduled banks are those which are not included in the second schedule of the RBI Act 1934. At present there is only one such bank in the country.

Regional Rural Banks

The Regional rural Banks (RRBs), the newest form of banks, have come into existence since middle of 1970s (sponsored by individual nationalized commercial banks) with the objective of developing rural economy by providing credit and deposit facilities for agriculture and other productive activities of all kinds in rural areas.

The emphasis is on providing such facilities to small and marginal farmers, agricultural labourers, rural artisans and other small entrepreneurs in rural areas. The number of branch  of RRBs (in 635 districts) is 18,299 (as on 31.12.2013).

First Regional Rural Bank was established on 2nd October,1975.

Co-operative Banks

Co-operative banks are so called because they are organized under the provisions of the co-operative Credit Societies law of the states. The major beneficiary of the Co-operative Banking is the agricultural sector in particular and the rural sector in general. The first such bank was established in 1904.

The Co-operative credit institutions operating in the country are mainly of two kinds : agricultural (dominant) and non-agricultural.

At the apex is the state Co-operative Bank (SCB) (co-operation being a state subject in India), at the intermediate (district) level are the Central Co-operative Banks (CCBs), and at the village level are primary Agricultural Credit Societies (PACs); Long-term agricultural credit is provided by the land Development Banks.

In the year 1991, Narsimham Committee was constituted to advice on the issue of reconstruction of banking system.

Development Banks

Industrial Development Bank of India (IDBI), established in 1964. Main Functions : Providing finance to large and medium scale industrial units.

Industrial finance  Corporation of India (IFCI), established in 1948. Main function : (a) Project finance (b) Promotional services.

Industrial Credit and Investment Corporation of India Limited(ICICI), established in 1991.

Main functions : – Providing term  loans in India and foreign currencies, Underwriting  of issues of shares and debentures.

Small Industries Development  Bank of India (SIDBI), established in 1989.

Main Functions  :-Providing assistance to small scale industries through state finance corporations, state industrial development corporations, commercial banks etc.

EXIM BANK (Export Import bank of India ) was established in 1982.

Main functions :- Coordinating the working of institutions engaged in financing export and import trade, financing exports and imports. Networth of the Bank (as on 31.03.2014) was RS-8,310 crore. National Housing Bank (NHB) started operations in 1988.

Main Functions  :- Development of housing finance in the Country.

NABARD (National Bank for Agriculture and Rural Development) was established in 1982. The paid-up capital of NABARD stood at Rs.2,000 crore as on 31 march,2010.

Main functions :- to serve as an apex refinancing agency for institutions engaged in providing agricultural finance to develop  credit delivery system to coordinate rural financing activities.

Insurance

The basic concept of insurance is of spreading the loss of a few over many. Insurance industry includes two sectors-life Insurance and General Insurance. Life Insurance in India was introduced by Britishers. A British firm in 1818 established the oriental life insurance Company at Calcutta, now Kolkata. Life Insurance Corporation (LIC) of India was established in September,1956. General  Insurance Corporation (GIC) was established in November,1972. Indian Insurance sector has low penetration particularly in rural areas. it also has low turnover and profitability despite high premium rate .The committee on Insurance sector Reforms was set-up in 1993 under the chairmanship of R.N.Malhotra which submitted its report in 1994. The insurance sector was opened up for private participation with the enactment of the Insurance Regulatory and Development Authority Act, 1999 (IRDA). The headquarter of IRDA is at Hyderabad.

The life Insurance Corporation has its central office in Mumbai, 8 zonal Offices at Mumbai, Kolkata,Delhi, Chennai, Hyderabad, Kanpur, Bhopal and Patna, 133 Divisional Offices, 73 Customer Zones, 2048 Branch Offices and 1346 Satellite offices as on 31 March,2014,spreads the message of Insurance the length and breadth of India.

At present LIC is operating internationally through Branch offices in Fiji, Mauritius and U.K. and through Joint venture Companies in Bahrain, Nepal, Sri Lanka, Kenya and Saudi Arabia. A wholly owned subsidiary, LIC (Singapore) established in April 2012.

Important Banking Terminology

1-Bank Rate:- Bank rate is the rate at which central bank of the country (e.g. RBI in India) allows finance to commercial banks. Bank Rate is a tool, which centre bank used for short-term purpose. Any upward revision in Bank Rate by Central bank is an indication that banks should also increase deposit rate as well as Base Rate/Benchmark prime Lending Rate .Thus any revision in the Bank rate indicates that it is likely that interest rates on customer’s  deposits are likely to either go up or go down, and it can also indicate an increase or decrease in customer’s EMI.

2-Basis Points:- It is the increase in interest rates in percentage terms. For instance, if the interest rate increases by 50 basis points (bsp), then it means that interest rate has been increased by 0.50%. One percentage point is broken down into 100 basis points. Therefore, an increase from 2 to 3 % is an increase of one percentage point or 100 basis points.

3-CRR(Cash Reserve Ratio):- CRR is the amount of funds that the banks have to keep with RBI. If RBI increases CRR, the available amount with the banks comes down.RBI is using this method (increase of CRR), to drain out the excessive money from the banks.

4-SLR (Statutory Liquidity Ratio) :- SLR is the amount a commercial banks needs to maintain in the form of cash, or gold, or govt. approved securities (Bounds ) before providing credit to its customers. SLR rate is determined and maintained by RBI in order to control the expansion  of the bank credit. Need for SLR :-  With the SLR, the RBI Can ensure the solvency of a commercial banks. SLR : SLR is used to control inflation and propel growth. Through SLR rate the money supply in the system can be controlled effectively.

5- Repo  Rate:- Repo rate is the rate at which commercial banks borrows rupees from RBI.A reduction in the repo rate will help banks to get money at cheaper rate. When the repo rate increases borrowing from RBI become more expensive.

6- Reverse Repo Rate :- Reverse Repo rate is the rate at which RBI borrows money from commercial banks. Banks are always happy to lend money to RBI since their money is in the safe hands with a good interest . An increase in reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. Reverse Repo Rate is always 1 percent less than the repo Rate.

7- NEFT (National Electronic Fund Transfer) : NEFT enables funds transfer from one bank to another but works a bit differently  than RTGS. NEFT is slower than RTGS. the  transfer is not direct and RBI acts as the service provider to transfer the money from one account to another. You can transfer any amount through NEFT, even a rupee.

8- RTGS(Real Time Gross Settlement) :- RTGS system is funds transfer system where transfer of money or  security takes from one bank to another on a ‘real time ‘ and on ‘gross’ basis. Settlement in ‘real time’ means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed . Minimum & Maximum Limit of RTGS : 2 Lakh and no upper limit.

9- Liquidity Adjustment Facility (LAF) : is a monetary policy tool which allows banks to borrow money through repurchase agreements. LAF is used to aid banks in adjusting the day to day mismatches in liquidity . LAY consists of repo and reverse repo operations.

10- Marginal Standing Facility (MSF) : MSF rate is the rate at which banks borrow funds overnight  from the Reserve Bank of India (RBI) against approved government securities. MSF is always 1 percent more than the Repo Rate.

11- NOSTRO Account : A Nostro account is maintained by an India Bank in the foreign countries

12- VOSTRO Account : A Vostro account is maintained by a foreign bank in India with their corresponding bank.

13- CRAR  (Capital to Risk Weighted Assets Ratio) : Capital to risk weighted asssets  ratio is arrived at by dividing the capital of the bank with aggregate risk weighted assets for credit risk , market risk and operational risk.

14- SDR (Special Drawing Rights) : SDR are new from  of international reserve assets, created by the International monetary fund in 1967. The value of SDR is based on the portfolio of widely  used countries and they are maintained as accounting entries and not as hard currency or physical assets like Gold.

15-BOND : Publicly traded long term debt securities issued by corporations and governments, whereby the issuer agrees to pay a fixed amount of interest over a specified period of time and to repay a fixed amount of principal maturity.

16- Non Performing Assets (NPA) : An asset (loan), including a leased asset , becomes non performing  when it stops generating income for the bank.

Note : Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset.

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