managing banking institution

7/29/2019 Managing Banking Institution

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Financial Services and SystemSasidharan & Mathews

Chapter 10

Management of Banking Institutions


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Definition of Banking Company

The word bank was derived from the word babcus

or banque which meant a bench.

Section 5 (3) (b) of The Banking Regulation Act

1949 defines banking as the accepting, for the

purpose of lending or investment, of deposits of

money from the public, repayable on demand or

otherwise, and withdrawable by cheque, draft,

order or otherwise.

According to Section 5 (3) (c) a Banking Company is

defined as any company which transacts the

business of banking


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Opening of Banks

Requires license issued by RBI

Minimum capital requirement for a new banking company

is Rs.200 crores

The promoter contribution is restricted to 10-40 per cent

Private participation is now permitted

Industrial houses are permitted to take upto 10 per cent

stake in the capital which includes the investment by

interconnected companies also

The promoters and the investor companies are not

allowed to avail credit facilities from the bank in which

they have invested.


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Opening of Banks

NBFCs are permitted to convert into banking companies,

provided their capital is not less than Rs.200 crores

The net worth has to be increased to Rs.300 crores in

three years

The NBFC applying for conversion should have a credit

rating of AAA or its equivalent in the year before theyapply to RBI for conversion into commercial banking

venture

The promoters have to bring down their stake to 40

percent including the stake by non-resident investorswhich should not exceed 20 per cent.

These banks are required to maintain a capital adequacy

ratio of 10 per cent on a continuous basis from the start

of their operations


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Opening of Banks

These newly started banks have to lend up to 40

percent to priority sector as applicable to other

domestic banks

They are required to open at least 25 per cent of their

branches in rural and semi-urban areas

They are not permitted to start mutual fund or

subsidiary before they complete three years from the

date of commencement


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Opening of Banks

Reserve Bank of India conducts inspection to

confirm the following aspects, before consideringthe request for opening a bank:

Ability to meet the claims from depositors

Conduct of business is not detrimental to the interest of the

present or future depositors

General character of the proposed management is not

prejudicial to the interest of general public or depositors

Adequacy of capital structure and prospects for earnings

Carrying the business is in the interest of the public

Issuing the license would not be prejudicial to the operation

and consolidation of the banking system

Carrying on the banking business will not be prejudicial to

the interest of public or depositors.


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Branch Expansion Policy

Prior approval of RBI is mandatory according to Section 23 of

BR Act RBI has introduced Branch Authorization Policy giving powers

to the banks for:

Opening of new branches

Setting up of Central Processing Zones/ Back Offices

Call centres

Shifting of branches

Conversion of branches

Upgradation of extension counters

Conversion of rural branch into satellite branch

Merger of branches

Closure of branches

Doorstep banking

Business facilitators/business correspondents


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Opening of New Branches

Assessment of potentiality for a new branchPreference for unbanked areas identified by the state

government

Scanning the area

Competitor analysis

Compliance with the laws/ norms of the local authority

Banks to present a medium term strategy regarding

their branch expansion to RBI.


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RBI will look into the following aspects before approving the

strategy:

Financial condition and history of the banking company

The general character of its management

Adequacy of capital structure and earning prospects

Public interest dimensions

The nature and scope of banking facilities provided by banks to

common persons, lending policies and efforts to promote financial

inclusion

Banking policies like minimum balance, no frill account, grievanceredressal mechanism etc.

Need for competition

Compliance with regulatory norms, corporate governance, risk

management, internal control mechanism etc.


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After examining these vital issues, RBI will giveapproval on an annual basis

Annual branch expansion policy submitted to RBI

should be with the approval of directors

The plan should cover opening, shifting, merger,closing and opening of ATM centres

Substitution of branches is considered on a case to

case based on the merit

If a bank want to open a branch in an underbanked

area, request can be placed before RBI any time during

a year which will considered on a case to case basis


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Opening of Service Branches

Banks are permitted to set up Central Processing

Centres/ Back Offices/ Service Branches exclusively to

attend to back office functions such as data processing,

verification and processing of documents, issuance of

cheque books, demand drafts etc. on requests received

from other branches and other functions incidental to

banking business

Service branches are not permitted to interact with

customers

These branches cannot be converted into general

banking branches

Proposals for such branches/offices also form part of the

annual branch expansion plan submitted to RBI.


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Call Centres

Call Centres are off-site locations from whichinformation relating to the services provided by a

bank can be obtained through tele-banking facility

They do not entertain any direct transaction with

customers

They do not undertake any banking transactions

Approval of RBI is not necessary for setting up call

centres

Opening, shifting and closing of call centres should

be reported to RBI


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Business Facilitator/ Business Correspondent

Banks are permitted to engage the following organisations as

Business Facilitators

NGOs/ Farmers' Clubs

Cooperatives

Community based organisations

IT enabled rural outlets of corporate entities,

Post Offices

Insurance agents

Well functioning Panchayats,

Village Knowledge Centres,

Agri Clinics/ Agri Business Centers,

Krishi Vigyan Kendras and KVIC/ KVIB unitsetc.

Business Facilitators form part of financial inclusion

programme


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The services of Business Facilitators can be used for

identification of borrowers and fitment of activities,

collection and preliminary processing of loan applications

including verification of primary information/data

creating awareness about savings and other products and

education and advice on managing money and debt counseling

processing and submission of applications to banks

promotion and nurturing Self Help Groups/ Joint Liability

Groups

post-sanction monitoring monitoring and handholding of Self Help Groups/ Joint Liability

Groups/ Credit Groups/ others

follow-up for recovery.


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The Business Correspondents can be:

NGOs/ MFIs set up under Societies/ Trust Acts

Societies registered under Mutually Aided Cooperative

Societies Acts or the Cooperative Societies Acts of States

section 25 companies

registered NBFCs not accepting public deposits and Post

Offices etc


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The Business Correspondents can undertake activities such as:

Disbursal of small value credit

Recovery of principal / collection of interest

Collection of small value deposits

Sale of micro insurance/ mutual fund products/ pension products/

other third party products

Receipt and delivery of small value remittances/ other payment

instruments

Banks can pay a reasonable commission to these agencies for

rendering their services

An agreement to be executed with the intermediary

Transactions by the intermediaries should be reflected in thebooks of accounts of the bank on the same day or on the next

working day

Banks would be responsible to the customer for the commission/

omission of the Business Facilitator/Correspondent

Banks are required to set-up a grievance redressal mechanism


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Doorstep Banking

Banks are now permitted to deliver cash at the

doorstep of the customers

Banks can also collect cash, collect cheques, deliver

demand drafts etc. at the customers premises

Individual banks have to design and launch suitableschemes

Services of suitable agencies including Business

Facilitators/ Business Correspondents can be used

for this purpose

Cash transactions are covered under the transit

insurance


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Shifting of Branches

Banks are permitted to shift their branches fromone location to another location in the same centre

without the approval of RBI except in the following

cases:

Shifting of a sole rural branch to outside the centre which

would make the centre unbanked area where DCC has

approved the shifting

Shifting to centres which are served by more than one

commercial banks including Regional Rural Banks

(RRBs) outside the block.


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Shifting of Branches

Banks should also comply with the following conditions:

Shifting of rural branches A rural branch can be shifted only to another rural branch

A branch in an underbanked area can be shifted only to another

underbanked area

Shifting of branch outside the block

The branch should be in existence for five years or more and are incurringlosses consecutively for the last three years

Branches located at centres prone to certain natural risks such as, floods,

landslides or likely to be submerged due to construction of dams or

affected by any natural calamities etc. can be shifted to another centre

Branches functioning in places where law and order problem, insurgency

or terrorist activities pose threat to bank personnel and property can be

shifted

Branches where the premises occupied by the bank are in a dilapidated

condition or burnt/destroyed and no suitable premises are available at the

centre etc.

Shifting of branches should be reported to the Regional Office of RBI.


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Conversion of Branches

Special Category to another Special Category

Special Category to General Category

Post-shifting report to RBI

General Category to Special Category requires the

prior approval of RBI

These cases have to included in the annual branch

expansion policy submitted to RBI

RBI does not permit conversion of a rural branch

into satellite branch


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Upgrading Extension Counters

Banks can open extension counters in specific

institutions like schools, colleges etc. for payment of

fee, payment of salary of staff etc. after obtaining

license from RBI

The extension counters are not allowed to entertaingeneral public

The extension counters can be converted into a full-

fledged branch after surrendering the license and

obtaining prior permission from RBI.

These cases should not be shown in the Annual

Branch Expansion Policy and should be taken up

separately.

f


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Merger of Branches

Urban/ metropolitan branches can be merged without the approval of RBI

RBI generally approve merger of rural/ semi-urban branches for fear that

the centre would become unbanked area

Special requests on account of reasons like natural calamity, law and

problems etc. need to be referred to RBI with the recommendations of

DCC

Banks are required to comply with the following before effecting the

merger:

Customers of merged bank is informed well in advance

Details of merger should be reported to the concerned regional office

of RBI immediately, but not later than two weeks

The license of the merged branch should be surrendered to RBI

immediately after the merger

Cl f B h


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Closure of Branches

Branches other than rural branches can be closed

with out the approval of RBI subject to compliance

with the following requirements:

Customers should be informed well in advance

Details of closure should be reported to RBI showing the

actual date of closure

Closure of rural branches only under exceptional

circumstances like loss making branches and that

too with the recommendations of DCC

O i ti l St t


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Organisational Structure

Board of Directors

Chairman & Managing Director

Executive Director

Chief General Managers

General Managers

Deputy General Managers

Assistant General Mangers

Chief Managers

Senior Managers

Managers (MM)

Managers/ Officers (JM )

Clerks/Cashiers/ Data Entry Operators

Subordinate Staff (Class IV)

Company Secretary Chief Vigilance Officer

O i ti l St t


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Board of Directors should represent various areas of

specialisation as defined under Section 10A of Banking

Regulations Act, 1949

51 per cent of the Board should be persons having professional

knowledge and practical experience in the specific areas

mentioned under the above provision of BR Act.

Appointment of Board of Directors requires approval RBI as well

as Shareholders

The directors should be fit and proper persons as defined by RBI

While appointing new directors a nomination committee

constituted by the Board for this purpose scrutinize the

nomination, verify their antecedents and confirm that they are

eligible to appointed as directors as per RBI norms

O i ti l St t


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The nomination together with the recommendation of the Board

should be submitted to RBI for approval and got approved bythe general body also

Not less than two directors should be persons having special

knowledge or practical experience in respect of agriculture and

rural economy, cooperation or small scale industry.

Not less than two third of the directors are required to retire by

rotation who can be re-elected

No director shall hold office for more than 8 years

Directors of banks are prohibited from holding position asdirectors in companies, other banks and financial institutions.

The directors are not eligible for any remuneration other than

the sitting fee and reimbursement actual expenditure towards

travel and accommodation

F ti f H d Offi


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Functions of Head Office

CMDs Secretariat

Board Room

Executive Director

Deputy Managing Directors

Chief General Managers

General Managers

Company Secretary

Finance and Accounts

Planning and Policy Department

Marketing Department

Customer Care Department

Credit Department

F ti f H d Offi


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Functions of Head Office

Corporate Finance Department

Priority Sector Credit Department

Non-Priority Credit Department

HR Department

Legal Department Treasury Department

Premises Department

Stationery Department

Audit Department

Vigilance Department

MIS Department

Security Department

O i ti f Z l Offi


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Organisation of Zonal Office

Zonal Head(General Manager/ Dy. General Manager)

Dy. General Manager/Asst. General Manager/Chief Manager

Asst. General Manager/Chief Manager

Chief Managers/Senior Managers

Senior Managers/Managers

Managers/Dy. Managers

Officers

Other operating staff

O i ti f R i l Offi


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Organisation of Regional Office

Regional Head

(Dy. General Manager/Asst. General

Manager/Chief Manager)

Asst. General Manager/Chief Manager/Senior

Managers

Chief Manager/Senior

Manager

Managers

Dy. Managers

Officers

Other Operating

Staff

O i ti f Z l Offi


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Organisation of Zonal Office

Zonal Head(General Manager/ Dy. General Manager)

Dy. General Manager/Asst. General Manager/Chief Manager

Asst. General Manager/Chief Manager

Chief Managers/Senior Managers

Senior Managers/Managers

Managers/Dy. Managers

Officers

Other operating staff

F ti f Z /R i l Offi


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Functions of Zona/Regional Offices

Planning Department

Personnel Department

Credit Department

Legal Department

Inspection Department

Lead Bank Division

Customer Care

Organisation of Branches


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Classification according to size:

Scale VI Branches (Exceptionally Large)

Scale V Branches (Large Branches)

Scale IV Branches (Metro and Urban Branches)

Scale III Branches

Scale II Branches

Scale I Branches



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Classification according to functions:

Agricultural Branch

Industrial Finance Branch

Corporate Branch

Overseas Branch

SSI Branch

Commercial Branch

Main Branch

NRI Branch



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Classification according to functions:

Personal Banking Branch

Asset Recovery Branch

Service Branch

Offshore Branch

Overseas/Foreign Branch

Specialised Branches

Extension Counters



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Classification for foreign exchange dealings:

Only branches designated by RBI can deal in foreign

exchange

Branches are classified into 3 categories based on their

status for dealing foreign exchange

Category A: Dealing, trading, maintaining currency positions,maintaining overseas bank accounts, exchange rate

management, submission of returns to RBI, etc., but normally

no direct transaction with customers.

Category B: Handling all customer transactions such as

purchase/negotiation of export documents, handling importtransactions, making remittances, purchase and sale foreign

exchange, submission of returns to RBI etc.

Category C: Can transact foreign exchange through Category

A or Category B branches.



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Branch Head

(General Manager/ Dy. General

Manager/Asst. General Manager/Chief

Manager/Senior Manager/Manager)

Section Heads

Section Officers

Other

Operating Staff

Functions of Branches


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Deposit Section:

Handling all types

of deposits

Custome

r

Cashier

Officer

Savings

Account

Current

Account

Term

Deposits

1

4 5 6

2

3 3 3



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Custome

r

Cashier Loan

Clerk

Credit Officer

Manager

1

2

3

4

6

7

8

5

8



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Other ServicesCustome

r

Cashier Remittance

Section

Deposits

Section

1

4

1

Officer

2

23

1

Collection

Section



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Single WindowSystem Customer

Officer

1 2 3 4



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Relationship Banking

Services of one officer is made available to customers

for assisting them in the banking operations

Generally certain number of customers are allotted to a

single official

May I help counter

Telephone banking

Door-step banking



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Back Office Functions

Maintenance of books of accounts and records

Preparation of returns

Balancing of accounts

Reconciliation of bank accounts etc.

In modern banking, these functions are

automatically taken care of by the operatingsystem installed in the computers



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Core Banking Data stored at a central place

Accounts can be accessed from any branches using

password protection

Data can be accessed by controlling offices for generatingvarious reports and returns

Books of accounts and records are posted updated instantly

Back to be created

Banks also create disaster recovery centres



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Core Banking

The system has some problems also

Less human intervention

More chances of committing frauds

Difficulty in unearthing frauds

Connectivity through leased line- line speed can

affect data transfer

Customers may have to wait for transacting ifconnectivity is lost due to technical fault

Technical problems may affect smooth banking

operations.

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