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TYPES OF BANKING

BRANCHING

UNIT BANKING

GROUP BANKING CHAIN BANKING

NARROW BANKING

UNIVERSAL BANKING.

7

2 Unit and branch banking:

Unit banking

A system where the operations of a bank are

confined to a single office.

The theory is that each bank should be

a local institution

Locally financed

Locally managed

Drawing funds from local depositors

Using its resources to develop local enterprises.

8

Unit banks are linked together by

correspondent bank system.

In this system, unit banks keep a/cs with city

banks and city banks with reserve banks.

This arrangement enables unit banks to make

remittances through the correspondent banks.

9

Unit banking in US

Several US states prohibit branching, oroperation of more than one full-servicebanking office.

These states had only unit banks.

Restrictive branching laws, encouragedchartering of large numbers of small,independently owned state banks, and largemultibank holding companies owningnumerous unit banks.

10

Unit banking

Branching laws in most US states have been

eased in the last several years, permitting

geographic expansion and branch banking

networks across the United States.

11

Branch banking

Multi-office banking, generally defined as

accepting deposits or making loans at facilities

away from a bank's head office.

Branch banking has gone through significant

changes since the 1980s as banks responded

to a more competitive financial services

market.

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Branch banking

Financial innovation such as internet banking

and ATMs will influence the future of "bricks

and mortar" banking by potentially reducing

the need to maintain extensive branch

networks to service consumers.

13

chain banking

Control of three or more independently

chartered banks by a few individuals, usually

through stock ownership or interlocking

directorships.

Mainly practiced in USA in states where

branch banking was not permitted by law.

14

chain banking

Chain banking differs from branch banking, or

multi-office banking within a single institution,

and group banking by affiliate banks within a

bank holding company.

Its importance in the US banking system has

declined since the late 1980s with the rapid

growth of interstate banking and, in several US

states, more liberalized branching laws.

15

Group Banking

A group of several banks controlled by a

holding company.

Each bank has its own Board of Directors.

The holding company

Owns majority capital stock in group banks.

Co-ordinates the activities of all banks of the

group

16

3. Universal banking

Definition of Universal Banking: As per the

World Bank, "Universal Banks operate

extensive network of branches, provide many

different services, hold several claims on

firms(including equity and debt) and

participate directly in the Corporate

Governance of firms that rely on the banks for

funding or as insurance underwriters".

17

A Universal Bank is a superstore for financial

products under one roof.

Corporates can get loans and avail of other

services, while individuals can deposit and

borrow.

It includes not only services related to savings

and loans but also investments.

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3. Universal banking

Universal banks offer a wide range of financial services,like Mutual Funds,

Merchant Banking,

Factoring,

Credit Cards,

Retail loans,

Housing Finance,

Auto loans,

Investment banking,

Insurance etc.

This is most common in European countries.

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ADVANTAGES OF BRANCH BANKING

1. Economies of large scale operation

2. Managing with lower cash reserves

3. Geographical spreading of risk

4. Safety of loans

5. Easy remittance of funds

6. Unified rate of interest

7. Better services to the community

8. Wider scope for the selection of securities

9. Efficient management

10. Mobilization of resources

11. Easy collection of cheques and bills

20

DISADVANTAGES OF BRANCH BANKING

1. Lack consideration for individual needs

2. Drain of financial resources from small areas

3. Red- Tape and delay

4. Lack of sympathy for local needs

5. Loss-making branches will continue subsidised by othersolvent branches.

6. Lack of effective control

7. Huge expense

8. Concentration of economic power

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ADVANTAGES OF UNIT BANKING

1. Easy to manage and control

2. More initiative in local problems

3. No diseconomies of scale

DISADVANTAGES

1. Division of labour and specialization is not possible

2. Cannot face crisis

3. Inadequate resources

4. Lack of efficient management5. Small area of operation

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Narrow banking : A concept

Also called a safe bank

Narrow banking would restrict banks to holding liquid

and safe government bonds.

Loans would instead be made by other financial

intermediaries.

That is, the deposit taking and payment activities have

been separated from financial intermediation activities.

Two different types of banks (financial companies) are

needed, one for each activity.

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Narrow banking

Yet to be implemented anywhere.

Key aim is to reduce the riskiness of banks and

avoid bank failures.

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4. BANKING SYSTEM IN INDIA

The first bank in India, The General Bank of

India was set up in 1786.

A major landmark was establishment of

Bank of Bengal (1809)

Bank of Bombay (1840)

Bank of Madras (1843)

by East India Company.

These banks were called Presidency Banks

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Imperial Bank

The Presidency Banks were amalgamated in

1921, to form Imperial Bank.

Imperial Bank of India performed all the

normal functions of a commercial bank.

In the absence of any central banking

institution in India until 1935, the Imperial

Bank of India also performed a number of

functions of a central bank.

26

The RBI, in the year 1955, acquired controlling

interest in the Imperial Bank of India.

Imperial Bank was renamed in1955 as the

State Bank of India, through State Bank of

India Act.

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Bank Nationalisation

The RBI was nationalized in 1949 in terms of

the Reserve Bank of India (Transfer to Public

Ownership) Act, 1948

Another major landmark was nationalisation

of the 14 biggest private sector banks in 1969.

The stated reason for the nationalization was

to give the government more control of credit

delivery.

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Reasons for nationalization

Concentration of wealth and economic power.

Abuse of power by directors

Denial of credit for agricultural operations.

Discriminatory policy against small borrowers

Credit for socially undesirable activities

Violation of the priorities laid down in thePlans

Absence of balanced banking development

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A second dose of nationalization of 6 more

commercial banks followed in 1980.

With the second dose of nationalization, the

GOI controlled around 91% of the banking

business of India.

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Major objectives

Removal of control by a few

Provision of adequate credit for agriculture,

small scale industry and export.

Giving a professional bent to management

Encouragement of a new class ofentrepreneurs

The provision of adequate training as well asterms of service for bank staff.

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The Banking System at present

The Indian Banking system consists of

A. Unorganised Sector

B. Organised Sector

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A. Unorganized Banking sector

Money lenders

Indigenous bankers

(Indigenous = Originating where it is found)

Landlords

Traders

Organized in the form of family orpersonal business

33

11. Unorganized Banking sector

Money lenders

Indigenous bankers

(Indigenous = Originating where it is found)

Landlords

Traders

Organized in the form of family orpersonal business

3434

Unorganised Sector:

Broad classification ofIndigenous bankers

Those whose principal business is banking

Those who combine their banking businesswith other trading functions

Those who are principally traders but employtheir surplus funds in banking.

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Indigenous bankers and

moneylenders

Banking in India is as old as the Vedas

Many references in the Vedas (composed

about 1500 B.C) and Manusmruti(written

between 200 BCE and 200 CE).

Also inArthasasthra (200 CE)

Indigenous bankers financed Indian trade and

commerce before the advent of European.

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Trade guilds

Merchants of trade guilds were doing banking

business, individually and collectively.

They collected deposits as trustees and paid

interest.

Moneylenders were initially held in respect.

But, over the centuries, they came to be

regarded as usurious, for their malpractices.

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Usury

Usury = lending money at an exorbitant

rate of interest

Moneylenders charged exorbitant rates and

cheated illiterate borrowers.

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Advent of British and Banks

With British rule, indigenous banking received agreat setback.

European type banks were established.

Uniform currency was introduced which hit themoney-changing part of their business.

The British govt took various steps to control themalpractices of moneylenders.

The co-operative movement was strengthened,which replaced moneylenders in their areas ofoperation.

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BANKING COMMISSION RECOMMENDATIONS

REGARDING INDIGENOUS BANKERS

Model central uniform legislation should be made

They should be controlled through their contactswith commercial banks.

Internal & external auditing

Should regulate interest rates charged byindigenous bankers.

A code of conduct should be evolved for theiroperation

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Defects of indigenous banking

They have mixed banking & non banking

business

The could not maintain secrecy of theiraccounts

They used to charge high rates of interest

They face the shortage of capital also.

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B. Organised Banking Sector

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BANKING SYSTEM IN INDIA

The system is headed by Reserve Bank of India (RBI),Indias central bank.

There are various types of banks, operating to meet

the requirements of various categories of peopleengaged in:

Agriculture

Business

Professions

Employment etc.

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Categorisation of Banks

Commercial banks

1. Public Sector BanksSBI and Associate Banks

Nationalised Banks

2. Private Sector BanksOld Private Sector Banks

New Generation Banks

3. Foreign Banks

4. Regional Rural Banks (RRB)

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Associate Banks of SBI

1 State Bank of Bikaner & Jaipurwww.sbbjbank.com

2 State Bank of Hyderabad www.sbhyd.com

3 State Bank of Indore www.indorebank.org

4 State Bank of Mysorewww.statebankofmysore.c

o.in

5 State Bank of Patiala www.sbp.co.in

6 State Bank of Travancore www.statebankoftravancore.com

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Categorisation of Banks 2

Development Banks

The major development Banks are: Industrial Finance Corporation of IndiaIFCI--1948

Small Industries Development Bank of India- SIDBI1990

Industrial Investment Bank Of India- IIBI

National Bank for Agriculture and Rural Development NABARD

Export Import Bank of India EXIM Bank

Some other erstwhile Development banks haveconverted themselves into commercial banks

Industrial Development Bank of IndiaIDBI

Industrial Credit and Investment Corporation of India-ICICI

46

Categorisation of Banks 3

Co-operative Banks

Primary Credit Societies

District Central Co-operative Banks

State Co-operative Banks

4747

5. Central bank - definition

A central bank, reserve bank, or monetary

authority is a banking institution granted the

exclusive privilege to lend a government its

currency.

It may also have supervisory powers, to

ensure that banks and other financial

institutions do not behave recklessly or

fraudulently.

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Some Central Banks

The first central bank of the world- Riks Bank

of Sweden - 1664

The Bank of England- England -1694

The Federal Reserve System- USA - 1913

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Functions of a central bank (not allfunctions are carried out by all central banks):

implementing monetary policy

setting the official interest rate used to manage

both inflation and the exchange rate Note issue, controlling the nation's money supply

the Government's banker

the bankers' bank ("lender of last resort")

managing the country's reserves offoreign exchangeand gold and the Government's stock register

regulating and supervising the banking industry

Control over lending by commercial banks

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Monetary policy

Central banks implement a country's chosen

monetary policy.

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MONETARY POLICY

Economic policy of the government in the

monetary field.

It operates through rate of interest and

availability of credit.

Money consists of both currency and credit

money

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Goals of monetary policy

Price Stability

High Employment

Economic Growth

Interest Rate Stability

Financial Market Stability

Foreign Exchange Market Stability

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Price Stability

Unanticipated inflation leads to lender losses. Nominalcontracts attempt to account for inflation. Effort successfulif monetary policy able to maintain steady rate of inf lation.

High Employment

The movement of workers between jobs is referred to asfrictional unemployment. All unemployment beyondfrictional unemployment is classified as unintendedunemployment. Reduction in this area is the target ofmacroeconomic policy.

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Economic Growth

Economic growth is enhanced by investment in technological

advances in production.Encouragement of savings supplies funds that can be drawn

upon for investment

55

Goals contd.

Interest Rate Stability

Volatile interest and exchange rates generate costs to

lenders and borrowers. Hence Interest Rate Stability is agoal of monetary policy.

Financial Market Stability

Stability in Financial markets such as market for equity andmarket for debt, is necessary for growth and smoothoperation of industry and commerce.

Foreign Exchange Market Stability

The exchange rate of a country s currency needs to be stableso that exports, imports and international investment arefacilitated.

56

Conflicts Among Goals

Goals frequently cannot be separated from each

other and often conflict.

Costs must therefore be carefully weighed before

policy implementation.

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Setting the official interest rates

CB controls certain short-term interest rates.

These influence the stock and bond markets

as well as mortgage and other interest rates.

However, CBs are not all powerful and they

have only limited powers to put their policies

into effect.

Most CBs have limited ability to influence

rates actually paid by private borrowers to

banks.58

Repo Rate

Whenever the banks have any shortage of

funds they can borrow it from RBI. Repo rate

is the rate at which banks borrow rupees from

RBI. A reduction in the repo rate will help

banks to get money at a cheaper rate. When

the repo rate increases borrowing from RBI

becomes more expensive.

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Reverse Repo Rate

The rate at which RBI borrows money from

banks.

An increase in Reverse repo rate can cause thebanks to transfer more funds to RBI due to theattractive interest rate.

It causes the money to be drawn out of thebanking system.RBI fine tunes usage of CRR, Bank Rate, RepoRate and Reverse Repo rate to control liquidityand interest rate.

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Bank Rate

A central bank adjusts the supply of currencywithin national borders by adjusting the bank

rate. When the central bank reduces the bank rate, it

increases the attractiveness for commercial banksto borrow, thus increasing the money supply.

And vice versa.

The instrument that has not been used by RBIsince April 2003, when it was brought down by0.25% to 6%.

61

Note Issue

Issuing paper money is an important function

of a central bank.

Having monopoly of note issue, the Central

Bank receives the following benefits.

1. Ensuring uniformity in the notes issued.

2. Creates confidence in public and brings stability

in monetary system.

3. Government is able to earn profit from printing

the currency (seigniorage)

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Banker to Government

Central Bank (CB) acts as banker, fiscal agent

and advisor to Govt.

It keeps the deposits of Central and State

Govts and makes payments on behalf of them.

It manages the entire public debt on behalf of

the govt.

It gives valuable advice to govt. on issues such

as devaluation, foreign exchange policy,

budgetary policy.63

Bankers bank

Commercial banks are required to keep a

certain percentage of their liabilities as Cash

Reserve with CB.

They also maintain other deposit accounts

with CB for transfer of funds to various

centres.

CB acts as a clearing house for other banks

and mutual obligations are settled through

this system.

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Lender of Last Resort

CB assists commercial banks when they face

difficult situations such as runs, so as to save

the financial structure from collapse.

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Custodian of forex reserves

CB keeps and manages the forex reserves of

the country.

It regulates the exchange rate of the national

currency.

If there are fluctuations in the forex rates, it

may have to buy or sell forex to minimise

instability.

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Banking Supervision

In some countries, Banking Supervision is

done by the CB.

In other countries, Banking Supervision is

done by a govt. dept. or another independent

authority.

The Bank Supervisor examines each banks

financials, behaviour and policies toward

customers.

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Banking Supervision 2

Any cartel of banks is closely watched and

controlled

Most countries control bank mergers.

They are weary of concentration in this

industry.

Lending bubbles are a particular area of risk.

In finance management, diversification

reduces risk.

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Credit control

This is a most important function of a Central

Bank.

Used for controlling inflationary and

deflationary pressures within an economy.

Quantitative methods.

Qualitative (Selective) methods.

69

Quantitative Methods

1. Bank Rate / Discount Rate policy

2. Open Market Operations

3. Variations in Reserve Ratios of Commercial

Banks

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1. Bank Rate / Discount Rate policy

Cen Bk controls credit by changing bank rate.

A rise in bank rate makes borrowing from CB

more costly.

Commercial Bks increase lending rates for

customers.

This discourages business activity.

Conversely, lowering bank rate, offsets

deflationary tendencies.

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Bank Rate

Bank rate is thus raised to control inflation.

In the opposite direction, lowering the bank

rate offsets deflationary rendency.

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2. Open Market Operations

Direct buying and selling of securities (bonds)

by the Cen Bk on its own initiative is called

Open Market Operations.

When Cen Bk sells, money is withdrawn from

the banking system and banks are forced to

curtail lending.

This discourages business activity.

73

Open Market Operations

In times of depression, the Cen Bk buys

securities, increasing banks cash reserves

Thereby, banks expand their loans, resulting in

expansion in investment, employment,

production and prices.

74

Variations in Reserve Ratios of

Commercial Banks

The Cen Bk controls inflation and deflation by

varying the CRR and SLR of comml. banks.

75

CRR : Cash Reserve Ratio.

It is a percentage of Bank Deposits that CommercialBanks are supposed to maintain with RBI.

It is a monetary control tool that RBI uses to regulatethe Money Supply in the Economy.When Inflation is High ( Money supply is high), RBIincreases the CRR Rate.

Commercial Banks will have to keep more percentageof deposits with RBI.

This in turn will reduce the commercial bank's Lendingcapacity.

When lending capacity is reduced, money supply in theeconomy is less, which will reduce inflation.

76

SLR: Statutory Liquidity Ratio

It is a part of deposits that Commercial Banks are

supposed to maintain with THEMSELVES INLIQUID FORM.

Liquid form means:Cash, Gold or Government Bonds.

This is done, to ensure sufficient Liquidity withCommercial Banks.

It is again expressed as a percentage of totaldeposits.

It is also used as a monetary tool to regulatemoney supply.

77

Current CRR & SLR rates in India

SLR : 24%

CRR : 6%

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Qualitative or Selective credit

Control (SCC)

This means the regulation and control of the

supply of credit among its possible users.

The aim is to curtail use of bank credit for

hoarding , speculation and other undesirable

activities.

The important SCC are the following.

79

SCC

Margin requirements

Regulation of consumer credit

Rationing of credit

Direct action

Moral suasion

80

SCC

Margin requirements: Cen Bk prevents

excessive use of credit for speculation, by

fixing minimum margins.

Regulation of consumer credit: Cen Bk fixes

minimum down payment and maximum

number of instalments, thereby encouraging /

discouraging consumer credit.

81

SCC

Rationing of credit: Cen Bk may fix ceiling for

Aggregate portfolio of each commercial bk

Ratio of capital of a comml bk to its total assets.

Direct action: Issuance of directives by cen bk

to comml bks regarding loan policies.

Moral suasion : Persuasion and request by cen

bk to comml bks to follow a certain monetary

policy.

82

Reserve Bank of India (RBI)

RBI, is the central banking system ofIndia

The institution was established on 1-4-1935

during the British-Raj in accordance with the

provisions of the Reserve Bank of India Act,

1934.

83

2 Structure

2.1 Central Board of Directors

2.2 Organisation

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Central Board of Directors

20 Members

Members:

Governor,

Dy. Governors- 4 ,

Govt. official -1

Directors nominated by govt.-10

Directors nominated from local boards-4

85

Organization:

Central Office : Mumbai

Local Boards at: Mumbai, Kolkata, Chennai, New Delhi

The Reserve Bank of India has branch offices at moststate capitals and at a few major cities in India[totalof 18 places]

86

Major Departments of RBI

Department of Payment and Settlement SystemsDepartment of Banking SupervisionDepartment of Currency Management

Internal Debt Management DepartmentMonetary Policy DepartmentDepartment of Government and Bank AccountsUrban Banks DepartmentDepartment of Non-Banking SupervisionRural Planning and Credit DepartmentDepartment of Statistical Analysis and Computer ServicesInspection Department

Department of External Investments and OperationsDepartment of Information TechnologyForeign Exchange Department

87

Main Functions

Monetary Authority

Manager of exchange control

Issuer of currency

Developmental role

Related functions

88

Monetary Authority

RBI is the main monetary authority of the

country

the central bank acts as the bank of the

national and state governments.

It formulates, implements and monitors the

monetary policy.

Objectives are maintaining price stability and

ensuring adequate flow of credit to productive

sectors.89

Monetary Authority

Is also the regulator and supervisor of the

financial system

prescribes broad parameters of banking

operations within which the country's banking

and financial system functions.

RBI controls the monetary supply, and

monitors economic indicators like the GDP

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Objectives

to maintain public confidence in the system,

protect depositors' interest

provide cost-effective banking services to the

public

91

Banking Ombudsman Scheme

formulated by the (RBI) for effective redressal

of complaints by bank customers.

92

Manager of exchange control

The central bank manages the goals of the

Foreign Exchange Management Act, 1999.

Objective: to facilitate external trade and

payment and promote orderly development

and maintenance of foreign exchange market

in India.

93

Issuer of currency

The bank issues currency and coins

Exchanges or destroys currency and coins not

fit for circulation

Objective: giving the public adequate supply

of currency of good quality

94

Developmental role

The central bank has to perform a wide range

of promotional functions to support national

objectives and industries.

The RBI faces a lot of inter-sectoral and local

inflation-related problems.

95

Related functions

banker to central and the state governments

performs merchant banking function for the

central and the state governments.

maintains banking accounts of all scheduled

banks.

96


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Conclusion

There is now an international consensus about

the need to focus the tasks of a central bank

upon central banking.

RBI is far out of touch with such a principle,

owing to the sprawling mandate described

above.

The recent financial turmoil world-over, has

however, vindicated the Reserve Bank's role in

maintaining financial stability in India.

97

7. Commercial Banks

Structure

Scheduled Banks: Banks included in Second

Schedule of RBI Act,1934.

Unscheduled Banks: Other banks

There are no such banks in India except

Local Area Banks (4)

Unscheduled Co-op banks

98

Scheduled Bank

Banks in the 2nd schedule enjoy some benefits

they have access to accommodation by RBI

in times of liquidity constraint

But, they become subject to RBIs reserve

requirements.

99

Classification of Scheduled Banks

1. Public Sector BanksSBI and Associate Banks

Nationalised Banks

2. Private Sector BanksOld Private Sector Banks

New Generation Banks

3. Foreign Banks4. Regional Rural Banks (RRB)

100

Public Sector Banks (PSBs)

PSBs have either the Govt. of India or the RBI

as the majority shareholder.

The segment has

1. SBI and its Associates

2. Nationalised Banks

101

SBI

SBI is Indias largest bank.

It has over 13000 branches, which is the

second largest network in the world.

The bank had 131 overseas offices spread over

32 countries as on 31st Dec 2009

The bank provides various domestic ,

international and NRI products and services

through its network.

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SBI & Associates

It was the first bank in India to introduce

Market segmentation of customers

Planning and Performance Budgeting & Reporting

SBI had 7 Associate banks, of which, State

Bank of Saurashtra has been merged with SBI.

103

Nationalised Banks

14 banks were nationalised in 1969

6 more were nationalised in 1980

Two of thenationalised banks were merged

with each other.

At present, there are 19 nationalised banks.

104

Functions of Commercial Banks

Primary Functions

Secondary Functions

General Utility Functions

105

Primary Functions

Acceptance of deposits

Granting Loans and Advances

106

Deposits

The most important activity of a comml bk is

mobilising deposits from the public.

Such deposits earn interest.

The bank lends a major portion of the

deposits, to industry, trade, agriculture and

individuals, and earns interest.

107

Deposits

Term Deposits

Demand Deposits

Term Deposits are kept with the bank for a

specified period (tenure)

The interest rate depends on the tenure

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Demand Deposits

Savings Accounts: Earns nominal interest.

Number of transactions limited. Ideal type for

employees, pensioners etc.

Current Accounts: Does not earn interest. No

limitation on number of transactions. Suitable

for businesses.

Savings and Current Accounts can be cheque

operated.

109

Loans and advances

The second important function of a comml bk.

Types of accounts:

Cash credit: A running account, generally grantedagainst security of stock.

Overdraft: Usually granted for personal credit facilities

Bill discounting: Granted against security of trade bills.Bank advances money against the bill. On due date,the bank presents the bill to the drawee and collectsthe bill amount.

Term loan: Granted for acquiring fixed assets.Repayable in instalments over a period not exceeding7 years, usually.

110

Other Services

Agency Services

Collection of cheques

Bills of Exchange and promissory notes

Execution of Standing Orders

Trustee Business

Safe Custody

Remittance of Funds

Issuing Letters of Credit

Pension Payment

Government Transactions.

111

Co-operative Banks

The Co operative banks in India started

functioning almost 100 years ago.

The Cooperative bank is an important constituent

of the Indian Financial System, judging by

the role assigned to co operative,

the expectations the co operative is supposed to fulfil,

their number,

and the number of offices the cooperative bankoperate.

112

The co operative movement originated in the West, but

the importance of such banks have assumed in India israrely paralleled anywhere else in the world.

The cooperative banks in India play an important roleeven today in rural financing.

The business of cooperative bank in the urban areasalso has increased phenomenally in recent years due tothe sharp increase in the number of primary co-operative banks.

113

Co operative Banks in India are registered

under the Co-operative Societies Act.

The cooperative bank is also regulated by the

RBI.

They are governed by the Banking Regulations

Act 1949 and Banking Laws (Co-operative

Societies) Act, 1965.

114
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rural areas

Cooperative banks in India finance rural areas

under:

Farming

Cattle

Hatchery

Personal finance

115

urban areas

Cooperative banks in India finance urban

areas under: Self-employment

Industries

Small scale units

Home finance

Consumer finance

Personal finance

116

NAFCUB

According to NAFCUB the total deposits &

lendings of Cooperative Banks in India is much

more than Old Private Sector Banks & also the

New Private Sector Banks.

NAFCUB: National Federation of Urban Co-op

Banks and credit societies

117

This exponential growth of Co operative Banks

in India is attributed mainly to their much

better local reach, personal interaction with

customers, their ability to catch the nerve of

the local clientele.

118

Co-operative Banks

Co-operative Banks

Primary Credit Societies

District Central Co-operative Banks

State Co-operative Banks

119119

Differences co-operative& commercial banks

Commercial

Joint-stock

Banking Regulation Act

Under direct control of RBI

Both public and private sector

Borrowers are only account

holders and no influence on

policy maters

Co- operative

Co-operative

Co-operatives societies Act

of 1904

Under direct control

Registrar of co-operative

societies

Private sector

Borrowers are member-

shareholders and have

voting power

120
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Merits of Co-op Banks

Familiar with local conditions

Lower administrative costs

Mobilization of small savings

Banking procedures are less complicated

Financially security to the members

121

Major problems

Weak capital base

NPAs increased sharply

Poor asset quality

Increased competition with commercial banks

Poor management

Lack of transparency

Limited branch network

Wrong commercial decisions

Political interference

122

Regional Rural banks( RRBs)

In 1975 , a working group-chairman- M.

Narasimhan to review the flow of institutional

credit to the rural people.

An alternative agency to provide institutional

credit to the rural people.

A combined form of co-operatives and

commercial banks.

123

Resources of RRBs Share capital,

Deposits from public,

Borrowing from sponsor banks,

Refinance from NABARD

Major objectives

To provide low cost banking facilities to the poor

to develop rural economy by providing credit & other facilities

to

Small and marginal farmers , agricultural labours, artisans and

small entrepreneurs socio- economic upliftment and improvements in the living

standards of the clientele

124

RRB: problems

The principal problem is low recovery rates and loan over dues due

to- internal factors Weak monitoring and supervision

Apathy towards recovery

Failure to link lending with development

Ensuring end use of the loan

External factors

political interference

Willful default

Draught and floods

Under development

Lack of legal and administrative support from the state govt. inthe matter of recovery

125

RRB: Recommendations

Kelkar Committee- 1986

Enhancement of authorized capital from Rs 1 crore to Rs 5

crore and paid up share capital from Rs 25 lakh to Rs.1

crore.

Appointment of Chairman of RRBs by concerned sponsor

bank in consultation with NABAD.

Training RRB staff and giving financial assistance to them

in the first five years of their existence sponsor banks

Provision of amalgamation of RRBs

Empowering the sponsor banks to monitor the progress of

RRBs

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Development banks-objectives

Serve as an agent of development- agriculture, industry, andinternational trade.

Accelerate the growth of the economy

Allocate resources to the high priority areas

Rapid industrialization and employment generation

Develop entrepreneurial skills

Promote the development of rural areas

Finance housing, SSIs, infrastructure, social utilities

Technical assistance

Refinance

Women developement

127

Non Banking Finance Companies

NBFCs These are financial intermediaries engaged primarily in the business

of accepting deposit and advancing loans.

It is mandatory that every NBFCs should be registered with RBI to

commence or carry on any business of NBFCs

Certain categories of NBFCs which are regulated by other regulators

like SEBI, IRDA, National Housing Bank

Major categories

Equipment leasing

Hire purchase

Loan companies

Investment companies

Chit fund company

128

What is a Non-Banking Financial Company

(NBFC)?A company registered under the Companies Act,

1956 and

Engaged in the business of

loans and advances,

acquisition of shares / stock / bonds / debentures/ securities

leasing, hire-purchase,

insurance business,

chit business

receiving deposits under any scheme or or

lending in any manner.

129

Registration with RBI

In terms of Section 45-IA of the RBI Act, 1934,

it is mandatory that every NBFC should be

registered with RBI to commence or carry on

any business of non-banking financial

institution

130

Exceptions

To obviate dual regulation, certain categories of

NBFCs which are regulated by other regulators

are exempted from the requirement of

registration with RBI viz.

131

Exceptions

Venture Capital Fund/Merchant Banking

companies/Stock broking companies

registered with SEBI,

Insurance Company holding a valid Certificate of

Registration issued by IRDA,

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Exceptions

Nidhi companies as notified under Section 620A

of the Companies Act, 1956,

Chit companies as defined in clause (b) of

Section 2 of the Chit Funds Act, 1982

Housing Finance Companies regulated by

National Housing Bank.

133

Different types of NBFCs

registered with RBI

(i) Asset Finance Company (AFC)

(ii) Investment Company (IC)

(iii) Loan Company (LC)

134

Asset Finance Company

AFC is a company with principal business of

financing of physical assets such as

automobiles,

Machines etc. And

not less than 60% of its total assets and total

income should be from this activity

135

RBI Classification

The above type of companies are further

classified into those accepting deposits or

those not accepting deposits.

136

Minimum Capital Requirement

Rs 200 lakh minimum net owned fund

to be possessed before registration as NBFC

with RBI.

137

Difference between banks &

NBFCs NBFCs are doing functions akin to that of banks;

however there are a few differences:

(i) an NBFC cannot accept demand deposits;

(ii) an NBFC is not a part of the payment andsettlement system and as such an NBFC cannotissue cheques drawn on itself;

(iii) deposit insurance facility of Deposit Insuranceand Credit Guarantee Corporation is notavailable for NBFC depositors unlike in case ofbanks.

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Need for regulation by RBI

RBI regulates NBFCs because mismanagement

and / or malpractices in NBFCs may harm the

financial system.

139

Achievements of Bank Nationalisation

Branch expansion: From only 8261 in June 1969, the number ofbranches of commercial banks increased to 65,521 in 2000.

Increased Coverage of rural areas

Growth in Deposit mobilization Growth in volume of credit

Sectoral development of credit

Advances to priority sectors: At the time of nationalisation thepriority sector concept was introduced by bringing agriculture,small-scale industry, retail trade, small business and smalltransport operators under its fold. It was made mandatory forbanks to provide 40 per cent of their net credit to these''priority'' sectors (18 % to Agriculture).

140

Defects

Increased trade unionism in banks

Politically influenced unviable lending

Unmindful expansion

Overstaffing

Poor customer service

Lack of young blood in the top management

141

Social banking

Social banking has three distinct components.

Interest rate are kept below the average interest rate inrural areas.

Identified priority sectors with specific targets &Lead Bank Scheme- LBS

Banking development on the basis of populationserved per bank office.

NABARD--- An apex institution looking after the planningand operation in the field of credit for agriculture andother economic activities in rural areas.

Now social banking institutions are competing with thecommercial banks for getting more profit

142

Privatization-infusion of financial efficiency A committee was appointed on financial system-1991-M.NarashimhanSuggestions to keep inflation and BOP position under control. Removal of license and permit system Remove protection and promote competition in foreign trade sector. Integration with world economy to attract capital and modern technology.Major changes. Reduction in SLR and CRR Freedom for fixing lending rates Modern system of payment-ATMs, RTGS Entry of private sector banks Securitization Act to recover NPASRESULTS Number of commercial banks increased Number of total branches increased The population per bank office went up The aggregate deposits went up Bank advances increased The credit deposit ratio increased The income of the banks increased Operating profit went up The total assets went up

143

mod 1 bank management

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