Banking Theory

Banking
Theory & Practice
Dr. S.G. Rama Rao

Introduction to
Indian Banking System

Basic Banking Terms
• Finance: The proper management of
money.
• Money: The current medium of
exchange or means of payment.
• Credit or Loan: A sum of money to be
returned normally with interest.

Bank
• It is a financial firm.
• The firm which deals banking activities.
• It is an institution whose debts are
widely accepted in settlement of other
people’s debts to each other.

Banking System
• The Merchant
• The Gold Smith (safe lockers)
• The Money lender (receiving deposits and
advancing loans)

Functions of a Bank
• Primary Functions
– Receipts of Deposits (Savings, Fixed, RD, etc.)
– Granting of Loans (with surety) and Advances
– Dealing with money (creating money)

Contd..

Functions of a Bank
• Subsidiary Functions
– Agency Services (on behalf of customer)
• Act as agent
• Collect the cheques
• Payment of Insurance Premium, etc.

– General Services
• Money transfer
• Providing lockers
• Help in foreign currency dealings, etc.

Role of Banks
•
•
•
•
•

Receiving Deposits
Lending (loan)
Portfolio Management (investment)
Foreign exchange dealings
Encourage the use of technology
(ATMs, Internet banking, etc.)

• Help to economic growth

Challenges
•
•
•
•
•
•

Changing needs of customers
Managing with regulatory reforms
Maintaining high quality assets
Management of impaired (harm) assets
Keeping pace with technology up-gradations
Sustaining healthy bottom lines and increasing
shareholder value

Banking History
• Bank of Venice was the first bank to start
commercial banking operations in 1157.
• Modern banking system began with the
opening of Bank of England in 1694.
• Bank of Hindustan was the first bank to be
established in India in 1770.

Important Milestones of the
Banking Industry

Contd..

Important Milestones of the
Banking Industry

Indian Banking History
• Name must include the word ‘Bank’, ‘Banker’ or
‘Banking’ for banking operations in India.
• In the first half of the nineteenth century, three
Presidency Banks were started in Bengal (1809),
Bombay (1840) and Madras (1843) with the financial
participation of the Government for conducting
banking business and issue currency notes.
• Towards the end of the 19th Century the cash balances
of the government were kept in the government
treasuries and the government drop its connections
with the Presidency Banks.
Contd..

Indian Banking History
• The Imperial Bank came into existence on the 27th
January, 1921 by the Imperial Bank of India Act of
1920.
• It was established by the amalgamation of the three
Presidency Banks.
• The Imperial Bank was the biggest bank until 1935.
• Until the establishment of the Reserve Bank of India in
1935, the Imperial Bank performed certain central
banking functions, although it was purely a commercial
bank.
• It acted as the sole-banker to the Government up to
establishment of RBI.

Public sector banks in India and
Private sector banks in India

Public Sector Banks
• These are those in which the majority stake is
held by the Government of India (GoI).

• Public sector banks together make up the
largest category in the Indian banking system.
• Public Sector Banks (SBI and associates +
Nationalized banks) control more than 75% of
the total deposits businesses in India whereas
Private Sector Banks around 17-18%.

Public Sector Banks
State Bank of India &
Its Seven Associate Banks
1. State Bank of Bikaner and Jaipur
2. State Bank of Hyderabad
3. State Bank of Indore
4. State Bank of Mysore
5. State Bank of Patiala
6. State Bank of Saurashtra
7. State Bank of Travancore

Nationalised Banks

Private Sector Banks
• Nationalisation of 14 banks in the year 1969 and
another set of 6 banks in the year 1989 reduced the
importance of Private sector banks in India.
• As a part of liberalization programme Government
took the initiatives on Private Sector banks for
creating competition among the banks.
• The Indian economy’s liberalisation in the early
1990s has resulted in the conception of various
private sector banks.

• These are working under the guidelines of RBI.
• HDFC was amongst the first to received an
approval from RBI to set up a bank in the
Private sector.
• Banks needs to maintain a net worth of Rs.300
crore at all times.
• Aggregate foreign investment in private banks
from all sources (FDI, NRI, etc.), the guidelines
stipulate that it can’t exceed 74% of the paid
up capital of the bank.

Types of Private Banks
• Old Private sector banks are those banks
which were not nationalized at the time of
bank nationalization that took place during
1969 and 1980.
• New private sector banks include those that
were established (after 1991) in the past
twenty years such as Yes Bank, Axis
bank, etc.

• Foreign Banks

List of Old Private Sector Banks (13)

List of New Private Sector Banks (7)

List of Foreign Banks (41) in India

Differences between Commercial Banks
Type of Commercial
Major
Banks
Shareholders
Public Sector Banks

Government
of India

Private
Individuals

Foreign Banks

Foreign
Entity

Major Players

SBI, PNB, Canara
Bank, Bank of Baroda,
etc.
ICICI Bank, HDFC
Bank, Axis Bank, Yes
Bank, etc.
HSBC, Standard
Chartered Bank, City
Bank, etc.

Indian banks operations abroad
and
Local Area Banks

Indian Banks’ Operations Abroad
• The survey report, which was released today, covered
171 overseas branches, 24 overseas subsidiaries on
Indian banks and 309 branches of foreign banks
operating in India.
• The overseas subsidiaries of Indian banks registered 11
per cent growth in headcount in 2011-12.
• The report said Indian banks operating abroad
employed 66.3 per cent of staff from local
sources, 30.8 per cent from India and remaining 2.9
per cent from other countries.

Indian Banks’ Operations Abroad
• "The profitability ratio, i.e. profit to total assets, of
branches of Indian banks operating abroad decreased
to 0.7 per cent (from 1.1 per cent) in 2011-12.
• The profitability ratio of foreign banks operating in
India increased to 2.4 per cent (from 2.3 per cent) in
2011-12," the survey report said.
• Bahrain, Belgium, Hong Kong, Japan, Singapore, Sri
Lanka, UAE, UK and USA were the major countries that
accounted together for nearly 91 per cent of the total
trade in banking services of the Indian banks' branches.

Overseas offices of Indian Banks abroad
as on March 31, 2013

Objective
• Setting up of local area banks in private sector
to cater to the credit needs of the local people
and to provide efficient and competitive
financial intermediation services in their area
of operation.

Scope of Activities
• These banks are being set up in district
towns, their activities will be focussed on the
local customers.
• It is expected that their lending will be to
– agriculture and allied activities,
– SSI,
– trading activities and
– the non-farm sector

Registration and Licensing
• The bank shall be registered as a public
limited company under the Companies
Act, 1956.
• It will be licensed under the Banking
Regulation Act, 1949 and will be eligible
for including in the Second Schedule of
the Reserve Bank of India Act, 1934.

Capital
• The minimum paid up capital for such a
bank shall be Rs.5 crore.
• The promoters‘ contribution for such a
bank shall at least be Rs.2 crore.

Promoters
• The promoters of the bank may comprise
individuals, corporate entities, trusts and
societies.
• In the application for a banking licence the
details of the initial contribution of
promoters, and the manner and method
through which the minimum share capital
of Rs.5 crore will be raised will need to be
indicated.

Area of Operation & Head Office
• The area of operation of the proposed bank
shall be a maximum of three geographically
neighboring districts.
• The Head/Registered Office of the bank will
be located at a centre within the area of
operation of the bank.

Branch Licensing
• The bank shall be allowed to open branches
only in its area of operation and in regard to
branch licensing, it shall be governed by the
existing policy.

Lead Bank Scheme
• The National Credit Council was set up in Dec.’67 to
determine the priorities of bank credit among various
sectors of the economy.
• The NCC appointed a study group on the organizational
framework for the implementation of social objectives
in Oct.’68 under the Chairmanship of Prof. D R Gadgil.
• Prof. DR Gadgil recommended in Oct.’69 the adoption
of an “Area approach” for the development of credit
and banking in the country on the basis of local
conditions.
• The Committee of Bankers appointed by RBI under the
Chairmanship of Sr. F.K.F. Nariman also endorsed this
area approach.

Lead Bank Scheme
• Under the scheme, the country was divided into
338 districts and mostly public sector banks to
play he ‘Lead’ role in coordinating the efforts of
all credit institutions in the district.
• The performance of the branches within the lead
area are monitored by Block Level Bankers
Committee at the block level, District consultative
committee at the district level and State Level
Bankers Committee at the state level.

Returns submitted by the Lead Bank
• Lead Bank Return 1 (Service area credit plan): Details
about annual credit plan of the branch.
• Lead Bank Return 2 (Service area operation scroll):
Details about priority sector credit
disbursement made each day during the
month to Lead District Manager.
• Lead Bank Return U2 : Modified version of
LBR2, submitted by semi urban/urban
branches once in a quarter.

Returns submitted by the Lead Bank
• Lead Bank Return 3 (Service area recovery and
outstanding statement): It is in 3 parts.
– Part A: Deposit and Advance Position – to be
submitted on quarterly basis.
– Part B: Outstanding under various Priority Sector
Advances – to be submitted on a half yearly basis.
– Part C: State of Recovery of Priority Sector
Advances giving details of demand, collection and
balances to be submitted on an annual basis.

Cooperative Banks
• A co-operative bank is a financial entity which
belongs to its members, who are at the same
time the owners and the customers of their
bank.
• Co-operative banks are often created by
persons belonging to the same local or
professional community or sharing a common
interest.

Differences Between Cooperative and
Commercial Banks
Commercial Banks

Cooperative Banks

Registration

Banking Regulation Act,
1949

The Co-operative Societies Act,
1904 of the concerned state.

Main Objective

To accept deposits from the
To accept deposits from
members and the public for the
public for the purpose of
purpose of providing loans to
lending to industry and
farmers and small businessmen
commerce.
with a motto of service.

Availability of
Funds

Massive funds

Limited funds

Area of
Operation

Operate over a larger area

Limited and mostly confined to
State.

Nationalisation

Nationalised banks

These are not nationalised banks.

Differences Between Cooperative and
Commercial Banks
Commercial Banks

Cooperative Banks

Merchant
Banking
Services

Provide merchant banking
services such as advising the Do not provide merchant
companies regarding the public banking services.
issue of shares.

Mutual
Funds

Do operate mutual funds

Basis of
operation

The basis of operations is on
Operates on the commercial
co-operative lines, i.e. service
principles. They operate to
to its members and the
earn a profit.
society.

Rate of
Interest

Provide a lesser rate of interest A little higher rate of interest
as compared to co-operative on deposits as compared to
banks.
commercial banks.

Do not operate mutual funds.

Some facts about
Cooperative banks in India
• Some cooperative banks in India are more forward
than many of the state and private sector banks.
• According to NAFCUB (National Federation of Urban
Co-operative Banks & Credit Societies Ltd.) the total
deposits & lending of Cooperative Banks in India is
much more than Old Private Sector Banks & also the
New Private Sector Banks.
• This exponential growth of Co operative Banks in India
is attributed mainly to their much better local
reach, personal interaction with customers, and their
ability to catch the nerve of the local clientele.

Regional Rural Banks (RRBs)
• RRB was introduced in India based on the
recommendations of Narasimham Committee.
• Initially 5 RRBs were started in UP, Rajasthan,
Haryana, Bihar and West Bengal on 2nd October,
1975.
• Each RRB has a maximum authorized capital of
Rs.5 cr.
• The shareholder-wise GoI/sponsor banks/State
Governments proportion and amount is 50:35:15
and Rs.11 billion: Rs.8 billion: Rs.3 billion
respectively in the financial year 2012.

Regional Rural Banks (RRBs)
• As on March 31, 2012, RRBs had a network of
16,914 branches.
• Under the agenda of financial inclusion,
73,000 villages that are not covered by any
bank and have a population of 2,000 and
above were to be covered by RRBs through
ICT-enabled Business Correspondents by
March 31, 2012.

National Bank for Agriculture and
Rural Development
• NABARD is an apex development bank with an
authorization for facilitating credit flow for
promotion
and
development
of
agriculture, small-scale industries, cottage and
village industries, handicrafts and other rural
crafts.
• It also has the mandate to support all other
allied economic activities in rural areas, promote
integrated and sustainable rural development
and secure prosperity of rural areas.

NABARD is entrusted with
• Providing refinance to lending institutions in rural
areas
• Bringing
about
or
promoting
institutions
development and Evaluating, monitoring and
inspecting the client banks

• Act as a coordinator in the operations of rural credit
institutions
• To help sectors of the economy that they have special
credit needs for eg. Housing, small business and
agricultural loans etc.

EXPORT-IMPORT (EXIM) BANK OF INDIA
• Export-Import Bank of India is the premier export
finance institution of the country, set up in 1982 under
the Export-Import Bank of India Act 1981.
• Government of India launched the institution with a
mandate, not just to enhance exports from India, but
to integrate the country’s foreign trade and investment
with the overall economic growth.
• Since its inception, Exim Bank of India has been both a
catalyst and a key player in the promotion of cross
border trade and investment.

Role of the EXIM Bank
• It is encouraging project exports from India.
• The Bank provides financial assistance by way of term
loans in Indian rupees / foreign currencies for setting
up new production facility, expansion / modernization /
upgradation of existing facilities and for acquisition of
production equipment/technology.
• Under its Export Marketing Finance programme, Exim
Bank supports Small and Medium Enterprises in their
export marketing efforts.

Role of the EXIM Bank
• The Bank has launched the Rural Initiative
Programme with the objective of linking
Indian rural industry to the global market.
• Programme for Research and development
• It also offers consultancy services like
agreements between Indian companies and
foreign companies for trading.

National Housing Bank (NHB)
•

The Sub-Group on Housing Finance for the Seventh Five Year Plan (1985-90)
identified the non-availability of long-term finance to individual households on
any significant scale as a major gap obstructing progress of the housing sector
and recommended the setting up of a national level institution.

•

The Committee of Secretaries considered' the recommendation and set up the
High Level Group under the Chairmanship of Dr. C. Rangarajan, the then
Deputy Governor, RBI to examine the proposal and recommended the setting
up of National Housing Bank as an autonomous housing finance institution.
The recommendations of the High Level Group were accepted by the
Government of India.

•

NHB was set up on July 9, 1988 under the National Housing Bank Act, 1987.

•

NHB is wholly owned by Reserve Bank of India, which contributed the entire
paid-up capital.

•

The Head Office of NHB is at New Delhi.

Objectives
• To promote a sound, healthy, viable and cost effective housing
finance system to cater to all segments of the population and
to integrate the housing finance system with the overall
financial system.
• To promote a network of dedicated housing finance
institutions to adequately serve various regions and different
income groups.
• To augment resources for the sector and channelise them for
housing.
• To make housing credit more affordable.

Objectives
• To regulate the activities of housing finance companies based
on regulatory and supervisory authority derived under the
Act.

• To encourage augmentation of supply of buildable land and
also building materials for housing and to upgrade the
housing stock in the country.
• To encourage public agencies to emerge as facilitators and
suppliers of serviced land, for housing.

Housing and Urban Development
Corporation Ltd. (HUDCO)
• It was incorporated on April 25, 1970 under the Companies
Act 1956, as a fully owned enterprise of the Government of
India.
• The establishment of HUDCO in 1970 as a sectoral
institution for comprehensively dealing with the problems
of growing housing shortages, rising number of slums and
for fulfilling the pressing needs of the economically weaker
section of the society was one of the significant steps in the
series of initiatives taken by Government.
• Thus the setting up of HUDCO was aimed at accelerating
the pace of construction and elimination of housing
shortages and for orderly development of urban centres.

Housing Development Finance
Corporation (HDFC)
• The Housing Development Finance Corporation Limited (HDFC) was
amongst the first to receive an ‘in principle’ approval from the
Reserve Bank of India (RBI) to set up a bank in the private sector, as
part of RBI’s liberalisation of the Indian Banking Industry in 1994.
• The bank was incorporated in August 1994 in the name of ‘HDFC
Bank Limited’, with its registered office in Mumbai, India.
• HDFC Bank commenced operations as a Scheduled Commercial
Bank in January 1995.
• HDFC Bank is headquartered in Mumbai.
• As on March 31, 2013, the Bank has a network of 3062 branches in
1845 cities across India.

• The Bank also has a network of 10743 ATMs across India.

Industrial Development Bank of India
(IDBI)
• It was established on 1-7-1964 as a wholly
owned subsidiary of RBI.
• The Bank offers personalized banking and
financial solutions to its clients in the retail
and corporate banking arena through its large
network of Branches and ATMs, spread across
length and breadth of India.
• Headquarters: Mumbai

Industrial Development Bank of India
(IDBI)
• Change of name of IDBI Ltd. to IDBI Bank Ltd.
– The Bank truly reflects the functions it is carrying
on, the name of the Bank was changed to IDBI Bank
Limited and the new name became effective from
May 07, 2008.

• Merger of IDBI Bank Ltd. with IDBI Ltd. (The
merger became effective from April 02, 2005.)
• Merger of United Western bank with IDBI
Ltd. (The merger came into effect on October
03, 2006.)

Developmental Activities of IDBI
• Promotional Activities
– Support to science and technology
– Energy conservation
– Common quality testing Centers for small
industries, etc.

• Technical Consultancy Organizations
– Advisory and consultancy services

• Entrepreneurship Development Institute
– Conducting studies or surveys of relevance to
industrial development.

Industrial Finance Corporation of
India (IFCI) Ltd.
• At the time of independence in 1947, India's
capital market was relatively under-developed.
• Although there was significant demand for new
capital, there was a dearth of providers.
• Merchant bankers and underwriting firms were
almost non-existent and commercial banks were
not equipped to provide long-term industrial
finance in any significant manner.

Industrial Finance Corporation of
India (IFCI) Ltd.
• It was established on July 1, 1948, as the first
Development Financial Institution in the country to
cater to the long-term finance needs of the industrial
sector.
• IFCI should directly access the capital markets for its
funds needs.
• It is with this objective that the constitution of IFCI was
changed in 1993 from a statutory corporation to a
company under the Indian Companies Act, 1956.
• Subsequently, the name of the company was also
changed to "IFCI Limited" with effect from October
1999.

Industrial Investment Bank of India
• The Industrial Investment Bank of India is a 100% government
of India-owned financial investment institution.
• It was established in 1971 by resolution of the Parliament of
India u/s 617 of the Companies Act.
• The bank was headquartered at Kolkata and has presence
in
New
Delhi, Mumbai, Chennai, Bengaluru, Ahmedabad and Guwaha
ti.
• The Industrial Reconstruction Corporation of India Ltd., set up
in 1971 for rehabilitation of sick industrial companies, was
reconstituted as Industrial Reconstruction Bank of India in
1985 under the IRBI Act, 1984.

Industrial Investment Bank of India
• With a view to converting the institution into a fullfledged development financial institution, IRBI was
incorporated under the Companies Act 1956, as
Industrial Investment Bank of India Ltd. (IIBI) in March
1997.
• IIBI offered a wide range of products and
services, including term loan assistance for project
finance, short duration non-project asset-backed
financing, working capital/other short-term loans to
companies,
equity
subscription,
asset
credit, equipment finance and investments in capital
market and money market instruments.

Industrial Credit and Investment
Corporation of India Bank
• ICICI was founded on 5th January 1955 as a public
limited company with government supported and
under the sponsorship of the world bank.
• ICICI established at the head quarters of the
Bombay with a specific purpose of assisting the
industries in private sector.
• It started its operations as a wholly privately
owned institutions but with nationalisation of life
insurance business.
• The LIC of India became its major share holder.

Objectives and functions of ICICI
• Encouraging and promoting ownership: The corporation aim is to
encourage to come forward to establish industries and promote the
private ownership.
• Underwriting issues of shares and Debentures: There is dynamo of
getting shares to such fail companies it giving the underwriting
commission to issue of shares and Debentures.
• Granting required loans in rupees repayable over a period of 15
years: Granting term loans to capital assets by purchase of land,
machinery. If grants the money or cash to the companies.
• Making foreign currency for payments: Making similar forms of
foreign currency for payments of imported capital equipment and
technical service.
– Furnishing technical and administrative assistance to industries
– Expansion and modernisation of such enterprises.

Small Industries Development
Bank of India
• Small Industries Development Bank of India
(SIDBI), set up on April 2, 1990 under an Act of
Indian Parliament, is the Principal Financial
Institution for the Promotion, Financing and
Development of the Micro, Small and Medium
Enterprise (MSME) sector and for Coordination of the functions of the institutions
engaged in similar activities.

Four basic objectives are set out in
the SIDBI Charter
•
•
•
•

Financing
Promotion
Development
Co-ordination

Infrastructure Development
Finance Co. (IDFC)
• It was born out of the need for a specialized
financial intermediary for infrastructure.
• Incorporated on January 30, 1997 in
Chennai, and it was set up on the
recommendations of the 'Expert Group on
Commercialisation of Infrastructure Projects'
under the Chairmanship of Dr. Rakesh Mohan.

Banking Theory

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