Introduction to commerccial banking
- 1. Introduction to Banking Industry & Regulation Dr. Prachi Beriwala Associate Professor School of Management Presidency University
- 2. Contents: • History of Banking • Evolution of Commercial Banking in India • Goals & functions of Bank Regulation • Trends in federal Legislation and Regulation • General Classification of Banks.
- 3. Meaning of commercial banks • A commercial bank is a financial institution which performs the functions of accepting deposits from the general public and giving loans for investment with the aim of earning profit. • In fact, commercial banks, as their name suggests, axe profit-seeking institutions, i.e., they do banking business to earn profit. Accepting deposits by paying less rate of interest Giving loans for investment by Charging High rate of Interest Earning profit (Difference between both the interests)
- 4. Types of commercial banks in India Commercial Banks Public Sector banks Private Sector banks Foreign banks
- 6. Pre Independence Period (1786-1947) • The first bank of India was the “Bank of Hindustan”, established in 1770 and located in the then, Indian capital, Calcutta. However, this bank failed to work and ceased operations in 1832. 1770 •The General Bank of India (1786-1791) •Oudh Commercial Bank (1881-1958) •Bank of Bengal (1809) •Bank of Bombay (1840) •Bank of Madras (1843) Various Banks established in India • During the British rule in India, The East India Company had established three banks: Bank of Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks. These three banks were later merged into one single bank in 1921, which was called the “Imperial Bank of India.” 1921 1955= The Imperial Bank of India was later nationalised and was named The State Bank of India, which is currently the largest Public sector Bank.
- 7. Pre independence Banks in India Bank Name Year of Establishment Allahabad Bank 1865 Punjab National Bank 1894 Bank of India 1906 Central Bank of India 1911 Canara Bank 1906 Bank of Baroda 1908
- 8. Reason for failure of Banks during pre- Independence Era Indian account holders had become fraud- prone Lack of machines and technology Human errors & time-consuming Fewer facilities Lack of proper management skills
- 9. Pre Nationalised Period (1947-1969) • At the time, when India got independence, all the major banks of the country were led privately which was a cause of concern as the people belonging to rural areas were still dependent on money lenders for financial assistance. • With an aim to solve this problem, the then Government decided to nationalise the Banks. These banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of India was nationalised in 1949.
- 10. Post Nationalisation period (1969-1991) After State Bank of India was formed in 1955 14 banks whose national deposits were more than 50 crores were nationalised between this time duration. Allahabad Bank Bank of India Bank of Baroda Bank of Maharashtra Central Bank of India Canara Bank Dena Bank Indian Overseas Bank Indian Bank Punjab National Bank Syndicate Bank Union Bank of India United Bank UCO Bank
- 11. Post Nationalisation period (1969-1991) In the year 1980, another 6 banks were nationalised Andhra Bank Vijaya Bank Corporation Bank Punjab & Sind Bank New Bank of India Oriental Bank of Comm seven subsidiaries of SBI which were nationalised in 1959 State Bank of Patiala State Bank of Hyderabad State Bank of Bikaner & Jaipur State Bank of Mysore State Bank of Travancore State Bank of Saurashtra State Bank of Indore
- 12. Impact of Nationalisation increase in funds =increasing the economic condition of the country Increased Efficiency evolution of the banking sector Better employment opportunity Helped in boosting the rural and agricultural sector work efficiency had increased
- 13. Regional Rural Banks • On the recommendation of M.Narsimhan committee, RRBs (Regional Rural Banks) were formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve large unserved population of rural areas and promoting financial inclusion. With a view to meet the specific requirement from the different sector (i.e. agriculture, housing, foreign trade, industry) some apex level banking institutions were also setup like • → NABARD (est. 1982) • → EXIM (est. 1982) • → NHB (est. 1988) • → SIDBI (est. 1990)
- 14. Recommendations of Naramsiham Report-I • 1. Establishment of a four-tier hierarchy for the banking structure consisting of three to four large banks with SBI at the top. • 2. The private sector banks should be treated equally with the public sector banks and govt. should contemplate to nationalize any such banks. • 3. The ban on setting new banks in private sector should be lifted and the licensing policy in the branch expansion must be abolished. • 4. The govt. has to be more liberal in the expansion of foreign bank branches and also foreign operations of Indian banks should be rationalized. • 5. The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should be progressively brought down from 1991-92.
- 15. 6. The directed credit program should be re-examined and the priority sector should be redefined to comprise small and marginal farmers, the tiny industrial sector, small business operators and weaker sections. 7. Banking industry should follow BIS/Basel norms for capital adequacy within three years. 8. Interest rates should be deregulated to suit the market conditions. 9. The govt. should tighten the prudential norms for the commercial banks. 10. The competition in lending between DFIs and banks should be increased and a shift from consortium lending to syndicated lending should be made. 11. In respect of doubtful debts, provisions should be created to the extent of 100 percent of the security shortfall. 12. The govt. share of public sector banks should be disinvested to a certain percentage like in case of any other PSU. 13. Each public sector banks should set up at least one rural banking subsidiary and they should be treated at par with RRBs.
- 16. Banking from 1991- till date
- 17. In 1990, due to liberlisation licenses to a small number of private banks were given, which came to be known as New Generation tech-savvy banks like Global Trust Bank, Axis bank (UTI then),ICICI Bank and HDFC Bank In 1991,on the recommendation of the Narsimhan committee RBI gave license to 10 private entities, of which 6 are survived like ICICI, HDFC, Axis Bank, IDBI, Indus, DCB In 1998,on the recommendation of the Narsimhan committee,RBI gave license to Kotak Mahindra Bank (2003) &Yes Bank (2004) In 2013-14, 3rd round of bank licensing took place. And in 2014 IDFC bank and Bandhan Bank emerged In order to further financial inclusion, RBI also proposed to set up 2 kind of banks i.e. Payment Banks and Small Banks
- 18. Recommendations of Naramsiham Report-II • 1. The committee favored the merger of strong public sector banks and closure of some weaker banks if their rehabilitation was not possible. • 2. It recommended corrective measures like recapitalization is undertaken for weak banks and if required such banks should be closed down. • 3. The committee had also suggested an amicable golden handshake scheme for surplus banking sector staff. • 4. Suggesting a possible short term solution to weak banks, the report observed that the narrow banks could be allowed as a mean of facilitating their rehabilitation.
- 19. • 5. Expressing concern over rising non-performing assets, the committee provided the idea of setting up an asset reconstruction fund to tackle the problem of huge nonperforming assets (NPAs) of banks under public sector • 6. The report emphasized the need of enhancement of capital adequacy norms from the present level of 8 percent but did not specify the amount to which it should be raised. • 7. The Banking Sector Reform Committee further suggested that existence of a healthy competition between public sector banks and private sector banks was essential. • 8. The report envisaged flow of capital to meet higher and unspecified levels of capital adequacy and reduction of targeted credit.
- 20. PRESENT SCENARIO OF BANKING INDUSTRY Improved management & control Healthy Competition Decrease in non performing loans Implement ation of latest technology Increased profitability of Banks Reward linked performance Excellence provision of service to General public
- 21. Evolution of banking ‘Bank’ word is derived from the words ‘ Bancus ’ or ‘ Banque ’ which means a bench. A simple form of banking was practiced by the ancient temples of Egypt, Babylonia, the ancient temples of Egypt, Babylonia, and Greece, which loaned at high rates of interest for the gold and silver deposited for safekeeping
- 23. How banking system emerged in India? • Kautilya, in 330 B.C. recognised the importance of accounting methods in economic enterprises. He developed Book-keeping rules to record and classify economic data. He also linked the successful enforcement of rules and regulations to their clarity, consistency and completeness. He also emphasised the role of ethics in the economic activities.
- 24. Banking Regulations The Banking Regulation Act 1949 contains various provisions’ governing the Commercial Banks in India. The Act was initially known as Banking Companies Act, 1949. It was passed in 1949 to consolidate and amend the laws relating to banking companies. The act was changed to Banking Regulation Act, 1949 from 1st March, 1966. Right from the definition of the word banking, its licensing, functioning, capital and reserve requirements, banking operations and management structure, liquidity provisions and profit distribution and bank inspection down to the take-overs and amalgamation of the banks and their liquidation have all been extensively covered under the Act.
- 25. Objectives of Banking Regulation Act, 1949 The objective of Banking Regulation Act, 1949 is to: • Provide specific legislation containing comprehensive provisions, particularly to the business of banking in India • Prevent such bank failures by prescribing minimum capital requirements • Ensure the balanced development of banking companies • Give powers to RBI to approve the appointment, reappointment, and removal of the chairman, directors, and officers of the banks • Safeguard the Interests of Depositors • facilitate strengthening the banking system of the country
- 26. Importance of Banking regulation act, 1949 Gives power to RBI to license banks & also regulation of shareholding Gives power to RBI to conduct appointment of boards and management members of Banks RBIU issues directives on banking policy in the interest of public good and can impose penalties, if required It lays down directions for audits to be managed by RBI, and control merging & regulation Co-operative banks were incorporated under this act in the amendment of 1965
- 27. Functions of Bank regulation • Monetary policy • Regulation and supervision of the banking and non-banking financial institutions, including credit information companies • Regulation of money, forex and government securities markets as also certain financial derivatives • Debt and cash management for Central and State Governments • Management of foreign exchange reserves • Foreign exchange management—current and capital account management • Banker to banks • Banker to the Central and State Governments • Oversight of the payment and settlement systems • Currency management • Developmental role • Research and statistics
- 28. Classification of banks in India
- 29. Public sector banks • These are the nationalised banks and account for more than 75 per cent of the total banking business in the country. Majority of stakes in these banks are held by the government. In terms of volume, SBI is the largest public sector bank in India and after its merger with its 5 associate banks (as on 1st April 2017) it has got a position among the top 50 banks of the world
- 30. Private sector banks • These include banks in which major stake or equity is held by private shareholders. All the banking rules and regulations laid down by the RBI will be applicable on private sector banks as well.
- 31. Foreign Bank • A foreign bank is one that has its headquarters in a foreign country but operates in India as a private entity. These banks are under the obligation to follow the regulations of its home country as well as the country in which they opearte • Citi Bank. • HSBC India • Deutsche Bank • Royal Bank of Scotland • DBS Bank • Barclays Bank • Bank of America • Bank of Bahrain and Kuwait • ANZ Bank
- 32. Number of Banks in India, as on 2020 Number of Public sector Banks in India are 12 Number of Private sector Banks in India are 22 Number of Foreign Banks in India are 45
- 33. Small Finance Banks • This is a niche banking segment in the country and is aimed to provide financial inclusion to sections of the society that are not served by other banks. The main customers of small finance banks include micro industries, small and marginal farmers, unorganized sector entities and small business units. These are licensed under Section 22 of the Banking Regulation Act, 1949 and are governed by the provisions of RBI Act, 1934 and FEMA Au Small Finance Bank Ltd Capital Small Finance Bank Ltd. Fincare Small Finance Bank Ltd. Equitas Small Finance Bank Ltd. ESAF Small Finance Bank Ltd. Suryoday Small Finance Bank Ltd. Ujjivan Small Finance Bank Ltd. Utkarsh Small Finance Bank Ltd. North East Small Finance Bank Ltd. Jana Small Finance Bank Ltd.
- 34. Regional rural Banks • These are also scheduled commercial banks but they are established with the main objective of providing credit to weaker sections of the society like agricultural laborers, marginal farmers and small enterprises. They usually operate at regional levels in different states of India and may have branches in selected urban areas as well. Other important functions carried out by RRBs include- • Providing banking and financial services to rural and semi-urban areas • Government operations like disbursement of wages of MGNREGA workers, distribution of pensions, etc. • Para-Banking facilities like debit cards, credit cards and locker facilities
- 35. Payment Banks • This is a relatively new model of bank in the Indian Banking industry. It was conceptualised by the RBI and is allowed to accept a restricted deposit. The amount is currently limited to Rs. 1 Lakh per customer. They also offer services like ATM cards, debit cards, net-banking and mobile-banking. “Banking at the doorstep” is the phrase. Six payment banks in India as on 2020 are: • Airtel Payment Bank • Indian Post Payments Bank • Fino Payments Bank • Paytm Payments Bank • Jio Payments Bank • NSDL Payments Bank(yet to start their operations)
- 36. Co-operative banks • Co-operative banks are registered under the Cooperative Societies Act, 1912 and they are run by an elected managing committee. These work on no-profit no-loss basis and mainly serve entrepreneurs, small businesses, industries and self-employment in urban areas. In rural areas, they mainly finance agriculture-based activities like farming, livestock and hatcheries. Two types of banks operating under this head are: • Urban Co-operative banks • Rural Co-operative banks
- 37. Scheduled banks • Scheduled banks are covered under the 2nd Schedule of the Reserve Bank of India Act, 1934, to be called as Schedule bank: • A bank that has a paid-up capital of Rs. 5 Lakh and above qualifies for the schedule bank category • A bank requires to satisfy the central bank that its affairs are not carried out in a way that causes harm to the interest of the depositors • A bank should be a corporation rather than a sole-proprietorship or partnership firm Non-scheduled banks • Non-scheduled banks refer to the local area banks which are not listed in the Second Schedule of Reserve Bank of India. Non-Scheduled Banks are also required to maintain the cash reserve requirement, not with the RBI, but with them.
- 38. LAWS RELATED TO BANKING SECTOR Companies Act, 1956 Banking Companies act Negotiable instruments, 1881 SARFAESI Act, 2002 Banker’s Book evidence act, 1891 Regional Rural Bank, 1976 SBI Act, 1955