jaiib_presentation2_nov08 (1).ppt jaiib_presentation2_
- 1. Principles & Practices of Principles & Practices of Banking Banking Module A Module A Indian Financial System Indian Financial System K Chockalingam K Chockalingam IIBF IIBF
- 2. Financial System Financial System An institutional framework existing in a An institutional framework existing in a country to enable financial transactions country to enable financial transactions Three main parts Three main parts Financial assets (loans, deposits, bonds, equities, etc.) Financial assets (loans, deposits, bonds, equities, etc.) Financial institutions (banks, mutual funds, insurance Financial institutions (banks, mutual funds, insurance companies, etc.) companies, etc.) Financial markets (money market, capital market, forex Financial markets (money market, capital market, forex market, etc.) market, etc.) Regulation is another aspect of the financial Regulation is another aspect of the financial system (RBI, SEBI, IRDA, FMC) system (RBI, SEBI, IRDA, FMC)
- 3. Financial assets/instruments Financial assets/instruments Enable channelising funds from surplus units to Enable channelising funds from surplus units to deficit units deficit units There are instruments for savers such as deposits, There are instruments for savers such as deposits, equities, mutual fund units, etc. equities, mutual fund units, etc. There are instruments for borrowers such as loans, There are instruments for borrowers such as loans, overdrafts, etc. overdrafts, etc. Like businesses, governments too raise funds Like businesses, governments too raise funds through issue of bonds, Treasury bills, etc. through issue of bonds, Treasury bills, etc. Instruments like PPF, KVP, etc. are available to Instruments like PPF, KVP, etc. are available to savers who wish to lend money to the government savers who wish to lend money to the government
- 4. Money Market Instruments Money Market Instruments Call money- money borrowed/lent for a day. No Call money- money borrowed/lent for a day. No collateral is required. collateral is required. Inter-bank term money- Borrowings among Inter-bank term money- Borrowings among banks for a period of more than 7 days banks for a period of more than 7 days Treasury Bills- short term instruments issued by Treasury Bills- short term instruments issued by the Union Govt. to raise money. Issued at a the Union Govt. to raise money. Issued at a discount to the face value discount to the face value Certificates of Deposit- Issued by banks to raise Certificates of Deposit- Issued by banks to raise money. Minimum value is Rs. 1 lakh, tradable in money. Minimum value is Rs. 1 lakh, tradable in the market the market CDs can be issued by banks/FIs CDs can be issued by banks/FIs
- 5. Money Market Instruments (2) Money Market Instruments (2) Commercial Paper (CPs) are issued by Commercial Paper (CPs) are issued by corporates to raise short term money corporates to raise short term money Issued in multiple of Rs.25 lakhs, can be Issued in multiple of Rs.25 lakhs, can be issued by companies with a net worth of issued by companies with a net worth of at least Rs. 5 crores at least Rs. 5 crores CP is an unsecured promissory note CP is an unsecured promissory note privately placed with investors at a privately placed with investors at a discount rate to face value. The maturity discount rate to face value. The maturity of CP is between 3 and 6 months of CP is between 3 and 6 months
- 6. Financial Institutions Financial Institutions Includes institutions and mechanisms which Includes institutions and mechanisms which Affect generation of savings by the community Affect generation of savings by the community Mobilisation of savings Mobilisation of savings Effective distribution of savings Effective distribution of savings Institutions are banks, insurance Institutions are banks, insurance companies, mutual funds- companies, mutual funds- promote/mobilise savings promote/mobilise savings Individual investors, industrial and trading Individual investors, industrial and trading companies- borrowers companies- borrowers
- 7. Financial Markets Financial Markets Money Market- for short-term funds Money Market- for short-term funds (less than a year) (less than a year) Organized (Banks) Organized (Banks) Unorganized (money lenders, chit funds, etc.) Unorganized (money lenders, chit funds, etc.) Capital Market- for long-term funds Capital Market- for long-term funds Primary Issues Market Primary Issues Market Stock Market Stock Market Bond Market Bond Market
- 8. Organized Money Market Organized Money Market Call money market Call money market Bill Market Bill Market Treasury bills Treasury bills Commercial bills Commercial bills Bank loans (short-term) Bank loans (short-term) Organized money market comprises Organized money market comprises RBI, banks (commercial and co- RBI, banks (commercial and co- operative) operative)
- 9. Call money market (1) Call money market (1) It deals with one-day loans (overnight, to be It deals with one-day loans (overnight, to be precise) called call loans or call money precise) called call loans or call money Participants are mostly banks. Also called inter- Participants are mostly banks. Also called inter- bank call money market. bank call money market. The borrowing is exclusively limited to banks, The borrowing is exclusively limited to banks, who are temporarily short of funds. who are temporarily short of funds. On the lending side, besides banks with excess On the lending side, besides banks with excess cash and as special cases few FIs like LIC, UTI cash and as special cases few FIs like LIC, UTI All others have to keep their funds in term All others have to keep their funds in term deposits with banks to earn interest deposits with banks to earn interest
- 10. Call money market (2) Call money market (2) Call loans are generally made on a clean basis- i.e. Call loans are generally made on a clean basis- i.e. no collateral is required no collateral is required The main function of the call money market is to The main function of the call money market is to redistribute the pool of day-to-day surplus funds redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of banks among other banks in temporary deficit of funds of funds The call market helps banks earn interest and yet The call market helps banks earn interest and yet improve their liquidity improve their liquidity It is a highly competitive and sensitive market It is a highly competitive and sensitive market It acts as a good indicator of the liquidity position It acts as a good indicator of the liquidity position
- 11. Bill Market Bill Market Treasury Bill market- Also called the T-Bill market Treasury Bill market- Also called the T-Bill market – These bills are short-term liabilities (91-day, 182-day, These bills are short-term liabilities (91-day, 182-day, 364-day) of the Government of India 364-day) of the Government of India – It is an IOU of the government, a promise to pay the It is an IOU of the government, a promise to pay the stated amount after expiry of the stated period from stated amount after expiry of the stated period from the date of issue the date of issue – They are issued at discount to the face value and at They are issued at discount to the face value and at the end of maturity, the face value is paid the end of maturity, the face value is paid – The rate of discount and the corresponding issue The rate of discount and the corresponding issue price are determined at each auction price are determined at each auction Commercial Bill market- Not as developed in Commercial Bill market- Not as developed in India as the T-Bill market India as the T-Bill market
- 12. Indian Banking System Indian Banking System Central Bank (Reserve Bank of India) Central Bank (Reserve Bank of India) Commercial banks Commercial banks Co-operative banks Co-operative banks Banks can be classified as: Banks can be classified as: Scheduled (Second Schedule of RBI Act, 1934) Scheduled (Second Schedule of RBI Act, 1934) Non-Scheduled Non-Scheduled Scheduled banks can be classified as: Scheduled banks can be classified as: Public Sector Banks Public Sector Banks Private Sector Banks (Old and New) Private Sector Banks (Old and New) Foreign Banks Foreign Banks Regional Rural Banks Regional Rural Banks
- 13. Indigenous bankers Indigenous bankers Individual bankers like Shroffs, Seths, Sahukars, Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. Combine trading and other business Mahajans, etc. Combine trading and other business with money lending. with money lending. Vary in size from petty lenders to substantial Shroffs Vary in size from petty lenders to substantial Shroffs Act as money changers and finance internal trade Act as money changers and finance internal trade through hundis (internal bills of exchange) through hundis (internal bills of exchange) Indigenous banking is usually family owned Indigenous banking is usually family owned business employing own working capital business employing own working capital At one point, it was estimated that IB met about At one point, it was estimated that IB met about 90% of the financial requirements of rural India 90% of the financial requirements of rural India
- 14. RBI and indigenous bankers (1) RBI and indigenous bankers (1) Methods employed by the indigenous bankers are Methods employed by the indigenous bankers are traditional with vernacular system of accounting. traditional with vernacular system of accounting. RBI suggested that bankers give up their trading RBI suggested that bankers give up their trading and commission business and switch over to the and commission business and switch over to the western system of accounting. western system of accounting. It also suggested that these bankers should It also suggested that these bankers should develop the deposit side of their business develop the deposit side of their business Ambiguous character of the hundi should stop Ambiguous character of the hundi should stop Some of them should play the role of discount Some of them should play the role of discount houses (buy and sell bills of exchange) houses (buy and sell bills of exchange)
- 15. RBI and indigenous bankers (2) RBI and indigenous bankers (2) IB should have their accounts audited by certified IB should have their accounts audited by certified chartered accountants chartered accountants Submit their accounts to RBI periodically Submit their accounts to RBI periodically As against these obligations the RBI promised to As against these obligations the RBI promised to provide them with privileges offered to commercial provide them with privileges offered to commercial banks including banks including – Being entitled to borrow from and rediscount bills with Being entitled to borrow from and rediscount bills with RBI RBI The IB declined to accept the restrictions as well as The IB declined to accept the restrictions as well as compensation from the RBI compensation from the RBI Therefore, the IB remain out of RBI’s purview Therefore, the IB remain out of RBI’s purview
- 16. Development Oriented Development Oriented Banking Banking Historically, close association between banks and Historically, close association between banks and some traditional industries- cotton textiles in the some traditional industries- cotton textiles in the west, jute textiles in the east west, jute textiles in the east Banking has not been mere acceptance of deposits Banking has not been mere acceptance of deposits and lending money to include development banking and lending money to include development banking Lead Bank Scheme- opening bank offices in all Lead Bank Scheme- opening bank offices in all important localities important localities Providing credit for development of the district Providing credit for development of the district Mobilising savings in the district. ‘Service area Mobilising savings in the district. ‘Service area approach’ approach’
- 17. Progress of banking in India (1) Progress of banking in India (1) Nationalisation of banks in 1969: 14 banks were Nationalisation of banks in 1969: 14 banks were nationalised nationalised Branch expansion: Increased from 8260 in 1969 Branch expansion: Increased from 8260 in 1969 to 68500 in 2005 to 68500 in 2005 Population served per branch has come down Population served per branch has come down from 64000 to 15000 from 64000 to 15000 A rural branch office serves 15 to 25 villages A rural branch office serves 15 to 25 villages within a radius of 16 kms within a radius of 16 kms Still only 32,180 villages out of 5 lakh have been Still only 32,180 villages out of 5 lakh have been covered covered
- 18. Progress of banking in India Progress of banking in India (2) (2) Deposit mobilisation: Deposit mobilisation: 1951-1971 (20 years)- 700% or 7 times 1951-1971 (20 years)- 700% or 7 times 1971-1991 (20 years)- 3260% or 32.6 times 1971-1991 (20 years)- 3260% or 32.6 times 1991- 2006 (11 years)- 1100% or 11 times 1991- 2006 (11 years)- 1100% or 11 times Expansion of bank credit: Growing at 20-30% Expansion of bank credit: Growing at 20-30% thanks to rapid growth in industrial and thanks to rapid growth in industrial and agricultural output agricultural output Development oriented banking: priority Development oriented banking: priority sector lending sector lending
- 19. Progress of banking in India (3) Progress of banking in India (3) Diversification in banking: Banking has Diversification in banking: Banking has moved from deposit and lending to moved from deposit and lending to Merchant banking and underwriting Merchant banking and underwriting Mutual funds Mutual funds Retail banking Retail banking ATMs ATMs Anywhere banking Anywhere banking Internet banking Internet banking Venture capital funds Venture capital funds Factoring- Factoring-
- 20. Profitability of Profitability of Banks(1) Banks(1) Reforms has shifted the focus of banks Reforms has shifted the focus of banks from being development oriented to from being development oriented to being commercially viable being commercially viable Prior to reforms, banks were not Prior to reforms, banks were not profitable and in fact made losses for profitable and in fact made losses for the following reasons: the following reasons: Declining interest income Declining interest income Increasing cost of operations Increasing cost of operations
- 21. Profitability of banks (2) Profitability of banks (2) Declining interest income was for the Declining interest income was for the following reasons: following reasons: High proportion of deposits impounded for High proportion of deposits impounded for CRR and SLR, earning relatively low interest CRR and SLR, earning relatively low interest rates rates System of directed lending System of directed lending Political interference- leading to huge NPAs Political interference- leading to huge NPAs Rising costs of operations for banks was Rising costs of operations for banks was because of several reasons: economic and because of several reasons: economic and political political
- 22. Profitability of Banks (3) Profitability of Banks (3) As per the Narasimham Committee (1991), the As per the Narasimham Committee (1991), the reasons for rising costs of banks were: reasons for rising costs of banks were: Uneconomic branch expansion Uneconomic branch expansion Heavy recruitment of employees Heavy recruitment of employees Growing indiscipline and inefficiency of staff due to Growing indiscipline and inefficiency of staff due to trade union activities trade union activities Low productivity Low productivity Declining interest income and rising cost of Declining interest income and rising cost of operations of banks led to low profitability in the operations of banks led to low profitability in the 90s 90s
- 23. Bank profitability: Suggestions Bank profitability: Suggestions Some suggestions made by Narasimham Some suggestions made by Narasimham Committee are: Committee are: Set up an Asset Reconstruction Fund to take Set up an Asset Reconstruction Fund to take over doubtful debts over doubtful debts SLR to be reduced to 25% of total deposits SLR to be reduced to 25% of total deposits CRR to be reduced to 3 to 5% of total CRR to be reduced to 3 to 5% of total deposits deposits Banks to get more freedom to set minimum Banks to get more freedom to set minimum lending rates lending rates Share of priority sector credit be reduced to Share of priority sector credit be reduced to 10% from 40% 10% from 40%
- 24. Suggestions (cont’d) Suggestions (cont’d) All concessional rates of interest should be All concessional rates of interest should be removed removed Banks should go for new sources of funds such as Banks should go for new sources of funds such as Certificates of Deposits Certificates of Deposits Branch expansion should be carried out strictly Branch expansion should be carried out strictly on commercial principles on commercial principles Diversification of banking activities Diversification of banking activities Almost all suggestions of the Narasimham Almost all suggestions of the Narasimham Committee have been accepted and implemented Committee have been accepted and implemented in a phased manner since the onset of Reforms in a phased manner since the onset of Reforms
- 25. NPA Management NPA Management The Narasimham Committee The Narasimham Committee recommendations were made, among recommendations were made, among other things, to reduce the Non- other things, to reduce the Non- Performing Assets (NPAs) of banks Performing Assets (NPAs) of banks To tackle this, the government enacted To tackle this, the government enacted the Securitization and Reconstruction of the Securitization and Reconstruction of Financial Assets and Enforcement of Financial Assets and Enforcement of Security Act (SARFAESI) Act, 2002 Security Act (SARFAESI) Act, 2002 Enabled banks to realise their dues Enabled banks to realise their dues without intervention of courts without intervention of courts
- 26. SARFAESI Act SARFAESI Act Enables setting up of Asset Management Companies to Enables setting up of Asset Management Companies to acquire NPAs of any bank or FI (SASF, ARCIL are acquire NPAs of any bank or FI (SASF, ARCIL are examples) examples) NPAs are acquired by issuing debentures, bonds or any NPAs are acquired by issuing debentures, bonds or any other security other security As a second creditor can serve notice to the defaulting As a second creditor can serve notice to the defaulting borrower to discharge his/her liabilities in 60 days borrower to discharge his/her liabilities in 60 days Failing which the company can take possession of Failing which the company can take possession of assets, takeover the management of assets and assets, takeover the management of assets and appoint any person to manage the secured assets appoint any person to manage the secured assets Borrowers have the right to appeal to the Debts Borrowers have the right to appeal to the Debts Tribunal after depositing 50% of the amount claimed Tribunal after depositing 50% of the amount claimed by the second creditor by the second creditor
- 27. The Indian Capital Market (1) The Indian Capital Market (1) Market for long-term capital. Demand Market for long-term capital. Demand comes from the industrial, service sector comes from the industrial, service sector and government and government Supply comes from individuals, corporates, Supply comes from individuals, corporates, banks, financial institutions, etc. banks, financial institutions, etc. Can be classified into: Can be classified into: Gilt-edged market Gilt-edged market Industrial securities market (new issues and Industrial securities market (new issues and stock market) stock market)
- 28. The Indian Capital Market (2) The Indian Capital Market (2) Development Financial Institutions Development Financial Institutions Industrial Finance Corporation of India (IFCI) Industrial Finance Corporation of India (IFCI) State Finance Corporations (SFCs) State Finance Corporations (SFCs) Industrial Development Finance Corporation (IDFC) Industrial Development Finance Corporation (IDFC) Financial Intermediaries Financial Intermediaries Merchant Banks Merchant Banks Mutual Funds Mutual Funds Leasing Companies Leasing Companies Venture Capital Companies Venture Capital Companies
- 29. Industrial Securities Market Industrial Securities Market Refers to the market for shares and Refers to the market for shares and debentures of old and new companies debentures of old and new companies New Issues Market- also known as the New Issues Market- also known as the primary market- refers to raising of new primary market- refers to raising of new capital in the form of shares and capital in the form of shares and debentures debentures Stock Market- also known as the secondary Stock Market- also known as the secondary market. Deals with securities already issued market. Deals with securities already issued by companies by companies
- 30. Financial Intermediaries (1) Financial Intermediaries (1) Mutual Funds- Promote savings and mobilise Mutual Funds- Promote savings and mobilise funds which are invested in the stock market funds which are invested in the stock market and bond market and bond market Indirect source of finance to companies Indirect source of finance to companies Pool funds of savers and invest in the stock Pool funds of savers and invest in the stock market/bond market market/bond market Their instruments at saver’s end are called units Their instruments at saver’s end are called units Offer many types of schemes: growth fund, Offer many types of schemes: growth fund, income fund, balanced fund income fund, balanced fund Regulated by SEBI Regulated by SEBI
- 31. Financial Intermediaries (2) Financial Intermediaries (2) Merchant banking- manage and underwrite new Merchant banking- manage and underwrite new issues, undertake syndication of credit, advise issues, undertake syndication of credit, advise corporate clients on fund raising corporate clients on fund raising Subject to regulation by SEBI and RBI Subject to regulation by SEBI and RBI SEBI regulates them on issue activity and SEBI regulates them on issue activity and portfolio management of their business. portfolio management of their business. RBI supervises those merchant banks which are RBI supervises those merchant banks which are subsidiaries or affiliates of commercial banks subsidiaries or affiliates of commercial banks Have to adopt stipulated capital adequacy norms Have to adopt stipulated capital adequacy norms and abide by a code of conduct and abide by a code of conduct
- 32. Conclusion Conclusion There are other financial intermediaries such There are other financial intermediaries such as NBFCs, Venture Capital Funds, Hire and as NBFCs, Venture Capital Funds, Hire and Leasing Companies, etc. Leasing Companies, etc. India’s financial system is quite huge and India’s financial system is quite huge and caters to every kind of demand for funds caters to every kind of demand for funds Banks are at the core of our financial system Banks are at the core of our financial system and therefore, there is greater expectation and therefore, there is greater expectation from them in terms of reaching out to the from them in terms of reaching out to the vast populace as well as being competitive. vast populace as well as being competitive.
- 33. hank ou hank ou K Chockalingam K Chockalingam TEL : 9322295394 TEL : 9322295394 e.mail: chockalingam_2000@yahoo.com e.mail: chockalingam_2000@yahoo.com chockalingam@iibf.org.in chockalingam@iibf.org.in