Economy Lecture 2

1. Theory: 1. evolution of banking system2. Nationalization3. SLR, CRR, PSL4. Narsimhan I, II5. MCQ

2. Current:1. New license (brief)2. Mahila Bank (Detail)3. MCQ

3. Mains answer writing

Financial intermediaries

• Barter => Double coincidence of wants• Money => circular flow of income• Financial intermediaries• Banking institutions• Non-banking institutions

Evolution (Pre independence)

Firangi Banks•Bombay, Bengal, Madras Presidency=> Imperial Bank’21 =>SBI’55•British Army, BureaucratsSwadeshi Banks•Allahabad Bank, PNB, BoB, Canara•Focus: Foreign trade, Merchants•Local=>Shroff, Moneylenders. Financial inclusion _____.

Evolution (Pre independence)

Birth of RBI: why?1.By 30s: 1200+ banks2.Only company law3.30s Great depression =>defaults4.’34 RBI

Evolution (Post-independence)

• SBI, ICICI, PNB, BoB.• Focus: merchant, industrial houses• Branch increase yes• Rural penetration no• FYP achievement • Nexus of industrial houses vs banks.

Nationalization of Banks

Financial inclusion:•RRB•Cooperative banks•NABARD

55 1 Imperial bank69 14 50 cr. deposit80 6 200 Andra,

Vijaya, Oriental

Mock Question

• Skip• Attempt• Mark n review

Mock Question (2013)

Q. In context of independent India's economy, which one of the following was the earlier event to take place?A.Nationalization of insurance companyB.Nationalization of state bank of IndiaC.Enactment of Banking regulation ActD.Introduction of first Five year plan.

1. Skip 2. Attempt 3. Mark n Review

Mock Question (2009)

Q. In context of independent India's economy, which one of the following was the earlier event to take place?A.Nationalization of insurance company: 55-56B.Nationalization of state bank of India: 55C.Enactment of Banking regulation Act: 49D.Introduction of first Five year plan: 51

Nationalization of Banks: problems

• Administered interest rate• political interference, loan mela=>NPA=>Civil Court.• Trade union, VRS• high reserve requirement: CRR 15%, SLR 40%=> • hard to get loans for business=> BoP crisis

Nationalization: high reserve ratio

Deposit Examples

Time Deposit FDRDDemand Deposit CASANet Demand and Time Liabilities (NDTL)

+100 cr.

• NBFC cannot accept Demand Deposit• CRR, SLR computed on NDTL

Nationalization: high reserve ratio: CRRDeposit Examples

Time Deposit FDRD

Demand Deposit CASA

Net Demand and Time Liabilities (NDTL)

+100 cr.

Reserve

CRR (min 3%) (-) 15 [no profit]

Cash Reserve Ratio•Both sch. & non•Penalty•No profit. Except 1999.•Right now 4%

Nationalization: high reserve ratio SLRDeposit Examples

Time Deposit FDRD

Demand Deposit CASA

Net Demand and Time Liabilities (NDTL)

+100 cr.

Reserve

CRR (min 3%) (-) 15 [no profit]

SLR (min 25%) (-) 40 [some profit]

Money left with bank =45

Statutory liquidity Ratio•All banks (sch, Non-sch.)•Cash, gold, RBI approved securities•Right now 23%

Nationalization: high reserve ratio (PSL)

Deposit Examples

Time Deposit FDRD

Demand Deposit CASA

Net Demand and Time Liabilities (NDTL)

+100 cr.

Reserve

CRR (min 3%) (-) 15 [no profit]

SLR (min 25%) (-) 40 [some profit]

Money left with bank =45

PSL (40%) =45 x 0.4=18

Left for normal borrowers =45-18=27 cr.

Priority sector lending•40% of net credit•Yearly•jain

Mock Q from 2012’s CSAT

Which of the following measures would result in an increase in the money supply in economy? (2012)1.Purchase of government securities from public by central bank2.Deposit of currency in commercial banks by the public3.Borrowing by government from the central bank4.Sale of government securities to the public by central bank.Answer choice A.Only 1B.2 and 4C.1 and 3D.2, 3 and 4

1. Skip 2. Attempt 3. Mark n Review

Nationalization: high reserve ratio (before LPG)

Deposit Examples

Time Deposit FDRD

Demand Deposit CASA

Net Demand and Time Liabilities (NDTL)

+100 cr.

Reserve

CRR (min 3%) (-) 15 [no profit]

SLR (min 25%) (-) 40 [some profit]

Money left with bank =45

PSL (40%) =45 x 0.4=18

Left for normal borrowers =45-18=27 cr.

Consequences?1.High cost of credit2.low expansion => jobs, taxations, export ($$)3.SLR not lowered4.Government borrowing5.Fiscal deficit, BoP

1991: Narsimhan Committee I (GoI)

• Deregulation of interest rate=>BPLR=>Base Rate.• PSL @normal interest rates=> interest subvention• Debt recovery tribunal => 1993 =>SARFAESI 2002• Liberate Branch expansion policy• Reduce CRR, SLR=>(15,40)=>(4,23)• Private / foreign banks=> 93 =>01 =>13• NBFC regulatory framework• 1992=>SBI shares sold. =>GoI ~60%

1998: Narsimhan Committee II (GoI)

1. NPA 0%, VRS2. Legal reforms for loan recovery. =>SARFAESI 20023. Computerization, electronic fund transfer, legal framework => Payment and

Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale (RTGS)4. Permit new private /foreign banks.

Before After- Banks- NBFC- DFI (Development Financial

institutions)- ICICI, IDBI, IFCI etc.

1. Banks2. NBFC

1998: Narsimhan Committee II (GoI)Before After1. Banks2. NBFC3. DFI (Development

Financial institutions)- ICICI, IDBI, IFCI etc.

1.Banks2.NBFC

Private banks 90s-2001

Private Bank License (2013)

• Feb’13- RBI notification• 26=> Ambani, Birla, Bajaj, Tata, Muthoot, Indian post • Minus (TATA, Videocon)• +1 KC Land and finance ltd.• =25 left.Bimal Jalan Committee• First meeting Nov’13=> Feb’14• =>Mahila Bank Sep’13 (public sector)

Banking 2014

Bharatiya Mahila Bank (2013)

• Budget 2013; 1000 crore Rs. (100% State Owned)

• Nothing new: 80s Pak, Tanzania 2009• MBN Rao Panel blue print (Canara)• Sept. License. Indira Gandhi’s b’day

(November 19)• HQ Delhi but launched from Mumbai due to

model code of conduct.• Usha Anantha-Subramanian • BoD=all women.• Staff, deposit= male + female; BoB, PNB

deputation.• Loan => predominantly to women.

Bharatiya Mahila Bank (2013)

• kitchen loans, education loans, small home-based catering businesses.• loans up to Rs 1 crore without collateral • CGTMSE (MSME Ministry)• Credit Guarantee Fund Trust for Micro

and Small Enterprises (CGTMSE).

PSB 4%

Bharatiya Mahila Bank 4.5%; (1 lakh+) 5%

Kotak 6%

Yes Bank 8%

Bharatiya Mahila Bank (2013)

• Skill development, financial literacy among women. • Core Banking Software by FIS

(American Co.)•Most banks use Finacle by Infosys.Target 1.25% branches in unbanked rural

areas.2.By March 2014: 25 branches3.By 2020: 700+ branches; 60k cr

business

Bakwaas Sawal

Who Among the following is the chairman of Bharatiya Mahila Bank?A.Arundhati BhattacharyaB.Aruna BahugunaC.Usha AnanthasubramaniumD.Shikha Sharma

Correct Statements about Bharatiya Mahila Bank?A.It was inaugurated in MumbaiB.On 25th November, the birth anniversary of Indira GandhiC.Both A and BD.Neither A nor B.

2TF

Correct Statements about Bharatiya Mahila Bank?A.Bharatiya Mahila Bank is owned by a consortium of Government of India, NABARD and financial institutions.B.For the first three years, Bharatiya Mahila bank will be exempted from CRR and SLR requirements.C.Both A and BD.Neither A nor B

Assertion reasoning

(A) Bharatiya Mahila Bank will bring down the gender divide in financial inclusion. (R) Bharatiya Mahila bank will cater only female depositors and borrowers.OptionsA.Both the statements are individually true and Statement R is the correct explanation of Statement A.B.Both the statements are individually true but Statement R is not the correct explanation of Statement A.C.Statement A is true but Statement R is false.D.Statement A is false but Statement R is true.

3TF

Correct Statements about Bharatiya Mahila Bank?1.They offers higher interest rates to female depositors over male depositors.2.The loan interest rates in Bharatiya Mahila bank, are decided by government of India. 3.Government has provided the initial capital in this bank from Nirbhaya Fund.Correct statementsA.Only 1 and 3B.Only 2 and 3C.only 1 and 2D.None of Above

1. Skip 2. Attempt 3. Mark n Review

3TF how to solve:

3TF how to solve:

Mains

GS: 250 marks, 3 hours = 60 x 3 =180 minutes

Mark Words Timelimit 180 Timelimit 170

1 20 0.72 0.68

5 100 3.6 3.4

10 200 7.2 6.8

250 5000 180 170

Mains

Discuss the importance of Bharatiya Mahila Bank in bringing down the gender divide in financial inclusion. (5m | 100 words)

Interview

1. Bharatiya Mahila Bank is a mere symbolic exercise for feel good publicity. Do you agree? Yes/No and Why?

Bharatiya Mahila Bank (2013)-Anti points

• SBI, PNB, BoB better suited, Govt. already majority shareholder.• 25% rural branching: duplication of effort.• Higher Staff deputation• In the first phase focus on state capitals and UT.• 4.5%/5% interest – pan India presence.• Overall a Tokenism/symbol but not substance.