COMMERCIAL BANKING SYSTEM AN OVERVIEW

7/28/2019 COMMERCIAL BANKING SYSTEM AN OVERVIEW

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MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

COMMERCIAL BANKING

SYSTEM AN OVERVIEWA PRESENTATION

BYCA. R.C.AGARWAL


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COMMERCIAL BANKS

Importance

Most important financial institution ineconomy

Banks are financial-services firms

Principal source of credit

Provide cheque books, credit or debit cards,electronic funds transfer etc. facility foreffecting payments to creditors/suppliers


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COMMERCIAL BANKS

Importance-CONT Provide consultancy for financial planning, project

planning

Provide financial information Provide consumer loans, working capital finance

Provide long term and short term loans

Help governments in fulfilling plan and socialobjectives

Success of banks depends on their ability toidentify financial services demanded by public


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The Different Kinds of Financial Service Firms

Calling Themselves Banks

Commercial Banks

Savings Banks

Cooperative Banks

Mortgage Banks

Community Banks

Money Center Banks

Investment Banks

Merchant Banks

International Banks

Wholesale Banks

Retail Banks

Limited Purpose Banks

Bankers Banks

Minority Banks

National Banks

State Banks

Insured Banks

Member Banks

Affiliated Banks

Virtual Banks

Fringe Banks

Universal Banks


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What is a Bank

Produce and sale professional management of publicfunds and perform many roles e.g.

Trust function

Credit function Investment planning function

Payments function

Savings function

Cash management function

Investment banking/underwriting function

Brokerage function


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Different roles played by banks

IntermediatorTransforming savings to credit to business and

others

Payments Making payments for goods and services on behalf

of customers

Guarantor Providing guarantee on behalf of customers

Issue letters of credit


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Different roles played by banks

Agency role

Manage and protect properties and

redeem securities on behalf of customers Policy role

Serve as conduit to government policies

to regulate growth of economyHelp government achieving its social

goals


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Services offered by banks historically

Accept savings/ term deposits

Provide business loans and advances

Discount commercial bills Carrying out currency exchanges

Safekeeping of valuables

Support government activities through credit

Finance under government schemes


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Recently introduced services

Consumer finance

Financial advice

Leasing finance

Venture capital loans Selling insurance products

Selling mutual fund products

Selling pension schemes and retirement plans

Security brokerage and investment services Merchant banking and issue related services

Portfolio management services


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Trends affecting banks

Service proliferation by adding new

services

Rising competition Deregulation

Rising fund costs

Customer sensitivity

Customer activism


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Trends affecting banks

Increasingly interest sensitive mix of funds

Technical revolution

Consolidation and geographical expansion Globalization of banking

Increased risk of failures and weakening of

deposit insurance schemes

New thinking to have small banks


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Functions of banking system

Collection of savings and

distribution for industrial

investment

Capital formation and

accelerating the economic growth


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Structure of Banking system in India

Government of India Regulatory body Scheduled/unscheduled banks

Public sector banks Old generation private sector banks New generation private sector banks-1991 Co-operative banks

Regional rural banks Local area banks-1997 Foreign banks


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Structure of Banking system in India

Financial Institutions

Micro-finance companies

Non-banking finance companies Co-operative credit societies

Money lenders


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INDIAN BANKING SYSTEM

Mainly there are three phases

Up to 19511951 to 1990

Early nineties onwards


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PRE - 1951

Control of money lenders

No lawstotal private sector

No regulatory body Hardly any industrialization

Main concentration on traditional agriculture

Banking Industry had little access to outsidesavings


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1951 to 1990

Private to public sector-

mixed economy Planned economic process-

First plan from 1951


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Main elements of commercial banks

Public ownership

Nationalisation

Reserve Bank of India (RBI)- 1948 State Bank of India (SBI)1956

14 major banks nationalised1969 with

deposits of 50 crore & above Nationalisation of 6 more banks - 1980


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Strengthening of institutional structure

`Development banks

Instrument of state policy for planning

priorities

Development of backward regions

Industrial Finance Corp. of India (IFCI)1948

State Financial Corps (SFC)1951

Industrial Credit and Investment Corp of India(ICICI)- 1966


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Strengthening of institutional structure `Development banks-cont

Industrial Development Bank of India (IDBI) -

1964State Industrial Development Corp. (SIDC)

State Industrial Investment Cop. (SIIC)

Small Industrial Development Bank of India(SIDBI)

National Bank for Agriculture and RuralDevelopment (NABARD) - 1982


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Commercial banks

Continued old way of deposit banking and ofshort term credit to trade and finance

Introduction of selective credit control (controlthrough quantum, rate of interest, margin etc.)

Started refinance based term lending andunderwriting of new issues

Started directly subscribing to shares anddebentures and lending against such securities


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Commercial banks

Provide finance to SSI, Exports & Agriculture

Credit Guarantee Scheme (CGS) - 1960 for SSI financeupto 75% of amount defaulted or guarantee amount

whichever lower, maximum 7.5 lacks for WC and 2.5lacks for TL

Export Credit & Guarantee Corp. (ECGC) Ltd.-1964

Agriculture Refinance Corp. - 1963 for refinance to

institutions & banks Extensive Branch expansion

Lead district and service area approach


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Nationalisation of banks 1969 & 1980

To serve better the needs of economy

To create job opportunities

To fulfill the objectives of plansTo provide banking service to maximum

population

Regulating the bank credit to priority andnon-priority sector


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Protection to customers

Foreign Exchange Regulation Act

(FERA)1973 -now converted to

Foreign Exchange ManagementAct (FEMA)

Banking regulationsCustomer service guidelines


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POST NINETIES

New

Economicpolicy

1991


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Privatisation of Financial Institutions

IFCI to IFCI Ltd.

IDBI to IDBI Ltd. & to IDBI bank

ICICI to ICICI bank Number of private banks set up

Govt. holding in banks diluted by more

than 40%


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Reorganisation of

Institutional Structure

Setting up of universal banks

One stop bankingPSB Boards to have share

holder representatives


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Development in commercial banking

Demand for refinance has shrunk

from banks

Focus on Non fund basedfinanceCapital adequacy, assetclassification & provisioning norms

and accounting standards made

applicable to DFIs and FIs


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Development in commercial banking

Financial services such as Merchant banking, Project counseling,

Portfolio management, Credit syndication, New issue management, Mergers and acquisitions - advisors,

Corporate advisory services, Debenture trusteeship, Sponsorship of mutual funds etc.


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Commercial Banks

Economic environment Statutory Liquidity Ratio (SLR) 38.5% , Cash Reserve

Ratio (CRR) 15% + 10% (incremental ratio) of netdemand & time liabilities (NDTL)

CRR now is 4.5% SLR is 23% Item / Week Ended 2007 2008 2009 2012

Sep. 7 Aug. 1 Sept. 5 Sept 22

Cash Reserve Ratio 7.00 8.75 9.00 4.5

Lower intt. on SLR and CRR Directed credit programmes to Priority sector Narsimham committee-I


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Growth of banking industry

Details 1951 19.7.69 1997 2012 Aug 31

No. of SCBs+Non-SCBs

(Exc.RRB) 92 85 101 171

RRB - - 196 86 Branches

(SCBs/Non-SCBs) 4,151 8,261 63,700 85,000

Deposits 919 5,540 5,07,533 63,40,420

Advances 727 3,813 2,82,702 47,22,600

Advance to priority Sec. 1,00,000 19,00,000


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Total Reserves 31.8.2012 (US$ Mn.) 290,461.6

Foreign exchange 257,620.1

Gold 26,239.4 Others 6,602.1

Currency with the public (Crore) 10,67,030

Credit to Govt. (RBI & Banks) (Crores) 25,94,820


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1951 1969 1995 2012

No of A/c credit 11,00,000 3,00,00,000

No. of A/cs deposit 18,00,000 36,00,00,000

% Demand deposits 67 50 35

% of fixed deposit 33 50 65

Credit deposit ratio 60% 75%

Cheques cleared No. 1341.87 ml.

Amount Rs. Billion 115,959.60


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Type of banks 1969 1997 2011

Nationalised banks 14 19 19

SBI & Associates. 8 8 6 RRB 196 82


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Commercial Banks

Directed credit

Scope of priority sector expended by including financeto SIDC, SFC, refinance to RRB and for Foreign and

new private sector banks investment in SIDBI bonds Heavy increase in branches, unprecedented growth in

deposits and advances mainly priority sector

Impressive progress in achieving social objectives

Heavy fall in productivity and profitability

High cost/exp. due to branch expansion in RU/SU


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Commercial Banks

Interest rate structure All intt. rates of deposits deregulated

From 1997 Bank Rate (BR) linked to refinance

from RBI, penal intt. by RBI for shortfall inreserve

PLR system introduced

Base rate system introduced

Concessional ROI withdrawn from priority sectorexcluding Export & Agri. Concessional ROI toexport finance with interest subside from GOI


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Commercial Banks

Capital adequacy norms 9% (capital to

risk weighted asset ratio)

Income recognition, Asset classification

and Provisioning norms

Introduced from 1992

Now NPA after 3 months Standard

sub standard

Doubtful

loss assets


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Commercial Banks

Transparency of financial statements

Formats changed- to disclose breakup ofprovisions and percentage of net NPA to net

advances etc.

Tax treatment to provisions

Only write off are tax deductible.

5% of income and 10% of average aggregateadvances of rural branches permitted as deductiblegeneral provision


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Commercial Banks

Board of Industrial Finance and Reconstruction (BIFR)

This has not been very successful experiment

Debt recovery tribunals-1993

8 recovery tribunals ONE appellate tribunal in Mumbai

Helped in the recovery of bad advances

Securitization Act

It has given extensive powers to banks to take possessionof assets and auction the same to recover the dues

Sale of NPA accounts in lots


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Commercial Banks

Regional rural banks

Sponsored by PSBs- 196 banksnow to RRBs 82

Branch licensing procedure - liberalized 1994

Foreign banks

Allowed to open branches on reciprocalarrangement

Permitted to invest upto 20%, within overall 40%investment, in private sector banks

They are exempt from target credit in agri. finance


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Commercial Banks

New private sector banks Since nineties new licenses started

A few banks e.g. Times bank, Global trust bank,

Punjab bank, Centurion bank of Punjab alreadyclosed / merged

Public issues of PSBs Most of the PSBs have come to capital market

minus Punjab & Sindh Bank United Bank of India has been permitted to come

with IPO


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Commercial Banks

Supervisory authority RBI Board of Financial supervision (RBI) has been

setup

Appointment of CMD/EDs and Boardmembers

Appointment Committee has been setup with RBIGovernor as chairman

Recruitment & creation of posts Public sector banks covered in autonomy criteria


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Commercial Banks

Narsimham Committee II - 1998

Appointed as a follow-up of 1992 recommendations and toexamine II generation reforms in terms of

action to be taken to strengthen the banking system streamlining procedures, upgrading technology and

HRD

structural changes in the system

Mutual Funds Bank subsidiaries sponsored

Many banks have started marketing the products


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LATEST DEVELOPMENTS

Indian economy more strong than many developedcountries

Conservative approach of RBI and Banks helped

China bank allowed to open branch in India Interest rates started moving upward side

Credit off-take slow

High inflation Problems in US economy

Problems in economy of European countries

COMMERCIAL BANKING SYSTEM AN OVERVIEW

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