Banking service system in india .pptx

All about banking service

1. Banking in India The banking sector in India plays a vital role in this country’s economic development . Over the centuries, numerous changes have occurred within this industry, from technological advancement to the diversification of financial services and products.  the pre-independence phase, which lasted nearly 200 years. During this period, there were close to 600 banks . At the same time, some significant developments in the banking industry also took place.  Bank of Hindustan is the first bank to exist , marking the foundation of India’s banking system. But it ceased to exist in 1932. 

2. History of Indian Banking System The Indian banking system began in the mid-18th century. The Bank of Hindustan, founded in 1770, was dissolved in 1829–32, while the General Bank of India, founded in 1786, collapsed in 1791. Following the history of the Indian Banking System, the oldest surviving bank is the State Bank of India(SBI). Bank of Calcutta, June 1806 The Bank of Bengal (1809), the Bank of Bombay (1840), and the Bank of Madras (1840) amalgamated in 1921 to form the Imperial Bank of India, which became the State Bank of India after independence. Until 1935, when the Reserve Bank of India Act, 1934, established the Reserve Bank of India, the presidential banks were quasi-central. SBI was established in 1959 by the State Bank of India Act, 1959. Affiliate banks In 1969, the Indian government nationalised 14 major commercial banks, including the Bank of India. Others were nationalised in 1980. Indian banking systems are mostly state-owned. Their network and size enable them to dominate banking.

3. Meaning Banking refers to the system of financial institutions , such as banks and credit unions, that provide various financial services to individuals, businesses, and governments . Banking services mainly include accepting deposits, lending money, facilitating transactions, and offering various financial products like savings accounts, loans, and credit cards.   Banking plays a crucial role in the economy by facilitating the flow of money and enabling economic activities.

4. Functions of Banks Banks in India offer a wide range of banking services, such as savings and checking accounts, loans (personal, business, and mortgages), credit cards, investment services, and electronic banking options like online and mobile banking. Some of the major functions of banks are mentioned below: Accepting Deposits : Banks provide a safe place for individuals and businesses to deposit their money, which can be withdrawn when needed. Providing Loans : Banks lend money to individuals and businesses for various purposes, such as home mortgages, business expansion, or personal loans. Payments and Settlements : Banks enable transactions through various payment methods, like checks, debit/credit cards, and electronic transfers.

5. Currency Exchange : Many banks offer foreign exchange services, allowing customers to buy, sell, or exchange foreign currencies. Safekeeping of Valuables:  Some banks offer safe deposit boxes for customers to securely store valuable items and documents. Investment Services : Banks also provide investment products like mutual funds, stocks, and bonds, helping customers grow their wealth. Internet Banking Services:  Banks offer online and mobile banking services, making it convenient for customers to access their accounts, pay bills, and transfer funds.

6. Classification of Banks in India Banks, forming part of the Banking System in India, can be divided into two categories – Scheduled Banks and Non-Scheduled Banks. Scheduled Banks Scheduled Banks under the Banking System in India refer to those financial institutions that are  listed in the 2nd Schedule of the Reserve Bank of India Act, 1934.  This inclusion signifies that they meet specific criteria set by the RBI and are subject to its stricter regulations. A bank to be listed in the schedule has to satisfy the following 2 conditions: It should have paid-up capital and reserves of not less than 5 lacs , and It should satisfy the RBI that their affairs are not being conducted in a manner detrimental to the interest of their depositors . If any Scheduled Bank violates these conditions, it gets de-listed from the schedule.

7. A Scheduled Bank gets the following  benefits : Facility of loans on Bank Rate from RBI. Automatic membership of Clearing House. Facility of Re-Discount of first-class exchange bills from RBI . Non-Scheduled Banks Non-Scheduled Banks under the Banking System in India refer to those financial institutions that  don’t meet the criteria   to be included in the 2nd Schedule of the Reserve Bank of India Act, 1934 . Being excluded from the schedule means they operate under a different set of regulations as compared to Scheduled Banks.

8. Difference between Scheduled Banks and Non-Scheduled Banks Basis of Difference Scheduled Banks Non-Scheduled Banks Meaning A banking company under the Banking System in India which is listed in the second schedule of the RBI Act 1934. A banking company under the Banking System in India that is not mentioned in the second schedule of the RBI Act 1934. Criteria – Should have a paid-up capital of `5 lakhs or more. – Have to ensure that its affairs are not conducted in a manner detrimental to the interest of its depositors. – No fixed criteria as such. Regulatory Requirements – Have to keep CRR deposits with the Reserve Bank of India. – Required to file their returns on a periodic basis. – Have to maintain CRR deposits with themselves. – No requirements of filing returns as such. Rights Available – Authorized to borrow funds from the RBI. – Can apply to join the clearinghouse. – Can avail of the facility of rediscount of first-class exchange bills from RBI. – Usually, not authorized to borrow funds from the RBI. However, they can borrow from the RBI under emergency conditions. – Not eligible for membership in the clearinghouse. – Facility of rediscounting exchange bills from RBI is not available for them. Risk They are financially stable and are unlikely to hurt the rights of the depositors. These banks are riskier to do business. Examples Most of the banks under the Banking System in India are Scheduled Banks. For example, Commercial Banks, Private, and Public Sector Banks. Only a few types of banks under the Banking System in India are Non-Scheduled Banks. For example, Local Area Banks (LABs), and some Urban Cooperative Banks (UCBs).

9. STRUCTURE OF BANKING SYSTEM IN INDIA

10. In India,  nationalised banks  are  public sector banks  which are commonly known as  government banks . A public sector bank in India refers to a bank in which the government owns at least 51% of its stakes . In India, the nationalisation of banks took place in two phases. The first phase was in 1969 when Indian PM Indira Gandhi announced the nationalisation of 14 large private-sector banks. The second phase was in 1980 , in which the government acquired 6 more private banks. There were also 7 subsidiaries of SBI, which were nationalised in 1959 . However, after the recent major bank mergers , there are currently 12 public sector banks in India.

11. Commercial Banks The institutions that accept deposits from the general public and advance loans with the purpose of earning profits are known as Commercial Banks . Commercial banks can be broadly divided into public sector, private sector, foreign banks and RRBs. In Public Sector Banks the majority stake is held by the government. After the recent amalgamation of smaller banks with larger banks, there are 12 public sector banks in India as of now . An example of Public Sector Bank is State Bank of India. Private Sector Banks are banks where the major stakes in the equity are owned by private stakeholders or business houses . A few major private sector banks in India are HDFC Bank, Kotak Mahindra Bank, ICICI Bank etc.

12. A Foreign Bank is a bank that has its headquarters outside the country but runs its offices as a private entity at any other location outside the country . Such banks are under an obligation to operate under the regulations provided by the central bank of the country as well as the rule prescribed by the parent organization located outside India. An example of Foreign Bank in India is Citi Bank. Regional Rural Banks were established under the Regional Rural Banks Ordinance, 1975 with the aim of ensuring sufficient institutional credit for agriculture and other rural sectors . The area of operation of RRBs is limited to the area notified by the Government. RRBs are owned jointly by the Government of India, the State Government and Sponsor Banks. An example of RRB in India is Arunachal Pradesh Rural Bank.

13. Cooperative Banks A Cooperative Bank is a financial entity that belongs to its members, who are also the owners as well as the customers of their bank. They provide their members with numerous banking and financial services. Cooperative banks are the primary supporters of agricultural activities, some small-scale industries and self-employed workers. An example of a Cooperative Bank in India is Mehsana Urban Co-operative Bank. At the ground level, individuals come together to form a Credit Co-operative Society . The individuals in the society include an association of borrowers and non-borrowers residing in a particular locality and taking interest in the business affairs of one another. As membership is practically open to all inhabitants of a locality, people of different status are brought together into the common organization. All the societies in an area come together to form a Central Co- operative Banks.

14. Development Banks Financial institutions that provide long-term credit in order to support capital- intensive investments spread over a long period and yielding low rates of return with considerable social benefits are known as Development Banks . The major development banks in India are; Industrial Finance Corporation of India (IFCI Ltd), 1948, Industrial Development Bank of India' (IDBI) 1964, Export-Import Banks of India (EXIM) 1982, Small Industries Development Bank of India (SIDBI) 1989, National Bank for Agriculture and Rural Development (NABARD) 1982.

15. Government Banks in India: List of Public Sector Banks in India 2024 Currently,  there are 12 nationalized banks in the country . Here is the  list of government banks in India  in 2024:  State Bank of India Bank of Baroda Punjab National Bank Bank of India Union Bank of India Canara Bank Bank of Maharashtra Central Bank of India Indian Overseas bank Indian Bank UCO Bank Punjab and Sind Bank

16. Banking Laws and Regulations in India: Overview and Updates April 2024 In India, the banking sector operates under a comprehensive framework of laws and regulations aimed at maintaining stability, protecting consumers, and promoting financial inclusion. Here's an overview of the key laws and recent updates: The Reserve Bank of India Act, 1934 : This is the primary legislation governing the functioning and operations of the Reserve Bank of India (RBI), India's central bank. It outlines the RBI's powers and responsibilities, including monetary policy formulation, currency issuance, and regulation of the banking sector. Banking Regulation Act, 1949 : This act empowers the RBI to regulate and supervise banks in India. It covers various aspects of banking operations, including licensing, capital adequacy, governance, and resolution of banking crises. The recent amendment to this act in 2020 paved the way for the establishment of the Financial Services Regulatory Authority (FSRA) as the overarching regulator for non-banking financial companies (NBFCs).

17. 2.Foreign Exchange Management Act (FEMA), 1999 : FEMA regulates foreign exchange transactions in India and aims to facilitate external trade and payments while maintaining the stability of the country's foreign exchange market. It governs various aspects such as foreign investment, external commercial borrowings, and transactions involving foreign currency. 3.Banking Ombudsman Scheme, 2006 : This scheme provides a mechanism for addressing grievances and complaints of customers against banks in a timely and cost-effective manner. The RBI appoints Banking Ombudsmen to resolve disputes between banks and their customers. 4.Payment and Settlement Systems Act, 2007 : This act regulates payment and settlement systems in India, including electronic funds transfer, card payments, and digital transactions. It aims to ensure the safety, efficiency, and reliability of payment systems while promoting innovation and competition.

18. 6.Insolvency and Bankruptcy Code (IBC), 2016 : The IBC provides a consolidated framework for the resolution of insolvency and bankruptcy proceedings in India. It applies to individuals, companies, and partnership firms and aims to expedite the resolution process, maximize the value of assets, and promote entrepreneurship. 7.Goods and Services Tax (GST) Act, 2017 : GST is a comprehensive indirect tax levied on the supply of goods and services in India. It replaced multiple indirect taxes levied by the central and state governments, simplifying the tax regime and promoting ease of doing business. Recent updates and reforms in India's banking laws and regulations include the merger of public sector banks to enhance efficiency and scale, initiatives to promote digital payments and financial inclusion, and regulatory measures to strengthen the resilience of banks and NBFCs in the face of economic challenges.

19. THE RESERVE BANK OF INDIA ACT, 1934 THE RESERVE BANK OF INDIA ACT, 1934 ACT NO. 2 OF 1934 [6th March, 1934.] An Act to constitute a Reserve Bank of India. WHEREAS it is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in [India ] and generally to operate the currency and credit system of the country to its advantage;AND WHEREAS it is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy; AND WHEREAS the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth ; AND WHEREAS the monetary policy framework in India shall be operated by the Reserve Bank of India;]

20. Reserve Bank of India Act, 1934

21. Organisational structure of RBI

22.   Establishment and Incorporation Of Reserve Bank – Section 3 Section 3 of the RBI Act states that a bank to be called the Reserve Bank of India. RBI shall be constituted for the purposes of taking over the management of the currency from the Central Government and of carrying on the business of banking in accordance with the provisions of the Act. RBI is a body corporate having perpetual succession and a common seal , and can sue and be sued.

23. Central Board of Directors (CBD) – Section 8 About Central Board of Directors – The Central Board of Directors is at the top of the Reserve Bank’s organisational structure. The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India as per Reserve Bank of India Act, 1934.

24. Important points – Governor and Deputy Governors shall be full time directors A Deputy Governor and the government official appointed by the CG may attend any meeting of the Central Board and take part in its discussions but shall not be entitled to vote When the Governor is, for any reason, unable to attend any such meeting, a Deputy Governor authorised by him in this behalf in writing may vote for him at that meeting Maximum Tenure –

25. Offices and Branches – The Reserve Bank has a network of offices and branches through which it discharges its responsibilities. The units operating in the four metros — Mumbai, Kolkata, Delhi and Chennai — are known as offices Currently, the Reserve Bank has its offices, including branches, at 27 locations in India. The offices and larger branches are headed by a senior officer of the rank of Chief General Manager. Smaller branches are headed by a senior officer of the rank of General Manager .

26. Functions of The Reserve Bank – Purpose of RBI – To regulate the issue of banknotes; To regulate keeping of reserves with a view to securing monetary stability in India; To operate the currency and credit system of the country to its advantage; to maintain price stability while keeping in mind the objective of growth; To look after the monetary policy framework in India.   Functions of RBI – Banking Functions Issue bank notes Monetary Policy Functions Public Debt Functions Foreign Exchange Management Banking Regulation & Supervision Regulation and Supervision of NBFCs Regulation & Supervision of Co-operative banks Regulation of Money Market Instruments Payment and Settlement Functions Consumer Protection Functions Financial Inclusion and Development Functions

27. Reserve Bank of India (Amendment) Act, 2006 [No. 26 OF 2006] [June 12, 2006] An Act further to amend the Reserve Bank of India Act, 1934 Be it enacted by Parliament in the Fifty-seventh Year of the Republic of India as follows:- Statement of Objects and Reasons . – Financial sector reforms are marking steady progress in India. The Indian financial markets now have more products, participants and better liquidity than before. For more operational flexibility , the Reserve Bank of India needs to have enabling powers to use a larger variety of financial instruments than hitherto.

28. foreign exchange and the market conditions - the Reserve Bank of India needs more flexibility to set Cash Reserve Ratio , which is one of the two statutory ( floor or ceiling) pre-emptions in respect of the resources of banks. Over-the-counter derivatives play a crucial role in reallocating and mitigating the risks of corporates, banks and other financial institutions . The ambiguity regarding their legal validity has inhibited the growth and stability of the market for such derivatives. It has become essential to provide for clear legal validity of such contracts. At present, under Section 29-A of the Securities Contracts (Regulation) Act, 1956, the Central Government has delegated to the Reserve Bank of India , by a notification, the powers exercisable by it under Section 16 of that Act, for regulating the transactions in money market and other instruments . Therefore, more effective regulation of the markets for interest rate contracts, including Government securities and money- market instruments as also derivatives , it is necessary to confer specific powers on the Reserve Bank of India, under the Reserve Bank of India Act, 1934, to lay down policy and to issue directions to agencies operating in these contracts, securities and derivatives.

29. The salient features of the Bill which seeks to amend the RBI Act are as follows:- (a) define the expressions, ‘derivative’, ‘repo’ and ‘reverse repo’ in Section 17 for the purposes of the business of the Bank and differently in new Chapter III-D for the purposes of regulatory powers of the Bank; (b) empower the Reserve Bank of India to deal in derivatives, to lend or borrow securities and to undertake repo or reverse repo; (c) remove the lower floor and upper ceiling of Cash Reserve Ratio (CRR) and to provide flexibility to RBI to specify CRR; (d) remove ambiguity regarding the legal validity of derivatives ; (e) empower RBI to lay down policy and issue directions to any agency dealing in various kinds of contracts in respect of Government securities, money-market instruments, derivatives, etc., and to inspect such agencies.

30. Negotiable Instrument Act 1881 MEANING OF NEGOTIABLE INSTRUMENTS A Negotiable Instrument is a document freely transferable by trade customs from one person to another by delivery or by endorsement. The property in such a document was transferred to a bonafide transferee for value. The Act does not define the term ‘Negotiable Instruments ’ but section 13of the Act provides for only some kinds of negotiable instruments , i.e., promissory notes and cheques, bills of exchange, which are payable either to order or bearer.  PROMISSORY NOTE According to section 4 of the NI Act, 1881, A promissory note is a negotiable instrument in writing and is not a banknote or a currency note. The person who has to pay is called the Maker . He is the debtor, and he shall sign on the instrument. The person willing to collect the money is called Payee or the creditor .

31. BILLS OF EXCHANGE A bill of exchange is an instrument that has an unconditional order directly signed by the Maker, directing a certain person to pay a certain sum of money only to, or to the order of, a specific person or the owner of the instrument . Cheque A cheque is a bill of exchange on a selected banker and not expressed to be payable other than on-demand, and it contains a cheque in the electronic form or the electronic image of a cheque.

32. purpose of the Negotiable Instrument Act. •The Act defines every topic concerned to the negotiable instruments for better vision and understanding. •The Act provides the penal provisions for effectively implementing the negotiable instruments process between two parties. If any party breaches its obligation or there is nonfulfillment of the said duty, it may be charged with offences leading to imprisonment. •It protects the right of the parties when they discharge their obligations diligently. •It mentions different conditions about the transaction systems and lays down its specific provisions. • The Act discards all types of discrepancies or hurdles between the parties. In case of disputes, the parties must undergo the established provisions and legally resolve the matter.

33. Recent developments: The Act was amended multiple times, The Amendment Act 2018 has two significant changes – the introduction of Section 143A and Section 148 always provide interim compensation during the unconcluded period of the criminal complaint and the criminal appeal. Significant characteristics The instrument holder is assumed to be the owner of the property contained in it. They are completely transferable. A holder in due course gets the instrument free from the defects of title of any previous holder. The holder, in due course, is permitted to use the instrument in his name. The instrument is transferable till it gets matured .

34. The Negotiable Instruments (Amendment And Miscellaneous Provisions) Act, 2002 Short title and commencement .-(1) This Act may be called the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 . Substitution of new section for section 6 .- For section 6 of the Negotiable Instruments Act, 1881 (26 of 1881 ) (hereinafter in this Chapter referred to as the principal Act), the following section shall be substituted, namely:-' 6." Cheque". - A" cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

35. Explanation I.- For the purposes of this section, the expressions- (a) " a cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system; (b)" a truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, Explanation II.- For the purposes of this section, the expression" clearing house" means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.'.

36. Definition of Cash Reserve Ratio (CRR) Cash reserve ratio (CRR) is generally defined as a particular minimum amount of deposits that needs to be maintained as a reserve by every commercial bank in India according to the requirement of the RBI. The CRR will be fixed as per the rules and regulations of the RBI. The cash reserve ratio in India is presently 4% (as on 4 October 2016 ). A bank will always have the right amount of cash and not fall short of funds when depositors or customer require funds for their various personal needs . This is a very good advantage for any bank's operations. However, one needs to note that when the CRR maintained with the RBI is high , the liquidity will be low in the economic system. It works vice versa wherein the lower the CRR maintained with the RBI, the higher will be the overall liquidity of the financial system.

37. How Does Cash Reserve Ratio (CRR) Help a Bank? When a bank has a sufficient amount of funds to provide to its depositors by maintaining the right CRR, the bank earns an excellent reputation among the public and it also earns a good name in the entire banking industry . It also gets recognised by the Reserve Bank of India for consistently keeping the required quantity of readily accessible money in the bank. Advantages of Cash Reserve Ratio (CRR) •Cash reserve ratio assists in building and sustaining the solvency position of any scheduled commercial bank. •It makes sure the liquidity system of scheduled commercial banks is consistently maintained well. •It works towards having a smooth supply of cash as well as credit in the nation's economy.

38. •Through the implementation of a cash reserve ratio, the Reserve Bank of India can control and coordinate the credits that are by commercial banks. •When the Reserve Bank of India reduces the cash reserve ratio , a scheduled commercial bank will have the ability to offer more loans such as personal loans, car loans, home loans, and other forms of credit to borrowers across the nation. This, in turn, will raise the flow of cash to the public. •When market interest rates go down intensely, the cash reserve ratio acts as a very good liquidity absorption instrument . This functioning of the instrument will help in improving the declining rates. •The implementation of the cash reserve ratio is more effective when compared to relying on other monetary instruments such as Market Stabilization Scheme (MSS) bonds . Typically, MSS bonds take a lot of time in controlling the liquidity system in the country. •The cash reserve ratio plays a positive role in moderating the financial environment whenever there is a surplus rupee situation.

39. Non-Performing Assets (NPA) NPA expands to non-performing assets (NPA). Reserve Bank of India defines Non Performing Assets in India as any advance or loan that is overdue for more than 90 days. “An asset becomes non-performing when it ceases to generate income for the bank,” said RBI in a circular form 2007. How Nonperforming Assets (NPA) Work? When the ratio of NPAs in a bank's loan portfolio rises, its income and profitability fall , its capacity to lend falls , and the possibility of loan defaults and write-offs rise. To address this issue, the government and the Reserve Bank of India have introduced various policies and methods to manage and reduce the amount of non-performing assets (NPAs) in the banking sector.

40. Financial Statements for Banks While the general structure of financial statements for banks isn’t that much different from a regular company , the nature of banking operations means that there are significant differences in the sub-classification of accounts . Banks use much more leverage than other businesses and earn a spread between the interest income they generate on their assets (loans) and their cost of funds (customer deposits). Typical Balance Sheet A typical balance sheet consists of the core accounting equation, assets equal liabilities plus equity . Under these accounts, non-banking companies may have other large classes such as PP&E(PROPERTY , PLANT AND EQUIPMENT), intangible assets, current assets, accounts receivables, accounts payables, and such.

41. A bank, however, has unique classes of balance sheet line items that other companies won’t. The typical structure of a balance sheet for a bank is: Assets Property Trading assets Loans to customers Deposits to the central bank Liabilities Loans from the central bank Deposits from customers Trading liabilities Misc. debt Equity Common and preferred shares

42. What is the CAMELS Rating System? The CAMELS Rating System was developed in the United States as a supervisory rating system to assess a bank’s overall condition . CAMELS is an acronym that represents the six factors that are considered for the rating . Unlike other regulatory ratios or ratings, the CAMELS rating is not released to the public . It is only used by top management to understand and regulate possible risks. Supervisory authorities use scores on a scale of 1 to 5 to rate each bank. The strength of the CAMEL lies in its ability to identify financial institutions that will survive and those that will fail. The concept was initially adopted in 1979 by the Federal Financial Institutions Examination Council (FFIEC) under the name Uniform Financial Institutions Rating System (UFIRS). CAMELS was later modified to add a sixth component – sensitivity – to the acronym.

43. Capital Adequacy Capital adequacy assesses an institution’s compliance with regulations on the minimum capital reserve amount . Regulators establish the rating by assessing the financial institution’s capital position currently and over several years. Assets This category assesses the quality of a bank’s assets . Asset quality is important, as the value of assets can decrease rapidly if they are high risk Management Capability Management capability measures the ability of an institution’s management team to identify and then react to financial stress. The category depends on the quality of a bank’s business strategy, financial performance, and internal controls

44. Earnings Earnings help to evaluate an institution’s long term viability . A bank needs an appropriate return to be able to grow its operations and maintain its competitiveness. The examiner specifically looks at the stability of earnings, return on assets (ROA), net interest margin (NIM), and future earning prospects under harsh economic conditions. Liquidity For banks, liquidity is especially important, as the lack of liquid capital can lead to a bank run . This category of CAMELS examines the interest rate risk and liquidity risk. Sensitivity Sensitivity is the last category and measures an institution’s sensitivity to market risks . For example, assessment can be made on energy sector lending, medical lending, and agricultural lending. Sensitivity reflects the degree to which earnings are affected by interest rates, exchange rates, and commodity prices, all of which can be expressed by Beta.