Introduction to banking

Introduction to banking

1. What is banking?
BasicDefinition:Asystemoftradingmoneywhich:providesa
safeplacetosaveexcesscash,knownasdeposits.
suppliesliquiditytotheeconomybyloaningthismoneyoutto
helpbusinessesgrowandtoallowconsumerstopurchase
consumerproducts,homes,carsetc.
Section5(b)oftheBankingRegulationAct1949defines
“Banking”as“Acceptingforthepurposeoflendingand
investment,depositsofmoneyfromthepublicrepayableon
demandorotherwiseandwithdrawablebycheque,draft,
orderorotherwise”Nodefinitionofbankingcanbe
comprehensiveenoughinthepresentcontext

2. What are banks?
Institutionswhichdealsinmoneyandcredit.An
intermediary,whichhandlesotherpeople’smoney
bothfortheiradvantageandtoitsownprofits.A
financialinstitutionthatlinkstheflowoffundsfrom
saverstotheusers.Playsanimportantroleinthe
economyofanycountryastheyholdthesavingof
thepublic.

3. Banking in India

4. Objectives
To make an account of evolution of
present day banking in India
To evaluate the interventions of state
in banking sector over years and
To appraise the entry of foreign banks

5. They said
"More and more these days I
find myself pondering how to
reconcile my net income with
my gross habits."
John Nelson.
"If you owe the bank $100
that's your problem. If you owe
the bank $100 million, that's
the bank's problem."
JP Getty.
"We didn't actually overspend
our budget. The allocation
simply fell short of our
expenditure."
Keith Davis.
"Anyone who lives within their
means suffers from a lack of
imagination."
Oscar Wilde.

6. Evolutionary Phases
Indigenous Reign
Direct Intervention
of the State
Liberalization
Transition
Entry of Foreign
Banks

7. Phase I: Indigenous banks
Vedas and the
Manusmriti:
Kautalya’sArthashastra:
Suggested Maximum
and Minimum Interest
rate
Kautalya, Yajnyavalkya
and Manu
recommended 15 per
cent interest per annum
on capital.
British rule almost wiped
out these tribes by
bringing European
Banks from urban
They moved to villages.
They survive even today.

8. How did Sahukar lend?
Borrower is known
Very little documentation
Sahukar usually a bad
guy
Exorbitant rates of
interests
Compounded Shorter
Intervals
Records Tampered
Mostly Mortgaged
lending on Land,
Properties, Jewels etc
Most cases poor
borrowers surrendered
their properties.

9. Phase II: Direct Intervention
Government Interventions
began in 1930s
The Reserve Bank which is
the Central Bank was
created in 1935 by passing
RBI Act 1934.
The RBI is the sole
authority for
◦issuing bank notes and
◦the supervisory body for
banking operations in India .
◦Supervising exchange
control and banking
regulations, and
◦administers the government's
monetary policy.
◦granting licenses for new
bank branches.

10. Intervention: Nationalization
In the wake of the Swadeshi
Movement, a number of banks
with Indian management were
established in the country
namely,
◦Punjab National Bank Ltd, Bank
of India Ltd, CanaraBank Ltd,
Indian Bank Ltd, the Bank of
Baroda Ltd, the Central Bank of
India Ltd.
In 1955, Govt. nationalized
Imperial Bank of India with
extensive banking facilities on
a large scale especially in
rural and semi-urban areas.
It formed State Bank of India
to act as the principal agent of
RBI and to handle banking
transactions

11. Intervention: Nationalization
On July 19, 1969, 14
major banks nationalized
and
in 15th April 1980 six
more commercial
80% of the banking
segment in India under
Government ownership
in 1990.
the branches of the
public sector bank India
rose to approximately
800% in deposits and
advances took a huge
jump by 11,000%.

12. Effect of Nationalization
the focus of lending
priority sectors were
agriculture, small-
scale industry, retail
trade, small business
and small transport
operators
poverty alleviation and
employment
generation programs.
the success of green
revolution and the
increase of aggregate
food grain production

13. Other sides of
Nationalization
Borrowings and lending restricted, not on
business line
Deterioration of Banker-customers
relationship
Poor Services
Employees Strikes
No Healthy competition among banks
Mounting hidden NPAs

14. Phase III -Liberalization
Constitution of Narasimham
committee and its report on
Banking reforms in 1991.
It covered the areas of interest
rate deregulation & directed credit
rules,
Statutory preemptions and entry
deregulation for both domestic
and foreign banks.
Lowering of the CRR and SLR
Interest rate liberalization
Do away with Entry barriers. By
March 2004, the new private
sector banks and the foreign
banks share shared almost 20%
of total assets
Prudential Norms act against
NPAs

15. Phase IV: Transition
Most Indian banks lagging
behind the areas of customer
funds transfer and clearing
systems.
Over-staffed and not able to
compete with new generation
private banks
While these new banks and
foreign banks still face
restrictions in their activities.
New banks are well-
capitalized,
Use modern equipment and
Attract high-caliber
employees. Indian banks were
given time to
Indian Banks to strengthen
their balance sheets,
consolidate and overall
become more robust, so that
they could compete.

16. Phase V: Entry of Foreign
Banks
Two of domestic banks in
India have turned like Foreign
Banks. About 74 per cent of
holdings of ICICI and HDFC
bank are in the hands of
foreigners.
Phase II of roadmap foreign
banks may be permitted to
have overall investment of 74
per cent in the private banks
of India in April 2009
New banks to be in India
◦Royal Bank of Scotland
◦Switzerland's UBS
◦US-based GE Capital
◦Credit Suisse Group
◦Industrial and Commercial Bank
of China
Areas of Concentration are
Risk Management,
customizing the products and
Value creation.

17. Types of banks in India
Central Bank: The Reserve Bank of India is the
central Bank that is fully owned by the
Government
Public Sector Banks: State Bank Group,
Regional rural banks
Private Sector Banks: Foreign Banks,
Scheduled and Non-Scheduled Banks
Co-operative Sector: State Co-operative
Banks, Central Co-operative Banks, Primary
Agriculture Credit Societies
Development Banks/Financial Institutions:
IDBI, NABARD

18. Commercial Banking
INTRODUCTION
Commercial banks are type of financial institutions that
lends money and provides transactional, savings, and
money market accounts and that accepts time deposits.
Commercial banking play very important role in economy by
mobilizing savings from various sectors.

19. INDIAN BANKING SYSTEM

20. Public Sector Banks
APublicSectorbankisoneinwhich,theGovernmentofIndia
holdsamajoritystake.Itisasgoodasthegovernment
runningthebank.Sincethepublicdecideonwhorunsthe
government,thesebanksthatarefully/partiallyownedbythe
governmentarecalledpublicsectorbanks.Thepublicsector
commercialbankingstartedwithsettingupofStatebankof
Indiain1955.
PublicSectorBanks(Nationalisedbanks):
StateBankofIndia(SBI)
CanaraBank
Indianoverseasbank
DenaBank
OrientalBankofCommerce

21. Private sector banks
Banks which are owned by individuals corporations
and not by government or cooperative societies fall
into this category. Private banks use the word
‘limited’ after their names.
Private Sector Banks:
HDFC Bank
ICICI Bank
Federal Bank
ING Vysya Bank
Axis Bank (formerly UTI Bank)

22. Regional rural banks(RRB’s)
TheGovernmentofIndiasetupRegionalRuralBanks
(RRBs)on
October2,1975whichweresponsoredbySyndicateBank,
State
BankofIndia,PunjabNationalBank,UnitedCommercial
BankandUnitedBankofIndia.Capitalsharebeing50%by
thecentralgovernment,15%bythestategovernmentand
35%bythescheduledbank.Theobjectivewastoprovide
creditandotherfacilitiestosmallandmarginalfarmersand
agriculturallabourers.

23. CO-OPERATIVE BANKS
A co-operative bank is a financial entity which belongs to its
members, who are at the same time the owners and the
customers of their bank. Co-operative banks are often
created by persons belonging to the same local or
professional community or sharing a common interest. Co-
operative banks are playing an important role in small towns
and villages.
List of Co-operative bank
Ahmedabad Mercantile Co-Op Bank Ltd.
Kalupur Commercial Coop.Bank Ltd.
Madhavpura Mercantile Co-Op Bank Ltd.
Mehsana Urban Co-Op Bank Ltd.
Nutan Nagarik Sahakari Bank Ltd

24. National Bank For agricultural and rural
development (NABARD)
NABARDwassetupthroughanActoftheIndianParliament
on12July1982asanapexdevelopmentbankforagriculture
andruraldevelopment.
NABARDisanapexDevelopmentBankthatfacilitatescredit
flowforpromotionanddevelopmentofagriculture,small-scale
industries,cottageandvillageindustries,handicraftsand
otherruralcrafts.

25. Foreign banks
Foreignbanksarethosebankswhichareregisteredor
incorporatedoutsideIndia.Theyhavetheirofficeorbranchin
India.TheglobalisationofIndianeconomywillencouragethe
presenceofmoreforeignbanks.
Someoftheforeignbankshavesuccessfullyintroduced
latesttechnologiesinthebankingpracticesinIndia.Thishas
madethebankingbusinessinthecountrymoresmoothand
interestingforthecustomers.
ListofforeignbanksinIndia
ABNAMRO
CitibankIndia
HSBC(Hongkong&ShanghaiBankingCorporation)
StandardCharteredBank

26. Commercial banking –primary
and secondary functions
Primary functions
Accepting deposits
Granting loans and advances
Secondary functions
Issuing letters of credit, travellers cheques
Undertaking safe custody of valuables, important documents,
and securities by providing safe deposit vaults or lockers
Providing customers with facilities of foreign exchange
Transferring money from one place to another; and from one
branch to another branch of the bank. Collecting and
supplying business information. Issuing demand drafts and
pay orders
Providing reports on the credit worthiness of customers.

27. Role of Commercial Banks
Providingdocumentaryandstandbylettersofcredit(trade
finance),guarantees,performancebonds,securities
underwritingcommitmentsandotherformsofoff-balance
sheetexposures
Safekeepingofdocumentsandotheritemsinsafedeposit
boxes
Currencyexchange
Issueofbanknotes(promissorynotesissuedbyabankerand
payabletobearerondemand)Processingofpaymentsby
wayoftelegraphictransfer,EFTPOS,internetbankingor
othermeansIssuingbankdraftsandbankcheques
AcceptingmoneyontermdepositLendingmoneybywayof
overdraft,installmentloanorotherwise
Creditintermediation
Creditqualityimprovement

28. Credit Creation
Creditcreationisconsideredtobethemainfunctionof
commercialbanksthesedays.“Creditcreationreferstothe
powerofcommercialbankstoexpandsecondarydeposits
eitherthroughtheprocessofmakingloansorthrough
investmentinsecurities”.

29. Basic concepts used in the
process of credit creation
1. Bank deposits
2. Business Institutions
3. Cash Reserve Ratio
4. Excess Reserves
5. Credit Multiplier

30. Process of Credit Creation
Single Bank System
Multiple Bank System

31. Limitations of credit creation
Cash Reserve Ratio
Amount of Primary Deposits
Banking Habits of the People
Credit Policy of the Central Bank
Policy of other banks
Nature of Securities or Availability of Good
Borrowers
Commercial and Industrial Condition

32. Services rendered by banks
Banks offer the following services to account holders at their
specified branches
multi-city / Payable at Par (PAP) cheque facility
anywhere banking facility
trade services
phone banking facility
internet bankingfacility
credit card
debit/ATM card
mobile banking and Real Time Gross Settlement (RTGS)
Locker facilities

33. Clearing Procedure
Bank Clearing house: The clearing house is a voluntary
association of banks under the management of a bank where
the settlement accounts are maintained. Wherever Reserve
Bank of India has its office (and a banking department), the
clearing house is managed by it. In the absence of an office
of the Reserve Bank, the clearing house is managed by the
State Bank of India, its associate banks and in a few cases by
public sector banks.
In India there are about 1050 cheques clearing houses.
These clearing houses clear and settle transactions relating
to various types of paper based instruments like cheques,
drafts, payment orders, interest / dividend warrants, etc.

35. Clearing Process
Theclearingprocessbeginswiththedepositofa
cheque/otherclearinginstrumentsreferredaboveinabank.
Thebankarrangesthechequessubmittedtoitforclearing
bankwiseandpresentsitintheclearinghousetoother
banks.Whentherearemorethanonebankbranchforabank
intheclearingarea,theywouldhaveacoordinatingbranch/
servicebranchtotakecareofpresentingthechequestothe
clearinghouse.
Uponreceiptofthecheques/otherinstruments,theyare
passedforpaymentifthefundsareavailableandthebanker
issatisfiedaboutthegenuinenessoftheinstrument.The
chequesthatareunpaidarereturnedtothepresentingbank
throughanotherclearingcalledtheReturnClearing.The
realizationofthefundsoccursafterthecompletionofreturn
clearingandbytheabsenceofanunpaidcheque

36. SettlementofFunds:Thesettlementoffundsinclearing
occursatseverallevels.Theaggregateamountorvalueof
chequespresentedbyabankonotherbanksrepresentsthe
claimbythatbankonotherbanks.Similarclaimsaremade
byallthebanksoneveryotherbankintheclearing.
Anetsettlementisarrivedattheclearinghouseandthedebit
orcreditpositionofthebankisdetermined.Theseare
bookedintheircurrentaccountsmaintainedbythesettling
bank.Thisrepresentstheinter-banksettlement.The
settlementoffundsbetweentheservicebranchandthe
branchconcernedrepresentsthetransferoffundstothe
branchlevel.Thepaymentprocessiscompletedonlywhen
thefundsaredebitedfromthedrawer’saccountandcredited
tothepayee’saccount.Thisoccursafterthecompletionof
thereturnclearingmentionedearlier

37. Modern technology in banking
Informationtechnologyisoneofthemostimportant
facilitatorsforthetransformationoftheIndianbanking
industryintermsofitstransactionsprocessingaswellasfor
variousotherinternalsystemsandprocesses.Thevarious
technologicalplatformsusedbybanksfortheconductoftheir
daytodayoperations,theirmannerofreportingandtheway
inwhichinterbanktransactionsandclea
Theprocessofcomputerisationmarkedthebeginningofall
technologicalinitiativesinthebankingindustry.
Computerisationofbankbrancheshadstartedwith
installationofsimplecomputerstoautomatethefunctioning
ofbranches,especiallyathightrafficbranches.Thereafter,
TotalBranchAutomationwasinuse,whichdidnotinvolve
banklevelbranchnetworking,ringisaffectedhasevolved
substantiallyovertheyears.

38. Core banking
Networking of branches are now undertaken to ensure better
customer service. Core Banking Solutions (CBS) is the
networking of the branches of a bank, so as to enable the
customers to operate their accounts from any bank branch,
regardless of which branch he opened the account with. The
networking of branches under CBS enables centralized data
management and aids in the implementation of internet and
mobile banking. Besides, CBS helps in bringing the complete
operations of banks under a single technological platform.
CBS implementation in the Indian banking industry is still
underway. The vast geographical spread of the branches in
the country is the primary reason for the inability of banks to
attain complete CBS implementation.

39. ATM
ATMswereintroducedtotheIndianbankingindustryinthe
early1990sinitiatedbyforeignbanks.Mostforeignbanks
andsomeprivatesectorplayerssufferedfromaserious
handicapatthattime-lackofastrongbranchnetwork.ATM
technologywasusedasameanstopartiallyovercomethis
handicapbyreachingouttothecustomersatalowerinitial
andtransactioncostsandofferinghasslefreeservices.Since
then,innovationsinATMtechnologyhavecomealongway
andcustomerreceptivenesshasalsoincreasedmanifold.
Publicsectorbankshavealsonowenteredtheracefor
expansionofATMnetworks.DevelopmentofATMnetworksis
notonlyleveragedforloweringthetransactioncosts,butalso
asaneffectivemarketingchannelresource.

40. Electronic fund transfer
system
There are various types of electronic clearing systems
functioning in the retail payments area in the country. Some of
them are ECS, NEFT etc.
Electronic Clearing Service (ECS)is a retail payment
system that can be used to make bulk payments / receipts of
a similar nature especially where each individual payment is
of a repetitive nature and of relatively smaller amount. This
facility is meant for companies and government departments
to make/receive large volumes of payments rather than for
funds transfers by individuals. The ECS facility is available in
47 centers across India operated by RBI at places where it
manages the clearing houses and by SBI and its associates
in other centers. The ECS is further divided into two types –
ECS (Credit) to make bulk payments to individuals/vendors
and ECS (Debit) to receive bulk utility payments from
individuals

41. National Electronic Funds Transfer (NEFT) system:-is a
nationwide funds transfer system to facilitate transfer of funds
from any bank branch to any other bank branch. This is typically
for individual / single payments. The system uses the concept of
centralized accounting system and the bank’s account that is
sending or receiving the funds transfer instructions, gets
operated at one center, viz. Mumbai only. The individual
branches participating in NEFT could be located anywhere
across the country. The beneficiary gets the credit on the same
Day or the next Day depending on the time of settlement. NEFT
operates on a deferred net settlement (DNS) basis which settles
transactions in batches. Presently it is settled in six batches the
last one being 1600 hrs. on a weekday and 3 batches with the
last one being 1200hrs on a Saturday. To participate in NEFT the
participating banks branch needs to have IFSC code
Indian Financial System Code (IFSC) is an alpha numeric code
designed to uniquely identify the bank-branches in India. This is
11 digit code with first 4 characters representing the banks code,
the next character reserved as control character (Presently 0
appears in the fifth position) and remaining 6 characters to
identify the branch. The MICR code has 9 digits to identify the
bank-branch.

42. Real Time Gross Settlement(RTGS)
Itisalargevaluefundstransfersystemwherebyfinancial
intermediariescansettleinterbanktransfersfortheirown
accountaswellasfortheircustomersona“realtime”andon
“gross”basis.Thesystemeffectsfinalsettlementofinterbank
fundstransfersonacontinuous,transaction-by-transaction
basisthroughouttheprocessingday(RTGSbusinesshours).
TheRTGSsystemisprimarilyforlargevaluetransactions.
TheminimumamounttoberemittedthroughRTGSisRs.1
lakh.ThereisnoupperceilingforRTGStransactions.Ona
typicalday,RTGShandlesabout14000transactionsaday
foranapproximatevalueofRs.1,50,000crore
WhileRTGSremittancewouldbecreditedtoabeneficiary’s
accountbymaximumtimelagoftwohours,NEFTtransaction
dependingonthetimingofthetransferwillbetransferredthe
samedayorthenextdayandinboththecaseswhenthe
transferhasnothappenedthemoneywouldbereturnedto
payer’saccount

43. Internet Banking
InternetbankinginIndiabegantakingrootsonlyfromtheearly
2000s.Internetbankingservicesareofferedinthreelevels.Thefirst
levelisofabank’sinformationalwebsite,whereinonlyqueriesare
handled;thesecondlevelincludesSimpleTransactionalWebsites,
whichenablescustomerstogiveinstructions,onlineapplications
andbalanceenquiries.UnderSimpleTransactionalWebsites,no
fundbasedtransactionsareallowedtobeconducted.Internet
bankinginIndiahasreachedlevelthree,offeringFullyTransactional
Websites,whichallowforfundtransfersandvariousvalueadded
services.
Internetbankingposeshighoperational,securityandlegalrisks.
ThishasrestrainedthedevelopmentofinternetbankinginIndia.
TheguidelinesgoverninginternetbankingoperationsinIndiacovers
anumberoftechnological,securityrelatedandlegalissuestobe
addressedinrelationtointernetbanking.Accordingtotheearlier
guidelines,allinternetbankingserviceshadtobedenominatedin
localcurrency,butnow,evenforeignexchangeservices,forthe
permittedunderlyingtransactions,canbeofferedthroughinternet
banking.

44. Phone Banking and Mobile Banking
Phoneandmobilebankingareafairlyrecentphenomenonforthe
Indianbankingindustry.Thereexistoperativeguidelinesand
restrictionsonthetypeandquantumoftransactionsthatcanbe
undertakenviathisroute.Phonebankingchannelsfunctionthrough
anInteractiveVoiceResponseSystem(IVRS)ortele-banking
executivesofthebanks.
Thetransactionsarelimitedtobalanceenquiries,transaction
enquiries,stoppaymentinstructionsonchequesandfundstransfers
ofsmallamounts(pertransactionlimitofRs2500,overallcapofRs
5000perdaypercustomer).Accordingtothedraftguidelineson
mobilebanking,onlybankswhicharelicensedandsupervisedin
IndiaandhaveaphysicalpresenceinIndiareallowedtooffer
mobilebankingservices.Besides,onlyrupeebasedservicescanbe
offered.Mobilebankingservicesaretoberestrictedtobankaccount
andcreditcardaccountholderswhichareKYCandAMCcompliant.

45. THANK YOU