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1. Unit 4 Banking System Balance sheet and portfolio management Indian banking system: Changing role and structure B anking sector reforms Banking Regulation Act 1949

2. The banking system's balance sheet reflects a bank's financial position at a specific time, showing its assets, liabilities, and equity . Key Components of a Bank’s Balance Sheet 1. Assets : Cash and Reserves : Cash held with the central bank (e.g., Reserve Bank of India) and in hand. Loans and Advances : Funds lent to individuals, corporations, and governments, which generate interest income. Investments : Holdings in government securities, bonds, or equities to diversify risk. Fixed Assets : The bank owns properties, buildings, and equipment. Other Assets : Interest receivable, deferred tax assets, etc. Balance Sheet and Portfolio management

3. 2. Liabilities : Deposits : Savings accounts, fixed deposits, and current accounts. This is the primary source of funding for a bank. Borrowings : Loans taken from other financial institutions or the central bank. Other Liabilities : Provisions for bad debts, taxes payable, etc. 3. Equity : Share Capital : Funds raised from shareholders. Reserves and Surplus : Retained earnings and reserves set aside for contingencies.

4. Portfolio Management in Banking Portfolio management in banking involves managing the bank's portfolio of assets (e.g., loans, investments) and liabilities (e.g., deposits, borrowings) to achieve the following objectives: Maximize Returns : Generate the highest possible income through interest, dividends, and capital gains. Minimize Risk : Diversify investments and loans to reduce exposure to credit, market, and operational risks. Liquidity Management : Ensure the bank has enough liquid assets to meet its short-term obligations, such as customer withdrawals. Regulatory Compliance : Maintain statutory reserves (e.g., Cash Reserve Ratio, Statutory Liquidity Ratio) and adhere to capital adequacy requirements.

5. Key Areas of Portfolio Management in Banks Loan Portfolio : Banks provide loans to individuals, businesses, and governments. The goal is to balance high-interest loans (e.g., personal loans) and low-risk loans (e.g., secured loans). Investment Portfolio : Banks invest in government securities, bonds, or equities to diversify income sources and reduce dependence on lending. Example: Investing in government treasury bills provides stable, low-risk returns. Deposit Portfolio : Managing different types of deposits (savings accounts, fixed deposits, current accounts) to ensure a stable funding source. Asset-Liability Management (ALM) : Aligning the bank's assets and liabilities to minimise risks like interest rate, liquidity, and currency risks.

6. Significance of Balance Sheet and Portfolio Management Ensures Stability : A well-balanced portfolio and a healthy balance sheet ensure the bank remains solvent and stable, even during economic downturns. Maintains Profitability : By optimising assets (e.g., loans, investments) and liabilities (e.g., deposits, borrowings), banks can maximise their profit margins. Manages Risk : Effective portfolio management reduces credit, market, and operational risks. Liquidity Management : Ensures the bank has enough liquid assets to meet withdrawal demands and other short-term obligations. Regulatory Compliance : Maintaining adequate reserves and capital ratios per regulatory norms ensures the bank operates within legal frameworks.

7. Impact of CAR on Bank’s Balance Sheet Tier 1 Capital : Core capital, including equity capital and disclosed reserves. This capital can absorb losses without the bank ceasing operations . Example: Paid-up equity capital, Retained earnings, Disclosed reserves (e.g., statutory reserves). Tier 2 Capital : Supplementary capital, such as revaluation reserves, hybrid instruments, and subordinated debt. Example : Subordinated debt (long-term loans with at least 5 years to maturity), Revaluation reserves (e.g., on real estate or investments), and General provisions (e.g., for bad loans). Risk-Weighted Assets (RWA) : The total of all assets adjusted for risk. Different assets have different risk weightings based on their potential to default. Example : Government bonds may have a risk weight of 0%, and Loans to businesses may have a risk weight of 100%.  

8. Significance of CAR for the Bank’s Balance Sheet Ensures Financial Stability : A higher CAR indicates that a bank has sufficient capital to handle unexpected losses, ensuring stability during economic downturns or financial crises. Regulatory Compliance : Regulatory authorities (e.g., RBI in India and Basel Committee globally) mandate minimum CAR levels to ensure systemic stability. E xample: Basel III requires banks to maintain a minimum CAR of 8% . The Reserve Bank of India (RBI) mandates a minimum CAR of 9% for Indian banks. Risk Management : CAR measures how well a bank can withstand risks like credit, market, and operational risks . A healthy CAR allows the bank to take calculated risks while protecting capital. Protects Depositors : CAR acts as a buffer to protect depositors' money by ensuring the bank has enough equity to cover losses before impacting depositor funds. Facilitates Growth : Banks with a higher CAR can expand their lending and investment activities because they have adequate capital to support higher risk-weighted assets. Improves Investor Confidence : A robust CAR reflects the bank's ability to sustain profitability and solvency, making it attractive to investors and other stakeholders.

9. Indian Banking System Role of the Banking System: The banking system in India has evolved from providing essential financial services like deposits and loans to becoming a critical part of economic transformation. Banks now play a dual role: As a financial intermediary for economic growth. As a vehicle for implementing government policies (e.g., financial inclusion).

10. Indian Banking System

11. Phases of Development: Foundation Phase (1949-1969) : The Banking Regulation Act of 1949 was introduced to regulate banking activities. Nationalizing Imperial Bank to form the State Bank of India (1955) . Expansion Phase (1969-1984) : Nationalization of 14 major banks (1969) to increase rural penetration. Formation of Regional Rural Banks (RRBs) in 1975. Consolidation Phase (1984-1990) : Focus on improving customer services and branch expansion. Reformatory Phase (1991 Onwards) : Economic liberalisation led to the entry of private and foreign banks. Introduction of Basel norms for risk management. Present Phase (2002-Present) : Technology adoption (e.g., mobile banking, UPI). Consolidation through mergers for more substantial banking entities.

12. Major Banks and Establishment Bank Name Year of Establishment Remarks State Bank of India (SBI) 1955 Formed by nationalizing the Imperial Bank of India. Punjab National Bank (PNB) 1894 First Swadeshi bank, a key player in rural credit. Allahabad Bank 1865 Merged with Indian Bank in 2020. ICICI Bank 1994 A leading private sector bank. HDFC Bank 1994 Largest private sector bank in India.

13. Mergers in Indian Banking Merged Banks Year of Merger Final Entity Name New Bank of India + Punjab National Bank (PNB) 1993 Punjab National Bank (PNB) SBI + Associate Banks + Bharatiya Mahila Bank 2017 State Bank of India (SBI) Bank of Baroda + Vijaya Bank + Dena Bank 2019 Bank of Baroda Union Bank of India + Andhra Bank + Corporation Bank 2020 Union Bank of India Canara Bank + Syndicate Bank 2020 Canara Bank Indian Bank + Allahabad Bank 2020 Indian Bank PNB + Oriental Bank of Commerce + United Bank of India 2020 Punjab National Bank (PNB)

14. Banking Sector Reforms and Committees Key Committees: Narasimham Committee I (1991) : Post-liberalization structural reforms. Recommendations: Reduce CRR and SLR. Introduce private banks. Strengthen capital adequacy norms. Narasimham Committee II (1998) : Improve bank efficiency and address NPAs. Recommendations: Consolidation of banks. Setup of Debt Recovery Tribunals. Increase CRAR to 10%.

15. Verma Committee (1999) : NPA management. Recommendations: Establish Debt Recovery Tribunals (DRTs). Improve credit risk management. P.J. Nayak Committee (2014) : Governance reforms in PSBs. Recommendations: Reduce government stake below 50%. Professionalised bank boards.

16. Raghuram Rajan Committee (2009) : Financial inclusion. Recommendations: Promote small finance and payment banks. Impact of Reforms: Reduced NPAs. Improved technology adoption. Introduction of new banking channels (e.g., mobile banking, UPI).