Agenda

Banking - Definition Permitted Businesses Evolution of Banking in India Present Form/Size of Banking in India

Banking Introduction & Overview

Reserve Bank of India The Central Bank Statues Governing Banks in India Typical Structure of Banks

Agenda
Banking - Definition

Banking - Definition
Section 5(b) of Banking Regulation Act, 1949: banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
Acceptance of deposits should be for purpose of lending or investment companies accepting deposits for purpose of trading/manufacturing are excluded. Accepting deposits of money from the public - any institution accepting deposits from members are excluded. Acceptance of deposits should be in money Deposits repayable to depositors on demand or otherwise. Deposits withdrawable by cheque, draft, order or otherwise.

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Permitted Businesses

Other Permitted Businesses

Section 6 (1) of Banking Regulation Act
Borrowing, raising or taking up of Money Lending or advancing money either secured/unsecured Drawing, accepting, discounting and dealing in Bills of Exchange, Hundis, Promissory Notes etc. Issuance of Letter of Credit/TCs Buying, selling and dealing in Bullion Buying and selling of Foreign Exchange, Foreign Bank Notes Purchasing & Selling of Bonds and other forms of securities Acquiring, holding, underwriting and dealing in stock, shares, debentures, bonds, securities and investments of all kinds. Safe Custody/Providing of Safe Deposit Vaults Acting as agent of Government/Local Body/carrying on Agency Business Carry on Guarantee/Indemnity Business
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Other Permitted Businesses

Section 6 (1) of Banking Regulation Act
Manage, sell and realise any property which may come in its possession in satisfaction of its claims Acquire, hold and deal with any property which may form the security for any loans and advances Undertake and execute Trust, Administration of Estate as executor Doing all such things which are incidental or conducive to the promotion or advancement of its business Do any other business specified by the Central Government as lawful business of a banking company

Agenda
Evolution of Banking in India

Prohibited Businesses
Buying, Selling and bartering of goods except in connection with its permitted businesses (e.g. realization of security) Holding immovable properties, except acquired for its own purposes, for period exceeding 7 years (Section 9)
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Evolution of Banking in India

Pre Independence
Negligible growth in banking till beginning of nineteenth century when 3 presidency banks namely the Bank of Bengal (1806), the Bank of Bombay (1840) and the Bank of Madras (1846) were established. Business of these banks initially confined to:
Keeping cash accounts and receiving deposits and, Discounting of bills of exchange or other negotiable securities Issuing and circulating cash notes.

Evolution of Banking in India

Post Independence
Post Independence, in order to ensure inclusive growth and economic regeneration of rural sectors, it was recommended to create a State Owned Bank by taking over Imperial Bank of India and integrating with it the former state owned or state associated banks. Accordingly, State Bank of India Act was passed in 1955 to constitute State Bank of India. Later State Bank of India (Subsidiary Banks) Act was passed in 1959 enabling SBI to takeover 8 former state associated banks. SBI continues to be the largest bank in India till date. Many banks were started by Indian businessmen during the Swadeshi Movement between 1906 to 1913/Europeans, which continued to survive Nationalization of Banks
14 Major commercial banks in 1969 and 6 other banks in 1980 Rationale Inclusive growth, reach to rural areas, social growth, finance to new businesses and SME, Change of orientation from profit to development

These 3 banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India in 1921. The new bank took role of a Commercial Bank, a Bankers Bank and Banker to the Government. Establishment of Reserve Bank of India in 1935 ended quasi-central bank role of Imperial Bank of India and it turned into a purely commercial bank over a period of time.

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Evolution of Banking in India

Post Independence Phase of Liberalization
1994 - Liberalisation Permitted setting up of banks in private sector to inject an element of competition in the industry. 10 new banks were set up in Private Sector 2004 Fresh set of licenses to 2 banks. 4 promoted by Financial Institutions, 1 each by conversion of Cooperative Society and NBFC, and remaining 6 by individual banking professionals and an established media house. ICICI, HDFC, IDBI, UTI, DCB, Kotak, IndusInd, Centurion, Global Trust, Bank of Punjab, YES, Times Bank

Agenda
Present Form/Size of Banking in India

Setting up of financial institutions viz. IDBI, ICICI, IFCI for providing long term finance to industry. Large number of foreign banks have been operating in India for over 100 years. However, aggressive during last 5-6 years.

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Present form of Banking in India

Public Sector Banks
State Bank Group (SBI & Associates) Nationalized Banks Other Public Sector Bank IDBI Regional Rural Banks
Came into existence in October 1975 Vast gap in supply of credit to the rural areas. Governed by Regional Rural Bank Act, 1976 Owned by Central Government and State Govt.

Present form of Banking in India

Cooperative Banks
Cooperative Bank is a cooperative society engaged in the business of Banking. All cooperative banks operating in one state are registered under the respective State Cooperative Societies Act. Cooperative Banks operating in more than one state are registered under Multi-Unit Cooperative Societies Act. Cooperative Banks are under dual control of State Government and Reserve Bank of India.

Private Sector Banks

Old Generation Laxmi Vilas, Federal, Dhanlaxmi, City Union, Karnataka etc. New Generation ICICI, Axis, HDFC, YES

Foreign Banks Standard Chartered, Citibank, DBS, HSBC, BNP etc.

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Present size of Banking in India

Industry (March 31, 2009)
27 Public Sector Banks 7 New Generation Private Sector Banks 15 Old Private Sector Banks 31 Foreign Banks 86 Regional Rural Banks 1,721 Urban Cooperative Banks 31 State Cooperative Banks, and

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Reserve Bank of India The Central Bank

Deposits INR 61,377.7 Bn.^ Advances INR 41,121.9 Bn.^ Investments INR 18,459.3 Bn.^
^ Data for scheduled commercial banks as at June 1, 2012

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Reserve Bank of India The Central Bank

Established on April 1, 1935 in accordance with provisions of the Reserve Bank of India Act, 1934. Fully owned by Government of India Central Office in Mumbai Functions under the directions of the Central Board of Directors. Full time Governor and not more than 4 Deputy Governors. Fundamental objective of maintaining nations monetary and financial stability. Crucial Role in Economy - From ensuring stability of interest and exchange rates, to providing liquidity and adequate supply of currency and credit; from ensuring banks penetration and safety of depositors funds to promoting and developing financial institutions and markets.

Reserve Bank of India The Central Bank

Monetary Authority - Formulation, implementation & monitoring of Monetary Policy
Monetary Policy refers to the use of instruments under the control of Central Bank to regulate the availability, cost, and use of money and credit. Objective: Maintaining price stability and ensuring adequate flows of credit to productive sectors to support economic growth and financial stability Tools: CRR*, SLR**, LAF (through Repo/Reverse Repo/MSF)***, Open Market Operations (Outright sale/purchase of Government Securities), Market Stabilisation Scheme (Absorption of liquidity through sale of Short Term Government securities in case of large inflows), Repo/Reverse Repo Rates, Special Liquidity Measures at certain occasions Annual Policy (in April) with Quarterly (3) and Mid Quarter Policy Reviews
* The share of net demand and time liabilities that banks must maintain as cash balance with RBI. ** The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as government securities, cash and gold. *** Consists of daily infusion or absorption of liquidity on a repurchase basis through Repo (liquidity injection) and reverse repo (liquidity absorption) auction operations, using government securities as collateral.

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Reserve Bank of India The Central Bank

Regulator of the Banking System - Prescribes broad parameters of banking operations within which the countrys banking and financial system functions
Objective: Safety and soundness of banking system, overall regulation of banking system, maintain public confidence, protect depositor interest, ensuring framework for orderly development and conduct of banking operations Tools: Licensing, Capital Requirement; Monitoring Governance, Appointment of Board Prudential regulations to ensure solvency and liquidity of banks, Power to regulate, give directions Prescribing lending to Priority Sector, Regulating interest rate in specific areas Regulations for income recognition, asset classification, provisioning, investment valuation, exposure limits and the like. On site inspections, audits, collect information, Powers for winding up, moratorium, amalgamation

Reserve Bank of India The Central Bank

Manager of Foreign Exchange
Roles: Regulating transactions related to external sector and facilitating orderly development & maintenance of foreign exchange market, ensuring smooth conduct in domestic foreign exchange market. managing the foreign currency assets of the country. Tools: Administration of FEMA, Licenses to act as AD, Investment of Foreign exchange reserve, participation in foreign exchange markets to ease volatility in periods of excess demand/supply

Regulator and Supervisor of Payment & Settlement System

Focus on development and functioning of safe, secure and efficient payment and settlement mechanisms. Functions: Facilitating cheque clearing, electronic fund transfer through NEFT, settlement of card payments and bulk payments such as ECS, settlement of inter-bank transactions through RTGS, Securities settlement system for Govt. securities market,

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Reserve Bank of India The Central Bank

Issuer of Currency
Objective: To give public adequate quantity of supplies of clean and genuine currency notes, agent for coins (ensuring adequate supply), RBIs counterfeiting measures (upgrade of security features, public awareness etc.) Sole note issuing authority, overseeing production (four printing presses) and managing distribution of currency (currency chest at more than 4,000 bank branches contain adequate quantity of notes and coins so that currency is available to public in all parts of the country)

Reserve Bank of India The Central Bank

Banker to Banks
Like individuals, businesses etc., banks need their own mechanism to transfer funds and settle interbank transactions such as borrowings from and lending to other banks- and customer transactions. As banker to the banks, RBI fulfills this role. In effect all the operating banks in the country have accounts with RBI. Current Accounts of all Banks (clearing and inter bank settlements, fund transfers, statutory reserve requirements, transaction balances), Remittances, Lender to Last resort (to banks unable to raise resources from inter-bank market, protects depositors interest and has a stabilising impact on the financial system and on the economy as a whole), loans & advances, Issuance of currency.

Banker and Debt Manager to the Government

Like individuals, businesses and banks, governments need a banker to carry out their financial transactions in an effective manner, including raising of resources from the public. As a banker to Central Government, RBI maintains its accounts, receives money into and makes payment out of these accounts and facilitate transfer of government funds. Undertaking transaction for central/state govts, to facilitate receipt and payments, managing govt. domestic debt with the objective of raising the required amount of public debt in a timely and cost effective manner, developing market for Government securities to enable the Government to raise debt at reasonable cost, Public Accounts department (day-to-day aspects of Governments banking operations, Public Debt Offices (depository services for government securities and servicing of loans).

Developmental Roles
Directing credit to priority sector, weaker section, micro credit, supporting small banks, financial inclusion, financial literary

Research, Data and Knowledge Sharing (RBI Publications Annual, Quarterly, Monthly, Weekly)

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Agenda
Statues Governing Banks in India

Statues Governing Banks in India

Umbrella Acts
Reserve Bank of India Act, 1934 Banking Regulation Act, 1949

Acts Governing Banking Operations

Companies Act, 1956 Negotiable Instrument Act, 1881 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 Banking Secrecy Act

Acts Governing Individual Institutions/Others

State Bank of India Act, 1954 IDBI Act, Public Debt Act, Foreign Exchange Management Act Indian Coinage Act

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Agenda
Typical Structure of Banks

Typical Structure of Banks

Business Functions
Retail Banking Assets/Liabilities Wholesale Banking

Lending Working Capital/Term Loans/Project Finance/Structured Finance Transaction Banking Liabilities/Trade Services/CMS Investment Banking
Treasury

Liquidity & Balance Sheet Management/Asset Liability Management Deposit/Lending Quotes/Curves Investments SLR/Non SLR/Equity Propriety Trading Bonds/Securities/Equity FX Treasury Buy Sell of Currency/Derivatives/Propriety Trading
Other Functions

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Risk, Market Risk, Audit, Compliance, Operations (Banking/Trade/Treasury), Back Office (Credit/Treasury), Legal, Customer Services, Admin, HR, IT, Research etc. 26

Typical Structure of Banks

Region/Cluster/Branch Structure/for Retail Banking for both Liabilities/Assets Regional Structures for Wholesale Banking Central Functions for Treasury, Risk, Audit, Compliance, Legal, HR etc. Operations were earlier de-centralized to branches. Now getting centralised with certain hubs (gradual shift in PSUs)

Thank You

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