Slide 1

Banking Financial Services Management Unit 1Overview of Indian Banking SystemOverview of Indian Banking SystemBanking DefinitionAccording to Sec.51 (1) b, Banking Regulation Act 1979 Banking means accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawal able by cheques, draft, order or otherwise

The Bank Market Structure in IndiaBank Market StructureCommercial BankFinancial InstitutionNon Banking Finance companiesCooperative InstitutionCommercial Bank structurePublic Sector Banks(26)Regional Rural BankForeign BanksPrivate Sector BanksCommercial BanksNationalized Bank (20)SBI Group(6)Old(13)New(7)Public Sector BanksThere are a totally 27 public sector banks in India.Public sector bank are regulated by the statutes of the parliament and some important provision in the banking regulation actState bank of India is regulated by the SBI 1955Subsidiaries of SBI regulated by the SBI(subsidiary bank)act1959Nationalized bank regulated by the banking companies act 1970 & 1980The statutes also stipulate that the government must hold a minimum shareholding of 51 % in Nationalized bank and 55% in SBI and SBI in turn will hold 51% in its subsidiariesForeign investment in any form cannot exceed more than 20% of the total paid up capital

Private Sector BanksAs on 2013, there were 21 private sector banks in India out of which 13 is classified as old and remaining 7 classified as NewThe licenses for private bank is given based on the principal that ownership and control is well diversified and sound corporate governance principles are observedNew private bank can enter the market with a paid up capital of 200 crores, which should be increased to 300Crs over the following three yearsNo single entity can have shareholding or ownership of more than 10% of the paid up capitalAggregate foreign investment in any Indian private sector bank cannot be more than 74%

Foreign BanksForeign banks are required to invest an assigned capital of USD25 million upfront at the time of opening their first branch in IndiaThey can operate in any the following waysThrough BranchesThrough wholly owned subsidiariesThrough subsidiaries with maximum aggregate of 74% ownership in a private sector bankForeign bank can have asset share, equity stake and FII in Indian banking systemIn the first phase, FB were allowed to establish wholly owned subsidiary with a minimum capital requirement of 300crs or spin off the existing operations into a subsidiary

Regional rural BanksRegional rural bank was created for rural credit delivery and to ensure financial inclusionTheir capital base is held by the central government, relevant state government and the commercial bank that sponsor them in the ratio of 50:15:35Recent initiative is to recapitalize and to amalgamation of RRB with their sponsor bank

Non Banking Financial Institution(NBFI)-The components

NBFIFinancial InstitutionsNon Banking Finance companiesPrimary DealersNon banking financial institutions are heterogeneous group of institution that caters to a wide range of financial requirements They can be grouped asFinancial institutionsNBFCPrimary DealersFinancial Institution Structure

Financial InstitutionInvestment Institution-LIC, GICState Level FI-SFC, SIDCSpecialized FIs-IVCF,ICICI Venture, TFCIAll India Fis-EXIM bank, NABARD, NHB,SIDBIFinancial Institution that fall under the category of NBFI complement banking in providing a wide range of financial services to a variety of customers and stake holdersWhile bank provide payment and liqidity service, NBFI offers equity and risk based productAll India FIs can be classified into Lending institution EXIMRefinancing Institution NABARD, NHB, SIDBIInvestment Companies like LIC & GIC deploy their resources for long term investmentThe RBI act of 1934 was amended in the year 1997 to bring a comprehensive legislative framework for regulating NBFC.The amendment called for compulsory registration and maintenance of net owned funds for all NBFCs.Two major categories of NBFC in India areNBFC-DNBFC-ND

Housing finance companies are special type of NBFC.The residuary non banking finance companies also a accepts deposits from the publicNBFC-ND can be further classified as NBFC-ND-SI where SI means systematically importantNBFC with asset size of more than 100cr is classified as NBFC-ND-SI

NBFC Category by liability(12225)NBFC-D(category A)(254)

NBFC-ND(Category-B)(11969)Residuary NBFC(2)NBFC-ND-SI(354)NBFC Structure based on Activity

NBFC category by activity/assetAsset Finance CompaniesInvestment CompaniesLoan companiesInfrastructure Finance companiesCore investment companiesInfrastructure debt fundMicro finance companiesNBFC factorsPrimary Dealer

Aprimary dealeris a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as amarket maker of government securities. The government may regulate the behavior and numbers of its primary dealers and impose conditions of entry.

Primary Dealer (21)Bank PDs(13)Standalone PDs(13)Structure of the Co-operative Banking structure

StCB-State Co-operative bank; DCCB- District Central Co-operative bank; PACS-Primary Agriculture Credit Society; SCARDB-State Co-operative agriculture and rural development bank; PCARDB-primary co-operative agriculture and rural development bank

Credit Co-operativesUCBs(1606)RuralCo-operativeScheduled(51)Non-Scheduled(1555)Multi State(25)Single State(26)Multi State(21)Single State(1534)Short term(92,833)Long Term(717)SCARDBs(20)PCARDBs(697)StCBs(31)DCCBs(370)PACSs(92,432)

Primary Functionsa) Accepting depositsThe most important activity of a commercial bank is to mobilise deposits from the public. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.b) Grant of loans and advancesThe second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts.Loans: A loan is granted for a specific time period. Generally, commercial banks grant short-term loans. But term loans, that is, loan for more than a year, may also be granted. The borrower may withdraw the entire amount in lump sum or in installments. However, interest is charged on the full amount of loan. Loans are generally granted against the security of certain assets. A loan may be repaid either in lump sum or in instalments.Advances: An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day to day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.

Modes of short-term financial assistancei) Cash credit Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per agreed terms and conditions with the customersii) OverdraftOverdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit is allowed either on the security of assets, or on personal security, or both.iii) Discounting of BillsBanks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.

Secondary functionsAgency Functions : Various agency functions of commercial banks are To collect and clear cheque.To make payment of rent, insurance premium, etc.To deal in foreign exchange transactions.To purchase and sell securities.To act as trusty, attorney, correspondent and executor. To accept tax proceeds and tax returns.General Utility Functions : The general utility functions of the commercial banks include To provide safety locker facility to customers.To provide money transfer facility.To issue traveller's cheque.To accept various bills for payment e.g phone bills, gas bills, water bills, etc.To provide merchant banking facility.To provide various cards such as credit cards, debit cards, Smart cards, etc.

The RBI Act, 1934The reserve bamk was established on April 1, 1935 in accordance with the provisions of the reserve bank of India Act 1934, with its central office at Mumbai since inceptionObjective of RBIto regulate the issue of bank notes and 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 advantageMain functions of RBIMonetary authorityRegulator and supervisor of the financial systemManager of exchange controlDevelopmental roleRelated functions

The RBI Act, 1934The RBI Was established on April 1, 1935 under the RBI Act of 1934. Originally, it was a shareholder bank which was taken over by the Central Government under the Reserve Bank Act, 1948. It had a paid-up capital of Rs.5 crores. There have been 78 amending acts, ordinances, regulations and adaptation orders till 12th June, 2006. The RBI Act consists of five chapters and five schedules. A brief outlines of these chapters are discussed followed by a summary of main provisions of the Act

The RBI Act, 1934Chapter I : Preliminary:The act may be called the RBI Act, 1934 and extends to the whole of India. It gives a number of definitions including that of the Bank, Bank for International settlement as well as Export-Import Bank, National Housing Bank, Small Industries Development Bank of India, Scheduled Bank, State Financial corporation, State bank, Cooperative bank etc.Chapter II : Incorporation, Capital, management and Business:It encompasses the establishment and incorporation of the bank, provisions regarding share capital, offices, branches and agencies as well as composition, function and meetings of its central board, local boards, as well as terms like disqualification removal, etc. of directors.Chapter III Central Banking functions:This Chapter outline banks obligations and right to transact government business, right to issue bank notes, their denomination, form as well as reissue, recovery and issue of special bank notes. The assets and liabilities of issue department, cash reserve ratios of scheduled banks, publication of consolidated statement by bank,

The RBI Act, 1934Chapter IIIA : Collection and furnishing of credit information:Provisions regarding the power of the bank to collect credit information, procedure for furnishing information and prohibited information are outlines in this chapter.Chapter IIIB: Provisions relating to non-banking institutions receiving deposits and financial institutions:Chapter IIIC: Prohibition of acceptance of deposits by unincorporated bodies:This chapter specifies the deposits are not to be accepted in certain cases.Chapter IIID: Regulation of transactions in derivatives, money market instruments or securities:It gives the definition for derivatives, money market instruments, repo and securities as well as specified transactions in derivatives.

The RBI Act, 1934Chapter IV : General ProvisionsThis chapter gives general provisions regarding contribution of central government to reserve funds, national, rural, industrial and housing credit, appointment, powers and duties of auditors, exemption of banks from income tax and super tax, delegation of powers, liquidation of the bank etc.Chapter V Penalties:This chapter lays down penalties for any person, directors auditor and company whoever makes a wrong statement willfully, whether in any application, declaration, return, advertisement, book, account, document, etc.Any default in complying with regulation of this act is also punishable.

The BANKING REGULATION Act, 1949The banking regulation act was passed as the banking companies act 1949 and came into force with effect from 16 March 1949. Subsequently it was changed to banking regulation act 1949 with effect from 1 March 1966.Some important section of the act are given as followsBanking means accepting for the purpose of lending or investment of deposit of money for the public repayable on demand or otherwise and withdrawal cheque, draft order or otherwiseBanking company means any company which transacts the business of banking

The BANKING REGULATION Act, 1949Demand liabilities are the liabilities which must be met on demand and time liabilities means liabilities which are not demand liabilitiesA banking company may be engaged in businesses like borrowing, lockers, letter or credit, travelers cheque and mortgagesCash reserve-scheduled banks to maintain 3 percent of the demand and time liabilities by way of cash reserve with themselves or by way of balance in a current account with the RBIEvery bank is to maintain a percentage of it demand and time liabilities by the way of cash, gold, unencumbered securities 25-40 percent as on the last Friday of second-the preceding fortnight-known as the SLR

The BANKING REGULATION Act, 1949Every bank has to publish its balance sheet as on 31st marchThe balance sheet is to audited by qualified auditorsA published balanced sheet and auditors report should be available to the public within 3 months from the end of the period to which they refer. The RBI may extend the period by a further 3 months

The BANKING REGULATION Act, 1949This Banking Regulation Act Consolidated the law relating to banking and provides for the nature of transactions which can be carried out by banks in India, the control over management suspension and winding up of banking companies and penalties for violating provisions of the Act. The Act contains following five parts:Part I : PreliminaryPart II : Business of Banking CompaniesPart IIA : Control over managementPart IIB: Prohibition of certain activities in relation to banking companiesPart IIC: Acquisition of the undertakings of banking companies in certain casesPart III: Suspension of business and winding-up of banking companiesPart IIIA: Special provision for speedy disposal of winding-up proceedingsPart IIIB : Provisions relating to certain operations of banking companiesPart IV : MiscellaneousPart V: Application of the Act of Cooperative Banks

Part I Preliminary:It defines a banking companys demand and time liabilities, secured and unsecured loans, managing agents, managing directors, sponsored and subsidiary banks, regional rural banks, etc.Part II Business of Banking companies:Specifies the businesses in which the bank may and must not engage, prohibition on trading rules regarding director and chairman, restriction on commission and brokerage, loans and advances. Nature of subsidiary companies, requirement as to minimum paid-up capital and reserves, account, balance sheets, licensing and auditing.Part III: Suspension of business and winding-up of banking companiesThis part contains provisions for suspension of business, winding up by High court, power to dispense with meetings with creditors, preferential payment to depositors, etc.

Part IV Miscellaneous:This part lays down penalties for officers, application for fines, special provisions for private banking companies, change of name or alternation of memorandum, power of central government to make rules, etc.Part V Application of the act to cooperative banks:It defines a cooperative bank, a cooperative credit society, a multistate cooperative society. Any dispute regarding their primary object or principal business is referred to and determined by the RBI. It also lays down requirements ads to minimum paid-up capital and reserves.

The Negotiable Instruments Act 1881Negotiable InstrumentAccording to Section 13(i) a negotiable instrument means a promissory note, bill of exchange or cheque payable either on order or to bearer.

An instrument may be negotiable either byStatute : Promissory Notes , bills of exchange and cheques are negotiable instruments under Negotiable Instruments Act 1881 .By Usage : Bank Notes , Bank Drafts , scripts, treasury Bills etc

Transfer by Negotiation Negotiation is a transfer of an instrument from one person to another in such a manner as to express title & to represent the transferee the holder thereof.Passing of possessionWith intention to pass titleMust be transferred in such a manner that the transferee becomes holder thereof.

CharacteristicsIt is freely transferableBetter titleRight to sueA negotiable instrument can be transferred any number of times till its maturityA negotiable instrument is subject to certain presumptions

Presumptions Consideration : Every negotiable instrument is deemed to have been drawn and accepted , endorsed, negotiated, or transferred for considerationDate : Every negotiable instrument must bear the date on which it is made or drawnAcceptance : Every Bill of exchange was accepted within a reasonable time after the date mentioned therein and before the date of its maturityTransfer : Every transfer should be made before the expiry

Meaning of EndorsementWhen a maker or holder writes the persons name on the face or back of the instrument & puts his signatures thereto for the purpose of negotiation, it is called endorsement.Person who signs endorserTo whom it is endorsed endorsee.A legal term that refers to the signing of a documentwhich allows for the legaltransfer of a negotiablefrom one party to another.When an employer signs a check, they are endorsing the transfer of money from the business accounts to the account of the employee.Promissory NotesSection 4 defines it as, A promissory note is an instrument in writing containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.The person who makes the promissory note is called the maker.The person to whom payment is to be made is called the payee. e.g. I promise to pay B or order rs. 500I promise to pay B Rs.500 on D death, provided D leaves me enough to pay that sumBill of ExchangeSection 5, is defined as A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

Parties to bill of exchange :Drawer The person who makes/orders to pay bill of exchange.Drawee The person who is directed to pay on bill. On acceptance he becomes acceptor.Payee The person to whom the payment is to be made.Drawer & Payee can be the same person. X sells goods worth Rs. 2000 to Y & allow him 3 months time to pay the price. X then draws a bill on Y Three months after date, pay to my order the sum of Rs. 2000 for value received. X is drawer . Y is Drawee.

ChequesSection 6, defines it as A cheque is a bill of exchange drawn on a specified banker & not expressed to be payable otherwise than on demand.It is always drawn on a bankIt is payable to bearer on demand

Parties To Cheque:Drawer who makes the chequePayee to whom payment is to be madeDrawee Bank .

Meaning of Crossing of ChequeCrossing of a cheque is a unique feature associated with a cheque affecting to a certain level the responsibility of the paying Banker and also its negotiable Character.Crossing of a Cheque is a direction to a particular Banker by the Drawer that Payment should not be made across the Counter. The payment on the crossed Cheque can be collected only through a Banker.Crossing of the Cheque is affected by drawing two parallel Transverse lines .The Cheque that is not crossed is an open Cheque.

Various kinds of CrossingGeneral Crossing:- which bears across its face the words & co. or the words not negotiable. For general crossing two transverse lines on the face of cheque are essential. The paying banker shall pay only to a banker. There are two sloping parallel lines, marked across its face The cheque bears an short form "& Co."between the two parallel lines The cheque bears the words "A/c. Payee" between the two parallel lines.The cheque bears the words "Not Negotiable" between the two parallel lines.Specimen of General Crossing

2. Special or Restrictive Crossing :- When a particular bank's name is written in between the two parallel lines the cheque is said to be specially crossed. Where a cheque bears across its face an addition the name of banker either with or without the words not negotiable. It contains: The name of the banker across the face of cheque.With the words not negotiableIn addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be written. The payment of such cheque is not made unless the bank named in crossing is presenting the cheque. The effect of special crossing is that the bank makes payment only to the banker whose name is written in the crossing. Specially crossed cheques are more safe than a generally crossed cheques.Specimen of Special or Restrictive Crossing

Right and Obligation of a BankerRight of a BankerFollowing are the major rights that a banker can exercise on his customer.Right of LienRight of set-offAutomatic right of set offRight of AppropriationRight to charge interestRight to charge service charges

Right of LienThe right of a creditor (Bank) to retain goods and securities owned by the debtor bailed (as security) to the bank until the loan due from the debtor is repaid is called the right of lien.The creditor (bank) has the right to maintain the security of the debtor but not to sell it.Types of LienParticular LienGeneral Lien

Particular LienParticular lien is one, in that the craftsman can retain those goods on which he has spent time, effort and money until he is paid. In Particular lien the creditor doesnt have the right to retain all the properties of the debtor.Eg: Ambassador and fiat car example

General LienGeneral lien gives the banker the right to retain goods and securities delegated to him in his capacity as a banker, in the absence of a contract contradictory to the right of lien. It extends to all goods/properties placed with him as a banker by his customer which are not particularly identified for another purpose.

Cases in which lien cannot exercise :If the goods and securities have been entrusted to the banker as a trustee or an agentIf a contract exists between the banker and the customer that is contradictory with the bankers right of general lienThe banker can exercise the right of lien only on goods standing in the name of the borrower and not jointly with others.Right of lien is not applicable on documents deposited for a special purpose or with specific instruction that the earnings are to be utilized for a specific purpose.

Right of Set OffThe banker has the right to set off the accounts of its customer. This enables a debtor (Bank) to set off a debt owed to him by a creditor (customer) before the latter recovers a debt due to him from the debtor.funds should belong to the customer.It can be exercised only after a notice is served on the customer informing the customer that the banker is going to exercise the right of set-off.To be on the safe side bankers must take a letter of set-off from the customer authorizing the bank to exercise the right of set-off without giving him any notice.Automatic Set OffSometimes the set off will happen automatically, it depends on the situation. In automatic set off there is no need of permission from the customer.The cases in which automatic set off can exercise are as follows :In case of the death of the customer.When the customer becomes insolvent.If a Garnishee(court) order is issued on the customers account by court.When a bank receives the notice of second mortgage on the securities already charged to the bank.

Right of AppropriationIn the normal course of business, a banker accepts payments from customers. If the customers have more than one account or he/she has taken more than one loan, the customer has the right to direct his banker against which debt the payment should be appropriated/settled. If the customer does not direct the banker and there is more than one debt outstanding in his/her name, the bank can exercise its right of appropriation and apply it in payment of any debt. The banker can apply it against time barred debts also. Once an appropriation has been made it cannot be reversed.

Right to charge interest

Right to charge service chargesBanks charge customers a particular amount if their balance is below a predetermined amount, for the usage of ATMs and withdrawals.Banks are free to charge these but the Reserve Bank of India expects banks to advise their customers of these charges at the time of opening an account and advise them when changes are being made.

Obligation of the BankerBanks have an obligation to honour the cheques drawn on it if the customer has sufficient funds in his account. It is also obliged to honor cheques up to the overdraft limit of a customer.Banker is bound to act as per the directions given by the customer. If directions are not given the banker should act according to how he is expected to act.Banks are obliged to maintain secrecy of their client accounts. There are times when information may be revealed.The conditions under which a banker is justified in making disclosures

The conditions under which a banker is justified in making disclosuresUnder lawUnder express or implied consent of the customerunder the practices/usages in the banking systemDisclosure in the Banks interestDisclosure in public/national interest

Financial Statement of Banks in IndiaBank in India have to prepare their financial statements in accordance with the third schedule of section 29 of the Banking regulation ActA typical balance sheet has 12 schedules, with schedule 13-16 allocated to the income statement

Schedule Liability Schedule Asset1 Capital 06 Cash and balance with RBIReserve & surplus 07 Balance with banks & money with callDeposits 08 Investments Borrowings 09 AdvancesOther Liability & provisions10 Fixed AssetsContigent Liability 11 Other Assets

Schedule Income Schedule ExpensesInterest Earned 15 Interest expendedOther Income 16 Operating expenses

Income StatementCapitalBank has to show the Authorized, Subscribed and Paid up capitalReserves and SurplusStatutory reserve- Not less than 20% of the previous year profits2) Capital reserve- excess depreciation on investments or profit on sale of investment or assets are carried to the capital reserve3) Share premium- this include any premium on the issue of share capital of the bank4) Revenue and other reserve- This will comprise all other reserve not included above5) Balance in profit and loss account

DepositsDemand deposits2) Saving DepositsTerm DepositsBorrowingsIn bank balance sheer, borrowings will show under two categoryBorrowings in IndiaBorrowing outside IndiaOther Liabilities and ProvisionsBills payableInter office adjustmentsInterest accruedOthers Provisions made for IT, Bad debts, depreciation in securities, unclaimed dividend, proposed dividend, provisions made for specific purposeBank Asset1) Cash and balance with RBI2) Balance with banks and money at call and short notice3) Investments4) Advances5) Fixed Assets6) Other AssetsCash and balance with RBICRR Cash in hand and cash in vaultsBalance with banks and money at call and short noticeAll lending to inter bank money marketsDeposits in other Indian banks and foreign banksInvestmentTo minimize the discriminate investment by the banks, RBI has drawn up a set of guidelines under which the investment will be slottedGovernment SecuritiesApproved SecuritiesSharesDebentures and bondsSubsidiaries and joint ventureOther investment like foreign investmentAll investment should be categorized as permanent and current investment and the same should be periodically marked to market

Loans and AdvancesThey are categorized underBy nature of credit facility- Bills purchased and discounted- Cash credit, overdraft, loan payable on demand- Term loansBy security arrangements- Secured by tangible asset- Covered by Bank/government guarantee- Unsecured advanceBy sector- Priority sector- Public sector advances- Banks- OthersFixed Asset1) Premises (including land)2) Other fixed asset(including furniture and fixture)3) Asset on leaseOther AssetInterest accruedInter office adjustmentsAdvanced Tax paid/ TDSStationery and stampsNon banking asset acquired in satisfaction of claimsOthersContingent liabilityClaims against the bank not acknowledged as debtLiability for partly paid investmentLiability on account of outstanding forward exchange contractGuarantees given on behalf of outside constituentsCurrency swapsInterest rate swaps, currency options and interest rate futuresOther items for which the bank in contingently liableIncome statement of Bank in IndiaIncomeInterest Earned> Interest/ discounts on advances/bills> Income from investment> Interest with balance with RBI> Others2) Other Income> Commission, exchange and brokerage> Profit/loss on investment> Profit/loss on revaluation of investment> Profit/loss on sale of building and other asset> Profit on exchange transaction> Income earned by the way of dividend> Miscellaneous incomeIncome statement of Bank in IndiaExpensesInterest Expensed> Interest on deposits> Interest on RBI/Interbank Borrowings> Other interestOperating Expenses> Salaries, rent, taxes and EB> Printing and Stationery, Advertisement and publicity> depreciation on bank property> director fees, allowance and expenses> auditor fees and expenses> Law charges> Postage, Telephone, Repairs & Maintainance> Insurance & Other expensesProvisions and Contingencies- provisions made for loan losses, diminution in value of investment.