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Banks: Section 5(c) of Banking Regulation Act, (BR Act), 1949: 'a banking company is a company which transacts

the business of banking in India. Section 5(b) of the BR Act defines banking as, '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. Three primary activities of a commercial banks are: (i) maintaining deposit accounts including current accounts (ii) issue and pay cheques, and (iii) collect cheques for the banks customers Banking Regulator

The Reserve Bank of India (RBI) is the central banking and monetary
authority of India, and also acts as the regulator and supervisor of commercial banks.

Scheduled Banks in India: Scheduled banks in India are those that are listed in the Second Schedule of the Reserve Bank of India Act, 1934. RBI includes only those banks in this schedule which satisfy the criteria as laid down vide section 42 (6) (a) of the Act: (i) has a paid- up capital and reserves of an aggregate value of not less than Rs. 5 lakhs (ii) satisfies the Bank that its affairs are not being conducted in a manner detrimental to the interest of its depositors, and (iii) is a State co- operative bank or a company or an institution notified by the Central Government in this behalf

SCBs are present throughout India and their branches, having grown
more than four-fold in the last 40 years now number more than 80,500 across the country

Scheduled Banks comprise:

Scheduled Commercial Banks and Scheduled Co-operative Banks

Scheduled Commercial Banks in India are categorized into 5 different groups according to their ownership and / or nature of operation.

(i) State Bank of India and its Associates, (ii) Nationalised Banks, (iii)
Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector).

Scheduled Co-operative Banks consist of Scheduled State Co-operative

Banks and Scheduled Urban Co-operative Banks. Every Scheduled bank enjoys the following facilities. 1. Such bank becomes eligible for debts/loans on bank rate from the RBI 2. Such bank automatically acquire the membership of clearing house

Present scenario of banking industry in India (on 31-03-2011)

Scheduled Commercial Banks (SCBs)

Public sector banks Private banks Foreign banks Regional Rural banks Total branches ATMs

= 165

= 26 (6SBI+19N+1IDBI) = 21(7 new and 14 old) = 36 = 82 = 85,393 = 74,505

According to a report by ICRA Limited, Public sector banks hold over 73.69% of total assets of the banking industry, Private and foreign banks holding 19.46% and 6.84% respectively

Public Sector Banks: Public sector banks are those in which the majority stake is held by the Government of India. Public sector banks together make up the largest category in the Indian banking system. There are currently 26 public sector banks in India. They include the SBI and its 5 associate banks (such as State Bank of Indore, State Bank

of Bikaner and Jaipur etc)

State Bank of Bikaner & Jaipur State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore State Bank of Patiala State Bank of Travancore

19 nationalised banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India

Bank of Maharashtra
Canara Bank Central Bank of India

Corporation Bank
Dena Bank Indian Bank

Indian Overseas Bank Oriental Bank of Commerce

Punjab and Sind Bank

Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank

IDBI Bank Ltd.

Public sector banks account for bulk of the branches in India (83% in 2011). In the rural areas, the presence of the public sector banks is overwhelming; in 2011, 94 percent of the rural bank branches belonged to the public sector.

Regional Rural Banks

Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural economy.

Each RRB is owned jointly by the Central Government, concerned State Government and a sponsoring public sector commercial bank. RRBs provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers.

Amalgamation of the RRBs of the same sponsored bank within a State to improve viability and profitability of RRBs.

Steep decline in the total number of RRBs to 82 as on March 31, 2011, as compared to 196 at the end of March 2005.

Private Sector Banks Majority of share capital is held by private individuals and corporates.

The private banks which were not nationalized in 1969, and 1980 are
collectively known as the old private sector banks and include banks such as The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc.

Entry of private sector banks was however prohibited during the postnationalisation period. In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, RBI permitted the private sector to enter into the banking system. This resulted in the creation of a new set of private sector banks, which are collectively known as the new private sector banks. There are 7 new private sector banks and 14 old private sector banks operating in India.

Foreign Banks

Foreign banks have their registered and head offices in a foreign country but operate their branches in India.

The RBI permits these banks to operate either through branches; or through wholly-owned subsidiaries.

The primary activity of most foreign banks in India has been in the corporate segment. However, some of the larger foreign banks have also made consumer financing a significant part of their portfolios.

These banks offer products such as automobile finance, home loans,

credit cards, household consumer finance etc.

Foreign banks in India are required to adhere to all banking

regulations, including priority-sector lending norms as applicable to

domestic banks.

In addition to the entry of the new private banks in the mid-90s, the increased presence of foreign banks in India has also contributed to boosting competition in the banking sector. At the end of March 2011, there were 36 foreign banks with 317 branches operating in India. Besides, 43 foreign banks were operating in India through representative offices. Under the World Trade Organisation (WTO) Agreement, RBI allows a minimum 12 branches of all foreign banks to be opened in a year

Co-operative Banks Cater to the financing needs of agriculture, retail trade, small industry and self-employed businessmen in urban, semi-urban and rural areas of India. co-operative credit structure in India is its heterogeneity. The structure differs across urban and rural areas, across states and loan maturities. Urban areas are served by urban cooperative banks (UCBs), whose operations are either limited to one state or stretch across states. The rural co-operative banks comprise State co-operative banks, district central cooperative banks, SCARDBs and PCARDBs ) Primary Cooperative

Agriculture and Rural Development Banks).

Oldest segment of the Indian banking system. The network of UCBs in India consisted of 1645 banks as at end-March 2010, while the number of state rural co-operative banks are 31 as at end-March 2010. The RBI and the National Agriculture and Rural Development Bank (NABARD) have taken a number of measures in recent years to improve financial soundness of co-operative banks.

Loans and Advances

Commercial Loans Segment

Personal Loans Segment

Working capital

Term Loans

Personal loans Housing loans Educational loans

Cash credit Overdraft Bills purchase Bills Discounting

Capital expenditure Equipment finance Project finance Acquisition finance


Capital market instruments

Debt market instruments

Fee based functions

Funds remittance

Establishment of LC/LG

Issue of Demand draft Issue of Telegraphic transfer Electronic Funds transfer

Letter of Credit Letter of Guarantee

Any where/ Any branch banking

On-line Banking Collection of bills/cheques

Fee Based

Agency function

Merchant Banking

Draft drawing arrangements Selling of insurance products Selling of Mutual funds Acting as agent for Govt., Local authority, undertaking

Project appraisal/ counseling

Syndication of loans
Venture Capital finance Issue management Bankers to issue Underwriting of issues Portfolio management Forex Advisory services

Investment Advisory services

Banking and the Economy Cash Reserve Ratio (CRR)

Scheduled Commercial Banks are required to maintain with RBI, an

average cash balance, the amount of which shall not be less than --% of the total of the Net Demand and Time Liabilities (NDTL) in India.

Demand Liabilities include all liabilities which are payable on demand

and they include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/ guarantees, balances in overdue fixed deposits, cash certificates and

cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand

Time Liabilities: are those which are payable otherwise than on demand and they include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on

The CRR is calculated on the basis of average of the daily balance maintained with RBI during the reporting fortnight. Scheduled Commercial

Banks are required to maintain minimum CRR balances up to 70% of the

total CRR requirement on all days of the fortnight. If RBI wants to tighten the monetary policy, it will raise the CRR. Lowering the CRR releases more liquidity into the market. Changes in CRR tend to have an immediate impact on the market.

Statutory Liquidity Ratio (SLR) All Scheduled Commercial Banks, in addition to CRR, are required to

maintain in India,
a) in cash, or b) in gold valued at a price not exceeding the current market price, or

c) in unencumbered approved securities valued at a price as specified by

the RBI from time to time, an amount which shall not, at the close of the business on any day, be less than 23% of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight. If RBI wants to tighten the monetary policy, it will raise the SLR. Such a measure would not be effective, if banks holding of SLR is higher than the statutory SLR rate. Lowering the SLR means that banks can sell some of their SLR securities to raise funds. It therefore tends to soften interest rates.

Repo rate Banks facing a shortage of funds can borrow from RBI through a repo

transaction. The transaction, backed by approved securities, has two legs:

In the first leg, the bank sells the required value of approved securities to RBI. RBI will release funds to the bank against this transaction.

In the second leg, the bank buys back the same securities. The price for
buying them back (higher than the price for the first leg) is pre-decided, when the repo transaction is agreed upon. The difference between the prices for the two legs thus, is the borrowing cost for the borrowing bank. A repo transaction is meant to meet only the short term (single day to a few days) requirements of banks. Current repo rate is --------%.

Reverse Repo Rate A reverse repo is the opposite of a repo.

RBI announces the repo rate and reverse repo rate. They tend to remain
steady for several weeks, until RBI chooses to change it. The current reverse repo rate is -----%. The reverse repo rate will always be lower than the repo rate. If RBI wants to signal tight monetary policy, it will increase the repo rate. If the overall liquidity position is tight, banks will increase their deposit rates or lending rates, since the borrowing cost from RBI is up.

A reduction in reverse repo rate makes it less interesting for banks to park
their funds with RBI. This measure is adopted when there is too much liquidity in the market, as reflected in the inter-bank call money market or short term funds. In general, the call money rate (which is determined by the market, not RBI) is expected to be between the repo rate and reverse repo rate

Open Market Operations Changes in CRR and SLR are mandatory. They affect all the scheduled commercial banks. These are very important tools of central banks in countries where the debt market is not so developed. In countries where debt markets are well developed, the central banks can influence liquidity through open market operations. If they want to suck liquidity from the market, they will sell securities (or gold, foreign exchange etc.) to the market. When the market buys these assets, liquidity is transferred from the market to the coffers of the central bank. If a central bank wants to increase liquidity in the market, it will buy back

securities (or gold, foreign exchange etc.) from the market. When it pays
for the assets acquired, liquidity is released in the market.

Wholesale and Retail banking

Wholesale banking: is the provision of services by banks to the likes of large corporate

clients, mid-sized companies, real estate developers and investors,

international trade finance businesses, institutional customers (such as pension funds and government entities/agencies), and services offered to

other banks or other financial institutions. In essence, wholesale banking

services usually involve high value transactions. Wholesale banking is commonly defined as banking services that are provided between merchant banks and other types of financial institutions. The term is often used, however, to refer to the wide range of financial services that are provided by financial institutions to various corporations and businesses as well as to government entities.

Wholesale banking is different from retail banking because wholesale banking focuses more on corporate-style entities and high-value transactions, and retail banking focuses on providing financial services to individual consumers. Wholesale Banking products:

Lending Foreign Exchange (Spot & Forward) Derivatives (Forex & Commodities) Deposits Government Securities (T-bills & bonds)

Retail banking The retail banking means products and services offered to individuals and households sector for personal use and consumption like loans for housing, vehicle, for consumer durable, loans for enjoying vacations etc. It not only means lending but also involves whole of the banking services provided to individuals and house-hold sector. The products to tap their savings and other services are included in retail banking. The retail banking concept has been expanded to include services provided

to small and medium sized business and also high net worth individuals

Retail banking The retail banking means products and services offered to individuals and households sector for personal use and consumption like loans for housing, vehicle, for consumer durable, loans for enjoying vacations etc. It not only means lending but also involves whole of the banking services provided to individuals and house-hold sector. The products to tap their savings and other services are included in retail banking. The retail banking concept has been expanded to include services provided

to small and medium sized business and also high net worth individuals

Retail banking products: Housing loans. Loan against salary/pension Loans for consumer durable. Personal loans for consumption. Educational loans. Auto loans, gold loans, festival loans etc. Loans against rent receivable. Loans for vacations. Loans to doctors for setting up clinic, to chartered accountants etc. Credit cards, debit cards. Global cards Deposit products like flexi deposits etc. Services like, electricity bill collection, telephone bills, school fees, insurance premium payment, filing of Income tax returns etc. ATM, Tele banking, Internet banking, 365 days banking , depository services etc.

Impact of retail banking

Customers have become king and banking revolves round him. Customer has got wide choice in terms of banks and services, as the banks are outbidding each other to provide new services, products with differential rate structure and utilities.

Even products are tailor-made to suit a class of customers. You want to

buy a plot of land, you want to apply for an IPO, you can approach a willing bank to lend you and create money for you.

Banks have become a financial super market.

Off-Balance Sheet Banking Off-Balance Sheet (OBS) instruments are contingent commitments or contracts, which generate income for a bank but do not appear as assets or liabilities on the traditional bank balance sheet. They can range from stand-by letters of credit to complex derivatives, such as swap-options.