COMMERCIAL BANKING SYSTEM AN OVERVIEW

A PRESENTATION BY CA. R.C.AGARWAL

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

COMMERCIAL BANKS

Importance Most important financial institution in economy Banks are financial-services firms Principal source of credit Provide cheque books, credit or debit cards, electronic funds transfer etc. facility for effecting payments to creditors/suppliers
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

COMMERCIAL BANKS

Importance-CONT

Provide consultancy for financial planning, project planning Provide financial information Provide consumer loans, working capital finance Provide long term and short term loans Help governments in fulfilling plan and social objectives Success of banks depends on their ability to identify financial services demanded by public

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

The Different Kinds of Financial Service Firms Calling Themselves Banks

Commercial Banks Savings Banks Cooperative Banks Mortgage Banks Community Banks Money Center Banks Investment Banks Merchant Banks International Banks Wholesale Banks Retail Banks

Limited Purpose Banks Bankers Banks Minority Banks National Banks State Banks Insured Banks Member Banks Affiliated Banks Virtual Banks Fringe Banks Universal Banks

What is a Bank

Produce and sale professional management of public funds and perform many roles e.g.

Trust function Credit function Investment planning function Payments function Savings function Cash management function Investment banking/underwriting function Brokerage function

Different roles played by banks

Intermediator

Transforming savings to credit to business and others Making payments for goods and services on behalf of customers Providing guarantee on behalf of customers

Payments

Guarantor

Issue letters of credit

Different roles played by banks

Agency role Manage and protect properties and redeem securities on behalf of customers Policy role Serve as conduit to government policies to regulate growth of economy Help government achieving its social goals

Services offered by banks historically

Accept savings/ term deposits Provide business loans and advances Discount commercial bills Carrying out currency exchanges Safekeeping of valuables Support government activities through credit Finance under government schemes

Recently introduced services

Consumer finance Financial advice Leasing finance Venture capital loans Selling insurance products Selling mutual fund products Selling pension schemes and retirement plans Security brokerage and investment services Merchant banking and issue related services Portfolio management services

Trends affecting banks

Service proliferation by adding new services Rising competition Deregulation Rising fund costs Customer sensitivity Customer activism

Trends affecting banks

Increasingly interest sensitive mix of funds Technical revolution Consolidation and geographical expansion Globalization of banking Increased risk of failures and weakening of deposit insurance schemes New thinking to have small banks

Functions of banking system

Collection of savings and distribution for industrial investment Capital formation and accelerating the economic growth

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Structure of Banking system in India

Government of India Regulatory body Scheduled/unscheduled banks Public sector banks Old generation private sector banks New generation private sector banks-1991 Co-operative banks Regional rural banks Local area banks-1997 Foreign banks
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Structure of Banking system in India

Financial Institutions Micro-finance companies Non-banking finance companies Co-operative credit societies Money lenders

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

INDIAN BANKING SYSTEM

Mainly

there are three phases Up to 1951 1951 to 1990 Early nineties onwards

PRE - 1951

Control of money lenders No laws total private sector No regulatory body Hardly any industrialization Main concentration on traditional agriculture Banking Industry had little access to outside savings
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

1951 to 1990

Private to public sectormixed economy Planned economic processFirst plan from 1951
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Main elements of commercial banks

Public ownership

Nationalisation Reserve Bank of India (RBI)- 1948 State Bank of India (SBI) 1956 14 major banks nationalised 1969 with deposits of 50 crore & above Nationalisation of 6 more banks - 1980

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Main elements of commercial banks

Strengthening of institutional structure

`Development banks Instrument of state policy for planning priorities Development of backward regions Industrial Finance Corp. of India (IFCI)1948 State Financial Corps (SFC)1951 Industrial Credit and Investment Corp of India (ICICI)- 1966

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Main elements of commercial banks

Strengthening of institutional structure

`Development banks-cont Industrial Development Bank of India (IDBI) 1964 State Industrial Development Corp. (SIDC) State Industrial Investment Cop. (SIIC) Small Industrial Development Bank of India (SIDBI) National Bank for Agriculture and Rural Development (NABARD) - 1982

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Commercial banks

Continued old way of deposit banking and of short term credit to trade and finance Introduction of selective credit control (control through quantum, rate of interest, margin etc.) Started refinance based term lending and underwriting of new issues Started directly subscribing to shares and debentures and lending against such securities

Commercial banks

Provide finance to SSI, Exports & Agriculture Credit Guarantee Scheme (CGS) - 1960 for SSI finance upto 75% of amount defaulted or guarantee amount whichever lower, maximum 7.5 lacks for WC and 2.5 lacks for TL Export Credit & Guarantee Corp. (ECGC) Ltd.-1964 Agriculture Refinance Corp. - 1963 for refinance to institutions & banks Extensive Branch expansion Lead district and service area approach

Nationalisation of banks 1969 & 1980

To serve better the needs of economy To create job opportunities To fulfill the objectives of plans To provide banking service to maximum population Regulating the bank credit to priority and non-priority sector

Protection to customers
Foreign

Exchange Regulation Act (FERA) 1973 -now converted to Foreign Exchange Management Act (FEMA) Banking regulations Customer service guidelines

POST NINETIES

New Economic policy 1991

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Privatisation of Financial Institutions

IFCI to IFCI Ltd. IDBI to IDBI Ltd. & to IDBI bank ICICI to ICICI bank Number of private banks set up Govt. holding in banks diluted by more than 40%

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Reorganisation of Institutional Structure

Setting

up of universal banks One stop banking PSB Boards to have share holder representatives

Development in commercial banking

Demand

for refinance has shrunk from banks Focus on Non fund based financeCapital adequacy, asset classification & provisioning norms and accounting standards made applicable to DFIs and FIs

Development in commercial banking

Financial services such as

Merchant banking, Project counseling, Portfolio management, Credit syndication, New issue management, Mergers and acquisitions - advisors, Corporate advisory services, Debenture trusteeship, Sponsorship of mutual funds etc.

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Commercial Banks

Economic environment Statutory Liquidity Ratio (SLR) 38.5% , Cash Reserve Ratio (CRR) 15% + 10% (incremental ratio) of net demand & time liabilities (NDTL)
CRR now is 4.5% SLR is 23% Item / Week Ended 2007 2008 2009
Sep. 7 Aug. 1 Sept. 5

2012
Sept 22

Cash Reserve Ratio

7.00 8.75

9.00

4.5

Lower intt. on SLR and CRR Directed credit programmes to Priority sector Narsimham committee-I
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Growth of banking industry

Details 1951 19.7.69 1997 2012 Aug 31 No. of SCBs+Non-SCBs (Exc.RRB) 92 85 101 171 RRB 196 86 Branches (SCBs/Non-SCBs) 4,151 8,261 63,700 85,000 Deposits 919 5,540 5,07,533 63,40,420 Advances 727 3,813 2,82,702 47,22,600 Advance to priority Sec. 1,00,000 19,00,000
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Growth of banking industry

Total Reserves 31.8.2012 (US$ Mn.) 290,461.6 Foreign exchange 257,620.1 Gold 26,239.4 Others 6,602.1 Currency with the public (Crore) 10,67,030 Credit to Govt. (RBI & Banks) (Crores) 25,94,820

Growth of banking industry

1951

1969

No of A/c credit No. of A/cs deposit % Demand deposits % of fixed deposit Credit deposit ratio Cheques cleared No. Amount Rs. Billion

67 33

1995 2012 11,00,000 3,00,00,000 18,00,000 36,00,00,000 50 35 50 65 60% 75% 1341.87 ml. 115,959.60

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Growth of banking industry

Type of banks 1969 Nationalised banks 14 SBI & Associates. 8 RRB

1997 19 8 196

2011 19 6 82

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Commercial Banks

Directed credit Scope of priority sector expended by including finance to SIDC, SFC, refinance to RRB and for Foreign and new private sector banks investment in SIDBI bonds Heavy increase in branches, unprecedented growth in deposits and advances mainly priority sector Impressive progress in achieving social objectives Heavy fall in productivity and profitability High cost/exp. due to branch expansion in RU/SU

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Commercial Banks

Interest rate structure

All intt. rates of deposits deregulated From 1997 Bank Rate (BR) linked to refinance from RBI, penal intt. by RBI for shortfall in reserve PLR system introduced Base rate system introduced Concessional ROI withdrawn from priority sector excluding Export & Agri. Concessional ROI to export finance with interest subside from GOI

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Commercial Banks

Capital adequacy norms 9% (capital to risk weighted asset ratio) Income recognition, Asset classification and Provisioning norms

Introduced from 1992 Now NPA after 3 months

Standard sub standard Doubtful loss assets

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Commercial Banks

Transparency of financial statements

Formats changed- to disclose breakup of provisions and percentage of net NPA to net advances etc.

Tax treatment to provisions

Only write off are tax deductible. 5% of income and 10% of average aggregate advances of rural branches permitted as deductible general provision

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Commercial Banks

Board of Industrial Finance and Reconstruction (BIFR) This has not been very successful experiment Debt recovery tribunals-1993 8 recovery tribunals ONE appellate tribunal in Mumbai Helped in the recovery of bad advances Securitization Act It has given extensive powers to banks to take possession of assets and auction the same to recover the dues Sale of NPA accounts in lots
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Commercial Banks

Regional rural banks Sponsored by PSBs- 196 banks now to RRBs 82 Branch licensing procedure - liberalized 1994 Foreign banks Allowed to open branches on reciprocal arrangement Permitted to invest upto 20%, within overall 40% investment, in private sector banks They are exempt from target credit in agri. finance
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Commercial Banks

New private sector banks

Since nineties new licenses started A few banks e.g. Times bank, Global trust bank, Punjab bank, Centurion bank of Punjab already closed / merged

Public issues of PSBs

Most of the PSBs have come to capital market minus Punjab & Sindh Bank United Bank of India has been permitted to come with IPO

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Commercial Banks

Supervisory authority RBI

Board of Financial supervision (RBI) has been setup

Appointment of CMD/EDs and Board members

Appointment Committee has been setup with RBI Governor as chairman

Recruitment & creation of posts

Public sector banks covered in autonomy criteria

MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL

Commercial Banks

Narsimham Committee II - 1998

Appointed as a follow-up of 1992 recommendations and to examine II generation reforms in terms of action to be taken to strengthen the banking system streamlining procedures, upgrading technology and HRD structural changes in the system

Mutual Funds
Bank subsidiaries sponsored Many banks have started marketing the products

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LATEST DEVELOPMENTS

Indian economy more strong than many developed countries Conservative approach of RBI and Banks helped China bank allowed to open branch in India Interest rates started moving upward side Credit off-take slow High inflation Problems in US economy Problems in economy of European countries
MANAGEMENT OF COMMERCIAL BANKS BY CA. R.C. AGARWAL