Banking

Contents:

Introduction. Nationalization of Indian banking system. Types of banks. Function of banks. Globalization of Indian banking system. E-Banking. Branch banking. ECS (electronic clearing system) EFT (electronic fund transfer) INFINET. Indian Banking Now.

INTRODUCTION OF A BANK
The Banking Companies Act of 1949, define Banking Company as a company which transacts the business of banking in India. It defines banking as, accepting for the purpose of lending or investment of deposit money from the public, repayable on demand or otherwise and withdraw able by cheque draft , order or otherwise A bank as an institution dealing in money and credit. It safeguard of the savings of the public and gives loans and advances. The word of Bank is said to be of Germanic origin , cognate with the French word Banque and the. Italian word Banca , both meaning bench.

The other remarkable developments to enhance competition in banking sector reforms:

1) It abolished administered interest rate regime by allowing banks to determine lending and deposit rates.

2) Competition has infused by allowing the operation o new private sector banks and more liberal entry of foreign banks. 3) Measures to broaden the ownership base of PSBs have also taken. 4) The system has also observed greater levels of transparency and standards of disclosure.

Nationalization of Indian banking system

Indian marched towards the establishment of public sector banking through the progressive nationalisation of commercial banks. There were three phases of bank nationalisation: Nationalistion of Imperial Bank of India in1955 and its seven associate banks in 1959-60. Nationlisation of the 14 major commercial banks in 1969. Nationlisation of 6 more commercial banks in 1980. On July 1, 1955 the government of India nationlised the Imperial Bank of India and converted it into the State Bank of India.. Later on in 1959-60, seven subsidiary State Banks were also nationalised to form the SBI Group. For a short period during December 1967 to June 1969, the Government of India pursued the banking of policy control of banks, aiming at an equitable and purposeful distribution of credit towards developmental needs. A such over 90 percent of the banking activity in the country is brought under into the public sector.

Types of Banks
Central Bank
Reserve Bank of India is a bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank.

Following are the functions of central banks.

a. b. c. d.

Bank of Issue Bankers' Bank and Lender of the Last Resort

Controller of Credit
Custodian of Foreign Reserves

Commercial Banks
Commercial banks are of FOUR types: Public Sector Banks

Private Sectors Banks Foreign Banks Regional & Rural Banks

Co-operative Banks

Customer's owned entities Democratic member control

Profil allocation

Specialised Banks
There are some banks, which cater to the requirements and provide overall support for setting are examples of such banks. They engage themselves in some specific area or activity and thus, are called Specialised banks. Let us know about them.

Export Import Bank of India (EXIM Bank)

Small Industries Development Bank of India (SIDBI)

National Bank for Agricultural and Rural Development (NABARD)

Functions of bank
Accepting deposits: Saving bank deposit Current account Fixed deposit Recurring deposit

Giving loans

Overdraft Loan Rediscounting of bill Credit card

Globalization Of Indian Banking System

Banking sector in India is expanding at an incredibly faster pace, with more and more banks realizing the benefits offered by globalization. Publicly owned banks handle more than 80% of the banking business in . India and the rest is in the hands of private sector banks. However, banking in both the government and private sector is being revolutionized by this latest phenomenon called globalization.

There are about 90 players in the banking sector in India, with 30competitors from each of the public, private and foreign sectors . With so many players present in the banking sector in India, a few of them will emerge as global competitors in the near future.

Glossary in E-Banking

ALPM Advanced Ledger Posting Machine BANKNET CRM Customer Relationship Manage-ment DBMS Database Management System E-Commerce SWADHAN

ATMs Electronic Banking Branch Banking

Branch 3 Branch 2 Branch 1 Head Office Branch 4

Branch n Branch 6

Branch 5

E-banking
The Reserve Bank of India constituted a working group on Internet Banking. The group divided the internet banking products in India into 3 types based on the levels of access granted. They are:

Information Only System: Electronic Information Transfer System Fully Electronic Transactional System

E Banking Services.

Automated Teller Machine (ATM): Credit Cards/Debit Cards: Smart Card Bill payment service Fund transfer

ECS

Electronic Clearing Scheme (ECS) operated by the RBI since 1996-97 Utilises BANKNET and INFINET Facilitates payment from a single account at a bank branch to any number of accounts maintained with the branches of the same or other banks Eg., Payment of dividends RBI has also launched ECS Debit for payment to utility companies like Telephones, Electricity etc..

Branch Banking.

Branch banking is the act of doing one's banking business at a location that is separate from the bank's central business location. Many large and small banks use branch banking in order to extend the reach of their services to different locations in a community, state, or country. Smaller branches are also less expensive to operate, and often easier for customers to access, while providing all of the features of a larger bank.

Electronic Funds Transfer (EFT)

Hosted and operated by the RBI. Permits fund transfer up to Rs 5 lacs from any account at any branch of any member bank in any city to any other account at any branch of any member bank in any other city. RBI acts as the service provider as well as regulator.

INFINET

Indian Financial Network Set up by RBI in June 1999 Satellite based WAN using VSAT (Very Small Aperture Terminal) technology. The hub and Network Management System of INFINET are located in the Institute for Development and Research in Banking Technology. Major applications: E-mail, Electronic Clearing Service - Credit and Debit, Electronic Funds Transfer.

Indian Banking-Now...

Transparency in Banking. Narrow Banking. Relationship Banking. Retail / Personal / Private Banking. Hi-tech Banking. Virtual Banking . Universal Banking.

Important rates

Business Segmentation

Main Cost and Income Components

Regulatory requirements for banks

Structure of Indian banking industry

Measures of Banks Profitability

Although net income gives us an idea of how well a bank is doing, it suffers from one major drawback. It does not adjust for the bank's size, thus making it hard to compare how well one bank is doing relative to another. A basic measure of bank profitability that corrects for the size of the bank is the return on assets (ROA). Secondly, because the owners of a bank must know whether their bank is being managed well, ROA serves as a good method to identify it. ROA = Net profit after taxes / assets

The return on assets provide information on how efficiently a bank is being run because it indicates how much profits are generated by each dollar of assets.

Measures of Banks Profitability

However, what the bank's owners (equity holders) care about most is how much the bank is earning on their equity investment. This information is provided by the other basic measure of bank profitability, the return on equity (ROE). ROE = Net profit after taxes / equity capital

Measures of Banks Profitability

There is a direct relationship between return on assets (which measures how efficiently the bank is run) and the return on equity (which measures how well the owners are doing on their investment). This relationship is determined by the equity multiplier (EM), the amount of assets per dollar of equity capital. EM = Assets / Equity capital

Measures of Banks Profitability

ROE can also be expressed as a multiplication of ROA and EM ROE = ROA * EM This formula tells us what happens to the return on equity when a bank holds a smaller amount of capital (equity) for a given amount of assets. For example, X bank has $100 million of assets and $10 million of equity, which gives it an equity multiplier of 10 ( = $100 million / $10 million). The Y bank, in contrast, has only $4 million of equity and $100 million of assets, which gives it and equity multiplier of 25 ( = $100 million / $4million). Suppose that these banks have been equally well run so that they have the same return on assets, 1%. The return on equity for the X bank equals to 1% * 10 = 10% , while the return on equity for the Y bank equals 1% * 25 = 25%. The equity holders in the Y bank are clearly a lot happier than the equity holders in the X bank because they are earning more than twice as high a return. We now can see why the owners of bank may not want it to hold a lot of capital. Given the return on assets, the lower the bank capital, the higher the return for the owners of the bank.

Measures of Banks Profitability

Another commonly used measure of bank performance is called the net interest margin (NIM). NIM is the difference between interest income and interest expenses as a percentage of total assets.

NIM = (Interest income - Interest expenses) / Assets

One of the bank's primary intermediation functions is to issue liabilities and use the proceeds to purchase income earnings assets. If a bank manager has done a good job of asset and liability management such that the bank earns substantial income on its assets and have low costs on its liability, profits will be high. How well a bank manages its asset and liabilities is affected by the spread between the interest earned on the bank's assets and the interest cost on its liabilities. This spread is exactly what net interest margin measures. If the bank is able to raise funds with liabilities that have low interest costs and is able to acquire assets with high interest income, the net interest margin will be high and the bank is likely to be highly profitable. If the interest cost of its liabilities rises relatively to the interest earned on its assets, the net interest margin will fall, and bank profitability will suffer.

Working of Banking Business

Conclusion

The structure is integrated, stable and efficient. Although the reform has made considerably progress in India, much need to be done with regard to legal and constitutional reform including bankruptcy procedures. It is hoped that the necessary legislative action in this area shall be initiated soon.