Economy Lecture 2

1. Theory:
1.
2.
3.
4.
5.

evolution of banking system

Nationalization
SLR, CRR, PSL
Narsimhan I, II
MCQ

2. Current:
1.
2.
3.

New license (brief)

Mahila Bank (Detail)
MCQ

3. Mains answer writing

Financial intermediaries
Barter => Double coincidence of wants
Money => circular flow of income
Financial intermediaries
Banking institutions
Non-banking institutions

Evolution (Pre independence)

Firangi Banks
Bombay, Bengal, Madras Presidency=> Imperial Bank21 =>SBI55
British Army, Bureaucrats
Swadeshi Banks
Allahabad Bank, PNB, BoB, Canara
Focus: Foreign trade, Merchants
Local=>Shroff, Moneylenders.
Financial inclusion _____.

Evolution (Pre independence)

Birth of RBI: why?
1. By 30s: 1200+ banks
2. Only company law
3. 30s Great depression =>defaults
4. 34 RBI

Evolution (Post-independence)
SBI, ICICI, PNB, BoB.
Focus: merchant, industrial houses
Branch increase yes
Rural penetration no
FYP achievement
Nexus of industrial houses vs banks.

Nationalization of Banks
55
69
80

Financial inclusion:
RRB
Cooperative banks
NABARD

1 Imperial bank
14 50 cr. deposit
6 200 Andra,
Vijaya, Oriental

Mock Question
Skip
Attempt
Mark n review

Mock Question (2013)

Q. In context of independent India's economy, which one of
the following was the earlier event to take place?
A. Nationalization of insurance company
B. Nationalization of state bank of India
C. Enactment of Banking regulation Act
D. Introduction of first Five year plan.

1. Skip

2. Attempt

3. Mark n Review

Mock Question (2009)

Q. In context of independent India's economy, which one of
the following was the earlier event to take place?
A. Nationalization of insurance company: 55-56
B. Nationalization of state bank of India: 55
C. Enactment of Banking regulation Act: 49
D. Introduction of first Five year plan: 51

Nationalization of Banks: problems

Administered interest rate
political interference, loan mela=>NPA=>Civil Court.
Trade union, VRS
high reserve requirement: CRR 15%, SLR 40%=>
hard to get loans for business=> BoP crisis

Nationalization: high reserve ratio

Deposit
Time Deposit
Demand Deposit
Net Demand and Time
Liabilities (NDTL)

Example
s
FDRD
CASA
+100 cr.

NBFC cannot accept Demand

Deposit
CRR, SLR computed on NDTL

Nationalization: high reserve ratio: CRR

Deposit

Examples

Time Deposit

FDRD

Demand Deposit

CASA

Net Demand and Time

Liabilities (NDTL)

+100 cr.

Reserve
CRR (min 3%)

(-) 15 [no profit]

Cash Reserve Ratio

Both sch. & non
Penalty
No profit. Except 1999.
Right now 4%

Nationalization: high reserve ratio SLR

Deposit

Examples

Time Deposit

FDRD

Demand Deposit

CASA

Net Demand and Time

Liabilities (NDTL)

+100 cr.

Reserve
CRR (min 3%)

(-) 15 [no profit]

SLR (min 25%)

(-) 40 [some profit]

Money left with bank

=45

Statutory liquidity Ratio

All banks (sch, Non-sch.)
Cash, gold, RBI approved
securities
Right now 23%

Nationalization: high reserve ratio (PSL)

Deposit

Examples

Time Deposit

FDRD

Demand Deposit

CASA

Net Demand and Time

Liabilities (NDTL)

+100 cr.

Reserve

CRR (min 3%)

(-) 15 [no profit]

SLR (min 25%)

(-) 40 [some profit]

Money left with bank

=45

PSL (40%)

=45 x 0.4=18

Left for normal borrowers =45-18=27 cr.

Priority sector lending

40% of net credit
Yearly
jain

Mock Q from 2012s

CSAT

Which of the following measures would result in an increase in the

money supply in economy? (2012)
1. Purchase of government securities from public by central bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank
4. Sale of government securities to the public by central bank.
Answer choice
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4

1. Skip

2. Attempt

3. Mark n Review

Which of the following measures would result in an increase in the

money supply in economy? (2012)
1. Purchase of government securities from public by central bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank
4. Sale of government securities to the public by central bank.
Answer choice
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4

Which of the following measures would result in an increase in the

money supply in economy? (2012)
1. Purchase of government securities from public by central bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank.
4. Sale of government securities to the public by central bank.
Answer choice
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4

Nationalization: high reserve ratio (before

LPG)
Deposit

Examples

Time Deposit

FDRD

Demand Deposit

CASA

Net Demand and Time

Liabilities (NDTL)

+100 cr.

Reserve

CRR (min 3%)

(-) 15 [no profit]

SLR (min 25%)

(-) 40 [some profit]

Money left with bank

=45

PSL (40%)

=45 x 0.4=18

Left for normal borrowers =45-18=27 cr.

Consequences?
1. High cost of credit
2. low expansion => jobs,
taxations, export ($$)
3. SLR not lowered
4. Government borrowing
5. Fiscal deficit, BoP

1991: Narsimhan Committee I (GoI)

Deregulation of interest rate=>BPLR=>Base Rate.
PSL @normal interest rates=> interest subvention
Debt recovery tribunal => 1993 =>SARFAESI 2002
Liberate Branch expansion policy
Reduce CRR, SLR=>(15,40)=>(4,23)
Private / foreign banks=> 93 =>01 =>13
NBFC regulatory framework
1992=>SBI shares sold. =>GoI ~60%

1998: Narsimhan Committee II (GoI)

1. NPA 0%, VRS
2. Legal reforms for loan recovery. =>SARFAESI 2002
3. Computerization, electronic fund transfer, legal framework => Payment and
Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale (RTGS)
4. Permit new private /foreign banks.
Before

After

- Banks
- NBFC
- DFI (Development Financial
institutions)- ICICI, IDBI, IFCI etc.

1. Banks
2. NBFC

1998: Narsimhan Committee II (GoI)

Before
1. Banks
2. NBFC
3. DFI (Development
Financial
institutions)- ICICI,
IDBI, IFCI etc.

After
1.Banks
2.NBFC

Private banks 90s-2001

Guideline

Operational Who?

93

94-95

1. ICICI
2. HDFC
3. UTI=>Axis (07)
4. IDBI
5. Indus
6. DCB
7. Global Trust Bank (2001 scam, OBC)
8. Bank of Punjab=>Centurion bank
9. Centurian Bank=>(HDFC)
10.Times Bank (HDFC)

01

03-04

1.
2.

Kotak Mahindra
Yes Bank

Private Bank License (2013)

Feb13- RBI notification
26=> Ambani, Birla, Bajaj, Tata, Muthoot, Indian post
Minus (TATA, Videocon)
+1 KC Land and finance ltd.
=25 left.
Bimal Jalan Committee
First meeting Nov13=> Feb14
=>Mahila Bank Sep13 (public sector)

Banking 2014

Bimal,
private
Bank
License

Nachiket,
Financial
inclusion

Mahila
Bank

Bharatiya Mahila Bank (2013)

Budget 2013; 1000 crore Rs. (100% State
Owned)
Nothing new: 80s Pak, Tanzania 2009
MBN Rao Panel blue print (Canara)
Sept. License. Indira Gandhis bday
(November 19)
HQ Delhi but launched from Mumbai due to
model code of conduct.
Usha Anantha-Subramanian
BoD=all women.
Staff, deposit= male + female; BoB, PNB
deputation.
Loan => predominantly to women.

Bharatiya Mahila Bank (2013)

PSB

4%

Bharatiya Mahila Bank

4.5%; (1 lakh+) 5%

Kotak

6%

Yes Bank

8%

kitchen loans, education loans, small

home-based catering businesses.
loans up to Rs 1 crore without collateral
CGTMSE (MSME Ministry)
Credit Guarantee Fund Trust for Micro
and Small Enterprises (CGTMSE).

Bharatiya Mahila Bank (2013)

Skill development, financial literacy
among women.
Core Banking Software by FIS
(American Co.)
Most banks use Finacle by Infosys.
Target

1. 25% branches in unbanked rural

areas.
2. By March 2014: 25 branches
3. By 2020: 700+ branches; 60k cr
business

Bakwaas Sawal
Who Among the following is the
chairman of Bharatiya Mahila
Bank?
A. Arundhati Bhattacharya
B. Aruna Bahuguna
C. Usha Ananthasubramanium
D. Shikha Sharma

Correct Statements about

Bharatiya Mahila Bank?
A. It was inaugurated in Mumbai
B. On 25th November, the birth
anniversary of Indira Gandhi
C. Both A and B
D. Neither A nor B.

2TF
Correct Statements about Bharatiya Mahila Bank?
A. Bharatiya Mahila Bank is owned by a consortium of Government of
India, NABARD and financial institutions.
B. For the first three years, Bharatiya Mahila bank will be exempted
from CRR and SLR requirements.
C. Both A and B
D. Neither A nor B

Assertion reasoning
(A) Bharatiya Mahila Bank will bring down the gender divide in financial
inclusion.
(R) Bharatiya Mahila bank will cater only female depositors and borrowers.
Options
A. Both the statements are individually true and Statement R is the correct
explanation of Statement A.
B. Both the statements are individually true but Statement R is not the
correct explanation of Statement A.
C. Statement A is true but Statement R is false.
D. Statement A is false but Statement R is true.

3TF
Correct Statements about Bharatiya Mahila Bank?
1. They offers higher interest rates to female depositors over male depositors.
2. The loan interest rates in Bharatiya Mahila bank, are decided by government of
India.
3. Government has provided the initial capital in this bank from Nirbhaya Fund.
Correct statements
A. Only 1 and 3
B. Only 2 and 3
C. only 1 and 2
D. None of Above

1. Skip

2. Attempt

3. Mark n Review

3TF how to solve:

Correct Statements about Bharatiya Mahila Bank?
1. They offer higher interest rates to female depositors over male depositors.
2. The loan interest rates in Bharatiya Mahila bank, are decided by government of
India.
3. (WRONG) Government has provided the initial capital in this bank from
Nirbhaya Fund. (Hindu 10 Jan 2014)
Answer Choices.
A. Only 1 and 3
B. Only 2 and 3
C. only 1 and 2
D. None of Above

3TF how to solve:

Correct Statements about Bharatiya Mahila Bank?
1. (WRONG) They offer higher interest rates to female depositors over male
depositors. (Hindu)
2. (WRONG) The loan interest rates in Bharatiya Mahila bank, are decided by
government of India. (Base rate theory)
3. (WRONG) Government has provided the initial capital in this bank from
Nirbhaya Fund. (Hindu 10 Jan 2014)
Answer Choice
A. Only 1 and 3
B. Only 2 and 3
C. only 1 and 2
D. None of Above

Mains
GS: 250 marks, 3 hours = 60 x 3 =180 minutes
Mark

Words

Timelimit 180 Timelimit 170

20

0.72

0.68

100

3.6

3.4

10

200

7.2

6.8

250

5000

180

170

Mains
Discuss the importance of Bharatiya Mahila Bank
in bringing down the gender divide in financial
inclusion. (5m | 100 words)

Discuss the importance of Bharatiya Mahila Bank in bringing down the gender divide in financial
inclusion. (5m | 100 words)

FIRST in World
Men can open accounts, interest rates
Usha Chairman, HQ Delhi.
Financial inclusion? Gender Divide?
2013, BMB started operation with 1k crore capital from government of India.
Low cost education loans for girls.
Most property titles are in the name of male family member.
Loans without collateral for women entrepreneurs, upto 1 crore, for catering,
creches and other microbiz.
Targets 2020. (60k crore, 700+ branch), Rural branching 25%
Run campaign on financial literacy, awareness.
SHG, specific schemes.
Conclusion!!

Interview
1. Bharatiya Mahila Bank is a mere symbolic exercise
for feel good publicity. Do you agree? Yes/No and
Why?

Bharatiya Mahila Bank (2013)-Anti points

SBI, PNB, BoB better suited, Govt. already majority shareholder.
25% rural branching: duplication of effort.
Higher Staff deputation
In the first phase focus on state capitals and UT.
4.5%/5% interest pan India presence.
Overall a Tokenism/symbol but not substance.