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Bank

From Wikipedia, the free encyclopedia Jump to: navigation, search For other uses, see Bank (disambiguation). "Banker" and "Bankers" redirect here. For other uses, see Banker (disambiguation). This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (July 2009) Banking
A series on financial services

Types of banks[show] Bank accounts[show] Bank cards[show] Funds transfer[show] Banking terms[show] Finance series[show]

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A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links together customers that have capital deficits and customers with capital surpluses. Due to their influential status within the financial system and upon national economies, banks are highly regulated in most countries. Most nations have institutionalised a system known as fractional reserve banking, in which banks hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords. Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and lending that had its roots in the ancient world. In the history of banking, a number of banking dynasties have played a central role over many centuries. The oldest existing bank, Monte dei Paschi di Siena, was founded in 1472 in Siena, Italy.[1]

Contents

1 History o 1.1 Origin of the word 2 Definition 3 Banking o 3.1 Standard activities o 3.2 Channels o 3.3 Business model o 3.4 Products 3.4.1 Retail banking 3.4.2 Business (or commercial/investment) banking 4 Risk and capital

5 Banks in the economy o 5.1 Economic functions o 5.2 Bank crisis o 5.3 Size of global banking industry 6 Regulation 7 Types of banks o 7.1 Types of retail banks o 7.2 Types of investment banks o 7.3 Both combined o 7.4 Other types of banks 8 Challenges within the banking industry o 8.1 United States o 8.2 Competition for loanable funds 9 Accounting for bank accounts o 9.1 Brokered deposits 10 Globalization in the Banking Industry 11 See also 12 References 13 Further reading 14 External links

History
Personal finance

Credit and debt


Mortgage Car loan Credit card Unsecured personal loan Rent-to-own Student loan

Pawn Transaction

Title loan Payday loan Refund Refinancing

anticipation loan Debt

consolidation

Bankruptcy

Employment contract

Salary Wage

Salary packaging Employee stock option Employee benefit

Retirement

Pension Defined contribution

Defined benefit

Social security Business plan Corporate action

Personal budget

Financial planner Financial adviser Stockbroker Financial independence Estate planning

See also

Banks and credit unions Cooperatives

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Main article: History of banking The origins of modern banking can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe.[2] One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de' Medici in 1397.[3] The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.[4] Modern banking practice, including fractional reserve banking and the issue of banknotes emerged in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths of London, who possessed private vaults, and charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee; these receipts could not be assigned, only the original depositor could collect the stored goods.

The sealing of the Bank of England Charter (1694). Gradually the goldsmiths began to lend the money out on behalf of the depositor, which led to the development of modern banking practices; promissory notes (which evolved into banknotes) were issued for money deposited as a loan to the goldsmith.[5] The goldsmith paid interest on these deposits. Since the promissory notes were payable on demand, and the advances (loans) to the goldsmith's customers were repayable over a longer time period, this was an early form of fractional reserve banking. The promissory notes developed into an assignable instrument which could circulate as a safe and convenient form of money backed by the goldsmith's promise to

pay,[6] allowing goldsmiths to advance loans with little risk of default.[7] Thus, the goldsmiths of London became the forerunners of banking by creating new money based on credit. The Bank of England was the first to begin the permanent issue of banknotes, in 1695.[8] The Royal Bank of Scotland established the first overdraft facility in 1728.[9] By the beginning of the 19th century a bankers' clearing house was established in London to allow multiple banks to clear transactions. The Rothschild's pioneered international finance on a large scale, financing the purchase of the Suez canal for the British government. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.[10] It is followed by Berenberg Bank of Hamburg (1590)[11] and Sveriges Riksbank of Sweden (1668).

Origin of the word


The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.[12] One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350325 BC, presented in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza () means both a table and a bank.

Definition
The definition of a bank varies from country to country. See the relevant country page (below) for more information. Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:[13]

conducting current accounts for his customers, paying cheques drawn on him/her, and collecting cheques for his/her customers.

Banco de Venezuela in Coro.

Branch of Nepal Bank in Pokhara, Eastern Nepal. In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how the bank is structured or regulated. The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purposes of entry regulating and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions:

"banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).

"banking business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period; 2. paying or collecting checks drawn by or paid in by customers.[14] Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect checks.[15]

Banking
Standard activities

Large door to an old bank vault. Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.

Banks can create new money when they make a loan. New loans throughout the banking system generate new deposits elsewhere in the system. The money supply is usually increased by the act of lending, and reduced when loans are repaid faster than new ones are generated. In the United Kingdom between 1997 and 2007, there was a big increase in the money supply, largely caused by much more bank lending, which served to push up property prices and increase private debt. The amount of money in the economy as measured by M4 in the UK went from 750 billion to 1700 billion between 1997 and 2007, much of the increase caused by bank lending. [16] If all the banks increase their lending together, then they can expect new deposits to return to them and the amount of money in the economy will increase. Excessive or risky lending can cause borrowers to default, the banks then become more cautious, so there is less lending and therefore less money so that the economy can go from boom to bust as happened in the UK and many other Western economies after 2007.

Channels
Banks offer many different channels to access their banking and other services:

Automated Teller Machines A branch is a retail location Call center Mail: most banks accept cheque deposits via mail and use mail to communicate to their customers, e.g. by sending out statements Mobile banking is a method of using one's mobile phone to conduct banking transactions Online banking is a term used for performing multiple transactions, payments etc. over the Internet Relationship Managers, mostly for private banking or business banking, often visiting customers at their homes or businesses Telephone banking is a service which allows its customers to conduct transactions over the telephone with automated attendant or when requested with telephone operator Video banking is a term used for performing banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a video conference enabled bank branch clarification DSA is a Direct Selling Agent, who works for the bank based on a contract. Its main job is to increase the customer base for the bank.

Business model
A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is via charging interest on the capital it lends out to customers.[citation needed] The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs

and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance. In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability). Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit. Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept its credit and/or debit cards. This helps in making profit and facilitates economic development as a whole.[17]

Products

A former building society, now a modern retail bank in Leeds, West Yorkshire.

An interior of a branch of National Westminster Bank on Castle Street, Liverpool

Bank of Georgia headquarters in Tbilisi, Georgia (country) Retail banking


Checking account Savings account Money market account Certificate of deposit (CD) Individual retirement account (IRA) Credit card Debit card Mortgage Home equity loan Mutual fund Personal loan Time deposits ATM card Current Accounts Cheque books

Business (or commercial/investment) banking


Business loan Capital raising (Equity / Debt / Hybrids) Mezzanine finance

Project finance Revolving credit Risk management (FX, interest rates, commodities, derivatives) Term loan Cash Management Services (Lock box, Remote Deposit Capture, Merchant Processing) credit services

Risk and capital


Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Some of the main risks faced by banks include:

Credit risk: risk of loss[citation needed] arising from a borrower who does not make payments as promised. Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). Market risk: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. Operational risk: risk arising from execution of a company's business functions. Reputational risk: a type of risk related to the trustworthiness of business. Macroeconomic risk: risks related to the aggregate economy the bank is operating in.[18]

The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted (see risk-weighted asset).

Banks in the economy

SEB main building in Tallinn, Estonia See also: Financial system

Economic functions
The economic functions of banks include: 1. Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash. 2. Netting and settlement of payments banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. Credit intermediation banks borrow and lend back-to-back on their own account as middle men. 4. Credit quality improvement banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are

generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. Asset liability mismatch/Maturity transformation banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets). 6. Money creation whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created.

Bank crisis
Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to the bank will not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if rising interest rates force it to pay relatively more on its deposits than it receives on its loans). Banking crises have developed many times throughout history, when one or more risks have emerged for a banking sector as a whole. Prominent examples include the bank run that occurred during the Great Depression, the U.S. Savings and Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s.

Size of global banking industry


Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record US$96.4 trillion while profits declined by 85% to US$115 billion. Growth in assets in adverse market conditions was largely a result of recapitalization. EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment banking totaled US$66.3 billion in 2009, up 12% on the previous year.[19] The United States has the most banks in the world in terms of institutions (7,085 at the end of 2008) and possibly branches (82,000).[citation needed] This is an indicator of the geography and regulatory structure of the USA, resulting in a large number of small to medium-sized institutions in its banking system. As of Nov 2009, China's top 4 banks have in excess of 67,000 branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy each had more than 30,000 branchesmore than double the 15,000 branches in the UK.[19]

Regulation
Main article: Banking regulation See also: Basel II Currently commercial banks are regulated in most jurisdictions by government entities and require a special bank license to operate. Usually the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits, even if they are not repayable to the customer's orderalthough money lending, by itself, is generally not included in the definition. Unlike most other regulated industries, the regulator is typically also a participant in the market, being either a publicly or privately governed central bank. Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries this is not the case. In the UK, for example, the Financial Services Authority licenses banks, and some commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of England, the UK government's central bank. Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customerdefined as any entity for which the bank agrees to conduct an account. The law implies rights and obligations into this relationship as follows: 1. The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank. 2. The bank agrees to pay the customer's checks up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit. 3. The bank may not pay from the customer's account without a mandate from the customer, e.g. a check drawn by the customer. 4. The bank agrees to promptly collect the checks deposited to the customer's account as the customer's agent, and to credit the proceeds to the customer's account. 5. The bank has a right to combine the customer's accounts, since each account is just an aspect of the same credit relationship. 6. The bank has a lien on checks deposited to the customer's account, to the extent that the customer is indebted to the bank. 7. The bank must not disclose details of transactions through the customer's account unless the customer consents, there is a public duty to disclose, the bank's interests require it, or the law demands it. 8. The bank must not close a customer's account without reasonable notice, since checks are outstanding in the ordinary course of business for several days. These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also

modify the above terms and/or create new rights, obligations or limitations relevant to the bankcustomer relationship. Some types of financial institution, such as building societies and credit unions, may be partly or wholly exempt from bank license requirements, and therefore regulated under separate rules. The requirements for the issue of a bank license vary between jurisdictions but typically include: 1. Minimum capital 2. Minimum capital ratio 3. 'Fit and Proper' requirements for the bank's controllers, owners, directors, or senior officers 4. Approval of the bank's business plan as being sufficiently prudent and plausible.

Types of banks
Banks' activities can be divided into retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entities; private banking, providing wealth management services to high net worth individuals and families; and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit organizations.

Types of retail banks

National Bank of the Republic, Salt Lake City 1908

ATM Al-Rajhi Bank

National Copper Bank, Salt Lake City 1911

Commercial banks: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses. Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners. Community development banks: regulated banks that provide financial services and credit to under-served markets or populations. Land development banks: The special banks providing Long Term Loans are called Land Development Banks, in the short, LDB. The history of LDB is quite old. The first LDB was started at Jhang in Punjab in 1920. The main objective of the LDBs are to promote the development of land, agriculture and increase the agricultural production. The LDBs provide long-term finance to members directly through their branches.[20] Credit unions or Co-operative Banks: not-for-profit cooperatives owned by the depositors and often offering rates more favorable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined area, members of a certain union or religious organizations, and their immediate families.

Postal savings banks: savings banks associated with national postal systems. Private banks: banks that manage the assets of high net worth individuals. Historically a minimum of USD 1 million was required to open an account, however, over the last years many private banks have lowered their entry hurdles to USD 250,000 for private investors.[citation needed] Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.

Savings bank: in Europe, savings banks took their roots in the 19th or sometimes even in the 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative; in others, socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralized distribution network, providing local and regional outreachand by their socially responsible approach to business and society. Building societies and Landesbanks: institutions that conduct retail banking. Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments. A Direct or Internet-Only bank is a banking operation without any physical bank branches, conceived and implemented wholly with networked computers.

Types of investment banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, provide investment management, and advise corporations on capital market activities such as mergers and acquisitions. Merchant banks were traditionally banks which engaged in trade finance. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike venture capital firms, they tend not to invest in new companies.

Both combined

Universal banks, more commonly known as financial services companies, engage in several of these activities. These big banks are very diversified groups that, among other services, also distribute insurance hence the term bancassurance, a portmanteau word combining "banque or bank" and "assurance", signifying that both banking and insurance are provided by the same corporate entity.

Other types of banks

Central banks are normally government-owned and charged with quasi-regulatory responsibilities, such as supervising commercial banks, or controlling the cash interest rate. They generally provide liquidity to the banking system and act as the lender of last resort in event of a crisis. Islamic banks adhere to the concepts of Islamic law. This form of banking revolves around several well-established principles based on Islamic canons. All banking activities must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees on the financing facilities that it extends to customers.

Challenges within the banking industry

The examples and perspective in this section may not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (September
2009)

This section does not cite any references or sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. (September 2008)

United States
Main article: Banking in the United States The United States banking industry is one of the most heavily regulated in the world,[21] with multiple specialized and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation (FDIC) as a regulator. However, for soundness examinations (i.e., whether a bank is operating in a sound manner), the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks; and the Office of Thrift Supervision, or OTS, is the primary federal regulator for thrifts[disambiguation needed]. State nonmember banks are examined by the state agencies as well as the FDIC. National banks have one primary regulatorthe OCC. Qualified Intermediaries & Exchange Accommodators are regulated by MAIC. Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere. The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal inter-agency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing. In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve, FDIC, OTS, MAIC and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced and budgets have been cut. The remaining regulators face an increased burden with increased workload and more banks per regulator. While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures across the United States. The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations. It has been a challenge for banks to effectively set their growth strategies with the recent economic market. A rising interest rate environment may seem to help financial

institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders. The management of the banks asset portfolios also remains a challenge in todays economic environment. Loans are a banks primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. While always an issue for banks, declining asset quality has become a big problem for financial institutions. There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of good times. The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. Problems are more likely to go undetected, resulting in a significant impact on the bank when they are discovered. In addition, banks, like any business, struggle to cut costs and have consequently eliminated certain expenses, such as adequate employee training programs. Banks also face a host of other challenges such as aging ownership groups. Across the country, many banks management teams and board of directors are aging. Banks also face ongoing pressure by shareholders, both public and private, to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various categories of risk. Banking is also an extremely competitive industry. Competing in the financial services industry has become tougher with the entrance of such players as insurance agencies, credit unions, check cashing services, credit card companies, etc. As a reaction, banks have developed their activities in financial instruments, through financial market operations such as brokerage and MAIC trust & Securities Clearing services trading and become big players in such activities.

Competition for loanable funds


To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U.S. Department of Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.[22] To compete for deposits, US savings institutions offer many different types of plans:[22]

Passbook or ordinary deposit accounts permit any amount to be added to or withdrawn from the account at any time. NOW and Super NOW accounts function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts. Money market accounts carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance. Certificate accounts subject to loss of some or all interest on withdrawals before maturity.

Notice accounts the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal. Individual retirement accounts (IRAs) and Keogh plans a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal. Checking accounts offered by some institutions under definite restrictions. All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons. Club accounts and other savings accounts designed to help people save regularly to meet certain goals.

Accounting for bank accounts

Suburban bank branch Bank statements are accounting records produced by banks under the various accounting standards of the world. Under GAAP and MAIC there are two kinds of accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses. This means you credit a credit account to increase its balance, and you debit a credit account to decrease its balance.[23]

This also means you credit your savings account every time you deposit money into it (and the account is normally in credit), while you debit your credit card account every time you spend money from it (and the account is normally in debit). However, if you read your bank statement, it will say the oppositethat you credit your account when you deposit money, and you debit it when you withdraw funds. If you have cash in your account, you have a positive (or credit) balance; if you are overdrawn, you have a negative (or deficit) balance. Where bank transactions, balances, credits and debits are discussed below, they are done so from the viewpoint of the account holderwhich is traditionally what most people are used to seeing.

Brokered deposits
One source of deposits for banks is brokers who deposit large sums of money on the behalf of investors through MAIC or other trust corporations. This money will generally go to the banks which offer the most favorable terms, often better than those offered local depositors. It is possible for a bank to engage in business with no local deposits at all, all funds being brokered

deposits. Accepting a significant quantity of such deposits, or "hot money" as it is sometimes called, puts a bank in a difficult and sometimes risky position, as the funds must be lent or invested in a way that yields a return sufficient to pay the high interest being paid on the brokered deposits. This may result in risky decisions and even in eventual failure of the bank. Banks which failed during 2008 and 2009 in the United States during the global financial crisis had, on average, four times more brokered deposits as a percent of their deposits than the average bank. Such deposits, combined with risky real estate investments, factored into the savings and loan crisis of the 1980s. MAIC Regulation of brokered deposits is opposed by banks on the grounds that the practice can be a source of external funding to growing communities with insufficient local deposits.[24]

Globalization in the Banking Industry


In modern time there has been huge reductions to the barriers of global competition in the banking industry. Increases in telecommunications and other financial technologies, such as Bloomberg, have allowed banks to extend their reach all over the world, since they no longer have to be near customers to manage both their finances and their risk. The growth in crossborder activities has also increased the demand for banks that can provide various services across borders to different nationalities. However, despite these reductions in barriers and growth in cross-border activities, the banking industry is nowhere near as globalized as some other industries. In the USA, for instance, very few banks even worry about the Riegle-Neal Act, which promotes more efficient interstate banking. In the vast majority of nations around globe the market share for foreign owned banks is currently less than a tenth of all market shares for banks in a particular nation. One reason the banking industry has not been fully globalized is that it is more convenient to have local banks provide loans to small business and individuals. On the other hand for large corporations, it is not as important in what nation the bank is in, since the corporation's financial information is available around the globe. A Study of Bank Nationality and reach

See also
Types of institutions:

Terms and concepts:


Terms and concepts:


Crime:

Banking by country

Bad bank Bankers' bank Building Society Cooperative bank Credit union Ethical bank Industrial loan

Bank regulation Bankers' bonuses Call Report Cheque Electronic funds transfer Factoring (finance)

Bank Narrow fraud banking Bank Overdraft robbery Overdraft Cheque protection fraud Piggy bank Mortgage Pigmy fraud Deposit Scheme Lists: Private Banking List of

Banking in Australia Banking in Austria Banking in Banglade sh Banking in

company Islamic banking Mortgage bank Mutual savings bank Offshore banking Person-toperson lending Public bank Savings and loan association Savings bank Sparebank

Finance Fractionalreserve banking Full-reserve banking Hedge fund IBAN Internet banking Investment banking Mobile banking Money Money laundering

Stockbroker Substitute check SWIFT Tax haven Venture capital Wealth Management Wire transfer

largest banks List of accounting topics List of bank mergers in United States List of banks List of economics topics List of finance topics List of largest U.S. bank failures List of oldest banks List of stock exchanges

Canada Banking in China Banking in France Banking in Germany Banking in Greece Banking in Iran Banking in India Banking in Israel Banking in Italy Banking in Pakistan Banking in Russia Banking in Singapor e Banking in Switzerla nd Banking in Tunisia Banking in the United Kingdom Banking in the United States

References

1. Jump up ^ Jucca, Lisa; Emilio Parodi; Gavin Jones; Sophie Sassard (March 9, 2013). "Special Report: Downfall of the world's oldest bank". Reuters. Retrieved 13 July 2013. 2. Jump up ^ Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company. 3. Jump up ^ Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum 4. Jump up ^ Macesich, George (30 June 2000). "Central Banking: The Early Years: Other Early Banks". Issues in Money and Banking. Westport, Connecticut: Praeger Publishers (Greenwood Publishing Group). p. 42. doi:10.1336/0275967778. ISBN 978-0-27596777-2. Retrieved 2009-03-12. "The first state deposit bank was the Bank of St. George in Genoa, which was established in 1407." 5. Jump up ^ Thus by the 19th century we find [i]n ordinary cases of deposits of money with banking corporations, or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to restore, not the same money, but an equivalent sum, whenever it is demanded. Joseph Story, Commentaries on the Law of Bailments (1832, p. 66) and Money, when paid into a bank, ceases altogether to be the money of the principal (see Parker v. Marchant, 1 Phillips 360); it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. Lord Chancellor Cottenham, Foley v Hill (1848) 2 HLC 28. 6. Jump up ^ Richards. The usual denomination was 50 or 100 pounds, so these notes were not an everyday currency for the common people 7. Jump up ^ Richards, p. 40 8. Jump up ^ "A History of British Banknotes". 9. Jump up ^ "A short history of overdrafts". eccount money. 10. Jump up ^ Boland, Vincent (2009-06-12). "Modern dilemma for worlds oldest bank". Financial Times. Retrieved 23 February 2010. 11. Jump up ^ The world's second oldest bankand its plans for the future, thegatewayonline.com 12. Jump up ^ de Albuquerque, Martim (1855). Notes and Queries. London: George Bell. p. 431. 13. Jump up ^ United Dominions Trust Ltd v Kirkwood, 1966, English Court of Appeal, 2 QB 431 14. Jump up ^ (Banking Ordinance, Section 2, Interpretation, Hong Kong) Note that in this case the definition is extended to include accepting any deposits repayable in less than 3 months, companies that accept deposits of greater than HK$100 000 for periods of greater than 3 months are regulated as deposit taking companies rather than as banks in Hong Kong. 15. Jump up ^ e.g. Tyree's Banking Law in New Zealand, A L Tyree, LexisNexis 2003, page 70. 16. Jump up ^ Bank of England statistics and the book "Where does money come from?", page 47, by the New Economics Foundation. 17. Jump up ^ "How Banks Make Money". The Street. Retrieved 2011-09-08. 18. Jump up ^ Bolt, Wilko; Leo de Haan; Marco Hoeberichts; Maarten van Oordt; Job Swank (2012). "Bank Profitability during Recessions". Journal of Banking & Finance 36 (9): 25522564. doi:10.1016/j.jbankfin.2012.05.011. 19. ^ Jump up to: a b Banking 2010 PDF (638 KB) charts 78, pages 34. TheCityUK.

20. Jump up ^ TNAU. "LAND DEVELOPMENT BANK". TNAU Agritech Portal. Retrieved 8 January 2014. 21. Jump up ^ Scott Besley and Eugene F. Brigham, Principles of Finance, 4th ed. (Mason, OH: South-Western Cengage Learning, 2009), 125. This popular university textbook explains: "Generally speaking, U.S. financial institutions have been much more heavily regulated and faced greater limitations ... than have their foreign counterparts." 22. ^ Jump up to: a b Mishler, Lon; Cole, Robert E. (1995). Consumer and business credit management. Homewood: Irwin. pp. 128129. ISBN 0-256-13948-2. 23. Jump up ^ Statistics Department (2001). "Source Data for Monetary and Financial Statistics". Monetary and Financial Statistics: Compilation Guide. Washington D.C.: International Monetary Fund. p. 24. ISBN 978-1-58906-584-0. Retrieved 2009-03-14. 24. Jump up ^ "For Banks, Wads of Cash and Loads of Trouble" article by Eric Lipton and Andrew Martin in The New York Times July 3, 2009

Further reading

"Genoa and the history of finance: a series of firsts ?" Giuseppe Felloni, Guido Laura. 9 November 2004, ISBN 88-87822-16-6 (the book can be downloaded at www.giuseppefelloni.it)

Berger A. (2010). To What Extent Will the Banking Industry be Globalized? A Study of Bank Nationality and Reach in 20 European Nations.

External links
Find more about Bank at Wikipedia's sister projects Definitions and translations from Wiktionary Media from Commons Source texts from Wikisource

Guardian Datablog World's Biggest Banks Banking, Banks, and Credit Unions from UCB Libraries GovPubs A Guide to the National Banking System (PDF). Office of the Comptroller of the Currency (OCC), Washington, D.C. Provides an overview of the national banking system of the USA, its regulation, and the OCC.

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What is a Bank ? Introduction


Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts as the backbone of modern business. Development of any country mainly depends upon the banking system. The term bank is either derived from old Italian word banca or from a French word banque both mean a Bench or money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging.

A bank is a financial institution which deals with deposits and advances and other related services. It receives money from those who want to save in the form of deposits and it lends money to those who need it.

Definition of a Bank

Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays out on customer's order."

Characteristics / Features of a Bank

1. Dealing in Money

Bank is a financial institution which deals with other people's money i.e. money given by depositors.

2. Individual / Firm / Company

A bank may be a person, firm or a company. A banking company means a company which is in the business of banking.

3. Acceptance of Deposit

A bank accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers.

4. Giving Advances

A bank lends out money in the form of loans to those who require it for different purposes.

5. Payment and Withdrawal

A bank provides easy payment and withdrawal facility to its customers in the form of cheques and drafts, It also brings bank money in circulation. This money is in the form of cheques, drafts, etc.

6. Agency and Utility Services

A bank provides various banking facilities to its customers. They include general utility services and agency services.

7. Profit and Service Orientation

A bank is a profit seeking institution having service oriented approach.

8. Ever increasing Functions

Banking is an evolutionary concept. There is continuous expansion and diversification as regards the functions, services and activities of a bank.

9. Connecting Link

A bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money.

10. Banking Business

A bank's main activity should be to do business of banking which should not be subsidiary to any other business.

11. Name Identity

A bank should always add the word "bank" to its name to enable people to know that it is a bank and that it is dealing in money.

What is banking and what is the role of banking in an economy?

In simple words, Banking can be defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit. However, with the passage of time, the activities covered by banking business have widened and now various other services are also offered by banks. The banking services these days include issuance of debit and credit cards, providing safe custody of valuable items, lockers, ATM services and online transfer of funds across the country / world.

It is well said that banking plays a silent, yet crucial part in our day-to-day lives. The banks perform financial intermediation by pooling savings and channelizing them into investments through maturity and risk transformations, thereby keeping the economys growth engine revving.

Banking business has done wonders for the world economy. The simple looking method of accepting money deposits from savers and then lending the same money to borrowers, banking activity encourages the flow of money to productive use and investments. This in turn allows the economy to grow. In the absence of banking business, savings would sit idle in our homes, the entrepreneurs would not be in a position to raise the money, ordinary people dreaming for a new car or house would not be able to purchase cars or houses. Ads by Google

What is a bank ? Define a Bank ?

In simple words, we can say that Bank is a financial institution that undertakes the banking activity ie.it accepts deposits and then lends the same to earn certain profit.

What is a Banking Company ?

Any company, which transacts the business of banking defined above is termed as Banking company

What is Banking System ?

Banking systems can be defined as a mechanism through which the money supply of the country is created and controlled.

Which are the oldest banks in India :

In 1839, some Indian merchants in Calcutta established India's first bank known as "Union Bank", but it could not survive for long and failed in 1848 due to economic crisis of 1848-49. Similarly, in 1863, "Bank of Upper India" was formed but it failed in 1913.

In 1865, "Allahabad Bank" was established as a joint stock bank. This bank has survived till date and is now considered as the oldest surviving bank in India.

How Do the Banks Work / What is the most important element for a bank to survive:

Trust is the most important element for a bank to survive. People keep money in a bank only when they trust that it will be given back to them as and when they demand the same on at least on the date of maturity in case the same has been given in the shape of fixed deposits. Of course, there are other reasons also for which people prefer to keep money in a bank rather than keep at home in their own safe. They can earn some extra money when the money is kept in saving or fixed deposits. Moreover, they can make payment by issuance of cheques and need not carry money for their day to day needs.

Banking in India
From Wikipedia, the free encyclopedia Jump to: navigation, search

Structure of the organised banking sector in India. Number of banks are in brackets.

Banking in India in the modern sense originated in the last decades of the 18th century. The first banks were Bank of Hindustan (1770-1829) and The General Bank of India, established 1786 and since defunct. The largest bank, and the oldest still in existence, is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955. For many years the presidency banks acted as quasi-central banks, as did their successors, until the Reserve Bank of India was established in 1935. In 1969 the Indian government nationalised all the major banks that it did not already own and these have remained under government ownership. They are run under a structure know as 'profit-making public sector undertaking' (PSU) and are allowed to compete and operate as commercial banks. The Indian banking sector is made up of four types of banks, as well as the PSUs and the state banks, they have been joined since 1990s by new private commercial banks and a number of foreign banks. Banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in rural India and to the poor still remains a challenge. The government has developed initiatives to address this through the State bank of India expanding its branch network and through the National Bank for Agriculture and Rural Development with things like microfinance.

Contents

1 History o 1.1 Colonial era o 1.2 Post-Independence o 1.3 Nationalization in the 1960s o 1.4 Liberalization in the 1990s o 1.5 Current period 2 Adoption of banking technology 3 Further reading 4 See also 5 References 6 External links

History
In ancient India there is evidence of loans from the Vedic period (beginning 1750 BC).[1][2] Later during the Maurya dynasty (321 to 185 BC), an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which

corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another.[3]

Colonial era
During the period of British rule merchants established the Union Bank of Calcutta in 1829, first as a private joint stock association, then partnership. Its proprietors were the owners of the earlier Commercial Bank and the Calcutta Bank, who by mutual consent created Union Bank to replace these two banks. In 1840 it established an agency at Singapore, and closed the one at Mirzapore that it had opened in the previous year. Also in 1840 the Bank revealed that it had been the subject of a fraud by the bank's accountant. Union Bank was incorporated in 1845 but failed in 1848, having been insolvent for some time and having used new money from depositors to pay its dividends.[4] The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India, it was not the first though. That honour belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French possession, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking centre. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalised and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found

banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (19141918) through the end of the Second World War (1939 1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Years 1913 1914 1915 1916 1917 1918 Number of banks Authorised capital Paid-up Capital that failed (Rs. Lakhs) (Rs. Lakhs) 12 274 35 42 710 109 11 56 5 13 231 4 9 76 25 7 209 1

Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralysing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was established in April 1935, but was nationalised on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[5] In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India". The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

Nationalization in the 1960s


Despite the provisions, control and regulations of the Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, the then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization."[6] The meeting received the paper with enthusiasm. Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969') and nationalised the 14 largest commercial banks with effect from the midnight of 19 July 1969. These banks contained 85 percent of bank deposits in the country.[6] Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With the second dose of nationalisation, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy

Liberalization in the 1990s


In the early 1990s, the then government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalised the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 464 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this

led to the retail boom in India. People not just demanded more from their banks but also received more.

Current period
By 2010, banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connexion with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.[7][8][9]

Adoption of banking technology


The IT revolution has had a great impact on the Indian banking system. The use of computers has led to the introduction of online banking in India. The use of computers in the banking sector in India has increased many fold after the economic liberalisation of 1991 as the country's banking sector has been exposed to the world's market. Indian banks were finding it difficult to compete with the international banks in terms of customer service, without the use of information technology. The RBI set up a number of committees to define and co-ordinate banking technology. These have included:

In 1984 was formed the Committee on Mechanisation in the Banking Industry (1984)[10] whose chairman was Dr. C Rangarajan, Deputy Governor, Reserve Bank of India. The major recommendations of this committee were introducing MICR technology in all the banks in the metropolises in India.[11] This provided for the use of standardized cheque forms and encoders. In 1988, the RBI set up the Committee on Computerisation in Banks (1988)[12] headed by Dr. C Rangarajan. It emphasized that settlement operation must be computerized in the

clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there should be National Clearing of inter-city cheques at Kolkata, Mumbai, Delhi, Chennai and MICR should be made Operational. It also focused on computerisation of branches and increasing connectivity among branches through computers. It also suggested modalities for implementing on-line banking. The committee submitted its reports in 1989 and computerisation began from 1993 with the settlement between IBA and bank employees' associations.[13]

In 1994, the Committee on Technology Issues relating to Payment systems, Cheque Clearing and Securities Settlement in the Banking Industry (1994)[14] was set up under Chairman W S Saraf. It emphasized Electronic Funds Transfer (EFT) system, with the BANKNET communications network as its carrier. It also said that MICR clearing should be set up in all branches of all those banks with more than 100 branches. In 1995, the Committee for proposing Legislation on Electronic Funds Transfer and other Electronic Payments (1995)[15] again emphasized EFT system.[13]

Total numbers of ATMs installed in India by various banks as on end June 2012 is 99,218.[16] The New Private Sector Banks in India are having the largest numbers of ATMs, which is followed by off-site ATMs belonging to SBI and its subsidiaries and then by Nationalised banks and Foreign banks. While on site is highest for the Nationalised banks of India.[13] Branches and ATMs of Scheduled Commercial Banks as on end March 2005[13] Bank type Number of branches On-site ATMs Off-site ATMs Total ATMs Nationalised banks 33627 3205 1567 4772 State Bank of India 13661 1548 3672 5220 Old private sector banks 4511 800 441 1241 New private sector banks 1685 1883 3729 5612 Foreign banks 242 218 582 800

Further reading

The Evolution of the State Bank of India (The Era of the Imperial Bank of India, 1921 1955) (Volume III) Banking Frontiers a monthly magazine, published by Mumbai based Glocal Infomart. Editor

See also

List of banks in India History of Banking Common Recruitment to Indian Banks through IBPS Indian Banking Industry Rising Above the Waves, January 2013 Dinodia Capital Advisors

References
1. Jump up ^ C Gomez Financial Markets Institutions And Financial Services PrenticeHall 2008 Retrieved 2012-07-11 ISBN 8120335376 2. Jump up ^ A Chavez Irapta, Et Al Introduction to Asia: History, Culture, and Civilization Rex Bookstore, Inc., 2005 Retrieved 2012-07-11 3. Jump up ^ "Evolution of Payment Systems in India =Reserve Bank of India". 4. Jump up ^ Cooke, Charles Northcote (1863) The rise, progress, and present condition of banking in India. (Printed by P.M. Cranenburgh, Bengal Print. Co.), pp.177-200. 5. Jump up ^ Reference www.rbi.org.in 6. ^ Jump up to: a b Austin, Granville (1999). Working a Democratic Constitution A History of the Indian Experience. New Delhi: Oxford University Press. p. 215. ISBN 019-565610-5. 7. Jump up ^ "ICICI personal loan customer commits suicide after alleged harassment by recovery agents". Parinda.com. Retrieved 2010-07-28. 8. Jump up ^ "Karnataka / Mysore News : ICICI Bank returns tractor to farmers mother". Chennai, India: The Hindu. 30 June 2008. Retrieved 2010-07-28. 9. Jump up ^ "ICICIs third eye : Its Indiatime". Indiatime.com. Retrieved 2010-0728.[dead link] 10. Jump up ^ "Computerisation of banking sector". 11. Jump up ^ "MICR technology". 12. Jump up ^ "Committee on Computerisation in Banks (1988)". 13. ^ Jump up to: a b c d INDIAN BANKING SYSTEM. I.K INTERNATIONAL PUBLISHING HOUSE PVT. LTD. 2006. ISBN 81-88237-88-4. 14. Jump up ^ "Reforms in banking system". 15. Jump up ^ "Reforms of banking sector". 16. Jump up ^ Indian banking system. I.K. International. 2006. ISBN 81-88237-88-4.

External links

IndianBanks.org, All India Banking Information Private banks score over public sector banks The importance of public banking Brief profiles, 200809 performance, and 200910 outlook on 10 leading Indian banks Indian Banks Logos Reserve Bank of India Dinodia Capital Advisors Leading Boutique Investment Bank in India Banking Sector in India Banker's Trust, A commentary column on the Banking sector in India published in The Mint financial newspaper [show]

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Norsk bokml Svenska Edit links This page was last modified on 5 January 2014 at 00:58. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Mobile view

Reserve Bank of India


From Wikipedia, the free encyclopedia Jump to: navigation, search

Reserve Bank of India

RBI seal

RBI headquarters in Mumbai

Shahid Bhagat Singh Marg Mumbai, Maharashtra April 1, 1935 (78 years ago) Established Raghuram Rajan Governor Indian rupee Currency ISO 4217 Code INR US$302.1 billion [1][Note 1] Reserves 8.75% [2] Bank rate Interest on reserves 4.00% http://www.rbi.org.in/ Website Headquarters The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the Indian rupee. It was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934.[3] The share capital was divided into shares of 100 each fully paid, which was entirely owned by private shareholders in the beginning.[4] Following India's independence in 1947, the RBI was nationalised in the year 1949. The RBI plays an important part in the development strategy of the Government of India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 21-member- Central Board of Directorsthe Governor (currently Raghuram Rajan), four Deputy Governors, two Finance Ministry representative, ten governmentnominated directors to represent important elements from India's economy, and four directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these local boards consists of five members who represent regional interests, as well as the interests of co-operative and indigenous banks. The bank is also active in promoting financial inclusion policy and is a leading member of the Alliance for Financial Inclusion (AFI).

Contents

1 History o 1.1 19351950 o 1.2 19501960 o 1.3 19601969 o 1.4 19691985 o 1.5 19851991 o 1.6 19912000 o 1.7 Since 2000 2 Structure o 2.1 Central Board of Directors o 2.2 Governors o 2.3 Supportive bodies o 2.4 Offices and branches 3 Main functions o 3.1 Bank of Issue o 3.2 Monetary authority o 3.3 Regulator and supervisor of the financial system o 3.4 Managerial of exchange control o 3.5 Issuer of currency o 3.6 Banker of Banks 4 Detection of Fake currency o 4.1 Developmental role o 4.2 Related functions 5 Policy rates and reserve ratios o 5.1 Bank Rate o 5.2 Reserve requirement cash reserve ratio (CRR) o 5.3 Statutory Liquidity ratio (SLR) 6 Publications 7 Further reading 8 Notes 9 References 10 External links

History
19351950

The old RBI Building in Nagpur The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles after the First World War. It began according to the guidelines laid down by Dr. Ambedkar. RBI was conceptualized as per the guidelines, working style and outlook presented by Ambedkar in front of the Hilton Young Commission. When this commission came to India under the name of Royal Commission on Indian Currency & Finance, each and every member of this commission were holding Ambedkars book titled The Problem of the Rupee Its origin and its solution.[5] The bank was set up based on the recommendations of the 1926 Royal Commission on Indian Currency and Finance, also known as the HiltonYoung Commission.[6] The original choice for the seal of RBI was The East India Company Double Mohur, with the sketch of the Lion and Palm Tree. However it was decided to replace the lion with the tiger, the national animal of India. The Preamble of the RBI describes its basic functions to regulate the issue of bank notes, keep reserves to secure monetary stability in India, and generally to operate the currency and credit system in the best interests of the country. The Central Office of the RBI was initially established in Calcutta (now Kolkata), but was permanently moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's central bank, except during the years of the Japanese occupation of Burma (194245), until April 1947, even though Burma seceded from the Indian Union in 1937. After the Partition of India in 1947, the Bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though originally set up as a shareholders bank, the RBI has been fully owned by the Government of India since its nationalization in 1949.[7]

19501960
In the 1950s the Indian government, under its first Prime Minister Jawaharlal Nehru, developed a centrally planned economic policy that focused on the agricultural sector. The administration nationalized commercial banks[8] and established, based on the Banking Companies Act of 1949 (later called the Banking Regulation Act), a central bank regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic plan with loans.[9]

19601969
As a result of bank crashes, the RBI was requested to establish and monitor a deposit insurance system. It should restore the trust in the national bank system and was initialized on 7 December 1961. The Indian government founded funds to promote the economy and used the slogan

"Developing Banking". The government of India restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to play the central part of control and support of this public banking sector.

19691985
In 1969, the Indira Gandhi-headed government nationalized 14 major commercial banks. Upon Gandhi's return to power in 1980, a further six banks were nationalized.[6] The regulation of the economy and especially the financial sector was reinforced by the Government of India in the 1970s and 1980s.[10] The central bank became the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits.[11] These measures aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sectors, like agri-business and small trade companies.[12] The branch was forced to establish two new offices in the country for every newly established office in a town.[13] The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects.[14]

19851991
A lot of committees analysed the Indian economy between 1985 and 1991. Their results had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole, and the security and exchange board proposed better methods for more effective markets and the protection of investor interests. The Indian financial market was a leading example for so-called "financial repression" (Mackinnon and Shaw).[15] The Discount and Finance House of India began its operations on the monetary market in April 1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalisation.[16]

19912000
The national economy came down in July 1991 and the Indian rupee was devalued.[17] The currency lost 18% relative to the US dollar, and the Narsimham Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private banking sector. This turning point should reinforce the market and was often called neo-liberal.[18] The central bank deregulated bank interests and some sectors of the financial market like the trust and property markets.[19] This first phase was a success and the central government forced a diversity liberalisation to diversify owner structures in 1998.[20] The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed nationalized banks in July to interact with the capital market to reinforce their capital base. The central bank founded a subsidiary companythe Bharatiya Reserve Bank Note Mudran Limitedin February 1995 to produce banknotes.[21]

Since 2000
The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the ftem in 20042005 (National Electronic Fund Transfer).[22] The Security Printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and produces banknotes and coins.[23] The national economy's growth rate came down to 5.8% in the last quarter of 20082009[24] and the central bank promotes the economic development.[25]

Structure

RBI runs a monetary museum in Mumbai

Central Board of Directors


The Central Board of Directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The Board consists of a governor, four deputy governors, fifteen[26] directors to represent the regional boards, two from the Ministry of Finance and ten other directors from various fields.

Governors
The current Governor of RBI is Raghuram Rajan. There are four deputy governors, Deputy Governor K C Chakrabarty, Anand Sinha, H R Khan and Urjit Patel. Deputy Governor K C Chakrabarty's term has been extended further by 2 years. Subir Gokarn was replaced by Urjit Patel in January 2013.[27]

Supportive bodies
The Reserve Bank of India has ten regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations are formed by five members, appointed for four years by the central government and servebeside the advice of the Central Board of Directorsas a forum for regional banks and to deal with delegated tasks from the central board.[28] The institution has 22 regional offices.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the financial institutions. It has four members, appointed for two years, and takes measures to strength the role of statutory auditors in the financial sector, external monitoring and internal controlling systems. The Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI deputy governor S. S. Tarapore to "lay the road map" to capital account convertibility. The five-member committee recommended a three-year time frame for complete convertibility by 19992000. On 1 July 2007, in an attempt to enhance the quality of customer service and strengthen the grievance redressal mechanism, the Reserve Bank of India created a new customer service department.

Offices and branches


The Reserve Bank of India has four zonal offices.[29] It has 19 regional offices at most state capitals and at a few major cities in India. Few of them are located in Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, and Thiruvananthapuram. It also has 9 suboffices located in Agartala, Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shillong, Shimla and Srinagar. The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune. There are also four Zonal Training Centres at Mumbai, Chennai, Kolkata and New Delhi.

Main functions

Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture depicting "Prosperity through agriculture".[30]

The RBI Regional Office in Delhi.

The regional office of RBI (in sandstone)in front of GPO(in white) at Dalhousie Square, Kolkata.

Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations.(one rupee note and coin, which are issued by Ministry of finance). The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department.

Monetary authority
The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system


The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system

functions.Its objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins.[31]

Managerial of exchange control


The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency
The bank issues and exchanges or destroys currency notes and coins that are not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves.

Banker of Banks

Nagpur branch holds most of India's gold deposits RBI also works as a central bank where commercial banks are account holders and can deposit money.RBI maintains banking accounts of all scheduled banks.[32] Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR, bank rate and open market operations. As banker's bank, the RBI facilitates the clearing of cheques between the commercial banks and helps inter-bank transfer of funds. It can grant financial accommodation to schedule banks. It acts as the lender of the last resort by providing emergency advances to the banks. It supervises the functioning of the commercial banks and take action against it if need arises.

Detection of Fake currency


In order to curb the fake currency menace, RBI has launched a website to raise awareness among masses about fake notes in the market.www.paisaboltahai.rbi.org.in provides information about identifying fake currency.[33]

Developmental role
The central bank has to perform a wide range of promotional functions to support national objectives and industries.[9] The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of this problems are results of the dominant part of the public sector.[34]

Related functions
The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition.[35] The institution maintains banking accounts of all scheduled banks, too. RBI on 7 August 2012 said that Indian banking system is resilient enough to face the stress caused by the drought like situation because of poor monsoon this year.[36]

Policy rates and reserve ratios


Policy rates, Reserve ratios, lending, and deposit rates as of 29 October 2013 8.75% Bank Rate 7.75% Repo Rate 6.75% Reverse Repo Rate 4% Cash Reserve Ratio (CRR) 23.0% Statutory Liquidity Ratio (SLR) 9.8[37] 0%10.25% Base Rate 4% Reserve Bank Rate 8.00%9.0% Deposit Rate

Bank Rate
RBI lends to the commercial banks through its discount window to help the banks meet depositors demands and reserve requirements for long term. The Interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if RBI wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 21 Oct, 2013, the bank rate was 8.75%.

Reserve requirement cash reserve ratio (CRR)

Every commercial bank has to keep certain minimum cash reserves with RBI. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate, [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 5% and 20% of total of their demand and time liabilities]. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to effect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 4.00%.. -25 basis points cut in Cash Reserve Ratio(CRR) on 17 September 2012, It will release Rs 17,000 crore into the system/Market. The RBI lowered the CRR by 25 basis points to 4.25% on 30 October 2012, a move it said would inject about 175 billion rupees into the banking system in order to pre-empt potentially tightening liquidity. The latest CRR as on 29/10/13 is 4%

Statutory Liquidity ratio (SLR)


Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.The latest SLR as on 14/12/13 is 23% In well-developed economies, central banks use open market operationsbuying and selling of eligible securities by central bank in the money marketto influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years. Generally RBI uses three kinds of selective credit controls: 1. Minimum margins for lending against specific securities. 2. Ceiling on the amounts of credit for certain purposes. 3. Discriminatory rate of interest charged on certain types of advances. Direct credit controls in India are of three types: 1. Part of the interest rate structure i.e. on small savings and provident funds, are administratively set. 2. Banks are mandatory required to keep 23% of their deposits in the form of government securities. 3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.

Publications
The report on Trend and Progress of Banking In India is an annual publication, which the RBI has to submit to the government in terms of the Banking Regulation Act 1949. The report is an authentic account of the developments in the financial sector.[38]

Further reading

S. L. N. Simha. History of the Reserve Bank of India, Volume 1: 19351951. RBI. 1970. ISBN 81-7596-247-X. (2005 reprint PDF) G. Balachandran. The Reserve Bank of India, 19511967. Oxford University Press. 1998. ISBN 0-19-564468-9. (PDF) A. Vasudevan et al. The Reserve Bank of India, Volume 3: 19671981. RBI. 2005. ISBN 81-7596-299-2. (PDF) Cecil Kisch: Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj. In: The Economic Journal. Vol. 59, No. 235 (Sep., 1949), pp. 436438. Findlay G. Shirras: The Reserve Bank of India. In The Economic Journal. Vol. 44, No. 174 (Jun., 1934), pp. 258274. Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve Bank of Indias Balance Sheet: Analytics and Dynamics of Evolution, November 2004.

Notes
1. Jump up ^ In 2011 dollars as of 2011.[1]

References
1. ^ Jump up to: a b Press Trust of India (25 December 2011). "India's forex reserves slump by $4.67 billion". Mumbai: New Delhi Television Limited. Retrieved 2 January 2012. 2. Jump up ^ Reserve Bank of India, 31 October 2013, http://www.rbi.org.in/ 3. Jump up ^ "Reserve Bank of India Act, 1934". p. 115. Retrieved August 6, 2012. 4. Jump up ^ "RESERVE BANK OF INDIA ACT, 1934 (As modified up to 27 February 2009)". Reserve Bank of India (RBI). Retrieved 20 November 2010. 5. Jump up ^ Cecil Kisch: Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj. In: The Economic Journal. Vol. 59, No. 235 (Sep., 1949), PP. 436438, p. 436. 6. ^ Jump up to: a b "Reserve Bank of India: Platinum Jubilee (PDF)". RBI.org.in. 2010. Retrieved on 15 April 2012. 7. Jump up ^ "History". RBI. 1935-04-01. Retrieved 2010-08-20. 8. Jump up ^ Beth Anne Wilson und Geoffrey N. Keim: India and the Global Economy in Business Economics, January 2006, S.29. 9. ^ Jump up to: a b Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve Bank of Indias Balance Sheet: Analytics and Dynamics of Evolution, November 2004, S.. 16.

10. Jump up ^ Ananya Mukherjee Reed: Corporate Governance Reforms in India in Journal of Business Ethics, Volume 37, Number 3 / May, 2002, p. 253. 11. Jump up ^ Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge with banking reforms? in Int Rev Econ (2009) 56:4784, p. 47-48. 12. Jump up ^ Panicos O. Demetriades, Kul B. Luintel: Financial Development, Economic Growth and Banking Sector Controls: Evidence from India. in The Economic Journal. Vol. 106, No. 435 (March 1996), pp. 359374, p. 360. 13. Jump up ^ Alpana Killawala: History of The Reserve Bank of India Summary, Reserve Bank of India Press Release, 18.03.2006 (RBI) 14. Jump up ^ Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve Bank of Indias Balance Sheet: Analytics and Dynamics of Evolution, November 2004, S. 40. 15. Jump up ^ Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge with banking reforms? in Int Rev Econ (2009) 56:4784, p. 48. 16. Jump up ^ Chronology of Events, Developing the Markets: Seeds of Liberalization1985 to 1991 (RBI) 17. Jump up ^ Amal Kanti Ray: Indias Social Development in a Decade of Reforms: 1990 91/19992000 in Social Indicators Research, Volume 87, Number 3 / July, 2008, p. 410. 18. Jump up ^ Ananya Mukherjee Reed: Corporate Governance Reforms in India in Journal of Business Ethics, Volume 37, Number 3 / May, 2002, p. 257. 19. Jump up ^ Raghbendra Jha, Ibotombi S. Longjam: Structure of financial savings during Indian economic reforms in Empirical Economics (2006) 31:861869, p.862. 20. Jump up ^ Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge with banking reforms? in Int Rev Econ (2009) 56:4784, p. 49, 21. Jump up ^ Chronology of Events, Crisis and Reforms- 1991 to 2000 (RBI) 22. Jump up ^ "RBI History Spanning 7 Decades of Public Service". Rbidocs.rbi.org.in. 1935-04-01. Retrieved 2010-08-20. 23. Jump up ^ Security Printing &Minting Corporation of India, About Us (SPMCIL) 24. Jump up ^ Second Quarter Review of Monetary Policy for the Year 200910, Punkt 15., (RBI) 25. Jump up ^ Macroeconomic and Monetary Developments Second Quarter Review 200910, S.94, (RBI) 26. Jump up ^ http://www.rbi.org.in 27. Jump up ^ "Chakrabarty re-appointed RBI Deputy Governor". 13 June 2012. 28. Jump up ^ "About us, Organisation and Functions". RBI. Retrieved 2010-08-20. 29. Jump up ^ "Reserve Bank of India". Rbi.org.in. Retrieved 2011-09-16. 30. Jump up ^ "History of Reserve Bank". Retrieved 2009-02-24. 31. Jump up ^ RBI, Frequently Asked Questions, Currency Matters (RBI) 32. Jump up ^ --~~~~http://www.rbi.org.in/ 33. Jump up ^ "RBI launches website to explain detection of fake currency". Times of India. 8 July 2012. 34. Jump up ^ Samarjit Das, Kaushik Bhattacharya: Price convergence across regions in India in Empirical Economics (2008) 34:299313, S. 312. 35. Jump up ^ Alpana Sivam, Sadasivam Karuppannan: Role of state and market in housing delivery for low-income groups in India in Journal of Housing and the Built Environment 17: 6988, 2002, S.85.

36. Jump up ^ "Indian banks can weather impact of drought: RBI". 07-08-2012. 37. Jump up ^ http://www.rbi.org.in/home.aspx# 38. Jump up ^ C. R. L. Narasimhan (2 December 2013). "NPA reduction, a key issue". The Hindu. Retrieved 2 December 2013.

External links
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Private-sector banks in India


From Wikipedia, the free encyclopedia Jump to: navigation, search The private-sector banks in India represent part of the indian banking sector that is made up of both private and public sector banks. The "private-sector banks" are banks where greater parts of stake or equity are held by the private shareholders and not by government. Banking in India has been dominated by public sector banks since the 1969 when all major banks were nationalised by the Indian government. However since liberalisation in government banking policy in 1990s, old and new private sector banks have re-emerged. They have grown faster and bigger over the two decades since liberalisation using the latest technology, providing contemporary innovations and monetary tools and techniques.[1] The private sector banks are split into two groups by financial regulators in India, old and new. The old private sector banks existed prior to the nationalisation in 1969 and kept their independence because they were either too small or specialist to be included in nationalisation. The new private sector banks are those that have gained their banking license since the liberalisation in the 1990s.

Contents

1 History and evolution 2 Old private-sector banks o 2.1 List of the old private-sector banks in India 3 New private-sector banks o 3.1 List of the new private-sector banks in India 4 References

History and evolution


Private-sector banks have been functioning in India since the very beginning of the banking system. Initially, during 1921, the private banks like bank of Bengal, bank of Bombay and bank of Madras were in service, which all together formed Imperial Bank of India.

Reserve Bank of India(RBI) came in picture in 1935 and became the centre of every other bank taking away all the responsibilities and functions of Imperial bank. Between 1969 and 1980 there was rapid increase in the number of branches of the private banks. In April 1980, they accounted for nearly 17.5 percent of bank branches in India. In 1980, after 6 more banks were nationalised, about 10 percent of the bank branches were those of private-sector banks.[2] The share of the private bank branches stayed nearly same between 1980 and 2000.[3] Then from the early 1990s, RBI's liberalisation policy came in picture and with this the government gave licences to a few private banks, which came to be known as new private-sector banks. There are two categories of the private-sector banks: "old" and "new". The old private-sector banks have been operating since a long time and may be referred to those banks, which are in operation from before 1991 and all those banks that have commenced their business after 1991 are called as new private-sector banks.[4] Housing Development Finance Corporation Limited was the first private bank in India to receive license from RBI as a part of the RBI's liberalization policy of the banking sector, to set up a bank in the private-sector banks in India.[5]

Old private-sector banks


The banks, which were not nationalized at the time of bank nationalization that took place during 1969 and 1980 are known to be the old private-sector banks. These were not nationalized, because of their small size and regional focus.[6] Most of the old private-sector banks are closely held by certain communities their operations are mostly restricted to the areas in and around their place of origin. Their Board of directors mainly consist of locally prominent personalities from trade and business circles. One of the positive points of these banks is that, they lean heavily on service and technology and as such, they are likely to attract more business in days to come with the restructuring of the industry round the corner.

List of the old private-sector banks in India


Name 1. Bank of punjab merged with Centurion Bank to form Centurion Bank of Punjab in June 2005 2. City Union Bank 3. Dhanlaxmi Bank 4. Federal Bank 5. ING Vysya Bank 6. Jammu and Kashmir Bank 7. Karnataka Bank Year established 1943 1904 1927 1931 1930 1938 1924

8. Karur Vysya Bank 9. Lakshmi Vilas Bank 10. Nainital Bank 11. Ratnakar Bank 12. SBI Commercial and international Bank 13. South Indian Bank 14. Tamilnad Mercantile Bank Limited 15. United Western Bank 16. IDBI Bank Ltd (reverse merged with parent IDBI in 2004 to become IDBI Bank. Making this public sector bank private)

1916 1926 1922 1943 1955 1929 1921 1936 1964

New private-sector banks


The banks, which came in operation after 1991, with the introduction of economic reforms and financial sector reforms are called "new private-sector banks". Banking regulation act was then amended in 1993, which permitted the entry of new private-sector banks in the Indian banking s sector. However, there were certain criteria set for the establishment of the new private-sector banks, some of those criteria being:#The bank should have a minimum net worth of Rs. 200 crores. 1. The promoters holding should be a minimum of 25% of the paid-up capital. 2. Within 3 years of the starting of the operations, the bank should offer shares to publicand their net worth must increased to 300 crores.[7]

List of the new private-sector banks in India


Name 1. Axis Bank (earlier UTI Bank) 2. Bank of Punjab (actually an old generation private bank since it was not founded under post-1993 new bank licensing regime) 3. Centurion Bank Ltd. (Merged Bank of Punjab in late 2005 to become Centurion Bank of Punjab, acquired by HDFC Bank Ltd. in 2008) 4. Development Credit Bank (Converted from Co-operative Bank, now DCB Bank Ltd.) Year established 1994

1989

1994

1995

5. HDFC Bank 6. ICICI Bank (previously ICICI and then both merged;total merger SCICI+ICICI+ICICI Bank Ltd} 7. IndusInd Bank 8. Kotak Mahindra Bank 9. Yes Bank 10. Times Bank (Merged with HDFC Bank Ltd.) 11. Global Trust Bank,India (Merged with Oriental Bank of Commerce)

1994

1996

1994 2003 2005 Unknown Unknown 2011

References
1. Jump up ^ "Introduction to private sector banks". Retrieved 10-09-2011. 2. Jump up ^ "Private banks Nationalisation". 3. Jump up ^ D. Muraleedharan. Modern banking- theory and practice. PHI. 4. Jump up ^ Dr. Mukund mahajan. Indian banking system. Nirali prakashan. pp. 2.12.2. 5. Jump up ^ "HDFC Bank". Retrieved 11-09-2011. 6. Jump up ^ "Nationalization of Banks". 7. Jump up ^ "Criteria set for the new private sector banks". [hide]

12. UP Agro Bank Corporation Limited

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Reserve bank Public sector banks

Reserve Bank of India Allahabad Bank Andhra Bank Bank of Baroda Bank of India

Bank of Maharashtra Bhartiya Mahila Bank Canara Bank Central Bank of India Corporation Bank Dena Bank IDBI Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of India State Bank of Mysore State Bank of Patiala State Bank of Travancore Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Axis Bank Catholic Syrian Bank City Union Bank Development Credit Bank Dhanlaxmi Bank Federal Bank HDFC Bank ICICI Bank IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank Lakshmi Vilas Bank Nainital Bank South Indian Bank Tamilnad Mercantile Bank Limited Yes Bank Cosmos Bank

Private sector banks

Cooperative

banks

Saraswat Bank Shamrao Vithal Co-op. Bank Pune Peoples Cooperative Bank Anyonya Co-operative Bank Mahila SEWA Cooperative Bank Mahesh Co-operative Bank ABN AMRO Abu Dhabi Commercial Bank Antwerp Diamond Bank Australia and New Zealand Banking Group Bank Internasional Indonesia Bank of America Bank of Bahrain and Kuwait Bank of Ceylon The Bank of Tokyo-Mitsubishi UFJ Barclays Citibank India Credit Suisse Deutsche Bank HSBC The Royal Bank of Scotland Scotiabank Standard Chartered Andhra Pragathi Grameena Bank Kerala Gramin Bank Bangiya Gramin Vikash Bank Gramin Bank of Aryavart North Malabar Gramin Bank Paschim Banga Gramin Bank Sarva UP Gramin Bank South Malabar Gramin Bank Uttar Bihar Gramin Bank Vananchal Gramin Bank List of regional rural banks in Uttar Pradesh BANCS Cashnet CashTree Cirrus IMPS MITR NFS

Foreign banks

Regional Rural Banks

Interbank networks

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Banker-Customer Relationship Explained in Detail


Banker-Customer Relationship

The relationship between banker and customer is mainly that of a debtor and creditor. However, they also share other relationships. Some of the important relationships they share are depicted below. Some of the important relationships they share are depicted below.

The banker-customer relationship is that of a: 1. 2. 3. 4. 5. 6. Debtor and Creditor, Pledger and Pledgee, Licensor and Licensee, Bailor and Bailee, Hypothecator and Hypothecatee, Trustee and Beneficiary,

7. Agent and Principal, 8. Advisor and Client, and 9. Other miscellaneous relationships. Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor

When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that of debtor (banker / bank) and creditor (customer). In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and the customer is the creditor. This is because the banker owes money to the customer. The customer has the right to demand back his money whenever he wants it from the banker, and the banker must repay the balance to the customer. In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the customer owes money to the banker. The banker can demand the repayment of loan / advance on the due date, and the customer has to repay the debt. A customer remains a creditor until there is credit balance in his account with the banker. A customer (creditor) does not get any charge over the assets of the banker (debtor). The customer's status is that of an unsecured creditor of the banker. The debtor-creditor relationship of banker and customer differs from other commercial debts in the following ways: 1. The creditor (the customer) must demand payment. On his own, the debtor (banker) will not repay the debt. However, in case of fixed deposits, the bank must inform a customer about maturity. 2. The creditor must demand the payment at the right time and place. The depositor or creditor must demand the payment at the branch of the bank, where he has opened the account. However, today, some banks allow payment at all their branches and ATM centres. The depositor must demand the payment at the right time (during the working hours) and on the date of maturity in the case of fixed deposits. Today, banks also allow pre-mature withdrawals. 3. The creditor must make the demand for payment in a proper manner. The demand must be in form of cheques; withdrawal slips, or pay order. Now-a-days, banks allow ebanking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee. This happens when customer pledges (promises) certain assets or security with the bank in order to get a loan. In this case, the customer becomes the Pledger, and the bank becomes the Pledgee. Under this agreement, the assets or security will remain with the bank until a customer repays the loan.

3. Relationship of Licensor and Licensee

The relationship between banker and customer can be that of a Licensor and Licensee. This happens when the banker gives a sale deposit locker to the customer. So, the banker will become the Licensor, and the customer will become the Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee. 1. Bailment is a contract for delivering goods by one party to another to be held in trust for a specific period and returned when the purpose is ended. 2. Bailor is the party that delivers property to another. 3. Bailee is the party to whom the property is delivered. So, when a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and the bank became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and Hypotheatee. This happens when the customer hypothecates (pledges) certain movable or non-movable property or assets with the banker in order to get a loan. In this case, the customer became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property belongs to the beneficiary. If the customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee of his customer. The customer is the beneficiary so the ownership remains with the customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following agency services:

Buying and selling securities on his behalf, Collection of cheques, dividends, bills or promissory notes on his behalf, and Acting as a trustee, attorney, executor, correspondent or representative of a customer.

Banker as an agent performs many other functions such as payment of insurance premium, electricity and gas bills, handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities, the banker acts as an advisor. The advice can be given officially or unofficially. While giving advice the banker has to take maximum care and caution. Here, the banker is an Advisor, and the customer is a Client.

9. Other Relationships

Other miscellaneous banker-customer relationships are as follows:

Obligation to honour cheques : As long as there is sufficient balance in the account of the customer, the banker must honour all his cheques. The cheques must be complete and in proper order. They must be presented within six months from the date of issue. However, the banker can refuse to honour the cheques only in certain cases. Secrecy of customer's account : When a customer opens an account in a bank, the banker must not give information about the customer's account to others. Banker's right to claim incidental charges : A banker has a right to charge a commission, interest or other charges for the various services given by him to the customer. For e.g. an overdraft facility. Law of limitation on bank deposits : Under the law of limitation, generally, a customer gives up the right to recover the amount due at a banker if he has not operated his account since last 10 years.

So, these were some important banker-customer relationships.

Modes of Operating Bank account


By Banyan Financial Advisors On January 23, 2012 23 Comments Number of View: 22669 Operating a bank account may sound very simple to you and possibly you may be wondering why I am trying to write a blog on modes of operating bank account. Well the motive is to reflect upon different ways you can open your bank account in order to control who can operate your account and when can a person operate the account.

It is very handy to know these details as it may be of help while trying to open a bank account. My experience while dealing with bankers has not been very positive as most of them didnt know the subtle differences between different modes of operating a bank account. Broadly, the following options are available when opening up a bank account:

1. 2. 3. 4. 5. 6. 7. 8. 9.

Single Joint Jointly or Survivor Either or Survivor Any or Survivor Former or Survivor Joint accounts with Special Instructions Via Letter of Authority / Power of Attorney holder Minor account

Single Mode of Operations This mode of operating a bank account is very simple and applies when you open a bank account in only one name. Hence the instruction given to the bank is Single, i.e. only the account holder shall operate the account. In case of death of the account holder, the proceeds shall be paid to the nominee or the legal representative of the deceased person.

Joint Holders When you have more than one account holders of a bank, the type of bank account is called a Joint Bank account. In case of a simple Joint mode of operation, both / all the account holders would have to sign a cheque in order to allow the cheque to clear. If for example, Mr. A & Mr B open a joint account with mode of operation Joint, then both Mr. A & Mr. B would have to sign together on the cheque. If only Mr. A or Mr. B signed the cheque, the respective bank wont honour the cheque. In case any of joint account holder dies, the account can not be further operated and the proceeds shall be payable to the surviving account holder along with the nominee / legal representative of the deceased account holder.

Jointly or Survivor Under this mode of operation of a Joint account, during the life time of the joint account holders, the cheque would have to be signed by both the Joint account holders (just like a normal Joint mode of operating a bank account). However, in a an event whereby any of the joint holder dies, the surviving account holder can continue to operate the account as if he was the single account holder. Alternatively, the proceeds of the account can be credited to the account of the surviving account holder. For example, if Mr. A & Mr. B operate their bank account in the mode of Joint or Survivor and Mr. A dies, then Mr. B can individually operate the account or transfer the proceeds to his own other bank account.

Either or Survivor (E o S)

This mode of bank account is opened when the number of bank account holders are more than 1. The account opened as Either or Survivor can be operated by any of the account holders and do not require joint signature of all account holders in order to operate the account. In case of our above example, if the account was opened under EoS mode, either Mr. A or Mr. B could individually operate the account as if they are the sole owner of the account. However, in case of death of any of the account holders, the surviving account holder can either continue to operate the account or take the proceeds into his own bank account.

Any or Survivor ( A o S) This mode of operation is very similar to the EoS category. Infact people often speak upon EoS or AoS interchangeably. However there is a slight difference between Either or Survivor versus Any or survivor mode. Just like EoS, an account opened under AOS mode can be operated by any of the account holders without requiring the other account holder(s) to sign. However the difference is after any of the account holder dies, the right to operate lies with the surviving account holders (but jointly). They have to decide if they would like to continue with the account as Either or Survivor or take the proceeds out of the account. In case where all but one account holder remains alive, the balance is paid to the surviving account holders.

Former or Survivor This account is opened jointly between more than one account holders. However, till the primary account holder is alive, the right to operate the account vests with him / her. After the death of the primary account holder, the right to operate vests with the surviving account holders after submission of necessary documents such as death certificates. It is necessary to clarify that while the primary account holder is alive, the other account holders can not operate the account. A slight different account operation mode is Latter or Survivor where by the second account holder shall operate the bank account till his / her death and only after that the surviving account holders shall be allowed to operate the bank account.

Joint Account Holders with Special Instructions These types of bank accounts are more prevalent for corporate bank accounts where by the management wants to enforce internal controls based upon the materiality of the amount. In these accounts, the management specifies the limits upto which a single named account holder can sign a cheque and beyond which dual or even more than two account holders would be required to sign. For very high value transactions, it can also be mentioned that signature would be required from a specific named individual in addition to other named account holders. For example, for cheques upto Rs. 100,000 Mr. X can sign. Between Rs. 100,000 & 10,00,000 Mr. X & Mr. Y both need to sign. Any cheque beyond Rs. 10 lacs, signature of Mr. Z is required.

Via Letter of Authority / Power of Attorney Holder In some accounts you can authorise a third party to operate your bank account in your name. In such cases, though the third party can sign the cheques, but can not deposit any cheques of their own into your account. Simply speaking only an authority to sign cheques or perform other functions such as create demand drafts, and other banking functions can be performed by the authority holder. Such accounts are more common in case of Non Resident Bank accounts (NRE / NRO) or current accounts. All the joint account holders needs to agree before creating an authority holder to the respective bank account.

Minor Bank account According to Indian Majority Act, any one who is less than 18 years of age is classified as a minor. A minor above 14 years of age can open and operate saving bank account. However, a minor who is a student (literate) can generally open and operate bank accounts above 12 years of age. However any account operated by Minor themself would not be issued a cheque book probably the reason behind that is any contract with a Minor is not valid (as per Contract Act) and hence collection of cheques are not generally allowed in Minor operated bank accounts. A guardian can also open an account in the name of the minor and can operate it. Once the minor attains majority or dies, the guardian should not operate the account.

What do you know understand by employment funds and explain the principle of liquidity and profitability or What do you mean by investment of bank fund
EMPLOYMENT OR ADVANCING FUNDS :When we talk about advancing of funds by commercial banks, it mean the profitable and safe use of funds. The main business of the commercial bank is to obtain money from the customer and invest this money. It earns the profit and pays interest to the customers from this profit. So it keeps in view its own interest and also the customer, so there are two objectives : i. It earns the profit for the customers. ii. To meet the demand of the customers it should keep sufficient cash. So profitability and liquidity are two main objectives. A bank provides loans to the companies, firms and individuals. So major function is that it should advance the loans. But lending of money is very risky. Before advancing the loans keeps in view some precautions or principles. These are following :

1. Profitability :It is the major objective in the banking business. Bank can earn maximum profit by investing its deposits in securities yielding height returns while advancing the loans this factor is considered by the banker. 2. Liquidity :If assets in a short time with minimum cost is called liquidity. It is the basic principle for investing the funds before the banker. If the investment is not liquid then bank will fail to meet the demand of its depositors. So every bank tries to invest the funds in to ready convertible securities. 3. Ability To Repay :It is the most important principle for investing funds. The bank keeps in view the borrower ability to repay the debt before lending the money. Character goodwill and business integrity of the borrower must be checked. 4. Productive Purpose :A banker should advance the loan for productive purpose. It will be very secure and definite source of repayment. Unproductive loans must be discouraged. It is observed that short term productive loans are very ideal. 5. Reasonable Security :While advancing the loan a banker secures loan by getting reasonable security from the borrower. It is called insurance against the risk of non repayment. The security offered against loan must be adequate and it can be disposed off without a loss and delay. 6. Ready Cash :A bank must keep the ready cash to meet the demand of the depositors. Any particular limit can be fixed keeping in view the daily experience. 7. Advance Distribution :In case of lending there is a risk of loss every time, so it is better that loan may not be given to any single particular area. It may be given to large number of borrowers over a large number of areas. It minimizes the risk. 8. Preference To National Interest :The bank must keep in view the policy of the state. If Govt. asks to provide loan to the agriculturist and small business, it should not be ignored it. The employment or investment of funds by a commercial bank means the safe utilization and profitable use of its funds. The bank obtains money from different sources and pays interest on them. It is the utmost desire of every commercial bank that it should invest its funds in a manner which serves its own as well as customer's interest. Its own interest is to earn profit for the shareholders. The other interest is of the customers along with interest as and when demanded by them. These two objectives of liquidity and profitability are obtained by utilizing the surplus funds into ready convertible securities. The main types of earning assets of a bank are different which is money including at short notice, investment in government and semi government securities. Public deposits are a powerful source of funds of banks. There are three types of the banks a deposit

one is current deposits, second is saving deposits and the third one is time deposits. Due to the spread of literacy, banking habits and growth in the volume of business operations there is marked increase in deposit money with banks. So the main mainly makes its investments in the other countries of the world.

What is employment or investment of bank funds? The employment or investment or advancing of funds by a commercial bank means the safe utilization and profitable use of its funds. The bank, as we know, obtains money from different sources and pays interest on them. It is the utmost desire of every commercial bank that it should invest its funds in a manner which serves its own as well as customers interest. Its own interest is to earn profit for the shareholders. The other interest is of the customers. The bank should keep sufficient cash at its disposal to pay back money to the customers along with interest as and when demanded by them. These two objectives of liquidity and profitability are obtained by utilizing the surplus funds into ready convertible securities. The main types of earning assets of a bank are as follows (1) money at call and short notice (ii) investment in government and semi government securities (iii) short and medium term loans (iv) discounting of bills. Factors of Good Advancing. The primary purpose of the bank is to grant loans to households, firms and companies. A major portion of its funds is used for giving loans. Loans are the major source of income of the bank. However, the lending of money is not without risk. A bank takes a number of precautions while sanctioning loans. The main considerations or factors which are taken into account while lending money by the bank are as follows:-(1) Liquidity. Liquidity is the first and the most important principle of banks investment policy. By liquidity is meant the relative ease and speed with which an asset can be converted into cash without incurring large costs. If is the policy of every commercial bank that it should invest its surplus funds in those assets which can be easily converted into cash and also yield profit. The reason behind it is that if the banks investments are not in liquid form, it may fail to meet its obligations towards its depositors. This may land the bank into difficultly. Every bank therefore, tries to invest its funds into ready convertible securities and not in immovable properties. (2) Safety. The principle of safety is of utmost importance for investment of funds by a bank. The bank, in its lending activity, takes into account the borrowers ability to pay the loan. It also sees that in case of non payment of loan, the security offered can be disposed off without loss and delay. (3) Profitability. Banking is a business. Like any other business, it also aims at earning profit. Profit can only be earned if a major portion of the deposits are invested in securities yielding high returns. While making advances, the bank cannot ignore this aspect that the funds invested remain fairly safe, liquid and give also a reasonable return. In order to achieve this objective, the bank keeps in its investment portfolio three types of investments, liquid, semi liquid and income earning investment. (4) Purpose of loan. While advancing money, the banker must examine and investigate the purpose of the loan. If the loan is for productive purposes, it will not only ensure the safety of money but also provide a definite source of repayment. Truly speaking, short term productive loans are ideal loans. The advances for hoarding, or for speculative activities, for marriages, pleasure tours etc., etc. are not safe and liquid. As such these should be discouraged.

(5) Security. The banker advances loans by considering the credit worthiness, honesty, good-will, business integrity of the borrower. Apart from these attributes in credit selection, the banker as for as possible secures loan by getting tangible security from the borrower. The security is considered as an insurance against risk of non payment of loan. The banker is to see that the security offered against loan is adequate, highly liquid, easy to handle and free from any default. (6) Spread of risk. An element of risk is present in every advance, however, secure it may be. It is therefore advised that the loans should be spread over (i) large number of borrowers (ii) over a large number of industries (iii) over a large number of areas ( villages towns, cities etc.) Diversification of advances thus minimizes the risk of defaults of loans. (7) Management of cash reserve. A bank has to keep a certain minimum percentage of its deposits in ready cash to meet it liability towards depositors. There is, however no limit on the maximum reserve to be kept by it. The bank, therefore, through its experience must keep an effective amount to meet the liability of the depositors. (8) National interest. The loans should be advanced keeping in view the national interest of the country If central bank directs that advances be given to small scale industries and agriculture and for export, the instructions should be followed in the national interest. Summing up, an ideal advance is one which is granted to a reliable customer for an approved purpose, against marketable securities, is liquid and profitable. Sentiments and personal relations have no place in lending as a function.

Measures to Solve the Problems of NonPerforming Assets NPA


Measures to Solve Problems of NPA

The problems of NPA have been receiving greater attention since 1991 in India. The Narasimham Committee recommended a number of steps to reduce NPA. In the 1990's the Government of India (GOI) introduced a number of reforms to deals with the problems of NPA.

Measures to Solve the Problems of NonPerforming Assets NPA


Post : Gaurav Akrani Date : 7/09/2011 07:59:00 PM IST No Comments Labels : Banking, Economics, India

Measures to Solve Problems of NPA

The problems of NPA have been receiving greater attention since 1991 in India. The Narasimham Committee recommended a number of steps to reduce NPA. In the 1990's the Government of India (GOI) introduced a number of reforms to deals with the problems of NPA.

Image Credits monojussi.

Major steps taken to solve the problems of Non-Performing Assets in India :-

1. Debt Recovery Tribunals (DRTs)

Narasimham Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. Accepting the recommendations, Debt Recovery Tribunals (DRTs) were established. There are 22 DRTs and 5 Debt Recovery Appellate Tribunals. This is insufficient to solve the problem all over the country (India).

2. Securitisation Act 2002

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is popularly known as Securitisation Act. This act enables the banks to issue notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the borrower cannot sell or dispose the assets without the consent of the lender. The Securitisation Act further empowers the banks to take over the possession of the assets and management of the company. The lenders can recover the dues by selling the assets or changing the management of the firm. The Act also enables the establishment of Asset Reconstruction Companies for acquiring NPA. According to the provisions of the Act, Asset Reconstruction Company of India Ltd. with eight shareholders and an initial capital of Rs. 10 crores has been set up. The eight shareholders are HDFC, HDFC Bank, IDBI, IDBI Bank, SBI, ICICI, Federal Bank and South Indian Bank.

3. Lok Adalats

Lok Adalats have been found suitable for the recovery of small loans. According to RBI guidelines issued in 2001. They cover NPA up to Rs. 5 lakhs, both suit filed and non-suit filed are covered. Lok Adalats avoid the legal process. The Public Sector Banks had recovered Rs. 40 Crores by September 2001.

4. Compromise Settlement

Compromise Settlement Scheme provides a simple mechanism for recovery of NPA. Compromise Settlement Scheme is applied to advances below Rs. 10 Crores. It covers suit filed cases and cases pending with courts and DRTs (Debt Recovery Tribunals). Cases of Willful default and fraud were excluded.

5. Credit Information Bureau

A good information system is required to prevent loans from turning into a NPA. If a borrower is a defaulter to one bank, this information should be available to all banks so that they may avoid lending to him. A Credit Information Bureau can help by maintaining a data bank which can be assessed by all lending institutions. S

Smaller banks face higher NPA risk

Sidhartha, TNN | Oct 23, 2013, 05.01AM IST NEW DELHI: State Bank of India, the country's largest lender, may have the highest proportion of bad debt, but it is the smaller public sector players that suffer from concentration risk with the top 30 non-performing assets (NPAs) accounting for over half the sticky assets. Data compiled by the finance ministry shows that at the end of June, there were at least eight banks, which have very high concentration of NPAs (see table). In case of SBI, the share of the top 30 NPA accounts was a little over 15%, a buffer provided by the large asset pool that the state-run bank enjoys. SBI's gross NPAs were estimated at 6.3% of its gross loans, compared to 5.3% for Punjab & Sind Bank. At the end of June, the gross NPAs of public sector banks, which include the principal and the interest dues, were estimated at around Rs 1.83 lakh crore, with the value of top 30 accounts estimated at close to Rs 64,000 crore, or 35% of the total bad debt. A loan is classified as an NPA if the borrower does not pay the installment for 90 days. What adds to the pressure on smaller banks is the fact that several of them, such as Bank of Maharashtra and Corporation Bank, witnessed restructured accounts turn into NPAs. While the average for public sector banks was 27% during the June quarter, in case of Bank of Maharashtra, nearly half the restructured accounts, which were under financial strain, turned NPA. State Bank of Travancore (48%) was at second position, followed by Syndicate Bank (45%) and Canara Bank (43%).

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