Banking

Kanika Khurana
Commercial Banks
• Provide various types of financial services in
return for payments in the form of interest,
discount, fees, commission etc
• Objectives
– Maximizing profits
– Liquidity Management
– Social obligations
• regional development, social welfare etc
Commercial Banks
• Fractional Reserve Banking
– Hold only part of their deposits as cash (CRR,
other reserves etc)
– Central Bank specifies reserve requirement to
control bank money and make deposits liquid
• Credit Creation
– Not only transfer but also create money
– Banks thus impact saving, investment, money
supply which in turn affects national income,
prices, inflation etc.
– Demand or checkable deposits of the bank are
accepted as money by the public
 Role of Banks
1. Create money (fractional reserve banking)
2. Have access to funds from the RBI, call money market
– Subscribe to govt. securities issued by RBI
– Help regulate money supply in economy
3. Mobilize and allocate savings in the country
– Act as safe and liquid outlets for people’s savings
– Convert savings into productive investments
4. Bank lending to corporate sector
– Provide detailed information as per loan contracts about corp.
– Reduce agency costs
– Efficient in monitoring and renegotiating contract on basis of
performance measures like working capital, liquidity,
profitability, net worth etc
 Role of Banks
5. Reduce cost of financial distress in corporates
– Restructure terms of contracts more easily, wave
covenants, extend more loans against collateral,
extend maturity
– In case of bonds, inefficient spending cutbacks,
bankruptcy are a higher possibility
6. Bank loans are unsubstitutable
– Economies of scope (efficiency from multiple
products in one organization) between deposit taking
and lending exist
– Better monitoring of credit risk
7. Large presence in all areas of the country
– Convenient to people from all regions, rural areas etc.
Liabilities of Banks
• 2 types- Demand and Term/ Time
1. Demand Deposits
– Current
• Chequable accounts with no restriction on
amount or no. of withdrawal from these
– Savings
• Earn interest, No. and amount of withdrawals is
limited
– Call Deposits (call money)
• Accepted from fellow bankers and repayable on
demand
Liabilities of Banks
• 2 types- Demand and Term/ Time
2. Term / Fixed Deposits
– Different maturity periods and
consequently different rate of interest
earned on them
Assets of Banks

1. Cash in Hand and Balances with RBI

2. Investments in SLR securities (19.5% of demand
and time liabilities)
– GoI securities and other approved securities
3. Others
– Non-approved securities (non-SLR securities)
– Eg. Shares and debentures, MF units, commercial
paper
Assets of Banks

4. Bank Credit
– Cash Credit and overdraft
– Bill discounting
– Loans
• Demand Loan- Short term loan repayable on
demand
• Term Loan- for more than 1 year with specific
repayment schedule
1. Net Interest Income

• Difference between interest income and interest

paid out
• Net Interest Margin is ratio of NII to Average
Earning Assets of the bank or Financial
Institution
• NIM= (Interest Income- Interest Expenses)
Average Earning Assets
Source: Capitalmind website
 2. Management of NPAs

• Non Performing Assets

– A loan that is in danger of default
– If the borrower fails to make interest or principal payments
for 90 days the loan is considered an NPA

– Gross NPA= Total amount of bad loans

– Net NPA= Gross NPA – Provisions
• Gross NPA Ratio = Gross NPA / Loans given
• Net NPA Ratio = Net NPA / Loans given
Gross NPA ratio was 5.1% for first
half of FY16, 9.85% for Q2 FY17!
2. Management of NPAs
Banks are required to classify NPAs further into
Substandard, Doubtful and Loss assets.
1. Substandard assets: Assets which has remained
NPA for a period less than or equal to 12 months.
2. Doubtful assets: An asset would be classified as
doubtful if it has remained in the substandard
category for a period of 12 months.
3. Loss assets: As per RBI, “Loss asset is considered
uncollectible and of such little value that its
continuance as a bankable asset is not warranted,
although there may be some salvage or recovery
value.”
2. Management of NPAs
• RBI had given a deadline of March’17 to banks to
clean up their balance sheet (write-offs,
provisioning)
• The SARFAESI Act empowers banks to auction
assets or properties that were submitted as
collateral while sanctioning loans
• The FRDI (Financial Resolution and Deposit
Insurance ) Bill is aimed at insuring the money of a
bank’s depositors in the case of an eventuality
where the bank would have to be liquidated

SARFAESI- Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act
2. Management of NPAs

• The Indian government and the country’s central

bank are at the final stage of drawing up a plan
to infuse Rs2.11 trillion capital into public sector
banks (PSBs)
– PSBs have a 70% share of the assets of Indian banking
industry, consisting of 21 public sector banks, 26
private sector banks, 43 foreign banks and 56 regional
rural banks.
 3. Capital Adequacy Norms
• Capital Adequacy Ratio (CAR) or Capital to Risk Weighted
Assets Ratio (CRAR)
• It helps understand the ability of a bank to withstand
losses without affecting its lenders and depositors.
• Ratio of bank’s capital to its assets (after assigning risk
weights)
– Low risk assets require less capital eg. Mortgage loans
– Higher risk capital requires more capital
• The Basel III norms stipulate a CAR of 8%
• RBI norms stipulate a CAR of 9% for Indian commercial
banks
Development Banks

• Financial institutions set up to promote balanced

development and thereby aid in the economic
growth of the country
• Eg. IFCI , SIDBI , EXIM Bank , NABARD
• International Development Banks- IMF, World
Bank
Development Banks- Objectives

• To serve as agent of development in various sectors

like industry, agriculture and trade
• To accelerate economic growth
• To allocate resources to high priority areas
• To foster rapid industrialization to provide
employment opportunities and higher production
• To promote development of rural areas
Changing Role- Dev Banks
• With changing requirements of
corporates, development of stock
markets, their original role is becoming
redundant
• They are gradually converting into
universal banks (providing all other
services)
– Eg. ICICI and IDBI through reverse mergers
Non Banking Financial Company (NBFC)
• Supplement role of banking sector by meeting
credit needs of corporates and unorganized sector
• How are they different?
– They can accept deposits but not demand deposits
– Cant issue cheques drawn on itself
– Cant borrow from RBI
– Have flexible structure- quicker decisions, tailor-made
services, assume greater risk
References

• http://www.thehindu.com/business/Economy/all
-you-need-to-know-about-indias-npa-crisis-
and-the-frdi-bill/article21379531.ece
• https://capitalmind.in/2016/09/indian-banking-
sector-report-npa-shocks-low-provisions/
• Indian Financial System – Bharti Pathak