DEFINITION

A Bank is an institution whose debts are widely accepted in settlement of other people s debts to each other. Banking Regulation Act, 1949 defines bank as accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise Banking is the lifeline of an economy. Commercial banks play a vital role in our economy. They are the heart of our financial structure. They are instrumental in development of economy

FUNCTIONS OF COMMERCIAL BANKS

Traditional Functions: i. Acceptance of Deposits a. Current Deposits b. Savings Accounts c. Fixed Deposits ii. Creation of credit iii. Lending a. Overdraft facilities b. Cash credit facility c. Direct Loans and Advances d. Bills discounting and purchase e. Term Loans iv. Transferring of money and other related activities  Incidental Functions: i. Transfer of funds and remittance facilities 

ii. Cheque clearences and collection of money iii. Agency and trustee business for customers iv. Safe custody of valuables v. Merchant banking and underwriting business vi. Portfolio management for customers vii. Arranging the investment of funds for corporate and non-corporate clients viii. Financing of import export business ix. Issue of foreign letters of credit & doing Foreign Exchange business ROLE OF COMMERCIAL BANKS  Mobilization of Savings  Facilitate commerce and trade  Provision of Finance to Backward Communities and Neglected Segments of the society  Development of Agriculture & other priority sectors in the economy

Role of Public Sector Banks

Social responsibilities and need to accelerate the process of economic development expanded the role of public sector banks The efforts of merging weak private sector units with public sector banks will enhance the role of the public sector banks. The major objectives of nationalization were: Widening the branch network of banks in rural and semi-urban areas Greater mobilization of savings through bank deposits Re-orientation of credit flows to benefit neglected sectors Some of the important measures taken to meet the objectives: Branch Licensing Policies open branches in rural, semi-urban areas Lend a certain proportion (40%) of their deposits to priority sector as agriculture, SSI etc. Deposits mobilized in rural, semi-urban areas were deployed in those areas only. To maintain 60% credit-deposit ratio. Bank participation in poverty alleviation programmes Lending rate structure of banks: large borrowers - high rates of interest, small borrowers low rates of interest Set up of Regional Rural Banks to meet credit requirements of weaker sections in the rural areas Introduction of Credit Authorization Schemes

Reforms in the Banking Sector

The most significant achievement of the financial sector has been the market improvement in the financial health of the commercial banking sector, in terms of asset quality, capital adequacy and profitability. Banking challenges in the new millennium:

The wake of globalization has provoked much reflections to strengthen the banking system. Banks have identified a no. of priorities to make the banking sector sound and vibrant to play a crucial role in the devp. of economy. The 1991 BSR implemented, have made PSBs serious about the risk-return trade-off and maximization of shareholder s return. The PSBs became conscious to their performance and shifted from volume to margin (i.e., from expansion to efficiency). 1. Technology: Most challenging task ahead to remain competitive of ever changing environment is advancing technology levels in banking so as to reach the global standards. 2. Human Resource Management: PSBs need the freedom to hire right talent at market. 3. Risk Management & Regulatory Implications: To reach international standards of capital adequacy, risk management & accounting practices 4. Structural Issues: Structure of a bank is business & technology driven 5. Corporate Governance: Ensure transparency and efficiency in running the organization. Exercise freedom, flexibility and autonomy be ensured 6. Rural Banking: Redesign the rural bank to deliver new products & services 7. Management of NPAs: Banks need to intensify their efforts to recover their overdues and prevent generation of fresh NPAs LIQUIDITY & PROFITABILITY Liquidity and Profitability are the two principles of sound banking. Liquidity refers to nearness to cash or easy convertibility into cash Profitability refers to the net return on the funds as reflected in the earning minus expenses per each unit of bank s funds. A bank is said to be liquid when it is able to meet all its current liabilities of demand nature i.e., its ability to pay deposits on demand. There are two types of liquidity: deposit liquidity & loan liquidity Deposit liquidity Bank s ability to pay deposits on demand. Loan Liquidity Bank s capacity to meet all the legitimate credit reuqirement The higher the deposit liquidity, the lower is the possible loan liquidity Measurement of Liquidity: Cash Reserve Ratio, Liquidity Ratio (Cash + Liquid Assets), Loan to deposit Ratio The concept of solvency and liquidity go together. Any bank should not only be liquid but also must be solvent to retain the confidence of its depositors. Solvency depends upon its profits and reserves. Profits are also required to meet demands of shareholders for dividends. Banks can increase their earnings by having more loans and investments of long-term nature. Liquidity and profitability are inversely relate to each other. The business of a bank is to maximize profits consistent with its maintaining a minimum level or liquidity as required for its structure of assets. Thus a bank has to choose a portfolio of assets, satisfying the opposing claims of liquidity and profitability

NON-PERFORMING ASSETS
NPA is defined as an advance where interest and / or instalment of principal remains overdue for a period of more than 180 days in respect of a term loan. NPAs are classified into two types: Gross and Net NPAs Gross refers to the quality of the loans made by banks Net refers to the actual burden of the banks Causes of NPAs: 1. Quality of Assets 2. Quality of loans 3. Borrowers integrity 4. Intentions of borrower and bank management 5. Lapses in supervision and follow-up of loans 6. Managerial incompetencies 7. Absence of will to recover loans 8. Lack of professionalism There are three types of NPAs: Sub-Standard: The account holder comes in this category when he don t pay 3 instalments continuously after 90 days in a year. For this bank has made 10% provision of funds from profits to meet the losses generated by this category. Doubtful category: Under this there are 3 sub categories as i. upto 1 yr 20% provision made by banks ii. Upto 2 yrs 30% provision made by banks iii. Upto 3 yrs 100% provision is made by banks Loss Assets: 100% provision is made. When account holder comes in this category banks can write off their accounts. After this the assets are haded over to recovery agent for sale. Effects of NPA on Banks & FIs: Restriction of flow of cash as provisions are made by bank to overcome NPAs Drain of profit, bad effect on goodwill

RETAIL BANKING
Retail banking is typical mass-market banking where individual customers use local branches of larger commercial banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth. It attracts market segment which offers opportunities with growth and profits Banks are coming out with more and more features to add value to retail banking

The Corporate Banks in India are ranked 2nd overall in the 2004 Greenwich Survey and is aiming at achieving the top rank in the coming surveys. Currently CB manages approx. 365 CB relationships with total advances of approx. USD 1.1 Bn as at 31 May 2008. This portfolio is largely spread within 9 sector teams divided as under : Consumer Brands Industrial Energy and Utilities Telecommunications . Automotive

Regulation of Stock Exchanges:

The Securities Contracts (Regulation) Act is the basis for the operations of the Stock Exchanges in India. No exchange can operate legally without govt. permission or recognition. A stock exchange is recognized only after the govt. is satisfied that its rules and byelaws confirm to the conditions prescribed for ensuring fair dealing and protection of investors. Where there are no stock exchanges, the govt. can license some of the brokers to perform the functions of a stock exchange in its absence. Securities Contracts (Regulation) Rules, 1957 Under the Act the govt. promulgated the S C R Rules, 1957. These rules are statutory and they constitute a code of standardized regulations uniformly applicable to all the recognized stock exchanges. There are at present 23 stock exchanges recognized under the S C R A, 1956. They are located at Mumbai, Kolkata, Chennai, Delhi, Ahmedabad, Hyderabad, Indore, Bhuwaneswar, Mangalore, Patna, Bangalore, Rajkot, Guwahati, Jaipur, Kanpur, Ludhiana, Baroda, Cochin, Pune, Coimbatore, Meerut, Visakhapatnam and Vijayawada.

The Governing Body of a recognized stock exchange has wide governmental powers and administrative powers and is the decision-making body. It has the power, subject to governmental approval, to make, amend and suspend the operation of the rules, byelaws and regulations of the exchanges. The organization of Mumbai Stock Exchange is typical. The members on roll elect: 16 members to be Directors on the Governing Board Elect a President, Vice-President & Treasurer ED is appointed by the government on recommendations by the Governing Body 3 representatives from the government 3 from the public & 1 from RBI on the board Stock Exchange Indicators: Inception: BSE 1875, NSE 1992 Coverage: BSE 417 Cities & Towns, NSE 334 Cities in India No. of Listed Cos.: BSE 7,129 ; NSE 999 Equity Capitalization: BSE Rs.19,87,170 Crores; NSE Rs.18,48,740 Crores The BSE accounts for 90% of the total capitalization in the country and two-thirds of the trading in the country and considered as main stock exchanges in India The stock market comprise of two markets i.e., primary market and secondary market. Primary market comprise of new issue of capital by new / existing companies. Secondary market is where listed securities are bought and sold. Trading is normally done in what we call market lots.

Trading & Settlement:

There are two important types of trading on the stock exchange, namely,  Ready Delivery Contract : Also known as Cash Trading / Cash Transaction and are to be settled within short period up to 7 days  Forward Delivery Contract: Discharged on fixed settlement days up to 15 days All the listed securities of a Stock Exchange are classified either as Specified Shares also called as A Group shares or Non-Specified Shares also called as B Group shares depending upon the process of settlement of transactions. Presently in India, SEs follow T + 2 days settlement cycle. Trading takes place every business day from 10.00 a.m 3.30 p.m, excluding, saturdays, sundays and exchange notified days  SEBI is the regulatory and control authority of stock exchanges  Only the brokers / sub-brokers who are registered with SE can buy / sell the shares  The client who wants to trade must register with one of the brokers / sub-brokers of the SE through Agreement form and must also deposit money as margin based to provide exposure in the stock market  The client must also open a demat a/c with a DP who is a intermediary registered with SEBI like the ICICI Bank, HDFC bank etc  Shares can be bought / sold through a broker on telephone and the brokers identify their clients through a unique code  After transaction is done by the client, the broker issues contract note and client needs to pay which includes Purchase price + Brokerage + stamp duty + securities transaction tax  Trading happens on first day and settlement happens two days after. For eg: if security is bought on Monday, settlement must be made on Wednesday, latest by Thursday, without which the broker will be penalized if exceeds Thursday.  Settlement is done through Clearing Corp. of the exchange. Settlement is done through banks registered with the exchange

 Clearing Corp. identifies payables / receivables position of brokers and reports are created and on T +2 days all the brokers are settled & clients are settled  This is all done through automated setup depository involving NSDL and CDSL

What is a Money Market? A Money Market may be defined as the market for lending and borrowing of short-term funds. A well organized Money Market is the basis for an effective monetary policy. The RBI occupies a pivotal position in the Money Market as it controls the flow of currency and credit into the market.