Professional Documents
Culture Documents
Submitted To Dr. Liaquat Ali Submitted By Reema Roll No. 5220 MBA-I(E)
ACKNOWLEDGEMENT
I am REEMA very grateful to Dr.LIAQAT ALI (School of Management Studies, Punjabi University,Patiala )who has been guiding me for my presentation and report. I am very thankful to him for giving guidelines for completion of my seminar project work. His knowledge and experience was a great motivating factor for me. Without his valuable support and guidance the successful completion of the project would not have been possible. I got very effective knowledge and experience while preparing my seminar project presentation and report. I give my special regards to my friend SANDEEP KAUR whose knowledge and help make the completion of my project possible especially in preparing the report. I am very thankful to her.
CONTENTS
1. Definition of bank 2. History of banking sector in India 3. Major functions of bank 4. Role of banking sector in economic development of India 5. Organisational structure of banking sector 6. Reserve bank of India 7. Functions of RBI 8. How RBI controls economy 9. Different type of accounts opened in the bank 10. Narsimah committee report recommendations- (1991-1998) 11. Privatisation and modernisation of banks 12. Some facts and figures about banks 3 4-7
Page no.
WHAT IS A BANK?
A banker or a bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution where one can place and borrow money and take care of financial affairs. In other words bank is that financial institution which accepts deposits from public and gives loan for purpose of consumption or investment. Besides, banks these days perform various other functions such as credit creation, transfer of funds, agency jobs and general services. According to Indian Banking Companies Act, Banking Company is one which transacts the business of banking which means the accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise. India has a well developed banking system. Most of the banks in India were founded by Indian entrepreneurs and visionaries in the pre-independence era to provide financial assistance to traders, agriculturists and budding Indian industrialists. The origin of banking in India can be traced back to the last decades of the 18th century. The General Bank of India and the Bank of Hindustan, which started in 1786 were the first banks in India. Both the banks are now defunct. The oldest bank in existence in India at the moment is the State Bank of India. The State Bank of India came into existence in 1806. At that time it was known as the Bank of Calcutta. SBI is presently the largest commercial bank in the country. The role of central banking in India is looked by the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India. Reserve Bank was nationalized in 1947 and was given broader powers. In 1969, 14 largest commercial banks were nationalized followed by six next largest in 1980. But with adoption of economic liberalization in 1991, private banking was again allowed. The commercial banking structure in India consists of: Scheduled Commercial Banks and Unscheduled Banks. Scheduled commercial Banks constitute those banks, which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI includes only those banks in this schedule, which satisfy the criteria laid down vide section 42 (6) (a) of the Act. Indian banks can be broadly classified into public sector banks, private banks and foreign banks.
PHASE I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.During the first phase the
growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority.During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.
PHASE II
Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Despite the provisions, control and regulations of 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, 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 Nationalisation." The meeting received the paper with enthusiasm.Seven banks forming subsidiary of State Bank of India was nationalised in 1960.on 19th July, 1969 major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:
1949: Enactment of Banking Regulation Act. 1955: Nationalisation of State Bank of India. 1959: Nationalisation of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalisation of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalisation of seven banks with deposits over 200 crore. After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.
PHASE III
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimha, a committee was set up by his name which worked for the liberalisation of banking practices. In the early 1990s, the then Narasimha Rao 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, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized 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 country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. 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 financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.
FUNCTIONS OF BANK
Functions of commercial banks can be divided into three parts:
1. Primary Functions
Commercial banks perform two primary functions: (1) Accepting deposits A bank accepts deposits from the public. People can deposit their cash balances in either of the following accounts to their convenience: (i) Fixed or Time Deposit Account: Cash is deposited in this account for a fixed period. The depositor gets receipt for the amount deposited. It is called fixed deposit receipt. The receipt indicates the name of the depositor, amount of the deposit, rate of interest and the period of deposit. This receipt is not transferable. If the depositor stands in need of the amount before the expiry of the fixed period, he can withdraw the same after paying the discount (interest) to the bank. This type of deposit attracts high rate of interest. Longer the period of deposit, higher is the rate of interest. It is so because bank can use this amount for a longer period. It is also called Time Liability of the bank. (ii) Current or Demand Deposit Account: A depositor can deposit his funds any number of times he likes and can also withdraw the same any number of times he wishes. Ordinarily, businessmen deposit their funds in this account. Generally, no interest is paid by the bank on the current account. Rather, the bank demands some charges from the depositors if the amount lying in the account falls below the minimum limit. The amount from this account is withdrawn through cheques. This type of account is also called demand liability. In America, it is called checking account. (iii) Saving Deposit Account: This account is meant for encouraging small savings. Restrictions are imposed by the bank on the amount to be withdrawn by the depositor. If the latter wants to withdraw more money than usually permitted, he has to give prior notice to the bank. Bank pays interest on this account although its rate is less than the rate of interest paid on fixed account.
(iv) Home Safe Saving Account: This account has been introduced recently by the banks. A small portable safe is provided to the depositor at his place. Key of the safe is kept by bank. Depositor puts his small savings in it as convenient to him and after sometime hands over the same to bank for getting it entered into his account. Many banks collect such savings through their agents deputed for the job. Interest paid on this account is less than on saving account. (v) Recurring Deposit Account: Under this account, a specified amount is deposited every month for a specific period, say, 12, 24, 36, or 60 months. This amount cannot be withdrawn before the expiry of the given period except under exceptional circumstances. Interest on the amount deposited is also credited to the account of the depositor. Like time deposit account, interest paid on this account is higher than saving account. (2) Advancing Loans Another primary function of the commercial banks is to advance loans. A certain part of the cash received by the banks as deposits is kept in the reserve and the rest is given as loan. Banks advance loans mostly for productive purposes, on approved security. The amount of loan is generally less than the value of the security. Banks advance following types of loans: (i) Cash Credit: The debtor is allowed to withdraw a certain amount on a given security. The debtor withdraws the amount within this limit. Interest is charged by the bank on the amount actually withdrawn. An important point in this regard is that withdrawal of cash by the borrower is determined by the bank on the basis of his stock statement and volume of production activity. (ii) Overdraft: Clients who have current account with the bank are granted the facility of withdrawing more money than actually lying in their accounts. It is called overdraft. This facility is available for short-term to reliable persons. Supposing, a person has Rs. 10,000 lying in current account. If the bank allows him to issue cheques upto Rs. 12,000, then the amount of Rs. 2,000 will be called overdraft. (iii) Demand Loans: Loans are given for some fixed amount, but without any specified maturity. The interest is chargeable on the whole amount from the day the loan is sanctioned irrespective of the fact that the debtor withdraws the whole amount or part
thereof. These loans are offered against personal security or against the security of financial assets or some durable goods. (iv) Short-term Loans: Short-period loans generally include: (o) personal loans, and (ii) loans to finance working capital. Interest is charged on the entire loan amount from the day it is entered in the loan account of the borrower. Generally, these loans are offered against some security. Hence, these are secured loans.
2. Secondary Functions
Besides the above primary functions, banks also perform many secondary functions viz. Agency functions and general utility services. (1) Agency Functions Banks function in the form of agents and representatives of their customers. Customers give their consent for performing such functions. The important functions of these types are as follows: (i) Collection and Payment of Various Items: Banks collect cheques, rent, interest, etc., on behalf of their customers and also make payment of taxes, insurance premium, etc., on their behalf. (ii) Purchase and Sale of Securities: Banks normally are more knowledgeable with regard to stock and share business. As such they buy, sell and deep in safe custody the securities on behalf of their customers. (iii) Trustee and Executor: Banks also act as trustees and executors of the property of their customers on their advice. (iv) Remitting of Money: Banks remit money at distant places through bank drafts. (v) Purchase and Sale of Foreign Exchange: Banks buy and sell foreign exchange, promoting international trade. This function is mainly discharged by Foreign Exchange Banks.
(vi)Letter of Reference: Banks also give information about economic position of their customers to domestic and foreign traders and likewise provide information about economic position of domestic and foreign traders to their customers. (vii) Underwriting: Banks underwrite the sale of new shares. Underwriting means that banks purchase themselves fully or partly the whole or unsold portion of the new shares. They also undertake private placement of new shares. It means that the new shares are sold privately to selected persons or institutions.
in raising the standard of living of the people and accelerating the rate of economic development. (6) Implementation of Monetary Policy: Government and Central Bank of every underdeveloped country need a well organised banking system to implement effectively its monetary policy. Contribution of the commercial banks is of great significance to achieve the objectives of the monetary policy of the country. These banks expand or contract credit as directed by the central bank. Effective implementation of monetary policy makes it possible to achieve the objectives of economic development, without any harmful impact of the inflationary and deflationary gaps in the economy. 7) Employment Opportunities: Unemployed youth get loans from these banks at low rate interest under various self-employment schemes. Thus, banks help in increasing employment opportunities and total output. It has a favourable effect on the economic development of the country.
ORGANISATIONAL STRUCTURE OF BANKING 1. Organized banking sector I. Commercial banks: Commercial Banks in India are broadly categorized into Scheduled
Commercial Banks and Unscheduled Commercial Banks. The Scheduled Commercial Banks have been listed under the Second Schedule of the Reserve Bank of India Act, 1934. The selection measure for listing a bank under the Second Schedule was provided in section 42 (60 of the Reserve Bank of India Act, 1934). Activities of Commercial Banks The modern Commercial Banks in India cater to the financial needs of different sectors. The main functions of the commercial banks comprise: y y y y transfer of funds acceptance of deposits offering those deposits as loans for the establishment of industries Purchase of houses, equipments, capital investment purposes etc.
The banks are allowed to act as trustees. On account of the knowledge of the financial market of India the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture. The
Indian Government presently hires the commercial banks for various purposes like tax collection and refunds, payment of pension s etc.These are classified as below:
successive years of patronage and constantly setting new standards in banking, ING Vysya Bank has many credits to its account. Examples of private sector banks are: ICICI bank IDBI Bank Axis bank Bank of Punjab Bank of Rajasthan Federal Bank HDFC Bank
Foreign banks
Foreign banks are working in India since British rule. The RBI has allowed the entry of foreign banks in India. Foreign equity in new Indian private sector banks is allowed. Foreign banks were permitted to enter in the Indian banking sector with a ceiling of 49 per cent of equity. Foreign banks were also permitted to enter in joint venture with local banks in nonbanking financial services in accordance with the foreign investment policy. Foreign banks have brought latest technology and latest banking practices in India. They have helped made Indian Banking system more competitive and efficient. Government has come up with a road map for expansion of foreign banks in India.
(b) Granting of loans and advances to artisans, small entrepreneurs and persons of small means engaged in trade, commerce or industry within the notified areas of rural areas.
Farming, Cattle, Milk, Hatchery, Personal finance y Cooperative banks in India finance urban areas under:
Self-employment Industries, Small scale units, Home finance, Consumer finance, Personal finance Some facts about Cooperative banks in India y Some cooperative banks in India are more forward than many of the state and private sector banks. y According to NAFCUB the total deposits & lendings of Cooperative Banks in India is much more than Old Private Sector Banks & also the New Private Sector Banks. y This exponential growth of Co operative Banks in India is attributed mainly to their much better local reach, personal interaction with customers, their ability to catch the nerve of the local clientele. (2) UNORGANISED SECTOR: The unorganised sector is consisted of indigenous bankers, moneylenders or Sahukars or Seth s etc. These persons are carrying out function of banking in the unorganised manner.
(i)
Indigenous Bankers: The activities of indigenous bankers are not at all regulated. These are the individuals or private firms which act like a bank as they receive deposits and give loans to public. These bankers were very active in the ancient and medieval periods. But with the growth of banking system in India, these bankers received a setback. But these bankers are still in operation in large numbers in the Western and Southern parts of the country. They charge high rate of interest and are not covered under the bank rate policy of RBI. Despite making attempts to regulate them, to restrict their operations and lately of liquidating them, they continue to keep their hold on small borrowers. Indigenous bankers provide finance for productive purposes directly to trade and industries. These bankers do no care the end-use of credit. Despite the stiff competition, they are surviving due to various favourable factors, like stringent conditions imposed by banks for granting credits, prompt and personalised services by these bankers to their customers, lower operational and establishment costs, etc. There is no certainty about the exact number of indigenous bankers operating all over India.
(ii)
Moneylenders: Moneylenders are persons who give loans to small borrowers, like farmers, artisans, agricultural labourers, factory and mine workers, etc. They depend entirely on their own funds for the working capital. These are of three types (1) Professional moneylenders, (2) Inherent moneylenders and (3) Nonprofessional moneylenders. The methods and area of operation differ from moneylender to moneylender. Therefore, they do not constitute a homogenous market. Generally, their business is confined to local limits. Although various measures have been introduced to control the activities of these lenders but still they are operating in India.
FUNCTIONS OF RBI
As a central bank, the Reserve Bank has significant powers and duties to perform. For smooth and speedy progress of the Indian Financial System, it has to perform some important tasks. Among others it includes maintaining monetary and financial stability, to develop and maintain stable payment system, to promote and develop financial infrastructure and to regulate or control the financial institutions. For simplification, the functions of the Reserve Bank are classified into the traditional functions, the development functions and supervisory functions.
bank is set up. It includes fundamental functions of the Central Bank. They comprise the following tasks. I) Issue of Currency Notes: The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of smaller denomination. These currency notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes and government of India bonds. II) Banker to other Banks: The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial banks in the country. The RBI can control the volumes of banks reserves and allow other banks to create credit in that proportion. Every commercial bank has to maintain a part of their reserves with its parent's viz. the RBI. Similarly in need or in urgency these banks approach the RBI for fund. Thus it is called as the lender of the last resort. III) Banker to the Government: The RBI being the apex monitory body has to work as an agent of the central and state governments. It performs various banking function such as to accept deposits, taxes and make payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government. It manages government public debts and maintains foreign exchange reserves on behalf of the government. It provides overdraft facility to the government when it faces financial crunch. IV) Exchange Rate Management: It is an essential function of the RBI. In order to maintain stability in the external value of rupee, it has to prepare domestic policies in that direction. Also it needs to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand and supply of the foreign currency (U.S Dollar) close to each other. V) Credit Control Function: Commercial bank in the country creates credit according to the demand in the economy. But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. On the other credit creation is below the required limit then it harms the growth of the economy. As a central bank of the nation the RBI has to look
for growth with price stability. Thus it regulates the credit creation capacity of commercial banks by using various credit control tools. VI) Supervisory Function: The RBI has been endowed with vast powers for supervising the banking system in the country. It has powers to issue license for setting up new banks, to open new branches, to decide minimum reserves, to inspect functioning of commercial banks in India and abroad, and to guide and direct the commercial banks in India. It can have periodical inspections an audit of the commercial banks in India.
National Institute of Bank Management i.e NIBM, Bankers Staff College i.e BSC and College of Agriculture Banking i.e CAB are few to mention. V) Collection of Data: Being the apex monetary authority of the country, the RBI collects process and disseminates statistical data on several topics. It includes interest rate, inflation, savings and investments etc. This data proves to be quite useful for researchers and policy makers. VI) Publication of the Reports: The Reserve Bank has its separate publication division. This division collects and publishes data on several sectors of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress of Commercial Banks India., etc. This information is made available to the public also at cheaper rates. VII) Promotion of Banking Habits: As an apex organization, the RBI always tries to promote the banking habits in the country. It institutionalizes savings and takes measures for an expansion of the banking network. It has set up many institutions such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982, NHB-1988, etc. These organizations develop and promote banking habits among the people. During economic reforms it has taken many initiatives for encouraging and promoting banking in India. VIII) Promotion of Export through Refinance: The RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India. The ExportImport Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose.
III) Control over NBFIs: The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs. IV) Implementation of the Deposit Insurance Scheme: The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits below Rs. One lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.
1).Quantitative methods
These methods maintain and control the total quantity or volume of credit or money supply in the economy. They are also called as credit control measures. The following are the different credit control measures adopted by the RBI: 1. Bank Rate: Bank rate (also known as discount rate)is the rate at which RBI rediscounts eligible papers like approved securities, bill of exchange and commercial papers held by the commercial banks. Thus it is the rate at which the RBI lends money to the commercial banks for their liquidity requirements. These loans are usually very short-term loans. The main idea is that if the central bank, RBI, has reduced this rate, it is a signal to banks that it is appropriate to borrow money from it in larger quantities. Changes in the bank rate affect the bank s borrowing rate from the RBI which in turn influences the bank s lending rates. Thus bank rate acts as a guideline to the banks for fixing their interest rates. Inflation leads to increase in the bank rate recession causes it to decline. In April 2010 the bank rate was fixed at 6%p.a.
2. Cash reserve ratio: Banks cannot loan out all their deposits because they may fail soon. RBI or central banks require banks to keep a small portion of their deposits as banks reserves , which the banks cannot lend out. This is known as CRR. The money supply in the economy is influenced by the cash reserve ratio. It is the ratio of a bank s time and demand liabilities to be kept in reserve with the RBI. The RBI is authorised to vary the CRR between 3% and 15%.When RBI increases CRR, banks are required to keep a higher amount of money in their banks reserves. Hence, less money is available for individuals and corporate in the market. A high CRR reduces the flow of money in the economy and is used to control inflation. On the other hand when RBI decreases CRR, Banks have more funds to lend to people. A low CRR increases the flow of money and is used to overcome recession. 3. Statutory liquidity ratio: Every bank is required to maintain a fixed percentage of its assets in the form of cash or other liquid asset, called SLR. With a view to reducing the flow of credit in the market, the central bank increases this liquidity ratio. However in case of expansion of credit, the liquidity ratio is reduced. The present level of SLR is 24%. 4. Open market operations: This is the primary and most frequent way by which RBI control monetary policy. Open market operations involve buying and selling of short term government securities. This method may be different from others but the end result is the same controlling money supply in the economy. During inflation, RBI sells the government
securities to the commercial banks and other financial institution. This reduces their cash lending and credit creation capacities. Thus, Inflation can be controlled. During recessions, RBI purchases government securities from commercial banks and other financial institution. This leaves them with more cash balances for lending and increases their credit creation capacities. Thus, recession can be overcome. 5. Repo rates and reverse repo rates: Repo rate and Reverse Repo rate are gaining significance in determining interest rate trends of commercial banks. Repo is a swap deal involving immediate sale of securities and a simultaneous re purchase of those securities at a future date at a predetermined price. Such deals take place between the RBI and other commercial banks and financial institution. Commercial banks and financial institution also park their funds with RBI at a certain rate This rate is called the reverse Repo Rate. Repo rates and reverse repo rate used by RBI to make liquidity adjustments in the market. The RBI uses this tool when it feels there is too much money floating in the banking system. If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer
them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk). Consequently, banks would have lesser funds to lend to their customers. This helps reduce the flow of excess money into the economy.
2).QUALITATIVE INSTRUMENTS
The Qualitative Instruments are also known as the Selective Tools of monetary policy. These tools are not directed towards the quality of credit or the use of the credit. They are used for discriminating between different uses of credit. It can be discrimination favouring export over import or essential over non-essential credit supply. This method can have influence over the lender and borrower of the credit. The Selective Tools of credit control comprises of following instruments. 1. Fixing margin requirements: The margin refers to the "proportion of the loan amount which is not financed by the bank". Or in other words, it is that part of a loan which a borrower has to raise in order to get finance for his purpose. A change in a margin implies a change in the loan size. This method is used to encourage credit supply for the needy sector and discourage it for other non-necessary sectors. This can be done by increasing margin for the non-necessary sectors and by reducing it for other needy sectors. Example:- If the RBI feels that more credit supply should be allocated to agriculture sector, then it will reduce the margin and even 85-90 percent loan can be given. 2. Consumer Credit Regulation: Under this method, consumer credit supply is regulated through hire-purchase and instalment sale of consumer goods. Under this method the down payment, instalment amount, loan duration, etc is fixed in advance. This can help in checking the credit use and then inflation in a country. 3. Publicity: This is yet another method of selective credit control. Through it Central Bank (RBI) publishes various reports stating what is good and what is bad in the system. This published information can help commercial banks to direct credit supply in the desired sectors. Through its weekly and monthly bulletins, the information is made public and banks can use it for attaining goals of monetary policy. 4. Credit Rationing: Central Bank fixes credit amount to be granted. Credit is rationed by limiting the amount available for each commercial bank. This method controls even bill
rediscounting. For certain purpose, upper limit of credit can be fixed and banks are told to stick to this limit. This can help in lowering banks credit expoursure to unwanted sectors. 5. Moral Suasion: It implies to pressure exerted by the RBI on the indian banking system without any strict action for compliance of the rules. It is a suggestion to banks. It helps in restraining credit during inflationary periods. Commercial banks are informed about the expectations of the central bank through a monetary policy. Under moral suasion central banks can issue directives, guidelines and suggestions for commercial banks regarding reducing credit supply for speculative purposes. 6. Control through Directives: Under this method the central bank issue frequent directives to commercial banks. These directives guide commercial banks in framing their lending policy. Through a directive the central bank can influence credit structures, supply of credit to certain limit for a specific purpose. The RBI issues directives to commercial banks for not lending loans to speculative sector such as securities, etc beyond a certain limit. 7. Direct Action: Under this method the RBI can impose an action against a bank. If certain banks are not adhering to the RBI's directives, the RBI may refuse to rediscount their bills and securities. Secondly, RBI may refuse credit supply to those banks whose borrowings are in excess to their capital. Central bank can penalize a bank by changing some rates. At last it can even put a ban on a particular bank if it does not follow its directives and work against the objectives of the monetary policy. These are various selective instruments of the monetary policy. However the success of these tools is limited by the availability of alternative sources of credit in economy, working of the Non-Banking Financial Institutions (NBFIs), profit motive of commercial banks and undemocratic nature off these tools. But a right mix of both the general and selective tools of monetary policy can give the desired results.
Savings Bank Account: Savings Bank Accounts are meant to promote the habit of saving among the citizens while allowing them to use their funds when required. The main advantage of Savings Bank Account is its high liquidity and safety. Current Account: Current Account is primarily meant for businessmen, firms, companies, and public enterprises etc. that have numerous daily banking transactions. Current Accounts are cheque operated accounts meant neither for the purpose of earning interest nor for the purpose of savings but only for convenience of business hence they are non-interest bearing accounts Demat Account: Demat refers to a dematerialised account. Demat account is just like a bank account where actual money is replaced by shares. Just as a bank account is required if we want to save money or make cheque payments, we need to open a demat account in order to buy or sell shares. Recurring Bank Deposits: Under a Recurring Deposit account (RD account), a specific amount is invested in bank on monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which the principal sum as well as the interest earned during that period is returned to the investor.
Ratio- (CRR) was as high as 15 percent. Taken together, banks needed to maintain 53.5 percent of their resources idle with the RBI. 2. Directed Credit Programme: Since nationalization the government has encouraged the lending to agriculture and small-scale industries at a confessional rate of interest. It is known as the directed credit programme. The committee opined that these sectors have matured and thus do not need such financial support. This directed credit programme was successful from the government's point of view but it affected commercial banks in a bad manner. Basically it deteriorated the quality of loan, resulted in a shift from the security oriented loan to purpose oriented. Banks were given a huge target of priority sector lending, etc. ultimately leading to profit erosion of banks. 3. Interest Rate Structure: The committee found that the interest rate structure and rate of interest in India are highly regulated and controlled by the government. They also found that government used bank funds at a cheap rate under the SLR. At the same time the government advocated the philosophy of subsidized lending to certain sectors. The committee felt that there was no need for interest subsidy. It made banks handicapped in terms of building main strength and expanding credit supply. 4. Additional Suggestions: Committee also suggested that the determination of interest rate should be on grounds of market forces. It further suggested minimizing the slabs of interest. Along with these major problem areas M. Narasimha Committee also found various inconsistencies regarding the banking system in India. In order to remove them and make it more vibrant and efficient, it has given the following recommendations.
hindrance in the productivity of the bank thus the committee recommended their gradual reduction. SLR was recommended to reduce from 38.5% to 25% and CRR from 15% to 3 to 5%. 2. Phasing out Directed Credit Programme: In India, since nationalization, directed credit programmes were adopted by the government. The committee recommended phasing out of this programme. This programme compelled banks to earmark then financial resources for the needy and poor sectors at concessional rates of interest. It was reducing the profitability of banks and thus the committee recommended the stopping of this programme. 3. Interest Rate Determination: The committee felt that the interest rates in India are regulated and controlled by the authorities. The determination of the interest rate should be on the grounds of market forces such as the demand for and the supply of fund. Hence the committee recommended eliminating government controls on interest rate and phasing out the concessional interest rates for the priority sector. 4. Structural Reorganizations of the Banking sector: The committee recommended that the actual numbers of public sector banks need to be reduced. Three to four big banks including SBI should be developed as international banks. Eight to Ten Banks having nationwide presence should concentrate on the national and universal banking services. Local banks should concentrate on region specific banking. Regarding the RRBs (Regional Rural Banks), it recommended that they should focus on agriculture and rural financing. They recommended that the government should assure that henceforth there won't be any nationalization and private and foreign banks should be allowed liberal entry in India. 5. Establishment of the ARF Tribunal: The proportion of bad debts and Non-performing asset (NPA) of the public sector Banks and Development Financial Institute was very alarming in those days. The committee recommended the establishment of an Asset Reconstruction Fund (ARF). This fund will take over the proportion of the bad and doubtful debts from the banks and financial institutes. It would help banks to get rid of bad debts. 6. Removal of Dual control: Those days banks were under the dual control of the Reserve Bank of India (RBI) and the Banking Division of the Ministry of Finance (Government of India). The committee recommended the stepping of this system. It considered and recommended that the RBI should be the only main agency to regulate banking in India.
7. Banking Autonomy: The committee recommended that the public sector banks should be free and autonomous. In order to pursue competitiveness and efficiency, banks must enjoy autonomy so that they can reform the work culture and banking technology up gradation will thus be easy. Some of these recommendations were later accepted by the Government of India and became banking reforms.
recommended a review of functions of boards and enabled them to adopt professional corporate strategy. 5. Review of banking laws: The committee considered that there was an urgent need for reviewing and amending main laws governing Indian Banking Industry like RBI Act, Banking Regulation Act, State Bank of India Act, Bank Nationalisation Act, etc. This up gradation will bring them in line with the present needs of the banking sector in India. Apart from these major recommendations, the committee has also recommended faster computerization, technology upgradation, training of staff, depoliticizing of banks, professionalism in banking, reviewing bank recruitment, etc PRIVATISATION AND MODERNISATION Privatisation and modernisation have been the two major components of reforms in the Indian banking system. The government is taking a U-turn from nationalisation to privatisation. While privatisation of the existing banks in the public sector is an idea that is gaining momentum, there has been a large number of private players in the capital and money market. This enhances competition and at the same time firmly exposes the financial sector to the principle of profitability. Subsidised credit must ultimately give way to the market forces of supply and demand if banking institutions are to keep pace with the emerging requirement of funds, particularly in industrial sector of the economy. Along with nationalised banks, main objectives behind maintaining banks operating in private sector are as follows: (i) increasing the efficiency and productivity of the banks, (ii) reducing the fiscal deficit, (iii) economic growth of the country at a rapid rate (iv) adequate return on investment, (v) provision of increased employment opportunities, (vi) increasing the productivity of the enterprises, (vii) expansion of customer service, (viii) greater expansion of banking services, (ix) increasing utilization of national resources, etc. Main Facilities Provided by Modern Banking Modernisation of the Indian banking system has been multidimensional. Indigenous banks have tried to keep pace with multinational banking corporations in the economy by launching diverse schemes of business operations with a view to expanding their business, quantitatively as well as qualitatively. Following facilities, reforms and changes highlight the various aspects of modernisation in the Indian banking system: (i) Personalised Banking
Banking are focusing on building personal rapport with the clients by attending to their personal banking requirements. These requirements may vary from simple banking querries to managing their financial assets and liabilities (or monetary receipts and payments). This is a major reformation in the Indian banking system, although it is still in its infant stage. When personalised banking becomes a widely accepted norm of the banking system, people would be induced to accept banking as a way of life. This would not only impart stability to the banking system but also substantially contribute to its growth and diversification. It would then serve as an important instrument of infrastructure in the economy, accelerating the overall process of the growth and development. (ii) Computerisation of Banking Services Computerisation is a notable change in the context of modernisation of the banking system. The conventional manual accounting system was not only cumbersome but highly time consuming as well. Now a computer software handles everything from account opening to estimating and entering all transactions in the bank accounts. Both efficiency as well as accuracy have tremendously improved. Following are some specific facilities which the banks have begun to offer in the computer age: (a) E-banking or Banking On-line: It refers to electronic banking. Banks are invariably having a website and its account holders are allowed a free access to it. Not only that an account holder can have a peep into his account balance (using the internet) but also he can advise for the transfer of funds to different people at different locations. One need not be physically present at the bank s counter to operate his account. (b) ATM Facility: Automatic Teller Machine is a boon to the banking services. These are money dispensers and as well swallow the documents you wish to be processed. These are widely spread across all parts of the country and are of great help in raising efficiency in the banking sector. Free access to ATM and quick dispensing of cash has rendered ATM a preferred choice compared to banking across the counter. (c) Anywhere Banking: Computerisation and interneting have facilitated anywhere banking . The conventional manual approach expected an account holder to conduct all his banking transaction only at the concerned bank branch where the account was initially opened. The advent of interneting has changed the scenario. Now an account holder can operate his account at any branch of the concerned bank anywhere in the country. Account profile of an account holder shows up on the screen in all branches of the bank just on a
click of the mouse. Anywhere banking has infact changed the concept of banking: banking is now a way of life, not merely restricted to the deposit and withdrawl of funds. (d) Debit Card and Credit Card Facility: Banks are offering debit card facility to their account holders. Flashing these cards, the account holders can buy things from the designated salesoutlets. Payments are debited to their account through an electronic devise. Credit card is a bit different. It offers credit facility to the card-holder. Credit limit varies from individual to individual depending upon his credit history and repayment capacity. Often, the credit is tax free for a period of nearly 40 days. However the banks charge about 2% commission on the value of transactions. Credit card facility has given a big boost to demand for goods and services both in the domestic as well as international market. (iii) Banking on Phone Banking on phone is another aspect of modernisation of the banking system. Banks are marketing a variety of loan packages simply through telephonic conversation. After a deal is struck, small loans are often delivered at the doorsteps of the borrowers. Banks have now shed reluctance of divulging account details to the account holders on the telephone, on rendering the proof of identity. Indeed, phone banking is fast spreading to cover more and more banking services.
(iv) Diversification of Banking
In the wake of banking sector reforms, there has been a notable spread or diversification of the banking activity. Mutual funds market and venture capital is an important area of diversification for the banks. Government of India has given a big push to this activity by linking it with the tax-exemption scheme. Exemption of income tax is allowed (upto certain limits) on the investment in mutual funds by the general public. Banks further invest their mutual fund proceeds in stocks and shares of the corporate houses. Mutual fund investments are subject to market risks and losses are the liability, not of the banks but of the investors. All These aspects of modernisation of banking activity in India suggest a quantum jump in banking business and a quantum jump in consumption as well as investment expenditure through the banking system. Consequent upon these changes, there has been a tremendous increase in overall level of economic activity in general and industrial activity in particular. A
record growth of the industrial sector in the recent past owes a great deal to the modernisation of banking activity in the country.
SOME FACTS AND FIGURES ABOUT INDIAN BANKING SECTOR y Indian banking sector has 6th rank in all over the world.
y y y y y SBI has 6500+ ATMs in the country. ICICI bank has 4500+ ATMs all over the country. RBI had printed 6,39,948 lakh crore notes till 6th Nov 2008. According to the survey of business magazine no. of ATMs grew 28% yearly. Transaction done through ATMs is more than Rs.70000 crore in a year .