CHAPTER- 01

Origination of Banking in India

Banking in India originated in the last decades of the 18th century.

The first banks The General Bank of

India 1786, & Bank of Hindustan 1790;

Bank of Bengal, Bank of Madras & Bank of Bombay merged--1921-Imperial Bank of India, ----State Bank of India in 1955.

Pre-Independence
HSBC ----Bengal in 1869 Punjab National Bank---Lahore 1895 The period between 1906 and 1911,

such as Bank of India, Corporation Bank,

Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

At least 94 banks in India failed--World War 1 period

Post-Independence
The major steps to regulate banking included: The Reserve Bank of India, established in April 1934, but was nationalized on January 1, 1949. In 1949, empowerment of Reserve Bank of India (RBI)
To regulate, Control, and Inspect the banks in India.

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.

RBI-- Function

Regulator and supervisor of financial system Monetary Authority Banker to the Government Monopoly of Note Issue (other than Rupee One notes and coins and subsidiary coins) Manager of Foreign Exchange Developmental role Related Functions

Nationalization

Liberalization
In the early 1990s, New Generation tech-savvy banks
Global

Trust Bank, which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. FDI cap raised from 10% to 74% with some restrictions.

Narsimahmam Committee

The purpose of the Narasimham-I Committee was

To study all aspects relating to the

structure, organization, functions and procedures of the financial systems and To recommend improvements in their efficiency and productivity.

Recommendations of NC1
1. 2. 3.

4. 5. 6. 7. 8.

9.

Opening of More Pvt. sector banks Motivation foreign banks to expand their network by opening new branches. Deregulation of RBI and Finance ministry of India. Making RBI as a regulator of all Banks and let Banks takes participation in equity market with govt. stake of 51%, Regulation introduced by RBI include CAR, Asset classification ,NPA ratio Corporate Governance : promoting customer relations and office culture Asset Reconstruction for bringing down NPA in future Risk Management CDR or centralized data repositor E-Banking and VRS

CAR
Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR) Capital adequacy ratios are a measure of the amount of a bank's core capital expressed as a percentage of its risk-weighted asset.

Narasimham-II Committee
Autonomy in Banking Reform in the role of RBI Stronger banking system Non-performing assets Capital adequacy and tightening of provisioning norms Entry of Foreign Banks

Non Performing Asset

A loan that is not earning income and:

1.

Full payment of principal and interest is no longer anticipated, Principal or interest is 90 days or more delinquent, or

2.

3.

The maturity date has passed and payment in full has not been made.

RBI CHANGING SCENARIO

REAL TIME GROSS SETTLEMENT (RTGS) SYSTEM - IN compliance with Basle Core Principles for Systemically Important Payment Systems of BIS Indian Financial Network INFINET a `oneof-a-kind initiative for sharing IT expensive resources `ANYWHERE BANKING THROUGH CBS, ANYTIME BANKING -National Financial Switch for interconnecting ATMs

RBI CHANGING SCENARIO

IMPROVING CG- set up through fit and proper criteria INTEGRATED RISK MANAGEMENT SYSTEMS NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT) SYSTEM and NATIONAL ELECTRONIC CLEARING SERVICE (NECS).

BANKING CONCEPTS

PLR or prime lending rate - rate of interest at which banks lend to their credit-worthy or favoured customers.

It is treated as a benchmark rate for most retail and term loans. influenced by RBIs policy rates the repo rate and cash reserve ratio

Deposit Rates - Interest rate paid on deposit accounts by commercial banks and other FIs Bank rate - rate of interest which RBI charges on loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by RBI to control money supply

Repo Rate - rate at which banks borrow from RBI. A reduction in repo rate will help banks to get money at a cheaper rate. Reverse Repo rate - rate at which RBI borrows money from banks. An increase in Reverse repo rate can cause banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system.

Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man. Difference between Bank Rate and Repo Rate While repo rate - applicable to short-term loans and used for controlling amount of money in market, bank rate - a longterm measure and governed by long-term monetary policies

STATUTORY LIQUIDITY RATIO (SLR)

OBJECTIVE
1) To restrict expansion of bank credit.

2) To augment investment of the banks in Government securities.

3) To ensure solvency of banks.

Commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively

MAINTAINED IN THE FORM OF :

a) Cash b) Gold marked to market c) Unencumbered approved securities or Gilts - valued at a price as specified

by RBI

CURRENT SLR 24%

CASH RESERVE RATIO (CRR)

OBJECTIVE

Banks required to hold a certain proportion of their deposits in the form of cash, deposited with RBI/currency chests, considered as equivalent to holding cash with themselves This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by RBI - CRR or Cash Reserve Ratio Also known as - Cash Asset Ratio or Liquidity Ratio

PURPOSE

Higher the ratio (i.e. CRR), lower is amount that banks will be able to use for lending and investment.

EXISTING CRR

4.75%

18