jaiib_presentation2_nov08

7/24/2019 jaiib_presentation2_nov08

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Principles & Practices ofPrinciples & Practices ofBankingBanking

Module AModule A

Indian Financial SystemIndian Financial System

K ChockalingamK ChockalingamIIBFIIBF


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Financial SystemFinancial System

An institutional framework existing in aAn institutional framework existing in a

country to enable nancial transactionscountry to enable nancial transactions

Tree main partsTree main parts Financial assets !loans" deposits" bonds" e#uities"Financial assets !loans" deposits" bonds" e#uities"

etc$%etc$%

Financial institutions !banks" mutual funds" insuranceFinancial institutions !banks" mutual funds" insurance

companies" etc$%companies" etc$%

Financial markets !money market" capital market"Financial markets !money market" capital market"

forex market" etc$%forex market" etc$%

egulation is anoter aspect of teegulation is anoter aspect of te

nancial system !B'" S(B'" ')A" FM*%nancial system !B'" S(B'" ')A" FM*%


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Financial assets+instrumentsFinancial assets+instruments

(nable cannelising funds from surplus units to(nable cannelising funds from surplus units to

decit unitsdecit units

Tere are instruments for sa,ers suc asTere are instruments for sa,ers suc as

deposits" e#uities" mutual fund units" etc$deposits" e#uities" mutual fund units" etc$

Tere are instruments for borrowers suc asTere are instruments for borrowers suc as

loans" o,erdrafts" etc$loans" o,erdrafts" etc$

-ike businesses" go,ernments too raise funds-ike businesses" go,ernments too raise funds

troug issue of bonds" Treasury bills" etc$troug issue of bonds" Treasury bills" etc$

'nstruments like PPF" ./P" etc$ are a,ailable to'nstruments like PPF" ./P" etc$ are a,ailable to

sa,ers wo wis to lend money to tesa,ers wo wis to lend money to te

go,ernmentgo,ernment


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Money Market 'nstrumentsMoney Market 'nstruments

*all money0 money borrowed+lent for a day$*all money0 money borrowed+lent for a day$1o collateral is re#uired$1o collateral is re#uired$

'nter0bank term money0 Borrowings among'nter0bank term money0 Borrowings among

banks for a period of more tan 2 daysbanks for a period of more tan 2 daysTreasury Bills0 sort term instruments issuedTreasury Bills0 sort term instruments issued

by te 3nion 4o,t$ to raise money$ 'ssued atby te 3nion 4o,t$ to raise money$ 'ssued ata discount to te face ,aluea discount to te face ,alue

*erticates of )eposit0 'ssued by banks to*erticates of )eposit0 'ssued by banks toraise money$ Minimum ,alue is s$ 5 lak"raise money$ Minimum ,alue is s$ 5 lak"tradable in te markettradable in te market

*)s can be issued by banks+F's*)s can be issued by banks+F's


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Money Market 'nstrumentsMoney Market 'nstruments

!6%!6% *ommercial Paper !*Ps% are issued by*ommercial Paper !*Ps% are issued bycorporates to raise sort term moneycorporates to raise sort term money

'ssued in multiple of s$67 laks" can be'ssued in multiple of s$67 laks" can be

issued by companies wit a net wort ofissued by companies wit a net wort ofat least s$ 7 croresat least s$ 7 crores

*P is an unsecured promissory note*P is an unsecured promissory note

pri,ately placed wit in,estors at apri,ately placed wit in,estors at adiscount rate to face ,alue$ Te maturitydiscount rate to face ,alue$ Te maturity

of *P is between 8 and 9 montsof *P is between 8 and 9 monts


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Financial 'nstitutionsFinancial 'nstitutions 'ncludes institutions and mecanisms'ncludes institutions and mecanisms

wicwic A:ect generation of sa,ings by te communityA:ect generation of sa,ings by te community

Mobilisation of sa,ingsMobilisation of sa,ings

(:ecti,e distribution of sa,ings(:ecti,e distribution of sa,ings

'nstitutions are banks" insurance'nstitutions are banks" insurance

companies" mutual funds0companies" mutual funds0

promote+mobilise sa,ingspromote+mobilise sa,ings

'ndi,idual in,estors" industrial and trading'ndi,idual in,estors" industrial and tradingcompanies0 borrowerscompanies0 borrowers


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Financial MarketsFinancial Markets

Money Market0 for sort0term fundsMoney Market0 for sort0term funds

!less tan a year%!less tan a year% ;rgani


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;rgani


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*all money market !5%*all money market !5%

't deals wit one0day loans !o,ernigt" to be't deals wit one0day loans !o,ernigt" to beprecise% called call loans or call moneyprecise% called call loans or call money

Participants are mostly banks$ Also called inter0Participants are mostly banks$ Also called inter0

bank call money market$bank call money market$

Te borrowing is exclusi,ely limited to banks"Te borrowing is exclusi,ely limited to banks"wo are temporarily sort of funds$wo are temporarily sort of funds$

;n te lending side" besides banks wit excess;n te lending side" besides banks wit excess

cas and as special cases few F's like -'*" 3T'cas and as special cases few F's like -'*" 3T'

All oters a,e to keep teir funds in termAll oters a,e to keep teir funds in term

deposits wit banks to earn interestdeposits wit banks to earn interest


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*all money market !6%*all money market !6%

*all loans are generally made on a clean basis0*all loans are generally made on a clean basis0i$e$ no collateral is re#uiredi$e$ no collateral is re#uired

Te main function of te call money market is toTe main function of te call money market is to

redistribute te pool of day0to0day surplus fundsredistribute te pool of day0to0day surplus funds

of banks among oter banks in temporary decitof banks among oter banks in temporary decitof fundsof funds

Te call market elps banks earn interest and yetTe call market elps banks earn interest and yet

impro,e teir li#uidityimpro,e teir li#uidity

't is a igly competiti,e and sensiti,e market't is a igly competiti,e and sensiti,e market 't acts as a good indicator of te li#uidity position't acts as a good indicator of te li#uidity position


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Bill MarketBill Market

Treasury Bill market0 Also called te T0BillTreasury Bill market0 Also called te T0Billmarketmarket= Tese bills are sort0term liabilities !>50day" 5?60day"Tese bills are sort0term liabilities !>50day" 5?60day"

89@0day% of te 4o,ernment of 'ndia89@0day% of te 4o,ernment of 'ndia

= 't is an ';3 of te go,ernment" a promise to pay te't is an ';3 of te go,ernment" a promise to pay testated amount after expiry of te stated period fromstated amount after expiry of te stated period fromte date of issuete date of issue

= Tey are issued at discount to te face ,alue and atTey are issued at discount to te face ,alue and atte end of maturity" te face ,alue is paidte end of maturity" te face ,alue is paid

= Te rate of discount and te corresponding issueTe rate of discount and te corresponding issueprice are determined at eac auctionprice are determined at eac auction

*ommercial Bill market0 1ot as de,eloped in*ommercial Bill market0 1ot as de,eloped in'ndia as te T0Bill market'ndia as te T0Bill market


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'ndian Banking System'ndian Banking System

*entral Bank !eser,e Bank of 'ndia%*entral Bank !eser,e Bank of 'ndia% *ommercial banks*ommercial banks *o0operati,e banks*o0operati,e banks

Banks can be classied asBanks can be classied as Sceduled !Second Scedule of B' Act" 5>8@%Sceduled !Second Scedule of B' Act" 5>8@%

1on0Sceduled1on0Sceduled

Sceduled banks can be classied asSceduled banks can be classied as

Public Sector BanksPublic Sector Banks Pri,ate Sector Banks !;ld and 1ew%Pri,ate Sector Banks !;ld and 1ew%

Foreign BanksForeign Banks

egional ural Banksegional ural Banks


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'ndigenous bankers'ndigenous bankers

'ndi,idual bankers like Sro:s" Sets" Saukars"'ndi,idual bankers like Sro:s" Sets" Saukars"

Maaans" etc$ *ombine trading and oterMaaans" etc$ *ombine trading and oter

business wit money lending$business wit money lending$

/ary in siCD of te nancial re#uirements of rural 'ndia


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B' and indigenous bankersB' and indigenous bankers

!5%!5% Metods employed by te indigenous bankers areMetods employed by te indigenous bankers are

traditional wit ,ernacular system of accounting$traditional wit ,ernacular system of accounting$

B' suggested tat bankers gi,e up teir tradingB' suggested tat bankers gi,e up teir trading

and commission business and switc o,er to teand commission business and switc o,er to te

western system of accounting$western system of accounting$

't also suggested tat tese bankers sould't also suggested tat tese bankers sould

de,elop te deposit side of teir businessde,elop te deposit side of teir business

Ambiguous caracter of te undi sould stopAmbiguous caracter of te undi sould stop

Some of tem sould play te role of discountSome of tem sould play te role of discount

ouses !buy and sell bills of excange%ouses !buy and sell bills of excange%


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B' and indigenous bankersB' and indigenous bankers

!6%!6% 'B sould a,e teir accounts audited by'B sould a,e teir accounts audited by

certied cartered accountantscertied cartered accountants

Submit teir accounts to B' periodicallySubmit teir accounts to B' periodically

As against tese obligations te B' promised toAs against tese obligations te B' promised topro,ide tem wit pri,ileges o:ered topro,ide tem wit pri,ileges o:ered to

commercial banks includingcommercial banks including

= Being entitled to borrow from and rediscount bills witBeing entitled to borrow from and rediscount bills wit

B'B'

Te 'B declined to accept te restrictions as wellTe 'B declined to accept te restrictions as well

as compensation from te B'as compensation from te B'

Terefore" te 'B remain out of B'Es pur,iewTerefore" te 'B remain out of B'Es pur,iew


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)e,elopment ;riented)e,elopment ;riented

BankingBanking istorically" close association between banks andistorically" close association between banks andsome traditional industries0 cotton textiles in tesome traditional industries0 cotton textiles in te

west" ute textiles in te eastwest" ute textiles in te east

Banking as not been mere acceptance ofBanking as not been mere acceptance of

deposits and lending money to includedeposits and lending money to include

de,elopment bankingde,elopment banking

-ead Bank Sceme0 opening bank oGces in all-ead Bank Sceme0 opening bank oGces in all

important localitiesimportant localities

Pro,iding credit for de,elopment of te districtPro,iding credit for de,elopment of te district

Mobilising sa,ings in te district$ HSer,ice areaMobilising sa,ings in te district$ HSer,ice area

approacEapproacE


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Progress of banking in 'ndiaProgress of banking in 'ndia

!5%!5% 1ationalisation of banks in 5>9> 5@ banks1ationalisation of banks in 5>9> 5@ banks

were nationalisedwere nationalised

Branc expansion 'ncreased from ?69C inBranc expansion 'ncreased from ?69C in

5>9> to 9?7CC in 6CC75>9> to 9?7CC in 6CC7 Population ser,ed per branc as comePopulation ser,ed per branc as come

down from 9@CCC to 57CCCdown from 9@CCC to 57CCC

A rural branc oGce ser,es 57 to 67 ,illagesA rural branc oGce ser,es 57 to 67 ,illages

witin a radius of 59 kmswitin a radius of 59 kms

Still only 86"5?C ,illages out of 7 lak a,eStill only 86"5?C ,illages out of 7 lak a,e

been co,eredbeen co,ered


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!6%!6% )eposit mobilisation)eposit mobilisation 5>7505>25 !6C years%0 2CCD or 2 times5>7505>25 !6C years%0 2CCD or 2 times

5>2505>>5 !6C years%0 869CD or 86$9 times5>2505>>5 !6C years%0 869CD or 86$9 times

5>>50 6CC9 !55 years%0 55CCD or 55 times5>>50 6CC9 !55 years%0 55CCD or 55 times (xpansion of bank credit 4rowing at 6C0(xpansion of bank credit 4rowing at 6C0

8CD tanks to rapid growt in industrial8CD tanks to rapid growt in industrial

and agricultural outputand agricultural output

)e,elopment oriented banking priority)e,elopment oriented banking priority

sector lendingsector lending


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!8%!8% )i,ersication in banking Banking as)i,ersication in banking Banking as

mo,ed from deposit and lending tomo,ed from deposit and lending toMercant banking and underwritingMercant banking and underwriting

Mutual fundsMutual funds etail bankingetail banking

ATMsATMs

Anywere bankingAnywere banking

'nternet banking'nternet banking /enture capital funds/enture capital funds

Factoring0Factoring0


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Protability ofProtability of Banks!5%Banks!5%

eforms as sifted te focus ofeforms as sifted te focus of

banks from being de,elopmentbanks from being de,elopment

oriented to being commercially ,iableoriented to being commercially ,iable

Prior to reforms" banks were notPrior to reforms" banks were not

protable and in fact made losses forprotable and in fact made losses for

te following reasonste following reasons

)eclining interest income)eclining interest income 'ncreasing cost of operations'ncreasing cost of operations


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Protability of banks !6%Protability of banks !6%

)eclining interest income was for te)eclining interest income was for te

following reasonsfollowing reasons

ig proportion of deposits impounded forig proportion of deposits impounded for

* and S-" earning relati,ely low interest* and S-" earning relati,ely low interestratesrates

System of directed lendingSystem of directed lending

Political interference0 leading to uge 1PAsPolitical interference0 leading to uge 1PAs

ising costs of operations for banks wasising costs of operations for banks wasbecause of se,eral reasons economic andbecause of se,eral reasons economic and

politicalpolitical


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Protability of Banks !8%Protability of Banks !8%

As per te 1arasimam *ommittee !5>>5%" teAs per te 1arasimam *ommittee !5>>5%" te

reasons for rising costs of banks werereasons for rising costs of banks were 3neconomic branc expansion3neconomic branc expansion

ea,y recruitment of employeesea,y recruitment of employees

4rowing indiscipline and ineGciency of sta: due4rowing indiscipline and ineGciency of sta: due

to trade union acti,itiesto trade union acti,ities

-ow producti,ity-ow producti,ity

)eclining interest income and rising cost of)eclining interest income and rising cost of

operations of banks led to low protability inoperations of banks led to low protability in

te >Cste >Cs


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Bank protabilityBank protability

SuggestionsSuggestions Some suggestions made by 1arasimamSome suggestions made by 1arasimam*ommittee are*ommittee are

Set up an Asset econstruction Fund toSet up an Asset econstruction Fund to

take o,er doubtful debtstake o,er doubtful debts S- to be reduced to 67D of total depositsS- to be reduced to 67D of total deposits

* to be reduced to 8 to 7D of total* to be reduced to 8 to 7D of totaldepositsdeposits

Banks to get more freedom to setBanks to get more freedom to setminimum lending ratesminimum lending rates

Sare of priority sector credit be reducedSare of priority sector credit be reducedto 5CD from @CDto 5CD from @CD


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Suggestions !contEd%Suggestions !contEd%

All concessional rates of interest sould beAll concessional rates of interest sould be

remo,edremo,ed

Banks sould go for new sources of funds suc asBanks sould go for new sources of funds suc as

*erticates of )eposits*erticates of )eposits

Branc expansion sould be carried out strictly onBranc expansion sould be carried out strictly on

commercial principlescommercial principles

)i,ersication of banking acti,ities)i,ersication of banking acti,ities

Almost all suggestions of te 1arasimamAlmost all suggestions of te 1arasimam*ommittee a,e been accepted and implemented*ommittee a,e been accepted and implemented

in a pased manner since te onset of eformsin a pased manner since te onset of eforms


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1PA Management1PA Management

Te 1arasimam *ommitteeTe 1arasimam *ommitteerecommendations were made" amongrecommendations were made" amongoter tings" to reduce te 1on0oter tings" to reduce te 1on0

Performing Assets !1PAs% of banksPerforming Assets !1PAs% of banksTo tackle tis" te go,ernment enactedTo tackle tis" te go,ernment enacted

te Securiti


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SAFA(S' ActSAFA(S' Act

(nables setting up of Asset Management *ompanies(nables setting up of Asset Management *ompaniesto ac#uire 1PAs of any bank or F' !SASF" A*'- areto ac#uire 1PAs of any bank or F' !SASF" A*'- areexamples%examples%

1PAs are ac#uired by issuing debentures" bonds or any1PAs are ac#uired by issuing debentures" bonds or anyoter securityoter security

As a second creditor can ser,e notice to te defaultingAs a second creditor can ser,e notice to te defaultingborrower to discarge is+er liabilities in 9C daysborrower to discarge is+er liabilities in 9C days

Failing wic te company can take possession ofFailing wic te company can take possession ofassets" takeo,er te management of assets andassets" takeo,er te management of assets andappoint any person to manage te secured assetsappoint any person to manage te secured assets

Borrowers a,e te rigt to appeal to te )ebtsBorrowers a,e te rigt to appeal to te )ebtsTribunal after depositing 7CD of te amount claimedTribunal after depositing 7CD of te amount claimedby te second creditorby te second creditor

di i l kT ' di * i l M k


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Te 'ndian *apital MarketTe 'ndian *apital Market

!5%!5%

Market for long0term capital$ )emandMarket for long0term capital$ )emandcomes from te industrial" ser,ice sectorcomes from te industrial" ser,ice sector

and go,ernmentand go,ernment

Supply comes from indi,iduals" corporates"Supply comes from indi,iduals" corporates"

banks" nancial institutions" etc$banks" nancial institutions" etc$ *an be classied into*an be classied into

4ilt0edged market4ilt0edged market

'ndustrial securities market !new issues and'ndustrial securities market !new issues andstock market%stock market%


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Te 'ndian *apital MarketTe 'ndian *apital Market

!6%!6% )e,elopment Financial 'nstitutions)e,elopment Financial 'nstitutions 'ndustrial Finance *orporation of 'ndia !'F*'%'ndustrial Finance *orporation of 'ndia !'F*'%

State Finance *orporations !SF*s%State Finance *orporations !SF*s%

'ndustrial )e,elopment Finance *orporation !')F*%'ndustrial )e,elopment Finance *orporation !')F*%

Financial 'ntermediariesFinancial 'ntermediaries Mercant BanksMercant Banks

Mutual FundsMutual Funds

-easing *ompanies-easing *ompanies

/enture *apital *ompanies/enture *apital *ompanies


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'ndustrial Securities Market'ndustrial Securities Market

efers to te market for sares andefers to te market for sares anddebentures of old and new companiesdebentures of old and new companies

1ew 'ssues Market0 also known as te1ew 'ssues Market0 also known as teprimary market0 refers to raising of newprimary market0 refers to raising of newcapital in te form of sares andcapital in te form of sares anddebenturesdebentures

Stock Market0 also known as teStock Market0 also known as tesecondary market$ )eals wit securitiessecondary market$ )eals wit securitiesalready issued by companiesalready issued by companies


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Financial 'ntermediaries !5%Financial 'ntermediaries !5%

Mutual Funds0 Promote sa,ings and mobiliseMutual Funds0 Promote sa,ings and mobilisefunds wic are in,ested in te stock marketfunds wic are in,ested in te stock marketand bond marketand bond market

'ndirect source of nance to companies'ndirect source of nance to companies Pool funds of sa,ers and in,est in te stockPool funds of sa,ers and in,est in te stock

market+bond marketmarket+bond marketTeir instruments at sa,erEs end are calledTeir instruments at sa,erEs end are called

unitsunits ;:er many types of scemes growt fund";:er many types of scemes growt fund"

income fund" balanced fundincome fund" balanced fund egulated by S(B'egulated by S(B'


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Financial 'ntermediaries !6%Financial 'ntermediaries !6%

Mercant banking0 manage and underwrite newMercant banking0 manage and underwrite new

issues" undertake syndication of credit" ad,iseissues" undertake syndication of credit" ad,ise

corporate clients on fund raisingcorporate clients on fund raising

Subect to regulation by S(B' and B'Subect to regulation by S(B' and B'

S(B' regulates tem on issue acti,ity andS(B' regulates tem on issue acti,ity and

portfolio management of teir business$portfolio management of teir business$

B' super,ises tose mercant banks wic areB' super,ises tose mercant banks wic are

subsidiaries or aGliates of commercial bankssubsidiaries or aGliates of commercial banks a,e to adopt stipulated capital ade#uacya,e to adopt stipulated capital ade#uacy

norms and abide by a code of conductnorms and abide by a code of conduct


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*onclusion*onclusion

Tere are oter nancial intermediariesTere are oter nancial intermediaries

suc as 1BF*s" /enture *apital Funds" iresuc as 1BF*s" /enture *apital Funds" ire

and -easing *ompanies" etc$and -easing *ompanies" etc$

'ndiaEs nancial system is #uite uge and'ndiaEs nancial system is #uite uge andcaters to e,ery kind of demand for fundscaters to e,ery kind of demand for funds

Banks are at te core of our nancialBanks are at te core of our nancial

system and terefore" tere is greatersystem and terefore" tere is greater

expectation from tem in terms of reacingexpectation from tem in terms of reacingout to te ,ast populace as well as beingout to te ,ast populace as well as being

competiti,e$competiti,e$


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ankank

ououK ChockalingamK ChockalingamTEL : 9322295394TEL : 9322295394

email: chockalingam!2"""#yahoocomemail: chockalingam!2"""#yahoocom chockalingam#ii$%o&ginchockalingam#ii$%o&gin

jaiib_presentation2_nov08

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