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Money, Banking

and Finance

Triumphant Institute of

Management Education P Ltd

Financial Sector • Mobilization and allocation of

savings.

• Financial sector constitutes of

Financial Institutions, Instruments

and Market.

• Acts as a conduit for the transfer of

financial resources from net savers

to net borrower.

Money Market • RBI occupies the central position.

• Borrowers: Manage to obtain short

term loanable amount.

• Lenders: Succeed in getting

creditworthy customer.

CIBIL • Credit Information Bureau (India) Limited or CIBIL is

a Credit Information Company (CIC) founded in

August 2000.

• CIBIL collects and maintains records of an

individual‘s payments pertaining to loans and

credit cards.

• CIBIL empowers both loan providers and

individuals to see their world more clearly and

hence, take better and more informed decisions.

Financial Institutions • Commercial Banks in India

• Insurance Provider in India

• Credit rating agencies in India

• Finance Minister of India

• Micro Finance Institutions

• Specialized Financial Institutions in

India

• Insurance Regulatory and

Development Authority

Financial Instruments • They can be broadly classified into Government

securities and Industrial securities.

• The Government securities are fixed income

securities backed by the government and there is

no risk of default.

• The Major Instruments that fall under Industrial

Securities are Debentures, Preference Shares

and Equity Shares.

• In other words, the industrial securities are about

the stock market and mutual funds.

G-Secs • These securities may have maturities ranging from

five to twenty years.

• These are fixed income securities, which pay

interest every six months.

• The Reserve Bank of India manages the issues of

the securities.

• The G -secs are primarily bought by the

institutional investors. The biggest investors are

commercial banks who invest in G-secs to meet the

regulatory requirement to maintain a certain

percentage of Statutory Liquidity Ratio (SLR).

• Insurance companies, provident funds, and mutual

funds are the other large investors.

T-bill • The Government of India also borrows short term

funds for up to one year.

• This is through the issue of Treasury Bills which are

sold at a discount to the face value and redeemed

at the full face value.

• Minimum amount of face value Rs.1 lac and in

multiples there of. There is no specific amount/limit

on the extent to which these can be issued or

purchased.

Maturity : 14/91/182 and 364 days.

Industrial Securities:

• These are securities issued by the corporate sector to

finance their long term and working capital

requirements. The Major Instruments are:

• Debentures

Debentures have a fixed maturity and pay a fixed or a

floating rate of interest during their lifetime. The company

has an obligation to pay interest and the principal amount

on the due dates regardless of its profitability position

Industrial Securities • Preference Shares

Preference Shares carry a fixed rate of

dividends.

These carry a preferential right to dividends

over the equity shareholders.

Similarly on the winding up of the company, the

preference share holders get back their capital

before the equity share holders.

• Now all preference shares in India are

`redeemable’, i.e. they have a fixed maturity

period. Thus, preference shares are sometimes

called a `hybrid variety’ – incorporating features

of debt as well as equity.

Industrial Securities

• Equity Shares • Equity Shares are regarded as high return

high risk instruments.

• These do not carry any fixed rate of return and

there is no maturity period.

• The company may or may not declare dividend

on equity shares.

• Equity shares of major companies are traded on

the stock exchanges.

• The major component of return to equity holders

usually consists of market appreciation.

Call Money Market:

• The loans made in this market are of a short term

nature – overnight to a fortnight .

• This is mostly inter-bank market.

• Those banks which are facing a short term cash

deficit, borrow funds from the cash surplus banks.

• The rate of interest is market driven and

depends on the liquidity position in the banking

system.

Commercial Paper (CP) and Certificate

of Deposits (CD) :

• CPs are issued by the corporate to finance their working

capital needs.

• These are issued for short term maturities.

• These are issued at a discount and redeemed at face

value.

• These are unsecured and therefore only those companies

who have a good credit standing are able to access funds

through this instrument.

• The rate of interest is market driven and depends on the

current liquidity position and the creditworthiness of the

issuing company.

• The characteristics of CDs are similar to those of CPs except

that CDs are issued by the commercial banks.

Commercial Bank

• A)

• PUBLIC SECTOR BANKS

• State Bank of India and its 7 associate Banks,

together called State Bank Group

• Nationalized Banks (20 in number)

• Regional Rural Banks sponsored by Public sector

Banks

Commercial Bank

• B)

• PRIVATE SECTOR BANKS

• Old Generation Private Banks.

• New Generation Private Banks

• Foreign Banks in India

• Scheduled Co-operative Banks

• Non Scheduled Banks

CO-OPERATIVE SECTOR BANKS

• C)

• CO-OPERATIVE SECTOR BANKS

• Central Co-operative Banks

• State Co-operative Banks

• Land Development Banks

• Primary agriculture Credit Societies

• Urban Co-operative Banks

• State Land Development Banks

Development Bank • D)

• DEVELOPMENT BANKS

• Export-Import Bank of India (EXIM Bank)

• Industrial Finance Corporation of India (IFCI)

• Industrial Development bank of India (IDBI)

• National Bank for Agriculture & Rural

Development (NABARD)

• Industrial Investment Bank of India (IIBI)

• Small Industries Development Bank of India

(SIDBI)

Important Terms

• What is Inflation or What is the

meaning of Inflation :

• A rise in general level of prices of goods and services

in a economy over a period of time.

• When the general price level rises, each unit of currency

buys fewer goods and services. Thus, inflation results

in loss of value of money.

Types of Inflation • a) DEMAND - PULL INFLATION: prices

increase results from an excess of demand

over supply for the economy as a whole.

• (b) COST - PUSH INFLATION: This type of

inflation occurs when general price levels

rise owing to rising input costs.

Deflation

• What is Deflation ? :

Deflation is the opposite of inflation. Deflation

refers to situation, where there is decline in

general price levels.

• reduction in the supply of money or credit.

• direct contractions in spending.

• side effect of increasing unemployment in an

economy.

Stagflation • What is Stagflation :

Stagflation refers to economic condition where

economic growth is very slow or stagnant and

prices are rising.

• Example:

At international level, this happened during mid

1970s, when world oil prices rose dramatically,

fuelling sharp inflation in developed countries.

Hyperinflation

• What is Hyperinflation :

• Hyperinflation is a situation where

the price increases are too sharp.

• Reason: • when there is a large increase in the money

supply, which is not supported by growth in

Gross Domestic Product (GDP).

CRR • What is CRR:

• CRR means Cash Reserve Ratio. Banks in India

are required to hold a certain proportion of their

deposits in the form of cash. This minimum

ratio (that is the part of the total deposits to be

held as cash) is stipulated by the RBI and is

known as the CRR or Cash Reserve Ratio.

• RBI has also cut 25 bps on CRR and thus it has

been reduced from 4.25% to 4.00%, and this

will be wef 9/2/2013.

Bank Rate • What is Bank rate?

• Bank Rate is the rate at which central bank of the

country (in India it is RBI) allows finance to commercial

banks.

• Any upward revision in Bank Rate by central bank is an

indication that banks should also increase deposit rates

as well as Base Rate / Benchmark Prime Lending Rate.

• Thus any revision in the Bank rate indicates that it is

likely that interest rates on your deposits are likely to

either go up or go down, and it can also indicate an

increase or decrease in your EMI.

• 8.75% wef 29/01/13

Repo-Rate • Repo (Repurchase) rate is the rate at which the

RBI lends shot-term money to the banks against

securities.

• When the repo rate increases borrowing from

RBI becomes more expensive.

• Decreased to 7.75% from 8% wef 29/01/13.

Reverse Repo-Rate • Reverse Repo rate is the rate at which banks park their

short-term excess liquidity with the RBI.

• The banks use this tool when they feel that they are

stuck with excess funds and are not able to invest

anywhere for reasonable returns.

• An increase in the reverse repo rate means that the RBI

is ready to borrow money from the banks at a higher

rate of interest.

• As a result, banks would prefer to keep more and more

surplus funds with RBI.

• 6.75% wef 29/01/13.

SLR

• What is SLR?

• Every bank is required to maintain at the close of

business every day, a minimum proportion of their Net

Demand and Time Liabilities as liquid assets in the form

of cash, gold and un-encumbered approved securities.

• The ratio of liquid assets to demand and time liabilities

is known as Statutory Liquidity Ratio (SLR).

• RBI is empowered to increase this ratio up to 40%. An

increase in SLR also restrict the bank’s leverage position

to pump more money into the economy.

• 23% wef 11/08/12.

Banking History…..

Banking History • Indigenous banking system was prevalent in the ancient

times.

• Origin of Western types commercial Bank in India dates back to 18th Century.

• The General Bank of India was set up in the year 1786, Bank of Hindustan established in Calcutta in year 1790 , under European management.

• The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called them Presidency Banks.

• The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks.

Foreign Banks in India…

• Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches - 83.

• BNP Paribas is the second oldest foreign bank on the Indian soil and is positioned amongst the leading corporate banks in India.

• It is followed by HSBC, which entered India in 1867, with 47 branches.

Banking History….. • These three banks were amalgamated in 1921

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.

Swadeshi Movement and

Banking History… • Inspired local businessmen and political

figures to found banks for the Indian community.

• Mission Swadeshi Bank on Indian Capital.

• A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

Swadeshi Movement and

Banking History • Allahabad Bank: 1865

• PNB : 1894

• Canara Bank: 1906

• Bank Of India : 1906

• Corporation Bank: 1906

• Indian Bank : 1907

• Bank of Baroda : 1908

• Central Bank of India :1911

• Bank of Mysore : 1913

• Union Bank Of India : 1922

• Syndicate Bank : 1925

• Vijaya Bank : 1931

• Dena Bank : 1938

Reserve Bank Of India

• Reserve Bank of India - Another breakthrough happened in this phase.

• The Reserve Bank of India was set up on the recommendations of Hilton-Young Commission.

• The commission submitted its report in the year 1926, though the bank was not set up for 9 years.

• Reserve Bank of India (RBI) was created with the central task of maintaining monetary stability in India. it was formally inaugurated only on April 1, 1935

Indian Banking Act • 5 lakh equity share of Rs. 100 each,

Non Government Share holder.

• The Reserve Bank Of India was nationalized on 1st Jan 1949.

• Indian Banking Act – March 1949.

• For the development of banking in rural areas – Imperial Bank of India nationalized as State Bank of India along with other 8 bank converted to Associate Banks.

Associate Banks

• State Bank of Bikaner and Jaipur.

• State Bank Of Hyderabad.

• State Bank of Mysore.

• State Bank of Indore.

• State Bank of Saurashtra. (merged with SBI)

• State Bank of Patiala.

• State Bank of Travancore.

Banking in

Pre-Nationalisation Era

(1947-1969)

Steps taken by Govt. of India to

regulate Banking Institutions

• 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.

DICGC

• Deposit insurance and credit guarantee corporation

(DICGC) is responsible for insuring your money in the banks.

They will insure all the commercial banks and cooperative

banks in India. The DICGC insures all deposits such as

savings, fixed, current, recurring, etc. except the following

types of deposits.

• Deposits of foreign Governments.

• Deposits of Central/State Governments.

• Inter-bank deposits.

• Deposits of the State Land Development Banks with the

State co-operative bank.

• Any amount due on account of any deposit received

outside India.

DICGC

WHY? • The falling insurance cover is due to the rising

proportion of high-value deposits.

• The insurance limit of Rs 1 lakh per account was

set way back in 1993. With inflation averaging

6.5 per cent in the last two decades, a Rs 1 lakh

deposit then would equal Rs 3.3 lakh at today’s

prices.

• Some experts feel that the situation calls for a

revision in the insurance cover offered.

Why Nationalisation?

● Because commercial banking system did not play its

role properly in the development of the nation

● Controlled by individuals who used public funds to

build private empires

● Concentration of banks in major commercial areas,

like cotton textiles in Western India and jute mills in

Eastern India

Analysis

● Small and Medium Enterprises consistently ignored

and starved of funds, contrary to government

policy

● Agricultural credit was never seriously considered

by private banks

● Private banks were urban-oriented & indulged in

class banking

Analysis

The process of

Nationalisation

● Carried out in two phases – '69 & '80

● 1969 - 14 banks with Bank Assets of Rs.50 cr &

above (CBI, BOI, PNB, Canara, UCB, Syndicate,

BOB, UBI, Bank Of Maharashtra, Dena, Allahabad,

Indian, IOB, United Bank of India)

● 1980 - 6 commercial banks with Bank Assets of Rs

200 Cr and above nationalised (Andhra, Punjab &

Sindh, New Bank of India, Vijaya, Corporation,

OBC)

How it happened

Focus Areas of

Public Sector Banks

● Rapid expansion in rural & semi-urban areas

● Sharp increase in bank credit to neglected sectors

● Focus widened from deposit-&-lending approach

to development-oriented banking

● Priority sector lending given top priority as part

of development-oriented banking

Focus Areas

Benefits of

Nationalisation

● Manifold increase in the number of branches

● Change in orientation from urban & class banking

to rural & mass banking

● Farmers, rural artisans, weaker sections & small

industries have benefitted from this change

● Great increase in bank credit from more than

Rs.4500 cr in '69 to over Rs.15 lakh cr in '09

Positives

RBI and its Functions RBI occupies the central position in the money market.

RBI

Borrower manage

To obtain short term

Loneable amount.

MONEY Market Lender succed to get

Creditworthy customers.

Functions of RBI

• Issue of Notes.

• Bankers to the government.

• Bankers Bank.

• Custodian of Foreign Reserve.

• Other functions.

Tools and wings of RBI to regulate

money market. • CIBIL - India's first credit information bureau- is a

repository of information, which contains the credit history of commercial and consumer borrowers.

• Banking Ombudsman – Solution of customer complaints, 11 ombudsman in four different regions.

• Debt Recovery Tribunals:- Established in Six Cities, to speed up the recovery of loans disbursed by banks and other financial institutions.

• DICGC (Deposit Insurance and credit guarantee Corporation) - Concept was given by the Reserve Bank of India and the Central Government after the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in 1960. Wholly owned subsidiary of RBI. Deposit insurance premium is borne entirely by the insured bank.

Tools and Act… • The SARFAESI Act - (The

Securitisation of financial assets & Enforcement of security interest act)

• Empowering banks /financial institution to recover their NPA’s without the intervention of court.

• Prevent fraud involving multiple lending by different banks on the same immovable property.

Current scenario….. • Currently, India has 88 scheduled commercial banks (SCBs)

• 26 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and38 foreign banks.

• They have a combined network of over 53,000 branches and 17,000 ATMs

• According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75% of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%respectively

Post-Liberalisation

Scenario

● Interest rates on domestic term deposits

decontrolled as also on bank loans above

Rs.2 lakh

● Stringent international accounting norms adopted

to ensure accurate reflection of financial position

● Capital framework of Tier-I and Tier-II capital

based on Basel Committee recommendations

adopted

Banking Today

Can access capital markets through issue of IPOs,

subject to 51% govt stake

Banks which achieve capital adequacy &

prudential accounting norms given operational

freedom

Entry of new generation private sector banks

allowed

Banking Today

RRB

• Set up in 1975 under the provisions of the RRB Act .

• As an alternative channel to “Cooperative Credit Structure”.

• Central Govt, State Govt and scheduled commercial banks have a share of 50%, 35% and 35% respectively.

NABARD

• Established on July 12, 1982.

• Set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts.

• NABARD Bill was accepted in 2001, authorized capital increased to 2000 crore from 500 Crore.

• Raise the fund from GOI, World Bank and other agencies.

Micro Finance Institutions

• Microfinance is the provision of financial services to low-income clients, self employed who traditionally lack banking services.

• As per the latest Microfinance bill NABARD is the regulator of MFIs.

• SKS Microfinance and Spandana Spoorthy are largest MFI.

• Micro Credit, Micro Saving.

Entry of Private Banks

in the

post-Liberalisation phase

● Guidelines for licenses of new banks issued in

1993

● Initial minimum paid-up capital to be Rs.200 cr

● Promoters' contribution should be at least 40% of

total paid up share capital

● NRI participation in primary equity can be a

maximum of 40%

Private Banks

● NBFCs with good & prudent track record can

convert into banks

● Minimum CAR of 10% to be maintained on a

continuous basis

● 25% of branches should be in rural &

semi-urban areas

● 40% of net bank credit should be to priority

sector areas

Private Banks

New Private Banks • Out of total 22 private banks there are

7 new private banks.

• NEW PRIVATE SECTOR BANKS - Axis Bank Ltd. Development Credit Bank Ltd. HDFC Bank Ltd. ICICI Bank Ltd. Indusind Bank Ltd. Kotak Mahindra Bank Ltd. YES Bank.

•

The Changing Face

of Banking

● PSBs set up mutual fund subsidiaries

● Growing trend towards retail banking, leading to

greater opportunities for growth and profit.

● Large-scale introduction of ATMs to facilitate ease

of access

● Internet & Mobile Banking

● e-payment mechanism -Such approaches are

lowering transaction costs, likely to result in saving

of Rs. 1 lakh crore for the Govt. of India.

Changing Face

Challenges …. • NPA

• Deregulation of saving bank accounts interest rate.

• CASA: Higher the CASA ratio better the net interest margin, which means better operating efficiency of the bank.

• Inclusive growth.

• CASA deposits - key differentiator in the current environment

• Human face of PSB Vs Aggressive Marketing of other commercial banks.

• HR for the PSU Banks.