BM Module 2&3

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Banking SystemIn India

Sheetal Thomas

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Types of banking services in

India

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The Narasimham Committee

1990s India had traumatic moments

Banks were burdened with large percentage of non-performing loans

Customer service had suffered and out-moded practices were

in vogue Overall re-hauling was needed for entire financial systems in

general and banking sector in particular

The Narasimham Committee was set up to recommendchanges in financial system

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Committee recommends Overall emphasis upon µde-regulation¶ No further nationalization to be adhered to

No distinction between µpublic¶ and µprivate¶ sector banks

Control of banking sector to be centralized (and not to bedivided between RBI and Dept. of Banking)

SLR and CRR sh

ould be reduced to prudent levels Concessional lending to be phased out

The capital base of banks should meet international standards

The appointment of Chief Executive of the banks to be de-politicized

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Role of Commercial and Central

Bank Commercial bank

± There is no specific definition (although Banking

Regulation Act ± defines banking)

± The µbanker¶ is one who deals in µmoney¶ ± Two essential functions of banking

1. Borrowing (accepting of deposits) of

money; and

2. Lending of money for needy purposes ± Besides these essential function a banking

company also performs

± Other agency and General utility functions

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³a commercial bank mobilizes the savings of the society. Thismoney is then provided to those who are in need of it bygranting overdrafts or fixed loans or by discounting bills of

exch

ange or promissory notes. In short, t

he primary functionof a commercial bank is that of a broker and a dealer in

money. By discharging this function efficiently and effectively,a commercial bank renders a very valuable service to thecommunity by increasing the productive capacity of thecountry and thereby accelerating the pace of economicdevelopment. It gathers the small savings of the people, thusreducing to the lowest limits the quantity of idle money«´

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Unit Banking

Unit banking refers to a single bank which renders servicesand operates without any branches anywhere. This kind of banking system is common in the USA. Restrictive branchinglaws encourage large numbers of small, independentlyowned state banks, and large multibank holding companiesowning numerous unit banks. Branching laws in most stateshave been eased in the last several years, permittinggeographic expansion and branch banking .Unit bankingoperate one full banking services.

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Branch Banking

Branch banking center or financial center refers to a single bank which operatesthrough various branches in a city or in diferent locations or out of the cities. Thiskind of banking system is common in India. e.g. State Bank of India. It offers awide array of face to face service to its customers.Historically, branches werehoused in imposing buildings, often in a neoclassical architecture style. Today,branches may also take the form of smaller offices within a larger complex, such

as a shopping mall.Services provided by a branch include cash withdrawals anddeposits from a demand account with a bank teller, financial advice through aspecialist, safe deposit box rentals, bureau de change, insurance sales (where itis allowed by law), etc.

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Branch Banking Followings are the main advantages of branch banking

1. Less Costly Larger banks have the resources and system to deliver low cost, broadly basedservices.

2. Diversification A branch banking organization can diversify its sources and uses of funds amongvarious users. It can direct funds into a market requiring financing. Deposits are receivedfrom the areas where lots of savings and loans are extended in those areas where fundsare scarce and interest rates are high.

3. Greater efficiency Under branch banking system, the bank with a number of branches processes hugefinancial resources and enjoys the benefits of large-scale operations. Highly trained andexperienced staff is appointed which increases the efficiency of the management.

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Advantages

4. More Safer A large banking system is generally safer. Fewer bank failures have occurredamong large banks.

5. Variety of services and low transaction costs A greater variety of services and products become available to a broader banking public. Since the bank branches are spread over the whole country,it is easier and cheaper to transfer funds from one place to another.

6. Security against the risk of failureThe branch banking is less risky and greater capacity to handle risks. Thelosses incurred by some branches may be offset by the profits earned byother branches.

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Disadvantages

Duplication of banking facilities

Unhealthy competition

Delay in decision making

Ineffective control over branches Lack of initiative

Lack of personal contact

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Universal banking

Often referred to as µfinancial service supermarket¶

An universal bank offers entire (or often most of) financial

services within the bank or through its subsidiaries, like

± Commercial banking solutions

± Investment banking

± Other related financial services including

insurance

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GROUP BANKING

Form of Holding Company in which a management

group has control of several existing banks. Each

bank in the group has its own board of directors,

but the holding company coordinates the activities

of all banks in the group, and owns a majority of

capital stock in member banks.

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CHAIN BANKING

The banks which are located in different parts of

the country is under the control of a single person

or a group of persons through stock ownership or

otherwise, but not a holding company.

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CORRESPONDENT BANKING

This is an informal arrangement in which a bankin a country maintains a deposit balance withbanks in foreign countries and looks to them for services and assistance.

These offices accept drafts, honor letters of credit,provide credit information, and collect or payforeign funds from import or export transactions.

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Deposit Banking System

Receiving deposits and making advances for a

short period is known as deposit banking.

No lock up of long-term advances

They need to have high liquidity

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Glass-Steagall Act 1933

The modern concept of ³Investment Bank´ wascreated in the Glass-Steagall act (Banking Act of 1933). Glass Steagall separated commercialbanks, investment banks, and insurance

companies. Carter Glass, Senator from Virginia, believed that

commercial banks securities operations hadcontributed to the crash of 1929, that banks failedbecause of their securities operations, and that

commercial banks used their knowledge as lendersto do insider trading of securities.

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Investment Banks

Bulge bracket firms: First Boston, Goldman

Sachs, Merrill Lynch, Morgan Stanley,

Salomon Brothers, Lehman Brothers.

Traditionally were often partnerships, butpartnership form is disappearing.

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The Industrial Development Bank of India (IDBI) was establishedin 1964 under an Act of Parliament. It was initially set up as a whollyowned subsidiary of the Reserve Bank of India (RBI) with a mandateof providing credit and other facilities for balanced industrialdevelopment. In 1976, the ownership of IDBI was transferred to theGovernment of India and it was accorded the status of principalfinancial institution in the country for co-ordinating the working of institutions, engaged in financing, promoting and developingindustry, and also assisting in the development of such institutions.Following amendment to IDBI Act in October 1994 to permit public

ownersh

ip up to 49% of its issued capital, IDBI went in for a publicissue in July 1995. The shareholding of Government of India in IDBIcurrently stands at 58.47%.

Industrial Finance Corporation of India (IFCI)IFCI, the first Development Finance Institution in India, was set up in1948, as a Statutory Corporation, to pioneer institutional credit to

medium and large industries IFCI was also the first institution in thefinancial sector to be converted into a Public Limited Company.IFCI's record of performance has broadly run parallel to the courseof industrial and economic development of the nation. IFCI'sprincipal operations include - Project financing, Financial services &Comprehensive corporate advisory services.

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Merchant Banking

A "Merchant Banker" could be defined as "Anorganisation that acts as an intermediary betweenthe issuers and the ultimate purchasers of securities in the primary security market³

Merchant Banker has been defined under theSecurities & Exchange Board of India (MerchantBankers) Rules, 1992 as "any person who isengaged in the business of issue management

either by making arrangements regarding selling,buying or subscribing to securities as manager,consultant, advisor or rendering corporate advisoryservice in relation to such issue management".

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BM Module 2&3

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