Bank Management IPM-Term V PDF

BANK MANAGEMENT IPM- Term V Dr. Shweta Ahalawat  Banking is defined under Section 5(b) of the Banking Regulation Act, 1949. It means accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque,...

BANK MANAGEMENT IPM- Term V Dr. Shweta Ahalawat  Banking is defined under Section 5(b) of the Banking Regulation Act, 1949. It means accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise’. Some important interpretations follow from the above definition. 12/12/2024 2  'Banking' means performing two essential functions of: (a) accepting deposits from the public; and (b) lending or investing the deposits. It, therefore, follows that if the purpose of accepting deposits is not to lend or invest, it cannot be called 'banking business’. For example, companies accepting deposits from the public for financing their business cannot be said to be doing banking business. 12/12/2024 3  Banks, as institutions which channel people's savings into productive loans and investments. Thus, banking mainly refers to deposits and loans. A broader definition of banking is any financial institution that receives, collects, transfers, pays, exchanges, lends, invests, or safeguards money for its customers. 12/12/2024 4  Financial System of any country has two important segments- the Financial Markets and the Financial Intermediaries 12/12/2024 5  Financial System The financial system transfers funds from savers to borrowers. Borrowers transfer returns back to savers through the financial system. Savers and borrowers include domestic and foreign households, businesses, and governments. Moving Funds Through the Financial System 12/12/2024 6  INDIAN FINANCIAL SYSTEM Financial system consists of financial markets and financial intermediaries Financial markets comprise of money market, capital market, forex market etc. Financial intermediaries: banks and non-banks. 12/12/2024 7  Prevalent Models of banking Prevalent models of banking The broad functions and objectives of the banking structure are more or less similar across countries. However, globally, there are different models of banking structures, different ownership patterns, and different emphasis on size of the banks. 12/12/2024 8  There are basically two pure models of banking: commercial banking and investment banking. Universal banking represents a combination of the two banking models in varying proportions. Thus, there are commercial banking - oriented Universal banks (Bank of America, Citi Group, HSBC, etc.) and Investment- banking oriented Universal banks (Barclays, Deutsche Bank etc.) 12/12/2024 9  Prevalent banking models Intermediaries Main functions - deposit Combination between security taking, making loans - issuers and Clientele – private firms, of investors to help corporate, government Investment firms raise capital etc. Provide financial Other services - credit and consultancy cards, payments and commercial services, equity research settlements , providing banking. guarantees and trade Provide various financing financial services _ Main Income sources: M&A, leveraged Interest from loans and finance, investments, restructuring, risk commissions and fees management, from other services underwriting, securities trading, Investment asset management, Commercial Universal Banks etc Banks Banks Main Income source: 12/12/2024 10 THE INDIAN BANKING SYSTEM-AN OVERVIEW The key feature that distinguishes the Indian banking sector from the banking sectors in many other countries is the plethora of different types of institutions that cater to the divergent banking needs of various sectors of the economy. 12/12/2024 11  For example, Credit cooperatives were created to cater to the credit, processing and marketing needs of small and marginal farmers organized on cooperative lines. Regional Rural Banks were created to bring together the positive features of credit cooperatives and commercial banks and specifically address credit needs of backward sections in rural areas 12/12/2024 12  Local Area Banks were brought in to bridge the gap in credit availability and strengthen the institutional credit framework in the rural and semi-urban areas. 12/12/2024 13  Indian banking System The financial institutional structure in India The financial institutional structure in India can be broadly classified into: (a) commercial banks; (b) non- banking financial institutions; c) co-operative credit institutions. 12/12/2024 14 Who owns the commercial banks in India Public sector banks: Public Sector Banks (PSBs) are a major type of government owned banks in India, where a majority stake (i.e. more than 50%) is held by the Ministry of finance of the Government of India or State ministry of finance of various State Government of India.. The officers working for these entities and their subsidiaries are gazetted officers. 12/12/2024 15  The employees subordinate to the officers working for these respective entities and their subsidiaries are also full-fledged government officers. The shares of these banks are listed on stock exchanges. Their main objective is social welfare There are 12 public-sector banks in India 12/12/2024 16  The Board of public sector banks comprises of whole time directors chairman, managing director(s), executive directors, government nominee directors, RBI's nominee directors, workmen and non workmen directors and other elected directors. The Indian government has recently constituted the Banks Board Bureau (BBB) for selection of Managing Directors and Directors of public sector banks and financial institutions. 12/12/2024 17  Private Sector Banks At present, there are 21 private banks in India. Private Sector Banks are those banks in which the majority of the stake is held by shareholders of the bank and not by the government. HDFC Bank, ICICI Bank, Axis Bank, etc. are the private sector banks in India. They provide all the banking products and services to the customers. 12/12/2024 18  Small Finance Banks (SFB) Universal banks may not be in a position to understand or cater to the needs of small value customers. Hence, In November 2014, RBI gave approvals / licences for Small Finance Banks. RBI issues license to entities to carry on the business of banking and other businesses in which banking companies may engage, as defined and described in Sections 5 (b) and 6 (1) (a) to (o) of the Banking Regulation Act, 1949, respectively. 12/12/2024 19  The objectives for setting up Small Finance Banks is to give a fillip(something which acts as a stimulus or boost to an activity.) to financial inclusion by (a) providing vehicles, and (b) supplying credit to small business units, small and marginal farmers, micro and small industries and other unorganized sector entities. 12/12/2024 20  Small finance banks are a type of niche banks in India. Banks with a small finance bank license can provide basic banking service of acceptance of deposits and lending. The aim behind these to provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganised 12/12/2024 21  Small finance banks can be established by (a) individuals/ professionals with 10 years' experience in the banking and finance industry, (b) companies / societies owned and controlled by residents, (c) existing Non Banking Finance Companies (NBFC), Micro finance institutions (MFI) and Local Area Banks (LAB) owned and controlled by residents. 12/12/2024 22  Payments Banks Payments Banks are essentially 'narrow banks’. To safeguard deposits placed with it, a narrow bank does not undertake lending activities. Rather, it invests the majority of its deposits in 'safe' instruments such as government securities. 12/12/2024 23  In November 2014, this class of niche banks was authorised by RBI. This category of banks was termed "Payments Banks" and the overarching objective was to accelerate financial inclusion. Payments banks are intended to provide (a) small savings accounts and (b) payments/ remittance services to the users. 12/12/2024 24  Issue ATM/debit cards. Payments banks, however, cannot issue credit cards. 12/12/2024 25  Example of Payment Banks in India: 1. Airtel Payments Bank 2. India Post Payments Bank 3. Jio Payments Bank 4. Idea Payments Bank 5. Paytm Payments Bank 12/12/2024 26  Services Payments banks can offer a limited range of services, including: Accepting deposits Providing ATM or debit cards Offering online or mobile banking Providing remittance services Assisting with money transfers Restrictions Payments banks cannot: Issue loans or credit cards Accept NRI deposits Form subsidiaries to provide non-banking financial services Engage in any lending activity Licensing The RBI grants licenses to mobile companies, grocery chains, and others to cater to individuals and small enterprises. 12/12/2024 27  Foreign Banks In 2004, RBI permitted foreign banks regulated by central bank in their home countries, to establish Wholly Owned Subsidiaries in India Foreign bank branch is a type of foreign bank that is obligated to follow the regulations of both the home and host countries. According to the Reserve Bank of India, there are currently 46 foreign banks in India. 12/12/2024 28  The presence and expansion of Foreign banks in India is with a view to fostering the inherent potential for sustained growth in the domestic economy and growing integration into the global economy. 12/12/2024 29  Regional Rural Banks (RRBs) The RBs were created for rural credit delivery and to ensure financial inclusion. Their capital base is held by the central government, relevant state government and the commercial bank that 'sponsors' them, in the ratio of 50:15:35, respectively. 12/12/2024 30  However, an issue that is considered to hamper performance efficiency of RRBs is the multiplicity of control--RBI is the banking regulator, while NABARD is the supervisor with limited supervisory powers. 12/12/2024 31  Non-banking Financial Institutions (NBFIs) are a heterogeneous group of institutions that cater to a wide range of financial requirements. They can broadly be grouped as All India financial institutions (AIFIs), non-banking financial companies (NBFCs) and primary dealers (PDs). 12/12/2024 32  NBFI – The Component All India Financial Institutions Non banking Finance Companies Primary dealers 12/12/2024 33  Non Banking Financial Institutions (NBFI) The 'financial institutions' (FIs) fall under the category of Non-banking Financial Institutions (NBFI)"° that complement banks in providing a wide range of financial services to a variety of customers and stakeholders. 12/12/2024 34  Financial Institution’s Structure All India FIs- EXIM bank, NABARD, NHB, SIDBI Financial Investmen Specialize t d FIs- Institutio Institution IVCF, ICICI ns s- LIC, GIC State level FIs- SFCs, SIDCs 12/12/2024 35  Based on their major line of activity, the all-India financial institutions are classified into: (1) term-lending institutions (EXIM Bank), which invests in projects directly through investments and loans; and (2) refinancing institutions (NABARD - National Bank for Agriculture and Rural Development, SIDBI - Small Industries Development Bank of India and NHB - National Housing Bank). 12/12/2024 36 The refinancing institutions extend refinance Specifically, however, NABARD extends refinance and other facilities for agriculture and allied activities, SIDBI for the micro, small and medium enterprises (MSME) sector and NHB for the housing sector. 12/12/2024 37  Investment institutions, such as LIC and GIC deploy their resources for long-term investment. State/regional level financial institutions comprise of State financial corporations (SFCs) and State Industrial and development corporations (SIDCs). 12/12/2024 38  Specialized FIs: Specialised Financial Institutions means the financial institutions established by specific law and management. 12/12/2024 39  Types of Specialised Financial Institutions: Industrial Credit and Investment Corporation of India (ICICI) : This was founded in 1955 as a public limited company under the Companies Act of 1956 for the purpose of providing long-term loans to companies for up to 15 years and subscribing to their shares and debentures for the sole purpose of the creation, expansion, and modernization of private sector industrial enterprises. It has also attracted foreign money to invest in the nation. 12/12/2024 40  Industrial Finance Corporation of India (IFCI): It was founded as a company in July 1948 under the Industrial Finance Corporation Act of 1948, with the primary goal of providing long- and medium-term financing to big industrial firms. Its goals include assisting in the establishment of a balanced regional economy, encouraging new entrepreneurs to enter key industries, and expanding management education throughout the country. TFCI : Specialized FI focusing on developing tourism and social infrastructure 12/12/2024 41  Non Banking Finance Companies (NBFC) The RBI Act 1934 was amended in January 1997 to bring in a comprehensive legislative framework for regulating NBFCs. The two major categories of NBFCs in India are the deposit taking (NBFC-D) (from the public) and non- deposit taking (NBFC-ND) NBFCs. Housing Finance Companies (HFC) are considered a special type of NBFC. 12/12/2024 42  Non-deposit taking NBFCs have been further bifurcated into NBFC-ND and NBFC-ND-SI. 'SI' stands for 'systemically important*. NBFCs with asset size of over Rs 5 billion are classified in this category. 12/12/2024 43  RBI designated those NBFCs with asset size of over Rs 5 billion as "systemically important' (NBFC-ND-SD, due to their linkages with money markets, equity markets, banks and financial institutions and brought them under a specific regulatory framework (capital adequacy and exposure norms**) from April 1, 2007. NBFC-ND-SI is the fastest growing segment of NBFCs. They raise resources primarily from issue of debentures, borrowings from banks and other financial institutions and issue of commercial paper. This category of NBFCs is closely monitored by RBI due to their systemic importance. 12/12/2024 44  Housing Finance Companies (HFC) Housing finance companies (HFC) are special types of NBFCs. When the National Housing Bank (NHB), one of the all India financial institutions was set up in 1988, there were about 400 housing finance companies regulated by the RBI that financed only 20 per cent of the population's home financing needs. Housing Development Finance Corporation (HDFC) was the largest housing finance company. The housing finance market has grown remarkably since then, with many banks and other institutions entering the sector. The NHB is the regulator and supervisor of HFCs. 12/12/2024 45  The multiplicity of regulators poses challenges in the functioning of the non banking sector.. 12/12/2024 46  A primary dealer (PD) is an RBI registered entity that is authorized in buying and selling government securities. 12/12/2024 47  Primary Dealers (21) Stan Ban dalo k ne PDs PDs (14) (7) 12/12/2024 48  Cooperative Credit Institutions They provide home loan, personal loan, vehicle loan to the members at a lower and reasonable rates of interest. 12/12/2024 49  What is the main purpose of cooperative credit? To promote social and economic betterment of members through self-help and mutual aid in accordance with cooperative principles. To raise funds for business of the Society.. To grant loans and advances to low income groups. 12/12/2024 50  The co-operative sector was conceived as the first formal institutional channel for credit delivery to rural India. It has been regarded as a key instrument for achieving the 'financial inclusion' objective. The urban co-operative banks (UCBs) are an important channel for financial inclusion in the semi-urban and urban areas, especially for the middle- and low-income customers. 12/12/2024 51  Though these institutions play a critical role in the financial sector, their commercial viability and financial soundness are seen as areas of concern. The size of the rural and co-operative sector is small when compared with the commercial banking sector. However, there are certain issues that have to be resolved if these institutions have to function efficiently. A key issue that hampers efficiency is that these institutions' operations are overseen by both the RBI / NABARD and the relevant state governments, which leads to multiplicity of control. 12/12/2024 52  REQUIREMENTS TO BE CALLED A BANK As per Sec. 5(b) of the Banking Regulation Act, 1949 (BR Act)', the term 'Banking' means accepting for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. Hence, the banker is in the business of accepting deposits from the public and utilizing these for the purpose of lending or investment. 12/12/2024 53  Thus, essentials to satisfy the requirements of the definition are: (a) Deposits should be only for lending and investment. Companies accepting deposits for trading manufacturing are not considered as a bank. (b) The deposit should be from the public. So, 'Nidhis’ mutual -benefit societies, co-operative societies that accept deposit from their members are not covered as a bank. (c) Acceptance of deposit should be in the form of money. 12/12/2024 54  A company incorporated under Indian Companies Act, 1956 or Companies Act, 2013 can be a bank, a banker or a banking company. Under Sec. 5(c) of BR Act, 'Banking Company' means any company that transacts the business of banking in India. Sec. 7(1) of BR Act prohibits use of the words 'banker’ or "banking' or 'banking company' by a company other than a banking company. Sec. 7(2) further prohibits the use of such words by an individual or a group of individuals or a firm. 12/12/2024 55  (a) Moneylenders are not bankers: The definition of banker does not include the moneylenders or mahajans, Sahukars or Shettys, because they run their business as individuals or groups of individuals and not as a company registered under the provisions of the Companies Act and BR Act. In the case of Kadiresan Chettiar vs. Ramanathan Chettiar (AIR 1927, Madras 438), it was held that while a moneylender lends his own money, a banker lends money of his customers/depositors. 12/12/2024 56  (b) Accepting deposits of money from the public: Every institution carrying out the business of banking must accept the deposits of money from the public and should not confine to the deposits from its members only. In the case entitled Mahalaxmi Bank Limited vs. Registrar of Companies, it was decided that if a company gave loan to the public but did not accept deposits from the public, it could not be considered as a banking company under Sec. 5 of BR Act. 12/12/2024 57  (c) Acceptance for the purpose of lending or investment: An institution accepting deposits of money without any purpose or with a purpose other than lending or investment cannot be termed as a bank. (d) Deposit repayable to depositors on demand or otherwise: Deposits of money may be repayable either on demand or if they are term deposits, on the expiry of the stipulated term or period. (e) The deposits may be withdrawable by the customers by cheque , draft, order or otherwise. 12/12/2024 58  Challenges and Competitors For banks 12/12/2024 59