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CHAPTER- 01

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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.

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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

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Post-Independence

The major steps to regulate banking included:

The Reserve Bank of India, established in April1934,

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 couldbe opened without a license from the RBI, and notwo banks could have common directors.

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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

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Nationalization

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Liberalization

In the early 1990s,

New Generat ion tech -savvy banks

Global Trust Bank, which later

amalgamated with Oriental Bank ofCommerce,

Axis Bank(earlier as UTI Bank), ICICI

Bank and HDFC Bank.

FDI cap raised from 10% to 74% with

some restrictions.

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Narsimahmam Committee

The purpose of the Narasimham-I

Committee was

To study all aspects relating to the

structure, organization, functions andprocedures of the financial systems and

To recommend improvements in their

efficiency and productivity.

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Recommendations of NC1

1. Opening of More Pvt. sector banks

2. Motivation foreign banks to expand their network by

opening new branches.

3. Deregulation of RBI and Finance ministry of India.

Making RBI as a regulator of all Banks and let Bankstakes participation in equity market with govt. stake of

51%,

4. Regulation introduced by RBI include CAR, Asset

classification ,NPA ratio

5. Corporate Governance : promoting customer relationsand office culture

6. Asset Reconstruction for bringing down NPA in future

7. Risk Management

8. CDR or centralized data repositor

9. E-Banking and VRS

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CAR

Capital adequacy ratio (CAR), also

called Capital to Risk (Weighted)

Assets Ratio (CRAR)

Capital adequacy ratios are ameasure of the amount of a bank's

core capital expressed as a

percentage of its risk-weighted asset.

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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

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Non Performing Asset

A loan that is not earning income and:

1. Full payment of principal and interest is no

longer anticipated,

2. Principal or interest is 90 days or more

delinquent, or

3. The maturity date has passed and payment

in full has not been made.

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REAL TIME GROSS SETTLEMENT (RTGS)

SYSTEM - IN compliance with Basle Core

Principles for Systemically Important

Payment Systems of BIS Indian Financial NetworkINFINETa `one-

of-a-kind initiative for sharing IT expensive

resources `ANYWHERE BANKING THROUGH CBS,

ANYTIME BANKING -National Financial

Switch for interconnecting ATMs

RBI CHANGINGSCENARIO

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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).

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BANKING CONCEPTS

PLR or prime lending rate - rate of interest at whichbanks 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 cashreserve ratio

Deposit Rates - Interest rate paid on deposit accounts by

commercial banks and other FIs

Bank rate - rate of interest which RBI charges on loansand 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

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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 frombanks. 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 long-

term measure and governed by long-term monetary policies

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STATUTORY LIQUIDITY RATIO

(SLR)

OBJECTIVE1) 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 specifiedby RBI

CURRENT SLR 24%

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CASH RESERVE RATIO (CRR)

OBJECTIVE

Banks required to hold a certain proportion of their deposits in the form ofcash, 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%