Commercial Bank Managemnt

8/13/2019 Commercial Bank Managemnt

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COMMERCIAL BANK MANAGEMENT

• In every country, banking system is regulated by someauthority in terms of laws of that country concerned.

• In the United States of America, the banking system isregulated by Federal Reserve Board (FRB). In United

Kingdom, the banking system is regulated by Bank ofEngland in spite of the fact that the banking is defined by inthe United Kingdom.

• The banking system in India is regulated by Reserve Bank ofIndia (RBI) which is also termed as Central Banking Authority

in the country.

• The RBI regulates the banking system in terms of RBI Act1934 and Banking Regulation Act 1949.



COMMERCIAL BANK MANAGEMENT • The banking system deals with people’s money and it is

necessary to generate, maintain and promote the confidence

and trust of the people in the financial/banking system.

• This is done by preventing and curbing the possibility of

misuse of the financial/banking system.

• In case of failure, the people will loose the trust and faith in

the financial/banking system which can have serious

implications for the economy of that country.

• Therefore, the rationale behind the regulation of

financial/banking system is:



CENTRAL BANK-RBI

• To generate, promote and maintain confidence and trust of

the public in banking/financial system.

• To protect the interest of the investors through adequate

and timely disclosure by financial/banking institutions.

• The investor should also have access to the revenue in

formations

• To ensure that financial markets are both fair and efficient.

•

To ensure that participants must adhere and follows therules and regulations of the market.

• In a developing country like ours, the role of the regulator

i.e. RBI is very crucial in achieving these objectives.



RESERVE BANK OF INDIA

• To achieve these objectives, RBI has created many

departments. Some of the important departments are:

• Customer Service Department.

•

Department of Banking Operations and Development • Department of Banking Supervision

• Department of Currency Management

• Department of Economic & Policy Research

• Department of Expenditure & Budgetary Control • Department of Government and Bank Accounts

• Department of Non-Banking Supervision (DNBS)

http://www.rbi.org.in/scripts/aboutusdisplay.aspx?pg=depts.htm
















RESERVE BANK OF INDIA • Department of Payment and Settlement System

• Department of Statistics and Information

• Financial Markets Department

•

Exchange control Department• Inspection Department

• Internal Debt Management Department

• Urban Banks Department

•











RESERVE BANK OF INDIA • The main objectives of RBI contained in the preamble of

the RBI Act, 1934.

• It reads, “ Whereas it is expedient to constitute ReserveBank for India to regulate the issue of bank notes and

keeping of reserves with a view to securing monetarystability in India and generally to operate the currency andcredit system of the country to its advantage”.

• Hence the main objectives of RBI are:

• The most important objective of the RBI is to promote

growth and maintain the price stability.• To maintain the monetary stability so that the business

and economic life can deliver welfare gains of a mixedeconomy.



RESERVE BANK OF INDIA • To maintain financial stability and ensuring the sound health

of financial institution so that economic units can conduct

their business with confidence.

• To maintain stable payment system, so that financial

transactions can be safely and efficiently executed.

• To ensure that by the financial system reflects the national

economic priorities and social concerns.

• To regulate overall volume of money and credit in the

economy to ensure a reasonable degree of price stability.

• To promote the development of financial markets and

systems to enable itself to operate/regulate efficiently



RESERVE BANK OF INDIA • To ensure that orderly conditions are maintained in the

foreign exchange market and the exchange rate is not

subject to excess volatility.

• Functions of Reserve Bank of India

• The essential functions of RBI, to achieve its objectives, are:

• Issuing Currency Notes.

• The RBI has the sole authority to issue, circulate, withdraw

and exchange the currency notes.• Presently, RBI has issued and put in circulation, note in the

denomination of Rs. 1,2,5,10,20,50,100,500 and 1000.



RESERVE BANK OF INDIA • The RBI is not authorized to issue 1 rupee note and coins.

• The Government of India is empowered to issue 1 rupee

note and coin as one rupee note and coin is the legal tender

money of India.

• Due to this reason the currency notes are signed by the

Governor RBI and one rupee note bears the signature of the

Secretary, Government of India.

• These one rupee notes and coins are put into circulation by

the RBI.

• Presently, the RBI has discontinued the printing of one rupee

note.



RESERVE BANK OF INDIA • The RBI has also started minting coins of denomination of

Rs.2, 5 and 10.

• The RBI has about 20 Issue Offices, over 4300 currency chest

and more than 4000 small coin depots.

• Most of the currency chests are kept in custody of various

banks that function as agents of the RBI.

• As a cover for note issue, RBI keeps a minimum value of gold

coins and bullion and foreign securities as part of total

approved assets.

• Government’s Bank- The RBI acts as the banker to the

Central and State Governments.



RESERVE BANK OF INDIA • As a banker to the Government, both State and Central, it

provides them banking services of deposits, withdrawal of

funds, making payments an receipts, collection and transfer

of funds and management of public debt.

• The RBI neither pays interest on Govt. deposits nor charges

any remuneration for these services.

• The RBI also allows overdrafts to the State as well as Central

Government under ‘ways and means advances’, subject to

certain rules and limits on the amount of overdrafts.

• This is done as per Central Government decision, in order to

contain the fiscal deficit.



RESERVE BANK OF INDIA • The RBI charges commission for managing the public debt

and interest on overdrafts from the State and Central

Government.

• Bankers’ bank- The RBI, like all other commercial banks, acts

as a ‘banker’s bank’. All the banks in India have to maintain

their accounts with RBI.

• All commercial banks, scheduled banks (appearing in the

Second schedule of RBI Act) have to maintain, the stipulated

reserves in cash and in approved securities as a percentageof their net demand and time liabilities(NDTL).

• These reserves are called Cash Reserve Ratio (CRR) and

Statutory Reserve Ratio (SLR).



RESERVE BANK OF INDIA • Lender of the last resort- It also acts as a ‘lender of the last

resort’ for banks.

• When banks are in needs of funds, they approach RBI and

get their bills rediscounted or through refinance mechanism

or through REPO (Repurchase Option)

• Banks’ supervision- Till November 1993, the RBI was

performing the supervisory function for the banking system.

• After 1993, this function has been separated from RBI.

• In 1994, Board of Financial Supervision (BFS) has been

established to oversee Indian Financial System, comprising

not only banking, but also All India Financial Institutions and

Non-banking financial companies (NBFCs).



RESERVE BANK OF INDIA • The BFS is chaired by the Governor of RBI and consists of a

full time Vice-chairman, and six other members.

• The RBI’s supervisory powers are:

– To issue licenses for setting up new banks, and for

establishing new branches for existing banks.

– To prescribe minimum requirements of paid up capital

and reserves, and maintaining cash reserves and other

liquid assets.

– To inspect the working of the schedule commercial banks

in India and abroad, from all relevant angles to ensure

their sound operations.



RESERVE BANK OF INDIA – To conduct investigations into complaints, irregularities,

frauds pertaining to banks.

– To control appointments, reappointments, termination of

Chairman & managing directors, executive directors and

Chief Executive officers of banks, both public sector and

private sector.

– To approve or compel amalgamation/merger of two

banks. The latest example is merger of Global Trust Bank

with Oriental Bank of Commerce in 2004.

• Development of Financial System-

• The RBI also has a developmental role, other than the

regulatory and supervisory role, over the banks.



RESERVE BANK OF INDIA • The RBI has created specialized financial institutions for

different sectors of the economy. They are:

– Industrial Finance: The Industrial Development Bank of

India (IDBI) was established in 1964 and Small Industries

Development Bank of India (SIDBI) for development of

large and small industries.

– Agricultural Credit: National Bank for Agriculture and

Rural Development (NABARD) was established in the year

1981 to look after for the development of agriculturesector.



RESERVE BANK OF INDIA – Export: Export-Import Bank of India (EXIM Bank), a

specialized financial institution was created to develop

the international trade.

– Deposit Insurance Corporation of India (DIC) was created

in the year 1961 to protect the interest of the small

depositors.

– Later on it became Deposit Insurance and Credit

Guarantee Corporation of India (DI&CGI).

• The RBI has also initiated many other schemes concerning

various aspects of banking.

• They are;



RESERVE BANK OF INDIA • Bill Market Scheme of 1952 and New Bill Market Scheme of

1970. Under the Bill Market scheme 1952, RBI was granting

loans to commercial banks against their demand promissory

notes supported by the approved Usance bills of their

customers.

• Under the New Bill Market Schemes, RBI rediscounted

genuine trade bills.

• The genuine trade bills are those which represent the actual

evidence or sale and dispatch of goods.

• Lead Bank Scheme: In 1969, after nationalization of 14

banks, the Government took the steps in extending the

banking system to rural areas.



RESERVE BANK OF INDIA • In this scheme all nationalized banks and some private

sector banks were allotted a few districts and were asked to

play the lead role in developing those districts.

• Tandon Committee: In 1974 a study group under the

chairmanship of Mr. P. L. Tandon was constituted for framing

guidelines for commercial banks for follow-up & supervision

of bank credit for ensuring proper end-use of funds.

• The group submitted its report in August 1975, which came

to be known as Tandon Committee’s report.

• Its main recommendations related to norms for inventory

and receivables, the approach to lending, style of lending

and follow ups & information system.



RESERVE BANK OF INDIA • In 1960, Credit Authorization Scheme and Consortium

Financing Scheme in 1970 were introduced which were

discontinued after liberalization in 1991.

• The latest initiative of RBI is to bring NBFCs under their

control. Now all NBFCs has to functions certain rules and

regulations prescribed by RBI.

• Exchange Control-

• The RBI is responsible for maintaining stability of the

external value of the Indian Rupee.

• It used to regulate the foreign exchange market in the

country as per the Foreign Exchange Regulation Act (FERA),

1947.



RESERVE BANK OF INDIA • This Act was later on amended in 1973.

• The FERA, 1973 is now replaced by Foreign Exchange

Maintenance Act 1999 (FEMA) due to implementation of

Narasimham Committee recommendation on Financial

Sector reforms.

• As per FEMA, 1999, RBI performs the following tasks:

– It administers foreign exchange control through its

Exchange Control Department (ECD).

– It authorizes banks, specified branches and other dealers,

called Authorized Dealers (Ads).



RESERVE BANK OF INDIA – The Authorized Dealers are those entities which are

authorized by RBI to deal in foreign exchange

transactions.

– The RBI manages exchange rate between the Indian and

Foreign currencies, by buy and selling foreign exchange

to/from the Authorized Dealers and other means.

– The RBI also manages the foreign exchange reserves of

the country and maintains reserves in the form of gold,

bullion and foreign securities which are issued byGovernments of other countries and the international

financial institutions.



RESERVE BANK OF INDIA • Monetary Policy- One of the most important role of RBI is to

control the money supply, the volume of bank credit and

also the cost of bank credit.

• By this, RBI overall control the money supply in the system.

The change in the volume of money supply is a technique to

control the inflationary or deflationary situations in the

economy.

• Tools of monetary control used by RBI

• The RBI has various tools to control the money supply in the

economy for controlling inflation or deflationary situations.



RESERVE BANK OF INDIA • The inflationary situation is when general price level

increases and the deflationary situation is when the general

price level falls.

• The various tools used by RBI to control the money supply in

the economy are:

• Cash Reserve Ratio (CRR):

• All banks (scheduled and non-scheduled) are under

obligation as per Banking Regulation Act 1949 to deposit a

certain proportion of their net demand and term liabilities

(NDTL) in the form of cash with the RBI.



RESERVE BANK OF INDIA • The demand liabilities are current accounts and saving bank

accounts and the term or the time liabilities are term

deposits (fixed deposits).

• This proportion is specified by RBI and could change from

time to time.

• The present CRR is 4% of the NDTL w.e.f. from 29.1.2013

(reduced from 4.25%).

• When the money supply in the economy increases and

results in inflationary tendencies, RBI increases the CRR and

vice versa.



RESERVE BANK OF INDIA • An increase in the CRR reduces the loanable funds with the

banks and reduction in CRR increases the loanable funds.

• At present, banks are not getting any interest on the CRR

balances kept with RBI.

• The CRR is governed by Section 42 of Reserve Bank of India

Act, 1934.

• Statutory Liquidity Ratio: The SLR is that proportion of a

bank’s Net Demand and Time Liabilities (NDTL) that it has to

maintains investment in certain specified assets (cash,

precious metal i.e. gold and bullion and approved securities

like bonds issued by Central Govt., State Govt etc.



RESERVE BANK OF INDIA • The SLR is governed by Section 24 of the Banking Regulation

Act, 1949.

• Earlier there was a minimum stipulation of 25% but this was

removed with an amendment to the Banking Regulation Act

in 2007.

• However, SLR cannot exceed 40%. The SLR determined and

maintained by RBI in order to control the expansion of bank

credit. The current SLR is 23%.

• The SLR has three objectives i.e. to restrict the expansion of

bank credit, to increase banks’ investment in approved

securities and to ensure solvency of banks.

•



RESERVE BANK OF INDIA • Increase in SLR results in the reduction of the lending

capacity and vice-versa.

• Bank Rate: Bank Rate is rate of interest at which banks

borrow money/funds from Central Bank/RBI without any

sale of securities.

• It is generally for a longer period of time.

• This is similar to borrowing money from someone any paying

interest the amount.

• In other words, Bank rate is the standard rate at which the

RBI is prepared to buy or rediscount bills of exchange or

other eligible commercial papers from banks.



RESERVE BANK OF INDIA • It is basic cost of rediscounting and refinance facilities

provided by the RBI.

• Open Market Operation:

• When RBI buy or sell the Govt. securities (both Central &

State) in the open market with a view to increase ordecrease the liquidity in the banking system.

• This has an effect on the loanable funds with the bankingsystem.

• When RBI observes that there is excess of liquidity in the

system, it starts selling the securities.• In case of shortage of liquidity, it starts buying the security

which results in pumping of liquidity in the system.



RESERVE BANK OF INDIA • Selective Credit Control: The SCC means that RBI intends to

control loans and advances against certain selective

commodities.

• The RBI has power under Sec 21 and 35A of Banking

Regulation Act to issue such directives.

• The sensitive commodities are pulses, other food grains,

oilseeds, oils including Vanaspati, all imported oil seeds and

oils, sugar including imported sugar, gur, khandsari,

cotton/kapas, paddy/rice wheat etc.

• The objectives of selective credit controls are to prevent

speculative holding of essential commodities which results

in a rise in their prices.



RESERVE BANK OF INDIA • The RBI’s general guidelines on selective credit controls are:

• Banks should not grant loan and advances to their customer

who are dealing in commodities comes under SCC or any

other credit facilities, including those against book

debts/receivables.

• The banks are also not supposed to grant loan against the

collateral securities, such as insurance policies, shares,

stocks and real estate, which would defeat the purpose,

directly or indirectly, of selective credit control.

• The credit limit granted against each commodity covered by

SCC directives should be segregated and the SCC restrictions

be applied to each of such segregated limits.

•



BANKING SECTOR REFORMS

• Post-Liberalization Era- In 1991, the Indian economy faced

greater challenges and therefore, it adopted the path of

liberalization by bringing several economic reforms in

general and banking sector in particular.

• The banking sector in particular had undergone tremendouschanges during the process.

• A committee under the chairman ship of Sh. Narasimham

was set up.

• This committee was set up on financial sector reforms.

• The purpose was to bring efficiency in the banking

operations.



BANKING SECTOR REFORMS • Several policy decisions based on the report submitted by

this committee on financial sector reforms were introduced.

• The major reforms included:

• Achieving prescribed capital adequacy ratio,

• Phased reduction of Cash Reserve Ratio and Statutory

Liquidity Ratio,

• Setting up a board for financial supervision, greater

autonomy to the bank and encouragement to private sector

to come into banking operations.

• This brought about competitiveness, reduction in the level of

non-performing assets.



BANKING SECTOR REFORMS • The first phase of banking sector reform which began in 1992

was focused on

• The transparent accounting norms,

• Cleansing the balance sheet,

• Reduction in the statutory pre-emption of resources ofbanks, and deregulation of interest rates.

• The following were the areas indentified for bringing desiredimprovements:

•

Liberalization of interest rates on deposits and loans andadvances.

• Phased reduction in statutory reserves.



BANKING SECTOR REFORMS • Encouraging private sector to banking operations for

bringing more efficiency in services and also the spirit of

competitiveness.

• Bringing transparency in financial reporting.

• Fixing capital standards as per Basel Accord Capital

Standards.

• Fixing prudential norms for asset classification, income

recognition and provisions for bad debts.

• Added focus on reduction of non-performing assets (NPAs)

• Bringing operational autonomy

• Diversification of banking operations



BANKING SECTOR REFORMS • Improved profitability and efficiency

• Better supervisory arrangements for banks by RBI

• Added focus on IT related services

•

Disinvestment of public ownership.• After implementation of reform process in the first phase

based on Narasimham Committee recommendation, the

committee submitted second report for implementation.

•

This was known as second generation reform.• The thrust of which was on improving the organizational

effectiveness.



BANKING SECTOR REFORMS • In the second phase emphasis was laid on the following

measures:

• Reduction of Govt. stake in banks to 33 per cent.

• Stricter prudential norms

• Greater emphasis on asset-liability management

• Introduction of narrow banking concept to rehabilitate weak

banks.

•

Setting up of the Asset Reconstruction Fund• Integration of NBFCs with financial system

• Consolidation of the banking industry by merging weak

banks with strong bank.

•F ti li ti f t ff t th d b h

Commercial Bank Managemnt

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