Commercial Bkg 4

7/27/2019 Commercial Bkg 4

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COMMERCIAL BANKING


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BANKING

Under Banking Regulation Act,1949 ,

banking includes accepting deposits

f rom publ ic , for the pu rpose of lend ing

or investment; and repayable on demand

or o therw ise and w ithdrawable by check ,

draft, order or otherwise .


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UNIT BANKING

It consists of provision of banking services by a single

institution .The size as well as area of operation aresmall. The unit banks may have branches within a

limited area.

Merits: Adoption to local conditions

Mobilization of deposits and deploying them for local

needs

Developing a friendly image

Serves local needs in an effective manner

Local resources put to local use


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BRANCH BANKING

In branch banking system a typical commercial bank

is a large institution having a large number ofbranches scattered all over the country .

The branches may be located in the same city ,state oracross other states within the nation or overseas.

The branches are controlled from one locationreferred to as head office.

Merits:

Facilitates allocation or transfer of savings to the mostefficient use

Division of labour

Provision of remittance facilities

Spread of risks


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Leads to uniform structure of interest rates

Banks need not specialize in any particular areaor industry

Fosters trader-customer contacts across thenation as well as cross borders

Demerits: Absence of delegation of powers

Delays

Loss of initiative Lack of familiarity with local conditions and

special problems of the region

Local savings get transferred elsewhere


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RETAIL BANKING

It refers to the mobilization of deposits from individuals

and lending to small business and in retail loanmarkets .

It consists of large volumes of low value transactions.

It includes a comprehensive range of financialproducts viz., deposit products ,residential mortgage ,

credit cards , auto finance , personal loans ,consumer

durable loans ,loans against equity shares , loans for

subscribing to Initial Public Offers , debit cards , billpayment services , mutual funds , investment advisory

services.


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These products provide an opportunity for

banks to diversify the asset portfolio with high

profitability and relatively lower NPA s.

Net banking ,phone banking, mobile banking,

ATMs and bill payments are the new facilities

that the banks are using to lure the customers

and also to reduce their total operating cost.


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WHOLESALE BANKING

It refers to dealing with large customers often

multinational companies , government or government

enterprises .

The wholesale banks deal in large valued transactions, usually in small volumes .

They draw funds from and lend funds to business .

It also includes transactions which the banks conduct

with each other via inter bank markets separate from

customers .

It is domestic as well as international .


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The practices basic to wholesale banking are :

Interbank markets in domestic and foreigncurrencies

Issue of certificates of deposit in domestic and

foreign currencies Lending by means of term loans ( roll over

credits)

Wholesale banking practices such as loansyndication; rollover credits and floating rate of

loans have filtered through retail end .


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UNIVERSAL BANKING

Universal banks are considered as one-stop

financial supermarket offering broad range of

services .in a narrow sense, universal banking

denotes combination of banking and insurance

and investment activities .universal banks are

those banks that offer a wide range of financialservices , beyond commercial banking,

insurance and investment banking etc.

ICICI was the first bank to turn itself intouniversal bank.


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Merits :

Greater economic efficiency in the form of lower cost ,

higher out put

better productDemerits :

Chances of gaining monopoly , which would

have undesirable consequences on economicefficiency

Conflict of interest


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BANKING REGULATION ACT ,1949

License from RBI establish; expand; close;

shift .

Closer look over the over all management ofbanks appoint / terminate the chairman

Exercise control over advances given by banks

Can put restriction on any transaction Can inspect books of accounts


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RESERVE BANK OF INDIA ACT ,1934

Cash Reserve Ratio Sec 42

Every bank has to maintain an average daily balance with RBI3% to15 % of Net Demand and Time Liabilities.

The regulator fixes this rate taking into consideration:

Macro economic condition Money supply in the market

CRR earlier was 8.25 % , was brought down to 5% and nowa days it is 7 %.

CRR is maintained in the form of : Approved assets

Deposit with RBI

Cash balance in currency chest kept in bank- deemed to bedeposited in RBI


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Yield :

Apex bank provides a yield of 6% on CRRmaintained i.e.

No yield for first 3% CRR

6 % yield if CRR is greater than 3 %. This is payable quarterly

Penalty:

Incase of default a penalty is charged on CRRgenerally greater than bank rate.


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Statutory Liquidity Ratio Section 24 (2A)

In addition to CRR bank has to maintain statutory

reserve in the form of:

Cash

Gold Approved securities

Balance in the form of current account

This is to control money supply for credit purpose ;

increase bank investment in government in governmentsecurities ; ensure solvency of banks.

Earlier this SLR was 38.5 % and now a days it is

25 % of Net Demand and Time Liabilities.


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Yield : Investment in selected portfolio earns large

yields for the bank.

Penalty: Penalty is charged at the rate of 3% p.a. in case

of default .

5 % in case of continuous default.


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DEMAND LIABILITIES

Current deposit

Savings DepositMargin against LC/Guarantee

Recurring Deposit

Balance of cash credit account

TIME LIABILITIES

Fixed Deposits

Cash CertificateIndian Development Bonds

Staff security deposits

Net Demand and Time Liabilities


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Excludes :

Liabilities of overseas branches

Interbank liabilities

Non resident deposits Vostro account balance


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PRUDENTIAL NORMS

Income recognition not on accrual basis buton realization basis

Asset classification :

standard ;

sub standard till 12 months ;

doubtful after 12 months ;

Capital adequacy :desirable 10%of the risk

(credit risk) weighted assets as base capital

NPAs should be less than 3% of net advances


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Provision of bad debts for doubtful assets

Standard Assets: 1%

Sub Standard Assets: Secured -10%

Unsecured - 20%

Doubtful Assets:

Secured - up to 12 months - 20%

12-36 months - 30%

more than 36 months - 100%

Unsecured -100%

Loss Assets: value of security goes below10% of outstanding liabilities.

Provision required is 100%


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USE OF FUNDS

8.25% CRR

25% SLR

40% Priority Sector Lending :agriculture ,SSE, artisans ;self

employment

26.75% Others


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THE INDIAN BANKING SYSTEM

Public

Sector

Banks

Private

Sector

Banks

Cooperative

Banks

Development

Banks

SBI and its

7associates

*19 nationalizedbanks

*Regional Rural

banks sponsored by

Public sector banks

*New Generation

pvt Sector banks

*Foreign banks

*Scheduled

Cooperative Banks

*Non- scheduled

Banks

*Central CB

*State CB

*Primary

Agricultural

Societies

*Urban CB

* Industrial

Finance

Corporation of

India (IFCI)

*Industrial

Investment

Bank of India

(IIBI)

*SIDBI

*NABARD

*Exim Bank

*National

Housing

Bank (NHB)


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THE INDIAN BANKING SYSTEM

The banking system in India has three tiers :

scheduled commercial banks;

the regional rural banks and

the cooperative and special purpose banks .

There are approximately :

80 scheduled commercial banks Indian and foreign;

200 regional rural banks and

more than 350 central cooperative banks , 20 land development banks and

a number of primary agricultural credit societies .


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In terms of business, the public sector banks namely

the State Bank of India and the nationalized banks

dominate the banking sector.

Scheduled commercial banks constitute those

banks which have been included in the 2nd Schedule

of the RBI Act 1934.

These banks enjoy certain privileges such as:

free concessional remittances facilities

financial accommodation from RBI

minimum cash reserve ratio to be kept with RBI


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FUNCTIONS OF COMMERCIAL BANK

BASIC SERVICES

To change cash for bank deposits and bank

deposits for cash . The deposit with bank vary in terms of maturity

,interest payment ; cheque facility and

insurability. Demand Deposits / CurrentDeposit ; Time Deposit Savings and Fixed .

To transfer bank deposits between individuals

and /or companies


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To exchange deposits for bills of exchange,

government bonds ,the secured and unsecured

promises of trade and industrial units

Credit extended in the form of cash credit ;

overdraft; demand loans ;purchase or

discounting of commercial bills and instalment

or hire purchase credit.

To underwrite capital issues


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FINANCIALSERVICES

Advice in portfolio management /investmentcounseling

Facilitate merger and acquisition

Management and distribution of mutual funds Sell insurance products

FIDUCIARY SERVICES Manage employee pension

Act as trustees and manage the asset for

others


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MARKETISATION OF BANKING

The rapid expansion ofOff-Balance Sheet activities

of banks consisting of :

commitments (unused overdraft facilities and note

issuance facilities ) which may require banks toadvance funds and acquire a credit exposure at some

future date.

providing guarantees and bankers acceptances, this

substitutes banks credit rating for that of the borrowingfirm

( this remains an off-balance sheet exposure for the

bank as long as the acceptance is not discounted)


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entry of banks into forward contracts in the

markets in foreign exchange ,interest rates and

stock market

banks engaging in securities underwriting


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THANK YOU

Documents

Commercial Bkg 4