ECONOMICS-(BANKING)

BANKING



1.Money market It refers to borrowing and lending. 2 parts organized and unorganized sector – Organized sector are State Bank, 7 associated banks, 19 Nationalised banks, RRB, Co-operative Banks, Non Governmental sector and other Banks. Unorganized includes the moneylenders and indigenous bankers.



2.Development of Indian Banking: Bank of Hindusthan 1779 was first bank at Calcuttaunder European management-Bank of Bengal 1806 , Bank of Bombay 1840, bank of Madras 1843, were called Presidency banks. 1881- First Bank with limited liability to be managed by Indian Board namely the Oudh Commercial bank- 1894- First purely Indian bank was Punjab National bank- Later Imperial bank 1921 by amalgamating the Presidency banks. RBI created in 1935- nationalized in 1949 – Imperial Bank, renamed as SBI in 1955- 14 Banks (50 crores) nationalized6-96 Banks (2 00crores) nationalized 1980 – N.B.I. merged with P.N.B. in 1993.



3.R.B.I: It has Governor and Board of Directors apart from Central Board 4 local boards. It has following functions: -

Functions:

1.Issue of Notes: followed Minimum Reserve System(MRS) –

200 Crore(115Crore gold+85Crore foreign exchange etc.)

2.Banker , Agent and Adviser to the Govt

3.Banker's Bank : Banking Regulation Act 1949 - Lender to the last resort.(loan to Commerlised Bank)

4.Controller of Credit & money supply

(i)Quantitative: Bank Rate, open Market operation, statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR

(ii)Qualitative (or) Selective: since 1956

1)Rationing of Credit 2)Regulation of Consumer credit

3)Variation in margin requirements.

4)Fixation of maximum limit of Credit given for a Special purpose.

5)Discriminatory interest rates on some special types of advances

5.Custodian of Foreign Reserves: RBI buys & sells the foreign currencies

6.Collecting and publishing the economic data.

7. Buying and selling of Govt. securities and trade bills

8.Representing the Govt in IMF.

9.Giving loans to the Govt to buying and selling of valuable commodities etc.











4.Techniques in credit control:

(a) Quantitative and Qualitative Credit Control – Bank rate - SLR, CRR, open marker operations etc., and variation in margin requirements publicity etc.,

(b)Qualitative or Selective Credit Control 1956 – 3 points -fixing margin requirements- maximum limit of credit and different interest rates.



5.Priority sectors: (a) Houses for slum, credit to formers for purchase, ordinary retailers etc., shall be given priority at least 40% to them (b) Differential rate of interest – less interest 4% rate for weaker sections. It is for those whose income not more than per annum 6400/7200 in Rural and Urban areas- for lands less than – 2.5-acres/1 acre non irrigated and irrigated land respectively. (c) New strategy for rural lending – 1987 service area approach.



6.Mid Term Monetary and credit policy – 2005-2006.

(The Reserve Bank of India in its mid-term review of the Monetary & Credit Policy for the year 2005-06 on Tuesday kept the bank rate unchanged at 6 per cent.However, as expected, in view of the current macroeconomic and over all monetary conditions, the reverse repo rate has been increased by 25 basis points with effect from October 26, 2005 to 5.25 per cent from the current level of 5 per cent. The cash reserve ratio (CRR) kept unchanged at 5 per cent. Accordingly, the fixed repo rate under Liquidity Adjustment Facility would be 6.25 per cent with effect from October 26, 2005



(7) IMD- operated by SBI for NRI – 5 years – different interest rates - loan available.



8.5C Formula for Banks: Challenge, competition, credit, customer and control prescribed by Ministry of Finance

10 Scheduled Banks (i) Paid up capital not less than 5 lakhs and activity will not affect interest of depositors.(ii)It has following facilities:-1.Eligible to get loan from RBI 2.Membership of clearing house 3. get rediscount in exchange bills

(b) Non Scheduled banks – not included in scheduled but to follow CRR conditions but no deposit with RBI and not eligible for loan from RBI.



9)Indian Banks Abroad: Bank of Baroda has the highest with 38 branches and SBI with 22 branches and Bank of India have 18 branches. In U.K. 19 branches and Fiji 9 branches.



10.New Banks in Private Sector:Created from 2000 based on Narasimham Committee – important are UTI, IIBL, ICIC, HDFC and IDBI. Amas Bank is the first private bank established Europe by Indian National in 1994 and Hinduja Group has established it at Geneva – Local Area Banks in private sector allowed by RBI in A.P, Maharashtra and Karnataka.

11. Co-operative Banks: It has 3 tier - state and district primary.



12. Regional Rural Banks (RRB)®1975 established under RRB Act 1976

Capital Source: Central Govt. 50% , State Govt. 15%,

Sponsered Public Sector Commercial Bank 35%

Objectives: 1)Rural Development especially in Remote Rural Areas

2)loan to weaker section (concessional rate of interest) 3)mobilise rural savings

*83% of branches in Rural Areas (except Sikkim)

*since 1987, no new RRB has been opened (Kelkar committee)

increased capital Rs.25 lakh to 1 Crore

1994-95 M.C.Bhandari Committee: to invest NON – SLR surplus fund in profitable areas

1995-96 –K.Basu Committee: Re-organisation of selected RRB's

Narasimham committee recommended to give more freedom to RRB



13. Committees: 1.Narasimham committee 1991 financial reforms.

b. Goiporria Committee – 1990 – improvement of consumer service in banking

c.Janakiraman Committee – 1992 high-level enquiry on irregularities in securities.

d.J.P.C. Shares scam in 1992. (e) Chandrashekar Committee: 1997 transfer of shares. (f) Pherwani Committee: 1991 established National Stock Exchange.



14.Banking Ombudsman – RBI introduced 1995 – 11 already appointed all except RRB included. Time limit one month.



15) Commercial Banks

A)Scheduled Banks :

1)Listed in 2nd scheduled of RBI Act 1934 2)Paid up capital not less than Rs.5lakhs 3)Any Activity of the bank will not adversely affect the interest of depositors.

B) Facilities: 1)Eligible for obtaining debts/Loans on BR from RBI

2)Membership of clearing house 3)Rediscount of first class exchange bills from RBI

C).Non-Scheduled Banks.: 1.Not listed in the 2nd Schedule2)No. of NSBs are continuously declining 3)CRR condition must be followed

4)Not eligible for having loan from RBI But eligible in Emergency conditions.

D)Nationaliation of Banks : *Jan 1st 1949 - RBI, * 1955-SBI

* July 19th 1969 - 14 large commercial banks whose reserves were more than Rs.50 Crore.

*1980 April 15 – 6 Private Sector banks whose reserves were more than Rs.200crore.]

*1993 the New Bank of India (1980) merged with Punjab National Bank(1969)

*Totally 28banks are nationalised

E)Co-operative Banks (State list)

State co-operatiave banks(SCB) – state level, apex co-operative bank of the stateCaptial Source: Refinance facility from RBI and shares & Loans

Central Co-operative banks(CCB or DCB): District level, Two types

I.Co-operative Banking union: Loans only to PACS

II.Mixed central Co-op Bank : Loans to Both PACS & individuals

Primary agricultural credit Societies(PACS) – Village level

1. Provide short term loan(normally 1 year, Maximum 3years) 2.minimum 10 persons needed for establishment 3.No.of PACSdecreasing 4.Mobilise deposits and savings



16)Some important banking Institutions:

a) IDBI- 1964-To provide financial assistance to industrial enterprises and to promote institutions engaged in industrial development.

b) IFCI: 1948 Act -To arrange medium and long term credit for varuois industrial enterprises- 1993 corpn was converted into a company

c) ICICI: 1955-Developing medium and small industries –2002 merged with ICICI Bank

d) UTI: 1964- Biggest mutual fund- people's savings and reinvestment. It started UTI bank in 1994 at Ahenmedabad.

Various Funds of UTI: 1) India Fund-1986 (ii) India Growth Fund 1988 (iii) India Access Fund 1997 (iv) India Debt Fund 1997 (v)Master Value- Index Fund 2 in 1998.

e) EXIM bank: 1982- For financing, facilitating and promoting foreign trade in India.

f) NHB: 1988-wholly owned by RBI.Apex institution for housing finance,


BANKING SURVEY POINTS- MOST IMPORTANT

BANKING 1M3 grew by 14 percent – last year 16.6% 2) BANK CREDIT sector increase of 20.4 3)M0GREW 14.1 ­– LAST YEAR 16.7% 4)Total bank credit increased by 14.2% 5) RIDF_ setup1995 1996 maintained By NABARD _mainobjective to provide loans to state government 6)Kisan credit cards 1998 99-operated through Co-operative bank commercial bank andRRB 414 lakhs cards iissue, 4.35 Crores 7) Finance to self help gropu started in 1992-90% to women group 8) AIFI-iicicimerged with ICICI Bank in march 2002-IDBI Limitedand IDBI Bank merged – working group on development financing headed by N.SATHASIVAM