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Banking System in India

Banking System in India. Indigenous bankers. Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. combine trading and other business with money lending. Vary in size from petty lenders to substantial shroffs

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Banking System in India

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  1. Banking Systemin India

  2. Indigenous bankers • Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. combine trading and other business with money lending. • Vary in size from petty lenders to substantial shroffs • Act as money changers and finance internal trade through hundis (internal bills of exchange) • Indigenous banking is usually family owned business employing own working capital • At one point it was estimated that IBs met about 90% of the financial requirements of rural India

  3. RBI and indigenous bankers • IB should have their accounts audited by certified chartered accountants • Submit their accounts to RBI periodically • As against these obligations the RBI promised to provide them with privileges offered to commercial banks including • Being entitled to borrow from and rediscount bills with RBI • The IBs declined to accept the restrictions as well as compensation from the RBI • Therefore, the IBs remain out of RBI’s purview

  4. BANKING SYSTEM IN INDIA

  5. SCHEDULED BANK: • which is registered in Second Schedule of the RBI • Must be carrying on a business of banking in India • Must have paid-up capital and reserve of an aggregate value of not less than Rs.5 lakh(100cr.-for New) • It must satisfy RBI- not in a manner detrimental to the interest of depositor • NON SCHEDULED BANK: • Which is not included in Second Schedule of RBI • Not entitled to facility of borrowing & rediscounting

  6. Co-operative Banks

  7. SCHEDULED COMMERCIAL BANKS • PUBLIC SECTOR BANKS • SBI & Associates (SBI Act, 1955) • Nationalised Banks (1969-1980) • PRIVATE SECTOR BANKS: • Post Reform Period 24 banks in pvt. Sector Banks • Initial minimum paid up capital from Rs.100 to Rs.200 crore.

  8. REGIONAL RURAL BANKS • Bank with local knowledge and familiarity • Organisation ability to mobilize deposits, access to money market and modernized outlook • ORGANISATION- Separate body corporate with perpetual succession and common seal- may establish its branches • CAPITAL- Authorised-1 cr.- paid up-50laks- -50% subscribed by Central Govt.-15%State Govt. – 35% by Sponsor Bank

  9. FOREIGN BANKS: Registered outside India- to operate in India the minimum capital requirement of US $25 million, spread over 3 branches, that is, US$ 10million for the 1st and 2nd bank respectively and US$5million for the 3rd branch • The no. of licences fixed is 12 per year both for new and expansion by existing banks

  10. Development Oriented Banking • Historically, close association between banks and some traditional industries- cotton textiles in the west, jute textiles in the east • Banking has not been mere acceptance of deposits and lending money; included development banking • Lead Bank Scheme- opening bank offices in all important localities • Providing credit for development of the district • Mobilising savings in the district. ‘Service area approach’

  11. Progress of banking in India (1) • Nationalisation of banks in 1969: 14 banks were nationalised • Branch expansion: Increased from 8260 in 1969 to 71177 in 2006 • Population served per branch has come down from 64000 to 16000 • A rural branch office serves 15 to 25 villages within a radius of 16 kms • However, at present only 32,180 villages out of 5 lakh have been covered

  12. Progress of banking in India (2) • Deposit mobilisation: • 1951-1971 (20 years)- 700% or 7 times • 1971-1991 (20 years)- 3260% or 32.6 times • 1991- 2006 (11 years)- 1100% or 11 times • Expansion of bank credit: Growing at 20-30% p.a. thanks to rapid growth in industrial and agricultural output • Development oriented banking: priority sector lending

  13. Progress of banking in India (3) • Diversification in banking: Banking has moved from deposit and lending to • Merchant banking and underwriting • Mutual funds • Retail banking • ATMs • Internet banking • Venture capital funds • Factoring

  14. Profitability of Banks(1) • Reforms have shifted the focus of banks from being development oriented to being commercially viable • Prior to reforms banks were not profitable and in fact made losses for the following reasons: • Declining interest income • Increasing cost of operations

  15. Profitability of banks (2) • Declining interest income was for the following reasons: • High proportion of deposits impounded for CRR and SLR, earning relatively low interest rates • System of directed lending • Political interference- leading to huge NPAs • Rising costs of operations for banks was because of several reasons: economic and political

  16. Profitability of Banks (3) • As per the Narasimham Committee (1991) the reasons for rising costs of banks were: • Uneconomic branch expansion • Heavy recruitment of employees • Growing indiscipline and inefficiency of staff due to trade union activities • Low productivity • Declining interest income and rising cost of operations of banks led to low profitability in the 90s

  17. Bank profitability: Suggestions • Some suggestions made by Narasimham Committee are: • Set up an Asset Reconstruction Fund to take over doubtful debts • SLR to be reduced to 25% of total deposits • CRR to be reduced to 3 to 5% of total deposits • Banks to get more freedom to set minimum lending rates • Share of priority sector credit be reduced to 10% from 40%

  18. Suggestions (cont’d) • All concessional rates of interest should be removed • Branch expansion should be carried out strictly on commercial principles • Diversification of banking activities • Almost all suggestions of the Narasimham Committee have been accepted and implemented in a phased manner since the onset of Reforms

  19. Income Recognition • Incomes from NPAs not recognised on accruals basis but on receipt basis • If interest debited not recovered within 180 days(2 quarters) then the same shall not be recognised as income

  20. Non Performing Asset(NPA)For Cash Credit & OD • Where the outstanding balance remains continuously in excess of the sanctioned limit/Drawing power OR • Where the outstanding balance is less than the sanctioned limit/Drawing power, but there is no credits continuously for 6 months OR • Where the credits are not enough to cover the interest debited during the 6 months as on the date of the Balance Sheet

  21. Non Performing Asset(NPA)(For Loans & Advances) • Standard Assets: are those which are not NPA as they are regular and performing and there are no adverse features • Sub-Standard Assets: are those which are NPAs for a period Not exceeding Two Years • Doubtful Assets: are those non-performing assets which remain as such for a period, Exceeding 2 years • Loss Assets: are those NPAs where 100% loss has been identified but not yet written off in the books of accounts

  22. Name of Asset Standard Asset Substandard Asset Doubtful Assets Doubtful upto 1 year (NPA more than 2 years but upto 3years) Doubtful for more than 1 year but upto 3 years (NPA more than 3yrs but upto 5 years) Doubtful for more than 3 years(NPA for more than 5 yrs) Loss Assets Provisioning Requirement No provision is required General prov.10% of outstanding 100% to the extent of deficit (deficit=advance –security) Plus 20% of Tangible Security 30% of Tangible Security 50% of Tangible Security 100% of the outstanding Provisioning for Loans & Advances

  23. Capital Adequacy Norms (9%) • Tier I Capital: • Paidup Capital • Statutary and other disclosed free reserves including share premium • General Reserve less • Investment in subsidiaries • Intangible assets • Brought forward and current losses

  24. Capital Adequacy Norms Tier II capital consists: • Undisclosed reserves & cumulative perpetual preference shares • Revaluation Reserves at a discount of 25% • Surplus provisions/loss reserves subject to a maximum of 1.25% weighted Risk Assets • Hybrid Debt Capital instrument • Subordinated Debt

  25. Capital Adequacy Formula Capital Adequacy=Capital Funds * 100 Weighted Risk Assets

  26. Other Important Terms • On Balance Sheet Items: Those Items which appear on the Balance Sheet of a Bank & for which RBI has given percentage weights to various types of assets • Off Balance Sheet Items: Those items which do not appear on the face of the Balance Sheet like Guarantees, Letter of Credit etc. • Dividend Payout Ratio: Banks should have a Capital Adequacy Ratio of atleast 9 for the a/c yr. for which it proposes to declare dividend subject to a ceiling on DP ratio 40%

  27. NPA Management • The Narasimham Committee recommendations were made, among other things, to reduce the Non-Performing Assets (NPAs) of banks • To tackle this the government enacted the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act (SARFAESI) Act, 2002 • Enabled banks to realise their dues without intervention of courts

  28. SARFAESI Act • Enables setting up of Asset Management Companies to acquire NPAs of any bank or FI (SASF, ARCIL are examples) • NPAs are acquired by issuing debentures, bonds or any other security • As a second creditor can serve notice to the defaulting borrower to discharge his/her liabilities in 60 days • Failing which the company can take possession of assets, takeover the management of assets and appoint any person to manage the secured assets • Borrowers have the right to appeal to the Debts Tribunal after depositing 75% of the amount claimed by the second creditor

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