Merchant Banking vs Investment Banking - Investment Banking by eduCBA
Banking
Transcript of Banking
Banking Systemin India
DEFINITION OF BANKING“Accepting, for the purpose of lending or
investment of deposit, of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”
- Banking Company- “any company which transacts the business of banking in India.”
(they follow withdrawal by cheque, draft, order etc.- Payment Mechanism)
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
BANKING SYSTEM IN INDIAORGANISED
BANKS IN INDIA-RBI
SCHEDULED BANKS(285)
NON-SCHEDULED BANKS (4)
COMMERCIAL BANKS
CO-OPERATIVE BANKS
URBAN CO-OPERATIVE
BANKS-52
STATE CO-OPERATIVE
BANKS- 27
PRIVATE SECTORBANKS-25
PUBLIC SECTOR BANKS-27
FOREIGN BANKS-29REGIONAL RURAL
BANKS- 96
SCHEDULED BANK: 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: Not entitled to facility of borrowing &
rediscounting
Co-operative Banks
CENTRAL CO-OPERATIVE
BANK- 369
PRIMARY AGRICULTURAL CO-OPERACTIVE CREDIT SOCIEY
DISTRICT CENTRAL
CO-OPERATIVEBANKS
STATECO-OPERATIVE
BANK -31
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.
REGIONAL RURAL BANKS Bank with local knowledge and familiarity Organizational ability to mobilize deposits,
access to money market and modernized outlook
CAPITAL- Authorised-1 cr.- paid up-50laks--50% subscribed by Central Govt.-15%State Govt. – 35% by Sponsor Bank
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 licenses fixed is 12 per year both for
new and expansion by existing banks
Progress of banking in India Nationalization of banks in 1969: 14 banks were
nationalized Branch expansion: Increased from 8260 in 1969 to
75177 in 2008 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
Progress of banking in India Deposit mobilization:
1951-1971 (20 years)- 700% or 7 times 1971-1991 (20 years)- 3260% or 32.6 times 1991- 2006 (18 years)- 1600% or 16 times
Expansion of bank credit: Growing at 20-30% p.a. thanks to rapid growth in industrial and agricultural output
Progress of banking in India 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
Commercial BanksFunctions Accepting Deposits Providing loans and advances Collecting and dealing with negotiable instruments Issuing letter of credit Dealing in foreign exchange Issuing, underwriting and dealing in government securities,
shares, debentures & other security& investment Providing safe deposit vaults Doing agency business Giving guarantees Merchant business
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
Capital Adequacy Norms (8%) Tier I Capital:
1. Paid-up Capital
2. Statutory and other disclosed free reserves including share premium
3. Capital reserves
Capital Adequacy NormsTier II capital consists:
1. Undisclosed reserves & cumulative perpetual preference shares
2. Revaluation Reserves at a discount of 25%
3. Surplus provisions/loss reserves subject to a maximum of 1.25% weighted Risk Assets
4. Hybrid Debt Capital instrument
5. Subordinated Debt
Capital Adequacy Formula
Capital Adequacy=Capital Funds * 100
Weighted Risk Assets
DEPOSIT MULTIPLIER & CREDIT CREATION FORMULA
K= 1/r
K= Deposit multiplier
r= ratio of cash reserve to deposit
LIMITATIONS OF CREDIT CREATION
ADEQUATE CASH RESERVE AVAILABILITY OF SECURITIES QUANTITY OF MONEY IN CIRCULATION ATTITUDE OF PEOPLE POLICY OF THE CENTRAL BANK NATURE OF BUSINESS CONDITIONS LEAKAGES BEHAVIOUR OF OTHER BANKS USE OF CHEQUE
RESERVE BANK OF INDIACENTRAL BANKING AND ITS FUNCTIONS
Origin of RBI
In 1921, 3 Presidency Banks were amalgamated to form the Imperial Bank of India
Existence in 1st April,1935 under RBI Act 1934. Setting up of such institution was based on
recommendation of Hilton Young Commission in the year 1926.
CONSTITUTION OF RBI CAPITAL – Rs.5 crore 5lakh fully paid up shares of Rs.100 each Rs. 2.2 lakhs subscribed by the Central
Government Nationalization of RBI in 1st January,1949,
entire share capital was acquired by Central Government
MANAGEMENT CENTRAL BOARD OF DIRECTORS
COMPRISING OF 20 MEMBERS: 1 GOVERNOR & 4 DEPUTY GOVERNORS
APPOINTED BY CENTRAL GOVERNMENT 4 DIRECTORS NOMINATED BY CENTRAL
GOVERNMENT ONE FROM EACH LOCAL BOARD
10 DIRECTORS NOMINATED BY CENTRAL GOVERNMENT
1 GOVERNMENT OFFICIAL NOMINATED BY CENTRAL GOVERNMENT
LOCAL BOARD FOR EACH REGIOANAL AREAS OF THE
COUNTRY THERE IS LOCAL BOARD: WESTERN – MUMBAI (Head Quarters) EASTERN – KOLKOTA NORTHERN- NEW DELHI SOUTHERN- CHENNAI
Functions: 1)Advising the Central Board 2) Performing other duties delegated by Central
Board
FUNCTIONS OF THE RBI 1) MONOPOLY OF NOTE ISSUE- THROUGH
I) ISSUE DEPARTMENT II) BANKING DEPARTMENT
MAINTAINS 18 ISSUE OFFICES; AND NETWORK OF 4301 CURRENCY CHEST AND 4027 SMALL COIN DEPOSITS
BASIS – I) PROPORTIONAL RESERVE SYSTEM – 40% to consist of coins, bullions, securities BULLIONS
- MINIMUM RESERVE SYSTEM- SINCE 1957- Rs.515cr.of assets- of which- Rs.400cr. In foreign securities and Rs.115cr. in gold coins & bullions
FUNCTIONS CONTD. … BANKER TO GOVERNMENT
ISSUE OF NEW LOANS & TREASURY BILLS WAYS & MEANS OF ADVANCES
ADVISER TO GOVERNMENT CONTROLLER OF CREDIT EXCHANGE CONTROL AUTHORITY BANKER’S BANK & LENDER OF LAST
RESORT BANK OF SETTLEMENT & CLEARANCE PROMOTER OF FINANCIAL SYSTEM SUPERVISING FUNCTION
INSTRUMENTS OF CREDIT CONTROL GENERAL OR QUANTITATIVE
BANK RATE OR THE DISCOUNT RATE POLICY OPEN MARKET VARIATIONS VARIABLE RESERVE RATIO (CRR, SLR, NLR)
SELECTIVE CREDIT CONTROL MINIMUM MARGIN FOR LENDING AGAINST SPECIFIC
SECURITIES CEILING ON THE AMOUNT OF CREDIT FOR CERTAIN
PURPOSE (Credit Authorization Scheme) DISCRIMINATORY RATES OF INTEREST ON CERTAIN
TYPES OF ADVANCES MORAL SUASION
CRR- CASH RESERVE RATIO-5.5%
The Scheduled commercial banks are required to maintain a minimum cash balance with the Reserve Bank at the close of business on any day.
SLR- STATUTORY LIQUIDITY RATIO-24%
Commercial banks have to maintain liquid assets in cash, gold and unencumbered Government securities amounting to not less than 20% of the total demand and time liabilities.
MONETARY POLICY AND RECESSION
BANK RATE
MARKET RATE
CREDIT OFFTAKE
MONEY SUPPLY
EXCESS DEMAND
PRICES
RECESSION
(6%- BANK RATE; 5.5%- REPO RATE)
FINANCIAL INCLUSIONFinancial inclusion is delivery of banking services at
affordable cost to the vast sections of disadvantaged and low income groups
Measures:1. Make ‘no-frills Account’2. Adopt one district in each state for 100% financial
inclusion3. Credit Card facility involving credit upto Rs.25000
without security4. Printed materials made available to retail customers in
the concerned regional language5. ‘Know Your Customers’ (KYC) procedure simplified
for low income group people
Monetary Policy
Monetary policy is that part of economic policy in which central bank controls the cost and supply of money and credit.
Monetary policy also called as the Reserve Bank of India’s Credit Policy
Objective of Monetary PolicyMonetary policy controls: Supply of money Availability of money Set the rate of interest Maintain price stability Prevent inflation
Monetary Policy 2010-11
Highlights of first quarter of the RBI's Monetary Policy for 2010-11
Cash reserve ratio raised by 25 basis points to 6% Repo rate has been increased by 25 basis points,
5.75% Reverse repo rate has been increased by 50 basis
points, 4.5% Bank rate retained at 6%
Economic growth projection seen at 8% for
2010-11 Statutory Liquidity Ratio (SLR) has been left
unchanged at 25%
Highlights of Mid Quarter of the RBI's Monetary Policy for 2010-11
The Repo Rate has been increased by 25 basis point from 5.75% to 6%
The Reverse Repo Rate has been increased by 50 basis point from 4.5% to 5%
However, the CRR, SLR, Bank Rate kept unchanged.
RBI to closely monitor price situation Lower policy rates can impair inflationary
expectations
Inflation based on WPI is 8.51% in August 2010
STRENGTHS OF MERGING ENTITIES
INCEPTION AT THE SAME TIME NEW GENERATION PRIVATE BANKS GEOGRAPHIC FIT HDFC Bank :
asset size of Rs. 131,439 crore as of the third quarter of 2007-08, 1,100 branches 21,477 employees NPA 0.4%
CBoP Bank : Rs. 25,404 crore 390 branches 7,500 employees NPA 1.7%
Both have had mergers in past CPoB has higher share of retail (60%) in its total loan portfolio than HDFC Bank (51%). Economies of scale and retail lending will get a big boost CBoP adds about 20% in terms of balance sheet Both understand consumer and retail banking Both have been on a technology platform
Mergers in Indian Banking Industry Indian Economy growing at 8% Banking Industry growing at 22% 2009 RBI will open up Indian Banking Industry Need many more banks, especially in the rural and
semi-urban areas More than 50% of the population does not have
banking accounts Hardly 20 Indian banks are found in top 1000 banks
of the world Therefore, future has to see many mergers in the
Indian Banking Industry
Important mergers in recent yearsIt includes the merger between IDBI & it’s own subsidiary IDBI Bank. The deal was worth $174.6 million .
Another merger was that between Centurion Bank & Bank of Punjab worth $82.1 million.
This merger led to the creation of the Centurion Bank of Punjab with 235 Branches in different regions of India.
List of Indian commercial banks Merged NAME OF TRANSFEROR BANK NAME OF TRANSFEREE BANK YEAR
BANK OF BIHAR STATE BANK OF INDIA (S.B.I.) 1969
NATIONAL BANK OF LAHORE S . B . I. 1970
EASTERN BANK LTD. CHARTERED BANK 1974
KRISHNARAM BALDEO BANK LTD.
S . B. I. 1975
BELGAUM BANK LTD. UNION BANK OF INDIA 1976
LAKSHMI COMMERCIAL BANK CANARA BANK 1984-85
BANK OF COACHIN S . B . I. 1984-85
MIRAJ STATE BANK UNION BANK OF INDIA 1985
HINDUSTAN COMMERCIAL BANK
PUNJAB NATIONAL BANK 1986
TRADERS BANK LTD. BANK OF BARODA 1988
UNITED INDUSTRIAL BANK ALLAHABAD BANK 1989-90
BANK OF TAMILNADU LTD. INDIAN OVERSEAS BANK 20-02-1990
BANK OF THANJAVUR LTD. INDIAN BANK 20-02-1990
PARUR CENTRAL BANK LTD.
BANK OF INDIA 20-02-1990
PURBHANCHAL BANK LTD. CENTRAL BANK OF INDIA 29-08-1990
KASHI NATH SETH BANK LTD.
S . B . I. 01-01-1996
BARI DOAB BANK LTD. ORIENTED BANK OF COMMERCE
08-04-1997
PUNJAB CO-OPERATIVE BANK
ORIENTED BANK OF COMMERCE
08-04-1997
BAREILY CORPORATION BANK
BANK OF BARODA 03-06-1999
SIKKIM BANK LTD. UNION BANK OF INDIA 22-12-1999
TIMES BANK LTD. HDFC BANK LTD. 26-02-2000
BANK OF MADHURA LTD. ICICI BANK LTD. 10-03-2001
BANARAS STATE BANK LTD.
BANK OF BARODA 20-06-2002
NEDUNGADI BANK LTD. PUNJAB NATIONAL BANK 01-02-2003
SOUTH GUJRAT BANK LTD. BANK OF BARODA 25-06-2004
GLOBAL TRUST BANK LTD. ORIENTAL BANK OF COMMERCE
14-08-2004
BANK OF PUNJAB LTD. CENTURION BANK 01-10-2005
IDBI BANK LTD. IDBI LTD. 02-04-2005
THE GANESH BANK LTD. THE FEDERAL BANK LTD. 02-09-2006
UNION WESTERN BANK LTD.
IDBI LTD. 03-10-2006
THE SANGLI BANK LTD. ICICI BANK LTD. 19-04-2007
LORD KRISHNA BANK LTD. CENTURION BANK OF PUNJAB
29-08-2007
ELECTRONIC BANKING
POPULAR ELECTRONIC DELIVERY CHANNELS1. ATMs
2. SMART CARD
3. TELE BANKING
4. INTERNET BANKING
ATM It is a novel cash dispenser They are user friendly and have mass acceptability I reaches out to large customer base at low cost Now banks have started to outsource and share ATMs
to reduce cost ATM also dispenses railway tickets, movie tickets etc. It is now used also as a marketing tool to target the
masses ATMs with finger print scanning technology may
become operative in future making it more convenient and cost effective
SMART CARDS It’s a chip based card which will store a
monetary value It is more secure than a ATM, Debit & Credit
Cards It recognises signature & voices Doesn't necessitate the use of PIN When transaction is made using the card, the
value is debited and the balance automatically comes down
FACETS OF E-BANKING1. Customer- to- Bank E-Banking
2. Bank- to- Bank E-Banking
3. Electronic Central Banking
4. Intranet Procurement
E-Banking Transactions Account Enquiry Fund Transfer Payment of Electricity, Water, Telephone Bills Online payment for transactions actually performed
through Internet Request for issuance of cheque book, draft etc. Statement of Accounts Access to latest schemes Access to rates of interest & other service charges
Electronic Cheque It is electronic image of a paper cheque It is generated, written and signed in a
secured manner using digital signature which has been legally recognised.
Digital signature is compulsory There should be minimum safety standards
like asymmetric crypto system
MChq Product In countries like Japan & other Asian Countries Working: all vital personal information is stored in a magnetic strip
& then loaded on to the sim card in a secured format Existing sim card has to be replaced with 128 bit encryphon key
which offers a higher degree of safety than the existing sim card. While shopping one only gives phone no. to merchant, who would
then send on a special mobile phone an sms to the server of the mobile service provider.
The customer will get inturn an sms asking him to confirm payment The customer will have to enter his persoanlised PIN number as an
added security measure and send back an sms confirming the amount to be paid .
The merchant and the customer will then get an sms confirming the completion of transaction.
The exchange normally happens within a minute