2. UNIT I
8-2
COMMERCIAL BANKS AND CENTRAL
BANKING
Commercial Banks - Functions - Credit creation -
Methods of credit control - Reserve Bank of India -
Organization and functions – Recent trends in
banking – Online banking – methods – benefits and
limitations.
3. Today’s Class Objective
8-3
Basic Concepts Related to Banking
Introduction to Bank
Meaning of Bank
Bank Definition
Banking Regulation Act of India, 1949 defines Banking.
Role Of Banks
Broad Classification of Banks in India
Commercial Banks
Main function of Commercial Banks
4. Basic Concepts in Banking
8-4
What is Banking.
Banking can be defined as the business activity of
accepting and safeguarding money owned by other
individuals and entities, and then lending out this
money in order to earn a profit.
5. Introduction to Bank
8-5
A bank is a financial establishment and a financial
intermediary that accepts deposits and ways those
deposits into lending activities, either directly by
loaning or indirectly through capital markets.
6. Meaning of Bank
01
A bank is an institution, usually
incorporated with power to issue its
promissory notes intended to circulate
as money (known as bank notes); or
to receive the money of others on general
deposit, to form a joint fund that shall be
used by the institution, for its own benefit,
for one or more of the purposes of making
temporary loans.
7. Bank Definition
8-7
A bank may be defined as an institution that accepts
deposits, makes loans, pays checks, and provides
financial services. A bank is a financial intermediary
for the safeguarding, transferring, exchanging, or
lending of money.
8. Banking Regulation Act of India, 1949 defines
Banking as
8-8
“Accepting, for the purpose of lending or of investment of
deposits of money from the public, repayable on demand
or otherwise or withdrawable by cheque, draft order or
otherwise.” The Reserve Bank of India Act, 1934 and the
Banking Regulation Act, 1949, govern the banking
operations in India.
9. Role Of Banks
8-9
A primary role of banks is connecting those with
funds, such as investors and depositors, to those
seeking funds, such as individuals or businesses
needing loans.
A bank is the connection between customers that
have capital deficits and customers with capital
surpluses.
11. Today’s Class Objective
8-11
What is assets and liabilities with examples?
In bank what it means?
Broad Classification of Banks in India
Commercial Banks
Main function of Commercial Banks
12. What is assets and liabilities with examples?
8-12
Liabilities are what the bank owes to others.
Specifically, the bank owes any deposits made in
the bank to those who have made them. ... After all,
the bank owes these deposits to its customers, and
are obligated to return the funds when the customers
wish to withdraw their money.
14. Broad Classification of Banks in India
8-14
1) The RBI: The RBI is the supreme monetary and banking authority in
the country and has the responsibility to control the banking system in
the country. It keeps the reserves of all scheduled banks and hence is
known as the “Reserve Bank”.
2) Public Sector Banks:
State Bank of India and its Associates (8)
Nationalized Banks (19)
Regional Rural Banks Sponsored by Public Sector Banks (196)
3) Private Sector Banks:
Old Generation Private Banks (22)
Foreign New Generation Private Banks (8)
Banks in India (40)
15. Broad Classification of Banks in India
8-15
4) Co-operative Sector Banks:
State Co-operative Banks
Central Co-operative Banks
Primary Agricultural Credit Societies
Land Development Banks
State Land Development Banks
16. Broad Classification of Banks in India
8-16
5) Development Banks: Development Banks mostly
provide long term finance for setting up industries. They
also provide short-term finance (for export and import
activities)
Industrial Finance Co-operation of India (IFCI)
Industrial Development of India (IDBI)
Industrial Investment Bank of India (IIBI)
Small Industries Development Bank of India (SIDBI)
National Bank for Agriculture and Rural Development
(NABARD)
Export-Import Bank of India
17. 7
Commercial Banks
Commercial banks comprising
Public sector banks,
Foreign banks, and
Private sector banks represent
the most important financial
intermediary in the Indian financial
system.
18. Commercial Banks
8-18
The changes in banking structure and control have
resulted due to wider geographical spread and
deeper penetration of rural areas, higher
mobilization of deposits, reallocation of bank credit
to priority activities, and lower operational
autonomy for a bank management.
Public sector
commercial banks, dominate the commercial
banking scene in the country. The largest
commercial Banks in India is SBI
19. List of commercial banks
Public sector bank
8-19
State Bank of India Punjab & Sind Bank
Dena Bank Bank of Maharashtra
Allahabad Bank Punjab National Bank
Indian Bank Canara Bank
Andhra Bank Syndicate Bank
Indian Overseas Bank Central Bank of India
Bank of Baroda Union Bank of India
Oriental Bank of Commerce Corporation Bank
Bank of India United Bank of India
IDBI Bank UCO Bank
Vijaya Bank
20. Indian private banks
8-20
Axis Bank *IndusInd Bank
*Bank of Rajasthan *ING Vysya Bank
*Bharat Overseas Bank *Jammu & Kashmir Bank
*Catholic Syrian Bank *Karnataka Bank Limited
*Centurion Bank of Punjab *Karur Vysya Bank
*City Union Bank *Kotak Mahindra Bank
*Development Credit Bank *Lakshmi Vilas Bank
*Dhanalakshmi Bank *Nainital Bank
*Federal Bank *Ratnakar Bank
*Ganesh Bank of Kurundwad *SBI Commercial and
International Bank
*HDFC Bank *South Indian Bank
*ICICI Bank *Tamilnad Mercantile Bank Ltd.
21. List of Foreign banks in India
8-21
• ABN-AMRO Bank
• Abu Dhabi Commercial Bank Ltd
• American Express Bank Ltd
• Citibank
• DBS Bank Ltd
• Deutsche Bank
• HSBC Ltd
• Standard Chartered Bank
22. Main function of commercial banks
A ) Acceptance ofdeposits
• Fixed deposit account
• Saving bank account
• Current account
B ) Advancing of loan
• Cash credit
• Call loans
• Over draft
• Bills discounting
23. Main function of commercial banks cont-
C) Agency function
• Collecting receipts
• Making payments
• Buy and sell securities
• Trustee and executor
D ) General utility function
• Issuing letters of credit, travelers cheques
• Underwriting share and debentures
• Safe custody of valuables
• Providing ATM and credit card facilities
• Providing credit information
25. Today’s Class Objective
8-25
History of Bank
In India
Ice Braking
RBI
Objectives of the Reserve Bank of India
FUNCTION OF THE RESERVE BANK OF INDIA
26. History of Bank
8-26
The word ‘Bank’ is said to be derived from French
word “Bancus” or “Banque”, i.e., a bench. It is
believed that the early bankers, the Jews Lombardy,
transacted their business on benches in the Market
place. Others believe that it is derived from German
word “Back” meaning a Joint Stock Fund.
27. In India
8-27
The Modern banking System started with the opening of
Bank of England in 1964. Bank of Hindustan was the first
bank to be established in India in 1770.
Three Presidency banks known as Bank of Bengal, Bank
of Bombay and Bank of Madras were open in 1809, 1840
and 1843 respectively at Calcutta, Bombay and Madras.
28. Fiscal policy
8-28
Fiscal policy is the means by which a government
adjusts its spending levels and tax rates to monitor
and influence a nation's economy. It is the sister
strategy to monetary policy through which a central
bank influences a nation's money supply.
29. Monetary Policy
8-29
Monetary policy is a central bank's actions and
communications that manage the money supply.
... Monetary policy increases liquidity to create
economic growth. It reduces liquidity to prevent
inflation. Central banks use interest rates, bank
reserve requirements, and the number of
government bonds that banks must hold.
30. RBI
8-30
The RBI Act, 1934 was passed and the Reserve Bank
of India became the first Central bank of the country
w.e.f. 01.04.1935, it took over the Central Banking
activities from the Imperial Bank of India. The RBI
was nationalized on 1.1.1949.
31. RBI
8-31
It performs important monetary functions from issue
of currency note to maintenance of monetary
stability in the country.
Initially the Reserve Bank of India was a private
share holder’s company which was nationalized in
1949. Its affairs are governed by the Central Board of
Directors appointed by the Government of India.
32. RBI
8-32
Since its inception the Reserve Bank of India had
played an important role in the economic
development and monetary stability in the country.
33. Objectives of the Reserve Bank of India
8-33
To regulate the issue of Bank notes and the keeping
of reserves with a view to securing monetary stability
in India and generally to operate the currency and
credit system of the country to its advantage.
34. FUNCTION OF THE RESERVE BANK OF
INDIA
8-34
Issuer of Currency Notes
Banker to the Government
Custodian of Cash Reserves of Commercial Banks
Custodian of Country’s Foreign Currency Reserves
Lender of Last Resort
Central Clearance and Accounts Settlement
Controller of Credit
Detection of Fake Currency
36. Today -Case Study – Yes Bank
8-36
Basic Concepts
Case Study – Yes Bank
37. Case Study – Yes Bank, Can we invest?
8-37
a) Situation Analysis
i. Synopsys Enter Case Study (summary of the case)
i. Introduction
ii. What went wrong?
b) Formulation of the Problem
c) Facts & Figures
d) SWOT Analysis
e) Assumption - solution to a problem
38. 8-38
Banks play a pivotal role in the economic growth of
the country. Failure of a bank, irrespective of the
ownership, private sector or public sector, can
impact everyone.
Hence, neither Government of India nor Reserve
Bank of India (RBI) never lets a bank – facing
troubles in its financial position – to fail.
39. Yes Bank Ltd
8-39
Yes Bank Ltd, one of the major private banks in
India, has been facing the problem of rapidly
deteriorating financial position.
This necessitated Reserve Bank of India (RBI) to
take immediate action in the form of a
reconstruction scheme to protect depositors money.
40. 2. Performing Assets
8-40
Definition of 'Non Performing Assets' Definition:
A non performing asset (NPA) is a loan or advance
for which the principal or interest payment remained
overdue for a period of 90 days. Description:
Banks are required to classify NPAs further into
Substandard, Doubtful and Loss assets.
41. 3. Cash Reserve Ratio (CRR)
8-41
All Scheduled Commercial Banks are at present
required to maintain with Reserve Bank of
India a Cash Reserve Ratio (CRR) of 5.00 per
cent of the Net Demand and Time Liabilities (NDTL)
(excluding liabilities subject to
zero CRR prescriptions) under Section 42(1) of
the Reserve Bank of India Act, 1934.
42. Corporate Governance:
8-42
Corporate governance is the combination of rules,
processes or laws by which businesses are operated,
regulated or controlled.
The term encompasses the internal and external factors
that affect the interests of a company's stakeholders,
including shareholders, customers, suppliers,
government regulators and management.
43. Situation Analysis – Synopsys
8-43
Introduction
Yes Bank, started in 2004, is one of the new
generation private banks that were allowed to start
banking operations by Reserve Bank of India in the
post-liberalisation era. The bank was founded by
Rana Kapoor and Ashok Kapur.
44. Situation Analysis – Synopsys
8-44
The bank engaged in highrisk lending, providing
loans to those who could not raise funds elsewhere.
The assets books of Yes bank showed promising
growth until 2017 when the problem of Non-
Performing Assets (NPAs) came into the highlight.
47. Solvency
8-47
Solvency: the possession of assets in excess of liabilities;
ability to pay one's debts.
Insolvency is a state of financial distress in which
someone is unable to pay their bills. It can lead
to insolvency proceedings, in which legal action will be
taken against the insolvent entity, and assets may be
liquidated to pay off outstanding debts.
48. Cash Runway
8-48
"Cash runway" refers to the length of time in which a
company will remain solvent, assuming that they are
unable to raise more money. ... So, if a company has
$30 million in cash and is burning through $5
million per month, they would have a cash runway of
six months before they would have to raise more
money
49. Case Study – Yes Bank, Can we invest?
8-49
a) Situation Analysis
i. Synopsys Enter Case Study (summary of the case)
i. Introduction
ii. What went wrong?
b) Formulation of the Problem
c) Facts & Figures
d) SWOT Analysis
e) Assumption - solution to a problem
50. How big is YES Bank?
8-50
YES bank is currently India’s fifth-largest private
sector lender.
Yes bank had deposits of Rs. 2 lakh crore. Its total
assets including loans given are Rs.3.5 lakh crore.
The bank has 18000+ employees and has more than
1100 branches and 1300 ATMs.
51. Formulation of the Problem
8-51
The crisis at YES Bank started when the huge NPA
issue at YES Bank became public.
Bad loans
Eroded capital base
Breach of RBI mandated ratios
Governance Issue: Under-reporting of NPAs
52. Formulation of the Problem
8-52
Deposits vs Loans
Unusual increase in loans given from FY 2014
– FY 2019
Rumours spread through social media
The bank’s failure to raise fresh capital
RBI moratorium
53. Facts & Figures
8-53
Loans not repaid is a major issue of most banks in India.
These bad loans are called Non-Performing Assets
(NPA). The Gross Non-Performing Assets of YES Bank
was 7.4% of the gross advances at the end of September
2019.
It became 18.87 per cent of the bank’s total loan book
(or Rs 40,709.20 crore) at the end of December 2019.
54. Facts & Figures
8-54
For the quarter ended December 2019, Yes Bank
reported a loss of Rs 18,564 crore compared to a
profit of Rs 1001 crore in the same quarter in 2018.
The bank’s net loss would have been wider at Rs
24,778 crore in the third quarter if it weren’t for a
tax write-back of Rs 6,214 crore.
In the preceding quarter, Yes Bank had reported a
net loss of Rs 600 crore.
55. SWOT Analysis
8-55
A study undertaken by an organization to identify its
internal strengths and weaknesses, as well as its
external opportunities and threats.
58. Today
8-
58
SWOT Analysis
Why are shareholders bearing the brunt of the
actions of a promoter? Should the losses of a private
entity be bailed out by the public? Between financial
years 2014 and 2019, Yes Bank's loan book grew to
Rs 2,50,000 crore from Rs 55,000 crore. The loan
book actually almost doubled between FY17 and
FY19.
59. Business entity concept
8-
59
The business entity concept states that the
transactions associated with a business must be
separately recorded from those of its owners or
other businesses.
Doing so requires the use of separate accounting
records for the organization that completely exclude
the assets and liabilities of any other entity or the
owner.
60. ultra vires
8-
60
Acting or done beyond one's legal power or
authority.
A company's constitution might outline the
procedure for appointing directors to its board. If
board members are added or removed without
following those procedures, then those actions would
be described as ultra vires.
61. lifting up corporate veil
8-
61
FRAUD OR IMPROPER CONDUCT– the most
common ground when the
courts lift the corporate veil is when the
members of the company are indulged in
fraudulent acts.
The intention behind it is to find the real interests
of the members. In such cases, the members cannot
use Salomon principle to escape from the liability.
62. SWOT Analysis - Strengths
8-
62
Piercing Line (Bullish Reversal)
Effectively using its capital to generate profit - RoCE
improving in last 2 years
Growth in Net Profit with increasing Profit Margin
(QoQ)
Company with decreasing Promoter pledge
FII / FPI or Institutions increasing their
shareholding
63. Weaknesses
8-
63
Promoter holding decreased by more than -2% QoQ
MFs decreased their shareholding last quarter
Inefficient use of shareholder funds - ROE declining
in the last 2 years
Inefficient use of assets to generate profits - ROA
declining in the last 2 years
64. Weaknesses
8-
64
Red Flag: Downgrade by Credit Rating Agency
Poor cash generated from core business - Declining
Cash Flow from Operations for last 2 years
Declining Net Cash Flow and Cash from Operating
Activity for last 2 years
Degrowth in Revenue and Profit
Companies with High Debt
Companies with Increasing Debt
Declining Revenue every quarter for the past 4
quarters
65. Weaknesses
8-
65
Promoter decreasing their shareholding
Low Piotroski Score : Companies with weak
financials
Declining Net Cash Flow : Companies not able to
generate net cash
Annual net profit declining for last 2 years
Major fall in TTM Net Profit
Weak performer : Stock lost more than 20% in 1
month
Weak Momentum: Price below Short, Medium and
Long Term Averages
66. Opportunities
8-
66
Turnaround companies- loss to profit QoQ
Highest Recovery from 52 Week Low
Decrease in NPA in recent results
Decrease in Provision in recent results
Stock with Low PE (PE < = 10)
68. Assumption - solution to a problem
8-
68
The Reserve Bank of India on Friday announced a
draft scheme of reconstruction for the troubled
private lender YES Bank.
Wherein the new investor will hold 49 per cent
shareholding at a minimum price of Rs 10 per share.
69. Assumption - solution to a problem
8-
69
The central bank said the State Bank of India has
expressed willingness to make investment in YES
Bank NSE 3.13 % and participate in its
reconstruction scheme.
SBI will not reduce its holding below 26 per cent
before completion of three years from the date of
infusion of the capital.
70. Assumption - solution to a problem
8-
70
According to the plan cleared by the Union
Cabinet on March 13, the State Bank of India (SBI) is
the lead rescuer in the consortium which will invest
Rs 7,250 crore in Yes Bank.
71. Assumption - solution to a problem
8-
71
SBI, India’s largest lender, will pick 725 crore shares
at Rs 10 each. Other lenders too have joined the
rescue act:
HDFC Ltd and ICICI Bank will invest Rs 1,000 crore
each (meaning 100 crore shares each),
while Axis Bank and Kotak Mahindra Bank will
invest Rs 600 crore and Rs 500 crore, respectively.
72. Assumption - solution to a problem
8-
72
YES Bank on late Thursday was placed under a
moratorium, with the RBI capping deposit
withdrawals at Rs 50,000 per account for a month
and superseding its board.
74. Introduction
E-Banking or Electronic Banking is a major innovation in
the field of Banking.
Earlier Banking was conducted in a very traditional manner,
there were no such innovations.
Information revolution led to the evolution of internet ,
which lead to E-Commerce continued by evolution of E-
Banking.
75. History Of E-Banking
E-Banking History dates back to 1980s.
The term online became popular in the late '80s and
referred to the use of a terminal, keyboard and TV (or
monitor) to access the banking system using a phone line
Stanford federal credit union was the first who offer
online internet banking services to all of its members in
1994.
Later on snapped up by other banks like
Well Fargo, Chase Manhattan and Security First Bank.
76. What Is an E-Bank?
Traditional banking business assumes:
Customer desk at bank’s building
Office hours from 8.00 am to 7.00 pm
Customers have:
Their job during the day
Family or other activities after the job Collision!
What can we do about it?
77. What Is an E-Bank?
Logical answer is to use e-channels:
Internet
WAP based mobile network
Automated telephone
ATM network
SMS and FAX messaging
Multipurpose information kiosks
Web TV and others …
77 / 99
E-channels enable financial transactions from anywhere and
allow non-stop working time.
78. E-BANKING
Modern banking is virtual banking.
Virtual Banking means a customer cannot see the bank but with
the help of technology he can conduct the banking activities
anywhere in the world.
The major types of virtual banking services includes:
1. Automated Teller Machines (ATMs)
2. Smart Cards
3. Phone banking
4. Home banking
5. Internet banking
79. Electronic Delivery Channels
Today’s banks are offering various delivery channels to provide
products & services to their customers.
The IT has helped banks in increasing the range of their products
& services and also in marketing them more effectively
The major channels are :-
1. ATMs
2. Smart Cards
3. Telebanking
4. Internet banking
81. Automated Teller Machines (ATMs)
ATMs are widely used electronic channels in banking.
It is a computer controlled device at which the customers can
make withdrawals, check balance without involving any
individuals.
To use this system customers are given a plastic card which
contains the customer’s name & account no.
Customer is given a pin number. Whenever he wants to use it
he needs to enter pin number.
Mostly ATMs are near to branches but nowadays ATMs are
available at places like malls, theaters, stations etc.
82. Smart Cards
It is a chip based card (micro chip containing
monetary value)
When a transaction is made using the card, the
value is debited & balances comes down.
It is used for making purchases without the need
of any pin.
It is a powerful card which carries out functions of
ATM card , Credit Card , Debit Card.
83. Tele-banking
It means banking over phone.
Mainly used for marketing banking services.
A customer can do entire Non-Cash related banking over
phone anywhere at anytime
With fall in mobile phone rates mobile banking will
emerge as one of the most cost effective delivery channel.
84. Internet Banking
It has helped in banking at the click of a mouse.
In internet banking , customer of a bank with a pc can log
on to the bank website & conduct basic functions.
85. Advantages of E-Banking
Round the clock banking.
User friendly.
Low cost.
Portable banking.
Quality banking.
Speed banking.
87. Online Banking Frauds
While online banking has been around for
many years, but no cases of fraud have been
reported until recently. Since the beginning of
the year 2004, reports of fraud cases nearly
explode.
88. Password + Fishing
The "phishing" scheme involves using fake emails and/or fake
websites. Criminals send emails that appear to be from the
customer's bank that direct customers to a fake website.
The first half of 2008 alone has seen 20,000 reported phishing
incidents – where users are sent phony emails taking them to
fake banking websites trying to get hold of their account details
– compared with just over 5,100 cases two years ago.
90. Spyware
is generally considered to be software that is secretly installed
on a computer and takes things from it without the permission
or knowledge of the user
Trojan horse
The "Trojan horse" scheme is based on embedding a computer
virus type software program onto the customer's PC. Trojans
often tie themselves into the keyboard driver and record
keystrokes
91. Skimming
Skimming is a more advanced version of an identity theft.
Fraudsters illegally copy the information from the magnetic
strip on the back of your plastic without interfering with the
legitimate payment transaction.
