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Banking Architecture in India, Banking Regulation, Monitoring and Control in India.pptx

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Banking Architecture in India, Banking Regulation, Monitoring and Control in India.pptx

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Evolution of banks in India, growth of banking in pre and post-independence period, nationalization of banks, diversification of banking activities, banking sector reforms, RBI and its functions

Evolution of banks in India, growth of banking in pre and post-independence period, nationalization of banks, diversification of banking activities, banking sector reforms, RBI and its functions

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Banking Architecture in India, Banking Regulation, Monitoring and Control in India.pptx

  1. 1. BANKING AND INSURANCE
  2. 2. Development of Banking in India • The first banking institution in India was the Bank of Bengal in 1809 that did not last long. • Many of the surviving banks were started by Indian businessmen during the Swadeshi Movement between 1906 and 1913. • The Imperial Bank of India was started by the government in 1921. • It was renamed as the State Bank of India (SBI) in 1955. • Issues of shares of the bank to the general public in 1955 resulted in it being not fully owned by the government, but it continued to be recognized as the government bank and had monopoly over the banking business of the government till 2003.
  3. 3. Development of Banking in India • Soon after India’s independence, the Industrial Development Bank of India (IDBI) and Industrial Credit and Investment Corporation of India (ICICI) were promoted by the Government of India to provide long term (up to 10 years) financial assistance to industries as there was dearth of capital for setting up industries and the existing banks specialized in providing short term finance. • The government and international development institutions like the World Bank (WB) provided them funds which they lent to Indian industries. Both these institutions have been converted a commercial banks after 2002
  4. 4. Development of Banking in India • Banks being commercial institutions, were reluctant to finance new and small business ventures that were risky and to set up branches in rural areas because the business potential was low. • The Government of India felt that providing banking services and financial assistance to all sections and sectors of the society was necessary to promote economic growth and welfare of the people. • Hence the Government of India nationalized all large banks in 1969 by paying off the owners. • The banks that were allowed to continue in the private sector, through many in number, had insignificant market share
  5. 5. Development of Banking in India • As owners of the banks, the government could influence the policies of nationalized banks. • The orientation of the banks was changed from profit to development and the next two decades saw unprecedented expansion of banks into rural and semi urban areas, and bank financing to the agriculture, small industries, and small business sectors multiplied manifold. • In 1980 another set of banks were also nationalized. • Subsequent to 2000 the government’s share holding has been diluted as the banks have raised capital from the market, but the management of the banks is firmly controlled by the government. • The government banks continue to control over 80 per cent of banking business in India.
  6. 6. Development of Banking in India • It was in 1994 that the Government of India decided to permit setting up of banks in the private sector to inject an element of competition in the banking industry as virtual monopoly had made the public sector banks rather complacent. • Eight new banks, including ICICI Bank, HDFC Bank, IDBI Bank and UTI Bank were set up in the next three years. • The new banks revolutionized the banking industry by embracing modern technology and management practices and by being customer- and profit- oriented. • The rapid growth of the private sector banks has promoted the public sector banks to mend their ways and many of them, especially the SBI, have transformed themselves in a big way.
  7. 7. Development of Banking in India • In 2002, ICICI was merged with the ICICI Bank and in 2004 IDBI was merged with the IDBI Bank. • While some foreign banks have been operating in India for over 100 years, it is only since 2004 that some of them have started expanding aggressively. • Their conservative attitude and reluctance to bring in capital has prevented them from growing as fast as private sector banks, which have stolen a march over them. • Since 2005 foreign banks have been evincing renewed interest in the Indian market.
  8. 8. Development of Banking in India • The co-operative banks form another group of important players in the Indian banking scene. • They originated well before independence but after 1947 a large number of co-operative banks were set up with the active encouragement of the government. • While their financial health is poor due to mismanagement, they continue to play a significant role, especially in the rural areas.
  9. 9. List of Public Sector Banks in India
  10. 10. List of Private Sector Banks in India
  11. 11. Role of Banks Intermediation Continuous economic growth is a necessity as population grows continuously and ever-increasing production of goods and services are required to meet the needs of the people and also to keep the people productively engaged. This calls for large investments, as even the smallest enterprise like that of a vegetable vendor requires investment of money for buying the pushcart and the stock of vegetables. While small businesses may be financed with own money, businessmen or entrepreneurs need financial assistance to start any business of reasonable size.
  12. 12. Role of Banks • In any society, the number of people with entrepreneurial inclinations is few because the majority of people are not capable or willing to take the risks involved in running a business. • While money is available with the savers of the society, the entrepreneurs are unable to access it as the savers would be unwilling to lend it to the entrepreneurs because of the following risks: • Credit Risk • Liquidity Risk • Interest Rate Risk
  13. 13. Credit Risk • Credit risk refers to the risk of default by the borrower for any reason. It is possible that the business does not generate sufficient income to repay the loan or the borrower is not honest enough to honour his commitment. • Credit risk is the most serious risk any lender faces and individuals savers cannot afford to take such risk.
  14. 14. Liquidity Risk • The borrower may have every intension to repay the loan and the business too may be doing well. However, there could be occasions when the borrower is not able to withdraw funds from the business when the lender demands repayment or the repayment is due. • There could be many types of temporary problems, which may or may not be in the control of the borrower that stands in the way of repayment of the loan
  15. 15. Interest Rate Risk • Another risk in lending money is the possibility of loss due to change in the rate of interest in the market. • At the time of the transaction the borrower may have agreed to give interest at the prevailing rate of, say, 10 per cent. • Subsequently, he may ask for a reduction in the rate of interest rate or repay the loan before the due date, quoting the terms of the original contract. • Both situations are to the detriment of the lender and individuals with savings would like to insulate themselves from such risk of loss due to movement in interest rates.
  16. 16. Role of Banks • The risk-averse nature of normal savers and the risks inherent in any entrepreneurial activity necessitates intermediaries who have the ability to insulate the savers from the risks inherent to business and make available the funds to entrepreneurs by managing the risks in an effective manner to minimize the chances of loss. • The process of transferring the funds from the savers to the entrepreneurs is called intermediation the essence of which is risk management.
  17. 17. Role of Banks • Money, to be productive, needs to circulate. If all savings are hoarded, the surpluses of the community will not be available for investments and this would lead to economic stagnation. • Financial intermediaries play an important economic function by facilitating productive use of the surpluses of the community to generate employment and promote economic welfare by enabling production of goods and services required by the community. Thus intermediation is a very important economic function.
  18. 18. Role of Banks • All institutions in the financial sector do or enable some form of intermediation. Banks—because of their reach, trust of the people they enjoy, and the other rules they play by—have emerged as the largest intermediaries across the world. • Consequently, banking has become a business with great social relevance. • The economic prosperity of the economy as a whole and of different regions and industries depend upon the banks. If the banks choose not to lend to a particular industry it is unlikely that the industry will flourish. • For instance, in the early days of the Information Technology (IT) industry, banks were reluctant to lend to the industry because banks did not understand the nuances of the IT business. As a result, the growth of the IT industry was lackluster.
  19. 19. Role of Banks • Once the banks understood the business and its potential, they started supporting the IT industry in a big way and played a decisive role in the spectacular growth of the industry. • Similarly, till the 1970s, banks were reluctant to lend to the agricultural sector and India continued to be a net importer of food grains. • The adoption of improved methods of agriculture which led to the green revolution and food self sufficiency, needed liberal doses of investments and it is the banks which provided the credit support necessary to make the green revolution a success.
  20. 20. Payment System • Apart from being the largest intermediary, two unique features differentiate banks from other intermediaries. • The second part of the definition of banking points to this feature. • Banks accept ‘deposits of money, repayable on demand…. and withdrawable by cheque…’. Banks are only the institutions that can accept demand deposits or deposits repayable as and when demanded by the depositor. • All other financial institutions can only take fixed deposits or deposits repayable after a specific period at time.
  21. 21. Payment System • Secondly, banks are the only institutions on which a depositor can issue a cheque to withdraw his deposits. • By its very definition, a cheque is an instruction issued to a bank to pay a certain sum of money to the person whose name is written on the cheque.
  22. 22. Payment System • The difficulty in transporting and exchanging large volumes of currency notes and coins to settle transactions have led to the growth of cheques as the most preferred instrument for settlement of transactions. • Cheques have effectively assumed the role of money, and the volume of money in circulation represented by cheques is much more than the volume of money in the form of currency notes and coins. In the process of handling cheques to settle transactions, banks also move money from place to place. • For instance, when a resident of Mumbai issues a cheque to a resident of Delhi and the payee’s bank in Delhi credits the money from the payer’s bank in Mumbai, money would have moved from place to place and from the payer’s account to the payee’s account. • As the only institutions that can complete transactions involving cheques, and also move money from place to place, banks collectively, have evolved into the payment system of the economy
  23. 23. Financial Services • From ancient times, banks have played the roles of safekeeper, financial intermediary, and payment system constituent. As times changed, banks have provided additional services to meet the changing needs of the people. • Today, banks take pride in positioning themselves as financial services providers rather than as just banks. • The financial services offered by banks include selling products of mutual funds and insurance companies, collection of utility bill payments, sale of gold coins, and many more
  24. 24. Banking Regulation • Banking is more than just a business. • Therefore, the great social and economic importance of banks makes regulation of their activities highly important. • Banking regulation seeks to ensure that banks: • Maintain adequate liquid resources at all times. • Manage all risks adequately and ensure that the funds under their management are safe. • Run their business in a profitable manner and the profits are used prudently to strengthen the banks and not freely distributed to please the investors. • Take their duty of secrecy seriously and at the same time not let anti-social elements use the banking system to subvert the economy. • Maintain certain minimum levels of service quality and not discriminate between the members of the public in making available banking services, which have assumed the nature of essential services.
  25. 25. Banking Regulation in India • Banks in India are regulated by and through the RBI using the powers conferred on them primarily by the RBI Act of 1934; the Banking Regulations (BR) Act of 1949; the FEMA of 1999, among others. • Respective state governments regulate cooperative banks under respective State Cooperative Societies Acts. • Multistate Cooperative Banks are regulated by the central government under the Multiunit Cooperative Societies Act. Cooperative banks are subject to dual regulation—both by the government and the RBI. • The need for closer regulation of cooperative banks has led to several state governments signing memorandum of understandings (MoUs) with the RBI giving them greater control over the cooperative banks.
  26. 26. Regulation by the RBI • RBI regulates the banks through statutory prescriptions, guidelines issued by the RBI, onsite inspections, and offsite supervision. • RBI issues important regulations and guidelines related to the following, which are of relevance in the day-to-day functioning of banks: 1. Nature of business 2. Licensing 3. Capital requirements 4. Appointment of whole-time and part-time directors 5. Know Your Customer (KYC) and Anti Money Laundering (AML) 6. Banking ombudsman scheme 7. Non-Performing Assets (NPA) norms 8. Rate of interest 9. CRR 10. SLR, etc.
  27. 27. Functions of the Reserve Bank of India • The RBI controls the entire financial sector of the economy. • It regulates the activities of the money market, acts as the custodian of the money market, tries to execute the monetary policy of the government, uses its powers to promote economic development of the country and so on. • Various functions performed by the RBI may be conveniently divided into two categories. They are as follows: (i) Traditional functions (ii) Promotional functions

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