Banking System in India is dominated by nationalized
banks. The nationalization of 14 privately owned banks in India took place on 19th of July 1969 by Mrs. Indira Gandhi the then prime minister, with an another installment of nationalization of 6 banks on 15.04.1980. The major objective of nationalization was to ensure mass banking as against class banking with banking infrastructure aimed at hilly tracts and terrains of the country. Prior to 1969, State Bank of India (SBI) was the only public sector bank in India. SBI was nationalized in 1955 under the SBI Act of 1955. Banking System in India Classification of Banks in India A. Central Bank: The Reserve Bank of India is the Central Bank. It is fully owned by the government. It is governed by a central board and headed by a Governor, who is appointed by the Central Government. It issues guidelines for the functioning of all banks operating within the country. B. Public Sector Banks: (a) The State Bank Group: the State Bank of India and its associate banks (b) 20 other nationalized banks (c) Regional rural banks: they are sponsored by public sector banks C. Private Sector Banks: (a) Private Banks (b) Foreign Banks Operating in India (c) Scheduled Cooperative Banks (d) Non-scheduled Banks D. Cooperative Banks: The cooperative sector banks are related with rural areas and serve rural people mainly. The cooperative banking sector is divided into the following categories: (a) State Cooperative Banks (b) Central Cooperative Banks (c) Primary Agriculture Credit Societies Some Financial Institutions 1. National Bank for Agriculture and Rural Development (NABARD) 2. Export Import Bank of India (EXIM Bank 3. National Housing Bank (NHB) 4. Housing and Urban Development Corporation Ltd. (HUDCO) 5. Industrial Investment Bank of India (erstwhile Industrial Reconstruction Bank of India) 6. Industrial Credit and Investment Corporation of India Bank (ICICI) 7. Small Industries Development Bank of India (SIDBI) 8. Infrastructure Development Finance Co. (IDFC) 9. Power Finance Corporation (PFC) Reserve Bank of India Commercial Banks Nationalised Bank, Private Bank, RRB Co-operative Banks Rural (Short Term Structure, Long Term Structure), Urban Development Banks NABARD, SIDBI, EXIM, IDBI Reserve Bank of India: Role and Functions Traditional Central Banking Functions (Monetary Functions) a. Bank of Issue – The Minimum Reserve System b. Banker to Government c. Banker's Bank and Lender of the Last Resort d. Controller of Credit e. Custodian of Foreign Reserves Supervisory Functions Promotional Functions Miscellaneous Functions a. a. Interest Rate Intervention b. b. Monetary Policy Instruments Traditional Central Banking Functions (Monetary Functions) • Bank of Issue — The Minimum Reserve System • Banker to Government • Bankers’ Bank and Lender of the Last Resort • Controller of Credit • Custodian of Foreign Reserve Supervisory Functions (Non-monetary Functions The Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers. The RBI has to supervise and control commercial and co-operative banks in relation to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation. Promotional Functions (Non-monetary Functions) Since Independence, with economic growth, the range of the Reserve Bank’s functions has steadily widened. The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. 1. The Reserve Bank promotes the banking habit. 2. Extends banking facilities to rural and semi-urban areas. 3. Establishes and promotes new specialized financing agencies i.e., Industrial Development Banks. 4. Development of the co-operative credit movement to encourage savings and to eliminate moneylenders from the villages and to route its short-term credit to agriculture. Miscellaneous Functions Following are the miscellaneous functions of RBI: • Interest Rate Interventions • Monetary Policy Instruments Departments of RBI Capital requirements – Capital Adequacy Reserve Requirements (CRR, SLR) Cash Reserve Ratio (CRR) CRR–A tool of credit control Statutory Liquidity Ratio (SLR) Treasury management Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of maximizing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a firm's collections, disbursements, concentration, investment and funding activities. In larger firms, it may also include trading in bonds, currencies, financial derivatives and the associated financial risk management. Objectives of Treasury Management To exploit potentials in markets which are becoming integrated and consequently volatile. To manage funding costs and efficient resource allocation. To optimisation of profitability through improving rate of return on portfolio, securities trading and achieving moderate capital gain. To controlling and minimizing market and credit risks. To use information technology for the entire gamut of activities. Comply with the requirements of regulators. Adhere to internal policy guidelines on money market and investments. To achieve above objectives, individual banks have to have following policies linked to overall business strategies and plans. Specific treasury policies and goals. Specific guidelines for managing various risks. Specific guidelines to build I.T. and analytical capabilities. Specify earning targets on ROE & ROA and acceptable risk levels and limits. Specify internal structure and decision-making roles. Techniques of Credit Control Quantitative or General Methods Bank Rate Policy Adjusting with CRR and SLR Lending Rate Repo Rate Reverse Repo Rate Qualitative or Selective Methods Marginal Requirements Regulation of Consumer Credit Credit Rationing Moral Suasion Direct Action Publicity Risk Management and Central Bank The survey of central bank risk managers confirms that a high proportion of central banks is currently restructuring their risk management operations. This survey reveals: 1. Increasing integration of risk management 2. Recognition of the importance of operational risk 3. A need for clear objectives for the various departments involved in risk management Central banks need to interpret the concept of risk in a very broad sense. Risk includes not only the identification and control of financial market risks and payment systems risks, but also reputation risks, political risks, regulatory risks, technological risks and moral hazards. Thus: 1. The key tasks of all central banks – monetary and exchange rate policy, oversight of payment systems, supervision, and crisis management – all require central banks to manage risk. 2. Central bankers need to identify and manage political and reputation risks. 3. Organize a risk management department so that it can work effectively with the internal audit department, the external auditors and the financial control department. 4. Larger central banks are leading the way in developing risk management procedures and translating this into corporate governance in the central bank. 5. For smaller banks with limited resources, setting up a separate risk management department is often not feasible. In these circumstances, risk has to be assessed and controlled by departmental heads. 6. Rising “risk awareness” is widely recognized as an important step to reducing operational risk for the organization as a whole. In nutshell, a risk identification and management culture has to be developed in a central bank. Functions of Treasury Management The various functions of domestic treasury are— (a)Maintenance of CRR/SLR (b)Deployment of surplus money in S.T. or L.T. instruments - Liquidity Management (c)Drawls of refinance limits - Liquidity Management (d)Maximizing returns through trading and retailing in securities -Investment Management Maintenance of CRR 1. Section 42(1) of the RBI Act empowers the RBI to stipulate ratio to be maintained - presently 4.75% w.e.f. 02.08.2012. 2. Can be any ratio between 3 and 20%. 3. Ratio is required to be maintained on the Demand and Time liabilities of banks excluding inter-bank dealings. 4. Balances with the RBI and also those in currency chests are eligible for computation but not balances with other banks and liquid cash held by individual banks. 5. Required to be maintained on 14 days period on a fortnightly average basis. 6. 70% on daily average basis to be maintained throughout the fortnight. 7. Defaulting banks are not allowed access to refinance/rediscounting facilities. Maintenance of SLR 1. RBI has authority to stipulate SLR up to 40% of NDTL of banks - presently 23% w.e.f. 02.08.2012. 2. Investments in approved liquid assets are eligible for computation. 3. Required to be maintained on daily basis but amount calculated on the basis of NDTL of second preceding fortnight. 4. Cash held by banks in their safes, other banks and held by them with RBI in excess of CRR requirements are eligible for SLR requirements. Liquidity Management 1. Treasury branch/department works out the liquidity requirements on a day to day basis taking into account the likely inflows and outflows which can be as under: Inflows Outflows 2. (a) Refinance availed Refinance repaid 3. (b) Currency chest deposits Currency chest withdrawals 4. (c) Net Clearing receipts Net Clearing payments 5. (d) Food Credit repayment Food credit disbursal 6. (e) Remittance received in RBI A/cs Remittances made out of RBI A/cs 7. (f) Call lending's repaid Call borrowings repaid 8. (g) Proceeds of investment sales Investments made 9. (h) Interest on investments (i) Other receipts in RBI A/cs Other drawings in RBI A/c Depending on whether the net position needs borrowings or lendings, treasurer has to choose the option from following alternatives: (a)Interbank Call money market (b)Liquidation of investments (c)Repos (d)Refinance/Rediscounting Window Call money sources has the following limitations: (i) Any indication to market regarding illiquidity - which is indicated when this market is tapped frequently - would increase costs. (ii)Since the lenders being competitors, they may not be prepared always to lend. (iii)Illiquidity may suddenly emerge in the market due to sudden developments. Liquidity management should be governed by a well laid out policy covering (i) Control of cash flows (ii)Monitoring of undrawn limits (iii)Control of short term borrowing capacity (iv)Management of portfolio of liquid assets (v)Contingency plan Investment Management Deposits mobilized by banks are required to be deployed either in loans & advances or in investments. While doing this every bank has to take care of credit risk, market risk. The portion of such deposits which are not lent are invested either in SLR securities and non-SLR securities. Since SLR securities are more risk free and there is a compulsion to invest their return is generally low. Non-SLR and SLR security investments are to be shuffled both within and between themselves taking into account the interest rate movements and connected price movements. Investments are therefore required to be invested in a professional manner keeping in mind the RBI's and the bank's own policy directives and operative guidelines. Functions of the investment department can be mentioned as: 1. Maintenance of SLR 2. Maximisation of yield on investment 3. Matching maturities of investments with those of deposits and borrowings • Prediction of interest rate movements and analysis of their impact on investment portfolio • Managing SLR/Non-SLR investment portfolio for profit maximization • Managing investments in capital markets • Optimisation of interest costs through repos in case of sudden shortages.
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