What is Financial System

A Financial System is the orderly mechanism and structure in an economy to mobilize the monetary resources from various surplus sector and allocate the same to the needy sectors. A financial system transforms savings into investment and consumption Financial intermediaries like banks, financial institutions, mutual funds etc. Undertake the task of this transformation.

Cont.
Organized sector Nationalized bank, cooperative bank, DFIs, Private/ Foreign Banks, Insurance/ Investment Companies. Unorganized sector- Money lenders.

Structure of Indian financial system

Introduction to banking
Meaning and definition of bank : Definition of bank under law: Section 5b of Banking Regulation Act 1949 defines bank as a institution which accepts deposits from public for the purpose of lending and investment. Repayable on demand or otherwise and withdrawal by cheque, draft and order.

Cont..
Section 5c defines banking company as a company which transact the business of banking in India. As per the above definition the following are the core function of a bank acceptance of deposit from public, withdrawal of cheque or otherwise on demand or repayable on maturity to customer. Lending or investing funds collected from customer Obligation to repay the deposits to the customers

Basic Principles of Banking

Principle of intermediation Principle of liquidity Principle of profitability Principle of solvency Principle of trust

Types of Banking Group in India

Bank are categorized according to their ownership pattern, function and operation coverage The Indian banking system is regulated by RBI It comprises schedule, non-schedule banks and are further classifieds into various sub categories (a) Schedule banks: RBI Act 1934

Cont
Co-operative banks Commercial banks These are sub-classified as: Foreign schedule banks Indian schedule banks

Functions of Bank
Traditional/ core functions:These are performed by almost every bank Accepting deposits Lending Funds remittance Miscellaneous services

Cont.
Modern functions:Trade finance International banking Merchant banking Credit card, debit card, smart card Factoring and forefaiting Leasing

Emerging trend in banking

Banking will be there but there will be no banks Brick and mortar banking is vanishing Virtual banking Banking is driven by technologies Electronic banking Universal banking Globalization of banking

Reserve bank of India

RBI was established on the recommendation of Royal Commission on Indian currencies and finance 1926 The Act was passed in 1934 and RBI was established on 1stApril,1935 as a private sector bank It was nationalized on 1stJanuary,1949 Central government owns 100%of the capital of RBI RBI is managed by a governor, 4 Deputy Governor and 15 Directors

Main Functions of RBI

Note issuing authority Bankers to the Government Bankers bank Supervision of Bank Development of financial systems Exchange control Monetary policies Change in monetary policies framework

Banking Regulation Act 1949

On 10th march,1949, Banking Companies Act 1949 was passed The nomenclature of the Act was changed from1st march,1966 as banking Regulation Act 1949 The need of the Act was to consolidate the law related to Banking companies to safeguard the interest of the depositor and economic interest of the country

Provision of Banking Regulation Act 1949

section 5b 5c description Banking acceptance of deposit for lending &investment purpose Banking business- company which transacts the business of banking in India. Paid up capital&reserve requirement Domestics-5lak International-15lak Restriction on advance against its own share Licensing of banking company Maintenance of slr (range 25%-40%) Empower rbi to undertake inspection of bank Returns of paid investment to customer

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20 22 24 35 45z

Cash Reserve ratio and statutory Liquidity Ratio

particular Concept &objective crr Quantitative tool- to regulate money supply in economy by changing crr Slr Quantitative tool- to regulate money supply in economy by varying slr,by way of investment in govt security

provision LIMITS Maintained by

Types of investment Requirements

Sec 42(1) of rbi act 1934 3%-20% RBI

cash

Sec 24(2-a) of BR ACT 1949 25%-40% TO BE KEPT IN SECURITIES IN INDIA

Cash , gold

Fortnightly basis Saturday Last Friday of second to following Friday -14 days preceding fortnight on daily basis Any shortfall to be In the case of default rbi penalized through charging will charge @3% above the

penalties

BANK @ BANKING BUSINESS

As per sec 49 of BRA,no person other than bank to accept deposit withdrawal by cheque . Acceptance of deposit is regulated by RBI. It is necessary to have license from RBI As per sec 7 only banking companies are permited to use word bank, banker, banking company as part of its name.

Cont.
PERMITTED BUSINESS: SEC6(1) OF BRA. B, lending ,or taking up money Lending or advancing of money Dealing in foreign currency Merchant banking business Acting as an agent for collection

PROHIBITED BUSINESS
SEC8 prohibits from engaging directly or indirectly in trading activities & undertaking trading activities Buying &selling or bartering of goods direstly or indirectly Sec9 prohibits from holding immoveable property excet required from its own use