MODULE 7 MONEY AND BANKING

COMMERCIAL BANKING STRUCTURE IN INDIA

Indian commercial banks are called Joint Stock Banks. Under the Reserve bank Of India Act,1934, the commercial banks in India are classified into: Scheduled Commercial banks Non-scheduled Commercial Banks

i. ii.

SCHEDULED COMMERCIAL BANKS

Scheduled commercial banks are those banks which are included in the second schedule of the Reserve Bank of India, having a paid-up capital and reserve together Rs.5 lakh and above. As on March 2004, there were 286 schedule commercial banks in the country.

NON-SCHEDULED COMMERCIAL BANKS

Non-scheduled banks are those whose total paid-up capital and reserve fund is less than Rs.5 lakh and whose name is not included in the second schedule of RBI Act,1934. At present, there are only two non-scheduled banks in the country.

DIAGRAMMATIC REPRESENTATION
Scheduled Commercial Banks
Public sector banks Nationalised banks Private sector banks Indian private sector banks New private sector banks Foreign banks

SBI and its associates

Old private sector banks

FUNCTIONS OF THE RESERVE BANK OF INDIA

a. 1. 2. 3. 4.

Bank of Issue Banker to Government Bankers Bank and lender of the last resort Controller of Credit Quantitative Methods Bank rate Variable cash reserve ratio (CRR) Statutory liquidity ratio (SLR) Open market operations (OMO)

CONTINUED.
b.

1. 2. 3.

Qualitative Credit controls/selective credit control Minimum margin for lending Ceiling on amount of credit Discriminatory rate of interest Custodian of Foreign Exchange Reserves

CONTINUED.
Supervisory

Functions Promotional Functions

RECOMMENDATIONS OF THE NARASIMHAN COMMITTEE, 1991

REFERENCE: DUTT AND SUNDARAM PG:853
1.

2.

3.

Aimed At : Ensuring a degree of operational feasibility Internal autonomy for the public sector banks in their decision making process Greater degree of professionalism in banking operations

IMPORTANT RECOMMENDATIONS :
1. Directed Investment a. Statutory Liquidity Requirements: The committee recommended that the government should reduce SLR from 38.5% to 25%. b. Cash Reserve Ratio CRR should be reduced from 15% to 3-5%. 2. Directed Credit Programmes 3. The Structure Of Interest rates 4. Structural Reorganization of the Banking Structure 5. Nationalisation of banks 6. Setting up of New banks

CONTINUED.. 7. Foreign Banks 8. Bad and Doubtful Debts 9. Removal of Dual Control 10. Autonomy to Banks 11. Disinvestment 12. Rural Banking Subsidiaries 13. Recruitment of Staff 14. Computerization

REFORM OF THE BANKING SECTOR

DUTT AND SUNDARAM

1. Statutory Liquidity Ratio (SLR) SLR on incremental net demand and time liabilities (DTL) has been reduced from 38.5% to 25% in 1997. 2. Cash Reserve Ratio (CRR) RBI reduced CRR from 15% to 5.5% in 2001. the purpose was to release funds locked up with RBI for lending to the industrial sectors .

CONTINUED..
3. Deregulation of Interest Rates Interest rates slabs were gradually reduced from 20 to 2 by 1995. 4. Prudential Norms The purpose was that commercial banks should reflect their financial positions more accurately and in accordance with international accounting practices.

CONTINUED.
5. Capital Adequacy Norms: were fixed at 8% by RBI in 1992. 6. Access to Capital Market: SBI was the first to raise through public issue over Rs. 1,400 crores as equity and Rs. 1,000 crores as bonds. 7. Freedom of Operation

CONTINUED..
8. New Private Sector Banks 9. Local Area Banks: LABs help to mobilise rural savings and to channelise them into investment in local areas. 10. Supervision of Commercial Banks RBI has set up a Board of Financial Supervision with an Advisory Council under the chairmanship of the Governor to strengthen the Supervisory and Surveillance system of banks and FIs.

CONTINUED
11. Recovery of Debts: The Government of India passed Recovery of Debts due to banks and FIs Act, 1993. Six Special Recovery Tribunal have been set up. 12. Phasing out of Directed Credit 13. Competition

MONETARY POLICY OF THE RBI / MEASURES OF CONTROL IMPOSED BY RBI TO REGULATE MONETARY SYSTEMS IN INDIA
Controlled

expansion ( 1951-72) RBIs Anti- Inflationary Monetary Policy since 1972. Entry of RBI into Foreign Exchange Market

MAJOR WEAPONS OF MONETARY POLICY / CONTROL MEASURES

Credit Control: 1. General Credit Controls a. Bank rate b. Cash reserve ratio c. Statutory Liquidity Requirements d. Open market Operations Of RBI 2. Selective and Direct Credit Controls

CONTINUED.

Credit Authorization Scheme (CAS) Credit Monitoring Arrangement (CMA)

e Banking

DEFINITION OF E-BANKING

e-banking is defined as the automated delivery of new and traditional banking products and services directly to customers through electronic, interactive communication channels. E-banking includes the systems that enable financial institution customers, individuals or businesses, to access accounts, transact business, or obtain information on financial products and services through a public or private network, including the Internet. Customers access ebanking services using an intelligent electronic device, such as a personal computer (PC), personal digital assistant (PDA), automated teller machine (ATM), kiosk, or Touch Tone telephone.

FUNCTIONS

Account Enquiry Fund Transfer Payment of Electricity, Water, Telephone bills etc. Online Payment for transactions actually performed through internet Request for issuance of cheque book, draft etc. Access to latest schemes Access to rates of interest and other service charges

PRACTICAL USES OF E-BANKING

Round the clock banking Convenient banking Low cost banking (service) Profitable banking Low cost banking (establishment) Quality banking Speed banking Service banking

CREDIT CARD

Definition A credit card is a card or mechanism which enables cardholders to purchase goods, travel and dine in a hotel without making immediate payments.

TYPES OF CREDIT CARDS

Credit card Charge card In-store card New types of credit cards Corporate credit cards Business cards Smart cards

PARTIES TO CREDIT CARDS

Issuer Card holders Member establishments Member affiliate

BENEFITS
1.

Card holders
They are simple to operate and easy to carry It is a convenient method of payment for goods and services Owing to revolving nature of credit, the customer can take advantage of it as and when he pleases, within the overall

Cash can be obtained at any branch of the issuer Overdraft facility is given to card holders who are entitled to spend more than their actual limit The purchasing power of the card holder increases to the extent of credit limit given in the card It provides a certain degree of prestige to the holder

2. Issuers
It

provides high profits for the banks Where the card is issued to nonaccount holders, it may help to get new customers A credit card system helps to control bank cost as it reduces the number of cheques issued by the customers

3. Member establishment
A

good cash flow is established because of the speedy settlement of bills by banks The acceptance of cards in lieu of cash reduces security risk They are able to offer credit facility to their customers without settling up their own credit arrangements Helps to increase the volume of business

DE-MERITS

1.

Card holders
They are burdened with service charge, annual fee, membership fee, etc. High rate of interest is charged for delayed payment A minimum of 5-10 % on monthly purchases apart from the additional charges are to be paid in case the consumers postpone the payment beyond the stipulated credit period Credit cards tempts the holders for more purchases beyond their income and

2. Issuers The cost involved in the credit card business is high which include cost of plastic card to be imported, cost of information, cost of placing and marketing cards, etc. The menace of frauds perpetuated by holders of bogus cards and sometimes in collusion with the member establishments is the major problem for the issuers The average utilisation of credit card is only 20% to 30% in India. The under utilisation of this facility erodes the probability of banks

3. Member establishments
The commission to be paid to the issuing banks/credit card organisation is heavy. Some banks may delay in payment due to lack of adequate system and trained personnel which affect the cash flow of the member establishment.

DEBIT CARDS

It is a prepaid card with some stored value. Every time a person uses the card, the merchant who in turn can get the money transferred to his account from the bank of the buyer, debits an exact amount of purchase from the card. The customer can never overspend because the system will reject any transaction that exceeds the balance in his account and the bank will never face a default because the amt spent is debited immediately from the customers account.

ELECTRONIC FUND TRANSFER

It is a scheme introduced by RBI to help banks offering their customers money transfer service from account to account of any bank branch in places where EFT services are offered. In this system, the sender and receiver of funds may be located in different cities and may even bank with different banks. Funds transfer within the same city is also permitted i.e., enables transfer of funds within the city or between cities and between branches of a bank and across banks. The scheme has been in operation since feb 7, 1996. It is a paperless money transfer system, which is available to all the account holders of a bank.

The EFT presently covers all the branches of the 27 public sector banks and 55 scheduled commercial banks at the 15 centers.

ATM

It is a device used by bank customers to process account transactions. The customer inserts into the ATM, a plastic card that is encoded with information on a magnetic strip. The strip contains an identification code that is transmitted to the banks central computer by modem. Every card holder would be given a PIN that he should enter and after verifying the same with the records, the ATM would allow operations. ATM is also known as Automated Banking

Cash Machine, Cash Dispenser, Automated Teller or Money Machine. Further the first ATM to be installed was by HSBC in 1987 at Mumbai and the Indian Bank was the first public sector bank to install ATM in India.