Banking
System
in
India
Indigenous bankers





Individual bankers like Shroffs, Seths, Sahukars,
Mahajans, etc. combine trading and other business with
money lending.
Vary in size from petty lenders to substantial shroffs
Act as money changers and finance internal trade
through hundis (internal bills of exchange)
Indigenous banking is usually family owned business
employing own working capital
At one point it was estimated that IBs met about 90%
of the financial requirements of rural India
RBI and indigenous bankers



IB should have their accounts audited by certified
chartered accountants
Submit their accounts to RBI periodically
As against these obligations the RBI promised to
provide them with privileges offered to commercial
banks including



Being entitled to borrow from and rediscount bills with RBI
The IBs declined to accept the restrictions as well as
compensation from the RBI
Therefore, the IBs remain out of RBI’s purview
BANKING SYSTEM IN INDIA
ORGANISED
BANKS IN INDIARBI
SCHEDULED
BANKS
(285)
COMMERCIAL
BANKS
PRIVATE SECTOR
BANKS-25
PUBLIC SECTOR
BANKS-28
FOREIGN BANKS-29
REGIONAL RURAL
BANKS- 96
NON-SCHEDULED
BANKS (4)
CO-OPERATIVE
BANKS
URBAN
CO-OPERATIVE
BANKS-52
STATE
CO-OPERATIVE
BANKS- 27

SCHEDULED BANK:
which is registered in Second Schedule of the RBI
 Must be carrying on a business of banking in India
 Must have paid-up capital and reserve of an
aggregate value of not less than Rs.5 lakh(100cr.-for
New)
 It must satisfy RBI- not in a manner detrimental to
the interest of depositor


NON SCHEDULED BANK:
Which is not included in Second Schedule of RBI
 Not entitled to facility of borrowing & rediscounting

Co-operative Banks
CENTRAL
CO-OPERATIVE
BANK- 369
PRIMARY
AGRICULTURAL
CO-OPERACTIVE
CREDIT SOCIEY
DISTRICT
CENTRAL
CO-OPERATIVE
BANKS
STATE
CO-OPERATIVE
BANK -31
SCHEDULED COMMERCIAL
BANKS

PUBLIC SECTOR BANKS
SBI & Associates (SBI Act, 1955)
 Nationalised Banks (1969-1980)


PRIVATE SECTOR BANKS:
Post Reform Period 24 banks in pvt. Sector Banks
 Initial minimum paid up capital from Rs.100 to
Rs.200 crore.

REGIONAL RURAL BANKS




Bank with local knowledge and familiarity
Organisation ability to mobilize deposits, access
to money market and modernized outlook
ORGANISATION- Separate body corporate
with perpetual succession and common sealmay establish its branches
CAPITAL- Authorised-1 cr.- paid up-50laks-50% subscribed by Central Govt.-15%State
Govt. – 35% by Sponsor Bank

FOREIGN BANKS: Registered outside Indiato operate in India the minimum capital
requirement of US $25 million, spread over 3
branches, that is, US$ 10million for the 1st and
2nd bank respectively and US$5million for the 3rd
branch

The no. of licences fixed is 12 per year both for new
and expansion by existing banks
Development Oriented Banking





Historically, close association between banks and some
traditional industries- cotton textiles in the west, jute
textiles in the east
Banking has not been mere acceptance of deposits and
lending money; included development banking
Lead Bank Scheme- opening bank offices in all
important localities
Providing credit for development of the district
Mobilising savings in the district. ‘Service area
approach’
Progress of banking in India (1)





Nationalisation of banks in 1969: 14 banks were
nationalised
Branch expansion: Increased from 8260 in 1969 to
71177 in 2006
Population served per branch has come down from
64000 to 16000
A rural branch office serves 15 to 25 villages within a
radius of 16 kms
However, at present only 32,180 villages out of 5 lakh
have been covered
Progress of banking in India (2)

Deposit mobilisation:
1951-1971 (20 years)- 700% or 7 times
 1971-1991 (20 years)- 3260% or 32.6 times
 1991- 2006 (11 years)- 1100% or 11 times



Expansion of bank credit: Growing at 20-30%
p.a. thanks to rapid growth in industrial and
agricultural output
Development oriented banking: priority sector
lending
Progress of banking in India (3)

Diversification in banking: Banking has moved
from deposit and lending to
Merchant banking and underwriting
 Mutual funds
 Retail banking
 ATMs
 Internet banking
 Venture capital funds
 Factoring

Profitability of Banks(1)


Reforms have shifted the focus of banks from
being development oriented to being
commercially viable
Prior to reforms banks were not profitable and
in fact made losses for the following reasons:
Declining interest income
 Increasing cost of operations

Profitability of banks (2)

Declining interest income was for the following
reasons:
High proportion of deposits impounded for CRR
and SLR, earning relatively low interest rates
 System of directed lending
 Political interference- leading to huge NPAs


Rising costs of operations for banks was
because of several reasons: economic and
political
Profitability of Banks (3)

As per the Narasimham Committee (1991) the reasons
for rising costs of banks were:





Uneconomic branch expansion
Heavy recruitment of employees
Growing indiscipline and inefficiency of staff due to trade
union activities
Low productivity
Declining interest income and rising cost of operations
of banks led to low profitability in the 90s
Bank profitability: Suggestions

Some suggestions made by Narasimham
Committee are:
Set up an Asset Reconstruction Fund to take over
doubtful debts
 SLR to be reduced to 25% of total deposits
 CRR to be reduced to 3 to 5% of total deposits
 Banks to get more freedom to set minimum lending
rates
 Share of priority sector credit be reduced to 10%
from 40%

Suggestions (cont’d)




All concessional rates of interest should be
removed
Branch expansion should be carried out strictly
on commercial principles
Diversification of banking activities
Almost all suggestions of the Narasimham
Committee
have
been
accepted
and
implemented in a phased manner since the onset
of Reforms
Income Recognition


Incomes from NPAs not recognised on accruals
basis but on receipt basis
If interest debited not recovered within 180
days(2 quarters) then the same shall not be
recognised as income
Non Performing Asset(NPA)
For Cash Credit & OD



Where the outstanding balance remains continuously in
excess of the sanctioned limit/Drawing power OR
Where the outstanding balance is less than the
sanctioned limit/Drawing power, but there is no credits
continuously for 6 months OR
Where the credits are not enough to cover the interest
debited during the 6 months as on the date of the
Balance Sheet
Non Performing Asset(NPA)
(For Loans & Advances)




Standard Assets: are those which are not NPA as they
are regular and performing and there are no adverse
features
Sub-Standard Assets: are those which are NPAs for a
period Not exceeding Two Years
Doubtful Assets: are those non-performing assets
which remain as such for a period, Exceeding 2 years
Loss Assets: are those NPAs where 100% loss has
been identified but not yet written off in the books of
accounts
Provisioning for Loans & Advances
Name of Asset
1.
Standard Asset
2.
Substandard Asset
3.
Doubtful Assets
1.
2.
3.
4.
Doubtful upto 1 year (NPA
more than 2 years but upto
3years)
Doubtful for more than 1 year
but upto 3 years (NPA more
than 3yrs but upto 5 years)
Doubtful for more than 3
years(NPA for more than 5 yrs)
Loss Assets
Provisioning Requirement
1.
No provision is required
2.
General prov.10% of outstanding
3.
100% to the extent of deficit
(deficit=advance –security) Plus
1.
20% of Tangible Security
2.
30% of Tangible Security
3.
50% of Tangible Security
4.
100% of the outstanding
Capital Adequacy Norms (9%)

Tier I Capital:
1.
2.
3.
Paidup Capital
Statutary and other disclosed free reserves
including share premium
General Reserve less



Investment in subsidiaries
Intangible assets
Brought forward and current losses
Capital Adequacy Norms
Tier II capital consists:
1. Undisclosed reserves & cumulative perpetual
preference shares
2. Revaluation Reserves at a discount of 25%
3. Surplus provisions/loss reserves subject to a
maximum of 1.25% weighted Risk Assets
4. Hybrid Debt Capital instrument
5. Subordinated Debt
Capital Adequacy Formula
Capital Adequacy=Capital Funds * 100
Weighted Risk Assets
Other Important Terms



On Balance Sheet Items: Those Items which appear
on the Balance Sheet of a Bank & for which RBI has
given percentage weights to various types of assets
Off Balance Sheet Items: Those items which do not
appear on the face of the Balance Sheet like
Guarantees, Letter of Credit etc.
Dividend Payout Ratio: Banks should have a Capital
Adequacy Ratio of atleast 9 for the a/c yr. for which it
proposes to declare dividend subject to a ceiling on DP
ratio 40%
NPA Management



The Narasimham Committee recommendations
were made, among other things, to reduce the
Non-Performing Assets (NPAs) of banks
To tackle this the government enacted the
Securitization and Reconstruction of Financial
Assets and Enforcement of Security Act
(SARFAESI) Act, 2002
Enabled banks to realise their dues without
intervention of courts
SARFAESI Act





Enables setting up of Asset Management Companies to
acquire NPAs of any bank or FI (SASF, ARCIL are
examples)
NPAs are acquired by issuing debentures, bonds or any
other security
As a second creditor can serve notice to the defaulting
borrower to discharge his/her liabilities in 60 days
Failing which the company can take possession of
assets, takeover the management of assets and appoint
any person to manage the secured assets
Borrowers have the right to appeal to the Debts
Tribunal after depositing 75% of the amount claimed
by the second creditor