PEOPLE‘S EDUCATION SOCEITY‘S DR. AMBEDKAR COLLEGE OF
COMMERCE AND ECONOMICS, WADALA, MUMBAI – 400 031.
NAAC ACCREDITED PROJECT REPORT ON
RISK MANAGEMENT IN BANKING SECTOR SUMITTED
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF
B.COM-BANKING & INSURACE BY
BHASKAR DURAISWAMY ROLL NO 02
T.Y.B.BANKING & INSURANCE (SEMESTER V) UNDER THE GUIDANCE OF
ACADEMIC YEAR 2011-2012 PEOPLE‘S EDUCATION SOCIETY
DR.AMBEDKAR COLLEGE OF COMMERCE & ECONOMICS WADALA, MUMBAI-400031.
CERTIFICATE
NAAC ACCREDITED
This is to certify that, Mr.BHASKAR DURAISWAMY. Of B.com
Banking & Insurance Semester V (2011- 2012) has successfully completes project on ―ROLE OF BANKS IN INDIAN FINANCIAL SYSTEM‖ under the guidance of prof.RASHNA GAIRA.
_____________________ (Signature of Project Guide) _________________________ (Signature of External Examiner) ______________________ (Signature of co-ordinator)
ACKNOWLEDGEMENT
It is my great privilege to thanks Dr. Ambedkar College of Commerce and Economics particularly to Prof. Z.Y.Khan (Co-ordinator of BBI ) for giving this opportunity to complete this project and support us
I also sincerely thank to my guide Prof. ___________ without whose support and guidance it would be impossible to complete the project work.
I also thanks to my parents, relatives and colleagues for their encouragement and support.
Place: _______________
________________
Date: ______________ (Signature)
I Mr. ________________________ the student of Dr. Ambedkar College of Commerce and Economics, studying T.Y.B.Com-Banking & Insurance (Semester v), hereby declare that I have completed this work on.
―ROLE OF BANKS IN INDIAN FINANCIAL SYSTEM‖ 2011-2012The information is genuine and practical to the best of my Knowledge.
Date: _____________
Place: ____________
INDEX
1. INTRODUCTION OF FINANCIAL SYSTEM
2. BANKING SERVICES 3. 4. 5. 6. 7. 8. 9. 10.
CHAPTER 1
INTRODUCTION OF FINANCIAL SYSTEM
Introduction financial system
The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations.
There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.
The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below;
Traditional financial systems in India
The National Bank for Agriculture and Rural Development has planned to conduct a study on the traditional micro-finance system in the northeast for exploring ways to link them with formal banking institutions. In many remote areas of the northeast, where formal banking institutions have not yet reached, traditional micro-finance systems are the only means for savings and credit. These systems have become so popular in some parts of the northeast that people prefer to invest more money in these financial bodies than banks. Marup in Manipur and Sonchoi in Assam were some of the most popular traditional micro-finance systems in the northeast.
Nabard executive director A K Bandyopadhyay said it was absolutely necessary to study the traditional micro-finance systems so that they could be formally linked to banks and financial institutions. "We need to know how the traditional micro-finance systems are working and how exchange of ideas can take place. That is why we want to carry out a comprehensive study on this," added Bandyopadhyay.
The study of traditional micro-finance system has become necessary to find out what has made them more popular than banks. Experts, however, said access barriers to banks have made the traditional system so popular among people. Over the years, these systems have evolved into efficient financial institutions.
"For instance, there are places in Manipur where there are no bank branches. In such a situation it is the Marup which serves as the most dependable financial institution.
FINANCIAL MARKETS
A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.
Money Market- The money market is a wholesale debt market for low-risk,
highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions.Capital Market - The capital market is designed to finance the long-term
investments. The transactions taking place in this market will be for periods over a year.Forex Market - The Forex market deals with the multicurrency
requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe.Credit Market- Credit market is a place where banks, FIs and NBFCs
purvey short, medium and long-term loans to corporate and individuals.FINANCIAL INTERMEDIATION
Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount. When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate information of the issue, issuer and the security should be passed on to take place. There should be a proper channel within the financial system to ensure such transfer. To serve this purpose, Financial intermediaries came into existence. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as the financial system widened along with the developments taking place in the financial markets, the scope of its operations also widened. Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets are different, there may be a few intermediaries offering their services in more than one market e.g. underwriter. However, the services offered by them vary from one market to another.
FINANCIAL INSTRUMENTS
Are those assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.
Some of the important money market instruments are briefly discussed below; 1. Call/Notice Money 2. Treasury Bills 3. Term Money 4. Certificate of Deposit 5. Commercial Papers
1. Call /Notice-Money Market
Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.
2. Inter-Bank Term Money
Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days
3. Treasury Bills.
Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.
4. Certificate of Deposits
Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.
5. Commercial Paper
CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is
thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.
Capital Market Instruments
The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc.
Hybrid Instruments
Hybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid instruments. Examples are convertible debentures, warrants etc.
Chapter 3
Banking Services in India
With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India.
With stiff competition and advancement of technology, the services provided by banks has become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south.
This section of banking deals with the latest discovery in the banking instruments along with the polished version of their old systems.
Structure of the organised banking sector in India. Number of banks are in brackets.
Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.
BankingChannels
ATM is a machine that dispenses cash and sometimes takes deposits without the need for a human bank teller. Some ATMs provide additional services. A branch is a retail location
Call center
Mail: most banks accept check deposits via mail and use mail to communicate to their customers, e.g. by sending out statements
Mobile banking is a method of using one's mobile phone to conduct banking transactions
Online banking is a term used for performing transactions, payments etc. over the Internet
Relationship Managers, mostly for private banking or business banking, often visiting customers at their homes or businesses
Telephone banking is a service which allows its customers to perform transactions over the telephone without speaking to a human
Video banking is a term used for performing banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a videoconference enabled bank branch.clarification
CHAPTER 2
History of banking financial system
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are
behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen
and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".
During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Years Number of banks that failed Authorised capital (Rs. Lakhs) Paid-up Capital (Rs. Lakhs) 1913 12 274 35 1914 42 710 109 1915 11 56 5 1916 13 231 4 1917 9 76 25 1918 7 209 1
Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater
involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."
The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.
Traditional Banking Services
Banks provide a number of services to consumers around the world. Traditional bank locations as well as electronic banking systems allow us to access bank accounts, deposit and withdraw funds, pay bills and more.
Traditional Banking Services
o Bank locations and branch locations offer a full range of services to the customer. Physical bank locations are fully staffed with knowledgeable employees ranging from tellers to loan officers.
Functions
o At a traditional bank, the customer can conduct a number of banking transactions. These include cashing a check, withdrawing funds, opening a new account and applying for a loan.
Considerations
Many consumers utilize both traditional banking services and electronic banking systems for different reasons. Some people prefer to cash checks at the
bank, however they may pay bills online. Convenience of electronic banking makes it a very popular option for many peopleBanks In India
In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players.
All these details and many more is discussed over here. The banks and its relation with the customers, their mode of operation, the names of banks under different groups and other such useful informations are talked about.
One more section has been taken note of is the upcoming foreign banks in India. The RBI has shown certain interest to involve more of foreign banks than the existing one recently. This step has paved a way for few more foreign banks to start business in India.
CHAPTER 4
TYPES OF BANKING IN THE FINANCIAL SYSTEM
Modern Banking
"Modern Banking" is a sequel to the highly successful "Modern Banking in Theory and Practice," first published in 1996. Over the last decade many aspects of banking have changed considerably, though the key features that distinguish banks from other financial institutions remain. Some might question the need for a book on banking rather than one on financial institutions - while
banks remain special and unique to the financial sector, books need to be devoted to them.
"Modern Banking" focuses on the theory and practice of banking, and its prospects in the new millennium. The book is written for courses in banking and finance at Masters/MBA level, or undergraduate degrees specialising in this area. Bank practitioners wishing to deepen and broaden their understanding of banking issues may also be attracted to this book. While they often have exceptional and detailed knowledge of the areas they have worked in, busy bankers may be all too unaware of the key broader issues. Consider the fundamental questions: "What is unique about a bank?" and "What differentiates it from other financial institutions?" Answering these questions begins to show how banks should evolve and adapt - or fail. If bankers know the underlying reasons for "why" profitable banks exist, it will help them to devise strategies for sustained growth.
"Modern Banking" concludes with a set of case studies that give practical insight into the key issues covered in the book: The core banking functionsDifferent types of banks and diversification of bank activitiesRisk management: issues and techniquesGlobal regulation: Basel 1 and Basel 2.Bank regulation in the UK, US, EU, and JapanBanking in emerging marketsBank failure and financial crisesCompetitive issues, from cost efficiency to mergers and acquisitionsCase Studies including: Goldman Sachs, Bankers Trust/Deutsche Bank, Sumitomo Mitsui, Bancomer
Among the Public Sector Banks in India, United Bank of India is one of the 14 major banks which were nationalised on July 19, 1969. Its predecessor, in the Public Sector Banks, the United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and
Hooghly Bank Ltd. (1932).
Oriental Bank of Commerce (OBC), a Governmet of India Undertaking offers Domestic, NRI and Commercial banking services. OBC is implementing a GRAMEEN PROJECT in Dehradun District (UP) and Hanumangarh District (Raiasthan) disbursing small loans. This Public Secotor Bank India has
implemented 14 point action plan for strengthening of credit delivery to women and has designated 5 branches as specialized branches for women
entrepreneurs.
This means that all the resources should be used efficiently to improve the productivity and ensure a win-win situation. To survive in the long run, it is essential to focus on cost saving. Previously, banks focused on the 'revenue' model which is equal to cost plus profit. Post the banking reforms, banks shifted their approach to the 'profit' model, which meant that banks aimed at higher profit maximization.
Banks such as State Bank of India, Bank of Baroda, Syndicate Bank and Canara Bank are known as Public sector banks. Public sector banks are controlled and managed by the Government of India. Public sector banks have been serving the nation for over centuries and are well known for their affordable and quality services.
The banking sector in India is mostly dominated by the Public sector banks. The Public sector banks in India alone account for about 75 percent of the total advances in the Indian banking industry. Public sector banks have shown remarkable growth over the last five four decades.
Private sector BankS
Private Banks are banks like HDFC bank, ICICI Bank, UTI bank and IDBI bank. The concept of private banking was introduced about 15 years ago. These are the banks that do not have any government stakes.
Private Banks have gained quite a strong foothold in the Indian banking industry over the last few years especially because of optimum use of
technology. The Private Banks are accountable for a share of 18.2 percent of the Indian banking industry.
IndusInd Bank was the first private bank in India. Currently the bank is among the fastest growing Bank Private Banks in the country. IDBI which is ranked as the tenth largest global development bank is counted as one of the finest
financial institutions in the subcontinent.
PRIVATE BANKS
Private banking in India was practiced since the begining of banking system in India. The first private bank in India to be set up in Private Sector Banks in India was IndusInd Bank. It is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the tength largest development bank in the world as Private Banks in India and has promoted a world class institutions in India. The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in India as part of the RBI's liberalisation of the Indian Banking Industry. It was incorporated in August
1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled Commercial Bank in January 1995. ING Vysya, yet another Private Bank of India was incorporated in the year 1930. Bangalore has a pride of place for having the first branch inception in the year 1934. With successive years of patronage and constantly setting new standards in banking, ING Vysya Bank has many credits to its account.
Co--operative BANKS
The Co operative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co operative, the expectations the co operative is supposed to fulfil, their number, and the number of offices the cooperative bank operate. Though the co operative movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India plays an important role even today in rural financing. The businessess of cooperative bank in the urban areas also has increased phenomenally in recent years due to the sharp increase in the number of primary co-operative banks.
Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
Urban Cooperative Banks in India
The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centred around communities, localities work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.
The origins of the urban cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany such societies were set up in India. Cooperative societies are based on the principles of cooperation, - mutual help, democratic decision making and open membership. Cooperatives represented a new and alternative approach to organisaton as against proprietary firms, partnership firms and joint stock companies which represent the dominant form of commercial organisation.
The Beginnings
The first known mutual aid society in India was probably the ‗Anyonya Sahakari Mandali‘ organised in the erstwhile princely State of Baroda in 1889 under the guidance of Vithal Laxman also known as Bhausaheb Kavthekar. Urban co-operative credit societies, in their formative phase came to be organised on a community basis to meet the consumption oriented credit needs of their members. Salary earners‘ societies inculcating habits of thrift and self help played a significant role in popularising the
movement, especially amongst the middle class as well as organized labour. From its origins then to today, the thrust of UCBs, historically, has been to mobilise savings from the middle and low income urban groups and purvey credit to their members - many of which belonged to weaker sections.
The enactment of Cooperative Credit Societies Act, 1904, however, gave the real impetus to the movement. The first urban cooperative credit society was registered in Canjeevaram (Kanjivaram) in the erstwhile Madras province in October, 1904. Amongst the prominent credit societies were the Pioneer Urban in Bombay (November 11, 1905), the No.1 Military Accounts Mutual Help Co-operative Credit Society in Poona (January 9, 1906). Cosmos in Poona (January 18, 1906), Gokak Urban (February 15, 1906) and Belgaum Pioneer (February 23, 1906) in the Belgaum district, the Kanakavli-Math Co-operative Credit Society and the Varavade Weavers‘ Urban Credit Society (March 13, 1906) in the South Ratnagiri (now Sindhudurg) district. The most prominent amongst the early credit societies was the Bombay Urban Co-operative Credit Society, sponsored by Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906..
The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad basing it to enable organisation of non-credit societies. The Maclagan Committee of 1915 was appointed to review their performance and suggest measures for strengthening them. The committee observed that such institutions were eminently suited to cater to the needs of the lower and middle income strata of society and would inculcate the principles of banking amongst the middle classes. The committee also felt that the urban cooperative credit movement was more viable than agricultural credit societies. The recommendations of the Committee went a long way in establishing the urban cooperative credit movement in its own right.
In the present day context, it is of interest to recall that during the banking crisis of 1913-14, when no fewer than 57 joint stock banks collapsed, there was a there was a flight of deposits from joint stock
3banks to cooperative urban banks. Maclagan Committee chronicled this event thus:
―As a matter of fact, the crisis had a contrary effect, and in most provinces, there was a movement to withdraw deposits from non-cooperatives and place them in cooperative institutions, the distinction between two classes of security being well appreciated and a preference being given to the latter owing partly to the local character and publicity of cooperative institutions but mainly, we think, to the connection of Government with Co operative movement‖.
Development Bank/Financial institutionsDevelopment Bank/Financial institutions
Introduction
Rural Cooperative Banking and Credit Institutions play an
important role in meeting the growing credit needs of rural India. The volume of credit flowing through these institutions has increased. The performance of these institutions, however (apparent in the share of total institutional credit and the indicators of their financial health), has been less than satisfactory and is deteriorating rapidly. Of late, a number of Committees have gone into the reasons for this situation and suggested remedial measures, but there has been little progress in implementing their recommendations.
revitalising the rural cooperative credit structure (CCS) and attributes high priority and urgency to it, felt it necessary to commission a fresh review. The Union Government constituted a Task Force (vide
Government of India notification dated 05 August 2004 reproduced in Annexure I) to formulate a practical and implementable plan of action to rejuvenate the rural cooperative credit structure. The Task Force comprises the following members and permanent invitees:
Commercial Banks
The commercial banking structure in India consists of:
Scheduled Commercial Banks Unscheduled Banks
Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934.
RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accomodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI.
For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.
BANKING SERVICES
For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.
Different methods of Granting Loans by Bank
The basic function of a commercial bank is to make loans and advances out of the money which is received from the public by way of deposits. The loans are particularly granted to businessmen and members of the public against personal security, gold and silver and other movable and immovable assets. Commercial bank generally lend money in the following form:
i) Cash credit ii) Loans
iii) Bank overdraft, and iv) Discounting of Bills i) Cash Credit :
A cash credit is an arrangement whereby the bank agrees to lend money to the borrower upto a certain limit. The bank puts this amount of
money to the credit of the borrower. The borrower draws the money
28 :: Business Studies
as and when he needs. Interest is charged only on the amount actually drawn and not on the amount placed to the credit of borrower‘s account. Cash credit is generally granted on a bond of credit or certain other securities. This a very popular method of lending in our country. ii) Loans :
A specified amount sanctioned by a bank to the customer is called a ‗loan‘. It is granted for a fixed period, say six months, or a year. The specified amount is put on the credit of the borrower‘s account. He can withdraw this amount in lump sum or can draw cheques against this sum for any amount. Interest is charged on the full amount even if the borrower does not utilise it. The rate of interest is lower on loans in comparison to cash credit. A loan is generally granted against the security of property or personal security. The loan may be repaid in lump sum or in instalments. Every bank has its own procedure of granting loans. Hence a bank is at liberty to grant loan depending on its own resources.
The loan can be granted as: a) Demand loan, or
b) Term loan a) Demand loan
Demand loan is repayable on demand. In other words it is repayable at short notice. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lumpsum (one time) or as agreed with the bank. Loans are normally granted by the bank against tangible securities including securities like N.S.C., Kisan Vikas Patra, Life Insurance policies and U.T.I. certificates. b) Term loans
are granted for more than one year and repayment of such loans is spread over a longer period. The repayment is generally made in suitable instalments of fixed amount. These loans are repayable over a period of 5 years and maximum upto 15 years.
Functions of Commercial Banks :: 29
Term loan is required for the purpose of setting up of new
business activity, renovation, modernisation, expansion/extension of existing units, purchase of plant and machinery, vehicles, land for setting up a factory, construction of factory building or
purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and other securities. The normal rate of interest charged for such loans is generally quite high.
iii) Bank Overdraft
Overdraft facility is more or less similar to cash credit facility. Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to withdraw a specified amount over and above the credit balance in his/her account. It is a short term facility. This facility is made available to current account holders who operate their account through cheques. The customer is permitted to withdraw the amount as and when he/she needs it and to repay it through deposits in his account as and when it is convenient to him/her.
Overdraft facility is generally granted by bank on the basis of a written request by the customer. Some times, banks also insist on either a
promissory note from the borrower or personal security to ensure safety of funds. Interest is charged on actual amount withdrawn by the
customer. The interest rate on overdraft is higher than that of the rate on loan.
iv) Discounting of Bills
Apart from granting cash credit, loans and overdraft, banks also grant financial assistance to customers by discounting bills of exchange. Banks purchase the bills at face value minus interest at current rate of interest for the period of the bill. This is known as ‗discounting of bills‘. Bills of exchange are negotiable instruments and enable the debtors to
discharge their obligations towards their creditors. Such bills of exchange arise out of commercial transactions both in internal trade and external trade. By discounting these bills before they are due for a nominal amount, the banks help the business community. Of course, the banks
foreign banks
Foreign Banks in India always brought an explanation about the prompt
services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative.
New rules announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allows them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that forign banks in India may not
acquire Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely. Please see the list of Foreign banks in India till date.
Development Banks In India
A Development Bank is a polygonal development finance institution devoted to improving the social and monetary development of its associate nations. Its main emphasis is the welfare of the people. For example the Asian Development Bank's overarching goal is to decrease poverty in Asia and the Pacific. It helps improve the value of people's lives by providing loans and scientific support for a broad variety of development activities.
A development bank's policies or programs center on the
following priorities:
a) Economic Growth b) Human Development c) Gender and Development d) Good Governance
e) Environmental Protection f) Private Sector Development g) Regional cooperation
The main functions of a Development Bank:
a) Increase loans and equity investments to its developing associate countries
(DMCs) for their monetary and social development.
b) Provides technical help for the planning and implementation of development
projects and programs and for advisory services.
and development.
d) Responds to requests for assistance in coordinating growth policies and plans
of its increasing member countries.
Formation of Development Banks In India:
Development banks were set up in India at various points of time starting from the late 1940s to cater to the medium to long term financing requirements of industry as the capital market in India had not developed sufficiently. The endorsement of planned industrialization at the national level provided the critical enticement for organization of Development banks at both all-India and state levels.
In order to perform their role, Development Banks were extended funds in the shape of Long Term Operations (LTO) Fund of the Reserve bank of India and government guaranteed bonds, which constituted main sources of their funds. Funds from these sources were not only available at concessional rates, but also on a long term basis with their maturity period ranging from 10-15 years.
On the asset side, their operations were marked by near absence of competition. A large variety of economic institutions have come into existence over the years to perform a type of financial actions While some of them operate at all-India level, others are state level institutions.
Besides providing direct loans, financial institutions also extend economic assistance by way of underwriting and direct contribution and by issuing guarantees. Recently, some Development Banks have started extending short term/working capital finance, although long term lending continues to be their major activity.
ROLE OF BANKS IN THE FINANCIAL SYSTEM
Money lending in one form or the other has evolved along with the history of the mankind. Even in the ancient times there are references to the moneylenders. Shakespeare also referred to ‗Shylocks‘ who made unreasonable demands in case the loans were not repaid in time along with interest. Indian history is also replete with the instances referring to indigenous money lenders, Sahukars and Zamindars involved in the business of money lending by mortgaging the landed property of the borrowers.
Towards the beginning of the twentieth century, with the onset of modern industry in the country, the need for government regulated banking system was felt. The British government began to pay attention towards the need for an organised banking sector in the country and Reserve Bank of India was set up to regulate the formal banking sector in the country. But the growth of modern banking remained slow mainly due to lack of surplus capital in the Indian economic system at that point of time. Modern banking institutions came up only in big cities and industrial centres. The rural areas, representing vast majority of Indian society, remained dependent on the indigenous money lenders for their credit needs.
Independence of the country heralded a new era in the growth of modern banking. Many new commercial banks came up in various parts of the country. As the modern banking network grew, the government began to realise that the banking sector was catering only to the needs of the well-to-do and the capitalists. The interests of the poorer sections as well as those of the common man were being ignored.
In 1969, Indian government took a historic decision to nationalise 14 biggest private commercial banks. A few more were nationalised after a couple of years. This resulted in transferring the ownership of these banks to the State and the Reserve Bank of India could then issue directions to these banks to fund the national programmes, the rural sector, the plan priorities and the priority sector at differential rate of interest. This resulted in providing fillip the banking facilities to the rural areas, to the under-privileged and the downtrodden. It also resulted in
financial inclusion of all categories of people in almost all the regions of the country.
However, after almost two decades of bank nationalisation some new issues became contextual. The service standards of the public sector banks began to decline. Their profitability came down and the efficiency of the staff became suspect. Non-performing assets of these banks began to rise. The wheel of time had turned a full circle by early nineties and the government after the introduction of structural and economic reforms in the financial sector, allowed the setting up of new banks in the private sector.
The new generation private banks have now established themselves in the system and have set new standards of service and efficiency. These banks have also given tough but healthy competition to the public sector banks.
ModernDayRole
Banking system and the Financial Institutions play very significant role in the economy. First and foremost is in the form of catering to the need of credit for all the sections of society. The modern economies in the world have developed primarily by making best use of the credit availability in their systems. An efficient banking system must cater to the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors. At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units. Rural sector in a country like India can grow only if cheaper credit is available to the farmers for their short and medium term needs.
Credit availability for infrastructure sector is also extremely important. The success of any financial system can be fathomed by finding out the availability of reliable and adequate credit for infrastructure projects. Fortunately, during the past about one decade there has been increased participation of the private sector in infrastructure projects.
The banks and the financial institutions also cater to another important need of the society i.e. mopping up small savings at reasonable rates with several options. The common man has the option to park his savings under a few alternatives, including the small savings schemes introduced by the government from time to time and in bank deposits in the form of savings accounts, recurring deposits and time deposits. Another option is to invest in the stocks or mutual funds.
In addition to the above traditional role, the banks and the financial institutions also perform certain new-age functions which could not be thought of a couple of decades ago. The facility of internet banking enables a consumer to access and operate his bank account without actually visiting the bank premises. The facility of ATMs and the credit/debit cards has revolutionised the choices available with the customers. The banks also serve as alternative gateways for making payments on account of income tax and online payment of various bills like the telephone, electricity and tax. The bank customers can also invest their funds in various stocks or mutual funds straight from their bank accounts. In the modern day economy, where people have no time to make these payments by standing in queue, the service provided by the banks is commendable.
While the commercial banks cater to the banking needs of the people in the cities and towns, there is another category of banks that looks after the credit and banking needs of the people living in the rural areas, particularly the farmers. Regional Rural Banks (RRBs) have been sponsored by many commercial banks in several States. These banks, along with the cooperative banks, take care of the farmer-specific needs of credit and other banking facilities.
Future
Till a few years ago, the government largely patro-nized the small savings schemes in which not only the interest rates were higher, but the income tax rebates and incentives were also in plenty. The bank deposits, on the other hand, did not entail such benefits. As a result, the small savings were the first choice of the investors. But for the last few years the trend has been reversed. The small savings, the bank
deposits and the mutual funds have been brought at par for the purpose of incentives under the income tax. Moreover, the interest rates in the small savings schemes are no longer higher than those offered by the banks.
Banks today are free to determine their interest rates within the given limits prescribed by the RBI. It is now easier for the banks to open new branches. But the banking sector reforms are still not complete. A lot more is required to be done to revamp the public sector banks. Mergers and amalgamation is the next measure on the agenda of the government. The government is also preparing to disinvest some of its equity from the PSU banks. The option of allowing foreign direct investment beyond 50 per cent in the Indian banking sector has also been under consideration.
Banks and financial intuitions have played major role in the economic development of the country and most of the credit- related schemes of the government to uplift the poorer and the under-privileged sections have been implemented through the banking sector. The role of the banks has been important, but it is going to be even more important in the future.
Role of banks and development finance institutions (DFIs)
India being a geographically vast country with its rural population constituting almost 70% of the total,
the role of regional rural banks remains important. The banking sector, characterised by the presence
of internationally active banks, national-level banks and regional rural banks, is likely to be preserved
to cater to the needs of a varied customer base. Consequent to liberalisation and financial sector
reforms, there has been some blurring of distinction between the activities of banks and DFIs. In
particular, the traditional distinction between commercial banking and investment banking has tended
to narrow somewhat. Banks have been moving into certain areas which were the exclusive domain of
the DFIs, eg project finance and investment banking. DFIs have recently been given the option to
convert themselves into universal banks with the RBI.s approval. To this end, a DFI would need to
prepare a transition path in order to comply fully with the statutory and regulatory requirements
applicable to banks. The RBI will consider such requests on a case by case basis.
Banks play a large role in the economy of every country in the world. They offer a large and ever expanding number of services to the public and private sector such as long and short-term loans, annuities, savings accounts,
mortgages, financial advice, and other financial services. Today people want more and more innovative services and with more competition in the banking industry, advertising has become much more common and it is vital for banks looking to survive in a tough market.
One of the main jobs for a banking executive today is to identify who their target market is and to market services that will appeal to that segment. Part of identifying your target market is determining the age, race, and ethnic make-up of the main customers and designing a campaign that will appeal to that group of people. If the target market for example is young married couples a good marketing campaign may involve long-term savings programs, college funds for any children they may have, and loans for a home.
If the target market is older couples who are in general better off financially the focus should be accounts that pay a fair market rate in interest. Since people in this category tend to have larger bank balances offering them more for their money makes it much more likely that you'll land their business and loyalty. Banks are getting more serious about marketing and it shows. All you have to do is watch television for a short period of time and you'll see a number of ads for banks that have branches all over the country. Expect this trend to continue as banks add more services in attempt to get more return on their money. In a competitive marketplace, effective marketing can be the difference between success and failure.
Chapter 3
Role of banks in Indian financial system
In India , as in many developing countries , the commercial banking sector has been the dominant element in the country‟s financial system . The sector has performed the key functions of providing liquidity and payment services to the real sector and has accounted for the Bulk of the financial intermediation process . Besides institutionalizing savings , the banking sector has contributed to the process of economic development by serving as a major source of credit to households , government , business and to weaker sectors of the economy like village and small scale industries and agriculture. Over the years, over 30-40% of gross household savings , have been in the form of bank deposits and around 60% of the assets of all financial institutions accounted for by commercial banks.
An important landmark in the development of banking sector in recent years has been the initiation if reforms following the recommendations of the first Narasimham Committee on Financial System. In reviewing the strengths and
weaknesses of these banks , the Committee suggested several measures to transform the Indian banking sector from a highly regulated to a more market oriented system and to enable it to compete effectively in an increasingly globalised environment . Many of the recommendations of the Committee especially those pertaining to Interest rate , an institution of prudential regulation and transparent accounting norms were in line with banking policy reforms implemented by a host of developing countries
Banking services in Indian Financial system
With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India.
With stiff competition and advancement of technology, the services provided by banks has become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south.
This section of banking deals with the latest discovery in the banking instruments along with the polished version of their old systems.
Hire purchase (abbreviated HP) is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now be found in China, Japan, Malaysia, India, Australia, Jamaica and New Zealand. It is also called closed-end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. In Canada and the United States, a hire purchase is termed an installment plan; other analogous practices are described as closed-end leasing or rent to own. The British concept of hire-purchase has, however, been there in India for more than 6 decates. The first hire-purchase company is believed to be Commercial Credit Corporation, successor to Auto Supply Company. While this company was based in Madras, Motor and General Finance and Instalment Supply Company were set up in North India. These companies were set up in the 1920s and 1930s.
Development of Hire-purchase took two forms: consumer durables and automobiles.
Consumer durables hire-purchase was promoted by the dealers in the respective equipment. Thus, Singer Sewing Machine company, or Murphy radio dealers would provide instalment facilities on hire-purchase basis to the customers of their products.
The other side developed very fast - hire-purchase of commercial vehicles. The dealers in commercial vehicles as well as pure financing companies sprang up.
The value of the asset being good and repossession being easy, this branch of financing activity flourished fast, although until recently, most of automobile financing business was in hands of family-owned businesses.
Essentially, asset-based financing in India particularly by non-banking financial companies is split in two documentation modes - lease and hire-purchase. These two are technically different instruments, but in essence, there is not much that differs between the two, except for the caption. Click here for more on comparison between lease and hire-purchase.
In spite of the substantive similarity, historically, there has been a diametric separation between these two forms. The assets usually subject matter of hire-purchase have been different from those generally leased out. Leasing has been used mostly for plant and machinery, while hire-purchase has commonly been used for vehicles. Even the players have been different.
The reasons for this diametric distinction are more historical than logical. Hire-purchase, essentially a British form, entered India during the Colonial era, and thrived as almost the only form of external finance available for commercial vehicles. For the financiers, as witnessed World-over, commercial vehicles was the natural choice for several asset-features he loves: lasting value, ready secondary market, self-paying feature, etc. Hence, the industry of hire-purchase became synonymous with truck-financing. Besides, the motor vehicles laws gave the surest legal protection any law could give to a financier: the financier would not have to carry any of the operational risks of a motor vehicle, and yet, any transfer of the vehicle would not be possible without the financier's assent.
Leasing, essentially a US-innovation, entered the country significantly in the early 80s, and was propagated as an alternative to traditional modes of industrial finance. Besides, the early motivation (which continues with a
number of players even now) of leasing was capital allowances, more significantly the investment allowance, which was not available for transport vehicles. Hence, the leasing form historically clung to industrial plant and machinery.
For several years, there was no lease of vehicles, because the Motor Vehicles law protection was not applicable to a lease, and there was no investment allowance on vehicles, and for reciprocal reasons, there was no hire-purchase of industrial machinery.
These reasons have vanished over time.
The Motor Vehicles law now treats leases and hire-purchase at par from the viewpoint of financier-protection.
Investment allowance has been abolished, and hence, there are no predominant tax-preferences to a lease.
The RBI treats lease and hire-purchase at par and has stopped giving a distinctive classification to leasing and hire-purchase companies.
The accounting norms lead to the same effect on pre-tax income, as also balance sheet values, be it a lease or hire-purchase transactions.
Financial service are an important component of financial system. Thesmooth functioning of financial system depends upon the range of financialservices extended by the providers. Financial services in India havewitnessed remarkable changes in the recent past after the implementation of
―Liberalization, privatization and globalization‖
.Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vital role asspecialized agencies. The resources raising functions remains to be the primary business of a merchant banker. The primary market holds the key torapid capital formation, growth in industrial productions and exports. Therehas to be accountability to the end use of funds raised from the market. Theincrease in the number of issues and amount raised the number of merchant bankers. Therefore, the field became highly competitive market where itrequires a specialized skill in handling the situation. The merchant bankershave a social responsibility to in building an industrial structure in India.
Investment
Investment has different meanings in finance and economics. In Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security of principle, as well as security of return, within an expected period of time.[1] In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling.
Investment is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments.
Investing in the stock market requires in-depth analysis of the scrip and the companies and the business that they are involved in. Retail investors seldom have the time and expertise to analyse stocks.
In India, Mutual funds come to the rescue of such investors. All wary investors know that the best way to make money is to involve in stock market investing and buying Indian mutual funds.
Mutual Funds in India comprise of a group of investors come together and create a corpus which in invested in the stock market by a fund manager. Thus, the investors can depend on the expertise of the fund manager in order to maximise the returns on their mutual fund portfolio.
In India, Mutual Funds invest in different securities subject to the investment objective as set forth in the prospectus. The prospectus is a legal document under SEBI laws and contains a lot of information about the mutual fund.
Investing in mutual funds in India has many benefits:
The expertise of the fund manager of the AMC that manages mutual funds money in India helps the investor to maximise the profits on the amount invested in the mutual fund.
Indian Mutual Funds invest money in a widespread basket of shares and equities, depending on the nature of the Fund and switch investments to different securities depending on the Equity market conditions
In India, Mutual funds are an easy and cost efficient way of investing along with tax benefits.
There are many kinds of mutual funds available for the investors to choose from.
Sector Specific Mutual Fund
Large/Small/Mid – cap Mutual Fund Index Mutual Funds
Here is some information on companies that would enable you to invest in some of the best mutual funds in India:
SBI Mutual Fund
Franklin Templeton Mutual Fund Reliance Mutual Fund
Tata Mutual Fund
Sundaram BNP Paribas MutualFund Fidelity Investments Mutual Fund
The capital markets today have not only become far more complex in terms of compliances, methodologies, effects and analysis but also need a constant tracking mechanism. As is the case globally, the Indian investor has also realized the advantages of seeking professional advice in order to not only manage but also augment his portfolio.
The Portfolio Management Schemes of the Company offer Discretionary Schemes (Unicon Optimizer & Unicon Growth) for Individuals, Corporate Bodies, Partnership firms, Proprietors, Non Resident Indians etc. The Company is registered with SEBI enabling it to undertake Portfolio Management activities under a specific license.
For any market condition:
Choose from our range of PMS products that are designed to perform in any market based on your investment objectives
Professional Fund Management:
The Schemes, duly approved by SEBI, are managed by a highly competent team comprising of portfolio managers and equity strategists, backed by a team of fundamental, technical and derivatives analysts
Personalized Service:
Proactive management of your funds by fund manager; backed by a Central Research team of Analysts and serviced by your dedicated Relationship Manager
Timely Review & Reporting:
