Banking - Evolution , Rbi

7/30/2019 Banking - Evolution , Rbi

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SOURCE: http://www.dnb.co.in/bfsisectorinindia/BankC2.asp

Evolution of the Indian Banking Industry:

The Indian banking industry has its foundations in the 18th century, and has had a varied evolutionary experience sincethen. The initial banks in India were primarily traders banks engaged only in financing activities. Banking industry in thepre-independence era developed with the Presidency Banks, which were transformed into the Imperial Bank of India andsubsequently into the State Bank of India. The initial days of the industry saw a majority private ownership and a highlyvolatile work environment. Major strides towards public ownership and accountability were made with nationalisation in1969 and 1980 which transformed the face of banking in India. The industry in recent times has recognised the importanceof private and foreign players in a competitive scenario and has moved towards greater liberalisation.
http://www.dnb.co.in/bfsisectorinindia/BankC2.asphttp://www.dnb.co.in/bfsisectorinindia/BankC2.asp


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In the evolution of this strategic industry spanning over two centuries, immense developments have been made in terms of the regulations governing it, the ownership structure, products and services offered and the technology deployed. The entireevolution can be classified into four distinct phases.

Phase I- Pre-Nationalisation Phase (prior to 1955) Phase II- Era of Nationalisation and Consolidation (1955-1990) Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial Liberalisation (1990-2004) Phase IV- Period of Increased Liberalisation (2004 onwards)

Current Structure

Currently the Indian banking industry has a diverse structure. The present structure of the Indian banking industry has beenanalyzed on the basis of its organised status, business as well as product segmentation.

Organisational Structure

The entire organised banking system comprises of scheduled and non-scheduled banks. Largely, this segment comprises of the scheduled banks, with the unscheduled ones forming a very small component. Banking needs of the financially excludedpopulation is catered to by other unorganised entities distinct from banks, such as, moneylenders, pawnbrokers andindigenous bankers.

Scheduled Banks

A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In order to be included under thisschedule of the RBI Act, banks have to fulfill certain conditions such as having a paid up capital and reserves of at least 0.5million and satisfying the Reserve Bank that its affairs are not being conducted in a manner prejudicial to the interests of itsdepositors. Scheduled banks are further classified into commercial and cooperative banks. The basic difference betweenscheduled commercial banks and scheduled cooperative banks is in their holding pattern. Scheduled cooperative banks arecooperative credit institutions that are registered under the Cooperative Societies Act. These banks work according to thecooperative principles of mutual assistance.

Scheduled Commercial Banks (SCBs):

Scheduled commercial banks (SCBs) account for a major proportion of the business of the scheduled banks. As at end-

March, 2009, 80 SCBs were operational in India. SCBs in India are categorized into the five groups based on their ownershipand/or their nature of operations. State Bank of India and its six associates (excluding State Bank of Saurashtra, which hasbeen merged with the SBI with effect from August 13, 2008) are recognised as a separate category of SCBs, because of thedistinct statutes (SBI Act, 1955 and SBI Subsidiary Banks Act, 1959) that govern them. Nationalised banks (10) and SBIand associates (7), together form the public sector banks group and control around 70% of the total credit and depositsbusinesses in India. IDBI ltd. has been included in the nationalised banks group since December 2004. Private sector banksinclude the old private sector banks and the new generation private sector banks- which were incorporated according to therevised guidelines issued by the RBI regarding the entry of private sector banks in 1993. As at end-March 2009, there were15 old and 7 new generation private sector banks operating in India.

Foreign banks are present in the country either through complete branch/subsidiary route presence or through theirrepresentative offices. At end-June 2009, 32 foreign banks were operating in India with 293 branches. Besides, 43 foreignbanks were also operating in India through representative offices.


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Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural economy by providing bankingservices in such areas by combining the cooperative specialty of local orientation and the sound resource base which is thecharacteristic of commercial banks. RRBs have a unique structure, in the sense that their equity holding is jointly held bythe central government, the concerned state government and the sponsor bank (in the ratio 50:15:35), which is responsiblefor assisting the RRB by providing financial, managerial and training aid and also subscribing to its share capital.

Between 1975 and 1987, 196 RRBs were established. RRBs have grown in geographical coverage, reaching out to increasingnumber of rural clientele. At the end of June 2008, they covered 585 out of the 622 districts of the country. Despite growingin geographical coverage, the number of RRBs operational in the country has been declining over the past five years due torapid consolidation among them. As a result of state wise amalgamation of RRBs sponsored by the same sponsor bank, thenumber of RRBs fell to 86 by end March 2009.

Scheduled Cooperative Banks:

Scheduled cooperative banks in India can be broadly classified into urban credit cooperative institutions and ruralcooperative credit institutions. Rural cooperative banks undertake long term as well as short term lending. Creditcooperatives in most states have a three tier structure (primary, district and state level).

Non-Scheduled Banks:

Non-scheduled banks also function in the Indian banking space, in the form of Local Area Banks (LAB). As at end-March2009 there were only 4 LABs operating in India. Local area banks are banks that are set up under the scheme announced bythe government of India in 1996, for the establishment of new private banks of a local nature; with jurisdiction over a


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maximum of three contiguous districts. LABs aid in the mobilisation of funds of rural and semi urban districts. Six LABs wereoriginally licensed, but the license of one of them was cancelled due to irregularities in operations, and the other wasamalgamated with Bank of Baroda in 2004 due to its weak financial position.

Business Segmentation

The entire range of banking operations are segmented into four broad heads- retail banking businesses, wholesale bankingbusinesses, treasury operations and other banking activities. Banks have dedicated business units and branches for retailbanking, wholesale banking (divided again into large corporate, mid corporate) etc.

Retail banking

It includes exposures to individuals or small businesses. Retail banking activities are identified based on four criteria of orientation, granularity, product criterion and low value of individual exposures. In essence, these qualifiers imply that retailexposures should be to individuals or small businesses (whose annual turnover is limited to Rs. 0.50 billion) and could takeany form of credit like cash credit, overdrafts etc. Retail banking exposures to one entity is limited to the extent of 0.2% of the total retail portfolio of the bank or the absolute limit of Rs. 50 million. Retail banking products on the liability sideincludes all types of deposit accounts and mortgages and loans (personal, housing, educational etc) on the assets side of banks. It also includes other ancillary products and services like credit cards, demat accounts etc.

The retail portfolio of banks accounted for around 21.3% of the total loans and advances of SCBs as at end-March 2009.The major component of the retail portfolio of banks is housing loans, followed by auto loans. Retail banking segment is awell diversified business segment. Most banks have a significant portion of their business contributed by retail bankingactivities. The largest players in retail banking in India are ICICI Bank, SBI, PNB, BOI, HDFC and Canara Bank.

Among the large banks, ICICI bank is a major player in the retail banking space which has had definitive strategies in placeto boost its retail portfolio. It has a strong focus on movement towards cheaper channels of distribution, which is vital forthe transaction intensive retail business. SBIs retail business is also fast growing and a strategic business unit for the bank.Among the smaller banks, many have a visible presence especially in the auto loans business. Among these banks thereliance on their respective retail portfolio is high, as many of these banks have advance portfolios that are concentrated incertain usages, such as auto or consumer durables. Foreign banks have had a somewhat restricted retail portfolio tillrecently. However, they are fast expanding in this business segment. The retail banking industry is likely to see a highcompetition scenario in the near future.

Wholesale banking

Wholesale banking includes high ticket exposures primarily to corporates. Internal processes of most banks classifywholesale banking into mid corporates and large corporates according to the size of exposure to the clients. A large portionof wholesale banking clients also account for off balance sheet businesses. Hedging solutions form a significant portion of exposures coming from corporates. Hence, wholesale banking clients are strategic for the banks with the view to gain otherbusiness from them. Various forms of financing, like project finance, leasing finance, finance for working capital, termfinance etc form part of wholesale banking transactions. Syndication services and merchant banking services are alsoprovided to wholesale clients in addition to the variety of products and services offered.


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Wholesale banking is also a well diversified banking vertical. Most banks have a presence in wholesale banking. But thisvertical is largely dominated by large Indian banks. While a large portion of the business of foreign banks comes fromwholesale banking, their market share is still smaller than that of the larger Indian banks. A number of large private playersamong Indian banks are also very active in this segment. Among the players with the largest footprint in the wholesalebanking space are SBI, ICICI Bank, IDBI Bank, Canara Bank, Bank of India, Punjab National Bank and Central Bank of India. Bank of Baroda has also been exhibiting quite robust results from its wholesale banking operations.

Treasury Operations

Treasury operations include investments in debt market (sovereign and corporate), equity market, mutual funds,

derivatives, and trading and forex operations. These functions can be proprietary activities, or can be undertaken oncustomers account. Treasury operations are important for managing the funding of the bank. Apart from core bankingactivities, which comprises primarily of lending, deposit taking functions and services; treasury income is a significantcomponent of the earnings of banks. Treasury deals with the entire investment portfolio of banks (categories of HTM, AFSand HFT) and provides a range of products and services that deal primarily with foreign exchange, derivatives andsecurities. Treasury involves the front office (dealing room), mid office (risk management including independent reporting tothe asset liability committee) and back office (settlement of deals executed, statutory funds management etc).

Other Banking Businesses

This is considered as a residual category which includes all those businesses of banks that do not fall under any of theaforesaid categories. This category includes para banking activities like hire purchase activities, leasing business, merchantbanking, factoring activities etc.

Products of the Banking Industry

The products of the banking industry broadly include deposit products, credit products and customized banking services.Most banks offer the same kind of products with minor variations. The basic differentiation is attained through quality of service and the delivery channels that are adopted. Apart from the generic products like deposits (demand deposits current, savings and term deposits), loans and advances (short term and long term loans) and services, there have beeninnovations in terms and products such as the flexible term deposit, convertible savings deposit (wherein idle cash insavings account can be transferred to a fixed deposit), etc. Innovations have been increasingly directed towards the deliverychannels used, with the focus shifting towards ATM transactions, phone and internet banking. Product differentiatingservices have been attached to most products, such as debit/ATM cards, credit cards, nomination and demat services.


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Other banking products include fee-based services that provide non-interest income to the banks. Corporate fee-basedservices offered by banks include treasury products; cash management services; letter of credit and bank guarantee; billdiscounting; factoring and forfeiting services; foreign exchange services; merchant banking; leasing; credit rating;underwriting and custodial services. Retail fee-based services include remittances and payment facilities, wealthmanagement, trading facilities and other value added services.

Non-Banking Financial Companies (NBFC) have rapidly emerged as an important segment of the Indian financial system.Moreover, NBFCs assume significance in the small business segment as they primarily cater to the credit requirements of the unorganised sector such as wholesale & retail traders, small-scale industries and small borrowers at the local level.NBFC is a heterogeneous group of financial institutions, performing a wide range of activities like hire-purchase finance,vehicle financing, equipment lease finance, personal loans, working capital loans, consumer loans, housing loans, loansagainst shares and investment, etc. NBFCs are broadly divided into three categories namely (i) NBFCs accepting depositsfrom banks (NBFC-D); (ii) NBFCs not accepting/holding public deposits (NBFC-ND); and (iii) core investment companies (i.e.those acquiring share/securities of their group/holding/subsidiary companies to the extent of not less than 90% of totalassets and which do not accept public deposits.)

The segment has witnessed considerable growth in the last few years and is now being recognised as complementary to thebanking sector due to implementation of innovative marketing strategies, introduction of tailor-made products, customer-oriented services, attractive rates of return on deposits and simplified procedures, etc.

While the functions of NBFCs are just like banks, there are few differences between both the institutions. These are: (i)NBFC cannot accept demand deposits; (ii) NBFC is not part of the payment and settlement system as well as it cannot issuecheques drawn on itself and (iii) deposit insurance facility of Deposit Insurance & Credit Guarantee Corporation is notavailable for NBFC depositors unlike in the case of banks.


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Regulatory Framework


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TYPES OF BANK DEPOSITS / ACCOUNTS (BY BANKS IN INDIA)

CURRENT DEPOSITS / ACCOUNTS

SAVING BANK / FUND DEPOSITS /

ACCOUNTSRECURRING DEPOSITS / ACCOUNTS

FIXED DEPOSITS / ACCOUNTS OR TERMDEPOSITS

Traditionally banks in India have four types of deposit accounts, namely Current Accounts, SavingBanking Accounts, Recurring Deposits and, Fixed Deposits. However, in recent years, due to ever

increasing competition, some banks have introduced new products, which combine the features of abovetwo or more deposits. These are known by different names in different banks, e.g 2-in-1 deposits, Smart

Deposits, Power Saving Deposits, Automatic Sweep Deposits etc. However, these have not been verypopular among the public.

What is a Current Account ? Who uses current accounts?

These accounts are used mainly by businessmen and are never used for the purpose of investment.These deposits are the most liquid deposits and there are no limits for number of transactions or the

amount of transactions in a day. Most of the current account are opened in the names of firm / companyaccounts. Cheque book facility is provided and the account holder can deposit all types of the chequesand drafts in their name or endorsed in their favour by third parties. No interest is paid by banks on

these accounts. On the other hand, banks charges certain service charges, on such accounts.

What is a Savings Bank Account ? Who uses Saving Bank Accounts ?

These deposits accounts are one of the most popular deposits for individual accounts. These accountsnot only provide cheque facility but also have lot of flexibility for deposits and withdrawal of funds fromthe account. Most of the banks have rules for the maximum number of withdrawals in a period and the


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maximum amount of withdrawal, but hardly any bank enforces these. However, banks have everyright to enforce such restrictions if it is felt that the account is being misused as a current account. Till24/10/2011, the interest on Saving Bank Accounts was regulared by RBI and it was fixed at 4.00% on

daily balance basis. However, wef 25th October, 2011, RBI has deregulated Saving Fund accountinterest rates and now banks are free to decide the same within certain conditions imposed by RBI.Under directions of RBI, now banks are also required to open no frill accounts (this term is used for

accounts which do not have any minimum balance requirements). Although Public Sector Banks stillpay only 4% rate of interest, some private banks like Kotak Bank and Yes Bank pay between 6% and

7% on such deposits. From the FY 2012-13, interest earned upto Rs 10,000 in a financial year onSaving Bank accounts is exempted from tax.

Click Here to know Which Banks are Paying the Highest Saving Bank Interest Rates / Interest Rates onSavings Account

What are Recurring Deposit Accounts ? Who use Recurring Deposit Accounts ? or RD accounts

These kind of deposits are most suitable for people who do not have lump sum amount of savings, butare ready to save a small amount every month. Normally, such deposits earn interest on the amount

already deposited (through monthly installments) at the same rates as are applicable for Fixed Deposits /Term Deposits. These are best if you wish to create a fund for your child's education or marriage of

your daughter or buy a car without loans or save for the future.

Under these type of deposits, the person has to usually deposit a fixed amount of money every month(usually a minimum of Rs,100/- p.m.). Any default in payment within the month attracts a small

penalty. However, some Banks besides offering a fixed installment RD, have also introduced a flexible /variable RD. Under these flexible RDs the person is allowed to deposit even higher amount of installments, with an upper limit fixed for the same e.g. 10 times of the minimum amount agreed upon.

Recurring Deposit accounts are normally allowed for maturities ranging from 6 months to 120 months.A Pass book is usually issued wherein the person can get the entries for all the deposits made by him /

her and the interest earned. Premature withdrawal of accumulated amount permitted is usuallyallowed (however, penalty may be imposed for early withdrawals). These accounts can be opened in

single or joint names. Nomination facility is also available.
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The RD interest rates paid by banks in India are usually the same as payable on Fixed Deposits, exceptwhen specific rates on FDs are paid for particular number of days e.g. 500 days, 555 days, 1111 days etc

i.e. these are not ending in a quarter.

(A) Click Here to know the Highest FD / RD Rates of Banks in India - 2012

(B) Click Here for : Recurring Deposit Calculator

What are Fixed Deposit or Term Deposits

All Banks offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years.The term "fixed" in Fixed Deposits (FD) denotes the period of maturity or tenor. Therefore, the

depositors are supposed to continue such Fixed Deposits for the length of time for which the depositor

decides to keep the money with the bank. However, in case of need, the depositor can ask for closing (orbreaking) the fixed deposit prematurely by paying paying a penalty (usually of 1%, but some bankseither charge less or no penalty). (Some banks introduced variable interest fixed deposits. The rate of

interest on such deposits keeps on varying with the prevalent market rates i.e. it will go up if marketinterest rates goes and it will come down if the market rates fall. However, such type of fixed deposits

have not been popular till date).

The rate of interest for Fixed Deposits differs from bank to bank (unlike earlier when the same wereregulated by RBI and all banks used to have the same interest rate structure. The present trends

indicate that private sector and foreign banks offer higher rate of interest.

The earlier trend that private sector and foreign banks offer higher rate of interest is no more validthese days. However, now a days small banks are forced to offer higher rate of interest to attract moredeposits. Usually a bank FD is paid in lump sum on the date of maturity. However, most of the bankshave also facility to pay/ credit interest in saving account at the end of every quarter. If one desires to

get interest paid every month, then the interest paid will be at a marginal discounted rate. In the
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changed computerized environment, now the Interest payable on Fixed Deposit can also be easilytransferred on due dates to Savings Bank or Current Account of the customer.

Documents

Banking - Evolution , Rbi