After going through this lesson you should be able to:
- Understand the Structure of Indian Banking System
- Explain the annual Reports of a Bank
Structure of Indian Banking System
The Indian financial system comprises a large number of commercial and cooperative banks, specialized developmental banks for industry, agriculture, external trade and housing, social security institutions, collective investment institutions, etc. The banking system is at the heart of the financial system.
The Indian banking system has the RBI at the apex. It is the central bank of the country under which there are the commercial banks including public sector and private sector banks, foreign banks and local area banks. It also includes regional rural banks as well as cooperative banks.
Reserve Bank of India
The central bank plays an important role in the monetary and banking structure of nation. It supervises controls and regulates the activities of the banking sector. It has been assigned to handle and control the currency and credit of a country.
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
“to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.”
Objectives of RBI
* To manage the monetary and credit system of the country.
* To stabilizes internal and external value of rupee.
* For balanced and systematic development of banking in the country.
* For the development of organized money market in the country.
* For proper arrangement of agriculture finance.
* For proper arrangement of industrial finance.
* For proper management of public debts.
* To establish monetary relations with other countries of the world and international financial institutions.
* For centralization of cash reserves of commercial banks.
* To maintain balance between the demand and supply of currency.
In India RBI have two departments, namely. Issue department and Banking department.
Its Main Functions:
1. Issue of Currency:
The central bank is given the sole syndication of issuing money with a specific end goal to secure control over volume of cash and credit. These notes course all through the nation as lawful delicate cash. It needs to keep a hold as gold and remote securities according to statutory standards against the notes issued by it.
It might be noticed that RBI issues all money notes in India aside from one rupee note. Once more, it is under the bearings of RBI that one rupee notes and little coins are issued by government mints. Keep in mind, the focal administration of a nation is generally approved to obtain cash from the national bank.
At the point when the focal government use surpasses government income and the administration can’t diminish its use, at that point it gets from the RBI. This is finished by offering security bills to RBI which makes new cash notes for the reason. This is called monetisation of spending deficiency or shortfall financing. The legislature spends new money and places it into dissemination to meet its use.
2. Banker to Government:
Central bank works as an investor to the legislature—both focal and state governments. It does all managing an account business of the legislature. Government keeps their trade offsets the present record with the national bank. Likewise, national bank acknowledges receipts and makes installment in the interest of the legislatures.
Additionally, national bank completes trade, settlement and other keeping money operations in the interest of the administration. National bank gives advances and advances to governments for transitory periods, as and when essential and it additionally deals with general society obligation of the nation. Keep in mind, the focal government can get any measure of cash from RBI by pitching its rupees securities to the last mentioned.
3. Banker’s Bank and Supervisor:
There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning. This duty is discharged by the central bank.
Central bank acts as banker’s bank in three capacities:
(i) It is the custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the central bank; and in this way the central bank is the ultimate holder of the cash reserves of commercial banks,
(ii) Central bank is lender of last resort. Whenever banks are short of funds, they can take loans from the central bank and get their trade bills discounted. The central bank is a source of great strength to the banking system,
(iii) It acts as a bank of central clearance, settlements and transfers. Its moral persuasion is usually very effective so far as commercial banks are concerned.
4. Controller of Credit and Money Supply:
Central bank controls credit and money supply through its monetary policy which consists of two parts—currency and credit. Central bank has monopoly of issuing notes (except one-rupee notes, one-rupee coins and the small coins issued by the government) and thereby can control the volume of currency.
The main objective of credit control function of central bank is price stability along with full employment (level of output). It controls credit and money supply by adopting quantitative and qualitative measures as discussed in Section 8.25.
5. Exchange Control:
Another obligation of the central bank is to see that the outside estimation of money is kept up. For example, in India, the Reserve Bank of India finds a way to guarantee outer estimation of a rupee. It embraces reasonable measures to achieve this protest. The trade control framework is one such measure.
Under trade control framework, each native of India needs to store with the Reserve Bank of India all remote cash or trade that he gets. Also, whatever remote trade he may require must be secured from the Reserve Bank by making an application in the endorsed frame.
6. Lender of Last Resort:
When commercial banks have exhausted all resources to supplement their funds at times of liquidity crisis, they approach central bank as a last resort. As lender of last resort, central bank guarantees solvency and provides financial accommodation to commercial banks
(i) by re-discounting their eligible securities and bills of exchange and
(ii) by providing loans against their securities. This saves banks from possible failure and banking system from a possible breakdown. On the other hand, central bank, by providing temporary financial accommodation, saves the financial structure of the country from collapse.
7. Custodian of Foreign Exchange or Balances:
It has been said over that the central bank is the caretaker of outside trade stores and country’s gold. It keeps a nearby watch on outside estimation of its cash and embraces trade administration control. All the remote money got by the nationals must be saved with the central bank; and if subjects need to make installment in outside cash, they need to apply to the national bank. Central bank likewise keeps gold and bullion saves.
8. Clearing House Function:
Banks receive cheques drawn on the other banks from their customers which they have to realise from drawee banks. Similarly, cheques on a particular bank are drawn and passed into the hands of other banks which have to realise them from the drawee banks. Independent and separate realisation to each cheque would take a lot of time and, therefore, central bank provides clearing facilities, i.e., facilities for banks to come together every day and set off their chequing claims.
9. Foreign Exchange Regulation Authority:
The RBI’s another major function is to control the foreign exchange reserves position from time to time. It maintains the stability of the external value of the rupee through its domestic policies and forex market. The RBI has the full authority to regulate the market as discussed below:
- To monitor the foreign exchange control.
- To prescribe the exchange rate system.
- To maintain a better relation between rupee and other currencies.
- To interact with the foreign counterparts.
- To manage the foreign exchange reserves.
It administers the FERA, 1973. It is replaced by the FEMA which would be consistent with full capital account convertibility with policies of the Central Government.
The RBI administers the control through the authorized forex dealers. The RBI is the custodian of the country’s foreign exchange reserves. The foreign exchange is precious and it takes the responsibility of the better utilization.
Commercial banks may be defined as, any banking organization that deals with the deposits and loans of business organizations.Commercial banks issue bank checks and drafts, as well as accept money on term deposits.
Commercial banks also act as moneylenders, by way of installment loans and overdrafts.Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals.
Public Sector Banks
Public sector in Indian banking emerged to its present position in three stages. First, the conversion of the then existing Imperial Bank of India into the State Bank of India in 1955, followed by the taking over of the seven state associated banks as its subsidiary banks, second the nationalization of 14 major commercial banks on July 19, 1969 and last, the nationalization of 6 more commercial banks on April 15, 1980. Thus 19 banks constitute the Public sector in Indian Commercial Banking.
Private Sector Banks
After the nationalization of real banks in the private part in 1969 and 1980, no new bank could be set up in India for around two decades, however there was no lawful bar to that impact. The Narasimham Committee on Financial Sector Reforms prescribed the foundation of new banks in India. Hold Bank of India, from that point, issued rules for the setting up of new private part banks in India in January 1993.
These rules go for guaranteeing that the new banks are fiscally reasonable and mechanically up and coming from the begin. They need to work in an expert way, in order to enhance the picture of business keeping money framework and to win the certainty of general society.
In January 2001 Reserve Bank of India issued new guidelines for the permitting of new banks in the private area. The notable highlights are as per the following:
1. Another bank might be begun with a capital of Rs. 200 crore. The total assets is to be raised to Rs. 300 crore in three years.
2. The promoter’s base holding in the capital should be 40 for every penny with a secure time of 5 years. Overabundance holding more than 40 for every penny should be weakened inside a year.
3. Non-occupant Indians can get 40 for each penny value share in the new bank. Any outside bank or fund organization may join as specialized teammates or as co-promoter, however their value investment will be limited to 20 for every penny, which will be inside the roof of 40 for every penny permitted to Non – occupant Indians.
4. Corporates have been permitted to contribute up to meet existing need segment standards and prudential standards and furthermore to open 25 % of their branches in country and semi-urban territories. Inclination will be given to promoters with mastery in financing need regions and country and agro based businesses.
5. Non-keeping money fund organizations may change over themselves into banks if their total assets is Rs. 200 crore, capital ampleness proportion is 12%, non performing resources underneath 5% and have triple A FICO score.
Notwithstanding the above rules, the new banks are represented by the arrangements of the Reserve Bank of India Act, the Banking Regulation Act and other significant statutes.
Local Area Bank
Local Area Banks were set up as per a Government of India Scheme announced in August 1996. The intention of the government was to set up new private local banks with jurisdiction over two or three contiguous districts. The objective of establishing the local area banks was to enable to mobilization of the rural savings by local institutions and make them available for investments in local areas. Thus, the overall idea was to bridge the gaps in the credit availability in the rural and semi-urban areas, thereby strengthening the institutional credit mechanism in such areas.
Pursuant to announcement of this scheme, RBI received some 227 applications, but most of them were rejected. RBI approved established of only 10 Local Area Banks but out of them only 4 are into existence as of 2015.
Functions of Local Area Banks
- The Local Area Banks can do all normal banking business but their major function was to finance agriculture and allied activities, small scale industries, agro-industries and trading / non-farm activities in the rural and semi-urban areas.
- These banks had to give out 40% of total credit to priority sector, of which 10% is to be given to weaker sections of the society.
Foreign Commercial Banks are the branches in India of the joint stock banks incorporated abroad. Their number has increased to forty as on 31st March, 2002. These banks, besides financing the foreign trade of the country, undertake normal banking business in the country as well.
Licensing of Foreign Bank: In order to operate in India, the foreign banks have to obtain a license from the Reserve Bank of India. For granting this license, the following factors are considered:
1. Financial soundness of the bank.
2. International and home country rating.
3. Economic and political relations between home country and India.
4. The bank should be under consolidated supervision of the home country regulator.
5. The minimum capital requirement is US $ 25 million spread over three branches – $ 10 million each for the first and second branch and $5 million for the third branch.
6. Both branches and ATMs require licenses and these are given by the RBI in conformity with WTO’s commitments.
Function of Foreign Banks: The main business of foreign banks is the financing of India’s foreign trade which they can handle most efficiently with their vast resources. Recently, they have made substantial inroads in internal trade including deposits, advances, discounting of bills, mutual funds, ATMs and credit cards. A large part of their credit is extended to large enterprises and MNCs located mostly in the tier one cities- mainly the metros, though some banks are now foraying in the rural sector as well. Technology used by these banks has been a major driver of change in the Indian banking industry. A highly trained and efficient workforce and the huge pool of capital resources at the disposal of these banks have created tremendous goodwill and prestige of foreign banks in India.
Apart from their main businesses, foreign banks are also instrumental in shaping the attitudes, perceptions and policies of foreign governments, corporates and other clients towards India, especially in the following areas:
1. Bringing together foreign institutional investors and Indian companies.
2. Organizing joint ventures.
3. Structuring and syndicating project finance for telecommunication, power and mining sectors
4. Providing a thrust to trade finance through securitization of export loan.
5. Introducing new technology in data management and information systems.
Performance: Foreign banks are not subject to the stringent norms regarding opening of rural branches, priority sector lending or bound by the social philosophy of Indian banks. These factors combined with the financial, technical and human resources of the foreign banks have ensured a healthy growth of these banks in India.
Other than the commercial banks, there exist in India another arrangement of keeping money organizations called co-agent credit foundations. These have been in presence in India since long. They attempt the matter of saving money both in urban and provincial zones on the standard of co-operation. They have served a valuable part in spreading the keeping money propensity all through the nation. However, their monetary position isn’t sound and a greater part of co-operative banks presently can’t seem to accomplish money related feasibility on a reasonable premise.
The agreeable banks have been set up under the different Co-operative Societies Acts sanctioned by the State Governments. Henceforth the State Governments manage these banks. In 1966, require was felt to manage their exercises to guarantee their soundness and to secure the interests of contributors. Thus, certain arrangements of the Banking Regulation Act 1949 were made appropriate to co-agent banks also. These banks have in this manner fallen under double control viz., that of the State Govt. what’s more, that of the Reserve Bank of India which practices control over them so far as their saving money operations are concerned.
The co-operative banking structure in India is divided into following main 5 categories:
|•||Primary Urban Co-op Banks|
|•||Primary Agricultural Credit Societies|
|•||District Central Co-op Banks|
|•||State Co-operative Banks|
|•||Land Development Banks|
Features of Cooperative banks
· These banks are government sponsored government supported and government subsidized financial agencies in India.
· Unlike commercial banks which focus on profits, cooperative banks are organized and managed on principles of cooperation, self help and mutual help. They function on a “no profit, no loss” basis.
· They perform all the main banking functions but their range of services is narrower than that of commercial banks.
· Some of them are scheduled banks but most are unscheduled banks.
· They have a federal structure of three-tier linkages and vertical integration.
· Cooperative banks are financial intermediaries only, particularly because a significant amount of their borrowings is from the RBI, NABARD, the central and state governments and cooperative apex institutions.
· There has been a shift of cooperative banks from the rural to the urban areas as the urban and non-agricultural business of these banks has grown over the years.
Weaknesses: Cooperative banks suffer from too much dependence on RBI, NABARD and the government.
· They are subject to too much officialization and politicization. Both the quality of loans assets and their recovery are poor. The primary agricultural cooperative societies- a vital link in the cooperative credit system- are small in size, very week and many of them are dormant.
· The cooperative banks suffer from existence of multiple regulation and control authorities.
· Many urban cooperative banks have failed or are in the process of liquidation.
· Cooperative banks have increasingly been facing competition from commercial banks, LIC, UTI and small savings organizations.
Regional Rural Banks
The nationalization of the banks in 1969 boosted the confidence of the public in the Banking system of the country. However, in the early 1970s, there was a feeling that even after nationalization, there were cultural issues which made it difficult for commercial banks, even under government ownership, to lend to farmers. This issue was taken up by the government and it set up Narasimham Working Group in 1975. On the basis of this committee’s recommendations, a Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the Regional Rural Banks Act 1976.
A Regional rural bank carries on the normal banking business i.e., the business of banking as defined in section 5(b) of the Banking Regulation Act, 1949 and engages in one or more forms of businesses specified in Section 6 (1) of that Act. A Regional rural bank may in particular, undertake the following types of businesses, namely:
- The granting of loans and advances, particularly to small and marginal farmers and agricultural laborers, and to cooperative societies for agricultural operations or for other connected purposes, and
- The granting of loans and advances, particularly to artisans, small entrepreneurs and persons of small means engaged in trade, commerce or industry or other productive activities within the notified areas of a rural bank.
Regional Rural Banks are thus primarily meant to cater to the needs of the poor and small borrower in the countryside.
The RRBs were owned by three entities with their respective shares as follows:
- Central Government → 50%
- State government → 15%
- Sponsor bank → 35%
Regional Rural Banks were conceived as low cost institutions having a rural ethos, local feel and pro poor focus. Every bank was to be sponsored by a “Public Sector Bank”, however, they were planned as the self sustaining credit institution which were able to refinance their internal resources in themselves and were excepted from the statutory pre-emptions.
An annual report is a reflection of the company’s philosophy, policies, achievements and shortcomings. The annual report gives general information regarding the name(s) of the chairman/MD, chief executive officer and all the directors, the bankers and auditors of the company, registered office, date, time and venue of the annual general meeting. An annual report comprises two parts.
Part I: It includes
Ø Notice of the meeting of the shareholders.
Ø Directors’ Report: The chairman of the company presents the Director’s report which usually highlights the company’s achievements in the given macro and micro-environment, new initiatives/ products/ technology, etc. proposed to be used, constraints if any faced by the company, future plans for modernization, diversification, etc.
Ø The company’s philosophy that describes how the company does business, is delineated in a separate section.
Ø Social responsibility report: It has initiatives for environment conservation and corporate social responsibility. Since banks do not manufacture goods, therefore, treatment of effluents is not relevant. However, most banks do conduct a number of social outreach programmes for education, training etc. for the poor and underprivileged sectors of the society.
Ø Corporate Governance report: Corporate Governance deals with conducting the affairs of the organization with integrity, transparency and commitment to principles of good governance. It has to be certified that all mandatory requirements as stipulated by Securities and Exchange Board of India (SEBI) have been complied with.
Ø Declaration of dividend (if any) is provided.
Ø Retirement, reappointment of existing directors or appointment of new directors.
Ø For the sake of uniformity and transparency in reporting, banks are also supposed to give details of their non-performing assets (NPA). NPAs are those assets which have remained unpaid for a period of ninety days. They are further categorized as sub-standard, doubtful and loss.
Part II: The second part of the report deals with performance highlights of the organization.
Ø It includes a balance sheet, a profit and loss account, cash flow statement and other statements and explanatory material that are an integral part of the financial statements.
Ø An auditors’ report certifying that the financial statements together present a true and fair view of the company’s affairs, and are in compliance with existing accounting standards, applicable laws and regulations.