First, they take a leading role in developing other financial intermediaries and markets. Second, due to the absence of well-developed equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs.
Finally, in emerging markets such as India, banks cater to the needs of a vast number of savers from the household sector, who prefer assured income and liquidity and safety of funds, because of their inadequate capacity to manage financial risks Definition of banks ‘accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order or otherwise three primary activities of a commercial bank (i) maintaining deposit accounts including current accounts, (ii) issue and pay cheques, and (iii) collect cheques for the bank’s customers Functions of Commercial Banks (i) Payment System Banks are at the core of the payments system in an economy.
A payment refers to the means by which financial transactions are settled.
A fundamental method by which banks help in settling the financial transaction process is by issuing and paying cheques issued on behalf of customers. Further, in modern banking, the payments system also involves electronic banking, wire transfers, settlement of credit card transactions, etc. In all such transactions, banks play a critical role. (ii) Financial Intermediation The second principal function of a bank is to take different types of deposits from customers and then lend these funds to borrowers, in other words, financial intermediation.
In financial terms, bank deposits represent the banks’ liabilities, while loans disbursed, and investments made by banks are their assets. Bank deposits serve the useful purpose of addressing the needs of depositors, who want to ensure liquidity, safety as well as returns in the form of interest. On the other hand, bank loans and investments made by banks play an important function in channelling funds into profitable as well as socially productive uses. (iii) Financial Services.
In addition to acting as financial intermediaries, banks today are increasingly involved with offering customers a wide variety of financial services including investment banking, insurance-related services, government-related business, foreign exchange businesses, wealth management services, etc. Income from providing such services improves a bank’s profitability. Scheduled banks in India are those that are listed in the Second Schedule of the Reserve Bank of India Act, 1934. RBI includes only those banks in this schedule which satisfy the criteria as laid down vide section 42 (6) (a) of the Act.
RBI as Bankers’ Bank As the bankers’ bank, RBI holds a part of the cash reserves of banks,; lends the banks funds for short periods, and provides them with centralised clearing and cheap and quick remittance facilities. Banks are supposed to meet their shortfalls of cash from sources other than RBI and approach RBI only as a matter of last resort, because RBI as the central bank is supposed to function as only the ‘lender of last resort’. To ensure liquidity and solvency of individual commercial banks and of the banking system as a whole, the RBI has stipulated that banks maintain a Cash Reserve Ratio (CRR).
The CRR refers to the share of liquid cash that banks have to maintain with RBI of their net demand and time liabilities (NDTL). 13 CRR is one of the key instruments of controlling money supply. By increasing CRR, the RBI can reduce the funds available with the banks for lending and thereby tighten liquidity in the system; conversely reducing the CRR increases the funds available with the banks and thereby raises liquidity in the financial system. These are mainly deposits. NDTL is discussed in Chapter 3 RBI as supervisor.
To ensure a sound banking system in the country, the RBI exercises powers of supervision, regulation and control over commercial banks. The bank’s regulatory functions relating to banks cover their establishment (i. e. licensing), branch expansion, liquidity of their assets,management and methods of working, amalgamation, reconstruction and liquidation. RBI controls the commercial banks through periodic inspection of banks and follow-up action and by calling for returns and other information from them, besides holding periodic meetings with the top management of the banks.
While RBI is directly involved with commercial banks in carrying out these two roles, the commercial banks help RBI indirectly to carry out some of its other roles as well. For example, commercial banks are required by law to invest a prescribed minimum percentage of their respective net demand and time liabilities (NDTL) in prescribed securities, which are mostly government securities. 14 This helps the RBI to perform its role as the banker to the Government, under which the RBI conducts the Government’s market borrowing program. Bank Deposit Accounts.
An efficient financial intermediation process, as is well known, has two components: effective mobilization of savings and their allocation to the most productive uses. In this chapter, we will discuss one part of the financial intermediation by banks: mobilization of savings. When banks mobilize savings, they do it in the form of deposits, which are the money accepted by banks from customers to be held under stipulated terms and conditions. Deposits are thus an instrument of savings. current account A current account is basically a running and actively operated account with very little restriction on the number and amount of drawings.
The primary objective of a current account is to provide convenient operation facility to the customer, via continuous liquidity. On account of the high cost of maintaining such accounts, banks do not pay any interest on such deposits. In addition, many banks insist on customers maintaining minimum balances to offset the transaction costs involved. If minimum balances are not maintained, these banks charge the customers a certain amount. Savings Bank Deposits Savings deposits are a form of demand deposits, which is subject to restrictions on the number of withdrawals as well as on the amounts of withdrawals during any specified period.
Further, minimum balances may be prescribed in order to offset the cost of maintaining and servicing such deposits. Savings deposits are deposits that accrue interest at a fixed rate set by RBI (3. 5 percent as of January 2010). Savings bank accounts are used by a large segment of small depositors as they can put their regular incomes into these accounts, withdraw the money on demand and also earn interest on the balance left in the account. The flexibility provided by such a product means that savings bank accounts cannot be opened by big trading or business firms.
Similarly, institutions such as government departments and bodies, local authorities, etc. cannot open savings bank accounts. CASA Deposits From a bank’s viewpoint, CASA deposits (Current Account and Savings Account deposits) are low-cost deposits, as compared to other types of deposits. Current account is noninterest bearing, while interest payable on savings accounts is very low (currently 3. 5 percent). To be competitive, it is important for banks to garner as much low-cost deposits as possible, because by doing so banks can control the cost of raising deposits and hence can lend at more competitive rates.
The methods used by banks to mobilize CASA deposits include offering salary accounts to companies, and encouraging merchants to open current accounts, and use their cash-management facilities. Banks with low CASA ratios (CASA deposits as % of total deposits) are more dependent on term deposits for their funding, and are vulnerable to interest rate shocks in the economy, besides the lower spread they earn. (As discussed above, banks earn profit on the spread between their deposit and loans rates. ) Foreign Currency Non Resident Account (Banks).
The Foreign Currency Non-Resident Account (Banks) or FCNR(B) accounts scheme was introduced with effect from May 15, 1993 to replace the then prevailing FCNR(A) scheme introduced in 1975. • These are foreign currency accounts, which can be opened by NRIs in only designated currencies: Pound Sterling, US Dollar, Canadian Dollar, Australian Dollar, EURO and Japanese Yen. • Repatriation of principal amount and interest is permitted. • These deposits can be opened only in the form of term deposits. • Deposits are in foreign currency and are repaid in the currency of issue.
Hence, there is no exchange risk for the account holder. • Transfer of funds from existing NRE accounts to FCNR(B) accounts and vice- versa, of the same account holder, is permissible without the prior approval of RBI. A bank should obtain the prior approval of its Board of Directors for the interest rates that it will offer on deposits of various maturities, within the ceiling prescribed by RBI. A key norm of the Basel committee is the Capital Adequacy Ratio (CAR), also known as Capital Risk Weighted Assets Ratio, is a simple measure of the soundness of a bank.
The ratio is the capital with the bank as a percentage of its risk-weighted assets. Given the level of capital available with an individual bank, this ratio determines the maximum extent to which the bank can lend Standard assets: Standard assets service their interest and principal instalments on time; although they occasionally default up to a period of 90 days. Standard assets are also called performing assets. They yield regular interest to the banks and return the due principal on time and thereby help the banks earn profit and recycle the repaid part of the loans for further lending.
The other three categories (sub-standard assets, doubtful assets and loss assets) are NPAs and are discussed below. Sub-standard assets: Sub-standard assets are those assets which have remained NPAs (that is, if any amount of interest or principal instalments remains overdue for more than 90 days) for a period up to 12 months. Doubtful assets: An asset becomes doubtful if it remains a sub-standard asset for a period of 12 months and recovery of bank dues is of doubtful. Loss assets: Loss assets comprise assets where a loss has been identified by the bank or the RBI. These are generally considered uncollectible.
Their realizable value is so low that their continuance as bankable assets is not warranted. Debt Restructuring Once a borrower faces difficulty in repaying loans or paying interest, the bank should initially address the problem by trying to verify whether the financed company is viable in the long run. If the company/ project is viable, then rehabilitation is possible by restructuring the credit facilities. In a restructuring exercise, the bank can change the repayment or interest payment schedule to improve the chances of recovery or even make some sacrifices in terms of waiving interest etc.
RBI has separate guidelines for restructured loans. A fully secured standard/ sub-standard/ doubtful loan can be restructured by rescheduling of principal repayments and/or the interest element. The amount of sacrifice, if any, in the element of interest, is either written off or provision is made to the extent of the sacrifice involved. The sub-standard accounts/doubtful accounts which have been subjected to restructuring, whether in respect of principal instalment or interest amount are eligible to be upgraded to the standard category only after a specified period.
To create an institutional mechanism for the restructuring of corporate debt, RBI has devised a Corporate Debt Restructuring (CDR) system. The objective of this framework is to ensure a timely and transparent mechanism for the restructuring of corporate debts of viable entities facing problems Bank Investments Commercial banks’ investments are of three broad types: (a) Government securities, (b) other approved securities and (c) other securities. These three are also categorised into SLR (Statutory Liquidity Ratio) investment and non-SLR investments.
SLR investments comprise Government and other approved securities, while non-SLR investments consist of ‘other securities’ which comprise commercial papers, shares, bonds and debentures issued by the corporate sector Under the SLR requirement, banks are required to invest a prescribed minimum of their net demand and time liabilities (NDTL) in Government- and other approved securities under the BR act, 1949. (Note that SLR is prescribed in terms of banks’ liabilities and not assets).
This provision amounts to ‘directed investment’, as the law directs banks to invest a certain minimum part of their NDTL in specific securities. While the SLR provision reduces a bank’s flexibility to determine its asset mix, it helps the Government finance its fiscal deficit Investment Policy The Investment Policy outlines general instructions and safeguards necessary to ensure that operations in securities are conducted in accordance with sound and acceptable business practices.
The parameters on which the policy is based are return (target return as determined in individual cases), duration (target duration of the portfolio), liquidity consideration and risk. Thus, while the Policy remains within the framework of the RBI guidelines with respect to bank investment, it also takes into consideration certain bank-specific factors, viz. , the bank’s liquidity condition and its ability to take credit risk, interest rate risk and market risk. The policy is determined for SLR and non-SLR securities, separately. The Investment
Policy provides guidelines with respect to investment instruments, maturity mix of investment portfolio, exposure ceilings, minimum rating of bonds/ debentures, trading policy, accounting standards, valuation of securities and income recognition norms, audit review and reporting and provisions for Non-Performing Investments (NPI). It also outlines functions of front office/ back office/ mid office, delegation of financial powers as a part of expeditious decision-making process in treasury operations, handling of asset liability management (ALM) issues, etc. Several banks follow the practice of a strategy paper.
Based on the market environment envisaged by Asset Liability Committee (ALCO) in the Asset Liability Management (ALM) Policy, a Strategy Paper on investments and expected yield is usually prepared which is placed before the CEO of the Bank. A review of the Strategy Paper may be done at, say half yearly basis and put up to the CEO. Statutory Reserve Requirements Banks’ investments in Central and State Government dated securities including treasury bills are governed by the RBI guidelines regarding maintenance of minimum level of SLR securities as well as their own approved policy.
As stated earlier, under the Banking Regulation Act, 1949, the RBI prescribes the minimum SLR level for Scheduled Commercial Banks (SCBs) in India in specified assets as a percentage of the bank’s NDTL. The actual percentage (that is, the value of such assets of an SCB as a percentage of its NDTL) must not be less than such stipulated percentage. The RBI may change the stipulated percentage from time to time. credit card frauds Yes, the RBI has implemented key measures to enhance better security of credit and debit cards.
Banks must issue international credit and debit cards that are EMV (Europay, Mastercard and Visa) chip-based with a pin enabled Magnetic strips are no more issued in the new cards. The active cards with magnetic strip will have newly set daily limitations The terminals used by the traders and the infrastructure must have payment-data security standard certificates If any suspicious purchases are witnessed, easy to use and quick measures are implemented for customers to block the card and for banks to check with the customer Tough love:
Raghuram Rajan puts onus on politicians to fix economy Raghuram Rajan, who took over as Reserve Bank of India governor a fortnight ago, unexpectedly raised interest rates on Friday, putting a higher priority on taming stubbornly high inflation than bowing to pressure to juice the struggling economy with cheap credit. Asia’s third-largest economy has been looking to the respected former International Monetary Fund chief economist to rescue it from slow growth, high inflation and a weakened currency. In the less than a month that he has been governor, he has been hailed as a rock star in Indian media.
But his tough love approach to monetary policy in his first policy review will put the onus on India’s politicians to fix deep-seated problems in the economy. He raised the benchmark interest rate at which banks borrow from the central bank by a quarter percentage point to 7. 5 per cent. The surprise rate hike sent Indian stocks into a tailspin. The Sensex index was down 2. 5 per cent or 600 points. A long-time University of Chicago professor known for having predicted the 2008 global financial crisis, Rajan’s steadying voice of authority had in recent weeks given a boost to investor confidence in India.
But the central bank has limited scope in addressing India’s economic woes. Rajan’s greatest potential contribution might lie in whether he can use his credentials and international standing to coax India’s government into reforming policies that he identifies as the underlying cause of the country’s economic doldrums. At the Reserve Bank, Rajan faces a tough, on-going balancing act of trying to stimulate growth while keeping inflation in check. He has signalled he considers stability in both prices and the currency a priority, indicating he likely will leave the benchmark interest rate of 7.
25 per cent unchanged at Friday’s review. Businesses and the government would have liked him to cut interest rates to boost consumption and kick-start flagging economic growth. The economy expanded 4. 4 per cent in the April-June quarter, far below the average of 8 per cent growth of just a few years ago. But making borrowing cheaper risks worsening inflation, which climbed to 6. 1 per cent in August, exceeding the 4. 5 per cent rate that the Reserve Bank has set as a target. For the millions of Indians who get by on less than $2 per day, such price increases, especially for food, are a major hardship.
“They really are in a bind,” said Anjalika Bardalai, an analyst for Eurasia Group. “There are a lot of different economic indicators that are not looking very good. And quite frankly, there is no single set of policies that is going to fix all the problems at once. ” India is suffering a host of economic problems: poor infrastructure and stubborn inflation that keeps interest rates high, dependence on imported fuel, a current account deficit due to low exports and high imports, and fragile confidence that has deterred business investment.
Plus, the government’s budget is in deficit thanks to costly fuel subsidies and the fiscal position is likely to deteriorate because of the looming cost of a new law guaranteeing food for the poor. To make matters worse, many foreign investors had been pulling out of India and other emerging markets because of expectations the Federal Reserve would scale back its easy credit policy that had sent “hot money” into riskier developing markets in search of higher returns. The Fed surprised many Wednesday by keeping the easy money going for now.
Stocks in India and other emerging markets rebounded but the withdrawal of stimulus is only a matter of time and is likely to roil world markets again. Rajan took office on September 4 at a low point, after a month of plunging stocks and a week after the rupee hit a lifetime low of 68. 8 against the dollar. He surprised almost everyone by immediately announcing short-term measures aimed at boosting confidence.
He said that banks would be allowed to open new branches without going to the RBI for permission and offered a “swap window” for banks holding U.S. dollar liabilities to exchange them at a lower-than-market rate of 3. 5 per cent; analysts at Barclays predicted the latter move could attract $10 billion in foreign currency inflows, bolstering the rupee and easing current account pressures. The next day, both the rupee and the Sensex stock index surged, and the Indian media swooned. One commentary in the financial daily Mint depicted Rajan as both swaggering like a Bollywood star and flying through air like a super-hero.
The “Rajan effect” may be short-lived, however, since India’s fundamental problems remain and he is limited mostly to the blunt instrument of setting interest rates. Plus, Rajan himself wrote in a recent article that the true solutions for the economy are making it easier to do business in India by improving infrastructure, easing regulations that slow down investment, reducing subsidies for fuel and reining in double deficits in the national budget and current account. These are all tasks that are the responsibility not of the Reserve Bank, but of the central government.
Part of his task as India’s rescuer-in-chief may be to leverage his reputation and popularity to try to persuade his counterparts in government to enact politically sensitive reforms, even as a looming election in May makes it particularly difficult. “Given his status in the U. S. and the world, he may indeed be able to influence the government,” said Moody’s economist Glenn Levine. “It may not be by a huge amount, because political realities will not shift, but the fact that he is a well-respected global economics professor may carry weight. “
Rajan reportedly has friendly relations with Finance Minister Palaniappan Chidambaram and met Tuesday with both him and Prime Minister Manmohan Singh ahead of Friday’s policy review. He was also asked about the RBI’s observation that growth could pick up later due to bright prospects of good kharif crop, upturn in exports and coming on stream of infrastructure projects cleared by the Cabinet Committee on Investment (CCI). Among others, one of the main features of the new legislation is setting up of the National Company Law Tribunal (NCLT) and Appellate Tribunal.
Once in place, NCLT would replace the Company Law Board. Reuters had earlier reported that the Reserve Bank of India (RBI) had relaxed intraday foreign exchange trading position restrictions that it imposed on some banks back in June. Governor Raghuram Rajan, speaking to reporters after the RBI’s mid-quarter policy review, said he does not anticipate a new set of rupee stabilising measures since the U. S. Fed had decided to postpone tapering its bond buying program. India stats Population of gurgaon- 15 lakh female- 7lk male- 8 lakhs rural- 4. 7 lakhs urban- 11. 3 lakhs Haryana pop- 2. 5 cr Faridabad- 18 lakhs.