Financial Institutional services concept The Banking Institutions
THE
BANKING INSTITUTION:-
Commercial banks
are a part of organized money market. They
are classified into scheduled and non-scheduled banks. Commercial banks
were first nationalized in 1969.
Commercial banks and their Development in India:-
Commercial
banks are part of an organized money market in India. Commercial banks mobilize
savings in under and rural areas and make them available to large and small
industrial and trading units mainly for working capital requirement.
The organized
banking system can be broadly categorized into 3 types.
● Central Bank of country/RBI.
● Commercial Banks.
● Co-operative banks\non-commercial banks.
The reserve bank of India is the supreme monetary and banking
authority in the country. One has responsibility to control banking system in
the country it keeps the cash reserves of all scheduled banks and hence known as
the reserve banks.
Under the RBI act 1934 banks were again classified into
scheduled banks and non-scheduled banks.
All commercial banks in India and foreign, regional rural
banks, state co-operative banks or scheduled banks. Non scheduled banks are
those which has not been included in the second schedule of RBI act 1934. At
present there are three non scheduled banks in the country. Scheduled banks
divided into co-operative banks and commercial banks. And commercial banks are
based on profits, where as co-operative banks are based on co-operative
principle.
Process
of banking in India:-
The Indian
banking system had gone to a series of crises and consequent bank failures and
its growth was quite slow during the first of half of the 20th
century. The RBI and all banks nationalized on JULY 1969.
Nationalization
of banks:-
The nationalization
of 14 major banks with deposit of rupees 50 crores or more in JULY 1969 was a
historic and momentous event in the history of India. In 1980’s again the Govt.
Took over other 6 commercial banks all together there are 20 nationalized banks
those are additional to the state bank of India and its associates banks
commonly called called SBI group which were taken over in 1955.
Some
of the changes in commercial banks:-
Branch expansion :-
Branch
expansion received and impetus after nationalization of the commercial banks.
The total number of bank offices increased from 8260 in June 1969 to 61059 in
June 1993. In 2004 the number branches expended in 67280 since nationalization
out of 52799 offices opened over 34500 offices have been setup in the unbanked
and rural and semi urban areas.
Deposit mobilization:-
Banks create
public from deposits and savings and by rendering quality services and speed
up, increase mobilize deposits at that time 1950-51 banks deposit are 820
crores credits are 580 crores. And 1990-91 generally are 116300 crores. And
2004-05 the bank deposits are 1719950 crores and credits are 1092090 cores.
Credit trends:-
Credit trends
also reveal that India’s banking structure is falling in line with the national
policies of fast economic development. The credit worthiness has been
redefined. Credit policy is being evolved to suit the growth of priority
sectors that include agriculture, small producers, national transporters back
word areas and the weaker section of the community. The credit guarantee scheme
has been introduced to overcome the difficulties in the way of rapid increase
in loans to small borrowers.
Lead bank scheme:-
In order to
extend credit facilities to the back ward areas and neglected sector, the
scheme, each commercial bank assigned the lead role for specified districts.
Lead banks carry out economic survey of the assigned districts with a view to
identifying growth centers for the purpose of branch expansion and intensive
development of credit to the priority sector.
Other developments:-
Among the
other important schemes in which commercial banks are participating, mention
can be made of district industrial centre’s, farmer’s services, village
adoption scheme, Export credit scheme etc.....
Functions of commercial banks:-
Commercial is
the most important source of institutional credit in the market. We can divide
functions of commercial into 2 groups
●
Banking functions (primary).
●
Non-banking functions (secondary).
Banking functions:-
(a)Acceptance of deposits:-
Bank accepts deposits from public. Deposits are the 3 types.
1.demand deposit.
2.Fixed deposit.
3.Recurring deposit.
1)Demand deposit:- Demand
deposits can be in the from of current account or saving account. Those
deposits are with draw able any time by the depositors by means of check.
2)Fixed deposit:-Fixed
deposits are those deposits, which are with draw able only after a specified
period.
Fixed deposit
earn a higher interest. From current deposits there is no interest or nominal
interest. For saving deposit interest varies with time period and ranges from 6
to 9% interest.
3)Recurring deposits:- In recurring deposits individuals deposits a
fixed sum every month for a fixed period of a time.
(b)Advancing loans:-
generally banks discourage loans for consumer purpose. Usually banks grant
short term of medium term loans to meet the requirements of working capital.
Loans
generated by the bank can be secured or un secured loans. There are various
ways in which bank generate loans to its customers. Those are as follows.
■
Over draft.
■
Direct loans.
■
Cash credit.
Banks do not give loan in the form of cash. They make the
customer open an account and transfer loan amount in the customers account.
(c)Credit creation:-
It is
remarked by Sayers that “Bankers are not merely purveyors of money but also
manufacture of money”
(d)use of cheque system:-
In modern
commercial world the use of cheque for economic transaction is very useful.
Non
banking functions:-
There are 2
types
a.
Agency service :-
I.
The banks make the periodic payments
of subscripted rent, insurance etc.. as per the standing order from customer.
II.
It also collects bills, cheques,
demand drafts etc.. on behalf of its customers.
III.
It acts as a trustee for property of
its customers.
IV.
It can helps in clearing and
forwarding goods of its customer, issues, receipts etc.. on behalf of its
customers.
b. General
utility services:-
I.
Safe deposit vault:-
Under
this schemes lockers are provided by bank to its customers at a nominal.
II.
Sage custody:-
Shares,
bills and other valuable documents are kept in safe custody. Banks return them
when demanded by its customers.
III.
It provides traveler’s cheque and
letters of credit to customer.
IV.
Customers maintain foreign exchange
department and deal in foreign exchange.
V.
The bank under writes issue of
shares and debentures of industrial concerns.
Objectives
of commercial banks:-
I.
To remove the ownership and control
of a few industrialists over the commercial banks and eliminate the use of bank
funds by the directors.
II.
To prevent concentration of economic
power in the hands of a few industrialists and business man who controlled the
banks.
III.
To present the use of bank fund for
anti social and speculative activities.
IV.
To mobilize savings and channels
them for productive purpose in accordance with plans and priority.
V.
To help in the most effective
development of national resources.
Public
sector banks:-
Public
sector banks dominate commercial banking in India. The Govt of India entered commercial
banking when it took over the imperial bank of India in 1955 and converted it
into the SBI of India on 1st July 1955. Now the SBI has seven
subsidiary banks. These banks are collectively known as SBI group.
In July
1060, the GOI took an important step of nationalizing 14 banks. In April 1st
1980 6 more banks were nationalized increasing the number of nationalized banks
20.
In October
1975 another category was added to the public sector banks in the form of
regional rural banks. These banks have been set up with the objective of
providing credit and other facilities for agriculture and other productive
activities in rural area these banks are public productive activities in rural
area these banks are public sector banks as 50% of their capital is provided by
the central Govt, 15 % by the state government and the central Govt, 15% by the
state Govt and the remaining balance 35% by sponsoring public sector commercial
bank.
Public sector banks are further classified into ;
I.
State bank of India
II.
Nationalized banks.
III. Regional rural banks.
State bank
of India:-
The public
sector commercial banking in India started with setting up of state bank of India
in 1955 these banks taken together are known as SBI group. Thus the group
consists of ...
State bank of India.
state bank of Hyderabad
state bank of Patiala.
state bank of Travancore.
state bank of Bikaner & Jaipur.
state bank of Mysore.
state bank of saurashtra.
state bank of Indore.
The state
bank of India was the first one to make a public issue in 1993-94. At present
bank has authorized capital of 1000 crores and the issued subscribed and paid
up capital of the bank is more then 474 crores.
Nationalized
banks:-
Another
important step towards public sector banking was taken by july 1069 when 14
banks with a deposit base of 50 crores or more were nationalized again in 1980
6 more banks were nationalized and total no.of banks nationalized 20 these
banks were...
Bank of boroda.
punjab national bank.
canara bank.
central bank of India.
Indian bank
Indian overseas bank
syndicate bank
Uco bank.
Allahabad bank.
united bank of India.
oriental bank of commerce.
corporation bank.
Private
sector banks:-
In
the post independence period, it was noticed that the private sector banks
controlled by industrial houses or business were ignoring the rural areas and
agriculture sector. This led to the setting up of the state bank of India in
1955.
However,
private sector banks continued to operate in the banking sector some of the
leading private sector banks which have been operating during the period are –
●
The vysya bank ltd
●
The federal bank ltd
●
The jammu & Kashmir bank ltd
●
The south Indian bank ltd
●
The united western bank ltd
●
The karur vysya bank ltd
●
Karnataka bank ltd
●
Bank of Madura ltd
●
The catholic Syrian bank ltd
●
Tamilnad mercandile bank ltd
●
The laxmivilas bank ltd
●
The sangli bank ltd
●
The dhana lakshmi bank ltd
●
The nedungadi bank ltd
●
Lord Krishna bank ltd
●
Bharat overseas bank ltd
New phase in private sector banking
The economic reforms initiated in th
1991 the process of reforming the banking industry was initiated in 1991 with
the setting up of the Narasimham committee which focused on ways to –
●
Vijaya bank
●
Dena bank
●
Bank of maharastra
●
Andhra bank
●
Punjab sind bank
●
New bank of India
Regional
Rural Banks:-
Regional rural banks
were setup on the recommendations of a working group headed by M.narasimhan in
1975. The objective was to provide credit and other facilities to small and
marginal farmers, agricultural labors and artisans, the need was left as
commercial banks and co-operative banks were not able to serve those segments
adequately these banks are regional banks with rural orientation. There are
scheduled banks which are governed by regional rural banks act 1976.
Distinction
form commercial banks:-
1.
The area of a RRB is limited to only
a region, comprising of some districts of a state.
2.
These banks grant loans only to the
rural agriculture sector and small artisans.
3.
The lending rates would be some what
lower than commercial banks.
4.
These are intended to eliminate
money lenders.
5.
These banks are to supplement the
effort of the vo-operative banks.
6.
Commercial banks sponsor RRB’s
At
present RRB’s working in all states except in chilli.
Improve the structure, organization,
functions and procedures of financial sector at large.
As
a result of the new policy on private sector banks the following private sector
banks started their operations.
■
Indus ind bank ltd
■
The UTI bank ltd
■
HDFC bank ltd
■
The ICICI bank ltd
■
Global trust bank ltd
■
Centurian bank ltd
■
The times bank ltd
■
The development co-operative bank
ltd.
■
The bank of Punjab ltd.
As
compared to old private sector banks the new private sector banks are showing
much better performance. With in a short period that they have been in
operations, the results have been excellent.
Non performing asset:-[NPA’s]
A
non-performing asset basically means an asset which has ceased to generate
income for the bank. A non performing asset is an advance were-
I.
Interest
or installment of principal remain overdue for a period of more than 180 days in
respect of a term loan.
II. The bill remains overdue for a
period of more than 180 days incase of the bills purchased and discounted.
III. The account remains ‘out of order’
for a period of more than180 days in respect of an overdraft/cash
IV. Interest or installment of principal
remain overdue for two harvest seasons but for a period of not exceeding two
half years in the case of an advance granted for agricultural purpose.
V. Any amount to be received for a
period of more than 180 days in respect of other accounts.
VI. In order to move closer to
international best practice and to ensure greater transparency the duration for
treating an asset an asset as NPA is proposed to be reduced from 180 days to 90
days with effect from march 31st , 2004.
Co-operative banks:-
Co-operative
banks are an important constituent of Indian financial system. Co-operative
banks are a part of the vast and powerful super structure of co-operative
institutions which are engaged in the tasks of production, processing,
marketing, distribution, servicing and banking in India.
In
rural areas as far as agriculture and related activities were concerned the
supply of credit , particularly institutional credit and un organized money
market agencies such as money lenders were providing credit often at high rates
of interest but co-operative banks providing reasonable rates of interest.
Today
co-operative banks continue to be a part of a set of institutions which are
engaged in financing, rural and agricultural development this setup comprises
the RBI, NABARD, commercial banks, regional rural banks and co-operative banks.
Structure
of co-operative banks
RBI
NABARD
State co-operative state land development Urban co-operative
banks banks banks
central co-operative central land development
bank banks
Interest rates:-
Interest
is the amount which is paid by a borrower for using funds belonging to someone
else. It is a transaction between surplus and deficit units. The surplus units
lend money because they earn an attractive amount for parting with in interest
involves a rate at which funds are borrows this rate is need based and
dependent on market position of demand and supply of funds. Therefore an
interest rate is to be paid to take a loan.
“according to Alfred.Marshall –
Interest in th price paid for abstinence of money”
Different kinds of interest rates:-
Ceiling rates of Interest:-
It
is also the maximum rate of interest fixed by any authority. In India the ceiling
rate is usually fixed by the GOI and RBI. It depends on the face value of the
financial instrument. It is fixed according to the face value of an instrument.
Coupon rate of interest:-
It
is the rate of interest paid on the face value of a brand or debenture. A
person who purchases a long term bond from company expects an interest in th
form of coupon.
Important aspect of interest:-
Time aspect of interest maturity
date:-
Interest
may be determined from the point of view of time or maturity date. It is paid
on a long term basis, or a medium term or a short period of time.
Long term interest:-
Long
term interest rates comprise of a period usually above 5 years or above 10
years
Medium term interest:-
Medium
term interest rate may vary from period of one year to 5 years.
Shor term interest:-
Short
term interest rate vary per day, per week, per mont, per year and the maximum
number of years for which it may ber consigned can be said to be three years.
Definition and function of capital market:-
Capital
market refers to market that deals in developmental finance through the
instruments of shares, debentures and long term loans the new issue market and
financial corporations are the main institutions of capital market.
“
capital market is concerned with the investment of funds in long term
securities”
The capital market is concerned with
long term finance
“capital market is concerned with
long term finance “ capital market refers to the facilities and institutional
arrangements for the borrowing and lending of long-term funds”
Functions of the capital market:-
Mobilize savings:-
The
capital market in India mobilize savings of the members of public and
industrial concern. Such savings are then utilized for the economic development
of the country.
Leading of funds:-
The
capital market facilitates to lend funds to various industrial concerns. The
industrial concern can borrow long term funds from various financial
institutions.
Direct collection of funds:-
The
primary market it possible to collect funds from the market. Interested
individuals or corporate bodies subscribe for the issue of shares and
debentures.
Easy liquidity:-
The
secondary market facilitates for the investors to sell off their securities in
the form of shares and debentures and convert their liquid cash.
Acts as a link:-
The
capital market acts as link between those who save and who are interested in
investing these save and who are interested in investing these savings.
Profitable use of funds:-
Capital
markets make it possible to make productive and profitable use of funds. This
is because the funds, which are lying
Idle with the owners, are utilized
by industrial enterprises in a profitable manner, thus bringing rewards to the
investors, users and the society.
Indian capital market before independence:-
The
Indian capital markets in India was not properly developed before independence.
a.
The
growth of the securities market was very much hampered since most of the
English enterprises in India looked to the London market rather than to the Indian
capital market.
b.
The
total number of companies was small and the number of securities traded on
stock exchange was still smaller.
c.
Individual
investors were very few and limited in the urban and rural areas. Besides the
government placed many restrictions on the institutional savers such as banks
and insurance companies and naturally they had to prefer government securities
and only to a smaller extent debentures.
d.
There
were no specialized intermediaries and agencies to mobilize the savings of the public and channeling them to investment.
Such institutions were start only after independence.
Indian capital market today:-
The
Indian capital market in last 2 decades has witnessed significant development.
The
Indian capital market today has 7500 listed companies and over 23 stock
exchanges. In size it is second to USA in terms of availability of industrial
securities.
All
these years the Indian capital market was insulted from international
influence. However due to new economic policy Indian capital market has opened
its doors to foreign capital and foreign investment.
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