Economics

Module 5 : Banking in India (Part 3)

NARASIMHAM COMMITTEES

  • The first Narasimham Committee was appointed by the Government in 1991 to analyze all factors related to financial system and give recommendation to improve its efficiency and productivity It is also known as Narasimham –I.
  • It was appointed in August 1991, against the backdrop of the Balance of Payment Crisis. Narasimham –I examined all aspects relating to the structure, organisation, functions and procedures of the financial system.
  • The committee submitted a comprehensive report in 1991.
  • It recommended for:
    • The reduction of Statuary Liquidity Ratio and Cash Reserve Ratio
    • Deregulation of interest rates
    • Phasing out Directed Credit Programmes
    • Structural Reorganization of Banks
    • Liberalization of Capital Markets and other measures to improve the competitive efficiency in banking sector
  • Government of India appointed Second Narasimham Committee in 1997 to review the implementation of the banking sector reforms since 1992. Narasimham – II submitted the report in 1998

Recommendations of Narasimham – II are:

  • There should be a three-tier structure in the banking sector
  • Committee has also supported that two or three large strong banks be given international or global character
  • Recommended the merger of strong banks which will have a “multiplier effect” on industry
  • Committee recommended ‘Narrow Banking Concept’ under which weak banks will be allowed to place their funds only in short term and risk free assets, to reduce the risk of non-performing assets
  • Government should raise the prescribed capital adequacy norms which would improve Risk absorption capacity
  • Greater autonomy was proposed for the public sector banks in order for them to function with equivalent professionalism as their international counterparts.
  • Committee recommended GOI equity in nationalized banks be reduced to 33% for increased autonomy
  • Committee recommended to review and amend main laws governing Indian Banking Industry such as RBI Act, Banking Regulation Act, State Bank of India Act, Bank Nationalization Act, etc.
  • Committee recommended a proper system to identify and classify Non-Performing Assets (NPAs)
  • To implement these recommendations, the RBI in Oct 1998, initiated the second phase of financial sector reforms on the lines of Narasimham Committee-II report
  • Committee’s recommendations let to introduction of a new legislation in 2002, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

BASEL NORMS

  • The Basel Committee on Banking Supervision (BCBS) is a forum for regular cooperation on banking supervisory matters.
  • It was established by the Central Bank Governors of G-10 Countries in 1974.
  • Its main objective is to strengthen the regulation, supervision and practices of the banks worldwide with the purpose of enhancing financial stability.
  • Basel I refer to the deliberations by Central bank Governors of G-10 countries in 1988. Basel I primarily focused on credit risk and set a minimum capital requirement for banks. It called for a minimum ratio of capital to risk weighted assets of 8% to be implemented by 1992.
  • Basel II accord published in 2004 known as Revised Capital Framework replaced Basel I.
  • Basel III was agreed upon by the members of Based Committee and introduced from 2013 to 2015. It was intended to strengthen bank capital requirements by increasing liquidity and decreasing bank leverage.

GOIPORIA COMMITTEE

The Committee appointed by the Government to recommended for improvement in bank customer service. It was chaired by M.N. Goiporia, Chairman of SBI. They submitted their report in 1991.

DO YOU KNOW?

  • Punjab National Bank was founded by Lala Lajpat Rai in 1894.
  • Andhra Bank was founded by Pattabhi Sitaramaiyya.
  • Feroz Shah Mehta was the first Chairman of Central Bank of India
  • Union Bank of India was inaugurated by Mahatma Gandhi.

CREDIT RATING

  • Credit Rating means the assessment and evaluation of credit risk associated with a financial instrument or an entity (an individual, a business, company or a government)
  • This concept was first introduced by John Moody in USA (1909). It was introduced in India in 1988 by ICICI and UTI jointly.
  • CRISIL (Credit Rating Information of India Ltd), ICRA (Investment Formation and Credit Rating Agency of India Ltd), CARE (Credit Analysis and Research Ltd), ONICRA (Onida Individual Credit Rating Agency of India Ltd), and SMERA (Small and Medium Enterprises Rating Agency) are major credit rating agencies of India.

BANK BOARDS BUREAU

  • Government of India Constituted Bank Board Bureau in 2016
  • It was formed under the recommendation of the Committee to Review Governance of Boards of Banks in India under the chairmanship ofJ. Nayak.
  • It was tasked to improve the governance of public sector banks, recommend heads and board level appointments of government owned banks and financial institution and advise the government on strategies for raising funds as well as mergers and acquisitions.
  • BBB is headquartered in Mumbai. Vinod Rai is the first Chairman of BBB

BANKING OMBUDSMAN SCHEME

  • Banking ombudsman is a quasi judicial authority appointed by Reserve Bank of India to redress customer complaints against deficiency in certain banking services.
  • There are 20 Banking Ombudsman offices in the country at present.
  • The Banking ombudsman scheme was first introduced in 1995 and revised in 2002. The current scheme came into effect in 2006.
  • All scheduled commercial banks, Regional Rural Banks, and scheduled Primary Cooperative Banks are covered under this scheme.

SBI, ICCI, Punjab National Bank and HDFC is collectively known as the Big Four. Internationally the term ‘Big Four’ is used to refer four major central banks such us Federal Reserve, The Bank of England, The Bank of Japan and The European Central Bank.

AUTOMATED TELLER MACHINE (ATM)

  • RBI defines ATM as ‘a computerized machine that provides the customers of banks the facility of accessing their account for dispensing cash and to carry out other financial & non-financial transactions without the need to actually visit their bank branch.’
  • The idea of ATM was first put forwarded by Luther George Simjian
  • The first ATM was invented by John Shephered Barron
  • The first bank to introduce ATM in India – S.B.C.(Mumbai 1987)
  • World’s first floating ATM was set up by ‘State Bank of India’ (in a Jhenkar boat operating between Kochi and Vypeen in 2004)
  • The World’s highest ATM is located in Pakistan (In Khunjerab Pass) (National Bank of Pakistan)
  • Highest ATM in India is located at – Nathu-la-pass in Sikkim (at Thegu) (Axis Bank ATM)
  • First anytime milk ATM established at Anand (Gujarat)
  • First post office savings bank ATM established at – Chennai
  • First Indian Warship to have an ATM onboard with the help of Satellite is INS Vikramaditya (SBI ATM).
  • Banks extended ATM services, offering them in multiple languages, adding bill payment, ticket payment and other financial services.

Labels of ATM

  • There are three types of Automated Teller Machines based on its ownership and management.
    • Banks own ATM: ATM was owned and operated by a particular bank. They may allow other bank’s ATM card by charging a transaction fee.
    • Brown Label ATM: Here ATM is owned by a third- party, but operated by the bank itself. The concerned bank will handle cash dispensation and backend connectivity.
    • White Label ATM: Here ATMs are owned and operated by a third party (a non-bank entity). They serve customers of all banks and are interconnected with the entire ATM network of the country. Non-bank ATM operators are authorized under Payment & Settlement Systems Act, 2007 by the Reserve Bank of India.

BANKER TO THE POOR

  • Muhammad Yunus, Bangladeshi Social entrepreneur and banker is known as Banker to the poor.
  • He founded Gramin Bank in Bangladesh and started micro – credit scheme. This resulted in large scale rural poverty alleviation and quality of life improved.
  • Muhammad Yunus and Gramin Bank was Awarded Nobel Price for Peace in 2006.
  • The autobiography of Muhammed Yunus is also titled ‘Banker to the Poor’.

 Headquarters of Nationalized Banks

  • Andhra Bank – Hyderabad
  • Allahabad Bank – Kolkata
  • Bank of India – Mumbai
  • Bank of Baroda – Vadodhara
  • Bank of Maharashtra – Lokmangal (Pune)
  • Canara Bank – Bengaluru
  • Corporation Bank – Udipi
  • Central Bank of India –  Mumbai
  • Dena Bank -Mumbai
  • Indian Overseas Bank –  Chennai
  • Oriental Bank of Commerce – New Delhi
  • Punjab National Bank   – New Delhi
  • Punjab Sind Bank –  New Delhi
  • Syndicate Bank – Manipal (Karnataka)
  • Union Bank of India –  Mumbai
  • Uco Bank –  Kolkata
  • United Bank of India  – Kolkata
  • Vijaya Bank – Bangalore
  • Bharathiya Mahila Bank – New Delhi

SLOGANS OF BANKS

  • State Bank of India: ‘Pure banking nothing else’, ‘With you all the way’, ‘The Bank of the common Man’, ‘The Nation Bank on us’, ‘The banker to every Indian’
  • Federal Bank : ‘Your Perfect Banking Partner’
  • Bank of India: ‘Relationship beyond Banking’
  • HDFC Bank : ‘We understand your world’
  • UCO Bank : ‘Honours your Trust’
  • ICICI Bank : ‘Khayal Apka’
  • Syndicate Bank : ‘Faithful and Friendly’
  • Canara Bank : ‘Together we can’
  • Punjab National Bank : ‘The name you can bank upon’
  • Vijaya Bank : ‘A friend you can bank upon’
  • HSBC Bank : ‘The worlds local bank’
  • South Indian Bank: ‘Experience Next Generation Banking’
  • IDBI : ‘ Banking for all; ‘Aao Sochein Bada’

POINTS TO REMEMBER

  • First bank in the world – Bank of Venice (1157)
  • Oldest working bank – Monte dei Paschi di Siena (Italy) (1472)
  • First bank to start permanent issue of bank notes – Bank of England (1695)
  • First Overdraft facility set up by – Royal Bank of Scotland
  • First bank in India – Bank of Hindustan
  • First Commercial bank in India having limited liability – Owdh Commercial Bank
  • Oldest Public Sector bank – Allahabad Bank
  • First Bank to start Savings Scheme – Presidency Bank
  • First Bank to start Cheque facility – Bengal Bank
  • First Indian Commercial bank to be wholly owned and managed by Indians – Central Bank of India
  • First truly Swadeshi Bank – Central Bank of India
  • First Bank to start credit card – Central Bank of India
  • First Bank to open a branch outside India – Bank of India (1946, London)
  • First bank to open a branch in Paris – Bank of India
  • First bank to introduce ATM – HSBC
  • First Bank to start Internet Banking – ICICI
  • First bank to establish Payment Gateway – SBI
  • First bank to introduce Core Banking – SBI
  • First Indian bank to get ISO certification –Canara Bank
  • First bank in India listed in New York Stock Exchange – ICICI
  • First public sector bank which launched Mutual fund – SBI
  • First Private bank in India – UTI Bank (now Axis Bank)
  • First bank to start Mobile ATM – ICICI Bank
  • First bank to launch talking ATM for visually impaired – Union Bank of India

GLOSSARY                                                       

  • Demand Deposit: The money deposited in a bank but can be withdrawn as per the requirement of the depositor, without any prior notice is called demand deposit.
  • Term Deposit: The money deposited in a bank for a predetermined rate of interest over a fixed amount of time, or term. It cannot be withdrawn as per the requirement of the depositor.
  • Savings Account: A savings account is designed with the primary purpose to help you save. This type of account allows the holder to deposit money as is convenient, on which the holder can earn interest.
  • Current Account: Current account is usually an account opened when there would be frequent transactions involved. This type of account is more suited for users like firms, companies, public enterprises, businessmen, etc. Currents accounts do not earn any interest.
  • Loans: The liability created by individuals and institutions is called loans. Generally, loans which are given for a period of less than 18 months are called short term loans, and if it is for more than 18 months it is known as long term loans.
  • Overdraft: It is the facility given by a bank to its permanent and reliable customers to withdraw money over and above their credit balance.
  • Collateral: Collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the collateral.
  • Insolvency: Insolvency is a term for when an individual or organization can no longer meet its financial obligations with its lender or lenders as debts become due. In legal terminology, it is the situation where the liabilities of a person or firm exceed its assets.
  • Liquidation: Liquidation in is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent.
  • Capital Adequacy Ratio: The Capital Adequacy Ratio, also known as capital-to-risk weighted assets ratio (CRAR), is a measure of a bank’s available capital expressed as a percentage of a bank’s risk-weighted assets. It is used to protect depositors and promote the stability and efficiency of financial systems around the world.
  • Risk Weighted Assets: The Risk Weighted Assets (RWA) refer to the fund based assets such as Cash, Loans, Investments and other assets. They are the total assets owned by the Banks; however, the value of each asset is assigned a risk weight (for example 100% for corporate loans and 50% for mortgage loans).
  • Return on Assets: ROA is the ratio of annual net income to average total assets of a bank during a financial year.
  • Know Your Customer (KYC) Norms: To prevent money laundering through the banking system, the Reserve Bank has issued ‘Know Your Customer’ guidelines. Banks are required to carry out KYC exercise for all their customers to establish their identity and report suspicious transactions to authorities.
  • Micro Finance: The objective of micro finance is to extend financial services to low income groups. It helps to promote saving habits and self employment activities among the poor. This mechanism helps members to avail themselves of loans without providing any collateral.
  • Non-Banking Financial Institutions (NDFI): The institutions which operate in the financial sector but not rendering banking services are called NBFI. They operate by mobilizing money from the public in different ways.
  • Non-Banking Financial Companies (NBFC): KSFE, Mahindra Finance, Muthoot Finance, Tata Capital etc. are some examples of NBFCs. Like Banks, Non-Banking Financial Companies also can provide loans and make investments. NBFCs provide services such as: Gold loan, Housing loan, Hire purchase, Chitties etc. But there are three main differences between a regular bank and NBFC. They are:
    • They cannot accept demand deposits (deposits repayable on demand)
    • They cannot issue Demand Drafts like banks
    • They cannot issue cheques drawn on itself
  • Deposit Insurance and Credit Guarantee Corporation: It is a subsidiary of RBI. The DICGC insures all deposits such as savings, fixed, current, recurring, etc in all commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks. Primary cooperative societies and NBFCs are not insured by the DICGC.

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