There are various reasons why banks should lend money. Firstly, Bank lends money to earn income and fulfil the legal requirement of Banking Regulation Act, 1949, second, in order to meet its liabilities arising out of interest and non-interest paid expenses, and third, as a partner to economic development process, e.g. lending to trade, commerce, industry, agriculture etc.
Bankers have liability on them as a part of Fair Practices Code set by IBA/RBI. These are:
Develop simplified and comprehensive loan application forms containing all important information like interest rate, manner of charging interest, etc.
Develop system of giving acknowledgement for receipt of all applications indicating any fee taken for processing fee, etc.
As a lender to ensure that there is proper assessment of credit requirement of borrowers.
Keep the record of duly signed sanctioned letter containing amount, interest charged and installment amount to be paid at specified intervals?
As a part of Fair Practices Code, banks are further required to:
Apprise the borrower of the state of their accounts from time to time.
Ensure that any change in interest rate, charges, etc. should be brought to the notice of the borrower.
Give reasonable notice to borrowers before taking decision to recall / accelerate payment as agreed.
Sources of funds (liability) available to lending banker for making advances are:
Paid-up capital
Reserve funds retained by bank out of profits
Deposits mobilized from public in various deposit accounts.
Borrowing from other banks / market etc.
Uses of funds by banks (assets) is either in the form of Fund based lending and / or Non-fund based lending
What is Lending?
Lending by banks means giving credit to borrowers for a particular purpose at a rate of interest pre-agreed rate of interest and repayable within specified period of time, as per terms and conditions agreed by both parties.
Principles of Lending
While lending to other parties bank has to ensure that the money lent will come back in the form of principal and interest. For this bank has to follow certain principles of lending that are based on the guidelines from the RBI and also practical experience of bankers over years. These principles of lending are given below:
While considering application for any loan or advance, bank must look into the following aspects:
That the lending is going to be profitable.
Borrower is acceptable to the bank in terms of his honesty, integrity, skills, business acumen etc.
Safety and liquidity aspects of Lending.
Purpose for which loans and advances are being given is productive and desirable. Purpose should be legitimate and as per law of the land.
Borrower has good repaying capacity, etc.
Profitable lending is a function of many aspects. All loans and advances must yield profit to bank. Principles to be followed will cover the following aspects:
Borrower must be trustworthy and of good character.
THE CONCEPT OF MARKETING
Marketing management is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational objectives. Basically, marketing is a business technique devised to sell products and services keeping in mind the needs and requirements of existing and prospective customers. Marketing is based on five concepts:
Product concept
Production concept
Marketing concept
Social marketing concept
Selling concept
IMPLEMENTING THE MARKETING CONCEPT
To implement the marketing concept/ companies need to focus on 3 basic areas:
Target market: The first step is to identify the target market. This can be by market research and deciding which target market will give the best returns.
Value proposition: In this concept/ the companies decide what strategy they need to adopt. The combination of above- the-line (ATL) and below-the-line (BTL) activities should be adopted. The kind of value should the firm create and deliver also decides marketing success.
Demands of the target market: A preferred step in marketing research is the consumer preferences study. The study will help the firm determine the needs wants and demands of the target market.
Marketing of Banking Services
Bank marketing is the sum of functions directed at providing services to satisfy customers' financial needs and wants more efficiently and effectively than the competitors in consonance with the organisational objectives.
Application of marketing techniques in banking means a coordinated organizational effort to reach to the customer to fulfil specific needs for getting patronage through use of people, products or services, price, promotion, branch outlets and distribution policies for maximising customer satisfaction.
In a competitive market, banks sell their services through branch counters throughout the entire country through the employees who act as salesmen recruited by the management.
Features of Bank Marketing
Banking products cannot be seen or felt like manufactured products (intangibility)
In banking products' marketing/ the product and the seller are inseparable (inseparability)
Banking products are introduced and delivered at the same time; they cannot be stored and inspected before delivering (perishability)
Standardisation of banking products is difficult (variability)
NEED FOR BANK MARKETING
Awareness among customers: Modem technology has caused awareness among customers of the developments in the financial system. Financial needs of the customers have grown up to a large extent like quick cash accessibility, money transfer, asset security, increased return on surplus funds, financial advice, deferred payments etc. With a wide network of bank branches, customers expect the banks to offer a more and better service to match their demands and this has forced banks to take up marketing in right earnest.
Quality of service as a key factor
With the economic development, fast change has been seen in every activity, and banking has been no exemption. Service quality is a key aspect in the competitive world, which is market driven and banks have faced this emerging scenario. In fact, it cannot be ignored that quality will in future be the sole determinant of more...
Current Developments in Indian Banking
The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks/ in addition to cooperative credit institutions.
The Indian Banking industry is currently worth Rs. 81 trillion (US $ 1.31 trillion) and banks are now utilizing the latest technologies like internet and mobile devices to carry out transactions and communicate with the masses.
BHIM (Bharat Interface for Money)
BHIM (Bharat Interface for Money) is a Mobile App developed by National Payments Corporation of India (NFCI), based on the Unified Payment Interface (UPI) intended to facilitate e-payments directly through banks. It was a part of the 2016 Indian bank note demonetisation and drive towards cashless transactions.
Government will also launch two new schemes to promote the use of the BHIM app. One will be referral payments for individuals, and the other will cashback for merchants who accept payments from BHIM. BHIM is currently being used by over 125 lakh Indian citizens.
Merger of five associate banks with SBI
The Union Cabinet approved the merger of five of State Bank of India subsidiaries with the SBI. They are: State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, and State Bank of Travancore. The merger proposal was announced in May 2016 and was scheduled for March 2017.
Asset Quality Review (AQR)
It aims to clean up the balance sheets of PSBs to ensure banks remain solvent and fully comply with global capital adequacy norms, Basel-III. Besides, revised programme of capitalisation will also be issued as part of it. It is likely to be completed by end of March 2017.
India's first international exchange at GIFT city
India's first international exchange India INX was inaugurated at the International Financial Service Centre (IFSC) of GIFT (Gujarat International Financial Tech) City Gandhinagar, Gujarat. India INX is a wholly- owned subsidiary of the Bombay Stock Exchange (BSE). It will enable Indian firms to compete on equal footing with offshore firms. EazyPay app for Merchants by ICICI Bank
ICICI Bank, India's largest private sector bank has launched EazyPay mobile application for merchants that allows all-in-one acceptance payments platform. This app consolidates all digital wallets, QR code. Unified Payments Interface (UPI), and credit & debit cards modes of payments. With this, ICICI Bank became first bank in the country to roll out all-in-one payments platform.
Committee on Digital Payments
It is 11-member committee notified in August 2016 by the Finance Ministry. It was tasked to review existing payment systems in the country and recommends appropriate measures for encouraging Digital Payments. It was having representatives from Reserve Bank of India (RBI), Unique Identification Authority of India (UIDAI), tax department and various industry bodies in the payments space.
Akodara becomes India's first Digital Village
Akodara more...
Indian Economy
Economy is a framework, within which economic activities like investment, production and consumption are carried out.
The economy of India is the 7th largest in the world by nominal GDP and the 3rd largest by Purchasing Power Parity (PPP). On a per capita income basis, India ranked 140th by nominal GDP and 122nd by GDP (PPP) in 2015, according to the IMF. India is the 19th largest exporter and the 13th largest importer in the world.
Economy
An economy consists of the production, trade of distribution and consumption of limited goods and services by different agents in a given geographical location. The economic agents can be individual, businesses, organisations or governments.
Types of Economy
Following are the types of economy
Capitalist Economy
In this type of economy, the central problems of economy is that there is no interference by the government and price mechanism operate through the forces of demand and supply. In the United States of America, the role of the government is minimal and thus, it is the best example of market economy.
Socialist Economy
All important decisions regarding production, exchange and consumption of goods and services are made by the government. The closest example of a centrally planned economy is the Soviet Union in the 20th century.
Mixed Economy
This type of economy consists of a combination of public sector and private sector units. A mixed economic system is an economic system that features characteristics of both capitalism and socialism. It basically incorporates governmental involvement in market based economy.
Some other types of economy are
(i) Welfare Economy It analyses the total good or welfare i.e. achieves at a current state as well as how it is distributed. Amartya Sen received the Nobel Prize in economic science in 1998 for his work in welfare economics.
(ii) Green Economy Green economy is an economy or economic development model based on sustainable development and a knowledge of ecological economics.
Sectors of Economy
Traditionally, economies are divided into three sectors
Primary Sector
This sector is involved in the extraction or harvesting of products from the Earth. It includes the production of raw materials and basic foods. Some of the activities included in this sector are as follows
Agriculture
Mining (metals, minerals and ores mining)
Forestry
Fishing, etc.
Secondary Sector
The secondary sector of the economy is involved in the production of finished goods. All manufacturing processing and construction activities lie in this sector.
Some of the activities included in this sector are as follow
Manufacturing e.g. building
Production e.g. cloth and bread
Electricity, gas and water etc., related works.
Tertiary Sector
The tertiary sector of the economy is also called the service sector. Some of the activities, which are part of this sector are as follows
Origin and Development of Banking in India
A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides Fundamental Banking Services such as accepting deposits and providing loans.
History of Banking in India
Banking system has been existing in India since ancient times. Though it was not in organised form before the arrival of Britishers, various banking activities were performed. After the arrival of Britishers in 17th century foreign banking system started declining. Mayser's Alexander and company established the first European bank The Bank of Hindustan in 1770.
The development of Banking system in India can be understood with the help of following choronology. We can summarise the origin of banking in India in the following way,
Early Phase of Indian Banks before 1935
The pre-independence period was largely characterised by the existence of private banks organized as joint stock companies. Most banks were small and had private shareholding of the closely held variety. They were largely localized and many of them failed.
The first bank in India, the General Bank of India, was setup in 1786. Bank of Hindustan and Bengal Bank followed.
The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called them Presidency banks. These three banks were amalgamated in 1920 to form Imperial Bank of India, a bank of private shareholders, mostly Europeans.
Allahabad Bank was established, exclusively by Indians, in 1865.
Awadh Commercial Bank was the first bank established in 1981 and governed by exclusively the Indians on the basis of extending loans.
Punjab National Bank was setup in 1894 with headquarters in Lahore.
Between 1906 and 1913, Bank of India (1906), Central Bank of India (1911), Bank of Baroda (1909), Canara Bank, Indian Bank (1907) and Bank of Mysore (1913) were setup.
To streamline the functioning and activities of commercial banks, the Government of India came up with the Banking Companies Act, 1949, which was later changed to the Banking Regulation Act, 1949.
Organization of RBI
Banking crisis during 1913-1917 and failure of 588 banks in various parts of the country underlined the need for regulating and controlling the commercial banks. RBI was established as regulator of banking system of India. It was established in 1935. The Head Office of the RBI was established in Calcutta (now Kolkata, but was moved to Bombay (now Mumbai) in 1937.
The general functions of the banks are as follows
To provide security to the savings of customers.
To control the supply of money and credit.
To encourage public confidence in the working of the financial system increase savings speedily and efficiently.
To avoid focus of financial powers in the hands of a few individuals and institutions.
To set equal norms and conditions (i.e. rate interest, period of lending, etc) more...
Banking Regulation System of India
The nature of banking business can be summarized in two words i.e. financial intermediation, which needs to be carried out efficiently for stimulating the real sectors of the economy. Another essential characteristic of banks is that they are highly leveraged and hence, need to be regulated for protecting the interest of depositors.
Banking in India, as elsewhere, takes diverse forms viz, banks formed under special statutes, companies registered under the Companies Act, 1956 or foreign companies and cooperative societies registered under the Cooperative Societies Act. Banks are classified on their ownership pattern such as Public Sector Banks, Private Sector Banks and Foreign Banks.
Indian Companies (Amendment) Act, 1936
The Indian Companies Act that was passed in 1913 introduced the institution of private companies in corporate sector in India. But the Act of 1913 did not provide the peculiar environment for Indian commerce, hence to remove these deficiencies, the Indian Companies (Amendment) Act was passed in 1936. The Amendment Act, 1936 introduced various provisions relating to functioning of directors, guaranteeing payment of provident fund to employess etc. Further in October 1942, Companies Act was amended so that any company which uses world 'bank', 'banking' or 'banker' shall be deemed to be a banking company.
Banking Regulation Act, 1949
The Banking Regulation Act, enacted in 1949, has been a milestone in the history of banking in India, This act provides a framework for regulation and supervision of commercial banking activity.
Reserve Bank of India
Reserve Bank of India is the Central Bank of our country. On the recommendation of Hilton Young Commission, it was established on 1st April, 1935 and in 1949 it was nationalised. The central office of the RBI is Bombay (now Mumbai). In terms of the preamble to the Reserve Bank of India Act, 1934, The main functions of the bank are to regulate the issuing of bank notes and keeping the 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.
Governor of RBI
Its first Governor was Sir Osborne Smith. RBI was nationalised on 1st Jan, 1949 and its first Indian Governor was CD Deshmukh. Banking crisis (during 1913-1917 and failure of 588 banks in various parts of the country underlined the need for regulating and controlling the commercial banks.
Governors of RBI and their Time –period
Financial Reforms in Banking Sector
A new era of banking industry in India was started after independence. In this era, efforts were made to improve banks's methodology and responsibilities and various committees were formed in this regard. Apart from this, banks also took various steps to improve their working procedure.
Important Acts Related to Banking Regulation
Banking Regulation Act, 1949
The Banking Regulation Act, 1949 came into force on 16th Mar, 1949. It contained various aspects related to Banking Companies in India.
Its purpose is to
provide safety in the interest of depositors;
prevent misuse of powers by managers of banks;
see that the act does not supersede, but supplements to the Companies Act, 1956.
State Bank of India Act, 1955
Imperical Bank of India was transformed into SBI through SBI Act, 1955 passed by Indian Parliament. As a result of it banking services were expanded to rural as well as semi-urban areas.
The State Bank of India
(Subsidiary Banks) Act, 1959
This Act provides the formation of Certain Government or Government Associated Banks as subsidiary of the State Bank of India.
Banking Laws
(Miscellaneous Provisions) Act, 1963
With a view to restraining the control exercised by particular group of persons over the affairs of banks and to providing for stricter Control Over Bank by the Reserve Bank, the banking laws (miscellaneous provisions) Act was passed in 1963.
Banking Law (Amendment) Act, 1968
In this act, it was decided as to which businesses banks are allowed to give loans. The role of banks in the areas of economic and social development was also specified.
The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
As per this act, no shareholder of the Corresponding New Bank, other than the Central Government shall be entitled to exercise voting rights in respect of any shares held by him. Under this provision, 14 banks were nationalised in 1970.
Regional Rural Banks Act, 1976
Regional Rural Banks were established under the provisions of an Ordinance passed on 26th Sep, 1975 and the RRB Act, 1976 to provide sufficient banking and credit facility for agriculture and other rural sectors. These were setup on the recommendations of the Narasimham working group.
SARFAESI Act, 2002
The full form of Sarfaesi Act is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks utilise this act as an effective tool for bad loans (NPA) recovery. It is possible that non-performing assets are backed by securities charged to the bank by way of hypothecation or mortgage or assignment.
Upon loan default, banks can seize the securities (except agricultural land) without intervention of the court. Sarfaesi is effective only for secured loans where bank can enforce the underlying security e.g. hypothecation, pledge and mortgages.
The Sarfaesi Act, 2002 gives powers of 'seize and desist' to banks. Banks can give a notice in writing to more...
New Banking System
Over the years, banks in India have taken a new turn to avail their services to its customers in more easy and friendly manner. RBI is the sole organisation for providing a platform to fulfill the services offered by various bank. The Government's objective of achieving 100% financial inclusion in India got a shot in the arm with the new banking system.
Indradhanush Scheme for Public Sector Banks
Union Government has launched a seven pronged plan called Indradhanush Mission to revamp functioning of Public Sector Banks (PSBs).
Mission Indradhanush is aimed to revamp the functioning of public sector banks so that PSBs can compete with the Private Sector Banks. The mission is a brainchild of PJ Nayak committee.
The mission includes the seven key reforms of appointments, board of bureau, capitalisation, de-stressing, empowerment, framework of accountability and governance reforms.
Appointments Government had already announced that the post of Chairman and Managing Director in Public Sector Banks are to be split into (a) MD and CEO; and (b) Non-Executive Chairman. Under the new process of selection for MD and CEO, even private sector candidates are also allowed to apply for the position of MD and CEO.
Banks Board Bureau BBB is a body of eminent professionals and officials, which replaced the Appointments Board for appointment of Whole-time Directors as well as Non-Executive Chairman of PSBs.
Capitalisation Government of India has made an exercise to estimate the capital requirements (Rs. 70000 cr) based on credit growth rate of 12% for the current year and 12 to 15% for the next three years depending on the size of the bank and their growth ability.
De-Stressing PSBs The government will concentrate on de-stressing the bank's bad loans.
Empowerment It provides greater flexibility in hiring the manpower to banks,
Framework of Accountability The government announced a new framework of key performance indicators for state-run lenders to boost efficiency in functioning while assuring them of independence in decision making on purely commercial considerations.
Governance Reforms Specific decision will be taken on optimising capital, digitizing process, strengthening, risk management, improving managerial performance and financial inclusion.
Banks Board Bureau
Banks Board Bureau (BBB) is an autonomous body of Union Government of India, with a view to improve Governance of Public Sector Banks (PSBs). The BBB started the function from 1st April, 2016.
The Bureau will recommend for selection of heads-Public Sector Banks and Financial Institutions and help Banks in developing strategies and capital raising plans. Former Comptroller and Auditor General (CAG) Vinod Rai has been appointed as the first Chairman of Banks Board Bureau (BBB). It is a part of a seven-pronged revamp plan for PSBs dubbed as Indradhanush (rainbow) plan.
Composition of BBB
BBB comprises of a Chairman and six more members with at least 3 former bankers, 2 professionals and secretary, department of financial services representing government.
Major Functions of BBB
Give recommendations for appointment of full-time Directors as more...
Banking Innovation in India
The term "Innovation" means to make something new- The innovations in the banking field mainly depends upon rapid growth in the technology. The banking industry has became one of the developed service sector industries in India. In the last decade, India has seen a shift from traditional payment methods, i.e. cash/paper-based payments to modern electronic payment systems. On one hand innovation has increased the working efficiency of banks whereas on the other hand customers are also at an ease.
Automated Teller Machine
Automated Teller Machine (ATM) is a computerised machine that provides the customers of banks the facility of accessing their account for dispensing cash and to carry out other financial and non-financial transactions without the need to actually visit their bank branch.
The benefit of ATMs for customers
provide 24 x 7 and 365 days a year service.
offer quicker and efficient service.
allow privacy in transactions.
provide error free service.
The benefits of ATM for banks
It is an alternative to extend banking hours.
It is an alternative to opening new branches.
It reduces the operating expenses of the bank.
It helps a banks to avoid transportation of cash and cash handling employees.
It can be located in any convenient location in any form as wall unit, lobby unit or a window unit.
It increases market penetration.
It relieves the bank employees from routine transactions so that they can focus more on analytical and innovative work.
History of ATM in India
First Bank to introduce ATM in India: HSBC, in 1987 (Mumbai).
First non-banking entity to introduce ATM in India: Tata Communications Payment Solutions Limited (Indicash).
ICICI was the first Bank to provide Mobile ATM.
India's first 'talking' ATM launched by Union Bank of India (UBI) for visually impaired was launched in Ahmedabad (Gujarat).
The National Payments Corporation of India (NPCI) launched India's first rural bank ATM card with a regional rural bank in Varanasi.
India's first non-bank owned ATM. opens in Thane district, Maharashtra by Tata Communication Payments Solutions Ltd.
Types of ATM
Different types of ATM are us follows
(i) White Label ATM The ATMs setup, owned and operated by non-banks are called White Label ATM's. Non-banking entities have entered the business of owning ATMs where customers of different banks can withdraw or deposit cash from their respective bank accounts.
Traditionally, Bank ATMs had their respective Bank logo, like SBI ATM and all. But White Label ATM's do not have this logo, as they are setup by non-banking entities. Tata Communication Payment Solutions (TCPS), launched first white label ATM of the country at Chandrapada (Mumbai).
(ii) Brown Label ATM Brown label A.TM are those Automated Teller Machines where hardware and the lease of the ATM machine is owned by a service provider, but cash management and connectivity to banking networks is provided by a sponsor bank whose brand is used on the ATM. The 'brown label5 has come up as an alternative more...
Financial Institutions in India
Finance
It is the procurement (to get, obtain) of funds and effective utilization of funds. It is the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities. Finance consists of financial system which include the public, private and government spaces and the study of finance and financial instruments, which can relate to countless assets and liabilities.
Categorization of Finance
Finance can be categorised into three types according to their objectivity
Short Term Finance It is often referred to as bridging finance, which usually refers to loans mostly offered on terms of up to 15 months.
Mid Term Finance This type of finance is given for longer period. It is for period saying from 15 months to 5 yr. Prominently it is given for machines, land separation, etc.
Long Term Finance These are given for term extending more than 5 yr. It is given for creating permanent structures.
Financial Institutions
Financial institutions of Indian money market are
Organized Sector
Organised sector of Indian money market is that sector whose parts and activities are systematically coordinated by the monetary authority.
It comprises of the folio-wing institutions
Reserve Bank of India At the apex of India, money market is the Reserve Bank of India. It is the Central Bank of the country.
Commercial Banks The Commercial Banks dominate the organised sector. It includes Public Sector Banks (State Bank of India + its Associate Banks + Nationalised Banks + Regional Rural Banks) and Private Sector Banks (Scheduled Banks + Non-Scheduled Banks + Foreign Banks).
Co-operative Banks They are a part of co-operative credit institutions that have a three-tier structure. At the top, there are State Co-operative Banks. At the district level, there are Central Co-operative Banks. At local level, there are Rural Primary Co-operative Banks and Urban Co-operative Banks.
Unorganised Sector
The unorganised market is that market whose activites are not systematically coordinated by the monetary authority. It is largely made up of indigenous bankers, moneylenders, Chit funds, Nidhis, etc.
Sources of Finances
There are two types of sources
Institutional Sources
The organisation and institutes which are established to provide loan are called institutional sources of finance. The main purpose of these institution are to arrange the finance. Insurance companies, banks, co-operative societies, UTI are some of the examples of financial institutions.
Non-Institutional Sources
Loan taken from friends, relatives, money lenders, mahajans are called non-institutional sources of finance.
Financial Instruments
Financial instruments provides short term credit. These include Bills, Treasury Bills, Promissory Notes, Hundis, Certificates of Deposits (CD) and Commercial Papers.
Financial Institutions for Agriculture
For the purpose of giving loan to agricultural sector, many financial institutions have been created jointly by government of India and RBI. Few of these institutions are co-operative bank like RRBs, NABARD, etc.
Commercial Bank
From 1st Fob, 1969, the government imposed more...
