BA4003 BANKING FINANCIAL
SERVICES
Unit - 1
INTRODUCTION TO INDIAN BANKING SYSTEM AND
PERFORMANCE EVALUATION
Overview of Indian Banking System , Functions Of Banks , keys
Acts Governing the Function Of Indian Banking System – RBI
Act 1943, Negotiable Instruments Act 1881, Banking Regulations
Act 1948 – Rights and Obligations of a Banker, Overview of
Financial Statement of Banks – Balance Sheet and Income
Statement.
OVER VIEW OF INDIAN
BANKING SYSTEM
Modern banking in India originated in the last decade of
the 18th century. The largest and the oldest bank which is
still in existence is the State Bank of India (S.B.I).
In the mid-nineteenth century the East India Company
established the Bank of Bengal, Bank of Bombay, Bank of
Madras.
The three banks were merged in 1921 to form the Imperial Bank
of India, which upon India's independence, became the State
Bank of India in 1955.
The Reserve Bank of India was established in 1935, under the
Reserve Bank of India Act, 1934.
In 1969 Indira Gandhi, the Prime Minister , continued this
process of nationalizing 14 major banks. Indian banks are
unique in many respects. prior to 1991 all banks were state
owned. In 1991 when the government opened banking to private
banks (e.g., ICICI bank and Bank of America), the public sector
has dropped by 20%. However, state owned banks still controls
approximately 80% of the country, s banking assets.
DEFINITION OF BANK
Sec 5(1) (b) of the Banking Regulation Act, 1949 defines
banking as, ‘financial intermediaries which are engaged in
the business of (i) Acting as a payment agent on behalf of
their customers and (ii) Borrowing and lending of money’.
Sec 5(1) (c) defines a banking company as, “ Any company
which transacts the business of banking in India”.
Functions of banks
Mobilizations of savings
Facilitate commerce and trade
Balanced regional development
Provision of finance to backward communities and neglected
segments of society – commercial and cooperative bank on
concessional rate.
Development of agriculture and priority sectors in the economy
– agriculture, small scale industries (SSIs),retail trade, small
borrowers, self-employed persons, etc.., and also exports .
Granting and issuing of letter of credit, traveler's cheques and circular
notes.
Buying and selling foreign exchange including bank notes, bullion
and specie.
Acquiring, holding, issuing on commission, underwriting, and
dealings in stocks, funds, shares, debentures, bonds, obligations,
securities and investments of all kinds.
Purchasing and selling securities on behalf of constituents or others,
the negotiating of loans and advances.
Safe custody of all kind.
KEY REGULATIONS IN INDIAN
BANKING SECTOR
The key statutes and regulations that govern the banking industry in India are
Reserve Bank of India Act, 1934 (RBI Act): The RBI Act was enacted to establish and set out
the functions of the RBI. The RBI Act empowers the RBI to issue rules, regulations, directions
and guidelines on a wide range of issues relating to the banking and the financial sector.
Banking Regulation Act, 1949 (BR Act): The BR Act provides a framework for the supervision
and regulation of all banks. It also gives the RBI the power to grant licenses to banks and
regulate their business operation. The BR Act also sets out details of the various businesses that
a bank in India is permitted to engage in.
Foreign Exchange Management Act, 1999 and the rules and regulations issued there under
(FEMA): The FEMA is the primary legislation in India which regulates cross-border
transactions and related activities. FEMA and the rules made there under are administered by
the RBI.
RBI ACT, 1934
Powers and functions of RBI
Section 36 mentions the powers of RBI. The Reserve Bank may
prohibit banking companies from entering into a particular
transaction and can advise the banking company.
It can also assist the banking company by granting loans or
advances under Section 18.
It can direct the banking company to call for a meeting of its
directors to discuss the matters of the company.
It can also appoint officers to observe how the affairs of the
banking company are conducted.
Offences and punishment under the Banking Regulation Act, 1949
ROLE AND FUNCTIONS OF RBI
The main function of Reserve Bank is to regulate the issue of bank
notes and the keeping of reserve with a view to securing monetary
stability in India and to generally to operate the currency and credit
system of the country to its advantage.
1. Monopoly of Currency Issue
2. Banker to Government
3. Adviser to the Government
4. Controller of Credit
Banking Regulations Act 1949
A Bill was introduced in March 1948
and was passed in the Parliament in
Feb. 1949.It came forced from 16th
March,1949. This Act was originally
called the Banking Companies
Act,1949 and now it is renamed as the
Banking Regulation Act,1949.
Objectives of the Banking Regulation Act, 1949
The objectives of the Banking Regulation Act are stated
below:
To meet the demand of the depositors and provide them
security and guarantee.
To regulate the opening of branches and changing of
locations of existing branches.
To prescribe minimum requirements for the capital of
banks.
To balance the development of banking institutions.
The Banking Regulation Act, 1949
Features of the Banking Regulation Act, 1949
The main features of the Act are mentioned below:
oNon-banking companies are forbidden to receive money
deposits that are payable on demand.
oRegulation on the acquisition of shares of banking
companies.
oPower of the Central Government to make schemes for
the banks.
oProvisions regarding liquidation proceedings for
banking companies
NEGOTIABLE INSTRUMENTS ACT, 1881
The term “Negotiable” means transferable from one person to another
person in return for consideration.
The term “Instrument” means any written document by which a right is
created in favor of some person.
DEFINITION OF NEGOTIABLE INSTRUMENT:
According to Sec. 13(a), “Negotiable Instrument (NI) means a Promissory
Note, Bill of Exchange or a Cheque payable either to order or bearer.
An Instrument may be negotiable either by:
(i) Statute (Written Law)
(ii) Usage of Promissory Note, Bill of Exchange or Cheque.
GENERAL TOPICS UNDER NEGOTIABLE INSTRUMENT
RULES APPLICABLE IN CASE OF LOST NEGOTIABLE INSTRUMENT:
When a Negotiable Instrument has been lost before it is overdue, the
holder may apply to the drawer (maker) to give him another bill of the
same amount.
The finder of the lost instrument gets no title.
When a Negotiable Instrument is lost, the holder should inform to
parties liable on it and should also give public notice by advertisement
in news paper.
Discharge of Negotiable Instrument
A Negotiable Instrument is said to be discharged when it
becomes completely useless.
A Negotiable Instrument is Discharged in the following cases:
By Payment in due course.
By Party Primarily Liable Became Holder.
By Cancellation.
By Material Alteration.
Provisions Relating to Cash
Reserve Ratio (CRR)
Cash reserve ratio (CRR) is the percentage of a bank's total deposits that it needs
to maintain as liquid cash. This is an RBI requirement, and the cash reserve is
kept with the RBI. A bank does not earn interest on this liquid cash maintained
with the RBI and neither can it use this for investing and lending purposes.
Maintenance of Minimum CRR on Daily Basis
Every scheduled bank, small finance bank and payments bank shall maintain
minimum CRR of not less than ninety per cent of the required CRR on all days
That is the average of CRR maintained daily shall not be less than the CRR
prescribed by the Reserve Bank.
Non - Performing Asset –TYPE - IDENTIFICATION
Term Loan - Account is treated Interest and/ or instalment remains over due for a
period of more than 90 days.
Cash Credit & Overdraft accounts -Account is treated as NPA if it remains out of
order for a period of more than 90 days. An account is treated as out of order if,
Agricultural Advances- In case of Short duration crops, the installment of
principle or interest thereon remains overdue for two crop seasons
In case of long duration crops, the installment of principle or interest thereon
remains overdue for one crop season.
Overview of financial statement of
banks
Every commercial and other banks in India have to maintain the financial
statement of their banks for a particular period of time. The financial
statements have to be prepared, verified and audited by the registered chartered
accountant and to be submitted to RBI for verification and authentication
purpose.
The following are the financial statements prepared by all the banks
1. Income Statement
2. Balance Sheet
Income statement focuses on inflow and outflows
Profit and loss account of banking is divided into four sec:
1. Income: Interest earned , other income , expenditure
2. Profit/loss
3. Appropriations.
Format of Bank
Balance Sheet
Form A
Form of Balance Sheet
Particulars Balance Sheet of….(here enter name of the Banking
Schedule Company)…….
As on 31.3…. As on 31.3….
Current Year Previous Year
Balance Sheet as on 31 March (Year)
st
Capital and Liabilities:
Capital 1
Reserves and Surplus 2
Deposits 3
Borrowings 4
Other liabilities and Provisions 5
Total
Assets
Cash and Balances with Reserve Bank 6
of India Balance with Banks
Money at call and Short Notice 7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent Liabilities 12
Bills for Collection
Format of Profit and Loss
Account
Form B
Form of Profit and Loss Account For the year ending 31 st March….
Particulars Schedule No Year ended as on 31.3…. Year ended as on 31.3…. (Previous
(Current Year) Year)
1) Income
Interest earned 13
Other income 14
Total
2) Expenditure
Interest Expended 15
Operating Expenses 16
Provisions and Contingencies
Total
Particulars Schedule No Year ended as on Year ended as on 31.3….
31.3….(Current Year) (Previous Year)
3) P&L
Net P&L(-) for the yr P&L
(-) brought forward
Total
4) APPROPRIATION
Transfer to statutory
reserves
Transfer to other reserves
Transfer to
government/proposed
Dividends
Balance carried over to B/S
Total
CAMEL
The CAMEL acronym stands for "Capital adequacy, Asset quality,
Management, Earnings, Liquidity,
CAMEL is a recognized international rating system that bank supervisory
authorities use in order to rate financial institutions according to six factors
represented by its acronym. Supervisory authorities assign each bank a score on a
scale. A rating of one is considered the best, and a rating of five is considered
the worst for each factor.
CAMEL is an international rating system used by regulatory banking authorities to
rate financial institutions, according to the six factors represented by its acronym.
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