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BBA-III SEMESTERIndian Banking System- UNIT- 1Structure and Organization of Banks , Reservebank of India, Apex banking institutions,Commercial banks , Regional rural banks , Co-operative banks , Development banks.STRUCTURE & ORGANISATION OF BANKS :Indian banking structure can be broadlyclassified in to two categories :(i) ORGANISED SECTOR(ii) UNORGANISED SECTOR
ORGANISED SECTOR BANKSMain constituents of organized sectorbanks are: 1. RESERVE BANK OF INDIA 2. COMMERCIAL BANKS 3. CO-OPERATIVE BANKS 4. SPECIALISED BANKS
Reserve Bank of IndiaReserve Bank of India is the apex monetaryInstitution of India which is responsible for theregulation of currency, printing of banknotesand minting coins. It is also called as thecentral bank of the country. The bank wasestablished on April1, 1935 in Kolkataaccording to the Reserve Bank of India act1934 but was later shifted to Mumbai in 1937.RBI was initially privately owned but sincenationalization in 1949, the Reserve Bank isowned by the Government of India.
COMMERCIAL BANKSCommercial Banking Systemconsists of :(i) Scheduled Banks(ii) Non scheduled BanksScheduled Banks : Scheduled banksare included in the second Scheduleof the Reserve Bank of India underAct, 1934. Every scheduled bankmust have a paid up capital &reserves of an aggregate value of atleast Rs.5 lakhs.
CLASSIFICATION OF SCHEDULEDBANKS(I) PUBLIC SECTOR BANKS: Thesebanks are owned & controlled by thegovernment . The public sectorcommercial banking in India started withsetting up of State Bank of India in 1955. Atpresent 8 state banks & associate banksare in the group of S.B.I. i.e. State bank ofHyderabad, State Bank of Indore etc. aswell as 20 nationalized banks i.e. Bank ofBaroda , Allahabad Bank etc. RegionalRural Banks are also the scheduled bankswhich are governed by R.R.B. ACT,1976.
(II) Private Sector Banks : Private sectorbanks continued to operate in the bankingsector after nationalization of 20 banks in 1969&1980. According to new policy framed inJanuary1993 by R. B. I. new banks wereformed in private sector . Such as :The U.T.I. Bank Ltd., HDFC Bank Ltd., etc.
(III)Foreign Banks : Foreign banks are working inIndia from British days. ANG Grindlays Bank has56 branches, The Standard Chartered Bank has 21branches. New foreign banks are : Barclays bank,Bank of Ceylon, Fuji bank etc.CO-OPERATIVE BANKS: It mainly meets thecredit needs of rural areas & agriculture. Co-operative banks has three tier functioning . StateCo-operative bank acts as an apex body at thestate level , District co-operative banks areoperating at the district level and co-operativesociety (banks) are operating at villages & town
SPECIALISED BANKSThese institutions look after differentsectors of economy . For example:IDBI,NABARD ,EXIM BANK ETC.
Unorganized Banking SectorThe unorganized sector of banking inIndia consists of money lenders andindigenous bankers known asshroffs, sahukars, mahajans, chettis,etc. These are individuals doingbanking business, along with tradingand commission business in manycases. Their activities are notorganized. They follow rules of theirown. The rate of interest charged bythem is very high.
Definition of organizationalstructure of banksAccording to G.Dessler, “ An organizationalset up consists of people who carry outdifferentiated tasks which are co-ordinatedto contribute to organizations goals.”Types of organizational structure of banks:The organizational set up of a bank ismainly based on departmentalization :Departmentalization:- It is the process ofdividing the total activities of the bank in tovarious departments, unit or sections. Thesimilar nature of bank activities aregrouped in one department.
Types of departmentalizationIn banking system these two types ofdepartmentalization is followed:-1. Departmentalization by territory:- Theorganizational set up of a commercial bank onthe basis of territory is of following type :(i)Central office: central office is maincontrolling authority of a particular bank.it issupreme body that determines the objectives ,policies & frame rule & regulation.(ii) Regional office: The regional office co-ordinate the functions of the branches located ina particular region. It is charged withresponsibilities of implementing the objectives& policies of top management to the branches.
(iii)Branch Office: The branch offices are thecenters that do the actual bankingbusiness. They are in direct contact withcustomers & cater to their needs.2. Departmentalization by Function:Functions include such activities aslending, investing, trust services,international banking, acceptingdeposits etc. Line managers areresponsible for the direct functions of acommercial bank.
Management of banksAccording to George R. Terry, “managementis a distinct process consisting of planning,organizing ,activating & controllingperformance to determine & accomplish theobjective by the use of people & resources.”Objectives of bank management:1.Maximisation of profit2.Meet challenges of competitors3.Improve the customer services4.Introduction of new schemes5. Manpower planning
Fundamental functions of bank management1.Planning2.Organising3.Staffing4.Directing5.Communication6.Controlling
Functional areas of bank management1.Deposit mobilization2.Financial management3.Credit management4. Profit evaluation5.Liquidity management(CRR,SLR)6.Marketing Management7.Portfolio(Asset) Management
Commercial banks According to the Banking Companies(Regulation)Act of India ,1949, “Bankingmeans the accepting ,for the purpose oflending or investment , of deposits of moneyfrom the public, repayable on demand orotherwise , and withdraw able by cheese ,draft or otherwise.”Features of commercial banks:1.Commercial establishment2.Accept deposits3.Repayment of accepted deposits4.Advancing loans to public5.Earning profit
The role of commercialbanksCommercial banks engage in thefollowing activities:1. processing of payments by way oftelegraphic transfer, internet banking, orother means2. issuing bank drafts and bank cheques3. accepting money on term deposit
---------4. lending money by overdraft, installmentloan, or other means5. providing documentary and standbyletter of credit, guarantees, performancebonds, securities underwritingcommitments and other forms of offbalance sheet exposures6. safekeeping of documents and otheritems in safe deposit boxes7. sales, distribution or brokerage, with orwithout advice, of: insurance, unit trustsand similar financial products as a
Functions of CommercialBanksThe functions of a commercial banksare divided into two categories:(i) Primary functions, and(ii) Secondary functions includingagency functions.(iii) Modern Functions(i) Primary functions:The primary functions of a commercialbank include:(a) accepting deposits; and(b) granting loans and advances;
(a) Accepting depositsThe most important activity of acommercial bank is to mobilise depositsfrom the public. People who have surplusincome and savings find it convenient todeposit the amounts with banks .Depending upon the nature of deposits,funds deposited with bank also earninterest. Thus, deposits with the bank growalong with the interest earned. If the rate ofinterest is higher, public are motivated todeposit more funds with the bank. There isalso safety of funds deposited with the
Different Modes of Accepting DepositsDifferent modes of Acceptance of DepositsBanks receive money from the public by way of deposits. Thefollowingtypes of deposits are usually received by banks:i) Current depositii) Saving depositiii) Fixed depositiv) Recurring depositv) Miscellaneous deposits
------i) Current DepositAlso called „demand deposit‟, current deposit can be withdrawn bythe depositor at any time by cheques. Businessmen generally opencurrentaccounts with banks. Current accounts do not carry anyinterest as theamount deposited in these accounts is repayable ondemand withoutany restriction.The Reserve bank of India prohibits payment of interest on currentaccounts or on deposits upto 14 Days or less except where priorsanctionhas been obtained. Banks usually charge a small amountknown asincidental charges on current deposit accounts dependingon the numberof transaction
Savings deposit/Savings BankAccounts Savings deposit account is meant for individuals who wish to deposit small amounts out of their current income. It helps in safe guarding their future and also earning interest on the savings. A saving account can be opened with or without cheque book facility. There are restrictions on the withdrawls from this account. To open a savings account, it is necessary for the depositor to be introduced by a person having a current or savings account with the same bank.
Fixed depositThe term „Fixed deposit‟ means depositrepayable after the expiry of a specifiedperiod. Since it is repayable only after afixed period of time, which is to bedetermined at the time of opening ofthe account it is also known as timedeposit. The rate of interest on fixeddeposits depends upon the period ofdeposits. The longer the period, thehigher is the rate of interest offered
Recurring DepositsRecurring Deposits are gaining widepopularity these days. Under this type ofdeposit, the depositor is required to deposita fixed amount of money every month for aspecific period of time. Each instalmentmay vary from Rs.5/- to Rs.500/- or more permonth and the period of account may varyfrom 12 months to 10 years. After thecompletion of the specified period, thecustomer gets back all his deposits alongwith the cumulative interest accrued on thedeposits.
Miscellaneous DepositsBanks have introduced severaldeposit schemes to attract depositsfrom different types of people, likeHome Construction deposit scheme ,Sickness Benefit deposit scheme,Children Gift plan, Old age pensionscheme, Mini deposit scheme, etc.
-----b) Grant of loans and advancesThe second important function of a commercial bank is to grantloans and advances. Such loans and advances are given tomembers of the public and to the business community at a higherrate of interest than allowed by banks on various deposit accounts.The rate of interest charged on loans and advances variesdepending upon the purpose, period and the mode of repayment.The difference between the rate of interest allowed on depositsand the rate charged on the Loans is the main source of a bank‟sincome.
(I)LOANA loan is granted for a specific time period. Generally,commercial banks grant short-term loans. But term loans,that is, loan for more than a year, may also be granted.The borrower may withdraw the entire amount in lumpsumor in instalments. However, interest is charged on the fullamount of loan. Loans are generally granted against thesecurity of certain assets. A loan may be repaid either inlumpsum or in instalments
Different methods of Granting Loans by BankThe basic function of a commercial bank is to make loans andadvancesout of the money which is received from the public by wayof deposits.The loans are particularly granted to businessmen andmembers of thepublic against personal security, gold and silver andother movable andimmovable assets. Commercial bank generally lendmoney in thefollowing form:i) Cash creditii) Loansiii) Bank overdraft, andiv) Discounting of Bills
------i) Cash Credit :A cash credit is an arrangement whereby the bank agrees to lendmoney to the borrower up to a certain limit. The bank puts thisamount of money to the credit of the borrower. The borrower drawsthe money as and when he needs. Interest is charged only on theamount actually drawn and not on the amount placed to the credit ofborrower‟s account. Cash credit is generally granted on a bond ofcredit or certain other securities. This a very popular method oflending in our country
-------ii) Loans :A specified amount sanctioned by a bank to the customer is called a„loan‟. It is granted for a fixed period, say six months, or a year. Thespecified amount is put on the credit of the borrower‟s account. Hecanwithdraw this amount in lump sum or can draw cheques againstthissum for any amount. Interest is charged on the full amount even iftheborrower does not utilise it. The rate of interest is lower on loansincomparison to cash credit. A loan is generally granted against thesecurity of property or personal security. The loan may be repaid inlump sum or in instalments. Every bank has its own procedure ofgranting loans. Hence a bank is at liberty to grant loan depending onits own resources.The loan can be granted as:a) Demand loan, orb) Term loan
a) Demand loanDemand loan is repayable on demand.In other words it is repayable at shortnotice. The entire amount of demandloan is disbursed at one time and theborrower has to pay interest on it. Theborrower can repay the loan either inlump sum (one time)or as agreed withthe bank. Loans are normally grantedby the bank against tangible securitiesincluding securities like N.S.C., KisanVikas Patra Life Insurance policiesand U.T.I. certificates.
b) Term loansMedium and long term loans are called „Termloans‟. These loans are repayable over a periodof 5 years and maximum up to 15 years. Termloan is required for the purpose of setting up ofnew business activity, renovation,modernization, purchase of plant and machinery, vehicles,landor purchase of other immovable assets. Theseloans are generally secured against themortgage of land, plant and machinery, buildingand other securities. The normal rate of interestcharged for such loans is generally quite high.
ii) AdvancesAn advance is a credit facility provided bythe bank to its customers. It differs fromloan in the sense that loans maybegranted for longer period, but advancesare normally granted for a short period oftime. Further the purpose of grantingadvances is to meet the day to dayrequirements of business. The rate ofinterest charged on advances variesfrom bank to bank. Interest is chargedonly on the amount withdrawn and not onthe sanctioned amount.
Modes of short-term financialassistanceBanks grant short-term financial assistance byway of cash credit, overdraft and bill discounting.a) Cash CreditCash credit is an arrangement whereby the bankallows the borrower to draw amounts up to aspecified limit. The amount is credited to theaccount of the customer. The customer canwithdraw this amount as and when he requires.Interest is charged on the amount actuallywithdrawn. Cash Credit is granted as per agreedterms and conditions with the customers.
(b)Bank OverdraftOverdraft is also a credit facilitygranted by bank. A customer who has acurrent account with the bank isallowed to withdraw more than theamount of credit balance in hisaccount. It is a temporary arrangement.Overdraft facility with a specified limitis allowed either on the security ofassets, or on personal security , orboth.
(c) Discounting of BillsBanks provide short-term finance bydiscounting bills, that is , makingpayment of the amount before the duedate of the bills after deducting acertain rate of discount. The party getsthe funds without waiting for the dateof maturity of the bills. Incase any bill isdishonoured on the due date, the bankcan recover the amount from thecustomer
Secondary functionsThese are as follows -1) Issuing letters of credit, travellers cheques,circular notes etc.2) Undertaking safe custody of valuables,important documents, andsecurities by providing safe deposit vaults orlockers;3) Providing customers with facilities of foreignexchange.4) Transferring money from one place toanother; and from onebranch to another branch of the bank.
--5) Standing guarantee on behalf ofits customers, for makingpayments for purchase of goods,machinery, vehicles etc.6 Collecting and supplying businessinformation;7) Issuing demand drafts and payorders; and,8) Providing reports on the creditworthiness of customers.
AGENCY & GENERAL UTILITY SERVICES(i) Agency ServicesAgency services are those services whichare rendered by commercialbanks as agents of their customers. Theyinclude :a) Collection and payment of cheques andbills on behalf of the customers;b) Collection of dividends, interest andrent, etc. on behalf of customers, if soinstructed by them; c)Purchase and sale of shares and securitieson behalf of customers;
---d) Payment of rent, interest,insurance premium, subscriptionsetc. on behalf of customers, if soinstructed;e) Acting as a trustee or executor;f) Acting as agents orcorrespondents on behalf ofcustomers for other banks andfinancial institutions at home andabroad.
ii) General utility servicesThese are available to the public onpayment of a fee or charge:-a)Issuing letters of credit and travellers‟cheques;b) Underwriting of shares, debentures,etc.;c) Safe-keeping of valuables in safedeposit locker;d) Underwriting loans floated bygovernment and public bodies.
--e) Supplying trade information andstatistical data useful to customers;f) Acting as a referee regarding thefinancial status of customers;g) Undertaking foreign exchangebusiness.
(iii)Modern functions1. Automatic teller machines (ATM)2. Credit Cards3. Mail Transfer & Telegrafic Transfer4. Tele Banking5. Internate Banking6.Round the clock Banking
Different Types of Banks -These are various kinds of Banks :Type 1. Saving BanksSaving banks are established to createsaving habit among the people. Thesebanks are helpful for salaried people andlow income groups. The deposits collectedfrom customers are invested in bonds,securities, etc. At present most of thecommercial banks carry the functions ofsavings banks. Postal department alsoperforms the functions of saving bank
Type 2. Commercial BanksCommercial banks are established with an objectiveto help businessmen. These banks collect moneyfrom general public and give short-term loans tobusinessmen by way of cash credits, overdrafts, etc.Commercial banks provide various services likecollecting cheques, bill of exchange, remittancemoney from one place to another place.In India, commercial banks are established underCompanies Act, 1956. In 1969, 14 commercial bankswere nationalised by Government of India. Thepolicies regarding deposits, loans, rate of interest,etc. of these banks are controlled by the CentralBank.
Type 3. Industrial Banks /Development Banks Industrial / Development banks collect cash by issuing shares & debentures and providing long-term loans to industries. The main objective of these banks is to provide long-term loans for expansion and modernisation of industries. In India such banks are established on a large scale after independence. They are Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI) and Industrial Development Bank of India (IDBI).
Type 4. Land Mortgage / LandDevelopment BanksLand Mortgage or Land Development banks are also known as Agricultural Banks because these are formed to finance agricultural sector. They also help in land development.In India, Government has come forward to assist these banks. The Government has guaranteed the debentures issued by such banks. There is a great risk involved in the financing of agriculture and generally commercial banks do not take much interest in financing agricultural sector.
Type 5. Indigenous BanksIndigenous banks means Money Lenders and Sahukars. They collect deposits from general public and grant loans to the needy persons out of their own funds as well as from deposits. These indigenous banks are popular in villages and small towns. They perform combined functions of trading and banking activities. Certain well-known indian communities like Marwaries and Multani even today run specialised indigenous banks.
Type 6. Central / Federal /National Bank Every country of the world has a central bank. In India, Reserve Bank of India, in U.S.A, Federal Reserve and in U.K, Bank of England. These central banks are the bankers of the other banks. They provide specialised functions i.e. issue of paper currency, working as bankers of government, supervising and controlling foreign exchange. A central bank is a non-profit making institution. It does not deal with the public but it deals with other banks. The principal responsibility of Central Bank is thorough control on currency of a country.
Type 7. Co-operative BanksIn India, Co-operative banks are registered under the Co-operative Societies Act, 1912. They generally give credit facilities to small farmers, salaried employees, small-scale industries, etc. Co-operative Banks are available in rural as well as in urban areas. The functions of these banks are just similar to commercial banks.
Type8. Exchange BanksHong Kong Bank, Bank of Tokyo, Bank of America are the examples of Foreign Banks working in India. These banks are mainly concerned with financing foreign trade.Following are the various functions of Exchange Banks :-1.Remitting money from one country to another country,2.Discounting of foreign bills,3.Buying and Selling Gold and Silver, and4.Helping Import and Export Trade
Type 9. Consumers Bank Consumers bank is a new addition to the existing type of banks. Such banks are usually found only in advanced countries like U.S.A. and Germany. The main objective of this bank is to give loans to consumers for purchase of the durables like Motor car, television set, washing machine, furniture, etc. The consumers have to repay the loans in easy installments.
Features of organizationalstructure of banks1. High degree of Departmentation2. Regional or zonal office3. Hierarchal managementA- Top managementB- Middle managementC- Branch management
BOARD OF DIRECTORSThe Board of Directors is the apex managementof a commercial bank. The board of Directorsframe policies ,concentrate more on importantissues & take strategic decisions .Functions of Boards of Directors :-Following are the important functions-1. Setting bank purpose & mission- Directors of abank is to determine the goals and objectives ofthe banks business . The boards of directors hasto decide in the light of capital position, size ofdeposits , demand for loan& investment .
---2. Formulating Bank Policies :- Boardhas to formulate specific policies forthe successful attainment of theobjectives. The realization of objectivesis made easy with the help of policies .3. Selection of bank executives :-Banking activities require trainedexecutives with knowledge. Executivesmust have knowledge of investments,credits operations , people & machines.
--4. Determination of Duty & Authority of Executive:- The executives must be given sufficienttraining to enable them to cope withadministrative details & follow the policies.5. Standing Committee:- Standingcommittee is constituted by boards. It ensuresbetter co-ordination between variousdepartments .6.Delegation of authorities :- Boards determineauthority and duties of executives to performtheir functions properly and efficiently.
Duties & liabilities of directorsStatutory Duties of Directors :- 1.Not to pay commission , brokerage , discount on shares in excess of the aggregate 2.5% the of paid up value of shares.2.Not to create any charge upon the unpaid capital of the bank.3.Not to pay dividends unless all the capitalized expenses are completely written off .4.To maintain not less than 20% of the total time & demand liabilities of the bank in form of cash , gold or securities.
---5. To ensure that the annual accounts of the bank are prepared on last working day of every calendar year as given in the third schedule of the act.6.To seek prior approval of Reserve Bank before appointing or removing any auditors of the bank.7. To furnish three copies of account and balance sheet and auditors report with in three months of the of the period they refer.
General duties of directors of abank1. To supervise the general affairs of of the bank2. To direct and control its subordinates3. To attend board meetings4. To examine reports and audit records5. To make best efforts to collect slow & doubt full debts6. To investigate credit worthy ness of the applicant granting loan.
Liabilities of bank directorsa. Liable to outsiders for ultra-vires actb. Liability for mis-statement in prospectusc. Liability for breach of trust- (i)liability for making secret profit (ii)liability for loss caused by his negligence
Organizational set up ofcentral office1. Board of directors :- The board of directors is the highest authority of a commercial bank The board of directors shall consist of not more than two whole –time directors& three directors to represent the interest of farmers , workers & artisans . One directors have to represent the depositors.
2. Chairman –cum-managingdirectorThe chairman cum managing director is the chief executive of the bank . He presides over the meeting of board of directors.3. Executive director: He is the executive head of the bank . He co- ordinates & supervises all operational responsibilities .4. General managers of various departments :- a- loans & advances department b-investment department
--c. Foreign exchange department :- ( issue of letter of credit , rediscounting ,foreign securities.)d. Audit departmente. Public relation departmentf. Legal departmentg. Organizational set up of zonal offices
Regional Rural BankEstablishment & Growth1. Initially, five RRBs were set up on October 2, 1975 which were sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank & United Bank of India . Capital share being 50% by the central government, 15% by the state government and 35% by the scheduled bank.2. Earlier Reserve Bank of India had laid down ceilings on the rate of interest to be charged by these RRBs. However from August 1996 the RRBs have been granted freedom to fix rates of interest, which is usually in the range of 14-18% for advances. There are 84 RRB banks at present.
--- 3. Each RRB is sponsored by a public sector bank‚ which provides assistance in several ways‚ viz., subscription to its share capital‚ provision of such managerial and financial assistance as may be mutually agreed upon and help the recruitment and training of personnel during the initial period of its functioning.
Objectives of RRBsRRBs was established with the following objective :- 1. Bridging the credit gap in rural areas 2. Check the outflow of rural deposits to urban areas 3. Reduce regional imbalances and increase rural employment , 4.provide credit and other facilities‚ especially to the small and marginal farmers‚ agricultural laborers, artisans etc.
--- 5.will operate within the local limits specified by notification. 6.establishing branches or agencies at places notified by the Government.
Functions of RRBs1.Every RRB is authorized to carry on to transact the business of banking as defined in the Banking Regulation Act:-(a) granting loans and advances to small and marginal farmers and agricultural laborers‚ including agricultural marketing societies‚ agricultural processing societies‚ cooperative farming societies & primary agricultural credit societies.
---(b) granting loans and advances to artisans‚ small entrepreneurs and persons of small means engaged in trade‚ commerce‚ industry or other productive activities‚ within its area of operation. (c)The Reserve Bank of India has brought RRB‟s under the ambit of priority sector lending on par with the commercial banks. They have to ensure that forty percent of their advances are accounted for the priority sector. Within the 40% priority target, 25% should go to weaker section or 10% of their total advances to go to weaker section.
Regional Rural Banks in India1.The State Bank of India is one of the major commercial banks having regional rural banks. There are 30 Regional Rural Banks in India, under the State Bank of India and it is spread in 13 states across India. The number of branches the SBI Regional Rural Banks is more than 2000.
2. Haryana State CooperativeApex Bank Limited The main purpose of the Haryana State Cooperative Apex Bank Limited is to financially assist the artisans in the rural areas, farmers and agrarian unskilled labor, and the small rural entrepreneurs of Haryana. Haryana State Cooperative Apex Bank Limited also referred as the HARCOBANK, is one of the apex organizations in the state of Haryana.
3. National Bank for Agricultureand Rural Development The main purpose of the National Bank for Agriculture and Rural Development is to provide credit for the development and publicity of small scaled industries, handicrafts, rural crafts, village industries, cottage industries, agriculture, etc.
4. United Bank of IndiaThe role played by the United Bank of India (UBI) as one of the regional rural banks is phenomenal. The UBI has propagated the network of branches in order to actively take part in the rural improvement and development.5. Syndicate BankThe development of the Syndicate Bank was in accordance to the development of the rural banking sector in India . The Syndicate Bank has performed actively in the development of the rural sector .
6. Regional Rural Banks in Tamil NaduIndian Bank has sponsored two Regional Rural Banks (RRBs) viz., Saptagiri Grameena Bank and Pallavan GramaBank.Pallavan Grama Bank with Head Quarters at Salem is operating in 14 districts .
7. Regional Rural Banks in UttarPradesh: 1.Allahabad UP Gramin Bank 2.Aryavart Gramin Bank 3.Ballia –Etawah Gramin Bank 4.Baroda Uttar Pradesh Gramin Bank 5.Kashi Gomti Samyut Gramin Bank 6.Kshetriya Kisan Gramin Bank 7.Prathama Bank 8.Sarva UP Gramin Bank 9.Shreyas Gramin Bank 10.Purvanchal Gramin Bank
----Regional rural banks allowed to start branches in Tier 2 cities without RBI nod;-The Reserve Bank of India allowed regional rural banks (RRBs) to open branches in Tier –ii cities without taking its permission on August 2, 2012. It has been decided to allow RRBs to open branches without having the need to take permission from Reserve Bank of India .
Organizational structureof Regional Rural Banks1. A Regional Rural Bank is sponsored by a commercial bank. The sponsored bank requests the Central Government for this purpose which issues a notification after consulting the concerned state government.2. Generally , regional rural bank covers one district & maximum coverage of a RRB has been eight district.3. Only the Manipur RRB covers the entire state of Manipur.
Board of DirectorsThe RRB is governed by a Board of directors who exercises all the powers and discharges all the functions of RRB. It consists of :-i- a chairman appointed by the Central government for five years,ii- three directors nominated by the central governmentiii- two directors nominated by the concerned stateiv- three directors nominated by the sponsor bankV- NABARD is vested with powers of inspection of RRBs.
Functions /objectives of RRBs1. Provide loans to Rural population :- RRB provides loans & advances to weaker section of the society.2. Grant loans to co-operative societies:- RRBs also provides loans & advances to co-operative societies including marketing societies , co-operative farming society etc.3. Banking services:- RRB has to take the banking services to the doorsteps of the rural masses .
---4. Mobilize Rural saving:- RRB mobilize the rural savings by accepting deposits & channelise them for productive activities in the rural areas.5. Arrangement of credit :- RRB provide credit to rural areas through refinance.6. Cheap supply of credit :- RRB is to bring down the cost of supplying credit in rural areas.7. Generate Employment opportunities :- RRB is major employment provider in rural areas.
Recent position(achievements)In recent years RRBs performance is as follows:-1. Extend advances for purchase of durable consumer goods.2. Issue travellers’ cheques as agents of their sponsor bank & provides locker facility,3. There are now 195 RRB in 23 states with 14500 branches ,4. Over 95% loans are provided to weaker section of society.
Performance of RRBS byMarch 2011The following programmes were included in the performance of RRB- · Credit Flow to Agriculture; · Current Viability; · Non-Performing Assets (NPA) position; · Capital-To-Risk-Weighted Assets Ratio (CRAR) position; · Core Banking Solutions (CBS) IN RRBs; · Branch Expansion of RRBs, etc.
---As on 31 March 2010, there were 82 RRBs with a network of 15475 branches spread over 619 districts in 26 States and 1 Union Territory. The following measures have been initiated to expand the outreach of the RRBs: 1.The RRBs were given a target in 2007 to open 2000 branches by March, 2011; 2.RRBs are required to migrate to Core Banking Solution (CBS) by September 2011 (As on date, 21 RRBs have already achieved 100% CBS status); 3. The Sponsor Banks would provide the required support to the RRBs sponsored by them for this purpose;
---- 4. For up gradation of Technology for Financial Inclusion, the RRBs are being provided funds from Financial Inclusion Fund (FIF) and Financial Inclusion Technology Fund (FITF) by NABARD. 5.As on 31.03.2010, 3 RRBs out of 82 RRBs were incurring losses. (Manipur Rural Bank –Rs. 2.98 crore, Puduval Bharthiar Grama Bank –Rs. 0.22 crore and Mahakaushall Gramin Bank- Rs. 2.45 crore) 6.The profitability of RRBs, as a segment, has been improving.
Factors responsible for losses some of the factors responsible for losses in RRBs are identified as : 1.low recovery, 2.High NPA, 3.low business level, 4.low productivity per branch and per staff, 5. high cost structure, 6.poor financial management, 7.limited area of operation, 8.non-viable level of operation in branches located in resource-poor areas etc. 9.one of the RRBs, namely Puduval Bharthiar Grama Bank, which was set up in March 2008, has not yet reached a breakeven point;
What is co-operative bank :-According to the International Co-operative Alliance Statement of co-operative identity, „a co-operative isan autonomous association ofpersons united voluntarily to meettheir common economic, social, andcultural needs and aspirationsthrough a jointly-owned anddemocratically-controlled enterprise.Co-operatives are based on thevalues of self-help, self-responsibility,democracy, equality, equity andsolidarity.
Principles (functions)of co-operative bankThe 7 co-operative principles are :1. Voluntary and open membership2. Democratic member control3. Member economic participation4. Autonomy and independence 5. Education, training and information6. Co-operation among Co-operatives7. Concern for Community
features : 1. Customers owned entities : In a co- operative bank, the needs of the customers meet the needs of the owners, as co-operative bank members are both. As a consequence, the first aim of a co-operative bank is not to maximize profit but to provide the best possible products and services to its members. Some co-operative banks only operate with their members but most of them also admit non-member clients to benefit from their banking and financial services.
----2. Democratic member control : co- operative banks are owned and controlled by their members, who democratically elect the board of directors. Members usually have equal voting rights, according to the co- operative principle of "one person, one vote".3.Profit allocation : In a co-operative bank, a significant part of the yearly profit/surplus is usually allocated to constitute reserves. A part of this profit can also be distributed to the co- operative members.
--4. Co-operative banks are deeply rooted inside local areas and communities. They are involved in local development and contribute to the sustainable development of their communities, as their members and management board usually belong to the communities in which they exercise their activities. By increasing banking access in areas or markets where other banks are less present - farmers in rural areas, middle or low income households in urban areas - co-operative banks reduce banking exclusion and foster the economic ability of millions of people.
Organizational structure of co-operative Bank The structure of commercial banking is of branch-banking type; while the co- operative banking structure is a three tier federal one.- A State Co-operative Bank works at the apex level (i.e. works at state level).- The Central Co-operative Bank works at the Intermediate Level (i.e. District Co- operative Banks ltd. works at district level)- Primary co-operative credit societies at base level (At village level)
Difference between Co-operative banks &Commercial bankThey differ from commercial banks in the following respects1. Commercial banks are joint-stock companies under the companies‟ act of 1956 whereas co- operative banks were established under the co-operative society‟s acts of different states.2. Commercial bank structure is branch banking structure whereas co-operative banks have a three tier setup, with state co- operative bank at apex level, central /district co-operative bank at district level, and primary co-operative societies at rural level.
---3. Only some of the sections of banking regulation act of 1949 (fully applicable to commercial banks), are applicable to co-operative banks, resulting only in partial control by RBI of co-operative banks and4.Co-operative banks function on the principle of cooperation and not entirely on commercial parameters.
RBI Policies for co-operativebanksThe RBI appointed a high power committee in May 1999 under the chairmanship of Shri. K. Madhava Rao, Ex-Chief Secretary, Government of Andhra Pradesh to review the performance of Urban Co-operative Banks (UCBs) and to suggest necessary measures to strengthen this sector. With reference to the terms given to the committee, the committee identified five broad objectives:1. To preserve the co-operative character of UCBs2. To protect the depositors‟ interest3. To reduce financial risk
Types of Co-operative BanksThe co-operative banks are small-sized units which operate both in urban and non-urban centers. They finance small borrowers in industrial and trade sectors besides professional and salary classes. Regulated by the Reserve Bank of India, they are governed by the Banking Regulations Act 1949 and banking laws (co-operative societies) act, 1965. The co-operative banking structure in India is divided into following 5 components:
1. Primary Co-operative CreditSociety The primary co-operative credit society is an association of borrowers and non-borrowers residing in a particular locality. The funds of the society are derived from the share capital and deposits of members and loans from central co-operative banks. The loans are given to members for the purchase of cattle, fodder, fertilizers, pesticides, etc.
2. Central co-operative banks These are the federations of primary credit societies in a district and are of two types those having a membership of primary societies only and those having a membership of societies as well as individuals. The funds of the bank consist of share capital, deposits, loans and overdrafts from state co-operative banks and joint stocks. These banks provide finance to member societies within the limits of the borrowing capacity of societies. They also conduct all the business of a joint stock bank.
3.State co-operative banks The state co-operative bank is a federation of central co-operative bank and acts as a watchdog of the co-operative banking structure in the state. Its funds are obtained from share capital, deposits, loans and overdrafts from the Reserve Bank of India. The state cooperative banks lend money to central co-operative banks and primary societies and not directly to the farmers.
4. Land development banks The Land development banks are organized in 3 tiers namely:- state, central, and primary level. They meet the long term credit requirements of the farmers for developmental purposes. They are governed both by the state government and Reserve Bank of India. Recently, the supervision of land development banks has been assumed by NABARD. The sources of funds for these banks are the debentures subscribed by both central and state government. These banks do not accept deposits from the general public.
5.Urban Co-operative Banks The term Urban Co-operative Banks (UCBs) refers to primary co-operative banks located in urban and semi-urban areas.. They mainly rely upon deposits from members and non-members and in case of need, they get finance from either the district central co-operative bank to which they are affiliated or from the apex co-operative bank if they work in big cities where the apex bank has its Head Office. They provide credit to small scale industrialists, salaried employees, and other urban and semi-urban residents.
What are the functions of CooperativeBanks in India? 1.Cooperative banks in India finance rural areas under: 1.Farming 2.Cattle 3.Milk 4.Hatchery 5.Personal finance
11. Cooperative banks in Indiafinance urban areas under:- 1.Self-employment 2.Industries 3.Small scale units 4Home finance 5.Consumer finance 6.Personal finance
Meaning of DevelopmentBanks Development banks are those financial institutions engaged in the promotion and development of industry, agriculture and other key sectors.In the words of A.G. Kheradjou :- “A development bank is like a living organism that reacts to the social- economic environment and its success depends on reacting most aptly to that environment”.
Definition D.M. Mithani states that “A development bank may be defined as a financial institution concerned with providing all types of financial assistance i.e. medium as well as long-term ,to business units in the form of loans, underwriting, investment and guarantee operations and development in general and industrial.”
Features of a developmentbankA development bank has the following features or characteristics: 1. A development bank does not accept deposits from the public like commercial banks and other financial institutions who entirely depend upon saving mobilization. 2. It is a specialized financial institution which provides medium term and long-term lending facilities. 3. It is a multipurpose financial institution. Besides providing financial help it undertakes promotional activities also. 4. It helps an enterprises from planning to operational level.
-----5. It provides financial assistance to both private as well as public sector institutions.6. The role of a development bank is of gap filler. When assistance from other sources is not sufficient then this channel helps.7. Development banks primarily aim to accelerate the rate of growth. It helps industrialization specific and economic development in general.8. The objective of these banks is to serve public interest rather than earning profits.9. Development banks react to the socio- economic needs of development.
Small Industries DevelopmentBank of India (SIDBI)SIDBI was established as wholly owned subsidiary of Industrial Development Bank of India (IDBI) under the small Industries Development of India Act 1989. It is the principal institution for promotion, financing and development of industries in the small-scale sector. Capital:- SIDBI started its operations from April 1990 with an initial authorised capital of Rs. 250 crore, which could be increased to Rs. 1000 crore.
What are the objectives ofSIDBI? In the setting up of SIDBI, the main purpose of the government was to ensure larger flow of assistance to the small-scale units. To meet this objective, the immediate thrust of the SIDBI was on the following measures: (i) initiating steps for technological upgradation and modernisation of existing units;(ii) expanding the channels for marketing the products of the small scale sector; and(iii) promotion of employment-oriented industries, especially in semi- urban areas to create more employ-ment opportunities and thereby checking migration of population to urban areas.
What are the functions ofSIDBI?The major functions of SIDBI are given below:(i) It refinances loans and advances provided by the existing lending institutions to the small-scale units.(ii) It discounts and rediscounts bills arising from sale of machinery to and manufactured by small-scale industrial units.(iii) It extends seed capital/soft loan assistance under National Equity Fund, Mahila Udyam Nidhi and Mahila Vikas Nidhi and seed capital schemes.
----(iv) It grants direct assistance and refinance loans extended by primary lending institutions for financing exports of products manufactured by small-scale units.(v) It provides services like factoring, leasing, etc. to small units.(vi) It extends financial support to State Small Industries Corporations for providing scarce raw materials to and marketing the products of the small-scale units.(vii) It provides financial support to National Small Industries Corporation for providing; leasing, hire pur-chase and marketing help to the small-scale units.
Development Banks in India Development banking was started after the World War II. It provided finance to reconstruct the buildings and industries which were destroyed in the war. In India, development banking was started immediately after independence. The arrangement of development
Development banks in India areclassified into following five groups: 1.Industrial Development Banks : It includes, for example, Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Small Industries Development Bank of India (SIDBI). 2.Agricultural Development Banks : It includes, for example, National Bank for Agriculture & Rural Development (NABARD). 3. Export-Import Development Banks : It includes, for example, Export-Import Bank of India (EXIM Bank). 4. Housing Development Banks : It includes, for example, National Housing Bank (NHB). 5.Industrial Finance Corporation of India (IFCI) is the first development bank in India. It started in 1948 to provide finance to medium and large-scale industries in India.
NABARDNABARD is set up as an apex DevelopmentBank with a mandate for facilitating creditflow for promotion and development ofagriculture, small-scale industries, cottageand village industries, handicrafts and otherrural crafts. It also has the mandate tosupport all other allied economic activities inrural areas, promote integrated andsustainable rural development and secureprosperity of rural areas. NABARD was setup in the year 1982. The AgriculturalRefinance & Development Corporation(ARDC) which was set up to look in to thecredit requirements in 1963 has also beenmerged with NABARD.
Role of NABARD NABARD is entrusted with the following role :- 1.Providing refinance to lending institutions in rural areas. 2.Bringing about or promoting institutional development. 3.Evaluating, monitoring and inspecting the client banks . 4.Acts as a coordinator in the operations of rural credit institutions .
----5.Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development6.Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development7.Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development8. Acts as regulator for cooperative banks and RRBs.
Some of the milestones inNABARDs activities are:1. NABARD has been pursuing a policy of promoting agricultural credit. NABARD provides 70% of loans through co- operatives & 30% through commercial banks.2. About 67% of the total disbursement of the NABARD have been for minor irrigation.3. NABARD has created Rural Infrastructural Development Fund to accelerate the agricultural development.
-----4. NABARD also provides financial help to small scale & cottage industry.5. NABARD has set up Research & Development Fund for granting assistance to various institution involved in rural credit.
Core banking Core banking is a general term used to describe the services provided by a group of networked bank branches. Bank customers may access their funds and other simple transactions from any of the member branch offices.
Core banking definitionCORE stands for "centralized online real-time environment".Core Banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers, and have a separate line of business to manage small businesses. Larger businesses are managed via the corporate banking division of the institution. Core banking basically includes deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, Internet banking, and branches.
----- A few decades ago it used to take at least a day for a transaction to reflect in the account because each branch had their local servers, and the data from the server in each branch was sent in a batch to the servers in the datacenter only at the end of the day (E o D).
Core banking solutionsMEANING:- Core banking solutions are banking applications on a platform enabling a phased, strategic approach that is intended to allow banks to improve operations, reduce costs, and be prepared for growth. Core banking solutions are new terminology frequently used in banking circles. The advancement in technology, especially Internet and information technology has led to new ways of doing business in banking. These technologies have also cut down time, working simultaneously on different issues and increasing efficiency.
DEFINITIONGartner defines a core banking system asa back-end system that processes dailybanking transactions, and posts updatesto accounts and other financial records.Core banking systems typically includedeposit, loan and credit-processingcapabilities, with interfaces to generalledger systems and reporting tools.Strategic spending on these systems isbased on a combination of service-oriented architecture and supportingtechnologies that create extensible, agilearchitectures.