Other Activities Of Commercial Banks in India

Other Banking Activities broadly classified into

1. Other Basic Banking Activities
2. Para-banking Activities

All this activities are to attract depositors and borrowers to increase the income for the bank. Bank in turn earn fees by offering this services.

Other Basic Banking Activities

1. Foreign Exchange Services

Banks will do Foreign currency exchange services for the customer. Banks will earn income from the buying and selling exchange rates of foreign currency.

2. Banks' Services to Government

Government department services like tax collections,payments of salaries and pension etc will take care by banks and government pay fees for the services.

3. Payment and Settlement Systems 

It is a two way flow of payments between payer and beneficiary. Based on Payer requests bank will process the transfer to the beneficiary.

There are 2 types of Payments

1. Paper based Forms ( Cash,Cheque,Demand Draft)

2. Electronic Forms

Paper Based Forms

Cheque is the primary paper based form of payment. Payer will issue cheque on the name of beneficiary and deposit in hisbank account. If the beneficiary have account in the same city it will credit in the same day and if it is other city means then bank will ensure the funds are collected from payers bank through "Clearing House".

A Clearing house is an association of banks and act as a central meeting place for bankers to exchange the cheques and claim funds on the same.

Paper based clearing system comprises

• MICR Clearing - Magnetic Ink Character Recognition techology of processing of cheques through the information in the bottom strip of the cheque.
• Non-MICR Clearing
• High Value Clearing

Cheque Truncation

  It is a system of Cheque clearing and settlement between banks based on electronic data/images or both without physical exchange of instrument.

Electronic Payment System

Payments between payer and beneficiary by electronic instructions without cheque. It is faster and more secure than cheque payment system.

Various forms of Electronic payment system are RTGS,NEFT,ECS.

Real Time Gross Settlement introduced in March 2004 and it is useful for faster fund transfer and also for high value of money (more than 2 Lakhs) . It will credit immediately.

ECS (Electronic Clearing Service) is a retail payment system useful for bulk receipts and payments.

ECS-Credit -  to make bulk payments to vendors /  to pay salary to the employees

ECS-Debit - to receive bulk payments from individuals / EMI debit

Para Banking Activities

RBI allowed scheduled commercial banks to take the para banking activities and it also provides guidelines to SCB for the activities.

Para banking activities includes Investment banking, Merchant banker (SEBI) services, Mutual fund business,Pension funds management  (PPM) by banks,Wealth management etc.

Bank Investments in India

Banks assets are held either in the form of  i) Loans and Advances and ii) Investments.
Investments are important source of income for bank.

Banks are required to invest a minimum of their Net Demand and Time Liabilities (NDTL) in SLR investments like Government securities and other approved securities under the BR act of 1949.

Investment Policy

Each bank is responsible for framing the investment policy of the bank. The Committee named Asset Liability Committee (ALCO) consists of senior bank officials and headed by CEO.

Investment Policy provides guidelines with respect to investment,maturity,rating bonds,standards,auditing and review.

Review will done on half yearly basis and it will submit to CEO for approval.

Statutory Reserve Requirements

As per BR act 1949, Banks needs to maintain a minimum percentage on central or state government approved securities and treasury bills.

If the bank fails to maintain the required amount of SLR on a given day then RBI will put a penalty of 3% of bank rate on the shortfall and if it continues on the second day then it will levy 5% per annum above the bank rate for the concerned days on shortfall.

SLR Investments are more safety.

Non-SLR Investments

If any proposal for new Non-SLR investments came to bank then the Investment Policy committee will review the Non-SLR Investments. After critical examination and clearance by Committee then sanction should obtained from respective authorities.Mutual bonds,shares and others will under Non-SLR Investments.

Banks Investment Classification and Valuation Forms

The Investment Portfolio of bank contains only Approved securities and Others(Shares,Debentures and bonds).

Investment Portfolio classified into 3 types

• Held To Maturity (HTM) - Securities held up to the time of maturity
• Held For Trading (HFT) - Securities to take profit on short term price / interest rate movements
• Available for Sales (AFS) - Securities not included in HTM and HFT are AFS.

Profit and loss on HFT and AFS categories are taken in the income statement. 

Shifting of investments from / to HTM and from AFS to HFT can done with the approval.

Shifting from HFT to AFS is not permitted.

Bank Lending in India

Banks depends on deposits from public and depositors requires security of their deposits with adequate return. Bank lending is necessary to make profit.

Basic principles of bank lending

1. Safety - Bank needs to ensure the money lend by them will come back
2. Liquidity- Bank will design the maturity period to ensure the money is not locked for long time
3. Profitability - Bank will fix correct interest rated to make profit
4. Risk Diversification - Banks will concentrate on different sectors,regions to avoid risks

Loan Policy

The Credit Policy Committee (CPC) of bank will prepare the lending policy and the same has to be approved by the Banks board of directors.

Basic Guidelines for loan policy  are in the following areas

1. Credit Deposit Ratio

      Some portion of bank deposits should maintained as CRR/SLR and in some Non-SLR Investments and in remaining bank can lend out some portion of its deposits. The average CD ratio is 70 percent and it will differ across banks.

2. Targeted Portfolio Mix

      Banks need to monitor all major sectors of the economy. Bank needs to decide which sector to avoid. Portfolio mix keeping in view both risk and return.

3. Hurdle Ratings

      Major risk factors associated with borrowers. Banks have risk rating system to rate the risk factors of the borrowers. Minimum rating required for new borrowers.

4. Pricing Of Loans

      Higher the credit risk of a borrower the rate of interest will also high. Based on Credit risk banks will give rate of interest of interest. Pricing of loans is also dependent on competition between banks.

5. Collateral Security

      Banks usually gives loan against some securities, securities can be in the form of both physical and financial asset. This reduces risk of the bank.

Types Of Advances

 Advances classified as below

1. Fund Based Lending

   Direct Form of lending to the borrower in the form of cash. Some cases it will backed up by some security.

2. Non-Fund Based Lending

   Facilities such as Letter of Credit and guarantees fall under the category of non fund based lending.

No direct form of cash lending.

Fund Based Lending

Some important types of fund based lending

Working Capital Finance

Definition of Working capital is Current Asset - Current Liabilities. Working capital finance is utilized for expanding the manufacturing unit.

Working capital finance can avail in 2 ways 

i) Short term loan component and

ii) Cash Credit component

Short term loan is the normal loan with monthly EMI and tenure. 

Cash credit component is bank will give 20% of loan amount as cash in the account.  Borrower need to pay interest only for the withdraw amount from the cash credit component.

Eg : If  bank provides 1Lakh Rupees as Cash credit component and the borrower withdraw only Rs.10000 after one month means he need to pay interest only for the Rs.10000.

Project Finance

Project Finance loans mainly for the manufacturing and infrastructure sectors. Banks financing in fixed or floating rate.

Loans to Small and Medium Enterprises

  Loans by banks to Small and Medium Enterprises (SME). Banks encourages financing to small enterprise that have homogeneous profile.

Banks are not advised to insist on collateral security for loans upto 10 Lakhs for micro enterprises.

Rural and Agriculture Loans

Rural and Agriculture loan is for loans to farmers , SME in rural areas. For Farmers bank lend loan for farming, tractors,pump sets etc. 

RRB banks plays major role in agriculture loans.

Directed Lending

RBI requires banks to lend in some sectors of the economy called directed lending. Banks wont concentrate on profits.

Priority Sector lending like agriculture,SME, retail trades and small housing loans and education loans.

Differential Rate of Interest Scheme - Low rate of interest for low income groups. RBI has advised 4% rate of interest for borrowers with Rs.18000 as annual income in rural areas and Rs.24000 as annual income in Urban areas.

RBI requires bank to give export credit at low rate of interest for pre and post shipment requirements.

Retail Loan

Retail loans includes personal loans, home loans, car loans, credit cards and consumer loans.

Except Personal loan and credit card borrower needs to pay certain portion of the asset cost and remaining portion as loan.

International Loans extended by banks

Indian corporates raise foreign currency loans from banks based in India as well as abroad as per the terms and conditions of RBI or Government of India.