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.

Bank Deposit Accounts in India

Commercial banks accept deposits from the public, basically for the purpose of lending. Deposits from the public are the principal sources of funds for banks.
Depositor want their money to be safe with the bank and wants to earn reasonable return.
The Process of deregulation of interest rates started in April 1992. Until then interest rates are fixed by RBI. Now banks have the freedom to fix their own deposit rated with very few exceptions.

Types Of Deposit Accounts

1. Demand Deposits

Demand deposits are defined as deposits payable on demand from one person to another through cheques and other clearing arrangements by banks. They have no fixed term on maturity.

2. Time Deposits

Time deposits are defined which are not payable on demand and have a fixed term of maturity. 

No deposit accounts available in the name of Demand and Time deposits. There are several deposit account offered by bank classified in 3 major categories

• Current Account ( Demand Deposits Category)
• Savings Bank Account (Both Demand and Time Deposit Categories)
• Term Deposit Account ( Time Deposits Category)

Current Deposits

Current deposits are non-interest bearing.A Current account is basically a running and  actively operated account with very little restriction on the number and amount of withdrawals. Banks insist on customers to maintain minimum balance if not bank will charge a certain amount.

Current accounts can be opened by rich individuals/ partnership firms / private and limited companies/ societies / trust etc

Savings Bank Deposits

Savings Bank accounts are used by large segment of small depositors as they can put their regular incomes into these accounts, withdrawal on demand and earn interest amount on the balance left in the account.

Savings bank account cannot be opened by big trading,government departments and bodies or business firms.

Term Deposits

Term deposit is a deposit received by the bank for a fixed period. Term deposits include Fixed Deposits/ Reinvestment deposits/ Recurring deposits.

Interest is paid on term deposits either on maturity or at intervals based on the scheme.

Customer can earn interest on term deposit for a minimum period of 7 days.

Interest rates on term deposits are higher than saving deposits.

CASA Deposits

Savings account deposits together with current account deposits called CASA deposits. 

CASA deposits include offering salary accounts to companies, and encouraging merchants to open current accounts , and use their cash-management facilities.

Other Accounts

Minor Accounts

Savings bank account opened by minors along with their guardians, operated by guardians until the minor attains major. 

Account of Illiterate/visually challenged persons

Account opened by banks at their own discretion, in the presence of mutually known witness,

Deposit Schemes for Senior citizens

Banks have developed fixed deposit schemes specially for senior citizens over the age of 60. Such schemes usually provide additional interest , over and above the normal interest on deposits across various maturities.

Dormant Accounts

Accounts which are not operated for a considerable period of time usually 12/24 months for savings accounts and 6/12 months for current accounts will be transferred to a separate dormant/inoperative account status.

Such accounts can be used again on an activation request to the bank.

NRO & NRE Accounts

NRI wants to transfer the overseas earned money back to India and NRI wants to keep India based earnings in India. NRI has the option of opening a Non Resident Rupee account (NRE) or Non-Resident Ordinary account (NRO).

Open by a Person of Indian Origin and an Overseas citizen of India.

Both accounts can be opened as savings as well as current account and are Indian Rupee accounts.

Need to maintain a minimum monthly balance of 75000 in both the accounts.

Differences between NRE and NRO Accounts

1. NRE account is freely transfer both principal and interest earned. NRO account allowed to transfer upto 1 million USD net of applicable taxes in a financial year.
2. NRE account is tax free. NRO account is subject to Indian tax.
3. Earning income in India (rent/dividends etc) cannot deposit in NRE account but deposit of such earnings are allowed in NRO account.
4. NRE account can jointly held with another NRI but not with resident Indian. NRO account can held with NRI as well as resident Indian.

Foreign Currency Non Resident Accounts

FCNR accounts was introduced on May 15th 1993.These are foreign currency accounts which can be opened by NRIs in only designated currencies.

These deposits can be opened in the form of term deposits.

Deposits are in foreign currency and are repaid in the currency of issue. There is no exchange risk for the account holder.

Transfer of funds from existing NRE to FCNR accounts or vice-versa is permissible without the prior approval of  RBI.

Banking Structure in India

 The Reserve Bank of India is the central banking and monetary authority of  India , acts as the regulator and supervisor of commercial banks.

Public Sector Banks

Public Sector Banks are those in which the majority stake is held by the Government of India.

Currently 27 public sector banks are there,

 include SBI and its 6 associate banks(State bank of Indore, State bank of Jaipur etc) 

 and 19 nationalised banks (Allahabad bank, Canara bank etc) 

 and IDBI bank.

Private Sector Banks

Majority of share capital is held by private individuals and corporates.

The private banks which are not nationalized in 1969 and 1980 are collectively known as old private sector banks. Eg. Jammu and Kashmir Bank, Lord Krishna bank etc..

In July 1993, RBI permitted the private sector banks in the banking system. This resulted in creation of new sector of banks calld New Private sector banks. Eg. ICICI,HDFC,UTI etc

At end of March 2009, 7 new private sector banks and 15 old private sector banks operating in India.

Foreign Banks

Foreign Banks have their registered and head offices in a foreign country but operate their branches in India. Foreign banks in India are required to adhere to all banking regulations. 

Under the World Trade Organisation (WTO) agreement , RBI allows a minimum 12 branches of all foreign banks to be opened in a year.

Regional Rural Banks

RRB established during 1976-1987 to develop rural economy. Each RRB is owned jointly by Central Government, Concerned State Government and sponsoring public sector commercial banks in the ratio (50:15:35) resp.

Co-Operative Banks

Co-Operative banks cater to the financial needs of agriculture, retail trade,small industry and self employed businessman in urban,semi-urban and rural areas.
Oldest segment in the Indian banking system.

Reserve Bank Of India (RBI)

The Reserve Bank of India is the central bank of  the country. It was established on April 1,1935 under the reserve bank of India act, 1934.

As the Central bank of the country, RBI performs a wide range of functions

• Act as the currency authority
• Controls money supply and credit
• Manages foreign exchanges
• Serves as a banker to the government
• Builds up and strengthens the countries financial infrastructure
• Acts as the banker of banks
• Supervises banks

Commercial Banking in India - Introduction

Banks have played a critical role in the economic development of some developed countries.In emerging economics banks are special for 3 important reasons

• They take a leading role in developing financial intermediaries and markets
• Corporate sectors depends heavily on banks to meet its financial needs
• Banks cater to the needs of savers,who prefer assured income and liquidity and safety of funds

In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR act),1949.BR act defines banking as

 "Accepting for the purpose of lending or investments,of deposits of money from the public, repayableon demand or otherwise, and withdrawal,by cheque,draft,order or otherwise."

Evolution of Banks in India

The Commercial Banking in India started in 1786 with the establishment of Bank of Bengal in Calcutta. The Indian government established three presidency banks

• Bank of  Bengal   (established in 1809)
• Bank of  Bombay (established in 1840)
• Bank of  Madras  (established in 1843)

In 1921 the above mentioned 3 presidency banks amalgamated to form the Imperial Bank of India, with mainly European shareholders.

In 1865, Allahabad bank was established with purely Indian Share holders.

Punjab National Bank established in 1895.

Between 1906 and 1913 other banks like Bank of India, Canara bank, Bank of Baroda, Central Bank of India, Indian Bank and Bank of Mysore were set up.

State Bank of India was constituted in 1955. Subsequently in 1959, SBI act was passed, enabling SBI to take over 8 former state associates and its subsidiaries.

In 1990's new private sector banks like ICICI bank, HDFC bank,IDBI bank and UTI  were set up.

Functions Of Commercial Banks

Payment System 

A Fundamental method by which banks help in settling the financial transaction process by issuing and paying cheques issued on behalf of customers. It also  involves electronic banking,wire transfers, settlement of credit card transactions etc.

Financial Intermediation

Bank will take deposits from customers and then lend these funds to borrowers. Bank Deposits address the purpose of liquidity,safety and minimal interest of money. Bank loan and Investments are useful for channelling the funds to make profit.

Financial Services

Financial services including investment banking, insurance related business, foreign exchange business, Wealth management services etc. Income from these services improve bank profit.