Introduction to Indian

Banking System and

Performance Evaluation
Unit 1
Learning Contents

Overview of Indian Banking system – Structure – Functions – Key

Regulations in Indian Banking sector –RBI Act, 1934/ 2006 –Banking
Regulation Act, 1949– Negotiable Instruments Act 1881/ 2002 –
Provisions Relating to CRR – Provision for NPA’s - Overview of Financial
Statements of banks – Balance Sheet – Income Statement - CAMEL
What is a BANK?
• An Institution deals with money

Features
• Accepts deposits

• Makes Loans & derives profit by interests

• Provides other financial services

Banking…

“A group of financial intermediaries which are engaged in the business

of carrying out the banking activities after getting necessary approval
from the Central Bank of the country Reserve Bank of India (RBI) under

the provisions of Banking Regulation Act 1949”

• Banking means • Banking Company
• Accepting • Company which transacts (acc.
• For lending or investment To company acts 2013)
• Deposits of money • Accepts deposits payable on

• Repayable on demand demand

• Withdrawal • Withdrawal

(Cheques ,drafts & orders) (Cheques ,drafts & orders)

Beyond Basic Functions
• Maintain records

• Daily financial transactions

• Review documents (loan applications)

• To avoid fraudulent

• Advice clients

• Helping clients in fin. Needs

• Offering best banking services

• Good advice – gains large client base

• Gather financial information

• Gathering financial information of clients

• Determining creditworthiness
Types of Banks…

• Commercial bank
• a financial institution that provides
services like loans, certificates of
deposits, savings bank accounts bank
overdrafts, etc. to its customers. These
institutions make money by lending loans
to individuals and earning interest on
loans
• Co-operative bank
• a small-sized, financial entity,
where its members are the owners
and customers of the Bank. They
are regulated by the Reserve Bank
of India (RBI) and are registered
under the States Cooperative
Societies Act.
• Central bank
• a public institution that
manages the currency of a
country or group of countries
and controls the money
supply – literally, the amount
of money in circulation.
• Development bank
• Specialized institutions that provide medium
and long-term credit lending facilities.
• Their main objective is to serve the public
interest instead of earning profits.
• They provide financial assistance to both public
as well as private sector institutions.
• Industrial – Agricultural – Exports & Imports –
Infrastructure – Sector-specific
• Payments bank
• a bank that does not offer loans or
credit cards. It takes deposits up to
Rs 1 lakh from its customers. It
provides various other financial
services such as remittance transfer
services, selling of financial products
of other banks etc.
• Small bank
• Basically work as savings vehicles as well, as
they are engaged in offering credit facilities
to small business units, micro and small
industries, small and marginal farmers and
other unorganized sectors through their
advanced technology & low-cost operations.
• Indigenous bank
• the system of banking that involves private firms or individuals who act as
banks by providing financial services such as loans and accepting deposits.
Indigenous banking system is made up of indigenous bankers who do not fall
under the purview of the government.

• Exchange banks
• offers foreign currency to a country's importers, exporters, or other financial
institutions. Additionally, they provide their customer's conversion facilities.
You can deal with international parties and currencies with the aid of
exchange banks.
• Savings bank
• A financial institution that gathers savings, paying interest or dividends to savers. It
channels the savings of individuals who wish to consume less than their incomes
to borrowers who wish to spend more.

• Export-Import Bank
• A specialized financial institution in India that was established in 1982. The bank's
primary function is to finance, facilitate and promote India's international trade.
Struct
ure of
the
Bank
Scheduled Banks

• The Scheduled banks have a capital requirement of a minimum of Rupees five lakhs.

• Can raise funds from the Reserve Bank at low-interest rates and also automatically
become members of clearinghouses.

• Need to keep a minimum balance with the RBI daily as the Cash Reserve Ratio or
CRR.

• All the commercial banks, national and international banks, cooperative, and
regional rural banks are Scheduled banks in India.
Non-Scheduled Banks

• Do not comply with the requirements that are set out by the central
bank of the country.

• non-scheduled banks also need to keep the cash reserve ratio, not
with the central bank but with themselves.

• These banks are generally very small.

• Their paid-up capital is less than Rupees five lakhs.

Commercial Banks

“a kind of financial institution that carries all the operations related

to deposit and withdrawal of money for the general public,

providing loans for investment, and other such activities.

These banks are profit-making institutions and do business only to

make a profit”
Functions of Commercial Banks

Primary Secondary
• Accepting deposits • Agency functions / Services

• Advancing loans • Fund transfer/purchase & selling of

shares/ premium payments
• Creation of credit
• Other functions
• Promote the use of cheque
• Locker facility
• Financing internal & foreign trade
• Fulfilment of Socio-economic objectives
• Remittance of funds
Cooperative Banks

• a small financial institution started by a group of individuals to

address the capital needs of their specific community.

• Such financial institutions are owned and controlled by their

members, and the board members are democratically selected to
oversee the operations.
Functions of Cooperative Banks

• Provide short & Medium term loans

• Serves as a link between NABARD and DCCB

• Helps the entrepreneurs

Functions of Indian Banking System

• Intermediation
• Mobilizing funds from customers to entrepreneurs

• Payment systems
• Safety, Security, Soundness & Efficiency

• Financial Services
• Asset based & Fee based
Key Regulations of IBS

• Why Regulations?

• Key Statutes
• Negotiable instruments Act 1881

• Recovery of debts due to banks & financial institutions act 1993

• Bankers books evidence act 1891

• Payment & settlements act 2007

• Securitization & Reconstruction of financial assets and enforcement of security interest act
2002
Reserve Bank of India Act 1934

• The central bank of India

• Looks after working and functioning

of money market

• RBI formed on 1st April 1935

Features of RBI

• Formulates, implements and monitors

monetary policies

• Maintains public confidence systems

• Facilitates external trade & Payments

• Provide adequate supply of currencies

to public
Functions & Working of RBI

• Monetary functions
• Issue of bank notes

• Banker to government – exchange, remittance, managing public debts

• Bankers bank

• Lender of the last resort – helps commercial banks in emergencies

• Custodian of foreign exchange reserves

• Credit control
Non-Monetary Functions Promotional Functions

• Provide license • Established the bill market

• Coverage of bank operations scheme
• Liquidation of weak banks
• Branch development
• Development of specialized
• Issue directions on credit control
financial institutions
• Training of bank personnel • Promote regional rural banks
• Restrict loans and advances • Establishment of export import
• Collect & supply information bank of India
• Spreading banking habits
• Corporate governance
• Promotes research
• KYC norms
• Transparency norms
• Risk management
• Audit and inspection
Scheme of RBI ACT
• CHAPTER I: Preliminary - Short title, extent and commencement - Definitions.

• CHAPTER II – Incorporation, Capital. Management & Business.

• CHAPTER III – Central Banking Functions

• CHAPTER IIIA – Collection & Furnishing of Credit Information

• CHAPTER III B – Provisions relating to non-banking institutions receiving deposits

and financial institutions

• CHAPTER IIIC - Prohibition of acceptance of deposits by unincorporated bodies

• CHAPTER IIID - Regulation of transactions in derivatives, money
market instruments, securities, etc.

• CHAPTER IIIE - Joint mechanism

• CHAPTER IIIF - Monetary policy

• CHAPTER IV - General provisions

• CHAPTER V – Penalties
RBI Act 2006

• Short title & Commencement

• Amendment of section 17
• Dealing in derivatives in any other financial instrument

• Repo and Reverse repo rates

• Amendment of section 42
• an additional average daily balance, the amount of which shall not be less than
the rate specified by the RBI
Banking Regulation Act, 1949

• PART I - Preliminary

• PART II - Business of banking companies

• PART IIA - Control over management

• PART IIAB - Supersession of board of directors of banking company

• PART IIB - Prohibition of certain activities in relation to banking companies

• PART IIC - Acquisition of the undertakings of banking companies in certain cases

• PART III - Suspension of business and winding up of banking companies

• PART IIIA - Special provisions for speedy disposal of winding up proceedings

• PART IIIB - Provisions relating to certain operations of banking companies

• PART IV - Miscellaneous

• PART V - Application of the act to co-operative banks

Negotiable Instruments Act –
1881/2002
• A written document which can be
transferred from one person to other
person by delivery

• Negotiable instruments include checks,

money orders, Demand Draft and
promissory notes
Features of NI

• Writing & Signature – Sign by parties

• Money – legal tender of money

• Freely transferable – one to another

• Notice – provide transfer notice

• Special procedure -

• Popularity

• Evidence – proof of indebtedness

Cheque
• Section 6 of NI Act, 1881-

• A cheque is defined as a bill of exchange drawn

on a specified banker and not expressed to be
payable otherwise than on demand.

• Thus, a cheque is a bill of exchange with two

added features-
• it is always drawn on a specified banker

• it is always payable on demand and not otherwise

Features of a Cheque
• Must be in writing

• Contains an unconditional order to pay

• Drawn on a specified banker

• For a certain sum of money

• The payee must be a definite person

• Amount must be written both in figures and words

• It must be dated

• It is always drawn on a specified banker

• It is always payable on demand and not otherwise

Types of Cheque

• Two Types:
• Open Cheque: which is payable in cash across the counter of the bank.

• Crossed Cheque: which has two short parallel lines marked across its face. It
can be paid only to another banker.
Bill of Exchange

• an instrument in writing, containing

an unconditional order, signed by the
maker, directing a certain person to
pay a certain sum of money only to
or to the order of, a certain person,
or to the bearer of the instrument.
Features of a Bill of Exchange

• It must be in writing. • It must be signed by the drawer.

• The sum payable must be certain or capable of

• It must contain an order to pay and not a
being made certain.
promise or request.
• The order must be to pay money and money
• The order must be unconditional.
alone.
• There must be three parties, viz., drawer,
• It must be duly stamped as per the Stamp Act.
drawee and payee.
• Number, date and place are not essential.
• The parties must be certain.
Promissory Notes

• An instrument in writing
containing an unconditional
undertaking, signed by the maker
to pay a certain sum of money to,
or to the order of, a certain
person or to the bearer of the
instrument.
Characteristics of a Promissory
Note
• In writing - A promissory note must be in writing. Writing includes print and

typewriting.

• Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere

acknowledgement of indebtedness is not sufficient.

• Unconditional - The promise to pay must not be conditional. Thus, instruments

payable on performance or non-performance of a particular act or on the happening

or non-happening of an event are not promissory notes.

• Signed by the Maker – The promissory note must be signed by the

maker, otherwise it is of no effect.

• Certain Parties - The instrument must point out with certainty the maker

and the payee of the promissory note.

• Certain sum of money - The sum payable must be certain or capable of

being made certain.

• Promise to pay money only - If the instrument contains a promise to

pay something in addition money, it cannot be a promissory note.

• Number, place, date etc

• These are usually found in a promissory note but are not essential in law. If a

promissory note does not bear a date, it is deemed to have been made when

it was delivered.

• It may be payable in installments

• It may be payable on demand or after a definite period - Payable 'on demand'
• means payable immediately or any time till it becomes time-barred. A demand promissory note

becomes time barred on expiry of 3 years from the date it bears.

• It cannot be made payable to bearer on demand or even payable to bearer after a certain

period

• It must be duly stamped under the Indian Stamp Act

• It means that the stamps of the requisite amount must have been affixed on the instrument and duly

cancelled either before or at the time of its execution. A promissory note, which is not so stamped, is

a nullity.
Cash Reserve Ratio - CRR

“A particular minimum amount of the total deposits of

customer that needs to be maintained by the commercial
bank as a reserve”

The CRR rate will be fixed as per the guidelines of the Central
Bank.
Key objectives of the CRR

• CRR helps control inflation. In a high inflation environment, RBI can increase
CRR to prevent banks from lending more.

• CRR also ensures banks have a minimum amount of funds readily available to
customers even during huge demand.

• CRR serves as the reference rate for loans. The banks cannot offer loans
below this rate.

• Since CRR regulates the money supply, it boosts the economy

Provisions of CRR

• By the RBI Amendment act 2006, section 42 (I A)

• The CRR is to be prescribed by RBI having regard to the need for securing
monetary stability

• By the omission of sub-section I-B

• The provision for interest payment on eligible CRR balances
Provision for NPA

“Non-Performing Assets are loans from banks or financial institutions

that no longer generate income because the borrower has not made
principal or interest payments for at least 90 days”
Overview of Financial Statements of
Banks
• analyzing financial statement is to discover credit risk effectively

• Balance Sheet
• a financial statement that summarizes a bank's assets, liabilities, and equity at a specific point in
time. It can be used to evaluate the bank's liquidity, solvency, and overall financial health.

• Profit & Loss Account

• is a financial statement that summarizes a bank's revenue, costs, and expenses over a specific
period of time, such as a month, quarter, or year. The P&L statement shows the bank's income
minus its expenses, resulting in a net profit or loss.
CAMELS

“an international rating system used by banking

regulators to evaluate financial institutions”

It assesses six factors to provide a comprehensive framework for understanding a bank's

financial condition
Components of CAMEL - Six Factors
• Capital adequacy: A bank's ability to continue operating if debtors don't repay their loans

• Asset quality: A bank's risk based on its investment and loan portfolios, and other assets

• Management: How well the bank's computerized information systems operate, and

whether it generates reports for management in a timely and accurate manner

• Earnings: Sustainability of earnings

• Liquidity: Asset and liability management

• Sensitivity: Sensitivity to market risk, especially interest rate risk

CAMEL – Rating System
1 - The bank has strong performance and risk management practices, and is sound and complies with
regulations.

2 - The bank is financially sound but has some moderate weaknesses.

3 - The bank has some flaws in its performance that are a cause for supervisory concern.

4 - The bank has poor performance that is a serious cause for supervisory concern.

5 - The bank has inadequate risk management practices and is fundamentally unsound. The bank may need to
replace or strengthen its board or management to correct problems and implement appropriate risk
management practices.