COMMERCIAL BANKS & INDUSTRIAL FINANCE: THE EVOLVING ROLE

1. COMMERCIAL BANKS & INDUSTRIAL FINANCE: THE EVOLVING ROLE

2. Financial System in India • Financial Sector includes three main segments viz., 1) Financial Markets - Money Market, Debt Market, Capital Market, Forex Market 2) Financial Institutions - Banks, Mutual Funds, Insurance Companies etc. 3) Financial Products - Loans, Deposits, Bonds, Equities etc.

3. Financial Sector - Regulators

4. BANK: Meaning & Definition • Bank is a financial intermediary between Money Savers and Money Seekers. • Bank is engaged in the business of purchasing and selling of MONEY. • Bank is a financial intermediary which accepts/takes deposits from public at large and make loans to different entities.

5. Banking in India • Banking in India is governed by Banking Regulation Act,1949 and RBI Act,1934 • Banking in India is controlled /monitored by RBI and Govt. of India

6. Phase – 1: Phase of Banking Consolidation • Three presidency banks were established in Calcutta (1806) in Bombay (1840) and in Madras (1843) • In the early part of 20th century, on account of the Swadeshi movement a number of join stock banks were established by Indians like Bank of India, Bank of Baroda and Central Bank of India. • In 1921 the three presidency banks were merged and the IMPERIAL BANK OF INDIA wascreated. • The Reserve Bank of India Act was passed in 1934 and the RBI came into existence in 1935 and RBI was nationalized in 1949.

7. Phase – 1: Phase of Banking Consolidation... • The Banking Regulation Act,1949 gave wide powers to RBI to act as the REGULATOR FOR BANKSin India • In 1955, State Bank of India became the successor to the Imperial Bank of India, under the State Bank of India Act, 1955. • Credit Authorization Scheme (CAS) was launched in November 1965.

8. Phase – 2Phase of Innovative Banking (1964 – 1990) • MAJOR ISSUES: • Social Control and Service - Banking Coverage and Credit Gaps (Priority Sector Finance) - Agricultural Finance Corporation Ltd • Organizational Changes • National Credit Council (1968) • To assess the DD of bank credit from various sectors of economy • To decide the priorities for grant of loans for various industries • To coordinate the investment policies of comm. Banks in India • LEAD BANK Scheme (1969) • Various committees were appointed by Govt. to improve the banking sector performance:

9. A. Daheja Committee Report: • Key Findings: • Industries were over – relying on bank credit • Industries using excess credit facilities • Poor Credit Appraisal by Banks • Suggestions: • Effective Credit Appraisal Mechanism • Industries should keep minimum inventories • Availability of Credit to Priority Sector • New Bill Market Scheme (NBMS)

10. B. Tondon Committee Report • Key Findings: • Rationing/Regulating of Bank Credit • Suggestions: • MPBF Mechanisms • Credit Control Standards for Banks • Bank Credit to priority sector • Uniform distribution of credit across industries

11. Nationalization of Banks:(From Private to Govt. Ownership) • In 1969, the Govt. of India NATIONALIZED 14 major commercial banks having deposits of Rs. 50 crore or more. • In 1980, SIX more commercial banks were NATIONALIZED, with a deposit of Rs. 200 crore. • The aim behind nationalization is to safeguard the Public InterestandSocial Control.

12. Phase – 3Phase of Prudential Banking (1991) • Banking Sector Reforms: • Appointed “NARSIMHAM COMMITTEE – I” in 1991 MAJOR RECOMMENDATIONS: • On Directed Investments (CRR & SLR) • SLR and CRR should be reduced to prudent levels • On Directed Credit Programmes • On Interest Rate Structure • On Capital Adequacy Norms • On Income Recognition, Asset Classification and Provisioning Requirements

13. “NARSIMHAM COMMITTEE – I” (1991) • MAJOR RECOMMENDATIONS: • On Organisation Structure • Branch Licensing • Universal Banking Service • International Banking • Expansion of RRBs (Regional Rural Banks) • Banking Orgn. Structure (Thee tire & Four Tire) • Free Entry to Foreign Banks • Free Entry for Private Sector Banks • Supervisory Authority (Board of Financial Supervision setup under RBI)

14. NARSIMHAM COMMITTEE – IIMAJOR RECOMMENDATIONS (1998) • CAPITAL ADEQUACY • Capital Adequacy should include “CREDIT RISK” & “MARKET RISK” • CRAR Should be increased from 8% to 10%. • The capital base of banks should meet International standards • ASSET QUALITY, NPAs AND DIRECTED INVESTMENTS • PRUDENTIAL NORMS AND DISCLOSURE REQUIREMENTS • Banks Should Strictly comply the RBI Prudential Norms • ASSET – LIABILITY MANAGEMENT

15. NARSIMHAM COMMITTEE – IIMAJOR RECOMMENDATIONS (1998)… • SYSTEM AND METHODS IN BANKS • More Operational Freedom to Banks • More Concentration on RURAL BANKING • Technology Up-gradation • Human Resource Development • INTERNAL SYSTEMS • Internal Audit and Inspection • Periodical Visits to Branch Offices • Simplification of documents and inter bank communication process

16. NARSIMHAM COMMITTEE – IIMAJOR RECOMMENDATIONS (1998)… • HUMAN RESOURCE MANAGEMENT • Free/Decentralized Recruitment • Training and Development Programmes for Employees • Flexibility to decide the “WAGE Structure” • VRS for employees • TECHNOLOGY UPGRADATION • MIS • COMPUTERISATION • TELE BANKING

17. NARSIMHAM COMMITTEE – IIMAJOR RECOMMENDATIONS – Contd… • STRUCTURAL ISSUES • No further NATIONALIZATION to be made • No distinction between ‘public’ and ‘private’ sector banks • Control of banking sector to be centralized • Emphasis upon ‘de-regulation’ of INT. RATE • RURAL AND SMALL INDUSTRIAL CREDIT • Development of RRBs and Dist. Credit Co-op Banks • Assigning KEY role to NABARD for AGRI. Finance

18. Classification of Banks

19. Commercial Banks: DEPOSIT PRODUCTS

20. Loan Products

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