INDIAN BANKING SYSTEM Unit -2 , Notes BBA code N302
BBA-III SEMESTERBBA- N302
INDIAN BANKING SYSTEM
Objective: The objective is to familiarize the
students to understand the practice and procedure of the Indian banking system
Unit II
State Bank of India: Brief
History, Objectives Functions; Structure and organization; Working and progress.
ReserveBank of India: Objectives;
Organization; functions and working; monetary policy, credit control measures
and their effectiveness.
The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of British India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921.
Primarily Anglo-Indian creations, the three
presidency banks came into existence either as a result of the compulsions of
imperial finance or by the felt needs of local European commerce and were not
imposed from outside in an arbitrary manner to modernize India's economy. Their
evolution was, however, shaped by ideas culled from similar developments in
Europe and England, and was influenced by changes occurring in the structure of
both the local trading environment and those in the relations of the Indian
economy to the economy of Europe and the global economic framework.
The State Bank of India is
the biggest commercial bank and holds a special position in the modern
commercial banking system in India. It came into existence on July 1, 1955
after the nationalization of the Imperial Bank of India. The Imperial Bank of India
was established in 1921 by amalgamating the three Presidency Banks of Madras,
Bombay and Bengal.Until the establishment of the
Reserve Bank of India in 1935, the Imperial Bank of India, in addition to its
normal commercial banking functions had been performing certain central banking
functions. It used to act as the banker to the government, as banker’s bank, and
as the clearinghouse.
After the establishment of the Reserve Bank of
India, the Imperial Bank of India left its central banking functions, but
continued to serve as the agent of the Reserve Bank in the areas where the
latter did not have its branches. In 1955, on the recommendations of the Rural
Credit Survey Committee, the Imperial Bank of India was nationalized and
renamed as the State Bank of India through the State Bank of India Act 1955.
Objectives:
The State Bank of India has been established to operate
on the normal commercial principles, with the only difference that, unlike
other commercial banks in the country, it takes into consideration and responds
in a progressively liberal manner the financial requirements of cooperative
institutions and small scale industries, particularly in the rural areas of the
country.
The main objectives of the State Bank are:
(i) To act in accordance with the broad economic policies
of the government;
(ii) To encourage and mobilize savings by opening
branches in rural and semi-urban areas and to promote rural credit;
(iii) To establish a government partnership in the
provision of cooperative credit;
(iv)To extend financial help for the establishment of
licensed warehouses and cooperative marketing societies;
(v) To provide financial help to the small scale and
cottage industries;
(vi) To provide remittance facilities to the banking
institutions.
SBI Functions:
1-As an agent of the Reserve Bank, the State Bank performs the following functions:
(i) It acts as the government’s bank, i.e., it collects
money and makes payments on behalf of the government and manages public debt.
(ii) It acts as the bankers’ bank. It receives deposits
from and gives loans to commercial banks. It also acts as the clearinghouse
for the commercial banks, rediscounts the bills of exchange of the commercial
banks and provides remittance facilities to commercial banks.
2. Ordinary Banking Functions:
The State Bank of India performs all kinds of commercial
banking functions:
(ii) It gives loans and advances against eligible
securities including goods, bills of exchange, promissory notes, fully paid
shares of companies, immovable property or documents of title, debentures, etc.
(iii) It invests its surplus funds in government
securities, railway securities, and securities of corporations and treasury
bills.
3. Other Functions:
The State Bank of India also performs the following other
functions:
(i) It buys and sells gold and silver.
(ii) It acts as an agent of cooperative banks.
(iii) It underwrites issues of stocks, shares,
debentures, and other securities in which it is authorized to invest funds.
(iv) It administers, singly or jointly, estates for any
purpose as executor, trustee or otherwise.
(v) It draws bills of exchange and grants letters of
credit payable out of India.
(vi) It buys bills of exchange payable out of India with
the approval of the Reserve Bank; it subscribes buys, acquires, holds, and sells
shares in the capital of banking companies.
4. Prohibited Functions:
The State Bank of India has been prohibited from doing
certain businesses by the State Bank of India Act:
(i) The State Bank cannot grant loans against stocks and
shares for a period of more than six months.
(ii) It can purchase no immovable property other than its
own offices.
(iii) It can neither rediscount nor offer loans against
the security of exchange bills whose maturity period exceeds six months.
(iv) It cannot rediscount bills which do not carry at
least two good signatures.
(v) It can neither discount bills nor grant credit to
individuals or firms above the sanctioned limit.
Achievements of State Bank of India:
The following are
the major achievements of the State Bank of India in different fields:
(A) General Progress:
The State Bank of India has made a tremendous
progress since its inception in 1955.
i. Deposit Mobilisation:
There has been an increasing trend with regard
to the mobilisation of deposits by the State Bank of India.
ii. Credit Expansion:
The progress in the field of credit expansion
has also been considerable over the years.
iii. Branch Expansion:
The number of branches of the State Bank of
India has also grown remarkably since its establishment.
iv. Present Position of State Bank Group:
By the end of March 2001, total deposits of
the State Bank Group (i.e., State Bank of India and its seven associates) had
reached Rs. 312117 crore, total advances granted by the group were Rs. 150390
crore and the total number of branches of the Group was 13509.
v. Profits, Efficiency, and Capital Adequacy:
Over the years, the SBI continued to show
better performance in terms of profits, efficiency, and capital adequacy.
vi. International Banking:
At present (March 2001), the SBI has a network
of 52 overseas offices with their operations spread over 31 countries. These
foreign offices mainly cater to the needs of the country’s foreign trade and
provide foreign currency resources to the Indian corporates.
During 2000-01, the foreign offices of the SBI
earned a net profit or Rs. 248 crore. The deposits and advances of the Bank’s
foreign offices were Rs. 7932 crore and Rs. 14797 crore respectively at the end
of March 2001.
vii. Technology Up gradation and Consumer
Services:
The State Bank of India (SBI) has taken
significant initiatives in the fields of technology up-gradation and better
consumer services.
(B) State Bank and Rural Credit:
The State Bank had made remarkable progress in
the field of rural credit. Since its establishment, it has been making
tremendous efforts to develop rural credit by extending credit facilities to
cooperative institutions and agriculturists.
Important measures are undertaken by the State
Bank to promote rural credit are as follows:
I. Expansion of
Rural Branches
II. Agricultural
Finance
III. Village
Adoption Scheme
IV. Integrated Rural
Development Programme
V. Regional Rural
Banks
VI. Agricultural
Development Branches
VII. Remittance
Facilities
VIII. Short-Term
Credit to Cooperative Banks
IX. Assistance to
Land Development Banks
X. Finance for
Marketing and Processing Societies
XI. Warehousing
Finance
(C) State Bank and Industrial Finance:
The State Bank of India has been extending
financial help for the promotion of industrial growth in the economy.
Various forms of
assistance to the industries by the Bank are given below:
I. Industrial
Finance:
II. Finance to Small
Scale Industries:
Organization of State Bank of India:
The organization of
the State Bank of India can be discussed under the following heads:
i. Capital:
The State bank of India has an authorized
capital of Rs. 20 crores which has been divided into 20 lakh shares of Rs. 100
each. The issued capital of the State Bank is Rs. 5.6 crore. The shares of the
State Bank are held by the Reserve Bank, insurance companies, and the general
public. At the end of March 2001, the paid-up capital and the reserves of the
State Bank was Rs. 13461 crore.
ii. Management:
The management of the State Bank of India is
under the control of a Central Board of Directors consisting of 20 members.
The break-up of the Central Board is as given
below:
(a) A Chairman and a Vice-Chairman are to be
appointed by the Central Government in consultation with Reserve Bank.
(b) Two Managing Directors are to be appointed
by the Central Board with the approval of the Central Government,
(c) Six directors are to be elected by the
private shareholders.
(d) Eight directors are to be nominated by the
Central Government in consultation with the Reserve Bank to represent
territorial and economic interests. Not less than two of them should have
special knowledge in the working of cooperative institutions and of the rural
economy,
(e) One director is to be nominated by the
Central Government,
(f) One director is to be nominated by the
Reserve Bank.
Subsidiary
Banks:
Through the State Bank of India (Subsidiary
Banks) Act, 1959, major state- associated banks were converted into a subsidiary
banks of State Bank of India.
At present, there are seven subsidiary banks of the State Bank of
India:
(a) The State Bank of Bikaner and Jaipur;
(b) The State Bank of Hyderabad;
(c) The State Bank of Mysore;
(d) The State Bank of Patiala;
(e) The State Bank of Saurashtra;
(f) The State Bank of Travancore; and
(g) The State Bank of Indore.
The State Bank of India holds not less than 55 per cent of the issued capital of each subsidiary bank. All subsidiary banks are merged in SBI in 2017
Reserve Bank of
India:
Reserve
Bank of India (RBI) is the central bank of the country and is different from
Central Bank of India. The central bank of the country is the Reserve Bank of
India (RBI). It was established in April 1935 with a share capital of Rs. 5
crores on the basis of the recommendations of the Hilton Young Commission. The
share capital was divided into shares of Rs. 100 each fully paid which was
entirely owned by private shareholders in the beginning. Reserve Bank of India
was nationalized in the year 1949. The Reserve Bank of India Act, 1934 was
commenced on April 1, 1935. The Act, 1934 (II of 1934)provides the statutory
basis of the functioning of the Bank.
The Bank was constituted for the need of
following:
1-To
regulate the issue of banknotes.
2-
To maintain reserves with a view to securing monetary stability and
3-To
operate the credit and currency system of the country to its advantage.
Functions of RBI
1-Traditional function
i-
Issue of Currency Notes:
ii-
Banker to other Banks:
iii-
Banker to the Government:
iv-
Exchange Rate Management:
v-
Credit Control Function:
vi-
Supervisory Function:
2- Developmental / Promotional Functions of RBI
i-
Development of the Financial System:
ii-
Development of Agriculture:
iii-
Provision of Industrial Finance:
iv-
Provisions of Training:
v-
Collection of Data
vi-
Publication of the Reports:
vii-
Promotion of Banking Habits
viii-
Promotion of Export through
Refinance:
1-Traditional
Functions of RBI -Traditional functions are those
functions that every central bank of each nation performs all over the world.
Basically, these functions are in line with the objectives with which the bank is
set up. It includes fundamental functions of the Central Bank. They comprise
the following tasks:
1-
Issue of Currency Notes: The RBI
has the sole right or authority or monopoly of issuing currency notes except
one rupee note and coins of smaller denomination.
These currency notes are legal
tender issued by the RBI. Currently, it is in denominations of Rs. 2, 5, 10, 20,
50, 100, 500, and 2,000. The RBI has powers not only to issue and withdraw but
even to exchange these currency notes for other denominations.
It issues these notes against the
security of gold bullion, foreign securities, rupee coins, exchange bills and
promissory notes and government of India bonds.
2-Banker
to other Banks: The RBI being an apex monitory the institution has obligatory powers to guide, help and direct other commercial
banks in the country.
The RBI can control the volumes of
banks reserves and allow other banks to create credit in that proportion. Every
commercial bank has to maintain a part of its reserves with its parent's viz.
the RBI.
It works as a representative of the
government even at the international level. It maintains government accounts,
provides financial advice to the government. It manages government public debts
and maintains foreign exchange reserves on behalf of the government. It
provides an overdraft facility to the government when it faces a financial crunch.
4-Exchange
Rate Management: It is an essential function of the
RBI. In order to maintain stability in the external value of the rupee, it has to
prepare domestic policies in that direction. Also, it needs to prepare and
implement the foreign exchange rate policy which will help in attaining the
exchange rate stability. In order to maintain the exchange rate stability, it
has to bring demand and supply of the foreign currency (U.S Dollar) close to
each other.
5-Credit Control Function: Commercial bank in the country creates
credit according to the demand in the economy. But if this credit creation is
unchecked or unregulated then it leads the economy into inflationary cycles.
On the other credit, creation is
below the required limit then it harms the growth of the economy. As a central
bank of the nation, the RBI has to look for growth with price stability. Thus it
regulates the credit creation capacity of commercial banks by using various
credit control tools.
6-Supervisory
Function: TheRBI has been endowed with vast
powers for supervising the banking system in the country. It has powers to
issue a license for setting up new banks, to open new branches, to decide minimum
reserves, to inspect the functioning of commercial banks in India and abroad, and
to guide and direct the commercial banks in India. It can have periodical
inspections an audit of the commercial banks in India.
Along with the routine traditional
functions, central banks especially in the developing country like India have
to perform numerous functions.
1.Development of the Financial System:
The financial system comprises the
financial institutions, financial markets, and financial instruments.
In an agrarian economy like ours,
the RBI has to provide special attention for the credit need of agriculture and
allied activities. It has earlier the Agriculture Refinance and Development
Corporation (ARDC) to look after the credit, National Bank for Agriculture and
Rural Development (NABARD) and Regional Rural Banks (RRBs).
Rapid industrial growth is the key
to faster economic development. In this regard, the adequate and timely
availability of credit to the small, medium, and large industry is very significant.
In this regard the RBI has always been instrumental in setting up special
financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK, etc.
The RBI has always tried to provide
essential training to the staff of the banking industry. The RBI has set up the
bankers' training colleges at several places. National Institute of Bank
Management i.e NIBM, Bankers Staff College i.e BSC, and College of Agriculture
Banking i.e CAB
5.Collection
of Data:
Being the apex monetary authority of
the country, the RBI collects process and disseminates statistical data on
several topics. It includes the interest rate, inflation, savings, and investments , etc. This data proves to be quite useful for researchers and policymakers.
6.Publication
of the Reports:
The Reserve Bank has its separate
publication division. This division collects and publishes data on several
sectors of the economy. The reports and bulletins are regularly published by
the RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and
Progress of Commercial Banks India., etc. This information is made available to
the public also at cheaper rates.
7.Promotion
of Banking Habits: As an apex organization, the RBI
always tries to promote banking habits in the country. It institutionalizes
savings and takes measures for an expansion of the banking network.
It has set up many institutions such
as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982,
NHB-1988, etc. These organizations develop and promote banking habits among people. During economic reforms, it has taken many initiatives for encouraging
and promoting banking in India.
8.Promotion of Export through Refinance:
The RBI always tries to encourage
the facilities for providing finance for foreign trade especially exports from
India.
The Export-Import Bank of India
(EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC)
are supported by refinancing their lending for export purposes.
Credit Control
Credit Control is an important tool used by the Reserve Bank of India, a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy.
The basic and important needs of
Credit Control in the economy are:
1-To encourage the overall growth of
the priority sector i.e. those sectors of the economy which is recognized by
the government as prioritized
2-To keep a check over the
channelization of credit so that credit is not delivered for undesirable
purposes.
3-To achieve the objective of
controlling Inflation as well as Deflation.
4-To boost the economy by
facilitating the flow of the adequate volume of bank credit to different sectors.
There are two methods that the RBI
uses to control the money supply in the economy-
(1)Qualitative Method
(2) Quantitative Method:
By qualitative methods means the
control or management of the uses of bank credit or manner of channelizing of
cash and credit in the economy.
Tools used under this method are:
Marginal
Requirement: Marginal Requirement of loan can be
increased or decreased to control the flow of credit for e.g. –a person
mortgages his property worth Rs. 1,00,000 against loan. The bank will give loan
of Rs. 80,000 only. The marginal requirement here is 20%. In case the flow of
credit has to be increased, the marginal requirement will be lowered.
Fixation
of credit Limit: Under this method, there is a maximum
limit to loans and advances that can be made, which the commercial banks cannot
exceed.
Publicity: RBI uses media for the publicity of its views on the
current market condition and its directions that will be required to be
implemented by the commercial banks to control the unrest.
Direct Action: Under the banking regulation Act, the central bank has the authority to take strict action against any of the commercial banks that refuse to obey the directions given by the Reserve Bank of India.
(2)
Quantitative Method:
By Quantitative Credit Control we
mean the control of the total quantity of credit. Different tools used under
this method are:
Bank
Rate: Bank Rate is also known as the Discount
Rate is the official minimum rate at which the Central Bank of the country is
ready to rediscount approved bills of exchange or lend on approved securities.
When the commercial bank for
instance has lent or invested all its available funds and has little or no
cash over and above the prescribed minimum, it may ask the central bank for
funds. This Rate is increased during the times of inflation when the money
supply in the economy has to be controlled.
Open
Market Operations: Open Market Operations indicate the
buying/selling of government securities in the open market to balance the money
supply in the economy.
During inflation, RBI sells government securities to commercial banks and other financial institutions.
This reduces their cash lending and credit creation capacities. Thus, Inflation
can be controlled.
Repo Rates and Reverse Repo Rates: In India, repo rate is the rate at which Reserve Bank of India lends money to commercial banks in India if they face a scarcity of funds.
Reverse Repo rate is the rate at which the Reserve Bank of India borrows funds from the commercial banks in the country
Cash
Reserve Ratio:
The money supply in the economy is
influenced by the cash reserve ratio. It is the ratio of a bank‘s time and
demand liabilities to be kept in reserve with the RBI. A high CRR reduces the
flow of money in the economy and is used to control inflation. A low CRR
increases the flow of money and is used to overcome the recession.
Statutory
Liquidity Ratio: Under SLR, banks have to invest a
certain percentage of their time and demand liabilities in Government approved
securities. The reduction in SLR enhances the liquidity of commercial banks.
Deployment
of Credit: The RBI has taken various measures
to deploy credit in different of the economy. The certain percentage of bank
credit has been fixed for various sectors like agriculture, export, etc
Comments
Post a Comment