Session Plan

(1) Indian Financial System, Role and Functions of RBI

(2) Different Types of Banking…..
 Retail Banking,
Wholesale Banking,
Private Banking,
International Banking,
Universal Banking,
 Small Finance Banks,
Small Payments Bank
Cont.
Narrow Banking,
 Shadow Banking,
 E-Banking,
Open banking
 Large and Wholesale Infrastructure Banks
Path to differentiated banking
(3) Mutual Funds, Insurance in Banks and Regulator
(4) Capital Market and Money Market with Banks and
Regulator
Cont.
(5) Relations with Banks
Banker Customer Relationship (Debtor-Creditor,
Creditor-Debtor,
 Bailee-Bailor,
 Agent-Principal,
 Lessor-Lessee,
 Indemnifier-Indemnified
Anti Money Laundering,
Cont.
Banker’s Special Relationship (Power of Attorney,
Garnishee Orders),
Banking Ombudsman Scheme
Account Opening
Ancillary Services
Portfolio advice
Merchant banking
Cont.
(5) Loans and advances ( Fund and Non fund based)
Working capital loan
Term loan
Project financing
Agricultural financing
SME financing
Credit evaluation
Participation of SHG
Cont.
(6) Risk Management and NPA Management
Basel I Accord
Basel II Accord
Basel III Accord
Risk Weighted Capital
Banking Codes and Standard Board of India
Credit Information Companies
Insolvency and Bankruptcy Regime
Bigger Picture
Who is the regulator?
Banks……………….clients (relationship) ….Retail, Private,
Wholesale, International, Corporate, SFB, SPB, Long
term and whole sale ,.Open banking, Phone banking,
Shadow banking, E banking, Narrow banking
Sectors…..Priority----------Profit sectors
 Assets ( Extend loans and advances) -----Liability ( take
deposits)
Is there any risk………..risk framework?
If colossal hair cut…………..what is the recourse?
Can we have a holistic look?
You may visualize the whole ecosystem of banking?
Is it regulated ? ( RBI)
What is the scope of banking? Who all are
participants? ( I, We, They, Living, Non Living, Trusts,
Cooperatives, Partnerships, Firms, Government, God)
If the participants don’t honour the contracts among
themselves...............where is the rule book......who
will resolve the conflicts................if failed........can the
Judiciary intervene?
Career Path in Public sector
Banks
Government Banks ( Scale 1, 2,.......so on)
1. Probationary Officers(all)
2. Credit Manager (all)
3. Treasury Manager(all)
4. Cyber Security Officer(IT+...............
5. Financial analyst (CFA/MBA/CA)
6. Portfolio Manager (CFA/MBA/CA)
7. Law Officer ( LLB+............)
Assistant manager.....manager....chief
manager....AGM...GM..........CMD
Career Path in Private Banks
Relationship Officer
Branch Relationship Manager
Personal Banker
Cluster Manager
Pri0rity Managers
SME Manager
Financial Analyst
Fund Manager
Treasury Manager
AVP, VP, MD, CMD
Cont.
Credit Manager
Individual.................
Middle Class.............
HNI..........................
Ultra HNI................
SME........................
Corporate...............
Forex......................
Project...................
Choice of two prime divisions
Assets side ( Loan and Advances)

Liability Side ( deposits, mutual funds, insurance)

Emerging opportunities
Fin tech
Edu tech
Heath tech

Banks have to play an important role with Fin Tech

revolution.
Be Vigilant
Read financial chronicles and follow the changes
happening around
Read annual reports, financial stability reports from
RBI
Follow lectures of RBI Governors and Deputy
Governors
Banks and FIs are leading recruiter, so it may be
useful if you acquaint yourselves with developments
in the banking sector.
 By
Santosh Kumar
Agenda of the Discussion
1. Let us start with Indian Financial
System
2. Then we will zero in on to RBI
and its roles and subsequently on
Banking
Financial System
An institutional framework to enable financial
transactions
Three pronged
 Financial assets (loans, deposits, bonds, equities, etc.)
 Financial institutions (banks, mutual funds, insurance

companies, etc.)
 Financial markets (money market, capital market, forex market,

etc.)
Regulated by …(RBI, SEBI, IRDA,PRDA, PDMA,
IBRI)
Financial assets/instruments
Enable channelizing funds from surplus units to
deficit units
Instruments for savers such as deposits, equities,
mutual fund units, etc.
Instruments for borrowers such as loans, overdrafts,
etc.
Like businesses, governments too raise funds through
issue of bonds, Treasury bills, etc.
Instruments like PPF, KVP, etc. are available to savers
who wish to lend money to the government
Financial

Institutions
Includes institutions and mechanisms which
 Affect generation of savings by the community
 Mobilization of savings

 Effective distribution of savings

Facilitating Institutions …….banks, insurance

companies, mutual funds- promote/mobilize savings
Participation from Individual investors, industrial and
trading companies- borrowers
Financial Markets
Money Market- for short-term funds (less than a
year)
 Organized (Banks)
 Unorganized (money lenders, chit funds, etc.)

Capital Market- for long-term funds

 Primary Issues Market
 Stock Market

 Bond Market
Money Market Instruments
Call money- money borrowed/lent for a day. No
collateral. Notice Money---2-14 days
Inter-bank term money- Borrowings among
banks for more than 7 days
Treasury Bills- short term instruments issued by
the Union Govt. Issued at a discount to the face
value
Certificates of Deposit- Issued by banks/FI.
Minimum value is Rs. 1 lakh, tradable in the
market. CDs issued by banks/FIs
Money Market Instruments
Commercial Paper (CPs) issued by corporate to raise
short term money
1. Issued in multiple of Rs. 5 lakhs, (by companies with a
net worth of at least Rs. 5 crores)
2. CP an unsecured promissory note privately placed
with investors at a discount rate to face value.
3. The maturity …3 and 6 months
Stop for a while
Promissory Notes
Legal instrument as a promise to pay a specific amount
at specific date for specific reason to specific person.
Organized Money Market
Call money market
Bill Market
 Treasury bills
Bank loans (short-term)
Participants: RBI, banks (commercial and co-
operative)
Call money market
Deals with one-day loans (overnight) ….. call
loans or call money
Participants are mostly banks. Also called inter-
bank call money market.
The borrowing limited to banks, temporarily
short of funds.
On the lending side, besides banks with excess
cash and as special cases few FIs like LIC.
Call money market
Call loans ……made on a clean basis- i.e. no collateral
is required
Function ….to redistribute the pool of day-to-day
surplus funds of banks among other banks in
temporary deficit of funds
Helps banks to earn interest and yet improve their
liquidity
Highly competitive and sensitive market
Acts as a good indicator of the liquidity position
How? What is the trend in the last year?
Bill Market
Treasury Bill market- Also called the T-Bill
market
1. Short-term liabilities (91-day, 182-day, 364-
day) of the Government of India
2. Promise to pay the stated amount on
maturity
3. Issued at discount and redeemed at face value
4. The rate of discount and the corresponding
issue price by auction.
Calculation of Return of T bills
FV = Rs 100

Price = Rs 98

Bought at 98 and sold at 100

Therefore yield = (2/98)*100 for 3 months = 0.02

Yield annualized = 0.02*4= 0.08 = 8%
Indian Banking System
Central Bank (Reserve Bank of India)
Commercial banks
Co-operative banks
Banks can be classified as:
 Scheduled (Second Schedule of RBI Act, 1934)
 Non-Scheduled

Scheduled banks can be classified as:

 Public Sector Banks
 Private Sector Banks (Old and New)
 Foreign Banks
 Regional Rural Banks
Indigenous bankers
Individual bankers …… Seths, Sahukars, Mahajans, etc.
Combine trading and other business with money
lending.
Vary in size from petty lenders to substantial ones.
Act as money changers and finance internal trade
Family owned business employing own working
capital
RBI advised for periodic reporting, auditing, and
graded compensation in Indigenous bankers. But
Failed. Outside the purview of RBI
Development Oriented Banking
Historically, close association between banks and
some traditional industries- cotton textiles in the
west, jute textiles in the east
Banking not been mere acceptance of deposits and
lending money to include development banking
Lead Bank Scheme- opening bank offices in all
important localities
Providing credit for development of the district
Mobilizing savings in the district. ‘Service area
approach’
Joint coordination between
Govt. and Bankers
State-level bankers committee + Development
Commissioner

Lead bank scheme + District Magistrate or DDC

Progress of banking in India
You may refer RBI report communicated.
Roles and Functions of RBI
1. Monetary Authority: control of the central bank to
regulate the availability, cost, and use of money and
credit………in tandem with economic objectives such as
low and stable inflation and growth (Why not
Impossible Trinity ?)
Possibly jot down as
 Maintaining price stability
 Sustainable credit flow to productive sectors
 Financial stability
Impossible trinity
Capital inflows
Exchange rate management
Interest rate management

RBI wants to manage only two monsters at a

time and the other left at the mercy of
market. Intensions of RBI may change in after
one or two quarters.
 RBI is manager of money
supply

Liquidity Liquidity
Injection Absorption
M3 M3
increase decreases
 Cont.
Monitor through the movement of
 interest rates,
 inflation rates,
 money supply,
 credit,
 exchange rate,
 trade, capital flows,
 fiscal position, agricultural outputs
 Cont.
Direct Instruments to control
CRR
SLR
Refinance Facilities
Indirect Instruments to control
Liquidity Adjustment Facility
Repo/Reverse Repo rate
Open Market Operations
Marginal Standing Facility
Bank rate
Market Stabilization Scheme
 CRR ( Cash Reserve Ratio)
Quantum of cash that bank is required to keep with
RBI as a proportion of their net demand and time
liabilities.
No interest paid on it by RBI
How much Today ? And Trend ?
It is maintained on daily basis. In case of default of
CRR requirement on a daily basis, penal interest will
be levied for the day at the rate of 3% per annum
above the bank rate on the calculated shortfall. If
continues on second day, 5% ………………….
Key rates today ( 14th July,
2022)
CRR: 4.5%
SLR: 18.00%
Policy Repo Rate: 4.9%
Reverse Repo Rate: 3.35%
Marginal Standing Facility Rate: 4.65% ( RBI will lend
banks in emergency situation but banks have to
pledge Govt securities)
Bank Rate: 5.15% (RBI will lend to banks at this rate)
 Statutory Liquidity Ratio (SLR)
It is the share of net demand and time liabilities that
banks must maintain in safe and liquid assets such as
Govt. securities, cash and gold.
Penalty rules are similar to CRR
How much today and trend?
 Other Instruments
Sector Specific Refinance Facilities
Provided to Banks
But we will check the facilities availed by SCB

Liquidity Adjustment Facility

Consists of daily infusion or absorption of liquidity on a
repurchase basis, through repo ( injection) and reverse repo
( liquidity absorption) auction operations, using Govt.
securities as collateral. Under LAF-Repo Rate, banks can
borrow from RBI at the repo rate by pledging Govt.
securities over and above the SLR requirements.
 Cont.
Repo/Reverse Repo Rate: determine the corridor
for the short term money market interest rates. It
will trigger movements in rates in other segments of
the financial market and the real economy.
Open Market Operations: Outright sales and
purchase of Govt. securities in addition to the LAF to
determine the level of liquidity over the medium
term. Operational from 2012 . Used frequently by RBI.
What is the limit today?
Other instruments
Marginal Standing Facility (MSF): SCB can borrow
over night at their discretion upto 2% ( 2012 onwards) of
their net demand and time liabilities at 100 bp above the
repo rate, against approved Govt. securities to provide a
safety valve against unanticipated liquidity shocks.
Minimum ticket size is one crore and multiples.
Bank rate: Rate at which the RBI is ready to buy or
rediscount bills of exchange or other commercial papers.
Signals the medium term stance of monetary policy.
Other Instruments
Market Stabilization Schemes: Current Level
Introduced in 2004 for issuing of treasury bills and dated
securities for absorbing excess liquidity.
RBI maintains a separate MSS cash balance of the Govt.
A state govt. account can be in overdraft for a maximum
period of 14 consecutive days with a limit of 36 days in a
quarter.
Rate of interest of WMA (Ways and Means Advances)is
linked to Repo rate
Surplus balances of the state Govt. is invested in treasury
bills
Let us get back to
other roles and
responsibilities of RBI
2. Issuer of Currency
Sole note issuing authority ( can we become cash less?)
Takes care of design, production and overall management of the
currency
Ensures adequate supply of clean and genuine notes/coins
Can issue the notes up to the value of Rs 10000
Monitors the security features of the bank notes as an anti-
counterfeiting measure.
Coins in circulation: 50 paise, 1,2,5, and 10 Rupees
Notes in circulation: 5, 10, 20, 50, 100, 500, 2000
Paise 50 can be used for transaction up to ten rupees.
Likely to introduce digital currency
3. Banker and Debt manager of
Govt. (PDMA in pipeline)
Manager of Govt. banking transaction for Centre and state
RBI maintains Govt. accounts …..receives money into it,
makes payment out of it and facilitates the transfer of
government funds.
Manage the Govt. domestic debt with the objective of
raising the required amount of public debt in a cost
effective and timely manner
Develop the market for Govt. securities to enable the Govt.
to raise debt at a reasonable cost, provide benchmarks for
raising resources by other entities and facilitate
transmission of monetary policy actions.
Cont.
Daily net position of the Govt. account is prepared
electronically.
If negative, RBI extends a short term interest bearing
advance also called as Ways and Means Advance
(WMA)
4. Banker to Banks
All banks will have accounts with RBI to facilitate
smooth and efficient transfer of funds and settle inter-
bank transactions such as borrowing from and
lending to other banks-the customer transaction.
Banks maintain accounts for SLR requirement
RBI acts as lender of the last resort if banks are
unable to raise short term liquid resources and
protects the interests of depositors.
5. Regulator of the Banking
System
Ensures safety and soundness of the banking system
Maintains financial stability and public confidence in the
system
Protects the interests of depositors ensures a framework for
orderly development and conduct of banking operations
conducive to customer interests
Oversee the activity of
1. Commercial banks, development financial institutions
2. Urban Cooperative banks, Regional Rural Banks, District
Central Cooperative Banks, State Co-operative Banks, NBFC
Cont.
Also takes care of licensing, prescribing capital requirements,
setting prudential regulations to ensure solvency ( long term)
and liquidity (short term) of the banks
Prescribing norms for priority sector lending, regulating
interest rates
Ensures through onsite inspections, off site surveillance, and
periodic report submissions
Ensures high quality corporate governance in banks……issued
guidelines for directors of banks with specialized knowledge in
different domains
“ Board for Financial Supervision” in RBI takes care of all these
6. Manager of Foreign Exchange
Administers the FEMA Act 1999 (Foreign Exchange
Management Act) by issuing licences to banks and
select institutions as authorized dealers in foreign
exchange and facilitate the development of regulated
exchange market in view of the open economy.
Manages the foreign currency assets and gold
reserves of the country
Also participates in sale and purchase of foreign
currency in order to curb the volatility of foreign
exchange market
Cont.
Foreign Exchange Department (FED) and Financial
Market Department (FMD) take care of these things

Status of foreign reserve is updated through Weekly

Statistical Supplement (WSS).
RBI allows banks to trade in offshore
rupee derivative market

The Reserve Bank (2020) allowed banks to participate in

offshore non-deliverable forward (NDF) rupee markets
with a view to contain volatility in the domestic
currency. The measures taken after consultations with
the government include allowing Indian banks which
operate from International Financial Services Centre
(IFSC) Banking Units (IBUs) to participate in the NDF
market.
Web-link for the news in
Economic Times
https://economictimes.indiatimes.com/markets/stoc
ks/news/rbi-allows-banks-to-trade-in-offshore-rupee-
derivative-market/articleshow/74842557.cms?utm_so
urce=contentofinterest&utm_medium=text&utm_ca
mpaign=cppst
7. Regulator and Supervisor of
Payment and Settlement Systems
Uses two systems broadly
Retail Payment System: Facilitating cheque clearing,
electronic fund transfer (NEFT), settlement of card
payments……operated through local clearing houses
throughout the country
Large value system: Facilitating settlement of
interbank transactions from financial markets, RTGS
for fund transfer, securities settlement system for
Govt. securities market, foreign exchange clearing for
transactions involving foreign currency.
8. Maintaining Financial Stability
Important in the wake of recent global financial crisis.
In 2009, RBI started a dedicated Financial Stability Unit
to monitor the macro financial system (recent financial
stability bill). We will not miss financial stability report.
Conduct macro prudential surveillance
Develop model for assessing financial stability
Preparation of half yearly financial stability reports
Database management of key variables
Conduct of systematic stress tests to assess resilience
9. Development Role
Make the credit available for productive sectors of the
economy……..build the financial infrastructure……expand
access to affordable financial services and improve
financial education and literacy
Deposit Insurance and Credit Guarantee Corporation
(1962) ….provide protection to bank deposits and small
borrowers ( Up to Rs 5 Lakhs)
Industrial development Bank of India (1964)…for industry
National Bank for Agriculture and Rural Development
(NABARD, 1982)…..for rural credit
Cont.
National Housing Bank (1989) ……..promote and
regulate housing finance
Lead bank scheme…in every district for
customization of local need and credit along with
Govt.
Sector specific refinance …..for promoting production
and export in a particular sector
Extending support to cooperative banks and RRB
Focus on financial inclusion
Regulatory Restrictions on Lending
No advance or loan can be granted against the
security of bank’s own shares
No loans against CDs and Indian Depository Receipts
No loans against FD of other banks
No loans to wilful defaulters
Avoid the concentration of credit risk by diversifying
the credit exposure in different sectors, firms,
individuals
NPA Management
The Narasimham Committee recommendations were
made, among other things, to reduce the Non-
Performing Assets (NPAs) of banks
To tackle this, the government enacted the
Securitization and Reconstruction of Financial Assets
and Enforcement of Security Act (SARFAESI) Act,
2002
Enabled banks ( secured financial creditors) to realize
their dues without intervention of courts
SARFAESI Act
Enables setting up of Asset Management Companies to
acquire NPAs of any bank or FI
NPAs are acquired by issuing debentures, bonds or any
other security
As a second creditor can serve notice to the defaulting
borrower to discharge his/her liabilities in 60 days
Failing which the company can take possession of assets,
takeover the management of assets and appoint any
person to manage the secured assets
Borrowers have the right to appeal to the Debts Tribunal
after depositing 50% of the amount claimed by the second
creditor
Recent parallel developments
Strategic debt restructuring ( controlled by RBI, but
now null and void after the IBC 2016)
Insolvency and bankruptcy code ( standalone
regulatory provision to be established)....takes care of
all types of creditors
The Indian Capital Market
Market for long-term capital. Demand comes from
the industrial, service sector and government
Supply comes from individuals, corporates, banks,
financial institutions, etc.
Can be classified into:
Gilt-edged market ( sovereign guarantee)
Industrial securities market (new issues and

stock market)
The Indian Capital Market
Development Financial Institutions
 Industrial Finance Corporation of India (IFCI)
 State Finance Corporations (SFCs)

 Industrial Development Finance Corporation (IDFC)

Financial Intermediaries
 Merchant Banks ( advisor, underwriter, fund raiser, market maker)
 Mutual Funds ( pool fund and invest on behalf of clients)

 Leasing Companies ( fixed tenure, Give asset or service, take rent)

 Venture Capital Companies ( provide capital to higher growth

trajectory firms)
Industrial Securities Market
Refers to the market for shares and debentures of old
and new companies
New Issues Market- also known as the primary
market- refers to raising of new capital in the form of
shares and debentures
Stock Market- also known as the secondary market.
Deals with securities already issued by companies
Financial Intermediaries
Mutual Funds- Promote savings and mobilise
funds which are invested in the stock market and
bond market
Indirect source of finance to companies
Pool funds of savers and invest in the stock
market/bond market
Their instruments at saver’s end are called units
Offer many types of schemes: growth fund,
income fund, balanced fund
Regulated by SEBI
Financial Intermediaries
Merchant banking- manage and underwrite new
issues, undertake syndication of credit, advise
corporate clients on fund raising
Subject to regulation by SEBI and RBI
SEBI regulates them on issue activity and
portfolio management of their business.
RBI supervises those merchant banks which are
subsidiaries or affiliates of commercial banks
Have to adopt stipulated capital adequacy norms
and abide by a code of conduct
Conclusion
There are other financial intermediaries such as
NBFCs ( can’t accept deposits), Venture Capital
Funds, Hire and Leasing Companies, etc.
India’s financial system is quite huge and caters
to every kind of demand for funds
Banks are at the core of our financial system and
therefore, there is greater expectation from them
in terms of reaching out to the vast populace as
well as being competitive.
Helpline
Venture Capital Funds…( High risk and high
return….invest in start-ups and small and medium
sized enterprises with huge potential)
Hire and lease……..mode of asset finance for
possession and control of assets
Debenture…..unsecured loan
Bill of exchange…..non interest bearing written order
(signed by creditor and accepted by debtor)
IDR, ADR