Structure of Banking Industry

Structure of Banking
Industry
Structure of Banks in India
Structure of Banks in India
Central Bank
• Central bank is responsible for regulating the banking
system of a nation.
• It is essentially a banker to banks as well as banker to
the Government.
• Central bank also is responsible for the monetary and
credit policies of the economy.
• Central bank issues currency notes for the country and
oversees the movement of currency value in relation to
other country’s currency value.
Reserve Bank of India
• The Reserve Bank of India Act, 1934 established
Reserve Bank as the Central bank of India.
• Regulator and Supervisory authority of the monetary
policy of India.
• Supervises the financial system of the Indian economy.
• Issues Indian currency note (Rupee)
• Ensures stability and management of interest rate in the
economy and exchange rates in an international setting.
• Regulates and supervises the payment and settlement
systems in the economy.
Role of Reserve Bank of India
• Developing financial institutions and markets.
• Promoting banking activities.
• Ensuring safety of depositors’ funds in the banking
system.
• Provide the supply of currency and credit for the
economy.
• Manage Government debt.
• Encourage financial inclusion in the society.
• Encourage developmental functions in the economy.
Structure of Reserve Bank of India
Commercial Banks
• Banks that accept deposits and provide loans and
advances.
• Three types of commercial banks.
• Public sector banks.
• Private sector banks.
• Foreign banks.
Structure of Public Sector Banks
Primary Functions of Commercial Banks
• Accepting deposits
• Surplus income and savings are mobilized as
short-term and long-term deposits for specified
interest rates.
• Providing loans and advances
• Fund needs of the society (individuals and
business establishments) are met through the
loans and advances at specified interest rates.
• Loans are long term fund assistance.
• Advances are short term fund assistance such as
cash credit, overdraft, discounting of bills.
Secondary Functions of Commercial Banks
• Safe custody of valuables.
• Providing foreign exchange.
• Transfer of money.
• Providing guarantee and letters of credit.
• Providing business support services such as
providing business information, credit reports etc.
Investment Banks
• Corporate financial advisory and investment service
providers.
• Assist
financial
markets
and
provide
capital
intermediation services.
• Provide consultancy, market research and broking
services to assist high net worth individuals and other
entities in their investment goals.
• Develop ventures through project finance to support
fund needs and export finance to meet international
trade ventures.
Functions of Investment Banks
• Services for individuals
• Maintain financial accounts
• Provide loans, lease and mortgages
• Pension management
• Investment management
• Private banking
• E-banking
Functions of Investment Banks
• Services for business firms and institutions
• Corporate advisory services
• Investment management of institutional investors
• Asset management services
• Industry analysis and research
• Information provision
• Merger and amalgamation activities
• Valuation services
Development Banks and Specialized Banks
• Specialized development financial institutions.
• Providers of long-term funds to economic sectors
experiencing shortage of funds.
• Substantiate and bridge market gaps in developing
economies.
Illustrative Development Banks
• Industrial Development Bank of India (IDBI)
• Industrial Finance Corporation of India (IFCI).
• National Bank for Agriculture and Rural Development
(NABARD)
• Export Import Bank of India (EXIM Bank)
• National Housing Bank (NHB)
• Small Industries Development Bank of India (SIDBI)
• Infrastructure Development Finance Company (IDFC)
• Industrial Investment Bank of India (IIBI)
• State Finance Corporations (SFCs)
Co-operative Banks
• Established for the purpose of providing funds for nonagricultural purposes.
• These banks were formed by local communities, local
geographical groups or work groups.
• Based on the principles of cooperation that implies
mutual
help,
decisions.
open
membership
and
participative
Types of Co-operative Banks
• State Co-operative Banks.
• Apex body of co-operative banks in a state.
• Central / District Co-operative Banks.
• Established at the district level and report to the State
Co-operative Banks.
• Primary Co-operative Banks.
• Located in urban or semi-urban areas catering to the
business needs of the locality.
• Located in rural areas to meet the funding needs of the
community / work group / area.
Structure of Co-operative Banks
Non Banking Finance Companies
• Non Banking Financial Companies offer a wide range of
services such as hire purchase finance, lease finance
and investment services.
• They
provide
financial
intermediation
and
have
expanded their products profile.
• The Reserve Bank of India working group on Financial
Companies introduced registration of such companies
with net owned funds (NOF) of Rupees 5 million or
above.
Types of NBFCs
• NBFCs accepting deposits
• NBFCs not accepting deposits but rendering financial
intermediation services
• NBFCs that are investment companies (90% or more of
their total assets are in the form of investment in
securities of their group / holding / subsidiary companies)
Mutual Funds
• Mutual funds are capital market intermediaries.
• Mutual funds are established as trust entities.
• Mobilize money in the form of units and invest them in
portfolios to meet risk-return expectations of investors.
• Mutual fund returns are shared among unit holders.
Structure of Mutual Fund
Microfinance Institutions
• Small scale financial service providers.
• Financial
services
are
provided
to
low-income
households and enterprises.
• Microfinance is provided by alternate sector such as
Non Government Organizations (NGOs), Self Help
Groups (SHGs).
Microfinance Business Models
• Joint Liability Group.
• The group who are co-guarantors for other
members of the group.
• Linkage with Banks.
• SHGs coordinate with bank in microfinance
activities.
Risk Management
Measurement and management of banking risks in a
regulated environment
• Credit risk
• Liquidity risk
• Market risk
• Operational risk
• System risk
Risk Management Structure
Risk Management in Banks
• Technology driven
• Model driven
• Capital adequacy to absorb risk
• Dynamic strategies
• Integration of risk management process
• Risk based bank audit and supervision
• Supportive legal environment
Board of Directors
Banking Business
Risk Management Practices
Lending decision
Loan policy
Deposit mobilization
Interest rate policy
Asset mobilization
Planning asset management
Credit management
Internal rating systems
Investment decision
Setting risk tolerance level