Banking System

Introduction

• Series: Simplified
• Topic: Banking System
• Dimensions Covered:
  • Functions of Bank
  • Types of Banks
  • Non-Performing Assets (NPA)
  • Committees on Banking Reforms

Functions of Bank

Monetary Functions

• Repo Rate: Rate at which the central bank (RBI in India) lends money to commercial banks.
• Reverse Repo Rate: Rate at which RBI borrows money from commercial banks.
• Bank Rate: Rate charged by RBI for lending funds to commercial banks.
• Marginal Standing Facility (MSF): Window for scheduled banks to borrow overnight from RBI in emergencies.
• Open Market Operations: Sale/purchase of government securities by RBI to adjust rupee liquidity conditions.

Primary Functions

• Accepting Deposits: Various types (savings, fixed, current, recurring).
• Granting Loans and Advances: Higher interest rate on loans than deposits.

Secondary Functions

• Issuing letters of credit, traveler’s checks, etc.
• Safe custody of valuables and documents.
• Foreign exchange dealings.
• Money transfer services (checks, pay orders, demand drafts).
• Standing guarantee for purchases.

Types of Banks

Central Bank

• Guides and regulates the banking system.
• Acts as the government's banker.
• Provides guidance to other banks.

Commercial Banks

• Public Sector Banks: Majority stake held by the government or RBI (e.g., SBI, Corporation Bank).
• Private Sector Banks: Majority stake held by private individuals (e.g., Jammu & Kashmir Bank, ICICI).
• Foreign Banks: Registered abroad but operate in India (e.g., HSBC, Citibank).

Development Banks

• Provide medium and long-term capital for industrial development (e.g., IFCI, SFCs).

Cooperative Banks

• Formed to serve common interests under the Cooperative Societies Act.
  • Primary Credit Societies: Village or town level.
  • Central Cooperative Banks: District level.
  • State Cooperative Banks: Apex state-level banks.

Specialized Banks

• Support specific business activities (e.g., Exim Bank, SIDBI, NABARD).
  • Exim Bank: Supports exporters and importers.
  • SIDBI: Finances small scale industries.
  • NABARD: Finances agricultural and rural sectors.

Regional Rural Banks (RRB)

• Provide concessional credit to agriculture and rural sectors.
• Established in 1975, joint venture between central government, state government, and commercial banks.

Payment Banks

• Operate on a smaller scale, cannot advance loans or issue credit cards (e.g., Airtel Payments Bank).
• Recommended by Dr. Nachi Keith Moore for lower-income groups.

Bad Bank

• Asset Management Company (AMC) handling bad loans of commercial banks to clean up balance sheets.

Non-Performing Assets (NPA)

• Definition: Bank asset not producing income.
  • Categories:
    • Substandard: NPA <= 12 months.
    • Doubtful: NPA > 12 months.
    • Loss Assets: Identified as loss but not written off.
• Impact: Reduces bank revenue streams.
• Strategies to Reduce NPAs:
  • Mission Indra Dhanush: To make public sector banks more transparent and professional.
  • Insolvency and Bankruptcy Code: Eases loan recovery process.
  • Stringent NPA Recovery Rules: Amended SARFAESI Act (2002) in 2016.
  • Recapitalization of Banks: Infusing capital in state-run banks.
• Measures by RBI:
  • Corporate Debt Restructuring (CDR).
  • Setting Joint Lenders Forum.
  • Increased provisioning for stressed assets.

Committees on Banking Reforms

• Bimal Jalan: New bank licenses.
• Nachiket More: Comprehensive financial services for small businesses and low-income households.
• KV Kamath: Financial architecture for MSMEs.
• Guard Gil (1969): Lead banking system.
• Usha Thorad: Financial inclusion, financial sector plan for North-East region.
• Urjit Patel: Current monetary policy framework.
• NK Sync: Review of Fiscal Responsibility and Budget Management Act.
• Shyamala Gopinath: Suggestions on Post Office small savings schemes.

Conclusion

• Stay tuned for the next episode.