Copy of 1 module-bi

Page 1

Introduction to the Program

  • SVKM's NMIMS Deemed-to-be University, Hyderabad Campus

  • Presented by: Dr. Surendar Gade, M.Com., M.B.A (Fin), Ph.D., PDF (UGC)

Page 2: Banking History & Introduction

  • Topics Covered:

    • History of Indian Banking

    • Principles of Banking

    • Basic Concepts

    • Need for Banking

    • Functions of Banks

    • Performance Measures (NIM, NIS, NII)

  • Outcome:

    • Understand the basics of the banking industry.

    • Analyze a bank’s performance.

Page 3: What is Financial System?

  • Definition:

    • A complex system comprising instructions, agents, practices, markets, transactions, claims, and liabilities.

  • Importance:

    • Facilitates the transfer of resources in the economy.

  • Finance Study:

    • Involves the study of money's nature, creation, behavior, regulations, and administration.

Page 4: Financial System Overview

  • Flow of Funds:

    • Savings → Seekers of funds (Businesses, Government)

    • Suppliers of funds (Households)

    • Flow of financial services, incomes, and financial claims.

Page 5: Financial System Components

  • Nature of Financial System:

    • A system comprised of interrelated factors.

  • Ingredients:

    • Financial institutions, markets, instruments.

Page 6: Role of Financial System

  • Function:

    • Channels funds from surplus units to deficit units.

  • Definitions:

    • Deficit units: Expenditures exceed income.

    • Surplus units: Income exceeds expenditures.

  • According to Van Horne:

    • The purpose of financial markets is to allocate savings efficiently.

Page 7: Key Factors in Financial System

  1. Money:

    • Medium of exchange, reflecting value in transactions.

  2. Credit:

    • Debt that requires repayment, usually with interest.

  3. Finance:

    • Represents monetary wealth of a state, institution, or individual.

Page 8: Objectives of the Financial System

  • Goals:

    1. Accelerating economic growth.

    2. Encouraging rapid industrialization.

    3. Acting as an agent for economic factors (industry, agriculture, government).

    4. Supporting rural development.

    5. Financing housing and small industries.

    6. Developing backward areas and infrastructure.

Page 9: Major Components of the Financial System

  • Four main components:

    1. Financial Institutions

    2. Financial Markets

    3. Financial Instruments

    4. Financial Services

Page 10: Components of Indian Financial System

  • Categories include:

    • Financial Institutions: Banking, Non-Banking

    • Financial Markets: Money, Capital

    • Financial Instruments: Asset/Fund Based

    • Financial Services: Merchant banking, Leasing

Page 11: Financial Markets Overview

  • Types of Financial Institutions:

    • Private Banks

    • Public Banks

    • Cooperative Banks

    • Regional Rural Banks

    • Foreign Banks

  • Market Types:

    • Money Market

    • Capital Market

Page 12: Financial Institutions

  • Function:

    • Mobilize and transfer funds from surplus units to deficit units.

  • Classifications:

    • Regulatory, Intermediaries, Non-intermediaries.

  • Participation in Financial Markets:

    • Engage only with financial assets (deposits, securities).

Page 13: Financial Markets Definition

  • Overview:

    • Mechanism for transferring funds from surplus to deficit units.

  • Categories:

    • Money Market: Short-term assets (< 1 year)

    • Capital Market: Long-term assets (> 1 year)

Page 14: Financial Instruments

  • Definition:

    • Commodities traded in a financial market, such as securities.

  • Diversity:

    • Various securities meet the needs of lenders and borrowers.

  • Characteristics:

    • Represents a claim to repayment of principal and/or periodic interest/dividends.

Page 15: Financial Services Overview

  • Definition:

    • Economic services provided by the finance industry managing money (e.g., banks, funds).

  • Types of Services:

    • Funds based: Factoring, Leasing

    • Fee-based: Merchant Banking, Brokerage

Page 16: Quiz on Financial System

  • Question: The word 'Financial System' implies?

Page 17: Answer to Quiz

  • Answer: A complex and interconnected system involving finance-related activities.

Page 18: Components of Financial System Quiz

  • Question: What are the components of the Financial System?

Page 19: Answer to Financial System Components Quiz

  • Answer:

    1. Financial Institutions

    2. Financial Markets

    3. Financial Instruments

    4. Financial Services

Page 20: Types of Financial Services Quiz

  • Question: What are the types of financial services?

Page 21: Answer to Financial Services Quiz

  • Answer:

    1. Funds based: Factoring, Leasing

    2. Fee-based: Merchant Banking, Brokering

Page 22: Types of Financial Markets Quiz

  • Question: What are the types of financial markets?

Page 23: Answer to Financial Markets Quiz

  • Answer:

    • Capital Market

    • Money Market

Page 24: Primary Market Quiz

  • Question: Is Primary Market part of Capital Market?

Page 25: Answer to Primary Market Quiz

  • Answer: Yes

Page 26: Definition of Bank

  • Definition:

    • Refers to a commercial banking organization, deriving from Germanic and possibly French and Italian origins ("Banqui", "Banca").

    • Historically relates to a bench used by moneylenders for financial transactions.

Page 27: Historical Context of Banking

  • Early Practices:

    • Banking activities date back to Babylon (2000 B.C.).

    • Mentioned in Chanakya's Arthashastra (300 B.C.).

  • Establishment of First Banking Institutions:

    • "Bank of Venice" (1157)

    • First bank in India: "Bank of Hindustan" (1770) which failed in 1832.

    • Modern banking began with the establishment of the "Bank of Bengal" (1806).

Page 28: Evolution of Banking in India

  • Merchant Banking and Hundis:

    • Merchant bankers were involved in trading and money remittances using hundis.

  • Role of Goldsmiths:

    • Goldsmiths began handling deposits and issuing receipts, leading to early banking practices.

Page 29: From Moneylenders to Banks

  • Transition from Goldsmiths to Moneylenders:

    • Goldsmiths advanced loans based on deposits while maintaining reserves.

    • Evolved into acceptance of deposits and loan advances, typical of modern banking.

Page 30: Phases of Banking Sector Development

  • Three Phases:

    1. Early Phase (1770-1969)

    2. Nationalization Phase (1969-1991)

    3. Liberalization Phase (1991-present)

Page 31: Early Phase Banking (1770-1969)

  • First Banks Established:

    • "Bank of Hindustan" (1770)

    • Over 600 banks were registered during this period, but few survived.

Page 32: Early Banking Establishments

  • Notable Banks:

    • General Bank of India (1786)

    • Oudh Commercial Bank (1881)

    • Bank of Bengal (1809)

    • Bank of Bombay (1840)

    • Bank of Madras (1843)

Page 33: Presidential Banks

  • British Era:

    • East India Company set up three Presidential Banks: Bank of Bengal, Bank of Bombay, Bank of Madras.

    • Merged in 1921 to form the "Imperial Bank of India," later nationalized as the State Bank of India in 1955.

Page 34: Major Banks Established

  • Establishment Years of Key Banks:

    • Allahabad Bank (1865)

    • Punjab National Bank (1894)

    • Bank of India (1906)

    • Central Bank of India (1911)

    • Canara Bank (1906)

    • Bank of Baroda (1908)

Page 35: Banking Failures Reasons

  • Factors Leading to Failures:

    • Fraud-prone behavior of account holders

    • Lack of technology and management skills

    • High human error rates and time-consuming processes

Page 36: Post-Independence Banking (1947-1991)

  • Nationalization Decision:

    • Major banks were privately led, leaving rural populations reliant on moneylenders.

    • Government nationalized banks under the Banking Regulation Act, 1949.

Page 37: Nationalization of Banks

  • Key Actions:

    • Formation of State Bank of India in July 1955.

    • Fourteen banks nationalized between 1969-1991.

Page 38: List of Nationalized Banks (1969)

  1. Allahabad Bank

  2. Bank of India

  3. Bank of Baroda

  4. Bank of Maharashtra

  5. Central Bank of India

  6. Canara Bank

  7. Dena Bank

  8. Indian Overseas Bank

  9. Indian Bank

  10. Punjab National Bank

  11. Syndicate Bank

  12. Union Bank of India

  13. United Bank

  14. UCO Bank

Page 39: Additional Nationalization (1980)

  • Additional Banks Nationalized:

    1. Andhra Bank

    2. Corporation Bank

    3. New Bank of India

    4. Oriental Bank of Commerce

    5. Punjab & Sind Bank

    6. Vijaya Bank

Page 40: SBI Subsidiaries Nationalization

  • Nationalization of SBI Subsidiaries (1960):

    • Following banks were nationalized:

      1. State Bank of Patiala

      2. State Bank of Hyderabad

      3. State Bank of Bikaner & Jaipur

      4. State Bank of Mysore

      5. State Bank of Travancore

      6. State Bank of Saurashtra

      7. State Bank of Indore

Page 41: Merger of SBI Subsidiaries

  • Mergers:

    • Subsidiaries merged with SBI in 2017 except for State Bank of Saurashtra (merged in 2008) and State Bank of Indore (2010).

  • Regional Rural Banks:

    • Established in 1975 to promote rural development in India.

Page 42: Liberalization Period in Banking (1991-Present)

  • Reforms Introduced:

    • Aimed for stability and profitability in nationalized banks.

    • Led by the M Narasimham committee.

    • Introduction of private sector banks.

Page 43: Private Sector Banks Established

  • Licenses Issued to:

    1. Global Trust Bank

    2. ICICI Bank

    3. HDFC Bank

    4. Axis Bank

    5. Bank of Punjab

    6. IndusInd Bank

    7. Centurion Bank

    8. IDBI Bank

    9. Times Bank

    10. Development Credit Bank

Page 44: Other Banking Measures Post Liberalization

  • Actions Taken Include:

    1. Foreign bank branches established in India.

    2. No further bank nationalization.

    3. Equal treatment for public and private sector banks by RBI.

    4. Joint ventures permitted between foreign and Indian banks.

    5. Introduction of Payment and Small Finance Banks initiatives.

    6. Transition to online banking and apps.

Page 45: Knowledge Check - Oldest Public Sector Bank

  • Question: Is the oldest public sector bank in India?

Page 46: Answer to Knowledge Check

  • Oldest Public Sector Bank: Allahabad Bank (1865).

Page 47: Definition of Bank

  • What is a Bank?

    • A bank serves as a bench for keeping, lending, and exchanging money and coins, as originally attributed to money lenders and changers.

Page 48: Historical Overview of Banking Development

  • Phases of Banking Development in India:

    • Early Phase (1770 - 1969)

    • Nationalization Phase (1969 - 1991)

    • Liberalization/Reforms Phase (1991-Present)

Page 49: Banks Nationalization Year Quiz

  • Question: How many banks were nationalized in 1969?

Page 50: Answer to Nationalization Quiz

  • Answer: Fourteen banks were nationalized in 1969.

Page 51: More on Nationalization in 1980

  • Question: How many banks were nationalized in 1980?

Page 52: Answer to 1980 Nationalization Quiz

  • Answer: Six banks were nationalized in 1980.

Page 53: Timeline for SBI Nationalization

  • When was SBI Nationalized?

    • SBI in July 1955

    • Subsidiaries in July 1960

Page 54: Basic Principles of Banking

  • Key Principles:

    1. Liquidity

    2. Solvency

    3. Profitability

    4. Safety

    5. Savings

    6. Services

    7. Secrecy

    8. Efficiency

    9. Location

Page 55: Principle of Liquidity

  • Explanation:

    • Combines demand deposits payable on demand and time deposits with expiry dates.

    • Banks maintain a reserve for daily customer transaction demands.

Page 56: Principle of Profitability

  • Objective:

    • To earn profit through investment in short-term loans while managing liquidity.

Page 57: Principle of Solvency

  • Definition:

    • Financial capability to ensure sufficient capital for operations.

    • Primarily derived from depositor funds.

Page 58: Principle of Safety

  • Description:

    • Ensures customers' deposits are managed with security as banks invest these funds.

Page 59: Principle of Savings

  • Relevance:

    • Banks play a crucial role in mobilizing savings from customers and incentivizing saving behavior.

Page 60: Principle of Services

  • Emphasis:

    • Banks aim to provide high-quality services that determine success and customer loyalty.

Page 61: Principle of Secrecy

  • Importance:

    • Confidentiality of customer accounts is paramount to maintain trust and satisfaction.

Page 62: Principle of Economy

  • Focus:

    • Striving for cost-effective operations to maximize profitability while minimizing unnecessary expenditures.

Page 63: Principle of Modernization

  • Relevance:

    • Adoption of modern technology is essential for banking efficiency and competitiveness.

Page 64: Principle of Location

  • Strategy:

    • Selection of bank locations based on potential customer accessibility and demand.

Page 65: Principle of Publicity

  • Overview:

    • Effective advertising strategies are essential for attracting new customers and retaining existing ones.

Page 66: Why Banking is Necessary?

  • Key Reasons:

    1. Ensure safety for customer savings.

    2. Offer interest on deposits to mitigate inflation impact.

    3. Facilitate loans for various sectors.

    4. Provide financial advice and services.

Page 67: Other Banking Contributions

  • Additional Roles:

  1. Promote saving habits.

  2. Support capital formation.

  3. Smoothen trade and commerce.

  4. Create employment opportunities.

  5. Aid agricultural and balanced development.

  6. Implement monetary policies.

Page 68: Types of Bank Accounts

  1. Savings Account

  2. Current Account

  3. Salary Account

  4. NRI Account

  5. Recurring Deposit (RD) Account

  6. Fixed Deposit (FD) Account

Page 69: Functions of Banks

  • Two Main Functions:

    1. Collection of deposits

    2. Making loans and advances

  • Secondary Functions:3. Agency services4. General utility services

Page 70: Primary Functions Detail

  • Collection of Deposits:

    • Banks collect various types of deposits including currents, savings, and fixed deposits.

  • Making Loans and Advances:

    • Banks utilize deposits to provide loans while retaining legal reserves.

Page 71: Special Functions of Banks

  • Agency Services:

    • Banks act on behalf of customers for payments and transactions.

  • General Utility Services:

    • Services include safeguarding valuables, money transfers, ATMs, and credit cards.

Page 72: Additional Banking Services

  • More services offered today include:

    • Investment counseling

    • Investment banking

    • Mutual funds

    • Project appraisal

    • Tax advisory services

    • Forex consultancy

Page 73: Quiz on Types of Loans

  • Question: A typical commercial bank provides?

    • Long term loans

    • Medium term loans

    • Short term loans

    • All of the above

Page 74: Current Accounts Quiz

  • Question: Current accounts are mainly opened for whom?

    • Salaried individuals

    • Agriculturists

    • Traders

    • All of the above

Page 75: Explanation of Fixed Deposits

  • Fixed Deposits:

    • Also known as accrued deposits, differ from recurring and demand deposits in terms of interest rates and conditions.

Page 76: First Joint Stock Bank Quiz

  • Question: Which was the first joint stock bank established in India?

    • Bank of Bombay

    • Oudh Bank

    • Bank of Hindustan

    • Hindustan Commercial Bank

Page 77: High Interest Deposits Quiz

  • Question: In which type of deposit is the high rate of interest provided by the bank?

    • A. Current Account

    • B. Recurring Deposit Account

    • C. Fixed Deposit Account

    • D. Savings Account

Page 78: Principles of Location Quiz

  • Question: What does the Principle of Location say?

Page 79: Agency Services Examples Quiz

  • Question: What are examples of agency services?

Page 80: Utility Services Examples Quiz

  • Question: What are examples of utility services?

Page 81: Bank Performance Measures Overview

  • Key Measures:

    • Net Interest Income (NII)

    • Net Interest Margin (NIM)

    • Net Interest Spread (NIS)

Page 82: Net Interest Income (NII)

  • What it is:

    • Difference between interest income and interest expenditure.

    • Indicates a bank's ability to manage interest risk.

Page 83: NII Calculation Components

  • Components:

    • Interest Income Includes:

      • Advances, investments, balance interest, and employee loans.

    • Interest Expenses:

      • Deposits and borrowings.

Page 84: Net Interest Margin (NIM) Explanation

  • Definition:

    • A profitability ratio showing how much money is made from investments, similar to gross margins.

  • Calculation:

    • NIM = (Interest Income - Interest Expense) / Interest Earning Assets

Page 85: NIM Example Calculation

  • Example:

    • Assume a bank with:

      • Interest Returns: $60,000

      • Interest Paid: $50,000

  • NIM Calculation:

    • NIM = 10,000 / 115,000 = 8.7%

Page 86: Net Interest Spread (NIS) Definition

  • Definition:

    • The difference between interest earned on assets and interest paid on liabilities.

  • NIS Calculation:

    • NIS = (Interest Income / Interest Earning Assets) - (Interest Expense / Interest Bearing Liabilities)

Page 87: NIS Example Calculation

  • Calculation for HDFC Bank:

    • Details:

      • Interest Earnings = ₹631616

      • Interest Expenses = ₹340696

      • Assets = ₹5983272

      • Liabilities = ₹5636994

    • Results:

      • NII = Earnings - Expenses = ₹290920

      • NIM = NII / Assets = 4.86%

      • NIS calculated based on earnings and expenses ratios.