Banking Awareness, Banking Terminologies for IBPS, RBI, SBI Exams

Indian Banking Industry

Historical background: - Swadeshi movement, which began in 1906, encouraged the formation of a number of commercial banks. Banking crisis during 1913-1917 and failure of 58 banks in various states during the decade ended 1949 underlined the need for regulating and controlling commercial banks.

The banking companies act was passed in February1949, which was subsequently amended to read as banking regulation act, 1949. This act provided the legal framework for regulation of the banking system by RBI. The largest bank imperial bank of India – was taken over by the RBI in 1955 and rechristened as State Bank of India, followed by inclusion of its Associate Banks in 1959. With a view to bring commercial banks into the mainstream of economic development, the Government issued an ordinance on 19 July 1969. The first phase of nationalization took place in 1969 where 14 banks were nationalized.

Meaning of bank: - bank is a lawful organization, which accepts deposits that can be withdrawn on demand. It also lends money to individuals and business houses that need it.

Role of banking: - it acts as an intermediary between people having surplus money and those requiring money for various business activities. It facilitates business transactions through receipts and payments by cheques instead of currency. It provides loans and advances to businessmen for short term and long term purposes. It also facilitates both import and expoet transactions. It helps in national development by providing credit to farmers small scale industries and self employed people as well as to large business houses which lead to balanced economic development in the country. It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles etc.

Public sector banks: - These are banks where majority stake is held by the government of India or Reserve bank of India. Example of public sector banks is State Bank of India, Corporation Bank, Bank of baroda and Dena bank, etc. there are at present 27 Public sector banks in India including Bhartiya Mahila Bank.

Private sector banks:- In case of private sector banks majority of share capital of the bank is held by private individuals. These Banks are registered as companies with limited liability. For example: The ICICI Bank, Axis Bank, federal Bank etc. the minimum capital for the private sector banks must be 33 crore.

Foreign Banks: - These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American express Bank, Standard & Chartered Bank, Gridlay’s Bank, etc. The number of foreign Banks operating in our country has increased since the financial sector reforms of 1991. According to a report by RBI there are 47 foreign Banks branches in India as on March 31, 2013.

Banking Ombudsman Scheme:-

- The banking ombudsman scheme makes available an expeditious and inexpensive forum to bank customers for resolution of complaints related to certain services rendered by banks. The Banking Ombudsman Scheme was introduced under section 35A of the Banking Regulation Act 1949 with effect from 1995. All banks come under it.

- The Banking ombudsman is a senior official appointed by RBI to receive and solve complaints against deficiency in certain banking services.

- One can file a complaint before the banking ombudsman if the reply to the representation made by the customer to his bank is not received within one month from the date on which bank received the complaint. The banking ombudsman doesn’t charge any fee for this. The highest appellate authority is Deputy governor of RBI.

Reserve bank of India: - The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.

The central office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937. The central office is where the governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the government of India.

Organization and management: - The Reserve Bank of India `is managed by the central board of Directors. Presently, this board consists of 20members. Besides Governor and four deputy governors, four Directors are nominated, each by the four local boards. Besides, 10 Directors and 1 government officer are nominated by the government of India. These Boards have been established, in Mumbai, Kolkata, Chennai and New Delhi respectively.

According to the Reserve Bank of India Act, the term of nominated members is for 4 years. Governor and Deputy Governors are appointed by the Government for a period of 5 years. Central board of Directors must hold at least 6 meetings in a year and at least 1 meeting in 3 months. Bank’s Head office is located in Mumbai. The Bank has 22 regional offices, most of which are in a state capitals.

Monetary Policy: - RBI formulates implements and monitors the monetary policy. Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit. The goal: achieving specific economic objectives, such as low and stable inflation and promoting growth.

Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth.

Direct Instruments

Cash Reserve Ratio (CRR):- CRR is the amounts of funds that the banks have to keep with RBI. The share of net demand and time liabilities that banks must maintain as cash balance with the Reserve Bank. If RBI increases CRR, the available amount with the banks comes down. RBI is utilizing this procedure (increase of CRR), to drain out the excessive money from the banks.

Statutory liquidity ratio (SLR):- SLR is a term used in the regulations of banking in India. It is the amount which a bank has to maintain in the form of cash, gold or approved securities balance in current amount with other commercial bank. Main use of SLR is used to control Inflation and propel growth. Through SLR rate the money supply in the system can be controlled effectively. The quantum is specified as some percentage of the total demand and time liabilities of a bank. This percentage is fixed by the Reserve Bank of India. Presently the SLR is 23%. The 23% is the minimum SLR (the statutory requirements to park their money in government bonds) limit the RBI can fix at present.

Refinance Facilities: - Sector-specific refinance facilities (e.g., against lending to export sector) provided to banks.

Indirect instruments

Liquidity adjustments facility (LAF):- It consist of daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection) and reserve repo (liquidity absorption) auction operations, using governments securities as collateral.

Open Market Operations (OMO):- outright sales/purchases of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term.

Market Stabilization scheme (MSS):- This Instrument for monetary management was introduced in 2004. Liquidity of a more enduring nature arising from large capital flows is absorbed through sale of short –dated government securities and treasury bills.

Repo rate: - repo rate is the rate at which RBI subscribe govt securities to the other scheduled commercial bank OR this is the interest at which RBI lends money to banks against govt securities and for short term period, upto 90 days.

Reverse Repo Rate:- a reverse repo is simply the same repurchase agreement as described from the buyer’s viewpoint and not the seller’s. We can say that reverse repo rate is the rate at which RBI pays to commercial banks when they park their excess liquidity with RBI.

Bank rate: - It is the rate at which the Reserve Bank of India is ready to buy or rediscount bills of exchange or other commercial papers. It also signals the medium-term stance of monetary policy. Lower bank rates can help to expand the economy, In case when unemployment is high, by reducing the cost of funds for borrowers. Contrary, higher bank rates help to prevail in the economy, when Inflation is higher than desired.

Marginal standing facility (MSF):- This is a rate at which banks borrow funds overnight from the Reserve Bank of India against approved government security bonds. This MSF came into force in May 2011.Under marginal standing facility (MSF) banks avail funds from the RBI on overnight basis against their excess Statutory liquidity ratio (SLR) holdings. Eligibility: all scheduled commercial banks having current account and SGL account with Reserve bank, Mumbai will be eligible to participate in the MSF scheme.

Timing… The facility will be available on all working days in Mumbai, excluding Saturdays between 3:30p.m and 4:30p.m.

Term Repo:- On October 08,2013 RBI decided to conduct auctions for Term Repos of 7-day and 14-day tenor, for a notified amount, through variable rate auction mechanism. The 14 day term repo will be conducted every reporting Friday and the 7 that term repo would be conducted on every non reporting Friday. The rate of auction has to be higher than the repo rate.

Money Market Instruments:-

Treasury bills: - These are the lowest risk category instruments for the short term. RBI issues treasury bills (T-Bills) at a prefixed day and for a fixed amount. There are 3 types of treasury bills. -91-day T-Bill: maturity is in 91 days, it is auctioned on every Friday of every week and the notified amount for auction is Rs.100 crore. -182-day T-Bill: maturity is in 182 days, it is auctioned on every alternative Wednesday, which is not a reporting week and the notified amount for auction is Rs.500 crore. -364- T-Bill: maturity is 64 days, it is auctioned on every alternative Wednesday which is reporting week and the notified amount for the auction is Rs.500 crores.

Certificates of deposits (CD):- after the treasury bills the next lowest risk category investment option is Certificate of Deposit (CD) issued by banks and financial institution (FI). Allowed in1989, D’s were one of RBI’s measures to deregulate the cost of funds for banks and FLs. A certificate of deposits is a negotiable promissory note, secure and short term, of up to a year, in nature.

A CD is issued at a discount to the face value, the discount rate being negotiated between the issuer and the investor. Although RBI allows CDs up to 1 year maturity, the maturity most quoted in the market is for 90 days.

Commercial Papers: - These are negotiable short term unsecured promissory notes with fixed maturities, is issued by well-rated organizations. These are generally sold on discount basis. Organizations can issue CPs either directly or through banks or merchant banks [called as dealers]. These instruments are normally issued in the multiples of five crores for 30/45/60/90/120/180/270/364 days.

Call Money:- call or notice money is an amount borrowed or lent on demand for a very short period. If the period is greater than one day and up to 14 days it is called notice money, otherwise the amount is known as call money. No collateral security is needed to cover these transactions.

Commercial Bills:- bills of exchange are negotiable instruments drawn by the seller or drawer of the goods on the buyer or drawee of the good for the value of the goods delivered. These bills are called trade bills. These trade bills are commercial bills when they are accepted by commercial banks.

Dated government securities:- these are securities issued by government of India and state govts. The date of maturity is specified in these securities therefore thay are known as dated govt. securities. The government borrows funds through the issue of long term dated securities, the lowest risk category in the economy.

Money Market concepts……

Issued Capital: - it is that part of a company’s capital that has been subscribed to bu shareholders.

Paid up Capital:- it is that part of issued capital of a company, paid up by the shareholders (promoters). It is that part, invested by promoters. Therefore, an issued capital may or may not be a paid up capital.

Authorized Capital:- it is the amount of share capital fixed in the memorandum of an association and the articles of association of a company as required by the company’s act. They are also known as nominal capital.

Net Asset Value (NAV):- the investment efficiency of the mutual fund can be measured in terms of the NAV and net sales. NAV is the indicator of the investment performance and it indicated the amount each unit holder will; get per unit on redemption or winding uo of mutual fund.

Bonds:- a bond is simply a loan, but in the form of a security, although terminology used is rather different. The issuer is equivalent to the borrower, the bond holder to the lender and the coupon to the interest. Bond enables the issuer to finance long term investments with external funds.

Debentures:- a debenture is a long term debt instrument used by government and large companies to obtain funds. It is similar to a bond except the securitization conditions are different. A debenture is usually unsecured in the sense that there are no pledges on specific assets.

Mutual Funds:- a mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short term money market instruments and other securities.