24 (A) Banking System in India

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A commercial bank is a type of financial intermediary. It is a financial

intermediary because it mediates between the savers and borrowers.
It does so by accepting deposits from the public and lending money
to businesses and consumers. Its primary liabilities are deposits and
primary assets are Ioan and bonds.
The commercial banking system in, India consists of public sector
banks; private sector banks and cooperative banks.
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They are owned by the Government- either totally or as a majority

stake holder.
State Bank of India and its five associate banks called the State
Bank group
19 nationalised banks
Regional Rural Banks mainly sponsored by Public Sector Banks
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Development Banks are those financial institutions which provide

long term capital for industries and agriculture: Industrial Finance
Corporation of India (IFCI), Industrial Development Bank of India
(IDBI), Industrial Credit and Investment Corporation of India (ICICI)
that was merged with the ICICI Bank in 2000, Industrial Investment
Bank of India (JIBI), Small Industries Development Bank of India
(SIDBI), National Bank for Agriculture and Rural Development
(NABARD),
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In 1969 and again in 1980, Government nationalized private

commercial banking units for channelizing banking capital into rural
sectors; checking misuse of banking capital for speculative purposes;
to shift from class banking to mass banking (social banking); and
to make banking into an integral part of the planning process of
socio economic development in the country. Today, no other
developing country can boast of a banking system comparable to
Indias in terms of geographic coverage, operational capabilities,
range of services and technological prowess.
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Co-operative Banks are organised and managed on the principle of

co-operation, self-help, and mutual help. They function with the rule
of one member, one vote and on no profit, no loss basis. Cooperative banks as a principle do not pursue the goal of profit
maximisation.
Co-operative bank performs all the main banking functions of
deposit mobilisation, supply of credit and provision of remittance
facilities.
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Banking sector reforms in India were conducted on the basis of

Narasimhan Committee reports I and 11(1991 and 1998 respectively).
The recommendations of Narsimham Committee 1991 are:
No more nationalization
create a level playing field between the public sector, private
sector and foreign sector banks.
select few banks like SBI for global operations.
reduce Statutory Liquidity Ratio (SLR) as that will leave more
resources with banks for lending.
reduce Cash Reserve Ratio (CRR) to increase lendable resources of
banks.
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rationalize and better target priority sector lending as a sizeable

portion of it is wasted and also much of it turning into
nonperforming asset.
introduce prudential norms for better risk management and
transparency in operations
deregulate interest rates
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Non-performing assets are those accounts of borrowers who have

defaulted in payment of interest or installment of the principal or
both for more than 90 days.
NPAs are largely a fallout of banks credit appraisal system,
monitoring of end usage of funds and recovery procedures. It also
depends on the overall economic environment, the business cycle
and the legal environment for recovery of defaulted loans. Wilful
default, priority sector problems among the poor etc are also
responsible.
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The following are the RBI guidelines for NPAs classification and
provisioning:
Sub Standard Assets These are those accounts which have been
classified as NPAs for a period less than or equal to 18 months.
Doubtful Assets These are those accounts which have remained as
NPAs for a period exceeding 18 months.
Loss Assets In other words, such an asset is considered
uncollectable and of such little value that its continuance as a
bankable asset is not warranted although there may be some salvage
or recovery value. But a loss asset has not been written off, wholly or
partly.
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To expedite recovery of loans and bring down the non-performing

asset level of the Indian banking and financial sector, the
government in 2002 made a new law that promises to make it much
easier to recover bad loans from willful defaulters. Called the
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002 (SARFAESI), the law has
given unprecedented powers to banks, financial institutions and
asset reconstruction securitization companies to take over
management control of a loan defaulter or even capture its assets.
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Banks lend to different types of borrowers and each carries its own
risk. They lend the deposits of public as well as money raised from
the market- equity and debt.
The intermediation activity exposes the bank to a variety of risks.
Cases of big banks collapsing due to their inability to sustain the risk
exposures are readily available.
Therefore, banks have to-keep aside a certain percentage of capital
as security against the risk of non-recovery.
Basel committee provided the norms called Basel norms to tackle
the risk.
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In 1988 Basel committee gave the first set of norms (Basel I) and
presently the Basel II norms are being complied with by Indian banks
as follows:
by 2008- foreign banks and Indian banks with overseas operation
and
by 2009 other Indian banks except local area banks and RRBs.
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NBFCS are largely referred to as shadow banking system or the

shadow financial system. They have become the major financial
intermediaries. As seen in the note on NBFCS elsewhere, shadow
institutions do not accept demand deposits and therefore are not
subject to the same regulations.
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Many people, particularly those living on low incomes, cannot access

mainstream financial products such as bank accounts and low cost
loans.
This financial exclusion forces them to borrow from the
moneylenders at high cost. Therefore, financial inclusion has been
the goal of governments policy since late sixties.
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It has been devised by the RBI in 2009. This index is simple average of
five sub indices chosen for banking stability map that RBI has
constructed. Banking Stability Map has used five key risk dimensions
like operational efficiency, asset- quality, liquidity and profitability.
These are based on capital adequacy ratio, cost-to-income ratio,
nonperforming loans to total loans ratio, liquid assets to total assets
ratio and net profit to total assets ratio.
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Even though many banks failed and some survived on huge bailouts in
the west due to the global financial crisis, Indian banking is almost
unscathed for the following reasons.
Public sector banks- 27- dominate.
FDI is 74% in private-banks but voting rights are only 10%.
We adopted capital account convertibility in a measured manner.
RET has been conservative and regulated the banks well. Banks were not
allowed to invest in risky instruments like credit default swaps (CDS).
Basel norms, SER and CRR levels were well maintained.
Prudential norms also saved the Indian banks from recklessness.
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The Committee on Financial Inclusion headed by Shri C. Rangarajan,

submitted its report in 2008 and recommended that the semi-urban
and rural branches of commercial banks and Regional Rural Banks
may set for themselves a minimum target of covering 250 new
cultivator and non-cultivator households per branch per annum with
an emphasis on financing marginal farmers and poor non- cultivator
households for achieving financial inclusion.
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It is the minimum rate of interest that a bank is allowed to charge

from its customers. Unless mandated by the government, RBI rule
stipulates that no bank can offer loans at a rate lower than BR to any
of its customers.
United Linked Invest Plans (ULIPs) are the insurance products in

which payment is made partly for premium (insurance) and rest of
it invested in the capital market like a Mutual Fund investment it led
to jurisdictional disputes between SEBI and IRDA. SEBI says that a
huge amount of ULIP is invested in stock market. Government
promulgated an ordinance to set up a mechanism to regulate such
jurisdictional disputes.
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The government has launched Swabhimaana programme to ensure banking facilities in habitation with a
population in excess of 2,000, by March 2012. The programme will
use various models and technologies, including branchless banking
through business correspondents. The government has decided to
pay banks Rs 140 for every no frills account they open as part of the
financial inclusion plan.
The initiative would enable small and marginal farmers obtain credit
at lower rates from banks and other financial institutions. This would
insulate them from exploitation of the money lenders
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Financial
Stability and Development Council is apex-level body

constituted by government of India on an Act of Parliament in 2010.
The idea to create such a super regulatory body was first mooted by
Raghuram Rajan Committee and Deepak Parekh Committee. The
recent global economic meltdown has put pressure on governments
and institutions across globe to regulate the economic assets. This
council is seen as an Indias initiative to be better prepared to
prevent such incidents in future. The new body envisages to
strengthen and institutionalise the mechanism of maintaining
financial stability, financial sector development,
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2009
Q. Consider the following pairs:
Large Bank
Country of Origin
1. ABN Amro Bank
USA
2. Barclays Bank
UK
3. Kookmin Bank
Japan
Which of the above pairs is/are correctly matched?
(a) 1 only
(b) 2 only
(c) 1 and 2
(d) 2 and 3
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Q. In the context of independent Indias economy, which one of the following was the
earliest event to take place?
(a) Nationalization of Insurance companies
(b) Nationalization of State Bank of India
(c) Enactment of Banking Regulation Act
(d) Introduction of First Five-Year Plan
2010
Q. Which of the following terms indicates a mechanism used by commercial banks
for providing credit to the government?
(a) Cash Credit Ratio
(b) Debt Service Obligation
(c) Liquidity Adjustment Facility
(d) Statutory Liquidity Ratio
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Q. With reference to the Non-banking Financial Companies (NBFCs) in India, consider

the following statements:
1. They cannot engage in the acquisition of securities issued by the government.
2. They cannot accept demand deposits like Savings Account.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2 (d) Neither 1 nor 2
Q. In India, the interest rate on savings accounts in all the nationalized commercial
banks is fixed by
(a) Union Ministry of Finance
(b) Union Finance Commission
(c) Indian Banks Association
(d) None of the above
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Q. When the Reserve Bank of India announces an increase of the Cash Reserve Ratio,
what does it mean?
(a) The commercial banks will have less money to lend.
(b) The Reserve Bank of India will have less money to lend.
(c) The Union Government will have less money to lend.
(d) The commercial banks will have more money to lend.
Q. With reference to the institution of Banking Ombudsman in India, which one of
the statements is not correct?
(a) The Banking Ombudsman is appointed by the Reserve Bank of India.
(b) The Banking Ombudsman can consider complaints from Non-Resident Indians
having accounts in India.
(c)The orders passed by the Banking Ombudsman, are final and binding on the
parties concerned.
(d)The service provided by the Banking Ombudsman is free of any fee.
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Q. Consider the following statements:

The functions of commercial banks in India include
1. Purchase and sale of shares and securities on behalf of customers.
2. Acting as executors and trustees of wills.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
2011
Q. Why is the offering of teaser loans by commercial banks a cause of economic
concern?
1. The teaser loans are considered to be an aspect of sub-prime lending and
banks may be exposed to the risk of defaulters in future.
2. In India, the teaser loans are mostly given to inexperienced entrepreneurs to
set up manufacturing or export units.
(a) 1 only
(b) 2 only
(c) Both 1 and 2 (d) Neither 1 nor 2
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Q. In India, which of the following have the highest share in the disbursement of credit
to agriculture and allied activities?
(a) Commercial Banks
(b) Cooperative Banks
(c) Regional Rural Banks
(d) Microfinance Institutions
Q. The lowering of Bank Rate by the Reserve Bank of India leads to
(a) More liquidity in the market
(b) Less liquidity in the market
(c) No change in the liquidity in the market
(d) Mobilization of more deposits by commercial banks
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2012
Q. The basic aim of Lead Bank Scheme is that

(a) Big banks should try to open offices in each district
(b) There should be stiff competition among the various nationalized banks
(c) Individual banks should adopt particular districts for intensive development
(d) All the banks should make intensive efforts to mobilize deposits
Q. The Reserve Bank of India (RBI) acts as a bankers bank. This would imply which
of the following?
1. Other banks retain their deposits with the RBI.
2. The RBI lends funds to the commercial banks in times of need.
3. The RBI advises the commercial banks on monetary matters.
Select the correct answer using the codes given below:
(a) 2, and 3 only
(c) 1 and 3 only
(b) 1 and 2 only
(d) 1, 2 and 3
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24 (A) Banking System in India

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www.iasexamportal.

A commercial bank is a type of financial intermediary. It is a financial

They are owned by the Government- either totally or as a majority

Development Banks are those financial institutions which provide

In 1969 and again in 1980, Government nationalized private

Co-operative Banks are organised and managed on the principle of

Banking sector reforms in India were conducted on the basis of

rationalize and better target priority sector lending as a sizeable

Non-performing assets are those accounts of borrowers who have

To expedite recovery of loans and bring down the non-performing

NBFCS are largely referred to as shadow banking system or the

Many people, particularly those living on low incomes, cannot access

The Committee on Financial Inclusion headed by Shri C. Rangarajan,

It is the minimum rate of interest that a bank is allowed to charge

United Linked Invest Plans (ULIPs) are the insurance products in

Stability and Development Council is apex-level body

Q. With reference to the Non-banking Financial Companies (NBFCs) in India, consider

Q. Consider the following statements:

Q. The basic aim of Lead Bank Scheme is that

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