Economy Lecture 2

1. Theory:
1. evolution of banking system
2. Nationalization
3. SLR, CRR, PSL
4. Narsimhan I, II
5. MCQ
2. Current:
1. New license (brief)
2. Mahila Bank (Detail)
3. MCQ
3. Mains answer writing
Financial intermediaries
Barter => Double coincidence of wants
Money => circular flow of income
Financial intermediaries
Banking institutions
Non-banking institutions

Evolution (Pre independence)
Firangi Banks
Bombay, Bengal, Madras Presidency=> Imperial Bank21 =>SBI55
British Army, Bureaucrats
Swadeshi Banks
Allahabad Bank, PNB, BoB, Canara
Focus: Foreign trade, Merchants
Local=>Shroff, Moneylenders.
Financial inclusion _____.
Evolution (Pre independence)
Birth of RBI: why?
1. By 30s: 1200+ banks
2. Only company law
3. 30s Great depression =>defaults
4. 34 RBI


Evolution (Post-independence)
SBI, ICICI, PNB, BoB.
Focus: merchant, industrial houses
Branch increase yes
Rural penetration no
FYP achievement
Nexus of industrial houses vs banks.
Nationalization of Banks

Financial inclusion:
RRB
Cooperative banks
NABARD
55 1 Imperial bank
69 14 50 cr. deposit
80 6 200 Andra,
Vijaya, Oriental
Mock Question
Skip
Attempt
Mark n review
Mock Question (2013)
Q. In context of independent India's economy, which one of
the following was the earlier event to take place?
A. Nationalization of insurance company
B. Nationalization of state bank of India
C. Enactment of Banking regulation Act
D. Introduction of first Five year plan.
1. Skip 2. Attempt 3. Mark n Review
Mock Question (2009)
Q. In context of independent India's economy, which one of
the following was the earlier event to take place?
A. Nationalization of insurance company: 55-56
B. Nationalization of state bank of India: 55
C. Enactment of Banking regulation Act: 49
D. Introduction of first Five year plan: 51
Nationalization of Banks: problems
Administered interest rate
political interference, loan mela=>NPA=>Civil Court.
Trade union, VRS
high reserve requirement: CRR 15%, SLR 40%=>
hard to get loans for business=> BoP crisis
Nationalization: high reserve ratio
Deposit Example
s
Time Deposit FDRD
Demand Deposit CASA
Net Demand and Time
Liabilities (NDTL)
+100 cr.
NBFC cannot accept Demand
Deposit
CRR, SLR computed on NDTL

Nationalization: high reserve ratio: CRR
Deposit Examples
Time Deposit FDRD
Demand Deposit CASA
Net Demand and Time
Liabilities (NDTL)
+100 cr.
Reserve
CRR (min 3%) (-) 15 [no profit]
Cash Reserve Ratio
Both sch. & non
Penalty
No profit. Except 1999.
Right now 4%
Nationalization: high reserve ratio SLR
Deposit Examples
Time Deposit FDRD
Demand Deposit CASA
Net Demand and Time
Liabilities (NDTL)
+100 cr.
Reserve
CRR (min 3%) (-) 15 [no profit]
SLR (min 25%) (-) 40 [some profit]
Money left with bank =45
Statutory liquidity Ratio
All banks (sch, Non-sch.)
Cash, gold, RBI approved
securities
Right now 23%

Nationalization: high reserve ratio (PSL)
Deposit Examples
Time Deposit FDRD
Demand Deposit CASA
Net Demand and Time
Liabilities (NDTL)
+100 cr.
Reserve
CRR (min 3%) (-) 15 [no profit]
SLR (min 25%) (-) 40 [some profit]
Money left with bank =45
PSL (40%) =45 x 0.4=18
Left for normal borrowers =45-18=27 cr.
Priority sector lending
40% of net credit
Yearly
jain
Mock Q from 2012s
CSAT
Which of the following measures would result in an increase in the
money supply in economy? (2012)
1. Purchase of government securities from public by central bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank
4. Sale of government securities to the public by central bank.
Answer choice
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4


1. Skip 2. Attempt 3. Mark n Review
Which of the following measures would result in an increase in the
money supply in economy? (2012)
1. Purchase of government securities from public by central bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank
4. Sale of government securities to the public by central bank.
Answer choice
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4


Which of the following measures would result in an increase in the
money supply in economy? (2012)
1. Purchase of government securities from public by central bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by government from the central bank.
4. Sale of government securities to the public by central bank.
Answer choice
A. Only 1
B. 2 and 4
C. 1 and 3
D. 2, 3 and 4


Nationalization: high reserve ratio (before
LPG)
Deposit Examples
Time Deposit FDRD
Demand Deposit CASA
Net Demand and Time
Liabilities (NDTL)
+100 cr.
Reserve
CRR (min 3%) (-) 15 [no profit]
SLR (min 25%) (-) 40 [some profit]
Money left with bank =45
PSL (40%) =45 x 0.4=18
Left for normal borrowers =45-18=27 cr.
Consequences?
1. High cost of credit
2. low expansion => jobs,
taxations, export ($$)
3. SLR not lowered
4. Government borrowing
5. Fiscal deficit, BoP

1991: Narsimhan Committee I (GoI)
Deregulation of interest rate=>BPLR=>Base Rate.
PSL @normal interest rates=> interest subvention
Debt recovery tribunal => 1993 =>SARFAESI 2002
Liberate Branch expansion policy
Reduce CRR, SLR=>(15,40)=>(4,23)
Private / foreign banks=> 93 =>01 =>13
NBFC regulatory framework
1992=>SBI shares sold. =>GoI ~60%



1998: Narsimhan Committee II (GoI)
1. NPA 0%, VRS
2. Legal reforms for loan recovery. =>SARFAESI 2002
3. Computerization, electronic fund transfer, legal framework => Payment and
Settlement Act=>Retail (ECS, NEFT, Card) + Wholesale (RTGS)
4. Permit new private /foreign banks.



Before After
- Banks
- NBFC
- DFI (Development Financial
institutions)- ICICI, IDBI, IFCI etc.
1. Banks
2. NBFC
1998: Narsimhan Committee II (GoI)



Before After
1. Banks
2. NBFC
3. DFI (Development
Financial
institutions)- ICICI,
IDBI, IFCI etc.
1.Banks
2.NBFC
Private banks 90s-2001
Guideline Operational Who?
93 94-95 1. ICICI
2. HDFC
3. UTI=>Axis (07)
4. IDBI
5. Indus
6. DCB
7. Global Trust Bank (2001 scam, OBC)
8. Bank of Punjab=>Centurion bank
9. Centurian Bank=>(HDFC)
10. Times Bank (HDFC)
01 03-04 1. Kotak Mahindra
2. Yes Bank
Private Bank License (2013)
Feb13- RBI notification
26=> Ambani, Birla, Bajaj, Tata, Muthoot, Indian post
Minus (TATA, Videocon)
+1 KC Land and finance ltd.
=25 left.
Bimal Jalan Committee
First meeting Nov13=> Feb14
=>Mahila Bank Sep13 (public sector)



Banking 2014
Bimal,
private
Bank
License
Nachiket,
Financial
inclusion
Mahila
Bank
Bharatiya Mahila Bank (2013)
Budget 2013; 1000 crore Rs. (100% State
Owned)
Nothing new: 80s Pak, Tanzania 2009
MBN Rao Panel blue print (Canara)
Sept. License. Indira Gandhis bday
(November 19)
HQ Delhi but launched from Mumbai due to
model code of conduct.
Usha Anantha-Subramanian
BoD=all women.
Staff, deposit= male + female; BoB, PNB
deputation.
Loan => predominantly to women.
Bharatiya Mahila Bank (2013)
kitchen loans, education loans, small
home-based catering businesses.
loans up to Rs 1 crore without collateral
CGTMSE (MSME Ministry)
Credit Guarantee Fund Trust for Micro
and Small Enterprises (CGTMSE).
PSB 4%
Bharatiya Mahila Bank 4.5%; (1 lakh+) 5%
Kotak 6%
Yes Bank 8%
Bharatiya Mahila Bank (2013)
Skill development, financial literacy
among women.
Core Banking Software by FIS
(American Co.)
Most banks use Finacle by Infosys.
Target
1. 25% branches in unbanked rural
areas.
2. By March 2014: 25 branches
3. By 2020: 700+ branches; 60k cr
business


Bakwaas Sawal
Who Among the following is the
chairman of Bharatiya Mahila
Bank?
A. Arundhati Bhattacharya
B. Aruna Bahuguna
C. Usha Ananthasubramanium
D. Shikha Sharma
Correct Statements about
Bharatiya Mahila Bank?
A. It was inaugurated in Mumbai
B. On 25
th
November, the birth
anniversary of Indira Gandhi
C. Both A and B
D. Neither A nor B.
2TF
Correct Statements about Bharatiya Mahila Bank?
A. Bharatiya Mahila Bank is owned by a consortium of Government of
India, NABARD and financial institutions.
B. For the first three years, Bharatiya Mahila bank will be exempted
from CRR and SLR requirements.
C. Both A and B
D. Neither A nor B
Assertion reasoning
(A) Bharatiya Mahila Bank will bring down the gender divide in financial
inclusion.
(R) Bharatiya Mahila bank will cater only female depositors and borrowers.
Options
A. Both the statements are individually true and Statement R is the correct
explanation of Statement A.
B. Both the statements are individually true but Statement R is not the
correct explanation of Statement A.
C. Statement A is true but Statement R is false.
D. Statement A is false but Statement R is true.
3TF
Correct Statements about Bharatiya Mahila Bank?
1. They offers higher interest rates to female depositors over male depositors.
2. The loan interest rates in Bharatiya Mahila bank, are decided by government of
India.
3. Government has provided the initial capital in this bank from Nirbhaya Fund.
Correct statements
A. Only 1 and 3
B. Only 2 and 3
C. only 1 and 2
D. None of Above

1. Skip 2. Attempt 3. Mark n Review
3TF how to solve:
Correct Statements about Bharatiya Mahila Bank?
1. They offer higher interest rates to female depositors over male depositors.
2. The loan interest rates in Bharatiya Mahila bank, are decided by government of
India.
3. (WRONG) Government has provided the initial capital in this bank from
Nirbhaya Fund. (Hindu 10 Jan 2014)
Answer Choices.
A. Only 1 and 3
B. Only 2 and 3
C. only 1 and 2
D. None of Above

3TF how to solve:
Correct Statements about Bharatiya Mahila Bank?
1. (WRONG) They offer higher interest rates to female depositors over male
depositors. (Hindu)
2. (WRONG) The loan interest rates in Bharatiya Mahila bank, are decided by
government of India. (Base rate theory)
3. (WRONG) Government has provided the initial capital in this bank from
Nirbhaya Fund. (Hindu 10 Jan 2014)
Answer Choice
A. Only 1 and 3
B. Only 2 and 3
C. only 1 and 2
D. None of Above

Mains
GS: 250 marks, 3 hours = 60 x 3 =180 minutes

Mark Words Timelimit 180 Timelimit 170
1 20 0.72 0.68
5 100 3.6 3.4
10 200 7.2 6.8
250 5000 180 170
Mains
Discuss the importance of Bharatiya Mahila Bank
in bringing down the gender divide in financial
inclusion. (5m | 100 words)
Discuss the importance of Bharatiya Mahila Bank in bringing down the gender divide in financial
inclusion. (5m | 100 words)
FIRST in World
Men can open accounts, interest rates
Usha Chairman, HQ Delhi.
Financial inclusion? Gender Divide?
2013, BMB started operation with 1k crore capital from government of India.
Low cost education loans for girls.
Most property titles are in the name of male family member.
Loans without collateral for women entrepreneurs, upto 1 crore, for catering,
creches and other microbiz.
Targets 2020. (60k crore, 700+ branch), Rural branching 25%
Run campaign on financial literacy, awareness.
SHG, specific schemes.
Conclusion!!
Interview
1. Bharatiya Mahila Bank is a mere symbolic exercise
for feel good publicity. Do you agree? Yes/No and
Why?
Bharatiya Mahila Bank (2013)-Anti points
SBI, PNB, BoB better suited, Govt. already majority shareholder.
25% rural branching: duplication of effort.
Higher Staff deputation
In the first phase focus on state capitals and UT.
4.5%/5% interest pan India presence.
Overall a Tokenism/symbol but not substance.