BANKING AND OPERATIONS MANAGEMENT

Unit 1
Banking System in India

➢ An Overview of Banking System in India

The banking system in India is a well-structured framework that plays a crucial role in the
country's economy. Here’s a brief overview:

1. Types of Banks

• Commercial Banks: These include public sector banks (like State Bank of India), private
sector banks (like HDFC Bank), and foreign banks. They offer various services, including
savings and current accounts, loans, and investment products.
• Cooperative Banks: These are smaller banks that operate on a cooperative basis, serving
specific communities or regions.
• Regional Rural Banks (RRBs): Established to provide banking services in rural areas,
focusing on agricultural and rural development.
• Development Banks: Institutions like NABARD (National Bank for Agriculture and Rural
Development) focus on the development of specific sectors, primarily agriculture and rural
development.

2. Regulatory Framework

• The Reserve Bank of India (RBI) is the central bank, responsible for regulating and
supervising the banking sector, issuing currency, managing monetary policy, and ensuring
financial stability.
• The Banking Regulation Act, 1949, provides the legal framework for the functioning of
banks in India.

3. Key Functions

• Accepting Deposits: Banks accept savings, fixed, and recurring deposits from the public.
• Providing Loans: They offer various loan products for personal, business, and agricultural
needs.
• Payment and Settlement: Banks facilitate payments through instruments like cheques,
NEFT, RTGS, and UPI.

4. Financial Inclusion

• The Indian banking system has made significant strides in promoting financial inclusion
through initiatives like Jan Dhan Yojana, which aims to provide banking access to all
segments of society.

5. Technological Advancements

• The sector has embraced digital banking, mobile banking, and fintech solutions to enhance
customer experience and operational efficiency.
 ➢ Commercial Banking Structure:
Meaning

Commercial banks are financial institutions that provide a range of banking services to the general
public and businesses. They primarily engage in accepting deposits and providing loans,
facilitating economic activities by acting as intermediaries between savers and borrowers.

Role of Commercial Banks

1. Financial Intermediation: They mobilize savings from the public and channel those funds
into productive investments, supporting economic growth.
2. Economic Development: By providing credit to various sectors, including agriculture,
small businesses, and infrastructure, commercial banks play a vital role in the overall
development of the economy.
3. Payment System: They facilitate smooth payment and settlement processes, ensuring
efficient transaction systems for individuals and businesses.

Functions of Commercial Banks

1. Accepting Deposits:
o Savings Accounts: Encourage savings by offering interest on deposits.
o Current Accounts: Provide facilities for frequent transactions without interest.
o Fixed and Recurring Deposits: Offer higher interest rates for longer-term savings.
2. Providing Loans:
o Personal Loans: Unsecured loans for personal needs.
o Business Loans: Loans for small and medium enterprises to promote
entrepreneurship.
o Home Loans: Financing for purchasing homes.
o Agricultural Loans: Special loans designed for farmers.
3. Payment and Settlement Services:
o Facilitate various payment methods, including cheques, electronic transfers (NEFT,
RTGS), and digital payments (UPI).
4. Investment Services:
o Offer investment products like fixed deposits, mutual funds, and government
securities.
5. Foreign Exchange Services:
o Facilitate foreign currency transactions and provide services related to international
trade.
6. Advisory Services:
o Provide financial and investment advice to clients, assisting them in managing their
finances effectively.
7. Risk Management:
o Help clients manage financial risks through insurance products and derivatives.
 ➢ Non-Banking Financial Corporations (NBFCs):
Meaning

Non-Banking Financial Corporations (NBFCs) are financial institutions that provide various
financial services similar to banks but do not have a full banking license. They cannot accept
demand deposits (like savings accounts) but can offer loans, asset financing, and investment
services.

Role of NBFCs

1. Financial Intermediation: NBFCs serve as intermediaries between savers and borrowers,

helping channel funds into productive investments.
2. Credit Supply: They provide credit to various sectors, especially to those underserved by
traditional banks, including small and medium enterprises (SMEs) and individuals.
3. Enhancing Financial Inclusion: NBFCs target segments of the population that may not
have access to conventional banking services, contributing to broader financial inclusion.
4. Asset Management: They offer investment products, including mutual funds and
securities, allowing individuals and businesses to manage their investments effectively.
5. Supporting Economic Development: By financing infrastructure projects and supporting
small businesses, NBFCs contribute to overall economic growth.

Growth of NBFCs

• Increasing Demand for Credit: The growing demand for credit, particularly from SMEs
and rural sectors, has driven the expansion of NBFCs.
• Liberalization of Financial Markets: Regulatory reforms and liberalization in the 1990s
paved the way for the establishment and growth of NBFCs.
• Technological Advancements: The use of technology in operations, customer service, and
loan disbursement has significantly enhanced their efficiency and reach.
• Diverse Financial Products: The introduction of varied financial products has attracted a
wider customer base, contributing to their growth.

Types of NBFCs

1. Asset Finance Companies (AFCs): Focus on financing physical assets like vehicles,
machinery, and equipment.
2. Loan Companies (LCs): Primarily engaged in providing loans and advances to
individuals and businesses.
3. Investment Companies (ICs): Invest in securities and shares, aiming to generate returns
for their investors.
4. Microfinance Institutions (MFIs): Provide small loans to low-income individuals or
groups, primarily for income-generating activities.
5. Housing Finance Companies (HFCs): Specialize in providing loans for purchasing,
constructing, or improving residential properties.

Regulations Governing NBFCs

• Regulatory Authority: The Reserve Bank of India (RBI) regulates NBFCs to ensure
stability and protect consumer interests.
• Registration: All NBFCs must be registered with the RBI and comply with specific
operational guidelines.
 • Capital Adequacy Norms: They must maintain a minimum capital adequacy ratio to
mitigate risks and ensure financial stability.
• Prudential Norms: Compliance with asset classification, provisioning for bad debts, and
lending limits is mandatory.
• Reporting Requirements: NBFCs are required to submit regular financial statements and
compliance reports to the RBI.

➢ CAMEL Ratings

CAMEL ratings are a system used to assess the health of banks and credit unions based on five
key components:

• Capital Adequacy: Evaluates the bank's capital relative to its risk.

• Asset Quality: Assesses the quality of the bank's assets, including loans and investments.
• Management Quality: Looks at the competence and effectiveness of the bank’s
management.
• Earnings: Measures profitability and the ability to generate income.
• Liquidity: Examines the bank’s ability to meet short-term obligations.

Each component is rated on a scale from 1 (strong) to 5 (weak). The overall CAMEL rating helps
regulators and investors gauge a bank's financial stability and risk level.

➢ Retail Banking

Retail banking refers to the division of a bank that deals directly with individual consumers and
small businesses. It offers a wide range of financial services and products designed for personal
use. Key features of retail banking include:

1. Accounts: Checking and savings accounts, as well as certificates of deposit (CDs).

2. Loans: Personal loans, auto loans, mortgages, and credit cards.
3. Services: Online banking, mobile banking, and ATM access.
4. Investment Products: Mutual funds, retirement accounts (like IRAs), and other savings
options.
5. Advisory Services: Financial planning and advice for personal finance management.

Retail banking aims to provide convenient access to financial services, helping individuals manage
their finances and achieve their financial goals.

➢ Microfinance

Microfinance is a financial service that provides small loans, savings accounts, and other financial
products to low-income individuals or entrepreneurs who lack access to traditional banking
services. Key features include:

1. Small Loans: Typically, microloans range from a few hundred to a few thousand dollars,
designed to help individuals start or grow small businesses.
 2. Financial Inclusion: Microfinance aims to empower underserved populations, particularly
in developing countries, by providing access to capital.
3. Group Lending: Many microfinance institutions use a group lending model, where
individuals borrow collectively, reducing the risk of default.
4. Support Services: In addition to financial products, microfinance often includes training
and support to help borrowers manage their businesses effectively.

Overall, microfinance seeks to promote economic development and alleviate poverty by enabling
financial independence and entrepreneurship.

➢ Online Banking

Online banking refers to the digital platform that allows customers to conduct financial
transactions and manage their accounts over the internet. Key features include:

1. Account Management: View balances, transaction history, and statements.

2. Funds Transfers: Easily transfer money between accounts or to other users.
3. Bill Payments: Schedule and pay bills online.
4. Mobile Access: Many banks offer apps for banking on smartphones and tablets.
5. Security Features: Robust security measures like encryption and two-factor authentication
to protect user data.

Online banking provides convenience and accessibility, enabling customers to manage their
finances anytime and anywhere without needing to visit a physical branch.

➢ Mobile Banking

Mobile banking refers to the use of mobile devices, such as smartphones and tablets, to access and
manage banking services. Key features include:

1. Account Access: Check balances, view transaction history, and access statements.
2. Fund Transfers: Transfer money between accounts or send money to others quickly.
3. Bill Payments: Pay bills directly from the mobile app.
4. Mobile Deposits: Deposit checks by taking a photo with the device’s camera.
5. Notifications: Receive alerts for transactions, due dates, and account activity.
6. Security: Enhanced security measures like biometric authentication (fingerprint or facial
recognition) and encryption.

Mobile banking offers convenience, allowing users to manage their finances on the go and
providing easy access to essential banking services.

➢ Payment Banks

Payment banks are a type of financial institution that offers a limited range of banking services,
primarily focused on payment and remittance services. They are designed to promote financial
inclusion and provide basic banking services to underserved populations. Key features include:

1. Deposits: Payment banks can accept small deposits but typically cannot offer loans or
credit products.
 2. Payment Services: They facilitate digital payments, fund transfers, and bill payments.
3. Mobile and Online Banking: Payment banks often provide robust mobile and online
banking platforms for easy access.
4. No Credit Risk: Since they don’t engage in lending, payment banks focus on secure
transactions and managing deposits.
5. Regulatory Framework: They operate under specific regulations set by central banks,
which govern their operations and limitations.

Overall, payment banks aim to enhance access to financial services and encourage savings among
low-income individuals and small businesses.

➢ Terms of Payment & settlement system

The terms of payment and settlement systems refer to the processes and mechanisms that facilitate
financial transactions between parties. Here’s a brief overview:

Terms of Payment

1. Payment Methods: Different ways to make payments, such as cash, checks, credit/debit
cards, bank transfers, and digital wallets.
2. Payment Terms: Conditions under which payments are made, including:
o Due Dates: When payment is expected (e.g., upon receipt, net 30 days).
o Discounts: Early payment discounts to encourage prompt payments (e.g., 2/10, net 30).
o Installments: Payments made in multiple parts over time.

Settlement Systems

1. Clearing: The process of reconciling and confirming transactions between parties,

ensuring that funds are available and correctly allocated.
2. Settlement: The actual transfer of funds between banks or financial institutions to finalize
a transaction. This can occur:
o Real-Time: Instantaneous transfer (e.g., RTGS – Real-Time Gross Settlement).
o Batch Processing: Transactions processed at specific intervals (e.g., ACH – Automated
Clearing House).
3. Payment Networks: Platforms that facilitate transactions, such as SWIFT for international
transfers or national payment systems like the ACH in the U.S.

Importance

These systems ensure efficient, secure, and timely processing of transactions, fostering trust and
reliability in financial markets. They are crucial for both individual consumers and businesses,
facilitating smooth economic activity.