Banking Structure in India

Bank
A bank is a financial institution that provides
banking and other financial services to their
customers. A bank is generally understood as an
institution which provides fundamental banking
services such as accepting deposits and providing
loans. There are also nonbanking institutions that
provide certain banking services without meeting
the legal definition of a bank. Banks are a subset of
the financial services industry.
Currently the Indian banking industry has a diverse
structure. The present structure of the Indian
banking industry has been analyzed on the basis of
its organized status, business as well as product
segmentation

Bank
The entire organised banking system comprises
of scheduled and non-scheduled banks. Largely,
this segment comprises of the scheduled banks,
with the unscheduled ones forming a very small
component.
Banking needs of the financially excluded
population is catered to by other unorganised
entities distinct from banks, such as,
moneylenders, pawnbrokers and indigenous
bankers.

Structure of Organised Indian Banking System

Reserve Bank of India

The reserve bank of India is a central bank and was
established in April 1, 1935 in accordance with the
provisions of reserve bank of India act 1934. The central
office of RBI is located at Mumbai since inception.
Though originally the reserve bank of India was privately
owned, since nationalization in 1949, RBI is fully owned
by the Government of India.
The RBI Act 1934 was commenced on April 1, 1935. The
Act, 1934 provides the statutory basis of the functioning
of the bank. The bank was constituted for the need of
following:
To regulate the issues of banknotes.
To maintain reserves with a view to securing monetary
stability
To operate the credit and currency system of the country
to its advantage.

Function of RBI
Bank
of
Issue:
The
RBI
formulates,
implements, and monitors the monitory policy.
Its main objective is maintaining price stability
and ensuring adequate flow of credit to
productive sector.
Regulator-Supervisor of the financial system:
RBI prescribes broad parameters of banking
operations within which the countrys banking
and financial system functions. Their main
objective is to maintain public confidence in the
system, protect depositors interest and provide
cost effective banking services to the public.

Function of RBI
Manager of exchange control: The manager
of exchange control department manages the
foreign exchange, according to the foreign
exchange
management
act,
1999.
The
managers main objective is to facilitate external
trade and payment and promote orderly
development and maintenance of foreign
exchange market in India.
Issuer of currency: A person who works as an
issuer, issues and exchanges or destroys the
currency and coins that are not fit for circulation.
His main objective is to give the public adequate
quantity of supplies of currency notes and coins
and in good quality.

Schedule & Unscheduled Bank

The commercial banking structure in India consists of
scheduled commercial banks, and unscheduled banks.
Scheduled Banks: Scheduled Banks in India constitute
those banks which have been included in the second
schedule of RBI act 1934. RBI in turn includes only those
banks in this schedule which satisfy the criteria laid down
vide section 42(6a) of the Act.
Scheduled banks in India means the State Bank of India
constituted under the State Bank of India Act, 1955 (23 of
1955), a subsidiary bank as defined in the s State Bank of
India (subsidiary banks) Act, 1959 (38 of 1959), a
corresponding new bank constituted under section 3 of the
Banking
companies
(Acquisition
and
Transfer
of
Undertakings) Act, 1980 (40 of 1980), or any other bank
being a bank included in the Second Schedule to the Reserve
bank of India Act, 1934 (2 of 1934), but does not include a
co-operative bank.

Schedule & Unscheduled Bank

For the purpose of assessment of
performance of banks, the Reserve Bank
of India categories those banks as public
sector banks, old private sector banks,
new private sector banks and foreign
banks, i.e. private sector, public sector,
and foreign banks come under the
umbrella of scheduled commercial
banks.

Schedule & Unscheduled Bank

Non-Scheduled Banks:
Non-scheduled banks also function in the Indian banking
space, in the form of Local Area Banks (LAB). As at endMarch 2009 there were only 4 LABs operating in India.
Local area banks are banks that are set up under the
scheme announced by the government of India in 1996,
for the establishment of new private banks of a local
nature; with jurisdiction over a maximum of three
contiguous districts.
LABs aid in the mobilisation of funds of rural and semi
urban districts. Six LABs were originally licensed, but the
license of one of them was cancelled due to irregularities
in operations, and the other was amalgamated with Bank
of Baroda in 2004 due to its weak financial position.

Commercial Bank
Commercial
Banks: Commercial
banks
mobilise savings of general public and make
them available to large and small industrial and
trading units mainly for working capital
requirements. Commercial banks in India are
largely Indian-public sector and private sector
with a few foreign banks. The public sector
banks account for more than 92 percent of the
entire banking business in Indiaoccupying a
dominant position in the commercial banking.
The State Bank of India and its 7 associate
banks along with another 19 banks are the
public sector banks.

Commercial Bank
Commercial Bank in India fall under different
categories on the basis of their ownership &
control over management.
Public Sector Banks:-Public sector in Indian
banking emergedto its present positionin three
stages.First,the conversion of the then existing
Imperial Bank of India into the State Bank of India
in 1955,followed by the taking over of the seven
state associated banks as its subsidiary
banks,second the nationalization of 14 major
commercial banks on July 19,1969 and last,the
nationalization of 6 more commercial banks on
April 15,1980.Thus 27 banks constitute the
Public sector in Indian Commercial Banking.

Commercial Bank
Private
Sector
Banks:-After
the
nationalization of major banksin the
private sectorin 1969and 1980,no new
bank could be set up in India for about
two decades,though there was no legal
bar to that effect.
The
Narasimham
Committee
on
Financial Sector Reforms recommended
the establishment of new banksin
India.Reserve
Bank
of
India,thereafter,issued guidelines for the

Commercial Bank
Foreign
Bank:-Foreign
Commercial
Banks are the branchesin India of the
joint
stock
banks
incorporated
abroad.Their number has increased to
forty as on 31stMarch, 2002.These
banks,besides financing the foreign trade
of the country,undertake normal banking
business in the country as well.

Regional Rural Banks

The Regional Rural Banks (RRBs) the newest
form of banks, came into existence in the
middle of 1970s (sponsored by individual
nationalized commercial banks) with the
objective of developing rural economy by
providing credit and deposit facilities for
agriculture and other productive activities of all
kinds in rural areas.
The emphasis is on providing such facilities
to small and marginal farmers, agricultural
laborers, rural artisans and other small
entrepreneurs in rural areas.

Feature Regional Rural Banks

(i) their area of operation is limited to a specified
region, comprising one or more districts in any
state;
(ii) their lending rates cannot be higher than the
prevailing lending rates of cooperative credit
societies in any particular state;
(iii)the paid-up capital of each rural bank is Rs. 25
lakh, 50 percent of which has been contributed
by the Central Government, 15 percent by State
Government and 35 percent by sponsoring
public sector commercial banks which are also
responsible for actual setting up of the RRBs.

Cooperative Bank
Cooperative banks are so-called because they
are organised under the provisions of the
Cooperative Credit Societies Act of the states.
The major beneficiary of the Cooperative
Banking is the agricultural sector in particular
and the rural sector in general.
The cooperative credit institutions operating
in the country are mainly of two kinds:
agricultural (dominant) and non-agricultural.
There are two separate cooperative agencies
for the provision of agricultural credit: one for
short and medium-term credit, and the other
for long-term credit. The former has three tier
and federal structure.

Cooperative Bank
At the apex is the State Co-operative Bank
(SCB) (cooperation being a state subject in
India), at the intermediate (district) level are
the Central Cooperative Banks (CCBs) and at
the village level are Primary Agricultural Credit
Societies (PACs).
Long-term agriculture credit is provided by the
Land Development Banks. The funds of the RBI
meant for the agriculture sector actually pass
through SCBs and CCBs. Originally based in
rural sector, the cooperative credit movement
has now spread to urban areas also and there
are many urban cooperative banks coming
under SCBs.

Balance Sheet of Commercial

Bank
Balance sheet of a commercial bank is a
statement of its assetsand liabilities at a
particular point of time.It throws light on the
financial healthor otherwise of the bank.
Another way of viewing a balance sheet is
as a statement of the sourcesand uses of bank
funds.Banks obtain funds in the form of
deposits
(fixed,savingsand
current)
by
borrowing from other banks (RBI,commercial
banks,
etc.)and
by
obtaining
equity
fundsfrom the owners (i.e. the shareholders of
the bank) through the capital account.All
these constitute the liabilities of the
bank.Banks use these funds to grant

Balance Sheet of Commercial

Bank
According to section 29 of the Banking
Regulation Act,1949,attheexpirationof
eachcalendar
yearevery
banking
company
incorporatedin
India,in
respect of all business transacted
through its branchesin India,shall
prepare with reference tothat yearor
period,as the case may be,a balance
sheetand profitand loss account as on
the last working day of the yearor the
period,as the case may be.

Item of the Balance Sheet of a Bank

The balance sheet of a commercial bank like any
other
balance
sheet
comprises
two
sides;conventionally
the
left
side
shows
liabilitiesand capital,while the right side shows
assets.A banks assets are indications of what the
bank ownsor the claims that the bank has on
external
entities:
individuals,firms,governments,etc.A
banks
liabilities are indications of what the bank owes as
claimswhich are held by external entities of the
bank.The net worthor capital is calculated by
subtracting total liabilities from total assets.
Assets-Liabilities = Net worth
Or
Assets= Liabilities+ Net worth

Liabilities of Bank
Liabilities of a commercial bank are claims on the
bank.They represent the amounts which are due from
the bank to its shareholders,depositors,etc.Bank
liabilities are the fundsthat banks obtainand the debts
they incur,primarily to make loansand purchase
securities.The major components of the liabilities of a
bank are as follows:
1.Capital: Capital and reserves what the customer
regards as an asset,the same bank deposit is a liability
for the bank as the customer gains claims over
them.The paid up share capital implies the liability of
the bank to its shareholders.It is the amount actually
received by the bank out of the total subscribed
capital.Adequateshare capitalis consideredas asource
of strength forthe bankas it providesconfidence tothe
depositorsabout the solvency of the bank.

Liabilities of Bank
2. Reserve Fund: Reserves are created out of
the undistributed profitswhich are retained over
a period of years by the bank.Creation of
reserve fund is a statutory requirement in most
of the countries of the world.Reserve
requirements limit the portion of the banks
fundsthat it can use to give loans and purchase
securities.Banks
build
up
reservesto
strengthen their financial positionand also to
meet
unforeseen
liabilitiesor
unexpected
losses.Reserve fund,together with capital
represents the capital structureor net worth of
the bank.

Liabilities of Bank
3. Deposits: Deposits constitute the major sources of
fundsfor banks.What the customer regards as an
asset,the same bank deposit is a liability for the bank
as the customer gains claim over them.Banks get funds
from investment and these are indirectly the source of
its income.Banks keep a certain percentage of its
timeand demand deposits in cashand after meeting
the liquidity requirement,they lend the remaining
amount on interest.Indian banks accept two main types
of deposits,demand depositsand term deposits.
Demand deposits,as the name suggests,are repayable
on particular period. The prosperity, growthand
goodwill of the bank depend upon the amount of these
deposits.Fixed deposits have specific maturityand so
can be used by banks to earn income.

Liabilities of Bank
4. Borrowing from Other Sources:In case of
need,banks can borrow from the Reserve Bank
of India,other commercial banks,development
banks,non-bank financial intermediaries like
LIC,UTI, GIC, etc.Secured loans are obtained on
the basis of some recognized,securities
whereas unsecured loans are out of its reserve
funds lying with the central bank.
5.Other Liabilities: Other liabilities include
bills
payable,bills
sent
for
collection,acceptance,endorsement,etc.The
amounts of all such bills are shown on the
liability side of the balance sheet.

Liabilities of Bank
6.Contingent Liability: Contingent liabilities are
those liabilitieswhich may arise in futurebut
cannot be determined accurately,e.g. guarantee
given on behalf of others,outstanding forward
exchange contracts, etc.These are shown on the
liability side as a rough estimate.
7.Profit or loss: Profit is unallocated surplusor
retained earnings of the year after paying
taxand
dividends
to
shareholders.As
shareholders have claim over the banks profit,it
is shown as a liability.In case of loss,the figure
will be shown on the assets side.

Assets of a Bank
Like all other business firms banks also strivefor
profit.Commercial banks use their funds primarily
to purchase income earning assets,mainly
loansand investments. These assets are shown in
the balance sheet of the bank in decreasing order
of the liquidity.The major assets of the bank
include:
1.Cash: Cash in handand cash balanceswith the
Reserve Bank of India are the most liquid assets of
a bank.Cash assets provide bank funds to meet
the withdrawals of depositsand to accommodate
new loan demand.Maintaining of cash reserve
ratio with RBI is a statutory requirement for the
banks.

Assets of a Bank
2.Money at Calland Short Notice: This is the money lent by
the banksto other banks,bill brokers,discount housesand
other financial institutions for a very short period of time
varying from 1 to 14 days.When these funds are repayable on
demand without prior notice,it is called money at call.On the
other hand,if some prior notice is required,it is known as
money at short notice.In the balance sheet,both are shown as
a single item on the asset side.Banks charge very low rate of
interest on these.If the cash position continues to remain
comfortable,these loans may be renewed day after day.
3.Loans and Advances: Loansand advances are the banks
earning assets.The interests earned from these assets
generate the bulk of commercial bank revenues.Loans may be
demand loansor term loanswhich may be repayable is
singleor in many installments.Advances are usually madein
the form of cash creditand overdraft.

Assets of a Bank
4.
Investments: Commercial banks use fundsfor
investmentin various types of securities like the gilt edged
securities of the centraland state government as well as
sharesand
debentures
of
corporate
undertakings.Thesecuritiesissued bygovernment aresafe
fromthe riskof defaultthough theyare subjectto riskfrom
changein rate of interest.These securities include treasury
bills, treasury deposit certificates, etc.The long-term
investments have the greatest profitability.
5.Bills
Receivable:
Bills
receivableand
other
creditinstruments acceptedby thecommercial bankson
behalfof theircustomers arealso shownon theasset
sideof the balance sheet.The reason isthat the bank has a
claim on the payee,on whose behalf it has accepted the
bills.Thus,the same amount appears on assets as well as
liabilities sides of the balance sheet of the bank.

Assets of a Bank
6.Other Assets: These include the
physical assets of a bank like the bank
premises,furniture,computers,machine
equipment,etc.These also include the
collateralswhich
the
bank
has
repossessedfrom
the
borrowersin
default.

CAMELS Rating
Soundness of a bank measured on a scale of 1
(strongest) to 5 (weakest). Bank examiners (trained and
employed by the country's central bank) award these
ratings on the basis of the adequacy and quality of a
bank's Capital, Assets (loans and investments),
Management, Earnings, Liquidity, and Sensitivity (to
systemic-risk).
Banks with a rating of 1 are considered most stable;
banks with a rating of 2 or 3 are considered average, and
those with rating of 4 or 5 are considered below average,
and are closely monitored to ensure their viability. These
ratings are disclosed only to the bank's management
and not to other banks or the general public. CAMELS
rating is an advanced version of the older MACRO rating.