Banking Awareness is the series which is updated daily, and is intended to help you with your preparation for various bank exams. The following article is about ‘Overview of Banking Industry in India’.
Banks are basically a part of the industry which offers financial services. At the core, they take deposits from customers for safe keeping or provide loans to businesses. In India, government-regulated banking system helped to boost the economy and social-economic condition of the people. It has been seen as a credit supplier in India. Banks not only work in the cities and towns but also in the agricultural and rural sectors.
Banking Awareness: Structure of the Indian Banks
Previously, there were money lenders and indigenous bankers conducting banking business. However, a series of reforms and regulations have streamlined the business. As the industry is governed by effective laws, it is healthy and prosperous. Consequently, a healthy banking system will mean a thriving economy. The Indian banks are broadly divided into:
- Scheduled Banks – those which are recognized under the second schedule of the RBI Act, 1934.
- Non-scheduled Banks – those which are not recognized by the RBI Act.
Scheduled Banks – The banks must have a minimum paid up capital of 0.5 million at its disposal. They must also fulfill all conditions laid down by the RBI and conduct business that does not harm the interest of the customers. The scheduled banks can be:
- Commercial Bank – these are commonly known banks, such as SBI, Punjab National Bank, Central Bank of India, and more.
- Cooperative Banks – these are scheduled banks under the Cooperative Societies Act. They are usually cooperative credit institutions where they thrive on mutual help and co-operative principles.
Scheduled Commercial Banks (SCBs): These banks provide the main banking business. These banks are divided into five groups based on how they operate and their ownership criteria.
- The six associate banks of SBI and SBI operate as per SBI Act, 1955 and SBI Subsidiary Banks Act, 1959.
- Other public sector banks that produce nearly 75% of the credit transactions.
- Old private sector banks which were private banks prior to 1993.
- New generation private sector banks which entered the Indian banking system in 1993.
- Regional Rural Banks (RRBs) are those which were established after 1975 to fund the rural sector. They must have a minimum resource base with state government, union government as well as the sponsor bank being the shareholders.
Scheduled Cooperative Banks: Scheduled cooperative banks are either urban credit cooperative organizations or rural cooperative credit groups. The co-operatives are mostly grouped into state level, district level, and primary level. They can lend both long term and short term projects, keeping in mind the principles of a cooperative.
Non-Scheduled Banks: There are some financial services offered by certain groups which don’t fall under the RBI Act. They include money-lenders, brokers, native bankers, etc. Non-scheduled banks are usually the Local Area Banks (LAB), which were set up in 1996. However, many are not operational now as they incurred loss or had irregular dealings.
Banking Awareness: Banking Business
Banking business can be classified into the following categories:
Retail Banking Business – This form of banking is the most common type of business in the banking industry and relates to the common man. It deals with individuals or small businesses, transaction in savings account or deposits. It does not deal with corporations or development plans of industries.
The yearly dealing should not be more than 0.5 billion for the bank. The credit is usually through cash credits or overdrafts. Retail banking includes credit cards, demat accounts, personal loans, educational loans, house loans, term deposits, and mortgages. One such unit should not be more than 0.2 percent of the bank’s portfolio. The banks, which are extensively into retail banking business includes ICICI, SBI, HSBC, etc. Most of these banks survive in this business because they provide cheaper and useful loans.
Wholesale Banking – Quite opposite to retail banking, wholesale or corporate banking deals with large corporate, government-owned organizations or groups, pension funds, or corporations. It includes loan transaction between two banks in the inter-bank market as well. The services offered in this business include maintaining trusts and cash management. It also deals with leasing a large corporate or government asset and merchant banking.
Wholesale banking is further classified into mid-corporate wholesale banking and large corporate wholesale banking. Often, the projects are off-balance sheet businesses where hedging is a common phenomenon. The clientele matter the most as many businesses generate through clients. It is common in this type of business to deal with working capital of a company, leasing or project funds, and more. Some important banks which have tapped a good percentage in the market are SBI, Bank of Baroda, IDBI bank, and Central Bank of India.
Treasury Operations – This form of business is done by the banks in the dept market. However, the RBI takes up a leading role in its activities. Some common activities include trading in mutual funds and equity market, forex trading, and derivatives. The banks conduct cross-currency swaps, Forex Inter Bank Borrowings, Forward Rate Arrangements (FRA), and so on. The business also deals with high frequency trading (HFT), and other forms of treasury operations.
Miscellaneous Banking Businesses
The other banking businesses offered by banks apart from the aforesaid businesses, include leasing businesses, and merchant banking. With online banking and technologies making a foray into the banking business, banks are no longer meant for safe-keeping of deposits.