Introduction and history of the banking industry
Most people think RBI is the first bank because it's our central bank but this is not true. In fact, there are so many banks was out there before it merged into a single bank which is called the Imperial Bank of India. It is one of the Oldest and largest bank later it is called as the SBI. So, technically SBI was made before the RBI but RBI was founded in 1935 while SBI was officially founded in 1955. Prior to that it was known as the imperial bank of india and was working for the british india.
The banking domain falls under the BFSI which is the Banking, financial services, and insurance domain.
BFSI usually consists of commercial banks, NBFCs, Co-op banks, PFs, MFs, and other small financial institutions.
There are two types of banks 1. Scheduled banks and 2. Non scheduled banks
What are schedule banks?
-> Those who falls under the RBI guidelines and operates Under the RBI is called scheduled banks. They automatically become part of the clearing house and they can use the interconnection between other scheduled banks. Example: public sector banks, private sector banks. Payment banks, small finance banks, regional rural banks, etc fall under the scheduled bank.
What are non-scheduled banks?
-> those who do not fall under the RBI and operate individually and manage by themselves are called non-scheduled banks. They can't get support from the RBI. And they don't have to follow the RBI guidelines. Thus they are very risky. unscheduled banks cannot facilitate interbank financial transactions and the clearance of cheques.
Types of Banks
Public sector banks: Public sector bank is a bank in which the goverment have controlling stack which is greater than 50%.
Example:
State Bank of India (57.6%)
Bank of Baroda (63.97%)
Canara Bank (62.93%)
Punjab National Bank (73.15%)
Indian Bank (79.86%)
Union Bank of India (83.49%)
Bank of India (81.41%)
Central Bank of India (93.08%)
Private sector banks: Private Sector Banks are those banks that are non-government and the majority of stack is held by the shareholders.
Example:
HDFC Bank
ICICI Bank
Axis bank
Kotak bank
Regional rural banks: Regional Rural Banks (RRBs) are government owned scheduled commercial banks of India that operate at regional level in different states of India.
Example:
Andhra Pradesh Grameena Vikas Bank
Assam Gramin Vikash Bank
Jharkhand Rajya Gramin Bank
Foreign banks: As per the name suggest, these banks are not indian but they operate businesses in india like city bank, HSBC, royal bank of scotland, etc.
Cooperative banks:
Co-operative as the name suggests, the members are the ownes and customers of the bank. It is organized on a cooperative basis with retails and commerical banking.
Example:
Kalupur co-operative bank
Bharat co-operative bank
Small finance banks: Small finance banks are very specific types of banks, which you can also call as Banks lite. Becasue small finance banks usually deal with the small capital and provide the basic banking services like deposit and lending. Main target area for these banks is to cover the are of finance that big banks and institutions can't.
Example:
AU small finance bank
Ujjivan small finance bank
Payment banks: Payments banks are new model of banks, conceptualised by the Reserve Bank of India (RBI), which cannot issue credit. These banks can accept a restricted deposit, which is currently limited to ₹200,000 per customer and may be increased further.
Example
Paytm payment bank
India post payment bank
Airtel payment bank
Development banks: Development banks can be known as special industrial financial institutions. Development banks in india is responsible for the economic development in country. These banks offers medium and long term finances to the private entrepreneurs and small businesses.
Example:
IDBI
Small industries development bank of india
Asian development bank (For the development of Asia)
Business model of the Banks and Terminologies
In short the business model is all Lending and Borrowing. Banks borrow money from RBI or other banks and lend to the retailers or businesses. In some case, banks lend their money to the RBI. But the core business is lending and borrowing.
(RBI decides these two rates)
Repo Rate: At which rate banks borrow money from the RBI.
Reverse Repo Rate: At which banks lends money to the RBI.
Components:
Saving account
Current account
Debit card
Credit card
Loans
Insurance
Mutual funds
Saving account: A savings account is an account that pays interest to the customers for keeping the deposit in the bank. Banks have to pay you interest on the deposit so this is a liability for the Banks. Generally this interest rate is low compared to FDs. As per 8 apr 2022 current rate is 3% for less than 50 lacs and 3.50% for greater than 50 lacs.
Current account: A current account, also known as financial account is a type of deposit account maintained by individuals who carry out significantly higher number of transactions with banks on a regular basis.
How banks make money with debit card and credit card?
When user purchase something with debit card, there is an MDR ( merchant discount rate) that is merchant pays to the bank. Suppose you have hdfc bank debit card and merchant have sbi machine, then some amount of fees will be go to the hdfc bank which debit card is used, sbi which provided the machine and master card , visa or rupay whose network is used.
On the side of credit card, if you miss the payment due date, they will charge huge amount of interest per day also there are many maintenance charges for the credit cards. If you withdraw cash from the credit card is also charged at a higher rate So, this is how banks makes money using credit card.
What is visa , mastercard and rupay?
-> They provide a payment network for the transaction.
-> RuPay is India's first-of-its-kind domestic card payment network. Visa and master card is international.
-> Operating cost is much higher on the side of the international cards like visa and master cards, while Rupay has the lowest operating cost.
-> Also the processing in the Rupay card is much more faster than the internationals cards because the processing happening in India and the latency is very less.
-> The banks issuing a MasterCard or a Visa card have to pay a fee every quarter for joining these foreign payment networks. while for issuing RuPay cards, the bank need not pay any fees to join the network.
Types of Loan
Home loan
Car loan
Personal loan
Education loan
Gold loan
Loan against property
Loan against Equity
Loan against FD
What is the difference between credit growth and deposit growth?
Credit means loans given out to borrowers by the banks. Credits are assets of the Bank. Deposits are the amount received from customers as deposits in the banks. Deposits are a liability to the bank. credit ( borrowers pays back to the bank with interest) (for the deposit banks have to pay with interest)
Credit to deposit ratio to check the liquidity of the bank and indicates the financial health of the bank.
The Structure of Loans
What is Provisioning?
Provisioning simple means loss going to happen. When banks think that this person is not going to pay us back or he seems doubtful then banks do provision for that asset. And then that asset is being categorised into different stages like you can see in the image above.
What is SMA?
SMA stands for Special Mention Accounts.
When some asset becomes stressed that means if someone doesn't pay whitin the 30 days, he will be categorized into SMA-0 type. If he still doesn't pay before the 60 days, he will be moved to SMA-1 type. And if Someone doesn't pay by the 90 days, he will be moved to the SMA-2. Once someone doesn't repay the loan to the banks after 90 days, it becomes the NPA.
What is NPA?
The core business of banking is Lending. But if someone doesn't pay the repayment even after 90 days then that asset is being considered as the NPA which is non- performing asset. These assets are further categorised into 3 stages.
1. Substandard assets: If the NPA period is below 12 months, it is called as substandard assets.
2. Doubtful assets: If the Asset remains NPA for more than 12 months then it is considered as the doubtful assets.
3. Loss assets: When the banks think, they can not recover from the particular asset means they classify them into the loss assets. Means recovery is not possible for that asset in some conditions.
What is Slippage?
The amount of asset that is being converted into NPA from the stressed assets is called as the Slippage for the banks.
What is NIM (Net Interest Margin)?
When banks lend money to someone, banks receive the interest. When someone lends to the banks in the form of FD or anything, in that case, bank has to pay the interest on that. So, the net amount that bank receives from the lending to the customer minus bank has to pay interest amount is called as the Net interest margin.
Risk management in banks
What if deposit are too much compared to the credits?
Because banks has to pay the interest on the deposit. Suppose bank have excess amount of deposit money but they can't make use of it. Then in that case, bank could go to the rbi and get interest from them which is also called reverse repo rate and pay to the depositers.
What are the asset reconstruction companies?
ARC or asset reconstruction companies you can simply call them as recovery company. ARC manages the recovery portion by selling and recovering assets from the NPA. ARC usually buys NPA from the banks and then the headache is now for the ARC, how to recover money from them.
What is capital adequacy ratio?
The capital adequacy ratio (CAR) is a measure of how much cash is available with the bank in order to manage the risk in any condition.
What is SLR?
SLR or the Statutory Liquidity Ratio is the minimum reserves that banks have to keep with themselves in the form of Cash, Cash equivalent, Gold or other securities.
What is CRR?
Cash Reserve Ratio (CRR) is the percentage of money, That bank have to keep it with the RBI in the form of Cash.
Standing deposit facility :
It is a facility by using which banks can lend money to the RBI at the reverse repo rate.
Marginal standing facility:
Marginal Standing Facility (MSF) is a facility in which banks can take overnight funds if inter-bank liquidity completely dries up. The Rate will be much higher than repo rate when using the MSF.
Liquidity adjustment facility:
LAF is a facility by using which banks can get liquidity from the RBI at the repo rate.In this case RBI lends money to the banks.
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