UNIT 1

Overview of Banking Industry

# History and Structure of Banking in India:
 Evolution of banking and its Phases:

1. Ancient and Medieval Period:

(A) Early banking practices: -
 Vedic Period: Informal lending activities and barter systems were prevalent, reflecting
rudimentary banking practices.
 Mauryan and Gupta Period: Organized trade using local currencies (mudra) and bartering goods
were common, indicating early economic systems.
(B) Temple Banks: -
 Temples as Financial Centers: Temples served as repositories of wealth and played a vital role in
both barter transactions and the use of local currencies.
 Influence on Regional Trade: Barter networks and local currency exchanges influenced regional
trade and economic ties.
(C) Medieval Period: -
 Sarrafas and Shroffs: Moneylenders and banking agents operated in medieval India, handling
transactions, including barter deals and local currency exchanges.
 Hundi System: The hundi system facilitated both credit transactions and trade, relying on trust-
based methods, further enhancing economic exchanges.

2. Colonial Era: Pre Independence banking in India

During the Pre Independence period over 600 banks had been registered in the country, but only a few
managed to survive.
The first bank of India was the “Bank of Hindustan”, established in 1770 and located in the then Indian
capital, Calcutta. However, this bank failed to work and ceased operations in 1832.
Some of the banks of this era are as follows:

(A) Bank of Hindustan: - (1770-1832)

 First bank in India, founded in 1770 in Calcutta.
 Ceased operations in 1832.

(B) Presidency Banks: - (1806-1921)

 Bank of Bengal (1806): Established in Calcutta, it was one of the earliest banks in colonial India.
 Bank of Bombay (1840): Founded in Bombay (Mumbai) to facilitate trade and banking activities.
 Bank of Madras (1843): Established in Madras (Chennai) to manage financial affairs in the
southern regions.
 (C) Private Banks: -
 The General Bank of India (1786-1791): One of the pioneering private banks.
 Oudh Commercial Bank (1881-1958): Operational from 1881 to 1958, headquartered in Faizabad,
Uttar Pradesh.

(D) British India Notes: - (1861-1947)

 British Government Issued Currency: Introduced in 1861, these notes were used as a standard
currency across colonial India.

(E) Imperial Bank of India: - (1921-1955)

 Merged entity of the three presidency banks: Bengal, Bombay, and Madras. It was named The
State Bank of India
 Acted as the central bank for the British colonial government in India.
The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of India, which is currently
the largest Public sector Bank.
Given below is a list of other banks which were established during the Pre-Independence period:
Bank Name Year of Establishment
Allahabad Bank 1865
Punjab National Bank 1894
Bank of India 1906
Central Bank of India 1911
Canara Bank 1906
Bank of Baroda 1908
3. Post Independence:
(A) Industrial Growth and Banking Reforms: -
 Nehruvian Era: Focus on industrialization and economic self-reliance led to the establishment of key
industries and the nationalization of major banks.
 Nationalization of Banks: Major banks were nationalized to facilitate financial inclusion, leading to
increased banking penetration in rural areas.
(B) Green Revolution and Agricultural Financing: -
 Agricultural Growth: The Green Revolution transformed Indian agriculture, requiring substantial financial
support for farmers.
 Regional Rural Banks: RRBs were established to cater specifically to rural and agricultural credit needs,
bolstering agricultural growth.

4. Liberalization Era:
(A) Liberalization and Economic Reforms: -
 LPG Reforms: Liberalization, Privatization, and Globalization (LPG) policies introduced, opening Indian
markets to foreign investments and encouraging entrepreneurship.
 Banking Sector Reforms: Dilution of government control, entry of private and foreign banks, and
technological advancements reshaped the banking landscape.
(B) Impact on Economic Growth: -
 Foreign Direct Investments (FDIs): Liberalized policies attracted FDI, boosting economic growth and
technological advancements.
 Entrepreneurial Boom: Economic reforms encouraged entrepreneurship, leading to the rise of startups and
innovative business ventures.
(C) Technological Advancements: -
 Computerization: The introduction of computers revolutionized banking operations, making processes
efficient and customer-friendly.
 ATM and Electronic Banking: ATMs and electronic banking facilities provided convenient services,
enhancing customer experience.
(D) Challenges and Opportunities: -
 Financial Inclusions: Efforts towards inclusive banking aimed to bring unbanked populations into the formal
financial system, promoting financial literacy and awareness.
 5. Present and Future of Indian Banking:
(A) Current Banking Landscape: -
 Digital Revolution: Rapid digitization, mobile banking, UPI, and e-wallets have transformed customer
experiences, ensuring 24/7 accessibility.
 Fintech Integration: Collaboration with fintech startups for innovative solutions, enhancing
services like payments, lending, and wealth management.
 KYC Updates: Advanced KYC norms and biometric authentication enhance security and ease of
transactions.
 Financial Inclusions: Ongoing efforts for banking the unbanked, providing basic financial services to
remote areas.
(B) Future Prospects: -
 Blockchain Integration: Exploration of blockchain technology for secure, transparent, and efficient
transactions.
(C) Challenges and Responses: -
 Cybersecurity: Constant vigilance, regular audits, and collaboration with cybersecurity experts ensure
robust defenses against cyber threats.

# Functions of Banking Sector:

Banks in India perform various functions, which can be broadly categorized into primary, secondary and modern
functions.
1. Primary Functions:
(A) Acceptance of Deposits: -
Banks accept deposits from the public in various forms, such as savings accounts, current accounts, and
fixed deposits. These deposits serve as a source of funds for the bank, which it can then lend out to
borrowers.
“Banks serve as custodians of public money, providing safety and interest to depositors.“
 Banks accept deposits from customers, who can withdraw their funds at any time.
 Customers can deposit money in various types of bank accounts, such as savings accounts,
current accounts, or fixed deposit accounts.
 Savings banks pay interest to customers on their deposits and are popular with small savers.
 Current accounts are running accounts that can be operated multiple times during a working day.
 Fixed deposit accounts hold deposits for a fixed period and offer higher interest rates.

(B) Granting Loans and Advances: -

Banks lend money to individuals, businesses, and other entities in the form of loans and advances. This is
the primary way in which banks generate income.
 Banks lend funds to individuals and businesses at a certain interest rate.
 Loans are primarily provided to agriculturists, industrialists, and businessmen for investment and
economic development.
“Facilitating economic growth by providing financial support to individuals and businesses, fostering
development”

(C) Credit Creation: -

Credit creation is also known as "Deposit Creation" because most of the money supply in modern
economies is in the form of bank deposits. It's a vital process for financing economic activities, promoting
investment, and stimulating economic growth.
 Banks take deposits: Banks accept deposits from the public.
 Banks keep reserves: Banks are required to keep a minimum fraction of their deposits as reserves,
as set by the Central Bank. This is called the Legal Reserve Ratio (LRR).
 Banks lend out the rest: Banks lend out the remaining portion of their deposits to customers and
businesses.
 Loans are recorded as deposits: Banks record the loans as deposits in the borrower's account.
 Borrowers spend the money: Borrowers can spend the money, increasing the amount of money in
circulation.
 “Through various credit facilities, banks contribute significantly to expanding the nation's economy.”

2. Secondary Functions:
(A) Agency Services: -
 Collection of cheques, bills, and drafts.
 Payment of interest, instalments of loans, insurance premium, etc.
 Collection of interest, dividend, etc.
 Banks facilitate the transfer of funds between individuals and businesses, both domestically and
internationally.
“Banks act as intermediaries, performing tasks like collecting cheques, payments, and handling legal
documents on behalf of customers.”

(B) Financial Advice: -

 Purchase and sale of securities.
 Purchase and sale of foreign exchange.
 Consultation for investment and financial planning
“Banks offer financial consultation, aiding customers in investment decisions and financial planning.”

(C) General Utility Services: -

 Banks provide foreign exchange services, such as currency exchange and remittances.
 Transfer of funds through demand drafts, mail transfer, etc.
 Locker Facilities
 Discounting bills of exchange
 Paying and Gather the Credit – It uses different instruments like a promissory notes, cheques, and
bills of exchange
“Providing services like locker facilities, foreign exchange, and traveler’s cheques for customer
convenience.”

3. Modern Functions:
Modern Banking or Internet banking offers a range of facilities, including online bill payments, fund transfers,
online shopping, and investment opportunities. This is just not time saving but also allows individuals to
carry out these activities from the comfort of their homes.
(A) Online and Mobile Banking: -
 E-banking offers significantly greater convenience.
 Individuals can check their bank balances, get information, and pay bills online without the need
to visit a physical bank.
“Embracing technology, banks enable seamless digital transactions and account management, ensuring
convenience for customers.”

(B) Risk Management: -

Offering services related to insurance, derivatives, and hedging to help businesses manage financial risks
effectively.

(C) Wealth Management: -

Providing specialized services to manage and grow the wealth of high net-worth individuals and
businesses.

# Role of Banking Sector in Indian Economy:

1. Financial Intermediary:
- Function: Facilitates the flow of funds from savers to borrowers, ensuring efficient capital utilization.
- Example: Banks collect deposits from individuals and lend to businesses at higher interest rates, enabling
enterprises to expand and create jobs.

2. Credit Creation:
 - Function: Banks create credit by lending a significant portion of the deposits received, stimulating
economic activities.
- Example: When a bank lends to a small business, it enables them to purchase inventory, hire employees,
and grow, boosting local economic development.

3. Supporting Agriculture:
- Function: Provides agricultural loans for crop cultivation, equipment, and modernization, enhancing rural
livelihoods.
- Example: Farmers receive loans to invest in quality seeds, irrigation, and technology, leading to increased
agricultural output and income.

4. Promoting SMEs and Strat-ups:

- Function: Extends financial support to SMEs, fostering entrepreneurship and job creation.
- Example: Start-ups and small businesses secure loans to expand operations, innovate, and compete,
contributing to economic diversification.

5. Social Banking:
- Function: Banks implement social welfare schemes, providing financial aid to marginalized communities.
- Example: Jan Dhan Yojana, launched by the government, enabled millions to open bank accounts,
promoting financial inclusion and reducing poverty.

6. Enabling International Trade:

- Function: Facilitates foreign exchange transactions, export and import financing, and trade-related
services, fostering global economic integration.
- Example: Banks provide letters of credit to exporters, ensuring secure international transactions.
Importers use trade finance services to manage payments and reduce risks.

7. Government Financing:
- Function: Participates in government borrowing, supporting public expenditure on infrastructure and
social programs.
- Example: Banks buy government bonds, enabling the government to fund projects like building highways,
schools, and healthcare facilities.

8. Training and Education:

- Function: Banks provide financial literacy programs and training, empowering individuals and businesses
with financial knowledge.
- Example: Initiatives like 'Bank Sakhi' in rural areas educate women about banking services, leading to
increased financial inclusion.

9. Money Market and Capital Market:

- Function: Banks contribute to the development of money and capital markets, ensuring efficient fund
allocation.
- Example: Banks underwrite Initial Public Offerings (IPOs) and facilitate trading in stock markets, fostering
a dynamic capital market ecosystem.

10. Ensuring Reasonable Price Stability:

- Function: Banks play a role in controlling inflation, ensuring essential goods remain affordable for the
public.
- Example: During periods of high inflation, banks may increase interest rates, making loans more
expensive. This discourages excessive spending and borrowing, contributing to price stability.

# Types of Banks:
(A) Commercial Banks: -
 Organized under the Banking Companies Act, 1956.
 They operate on a commercial basis and its main objective is profit.
 They have a unified structure and are owned by the government, state, or any private entity.
 They tend to all sectors ranging from rural to urban.
 These banks do not charge concessional interest rates unless instructed by the RBI Public deposits are
the main source of funds for these banks.
They can be further classified into 3 categories:
(a) Public sector Banks – A bank where the majority stakes are owned by the Government or the central
bank of the country. (Bank of Baroda, Allahabad Bank, SBI, Union Bank etc.)
(b) Private sector Banks – A bank where the majority stakes are owned by a private organization or an
individual or a group of people. (ICICI Bank, HDFC Bank, Yes Bank, AXIS Bank etc.)
(c) Foreign Banks – The banks with their headquarters in foreign countries and branches in our country, fall
under this type of bank. (CITI Bank, HSBC, Standard Chartered, Deutsche Bank etc.)

(B) Regional Rural Banks: -

 These are special types of commercial Banks that provide concessional credit to agriculture and rural
sectors.
 RRBs were established in 1975 and are registered under the Regional Rural Bank Act, 1976.
 RRBs are joint ventures between the Central government (50%), State government (15%), and a
Commercial Bank (35%).
 196 RRBs have been established from 1987 to 2005.
 From 2005 onwards government started the merger of RRBs thus reducing the number of RRBs to 82
 One RRB cannot open its branches in more than 3 geographically connected districts.
 There are 43 Regional Rural Banks (RRBs) in India. They are sponsored by commercial banks and are
set up to provide banking services to rural areas.

(C) NABARD: - (National Bank for Agricultural & Rural Development)

 NABARD provides financial assistance for rural, village, and agricultural development, including
handicrafts.
 It acts as the apex regulatory body for regional rural banks (RRBs) and cooperative banks in India.
NABARD falls under the jurisdiction of the Ministry of Finance.

(D) Small Finance Bank: -

 Small finance banks play a crucial role in supporting micro-industries, marginal farmers, and small
artisans.
 They offer loans and financial assistance to individuals in the unorganized sector of society.
 These banks are regulated by the RBI.
 Some operational small finance banks in India include AU Small Finance Bank, Suryoday Small Finance
Bank, Capital Small Finance Bank, Northeast Small Finance Bank, and Jana Small Finance Bank.
 There are 21 Small Finance Banks (SFBs) in India. They are set up to provide banking services to
underserved segments of the population, such as small businesses and low-income households.

(E) EXIM Bank: -

 EXIM Bank finances the export and import of goods by foreign countries.
 It operates under the Export-Import Bank of India Act of 1981 and serves as a provider of export
credit, similar to global Export Credit Agencies.
 To get loans or other financial assistance with exporting or importing goods by foreign countries can
be done through this type of bank

(F) Cooperative Bank: -

 These banks are organised under the state government’s act. They give short-term loans to the
agriculture sector and other allied activities.
  The main goal of Cooperative Banks is to promote social welfare by providing concessional loans.
 They are organised in the 3-tier structure:
(a) Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt, NABARD)
- Funded by RBI, the government and NABARD. Money is then distributed to the public
- Concessional CRR and SLR apply to these banks. (CRR- 3%, SLR- 25%)
- Owned by the state government and top management is elected by members
(b) Tier 2 (District Level) – Central/District Cooperative Banks
(c) Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

(G) Payment Banks: -

 A newly introduced form of banking, the payments bank has been conceptualized by the Reserve
Bank of India.
 People with an account in the payments bank can only deposit an amount of up to Rs.1,00,000/- and
cannot apply for loans or credit cards under this account.
 There are 3 Payment Banks in India.
 They are limited to offering basic banking services, such as savings accounts, debit cards, and money
transfers.

# Update List of Banks in India:

Public Sector Banks Private Sector Banks Foreign Banks
SBI HDFC Bank Citibank
Bank of Baroda ICICI Bank HSBC
Punjab National Bank Axis Bank Standard Chartered
Canara Bank Kotak Mahindra Bank Deutsche Bank
Bank of India IndusInd Bank BNP Paribas
Union Bank of India YES Bank JPMorgan Chase
Indian Bank RBL Bank Bank of America
Central Bank of India DCB Bank Barclays
UCO Bank AU Small Finance Bank Mizuho Bank
IDBI Bank Bandhan Bank Sumitomo Mitsui Banking
Corporation
Bank of Maharashtra IDFC Bank Mitsubishi UFJ Financial Group
Bank of India (New Zealand)

# RBI Structure & Function:

Structure:
(A) Foundation and Initiation:
 Establishment: Founded on April 1, 1935, under the Reserve Bank of India Act.
 Why: Formed to centralize control over monetary policy and currency issuance in India during the
British colonial rule.
 Role: Aims to maintain economic stability, control inflation, and promote financial inclusion
(B) Organizational Structure:
 Main Office: Mumbai (Central Office).
 Regional Offices: Across major cities in India, ensuring nationwide coverage.
 Departments: Structured divisions like Banking Regulation, Currency Management, Monetary Policy,
and more.
 Governance: Headed by a Governor, supported by Deputy Governors and a Board of Directors.
Functions:
 (A) Banking Regulation: Regulates and supervises banks and financial institutions for stability and consumer
protection.
(B) Currency Management: Manages the nation's currency circulation, ensuring its integrity.
(C) Monetary Policy: Formulates policies to control inflation, interest rates, and money supply.
(D) Foreign Exchange Management: Manages and regulates the country's foreign exchange reserves.
(E) Financial Stability: Ensures the overall stability of the financial system, preventing crises.
Role of RBI in Inflation Control:
Inflation arises when the demand increases and there is a shortage of supply There are two policies in the hands
of the RBI.

# Overview of Monetary and Fiscal Policy:

Monetary Policy: -
Monetary policy refers to the management of money supply and interest rates by a central bank.

Quantitative Measures:
Repo Rate: Interest rate at which RBI lends to banks.
Reverse Repo Rate: Rate at which RBI borrows from banks.
Ratios:
- Cash Reserve Ratio (CRR): Portion of deposits banks must keep with RBI.
- Statutory Liquidity Ratio (SLR): Portion of deposits invested in government securities.
Bank Rate: Interest rate at which RBI lends long-term funds to banks.
Marginal Standing Facility (MSF): Rate at which banks can borrow overnight funds from RBI.
Open Market Operations (OMO): Buying/selling government securities.

Qualitative Measures:
Direct Action: The central bank can take direct action to influence the behavior of banks and other financial
institutions.
Direct Action: The central bank can take direct action to influence the behavior of banks and other financial
institutions.
Moral suasion: Central bank officials meet with bank executives to encourage or discourage certain types of
lending.
Publicity: The central bank can also use publicity to influence the expectations of businesses, consumers, and
investors.

Fiscal Policy: -
Fiscal policy is the use of government spending and taxation to influence the economy. it is used to promote
economic growth, reduce inflation, and stabilize the economy.

Fiscal Policy Measures Definition Implementation Purpose

Taxation Government levies taxes Adjusting tax rates or Regulates government
on individuals and introducing new taxes. revenue, influences
businesses. consumer spending, and
business investments.
Government Spending Government expenditure Allocating funds to various Stimulates economic
on public services, sectors like healthcare, growth, generates
infrastructure, and welfare education, defense, etc. employment, and
programs. enhances public welfare.
Subsidies Financial assistance Offering subsidies to Encourages production,
provided by the agricultural, energy, or stabilizes prices, and
 government to specific manufacturing sectors. ensures affordability for
industries or commodities. consumers.
Public Debt Management Government borrows Issuing bonds, managing Balances budget deficits,
funds through bonds and debt levels, and maintains economic
securities. repayment planning. stability, and ensures long-
term fiscal health.

UNIT 2
Retail Banking: Deposits

Retail banking refers to the services and products that banks provide to individuals and small businesses.
Some examples of retail banking services:
Savings and Current Accounts: These accounts allow you to store your money and write cheques or make
withdrawals.
Loans: Banks offer a variety of loans, such as home loans, auto loans, and personal loans.
Credit cards: Credit cards allow you to borrow money to purchase goods and services.
Investment products: Banks also offer a variety of investment products, such as mutual funds and stocks

# Why do banks do Retail Banking?

Retail Banking: -
 Where the bank directly deals with customer
 Business to Customer
 Savings Accounts
 Retail Banking targets at the individual segment
 The ticket size of loans in retail banking is low
 Risk is widespread in retail banking as customer base is huge
 Returns are more in retail banking as the spreads are more for different asset classes in retail

Corporate Banking: -
 Where the bank directly deals with businesses
 Business to Customer
 Current Accounts
 The ticket size of loans in corporate banking is high
 Risk is more as the ticket size is big though customer base is relatively small
 The returns will be low as corporates bargain for lower rates due to higher loan amounts.

# Different Types of Deposit Accounts:

(A) Demand Deposit Account:
(1) Savings Account: -
Features: -
 Liquidity: Savings accounts are highly liquid, which means that you can withdraw your money
at any time without penalty.
 Interest: Savings accounts earn interest on your balance, so your money can grow over time.
 Convenience: You can access your savings account online, through an ATM, or by writing a
cheque.
 Safety: Savings accounts are federally insured, so your money is safe even if the bank fails.

Demerits: -
 Low interest rates: Savings accounts typically offer lower interest rates than other types of
investments, such as fixed deposits and recurring deposits.
 Withdrawal restrictions: Some savings accounts may have restrictions on the number of
withdrawals you can make per month.
 Minimum balance requirement: Most savings accounts have a minimum balance requirement.
If your balance falls below the minimum requirement, you may be charged a fee.

(2) Current Account Deposits: -

A current account is a type of bank account that is designed for businesses and individuals who need to
make and receive frequent payments. Current accounts.
Features: -
 No interest: Current accounts do not pay interest on the money deposited.
 Cheque writing: Current account holders can write cheques to pay for goods and services.
 Overdraft protection: Current account holders may be eligible for overdraft protection, which
allows them to withdraw more money than they have in their account.
 Account fees: Current account holders are typically charged a monthly service fee.
 Minimum balance: Current account holders must maintain a minimum balance in their
account. If the minimum balance is not maintained, the bank may charge a fee.
 Other features: Current account holders may also have access to other features, such as
online banking, mobile banking, and bill pay.

Opening & Closing of a current account: -

 Step 1: Proof of identity, such as a passport, driver's license, or Aadhaar card
 Step 2: Proof of address, such as a utility bill or rental agreement
  Step 3: Verification through Permanent Account Number (PAN)
 Step 4: KYC form duly filled and signed
 Once you have submitted the required documents, the bank will open your current account
and issue you a cheque-book and ATM card.
 To close a current account, you will need to submit a written request to the bank. The bank
will require you to settle all outstanding balances before closing your account.

(B) Term Deposit Account:

(1) Fixed Deposits: -
A fixed deposit account is a type of savings account that offers a higher interest rate than a traditional
savings account, but in exchange, money is locked in for a fixed period of time.
Features: -
 Higher interest rates: Fixed deposit accounts typically offer higher interest rates than traditional
savings accounts. The interest rate depends on the tenure of the deposit and the amount
deposited.
 Guaranteed returns: The interest rate on a fixed deposit account is guaranteed, so you know
exactly how much money you will earn at the end of the tenure.
 Safety: Fixed deposit accounts are insured by the Deposit Insurance and Credit Guarantee
Corporation (DICGC) up to ₹5 lakh per depositor, per account ownership type, at each insured
bank.
 Convenience: Fixed deposit accounts can be opened online or at a bank branch.

Demerits: -
 Money is locked in: Fixed deposit accounts lock in your money for a fixed period of time. If you
withdraw your money before the maturity date, you may have to pay a penalty.
 Lower liquidity: Fixed deposit accounts are less liquid than traditional savings accounts. This
means that you cannot withdraw your money at any time without penalty.

(2) Recurring Deposit: -

A recurring deposit (RD) account is a type of savings account that allows you to deposit a fixed amount of
money every month for a fixed period of time. The typical tenure can range from 6 months to 120
months.
Features: -
 Regular deposits: You can deposit a fixed amount of money every month, which makes it easy to
save money.
 Higher interest rates: RD accounts typically offer higher interest rates than traditional savings
accounts.
 Guaranteed returns: The interest rate on a RD account is guaranteed, so you know exactly how
much money you will earn at the end of the tenure.
 Safety: RD accounts are insured by the Deposit Insurance and Credit Guarantee Corporation
(DICGC) up to ₹5 lakh per depositor, per account ownership type, at each insured bank.
 Convenience: RD accounts can be opened online or at a bank branch.

Demerits: -
 Money is locked in: RD accounts lock in your money for a fixed period of time. If you withdraw
your money before the maturity date, you may have to pay a penalty.
 Lower liquidity: RD accounts are less liquid than traditional savings accounts. This means that you
cannot withdraw your money at any time without penalty.

Comparative Chart:
Feature Savings Current Fixed Recurring
Account Account Deposit Deposit
 Liquidity High High Low Low
Interest Rate Low Low Medium Medium
Withdrawal Restrictions Some Low High High
Minimum Balance Requirement Yes No No Yes
Overdraft Facility No Yes Yes No

# Loans: Important Retail and Commercial asset Products:

A loan is a sum of money that one party lends to another party, in exchange for a promise of repayment. The
repayment typically includes interest, which is a fee charged by the lender for the use of the money.
Few keys associated with loans: -
 Eligibility Criteria: Age, income stability, credit score, and employment status determine eligibility.
 Purpose: Indicates the specific use for which the loan can be taken, such as purchasing a home, car, or
funding education.
 Loan Amount: The maximum amount that can be borrowed, often based on the borrower's repayment
capacity.
 Margin: The percentage of the total cost that the borrower must provide as a down payment. The rest is
financed by the loan.
 Security: The assets or collateral provided to secure the loan, which the lender can claim if the borrower
defaults.
 Disbursement Process: Outlines the steps involved in verifying documents, loan approval, and how the funds
are given to the borrower.
Loans can be used for a variety of purposes, such as:
 Purchasing a home or vehicle
 Consolidating debt
 Paying for education
 Financing a business
 Covering unexpected expenses
 Supporting farming

 Different types of Loans:

(A) Home Loan:
 Purpose: Purchase or construct a home.
 Key Features: Long tenure, lower interest rates, tax benefits on repayments.
 Considerations: Property evaluation, interest rate fluctuations.
(B) Auto/Vehicle Loan:
 Purpose: Purchase vehicles, including cars, bikes, or commercial vehicles.
 Key Features: Fixed or floating interest rates, down payment requirements.
 Considerations: Repayment tenure, vehicle insurance.
(C) Personal Loan:
 Purpose: Unrestricted, often for immediate financial needs or emergencies.
 Key Features: Quick approval, no collateral, higher interest rates.
 Considerations: High-interest costs, disciplined repayment.
(D) Educational Loan:
 Purpose: Fund education, both in domestic and international institutions.
 Key Features: Moratorium period, lower interest rates, tax benefits.
 Considerations: Course selection, repayment grace period.

(E) Agriculture Loan:

 Purpose: Support farmers for agricultural activities, purchase of equipment, or land.
 Key Features: Subsidized interest rates, flexible repayment schedules.
 Considerations: Crop yield, market dynamics, government policies.
 (F) Commercial Loan:
 Purpose: Boost businesses, expansion, working capital, or capital expenditures.
 Key Features: Tailored for businesses, collateral often required.
 Considerations: Business viability, repayment from profits.
Loan Type Eligibility Purpose Loan Margin Security Disbursement
Criteria Amount Process
Home Loan Age, income Purchase or Based on Typically, Property being Verification,
stability, credit construct a property 10-20% financed documentation,
score, home, value legal checks,
employment renovation loan approval
history
Auto/Vehicle Age, income, Buying a Up to a Typically, Vehicle being Loan approval,
Loan credit score, car, two- percentage 10-20% financed vehicle
employment wheeler of the inspection,
status vehicle cost documentation,
disbursal
Educational Age, income, Various Usually a None Collateral/security Approval based
Loan credit score, personal fixed may not be on documents,
employment needs amount required disbursed
stability directly to the
applicant
Personal Age, academic Education Based on None Collateral/security, Disbursed
Loan record, course expenses tuition fees, co-borrower may directly to the
and college living costs, be required educational
etc. institution,
verified
documents
Agricultural Farm ownership, Agricultural Depends on Varies Agricultural land, Verification of
Loan credit history, needs the crops, or land and
farm income agricultural equipment project, loan
project approval,
disbursal

Commercial Business Business Based on Varies Business assets, Verification of

Loan stability, expansion, business receivables, or business
creditworthiness, working needs projects documents,
business plan capital approval
process,
disbursal

 Loan Pricing, Problem and Solution Related to each step of – Loan Pricing Steps:
Loan pricing refers to the process of setting the interest rates, fees, and terms associated with loans offered
by financial institutions.

Problems and Solutions Related to Loan Pricing Steps:

(1) Interest Rate Setting:
 Problem: High interest rates can deter borrowers due to unaffordability, reducing loan demand.
 Solution: Research market rates, balance profitability with affordability, and adjust rates based on
market changes.
(2) Prepayment Issues:
 Problem: Hefty prepayment penalties can discourage borrowers from early repayment.
 Solution: Implement reasonable prepayment charges or consider removing penalties altogether. Offer
incentives for timely repayment and financial education about the benefits of early repayment.
 (3) Moratorium:
 Problem: New businesses struggle without a moratorium period.
 Solution: Provide moratoriums for select loans, allowing time for financial stability. Clearly define
terms, including accrued interest.
(4) Processing Fees:
 Problem: High processing fees burden borrowers financially.
 Solution: Calculate fees based on costs, communicate transparently, consider waivers for specific
customer segments or loans.
(5) CIBIL:
 Problem: Low CIBIL scores can lead to higher interest rates or loan rejections.
 Solution: Improve score accuracy by verifying information with lenders. Develop new models
considering income and employment, not just credit history.

# Reserves and Ratios:

CRR and SLR are used by the central bank to control the money supply in the economy. Both are calculated as a
percentage of Net Demand and Time Liabilities (NDTL). (aggregate of SA, CA, FD )
(A) CRR (Cash Reserve Ratio): -
 A portion of a bank's deposits must be maintained with the central bank in cash reserves.(presently
4.5% ) In case a bank fails to maintain its CRR, it has to pay fines to the RBI for that particular day
which is charged at 3% per annum above the bank rate. It is charged on the shortfall. f saving, current
and fixed deposit).

(B) SLR (Statutory Liquidity Ratio): -

 A portion of a bank's deposits that must be maintained in the form of approved securities such as
government bonds, gold, and cash.
 SLR is currently set at 18% .
 Penal provisions are same as of CRR.

(C) PLR (Prime Lending Rate): -

 The minimum interest rate at which banks lend to their most creditworthy customers.
 PLR is used as a benchmark for setting interest rates on other loans.
 PLR is typically higher than MCLR.
 Banks can offer different interest rates to borrowers based on their creditworthiness and other
factors.

(D) MCLR (Marginal Cost of Funds Based Lending Rate): -

 A benchmark interest rate determined by banks based on their marginal cost of funds.
 MCLR is used to set interest rates on loans and advances.
 MCLR is a more transparent and market-linked interest rate than PLR.

UNIT 3
Banking Services
Banking services encompass a wide range of financial activities that facilitate the flow of funds, enable payments,
and support economic growth.
These services play a crucial role in the modern economy by
Intermediation Of Funds: Banks act as intermediaries, channeling funds from savers to borrowers, ensuring efficient
allocation of capital.
Payment Facilitation: Banks provide various payment mechanisms, such as cheques, debit and credit cards, and
electronic transfers, enabling seamless transactions.
Financial Services Provision: Banks offer a diverse range of financial services, including loans, investments,
insurance, and wealth management, catering to the needs of individuals, businesses, and institutions.

# Interest and Non-Interest Income and Expenses:

 Interest Income: Interest income is the revenue generated by banks through interest-bearing assets such as
loans and investments.
Example: When a bank issues a home loan to a customer, the interest paid by the borrower contributes to
the bank's interest income.

 Non-Interest Income: Noninterest income encompasses revenue streams beyond interest, including fees,
commissions, and other service charges.
Example: Charges for services like account maintenance fees or processing fees for loans fall under
noninterest income.

 Expenses: Banks incur various costs in their operations, which can be categorized into interest and
noninterest expenses.
Example: Interest expenses include payments made on deposits, while noninterest expenses cover
operational costs like salaries, rent, and technology infrastructure.

# Comparative Study of Public and Private Sector Bank Sources of Income & Expenses:
Aspect Public Sector Banks Private Sector Banks
Sources of Income Government schemes Retail banking
Agricultural loans Corporate loans
Priority sector lending Priority sector lending
Expenses Social responsibilities leading to NPAs Streamlined approach to expenses

Interest on loans and advances Fee-based income (credit cards, wealth

management)
Higher provisioning Emphasis on efficiency and technology
adoption
Efficiency May face bureaucratic challenges Generally, more efficient in operations
Innovation Adapting to technology gradually Quick to embrace innovations in financial
services
Customer Focus Geared towards social objectives Customer-centric approach, quick response to
trends

UNIT 4
Risk Management in Banks
Risk management in banks is to identify, assess, and mitigate potential losses that could arise from various factors.
The Reserve Bank of India (RBI) has set out guidelines and regulations for risk management in banks to ensure the
stability and soundness of the financial system.
Objectives of Risk Management in Banks:
(1) Financial stability: To protect the bank's financial stability and prevent it from insolvency or failure.
(2) Regulatory compliance: To adhere to the RBI's guidelines and regulations on risk management.
(3) Profitability: To minimize losses and maximize profitability by managing risks effectively.
(4) Customer protection: To safeguard customer funds and investments from potential losses.
(5) Stakeholder confidence: To maintain the trust and confidence of stakeholders, including depositors,
investors, and the public.

# Types of risk in banking:

(A) Credit risk: The risk of borrowers defaulting on their loans, leading to financial losses for the bank.
(B) Market risk: The risk of losses due to fluctuations in market prices, such as interest rates, foreign exchange
rates, and equity prices.
(C) Operational risk: The risk of losses due to internal failures, such as human errors, fraud, and system failures,
and external events, such as natural disasters or cyberattacks.
(D) Liquidity risk: The risk of the bank being unable to meet its short-term obligations, such as customer
withdrawals or loan repayments.

(A) Credit Risk:

Credit risk is a significant concern for banks, representing the potential that borrowers may fail to repay their
loans, resulting in financial losses.
 Risk Management Strategies
 Credit Assessment-
o Thoroughly evaluate the creditworthiness of borrowers before extending loans.
o Considering factors such as income, credit history, and collateral.

 Diversification-
o Spreading credit exposure across various sectors and industries.
o Avoiding over-concentration in a specific segment to reduce risk.

 Loan Collateral-
o Requiring collateral for high-risk loans to mitigate potential losses.
o Ensuring the value and quality of collateral through periodic assessments.

 Risk Mitigation Instruments-

o Using financial instruments like credit derivatives to transfer or mitigate credit risk.
o Hedging strategies to offset potential losses.

 Risk Grading-
o Assigning risk grades to loans based on the likelihood of default.
o Categorizing loans into low, medium, or high-risk segments.

 Credit Monitoring-
o Regularly monitoring borrowers' financial health and performance.
o Identifying early warning signals of potential default.

 Credit Limits-
o Setting appropriate credit limits for individual borrowers.
o Considering the borrower's capacity to repay when determining limits.

 Credit Policies-
o Establishing and enforcing clear credit policies and guidelines.
o Regularly reviewing and updating policies to adapt to changing economic conditions.

(B) Operational Risk:

Operational risk is the risk of losses arising from internal failures, external events, or inadequate processes
that disrupt a bank's operations and lead to financial losses.
Unlike credit risk, which stems from the actions of borrowers, operational risk arises from internal factors
within the bank itself.
Key Sources of Operational Risk:
 Internal Failures: Human errors, fraud, system failures, and technology disruptions can lead to
operational losses.
 External Events: Natural disasters, cyberattacks, and terrorism can cause operational disruptions and
financial losses.
 Inadequate Processes: Inefficient or outdated processes, poor internal controls, and lack of training
can increase operational risk.
Types of Operational Risk:
 Fraud: Fraudulent activities within the bank, such as employee embezzlement, account manipulation,
or forgery, can lead to significant financial losses.
 Process Errors: Errors in processing transactions, managing records, or maintaining systems can cause
financial losses and customer dissatisfaction.
 System Failures: Technology breakdowns, software glitches, or cyberattacks can disrupt operations
and lead to financial losses or reputational damage.
 External Events: Natural disasters, such as floods, earthquakes, or power outages, can disrupt
operations and cause financial losses.
  Business Disruptions: Regulatory changes, legal disputes, or macroeconomic shocks can disrupt
business operations and increase operational risk.
Risk Management Strategies:
 Identify and assess potential risks
 Implement strong internal controls
 Manage technology-related risks
 Develop business continuity plans
 Train employees on operational risk
 Manage third-party vendor risks
 Respond promptly to incidents

(C) Market Risk:

Market risk is the risk of financial losses arising from fluctuations in market prices, such as interest rates,
foreign exchange rates, and equity prices.
These fluctuations can impact a bank's portfolio of investments, its trading activities, and its overall financial
performance.
Types of Market Risk:
 Interest Rate Risk: Changes in interest rates can affect a bank's earnings from fixed-income
investments and its ability to manage its liabilities.
 Foreign Exchange Risk: Fluctuations in exchange rates can impact the value of a bank's foreign
currency holdings and its cross-border operations.
 Equity Price Risk: Changes in equity prices can affect the value of a bank's equity investments and its
overall market capitalization.
 Commodity Price Risk: Fluctuations in commodity prices, such as oil, gas, and metals, can affect a
bank's exposure to commodity-related loans or investments.
 Volatility Risk: Sudden or unexpected changes in market prices can lead to significant losses and
disrupt a bank's risk management strategies.
Risk Management Strategies:
 Risk Identification-
o Identifying and assessing market risks associated with interest rates, exchange rates, and
other relevant factors.
o Understanding the impact of market fluctuations on the bank's portfolio.

 Portfolio Diversification-
o Diversifying the investment portfolio to spread risk across different asset classes.
o Balancing risk and return objectives to align with the bank's overall strategy.

 Market Intelligence-
o Staying informed about economic and market developments that could impact risk exposure.
o Utilizing market research and analysis to make informed investment decisions.

 Dynamic Risk Management-

o Continuously monitoring and adjusting risk management strategies in response to changing
market conditions
o Adapting risk management practices to align with the bank's risk tolerance.

 Risk Measurement and Quantification-

o Employing quantitative tools to measure and quantify market risk exposure.
o Stress testing portfolios to assess potential losses under extreme market conditions.

 Hedging Strategies-
o Implementing hedging instruments, such as derivatives, to offset potential losses.
o Regularly reviewing and adjusting hedging strategies based on market conditions.

 Regulatory Compliance-
 o Adhering to regulatory guidelines related to market risk management.
o Ensuring compliance with reporting requirements and capital adequacy standards.

 Scenario Analysis-
o Conducting scenario analysis to understand the potential impact of various market scenarios.
o Enhancing preparedness for unforeseen market events.