What is Banking
A bank is a link between customers who have capital deficits and capital surpluses. It is a financial institution and financial intermediary that accepts deposits from one customer and channels this deposits to other customer either directly by loaning or indirectly through capital market.
Now let’s look at major division of the banking sectors
- Public Sector banks in India – All government owned banks come in this category. Along with Reserve bank of India, SBI, its associates and about 20 nationalized banks comprises of these category. Some of the Regional rural banks that are funded by government banks also come in this category.
- Private sector Banks in India – With policies on Liberalization being taken up , private sector banks were established which offered various services to various customers and contributed heavily on growth of economy
- Foreign banks in India – These banks are situated outside India and have their branches in India. With their existence competition has been increased in the banking sector. Now these banks are permitted to set up local subsidiaries. The policy for foreign banks conveys that they cannot acquire the Indian banks except for the weak banks which are identified by RBI and their Indian subsidiaries will not be able to open branches easily.
- Regional Rural Banks – SBI has 30 regional banks in India known as RRBs, apart from SBI there are many rural banks which are located in rural areas. There are 14475 rural banks which are located in remote rural areas.
- Cooperative banks in India – With the aim to cater to rural population the cooperative banks were set up in India 100 years ago. It takes care for the issues like agricultural credit. It finance rural areas under.
- Cooperative banks in India finance rural areas under:
- Personal Finance
- Cooperative banks in India finance rural areas under:
- Cooperative banks in India finance urban areas under:
- Small scale units
- Home finance
- Consumer finance
- Personal finance
Under the guidance of the Board for Financial Supervision RBI performs the function of financial supervision. The main functions of RBI are
- It has monetary authority i.e it formulates, implements an monitors the monetary policy
- It is a Regulator and supervisor of the financial system:
- It is a manager of foreign exchange i.e it facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market in India.
- It issues and exchanges or sabotage currency and coins not fit for circulation.
- It plays a developmental role by performing a wide range of promotional functions which supports our national objectives.
- It maintains banking accounts for all scheduled banks and performs merchant banking function for the central and the state government
Important banking terms
- Liquidity Adjustment Facility (LAF):
This a tool used in monetary policy which allows banks to respond to liquidity pressures and is used by government to assure basic stability in the financial markets. LAF allows banks to borrow money through repurchase agreements.
- Cash reserve ratio:
The reserve bank requires banks to maintain amount of cash in reserve as a % of deposits is cash reserve ratio. This is done to ensure that banks have sufficient cash to cover customer withdrawals.
- Bank rate:
A rate which the reserve bank is ready to buy or rediscount bills of exchange or other commercial papers. If the bank rate is increased , the interest rate that a bank pays also increases.
- Repo and Reserve Repo:
Repo rate is the rate at which the banks borrow some amount due to the shortages they face from the central bank of India. When repo rate decreases the banks are able to borrow money at a lower rate and vice versa
Reverse Repo Rate
Reverse repo rate is the rate at which the central bank absorbs liquidity from the banks, If reverse repo increases , it is attractive for banks as get higher interest rate on the amount they have invested and the banks are happy when they invest in the RBI as their money is in the safe hands. Reverse repo lower than repo by 100 bps.
- Statutory Liquidity Ratio (SLR):
Statutory Liquidity ratio is determined by RBI which refers to that amount which the commercial banks require to maintain in the form of cash, gold or government approved securities i.e bonds and shares of different companies before providing credit to customers.The SLR rate is calculated as Total demand/ Time liabilities x 100.The maximum limit of SLR is 40% and minimum limit of SLR is 24%.
- Non-Performing Assets (NPA)
The assets come under non-performing assets when it ceases to generate income for the bank. The assets a loan or an advance becomes non performing when
- Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan
- The account remains „out of order‟ in respect of an Overdraft/Cash Credit (OD/CC)
- The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted
- A loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons.
- A loan granted for long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season.
- Net interest Margin –
It is calculated as interest income divided by interest earning asset. It evaluates a bank’s investment decision. A good ratio indicates a healthier investment decision.
- Capital Adequacy ratio –
This ratio is expressed as a percentage of sales. In order to protect the investor and promote the stability of the financial system around the world this ratios is used.
Jobs in banking sector
The different jobs that are available in the banking sector are:
- Relationship manager
- Credit analyst
- Bank manager
- Branch manager
- Risk manager
- Customer care executive etc.