Indian Banking Sector: Concept, Structure, Statistics, Importance Leave a comment

Some banks, including some public sector banks among the 26 public sector banks that we have, may be better off merging. The need for two or three world-size banks in an economy that is poised to become one among the five largest in the world is rather obvious”. 3.7 Expansion of the existing banking business requires additional capital support. Indian banking is dominated by the public sector, which accounted for about 73 per cent of total assets of the banking sector at end-March 2012.

  1. DRs issued by a bank or a depository in USA against underlying rupee shares of a company incorporated in India are known as American Depository Receipts (ADRs) and those issued by a bank or a depository elsewhere are known as Global Depository Receipts (GDRs).
  2. Some of the primary services they offer to its customers are banking services, microfinance, MSME, and affordable housing finance to urban, semi-urban, and rural customers.
  3. Out of the total of 333 foreign bank branches, 331 are in urban and metropolitan areas (out of which 44 branches are in underbanked districts).
  4. 4.7 On balance, however, it would seem that small banks do embody the potential for furthering the cause of financial inclusion.
  5. The effect of boards on performance of Indian banks was also investigated by Sarkar and Sarkar (2018).

Grove et al. (2011) found a concave relationship between board size and performance of the US banks. Further, their study supported a negative association between CEO duality and bank performance. Also, Adam and Mehran (2012) examined 35 US bank holding companies and found that larger boards positively correlated with bank performance. However, they established no significant relationship between board composition and performance, which was measured by Tobin’s Q statistic. Nyamongo and Temesgen (2013) reported that the larger board size deteriorates the performance, while the independent directors enhance the performance of Kenyan banks.

Structure of Banking: Meaning, Concepts, Structure, Examples for General Banking Awareness

For PSBs, the GoI decides the remuneration of whole-time directors in consultation with RBI. However, RBI approves the remuneration packages of whole-time directors for the PBs (RBI, 2019b). Based on the “Guidelines on Compensation to Whole-time Directors”, the executives of PBs embraced all the aspects of remuneration, including stock options and equity grants, which is not practicable in PSBs. Although the scheme of stock options and equity grants is recommended for PSBs by the BBB in 2017.

The offshore bank shall not operate savings accounts or accept fixed deposits denominated in Singapore dollars. Finally, the representative office licence prevents banks from conducting regular banking operations, but promotes business and correspondent banking business between their home offices and the region. 5.25 In this context, a question arises whether and to what extent the recommendations of the Vickers and Liikanen Reports need to be factored in for restricting the universal banking model. It would appear from the Indian stand point that such proposals may be of limited relevance as Indian banks basically engage in plain vanilla banking. This position could be reviewed after say, 5 years keeping in view the riskiness and complexity of the investment banking services being offered by Indian banks and factoring in the experience from the implementation of the two Reports’ recommendations. 5.6 The stand-alone investment banks in the US failed in the wake of the recent financial crisis due to excessive leverage and reliance on predominantly short-term debt funding for the long-term mortgages (Brunnermeier, 2008).

They yearn to become a bank that is everyone’s choice by offering quick and unique financial solutions. RBL team says that they have customers at their heart; employees are their pillar, and shareholder value is their focus. To achieve all this, they offer best-in-class products and services plus offer an environment where employees can work comfortably. Their business model is pretty different from other banks as they work on the two-legged business model, wherein they try and increase lending in the home territory and search to capture niche lending opportunities on a pan-India basis. They have an interesting tagline that absolutely goes with the services they offer, i.e., “A perfect banking partner.” They render their users one of the most efficient and convenient banking solutions.

Regional Rural Banks (RRBs)

In the US, sections 23A and 23B of the Federal Reserve Act specify the statutory restrictions on transactions between a member bank and its affiliates. In the European Union (EU), the Financial Conglomerates Directive provides a framework for supplementary layer of prudential supervision of financial conglomerates addressing the concerns behind such transactions. The IWG interacted with certain serving and retired Deputy Governors of Reserve Bank, serving bankers, legal experts, and other professional and experts in the field of banking to get their insights hierarchy in private banks in india on the subject. A summary of views of experts on various issues is furnished in Annex I. The IWG also studied the international practices followed in some major jurisdictions. (iii) While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within 5 years from announcement of tax-neutrality. (i) NOFHCs should continue to be the preferred structure for all new licenses to be issued for Universal Banks.

This finding helps us to substantiate that the regulators took a series of potent and effective policy stances during the crisis period, which to some extent, steps in the right direction to manage the impact of the crisis on PSBs within tolerable limits (see specification (viii) in Table 12). Finally, by including the FORBRANCH as a control variable, we can see from model specifications (vi), (vii), and (viii) that bank expansion through branch internationalisation has a strong positive impact on bank soundness. 6.14 At present, the Government is the owner of about three-fourths of the total assets in the banking system. Initiative for the exercise at least at the preliminary stage should come from the Government. It also requires the integration of the heterogeneous work cultures and alignment of technology in the merged entities.

Designations in HDFC Bank: From Joining as an Assistant Manager to climbing to the rank of Managing Director.

Credit institutions (which include banks) must report financial information relating to ‘significant shareholders’ i.e. persons holding 10 per cent or more of a credit institution’s voting rights to the Prudential and Resolution Control Authority (ACPR), annually. A change in the shareholding structure of a credit institution (CI) must be also be informed to the ACPR. The Bank Act does not permit any person to have ‘significant interest’ (aggregate holding greater than 10 per cent by the person and entities controlled by the person) in any class of shares of the bank or bank holding company except with requisite approval.

33) As the licensing is now on-tap, Reserve Bank may prepare a comprehensive document encompassing all licensing and ownership guidelines at one place, with as much harmonisation and uniformity as possible, providing clear definition of all major terms. It will also provide flexibility to Reserve Bank to fine tune the instructions, at a short notice, through small relevant amendment in this document. 5.9.3 After considering the opinion furnished by the experts on this issue and further deliberations, the IWG is of the view that existing banks also have to be covered with provisions of new licensing guidelines because new provisions generally seek to plug lacunae in the existing system. Further, harmonisation of all guidelines is desirable to create a level playing field.

Environmental, Social and Governance Committee

10.11 In short, the reoriented structure will be dynamic, with the emergence of well capitalised banks, which are prudently regulated and rigourosly supervised. The task of restructuring the Indian banking system is a complex exercise and poses a number of challenges and would require wading through several cumbersome and conflicting processes and execute a plan of action. 9.7 The Financial Stability Board has proposed a set of twelve core elements viz.

The third tier may encompass old private sector banks, Regional Rural Banks, and multi state Urban Cooperative Banks. The fourth tier may embrace many small privately owned local banks and cooperative banks, which may specifically cater to the credit requirements of small borrowers in the unorganised sector in unbanked and under banked areas. The present and the indicative profiles of the reoriented banking system after the envisaged restructuring are given in Annex III. 5.15 Though studies show that neither of the models, i.e., universal banks or investment banks did better than the other during the crisis, several jurisdictions have supplemented or propose to supplement the enhanced prudential regulations under Basel III with structural measures to combat systemic risks. The proposed structural measures range from moving businesses identified as too risky and complex into stand-alone entities to prohibiting banks from engaging in these activities altogether.

One should not ignore the fact that beyond a point, size may not increase efficiency. An informed debate among all stakeholders will help to arrive at a rational decision in this regard. 3.2 The Indian banking sector has come a long way since independence, more so since the nationalisation of 14 major banks in 1969 and 6 banks in 1980. There has been a substantial increase in banking business over the years, captured by the ratio of banking business (credit plus deposits) to GDP. Over the years, the reach of banking has widened significantly to include relatively under-banked regions, particularly in rural areas. Commercial bank credit as per cent of GDP picked up steadily from 5.8 per cent in 1951 to 56.5 per cent by 2012.

As of 1st April 2020, there are 12 public sector banks (PSBs) in which the GoI holds more than 50 per cent of the stake, 22 private banks (PBs), and 44 foreign banks (FBs). All public and private banks are listed except for three old private banks (the Catholic Syrian Bank, the Tamilnad Mercantile Bank, and the Bank of Nainital). Reserve Bank of India regulates banks under the Banking Regulation Act, 1949 (amended in 2017), which gives the industry a unified regulatory environment.

Another contribution of this study lies in using data information on 14 ratio indicators and 48 equity and debt governance norms to construct bank soundness and governance indices, respectively. The corporate finance literature argues stakeholders for banking firms include not only shareholders (majority and minority), but also, comprises depositors and other creditors whose trust needs to remain intact in the bank by the managers. Therefore, the scope of corporate governance, particularly for banks, extends beyond the equity governance (shareholders) to encompass debt governance (debtholders)4. As far as we could possibly know, no previous empirical study used such a wide array of indicators to build these indices of bank soundness and governance. At long last, this is perhaps the first study that investigates a link between “governance-efficiency-soundness” in the banking industry in India.

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