Class 2

Class 2

Why & How the banking continues to exist –

1) Serving the small savers (after maintaining a minimum amount with bank)

2) Risky arbitrage (Willingness to accept risky funds – deposits on demand while issuing low risky securities to depositors)

De-regulation

***Reduction in SLR or CRR is not De-regulation. It is intensity of regulation

1. De-regulation of interest rates (like for priority sectors) – External regulation is slowly minimized. Big customers do not want to disclose their details.

2. Rising cost of funds – Spread decreasing due to intense competition. RBI allows lower SLR for some banks having liquidity crunch.

3. Repo Rate – RBI lends to banks

4. Reverse Repo – RBI borrows from banks

Trends to be taken care of

1. Technological revolution – Bank absorbs technology and upgrades staff to adapt to it. Ex – New version of Finacle (Infosys product) is given to existing users for feedback on comfort of using.

2. Globalization – Having back-up office in different countries

3. Dis-intermediation – Banks moving to provide fee-based services

4. Change of life style – Consumption & spending pattern / savings etc. has changed. People are now working in night shifts also

5. Change of lending – Investment in equity and private company securities other than Government bonds

6. Aging of staff – Max age of employees in dealing room of bank is 35 years

Indian Nationalized bank’s Disinvestment process

Earlier Days

· Government holds 100% stake in the bank

· Government sells say 40% stake and maintain 60% with them

· Premium earned here is used to reduce fiscal deficit

Now-a-days

· Bank floats additional share for public, original capital of bank is not changed

· Additional capital reduces the over-all share of government in public sector banks

· Premium is retained by banks & is used as liquid assets instead of reducing fiscal deficit

Branch Vs Bank

1) Unit Bank – Bank with only 1 branch

2) Branch Banking – It follows Brick and Mortar structure (businesses that have physical presence rather than just virtual / online; located or serving customers in a physical facility)

3) Credit Delivery Mechanism – Even distribution of banking system (bank branches)

Population Density	Name
Less than 10,000	Rural
10,000 to 100,000	Semi-urban
100,000 to 1 Million	Urban
More than 1 Million	Metropolitan

** No person should travel more than 3 kms for availing banking services

WTO stresses that every member country should allow 12 new branches of a foreign banks to be opened each year to avoid concentration of banks in just 1 country