In November 1999, when Deepak Parekh and S M Data, Chairman of new private sector banks shook hands, they created a history of sorts. It is the first ever mega merger of Indian banks. It signaled that Indian banking sector has finally joined the MBA bandwagon. There is no denying the fact that there have been mergers in the Indian banking sector before, but they were essentially attempts by the government to bailout the weak public sector banks that made the stronger partners feeble. Now, the paradigm shifts lies in the fact that while the earlier mergers took place at the behest of the government, the market forces drove the merger of HDFC BANK and Times Bank. Any talk of M&A in the Indian banking sector would have been pointless a few years ago. And any suggestion of merger of banks would be regarded as nothing short of Continue reading
Indian Banking System
Different Types of Risks Faced by Banks Today
All companies which have a profit maximizing objective hold a certain degree of risk whether through microeconomic or macroeconomic factors. Banks also face a number of risks atypical of non financial companies due to the payment and intermediary function which they perform. Recent changes in the banking environment has lead to an increased pressure to maximize shareholder value, this means that banks take on a higher risk in order to gain a higher return. It is due to this increased pressure and market volatility that banking risk needs such effective management to ensure the banks continued solvency. Risk can be defined as an “exposure to uncertainty of outcome” measured by the volatility (standard deviation) of net cash flow within the firm. Banks aim to add equity to the bank by maximizing the risk adjusted return to shareholders highlighting the importance of fully considering the risk and return business equation. Exposure Continue reading
Risk Management Structure / Framework in Banks
A major issue in establishing an appropriate risk management organization structure is choosing between a centralized and decentralized structure. The global trend is towards centralizing risk management with integrated treasury management function to benefit from information on aggregate exposure, natural netting of exposures, economies of scale and easier reporting to top management. The primary responsibility of understanding the risks run by the bank and ensuring that the risks are appropriately managed should clearly be vested with the Board of Directors. The Board should set risk limits by assessing the bank’s risk and risk-bearing capacity. At organizational level, overall risk management should be assigned to an independent Risk Management Committee or Executive Committee of the top Executives that reports directly to the Board of Directors. The purpose of this top level committee is to empower one group with full responsibility of evaluating overall risks faced by the bank and determining the Continue reading
History of banking in India
There are three different phases in the history of banking in India. Pre-Nationalization Era. Nationalization Stage. Post Liberalization Era. 1. Pre-Nationalization Era: In India the business of banking and credit was practices even in very early times. The remittance of money through Hundies, an indigenous credit instrument, was very popular. The hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different parts of the country. The modern type of banking, however, was developed by the Agency Houses of Calcutta and Bombay after the establishment of Rule by the East India Company in 18th and 19th centuries. During the early part of the 19th Century, ht volume of foreign trade was relatively small. Later on as the trade expanded, the need for banks of the European type was felt and the government of the East India Company took interest in having its own bank. The government of Continue reading
Role of RBI (Reserve Bank of India) in Payment Systems
The Reserve Bank of India participates in the payment systems as a user of the system, as the service provider for various components of the systems and is also the regulator of the systems in many instances. As a user, the RBI submits instruments for clearing in the cheque-based clearing operations. RBI also participates as a user in the Electronic Clearing Service (ECS)and EFT systems for making its own internal payments to its employees, vendor payments etc. Similarly, RBI transactions in Repo / Reverse Repo under LAF, Open Market Operations etc., would also be settled through the respective components of payment systems. As a provider of payment system services, the RBI has taken many initiatives as can be seen under the evolution of payment systems in the country in the development and operationalisation of the systems. Under this, the clearing houses and ECS systems are managed by the Reserve Bank Continue reading
Important Functions of Development Banks
Development banks have been started with the motive of increasing the pace of industrialization. The traditional financial institutions could not take up this challenge because of their limitations. In order to help all round industrialization development banks were made multipurpose institutions. Besides financing they were assigned promotional work also. Some important functions of these institutions are discussed as follows: 1. Financial Gap Fillers Development banks do not provide medium-term and long-term loans only but they help industrial enterprises in many other ways too. These banks subscribe to the bonds and debentures of the companies, underwrite to their shares and debentures and, guarantee the loans raised from foreign and domestic sources. They also help undertakings to acquire machinery from with in and outside the country. 2. Undertake Entrepreneurial Role Developing countries lack entrepreneurs who can take up the job of setting up new projects. It may be due to lack of Continue reading