Episode: 01 (A brief idea about banking and financial system in India)
Arindam: - Viewers! Look at this auditorium of IBI (Indian Banking Institute) Head Office. So, many people have come here to learn about Banking. Anyway, a new professor has entered inside the auditorium now. Just enjoy the 1st episode of this program.
Professor Ratnadhikary: - Hello everybody! Before starting the class, let me introduce myself. I am Rabindranath Ratnadhikary. I am having around 23 years of experience in a PSU Bank of India. Now, let us start today’s session. Today, we are going to have a brief idea about banking and financial system in India. Can anyone of you define the word, ‘Bank’? What is a ‘Bank’?
Sailendra: - Bank is an office which accepts cash as deposits and also makes cash payments.
Professor Ratnadhikary: - Ok! As per your viewpoint, a bank is an office which provides financial transactions. But, behind each and every financial transaction, there is an operating cost. Now, why a person will keep money in a Bank instead of keeping it in his house?
Priyadarshan: - Our money will remain secure in a Bank. If I keep the money in my house, then someone may steal that money, or maybe, due to some natural calamities, all the money may get destroyed.
Professor Ratnadhikary: - It is a secondary reason. The primary reason for keeping your money in a Bank is that you are getting interest on your deposited money. Smart people know the concept of inflation and time value of money. That’s why; they keep their money as deposits in a Bank. Say, for example, I have opened up a new bank in my locality where 100 villagers have kept some deposits in their respective accounts of this bank. Say, the total deposits of this new bank is Rs. 50,000/-. Say, I am giving an interest of 10% per year on the deposit money. So, my bank is liable to pay Rs. 5000/- in total to its depositors. Therefore, Rs. 5000/- is a liability or rather an expense for this bank. So, after 1 year, my bank will be having a loss of Rs. 5000/- . How will the bank survive then?
Madhubala:- Bank will give loans to the customers.
Professor Ratnadhikary:- Yes, she is correct. The other name of Banking is Lending. If the bank lends Rs. 4,00,000/- in a year at a rate of 25% per annum, then, even at a simple interest rate calculation, the bank is able to display in its balance sheet that in a year, the bank has earned Rs. 1,00,000/- as interest on loans. So, net profit after 1 year is (Interest Earned on Advances – Interest paid on Deposits) which is equal to Rs. 50,000/- in this particular example.
Arindam:- I have a question.
Professor Ratnadhikary:- Oh! The anchor of RBTV is also having a question. That means; I am succeeding in attracting everyone’s attention in this class. Yes, Arindam, what’s your question?
Arindam:- If only 10% of the Interest Earned on Advances get truly realized, then how will you show the other 90% of the Interest Earned on Advances in the Bank Balance Sheet.
Professor Ratnadhikary:- Show me a Bank, where they have fully realized the entire Interest Earned on Advances from the customers fully. At least, in 30% of the cases of bad loans, write-offs take place. To do write-offs, a Bank does some provisioning from the Gross Profit of the Balance Sheet. We will deal with those things in detail in later classes. Anyway, so, finally, what is the definition of a Bank? A Bank is a financial intermediary which transforms savings of customers into Project Investments or General Investments. Now, can anyone of you tell me that which bank acts as the Banker of all Banks in India? Which governing body controls and monitors the functioning of all banks in India?
Suhasini:- Reserve Bank of India.
Professor Ratnadhikary:- Correct answer. RBI or Reserve Bank of India is the Central Banking Authority of India. RBI looks after monetary and inflation control. It even performs bank supervision. But how this RBI always succeeds in making monetary control? Again, let me give you an example. Say, a Bank is having total deposits of Rs. 60,000/-. If the bank lends Rs. 55,000 to the borrowers, then it is a gambling. But, if a Central Committee Body makes a law, that the bank has to keep at least 25% of the total deposits as a reserve fund or to maintain a certain (Credit/Deposit) or C/D ratio, then, the Bank will keep aside Rs. 15,000/- as a security money of the Bank. In a similar fashion, RBI came out with the idea of implementing CRR and SLR on all the Banks. CRR stands for Cash Reserve Ratio and SLR stands for Statutory Liquidity Ratio. We will deal with these things when we will go through the sessions on Basel III framework. Basically, RBI plays with CRR, SLR, Repo Rate, Reverse Repo Rate and Bank Rate to control the money pumping strategy in our Indian economy. Don’t worry; we will deal with these things later in details.
Sailendra:- Sir, Banking system of India is the Financial system of India. If banking sector progresses, the Indian economy will also progress.
Professor Ratnadhikary:- No, Indian financial system also has some other players. If on one side, it is the banking sector, then on the other side, there are Capital Markets and Insurance Sector. Banks, Stock Exchanges and Insurance Companies are three main pillars of Indian Financial System. RBI controls Banks, SEBI controls Stock Exchanges and IRDA controls Insurance companies.
Manikanchan:- Many a times, we have seen that RBI has decreased the SLR. Why they did that?
Professor Ratnadhikary:- Sometimes, to bring rapid development of our rural sector or infrastructure sector, Indian economy requires some more money. Decrease in SLR pumps out more money to the Banks and hence the amount of advances increases in the Indian economy. Almost same is the case with CRR also. Cash Reserve Ratio is the mandatory deposit to be held by banks with RBI.
Dhyanchand:- Sir, you talked about banking financial services only. But, what are the non-banking financial services then?
Professor Ratnadhikary:- Those are some different things though somewhat related to banking also. We will deal with Leasing, Hire-Purchase and Bill Discounting later on. Now focus on banking sector only. So, we wrap it up here for today. See you all in the next session. Bye!
Arindam:- Some topics of this session went above my head. I don’t know the feedback of other audiences out here. Anyway, viewers! There is lot to be learned about Banking. If any banker ever tells you that he/she knows everything about Banking, then he/she is the No. 1 liar of the World. Banking is like a Big Blue Ocean. The more you swim deeper in it, the more you explore, the more you discover and the more you innovate. That’s the magic of Banking. See you all in the next episode. Keep on watching this show. Goodbye to all the viewers for the time being.
