1.Explain the post Independence Banking in India.Describe the impact of 1991 reforms of Indian Banking. Ans: Post Independence Banking in India: Immediately after the Independence, the partition of India in 1947 adversely impacted the economies of Punjab and West Bengal by paralyzing banking activities for months.With end of British rule in India marked the end of a regime of the Laissez-faire for the Indian banking sector. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. To streamline the functioning and activities of commercial banks, the government of India has came up with the Banking Companies act, 1949. The Reserve Bank of India, India’s central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. The Reserve Bank of India was vested with major powers for the supervision of banking inn India as he central banking authority. The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors. During those days, the general public had lesser confidence in Banking. As an aftermath, the deposit mobilization process was very slow. Moreover, the savings bank facility provided by postal department was considered comparatively safer than banks, and funds were largely given to traders. Post-Independence Banking History can be classified into two major categories: 1. Bank Nationalization in India: In India, the Banking Sector has been dominated by Government or Public Sector Banks (PSBs) for last 64 years. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, state-sponsored, state-partnered commercial banking institution with an effective machinery of branches spread all over the country. The as a result of reorganization of princely states. On July 19.recommendation of this committee led to establishment of first Public Sector Bank in the name of State bank of India on July 01. Allahabad Bank 2. Bank of Maharashtra 6. Bank of Baroda 4. Central Bank of India 8. Similarly during 1956-59. List of Nationalised Banks in India: 1. of then Imperial Bank of India. The second phase of bank nationalisation took place in 1980 during the prime ministerial tenure of Indira Gandhi. the Govt. Bank of India 5. The main objective behind this bank nationalisation was to spread banking infrastructure in rural India and make cheap finance available to Indian farmers. Andhra Bank 3. 1955 by acquiring the substantial part of share capital by Reserve Bank of India. Corporation Bank 9. Canara Bank 7. Dena Bank . the State Bank of India associate Bank came into fold of Public sector banking. in which 6 more banks were nationalised with deposits over 200 crores. 1969. promulgated Banking Companies (Acquisition and Transfer of Undertakings) ordinance 1969 to acquire 14 bigger commercial banks with with deposits over 50 crores. For the first time in India new private banks got license for providing banking service. Oriental Bank of Commerce 13. Vijaya Bank 2. Indian Bank 11.Bank Liberalization in India: Liberalisation in banking sector in India noticed in early 1990s’ when India adopted a new economic policy for the development of the nation. ICICI Bank and HDFC Bank. Indian banking sector has . Union Bank of India 18. It was later amalgamated with Oriental Bank of Commerce. Syndicate Bank 16. Punjab and Sind Bank 14. These banks came to be known as the New Generation tech-savvy banks. UTI Bank (Now known as Axis Bank).10. Punjab National Bank 15. re-energize the banking sector in India. This move towards the Liberalisation along with the rapid economic growth in India. The list of banks set up after new liberalization policy includes Global Trust Bank. Indian Overseas Bank 12. UCO Bank 17. Narasimha Rao government embarked on a policy of liberalization. United Bank of India 19. The first bank in India set up after the adaptation of new liberalization policy in banking sector was Global Trust Bank. licensing a small number of private banks. Global banks that boast of the best practices in the way they allocate capital and manage risks are also prone to make elementary .noticed rapid growth with strong contribution from all sector of banks – government banks. or around 300 days from now. The credit crisis has brought the dark underside into focus. That underlies the case for greater freedom for foreign banks. an annual publication from the World Bank that was released last week. the Reserve Bank of India is likely to open up the Indian banking market further in April. the global credit crisis has shown how problems in Western banks can reverberate through financial systems in emerging markets. as reiterated in Global Development Finance 2008. private banks and foreign banks. The next stage for the Indian banking sector has been set up with the proposed relaxation in the norms for Foreign Direct Investment (FDI). First. All Foreign Investors in banks can holds up to 74% with some restrictions of the company. Elucidate on the role of foreign banks in India Ans: Role of foreign banks in India Foreign banks play a relatively minor role in the Indian economy. This fact is relevant right now for two reasons. Impact of 1991 reforms of Indian Banking: Q2. The advantages of greater foreign bank participation are clear: They tend to increase the efficiency of the local banking system. Two. bring in more sophisticated financial services and have the ability to nurse weak banks back to health. India needs more foreign bank participation. Singapore. Discuss Currency swap with a suitable example Ans: 1. what is the objection to more direct participation? 8 Write a note on 1. India etc and can be termed as multinational banks. But that would be a mistake. hence. need tighter regulation than markets in goods and services. Multinational Banking 2. which is one reason that India could support credit growth of 28.1% despite the fact that deposits grew at only 18. Multinational Banking A bank that has offices and operations across multiple countries can be considered a multinational bank. Letters of Credit 3. The question is: If regulators are comfortable getting resources from foreign banks indirectly through the global credit markets. Local banks have been on a borrowing spree abroad. Standard Chartered bank etc have offices in many countries like USA. They raised more than $12 billion between 2003 and 2006. International Financial Institutions 4. UK. The main contention—that foreign banks account for just 5% of India’s loan market—is misleading.mistakes. Describe in brief the concept of ALM (Asset-Liability Management) 5. 2. So. While we agree that banking markets tend to be prone to crises and. A lot of this overseas borrowing must have come from foreign banks operating in global financial centres. Letters of Credit .5%. which way should policy swing? It is tempting to conclude that India is better off with its current policy of caution about the entry of foreign banks. For ex: Citibank. partly because of the imperfect nature of regulations and partly because bankers have perverse incentives to be loose with other people’s money. or paying bank). a letter of credit is a nonnegotiable instrument but may be transferable with the consent of the applicant. in addition to managing risk. the largest commercial banks each have assets of c. This compares to the two components of the World Bank. the two most basic ones are (1) Revocable-credit letter of credit and (2) Irrevocable-credit letter of credit. the international banking system acts as an intermediary between far flung exporters and importers. asset/liability management entails managing assets and cash inflows to satisfy various obligations. Today.$2. Their owners or shareholders are generally national governments. commercial invoice. the banking system does not take on any responsibility for the quality of goods. or any other provision in the contract of sale. . negotiating bank. the International Chamber Of Commerce (ICC) has suggested specific terms (called Incoterms) that are now almost universally accepted and used.000 billion. and hence are subjects of international law. Since the unambiguity of the terminology used in writing a letter of credit is of vital importance. whereby one endeavors to mitigate or hedge the risk of failing to meet these obligations. For comparison. Success in the process may increase profitability to the organization. To establish a letter of credit in favor of the seller or exporter (called the beneficiary) the buyer (called the applicant or account party) either pays the specified sum (plus service charges) up front to the issuing bank. the world's largest IFI is the European Investment Bank. although some bilateral financial institutions (created by two countries) exist and are technically IFIs. A letter of credit guarantees payment of a specified sum in a specified currency. the IBRD (assets of $358 billion in 2014 and the IDA (assets of $183 billion in 2014). In effect. These documents almost always include a clean bill of lading or air waybill. 3. Unlike a bill of exchange. However. It is a form of risk management. International Financial Institutions The international financial institutions (IFIs) are financial institutions that have been established (or chartered) by more than one country. provided the seller meets precisely-defined conditions and submits the prescribed documents within a fixed timeframe. although other international institutions and other organizations occasionally figure as shareholders. by a buyer's or importer's bank (called the issuing bank) to the seller's or exporter's bank (called the accepting bank. with a balance sheet size of Euros 512 billion in 2013. Although letters of credit come in numerous types. which comes in two versions (a) Confirmed irrevocable letter of credit and (b) Not-confirmed irrevocable letter of credit. The best known IFIs were established after World War II to assist in the reconstruction of Europe and provide mechanisms for international cooperation in managing the global financial system. The most prominent IFIs are creations of multiple nations. 4.A written commitment to pay. or negotiates credit. and certificate of origin. Thus. a letter of credit substitutes the creditworthiness of a bank for the creditworthiness of the buyer.000-3. Describe in brief the concept of ALM (Asset-Liability Management) Although it has evolved over time to reflect changing circumstances in the economy and markets. Letters of credit are formal trade instruments and are used usually where the seller is unwilling to extend credit to the buyer. in its simplest form. genuineness of documents. A monthly mortgage is a common example of a liability that a consumer has to fund out of his or her current cash inflow. Each month. a pension plan must satisfy contractually established benefit payments to retirees. Now. Here are some examples of the asset/liability challenges of various financial institutions and individuals. Now. because in interest rate swap. As you can assume. it is more strategic than tactical. while at the same time sustain an asset base through prudent asset allocation and risk monitoring. but on a much more complex scale. as such. 5. from which to generate these ongoing payments. or the difference between the market value of assets and the present value of the liabilities and their relationship. We are explaining currency swap examples : 1st Example of Currency Swap Company A is doing business in USA and it has issued bond of $ 20 Million to bondholders that has been nominated in US $. The challenge is to understand their characteristics and structure assets in such a way as to be able to satisfy them. surplus is known as net worth. we both principle and interest of loan is exchanged from one party to another party for mutual benefits. This may result in an asset allocation that would appear suboptimal (if only assets were being considered). Alternatively. the liabilities of financial institutions can be quite complex and varied. For example. Interest rate swap is different from currency swap.Some practitioners prefer the phrase "surplus optimization" as better to explain the need to maximize assets available to meet increasingly complex liabilities. Discuss Currency swap with a suitable example Currency Swap is an agreement between two parties of two countries for exchanging of principle and interest of loan at its present value. Company A will get $ 10 million EurosBonds with its . we just exchange the interest from fixed to floating rates but in currency swap. the individual faces the task of having sufficient assets to pay that mortgage. Financial institutions have similar challenges. The discipline is conducted from a long-term perspective that manages risks arising from the interaction of assets and liabilities. both company's directors sit in one room and agreed for exchanging the principle and interest of both bonds. Asset and liabilities need to be thought of as intricately intertwined. Other company B is doing business in Europe. rather than separate concepts. This swap is very useful for controlling foreign exchange risk. It has issued bond of $ 10 Million Euros. It means that both are benefited with single deal of currency swap. 3rd Example of Currency Swap Suppose one USA company wants to start his factory in India. Now getting money will be asset in the form of central bank liquidity swaps.interest payment and Company B will get $ 20 million bond for exchanging his principle and interest. 2nd Example of Currency Swap Federal Reserve bank of USA exchanged his taken debt with foreign country and its value is 0.06 Billion Dollars. Now company A has Indian currency for doing business in India and company B which is Indian company has USA currency and it can get Forex earning. . This is the simple example of currency swap. For this it gets $10 billion dollar in the form of loan from USA market and Exchanges this amount from India company B.