money, banking and finance - cibil empowers both loan providers and individuals to see their world...
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www.time4education.com
Money, Banking
and Finance
Triumphant Institute of
Management Education P Ltd
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Financial Sector • Mobilization and allocation of
savings.
• Financial sector constitutes of
Financial Institutions, Instruments
and Market.
• Acts as a conduit for the transfer of
financial resources from net savers
to net borrower.
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Money Market • RBI occupies the central position.
• Borrowers: Manage to obtain short
term loanable amount.
• Lenders: Succeed in getting
creditworthy customer.
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CIBIL • Credit Information Bureau (India) Limited or CIBIL is
a Credit Information Company (CIC) founded in
August 2000.
• CIBIL collects and maintains records of an
individual‘s payments pertaining to loans and
credit cards.
• CIBIL empowers both loan providers and
individuals to see their world more clearly and
hence, take better and more informed decisions.
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Financial Institutions • Commercial Banks in India
• Insurance Provider in India
• Credit rating agencies in India
• Finance Minister of India
• Micro Finance Institutions
• Specialized Financial Institutions in
India
• Insurance Regulatory and
Development Authority
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Financial Instruments • They can be broadly classified into Government
securities and Industrial securities.
• The Government securities are fixed income
securities backed by the government and there is
no risk of default.
• The Major Instruments that fall under Industrial
Securities are Debentures, Preference Shares
and Equity Shares.
• In other words, the industrial securities are about
the stock market and mutual funds.
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G-Secs • These securities may have maturities ranging from
five to twenty years.
• These are fixed income securities, which pay
interest every six months.
• The Reserve Bank of India manages the issues of
the securities.
• The G -secs are primarily bought by the
institutional investors. The biggest investors are
commercial banks who invest in G-secs to meet the
regulatory requirement to maintain a certain
percentage of Statutory Liquidity Ratio (SLR).
• Insurance companies, provident funds, and mutual
funds are the other large investors.
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T-bill • The Government of India also borrows short term
funds for up to one year.
• This is through the issue of Treasury Bills which are
sold at a discount to the face value and redeemed
at the full face value.
• Minimum amount of face value Rs.1 lac and in
multiples there of. There is no specific amount/limit
on the extent to which these can be issued or
purchased.
Maturity : 14/91/182 and 364 days.
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Industrial Securities:
• These are securities issued by the corporate sector to
finance their long term and working capital
requirements. The Major Instruments are:
• Debentures
Debentures have a fixed maturity and pay a fixed or a
floating rate of interest during their lifetime. The company
has an obligation to pay interest and the principal amount
on the due dates regardless of its profitability position
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Industrial Securities • Preference Shares
Preference Shares carry a fixed rate of
dividends.
These carry a preferential right to dividends
over the equity shareholders.
Similarly on the winding up of the company, the
preference share holders get back their capital
before the equity share holders.
• Now all preference shares in India are
`redeemable’, i.e. they have a fixed maturity
period. Thus, preference shares are sometimes
called a `hybrid variety’ – incorporating features
of debt as well as equity.
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Industrial Securities
• Equity Shares • Equity Shares are regarded as high return
high risk instruments.
• These do not carry any fixed rate of return and
there is no maturity period.
• The company may or may not declare dividend
on equity shares.
• Equity shares of major companies are traded on
the stock exchanges.
• The major component of return to equity holders
usually consists of market appreciation.
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Call Money Market:
• The loans made in this market are of a short term
nature – overnight to a fortnight .
• This is mostly inter-bank market.
• Those banks which are facing a short term cash
deficit, borrow funds from the cash surplus banks.
• The rate of interest is market driven and
depends on the liquidity position in the banking
system.
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Commercial Paper (CP) and Certificate
of Deposits (CD) :
• CPs are issued by the corporate to finance their working
capital needs.
• These are issued for short term maturities.
• These are issued at a discount and redeemed at face
value.
• These are unsecured and therefore only those companies
who have a good credit standing are able to access funds
through this instrument.
• The rate of interest is market driven and depends on the
current liquidity position and the creditworthiness of the
issuing company.
• The characteristics of CDs are similar to those of CPs except
that CDs are issued by the commercial banks.
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Commercial Bank
• A)
• PUBLIC SECTOR BANKS
• State Bank of India and its 7 associate Banks,
together called State Bank Group
• Nationalized Banks (20 in number)
• Regional Rural Banks sponsored by Public sector
Banks
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Commercial Bank
• B)
• PRIVATE SECTOR BANKS
• Old Generation Private Banks.
• New Generation Private Banks
• Foreign Banks in India
• Scheduled Co-operative Banks
• Non Scheduled Banks
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CO-OPERATIVE SECTOR BANKS
• C)
• CO-OPERATIVE SECTOR BANKS
• Central Co-operative Banks
• State Co-operative Banks
• Land Development Banks
• Primary agriculture Credit Societies
• Urban Co-operative Banks
• State Land Development Banks
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Development Bank • D)
• DEVELOPMENT BANKS
• Export-Import Bank of India (EXIM Bank)
• Industrial Finance Corporation of India (IFCI)
• Industrial Development bank of India (IDBI)
• National Bank for Agriculture & Rural
Development (NABARD)
• Industrial Investment Bank of India (IIBI)
• Small Industries Development Bank of India
(SIDBI)
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Important Terms
• What is Inflation or What is the
meaning of Inflation :
• A rise in general level of prices of goods and services
in a economy over a period of time.
• When the general price level rises, each unit of currency
buys fewer goods and services. Thus, inflation results
in loss of value of money.
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Types of Inflation • a) DEMAND - PULL INFLATION: prices
increase results from an excess of demand
over supply for the economy as a whole.
• (b) COST - PUSH INFLATION: This type of
inflation occurs when general price levels
rise owing to rising input costs.
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Deflation
• What is Deflation ? :
Deflation is the opposite of inflation. Deflation
refers to situation, where there is decline in
general price levels.
• reduction in the supply of money or credit.
• direct contractions in spending.
• side effect of increasing unemployment in an
economy.
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Stagflation • What is Stagflation :
Stagflation refers to economic condition where
economic growth is very slow or stagnant and
prices are rising.
• Example:
At international level, this happened during mid
1970s, when world oil prices rose dramatically,
fuelling sharp inflation in developed countries.
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Hyperinflation
• What is Hyperinflation :
• Hyperinflation is a situation where
the price increases are too sharp.
• Reason: • when there is a large increase in the money
supply, which is not supported by growth in
Gross Domestic Product (GDP).
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CRR • What is CRR:
• CRR means Cash Reserve Ratio. Banks in India
are required to hold a certain proportion of their
deposits in the form of cash. This minimum
ratio (that is the part of the total deposits to be
held as cash) is stipulated by the RBI and is
known as the CRR or Cash Reserve Ratio.
• RBI has also cut 25 bps on CRR and thus it has
been reduced from 4.25% to 4.00%, and this
will be wef 9/2/2013.
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Bank Rate • What is Bank rate?
• Bank Rate is the rate at which central bank of the
country (in India it is RBI) allows finance to commercial
banks.
• Any upward revision in Bank Rate by central bank is an
indication that banks should also increase deposit rates
as well as Base Rate / Benchmark Prime Lending Rate.
• Thus any revision in the Bank rate indicates that it is
likely that interest rates on your deposits are likely to
either go up or go down, and it can also indicate an
increase or decrease in your EMI.
• 8.75% wef 29/01/13
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Repo-Rate • Repo (Repurchase) rate is the rate at which the
RBI lends shot-term money to the banks against
securities.
• When the repo rate increases borrowing from
RBI becomes more expensive.
• Decreased to 7.75% from 8% wef 29/01/13.
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Reverse Repo-Rate • Reverse Repo rate is the rate at which banks park their
short-term excess liquidity with the RBI.
• The banks use this tool when they feel that they are
stuck with excess funds and are not able to invest
anywhere for reasonable returns.
• An increase in the reverse repo rate means that the RBI
is ready to borrow money from the banks at a higher
rate of interest.
• As a result, banks would prefer to keep more and more
surplus funds with RBI.
• 6.75% wef 29/01/13.
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SLR
• What is SLR?
• Every bank is required to maintain at the close of
business every day, a minimum proportion of their Net
Demand and Time Liabilities as liquid assets in the form
of cash, gold and un-encumbered approved securities.
• The ratio of liquid assets to demand and time liabilities
is known as Statutory Liquidity Ratio (SLR).
• RBI is empowered to increase this ratio up to 40%. An
increase in SLR also restrict the bank’s leverage position
to pump more money into the economy.
• 23% wef 11/08/12.
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Banking History…..
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Banking History • Indigenous banking system was prevalent in the ancient
times.
• Origin of Western types commercial Bank in India dates back to 18th Century.
• The General Bank of India was set up in the year 1786, Bank of Hindustan established in Calcutta in year 1790 , under European management.
• The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called them Presidency Banks.
• The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks.
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Foreign Banks in India…
• Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches - 83.
• BNP Paribas is the second oldest foreign bank on the Indian soil and is positioned amongst the leading corporate banks in India.
• It is followed by HSBC, which entered India in 1867, with 47 branches.
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Banking History….. • These three banks were amalgamated in 1921
and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders.
• In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
• Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.
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Swadeshi Movement and
Banking History… • Inspired local businessmen and political
figures to found banks for the Indian community.
• Mission Swadeshi Bank on Indian Capital.
• A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
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Swadeshi Movement and
Banking History • Allahabad Bank: 1865
• PNB : 1894
• Canara Bank: 1906
• Bank Of India : 1906
• Corporation Bank: 1906
• Indian Bank : 1907
• Bank of Baroda : 1908
• Central Bank of India :1911
• Bank of Mysore : 1913
• Union Bank Of India : 1922
• Syndicate Bank : 1925
• Vijaya Bank : 1931
• Dena Bank : 1938
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Reserve Bank Of India
• Reserve Bank of India - Another breakthrough happened in this phase.
• The Reserve Bank of India was set up on the recommendations of Hilton-Young Commission.
• The commission submitted its report in the year 1926, though the bank was not set up for 9 years.
• Reserve Bank of India (RBI) was created with the central task of maintaining monetary stability in India. it was formally inaugurated only on April 1, 1935
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Indian Banking Act • 5 lakh equity share of Rs. 100 each,
Non Government Share holder.
• The Reserve Bank Of India was nationalized on 1st Jan 1949.
• Indian Banking Act – March 1949.
• For the development of banking in rural areas – Imperial Bank of India nationalized as State Bank of India along with other 8 bank converted to Associate Banks.
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Associate Banks
• State Bank of Bikaner and Jaipur.
• State Bank Of Hyderabad.
• State Bank of Mysore.
• State Bank of Indore.
• State Bank of Saurashtra. (merged with SBI)
• State Bank of Patiala.
• State Bank of Travancore.
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Banking in
Pre-Nationalisation Era
(1947-1969)
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Steps taken by Govt. of India to
regulate Banking Institutions
• 1949 : Enactment of Banking Regulation Act.
• 1955 : Nationalisation of State Bank of India.
• 1959 : Nationalisation of SBI subsidiaries.
• 1961 : Insurance cover extended to deposits.
• 1969 : Nationalisation of 14 major banks.
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DICGC
• Deposit insurance and credit guarantee corporation
(DICGC) is responsible for insuring your money in the banks.
They will insure all the commercial banks and cooperative
banks in India. The DICGC insures all deposits such as
savings, fixed, current, recurring, etc. except the following
types of deposits.
• Deposits of foreign Governments.
• Deposits of Central/State Governments.
• Inter-bank deposits.
• Deposits of the State Land Development Banks with the
State co-operative bank.
• Any amount due on account of any deposit received
outside India.
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DICGC
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WHY? • The falling insurance cover is due to the rising
proportion of high-value deposits.
• The insurance limit of Rs 1 lakh per account was
set way back in 1993. With inflation averaging
6.5 per cent in the last two decades, a Rs 1 lakh
deposit then would equal Rs 3.3 lakh at today’s
prices.
• Some experts feel that the situation calls for a
revision in the insurance cover offered.
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Why Nationalisation?
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● Because commercial banking system did not play its
role properly in the development of the nation
● Controlled by individuals who used public funds to
build private empires
● Concentration of banks in major commercial areas,
like cotton textiles in Western India and jute mills in
Eastern India
Analysis
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● Small and Medium Enterprises consistently ignored
and starved of funds, contrary to government
policy
● Agricultural credit was never seriously considered
by private banks
● Private banks were urban-oriented & indulged in
class banking
Analysis
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The process of
Nationalisation
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● Carried out in two phases – '69 & '80
● 1969 - 14 banks with Bank Assets of Rs.50 cr &
above (CBI, BOI, PNB, Canara, UCB, Syndicate,
BOB, UBI, Bank Of Maharashtra, Dena, Allahabad,
Indian, IOB, United Bank of India)
● 1980 - 6 commercial banks with Bank Assets of Rs
200 Cr and above nationalised (Andhra, Punjab &
Sindh, New Bank of India, Vijaya, Corporation,
OBC)
How it happened
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Focus Areas of
Public Sector Banks
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● Rapid expansion in rural & semi-urban areas
● Sharp increase in bank credit to neglected sectors
● Focus widened from deposit-&-lending approach
to development-oriented banking
● Priority sector lending given top priority as part
of development-oriented banking
Focus Areas
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Benefits of
Nationalisation
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● Manifold increase in the number of branches
● Change in orientation from urban & class banking
to rural & mass banking
● Farmers, rural artisans, weaker sections & small
industries have benefitted from this change
● Great increase in bank credit from more than
Rs.4500 cr in '69 to over Rs.15 lakh cr in '09
Positives
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RBI and its Functions RBI occupies the central position in the money market.
RBI
Borrower manage
To obtain short term
Loneable amount.
MONEY Market Lender succed to get
Creditworthy customers.
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Functions of RBI
• Issue of Notes.
• Bankers to the government.
• Bankers Bank.
• Custodian of Foreign Reserve.
• Other functions.
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Tools and wings of RBI to regulate
money market. • CIBIL - India's first credit information bureau- is a
repository of information, which contains the credit history of commercial and consumer borrowers.
• Banking Ombudsman – Solution of customer complaints, 11 ombudsman in four different regions.
• Debt Recovery Tribunals:- Established in Six Cities, to speed up the recovery of loans disbursed by banks and other financial institutions.
• DICGC (Deposit Insurance and credit guarantee Corporation) - Concept was given by the Reserve Bank of India and the Central Government after the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in 1960. Wholly owned subsidiary of RBI. Deposit insurance premium is borne entirely by the insured bank.
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Tools and Act… • The SARFAESI Act - (The
Securitisation of financial assets & Enforcement of security interest act)
• Empowering banks /financial institution to recover their NPA’s without the intervention of court.
• Prevent fraud involving multiple lending by different banks on the same immovable property.
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Current scenario….. • Currently, India has 88 scheduled commercial banks (SCBs)
• 26 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and38 foreign banks.
• They have a combined network of over 53,000 branches and 17,000 ATMs
• According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75% of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%respectively
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Post-Liberalisation
Scenario
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● Interest rates on domestic term deposits
decontrolled as also on bank loans above
Rs.2 lakh
● Stringent international accounting norms adopted
to ensure accurate reflection of financial position
● Capital framework of Tier-I and Tier-II capital
based on Basel Committee recommendations
adopted
Banking Today
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Can access capital markets through issue of IPOs,
subject to 51% govt stake
Banks which achieve capital adequacy &
prudential accounting norms given operational
freedom
Entry of new generation private sector banks
allowed
Banking Today
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RRB
• Set up in 1975 under the provisions of the RRB Act .
• As an alternative channel to “Cooperative Credit Structure”.
• Central Govt, State Govt and scheduled commercial banks have a share of 50%, 35% and 35% respectively.
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NABARD
• Established on July 12, 1982.
• Set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts.
• NABARD Bill was accepted in 2001, authorized capital increased to 2000 crore from 500 Crore.
• Raise the fund from GOI, World Bank and other agencies.
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Micro Finance Institutions
• Microfinance is the provision of financial services to low-income clients, self employed who traditionally lack banking services.
• As per the latest Microfinance bill NABARD is the regulator of MFIs.
• SKS Microfinance and Spandana Spoorthy are largest MFI.
• Micro Credit, Micro Saving.
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Entry of Private Banks
in the
post-Liberalisation phase
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● Guidelines for licenses of new banks issued in
1993
● Initial minimum paid-up capital to be Rs.200 cr
● Promoters' contribution should be at least 40% of
total paid up share capital
● NRI participation in primary equity can be a
maximum of 40%
Private Banks
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● NBFCs with good & prudent track record can
convert into banks
● Minimum CAR of 10% to be maintained on a
continuous basis
● 25% of branches should be in rural &
semi-urban areas
● 40% of net bank credit should be to priority
sector areas
Private Banks
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New Private Banks • Out of total 22 private banks there are
7 new private banks.
• NEW PRIVATE SECTOR BANKS - Axis Bank Ltd. Development Credit Bank Ltd. HDFC Bank Ltd. ICICI Bank Ltd. Indusind Bank Ltd. Kotak Mahindra Bank Ltd. YES Bank.
•
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The Changing Face
of Banking
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● PSBs set up mutual fund subsidiaries
● Growing trend towards retail banking, leading to
greater opportunities for growth and profit.
● Large-scale introduction of ATMs to facilitate ease
of access
● Internet & Mobile Banking
● e-payment mechanism -Such approaches are
lowering transaction costs, likely to result in saving
of Rs. 1 lakh crore for the Govt. of India.
Changing Face
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Challenges …. • NPA
• Deregulation of saving bank accounts interest rate.
• CASA: Higher the CASA ratio better the net interest margin, which means better operating efficiency of the bank.
• Inclusive growth.
• CASA deposits - key differentiator in the current environment
• Human face of PSB Vs Aggressive Marketing of other commercial banks.
• HR for the PSU Banks.
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