1. Functions of Banks in an Economy

2. Functions Performed by Banks Link the fund-deficit organizations with fund-surplus organizations. Mobilize deposits from public and provide financial assistance to business. Reduce market imperfections. Evaluation and analysis of risks of business entities and provide the needed tools for risk reduction. Credit creation to meet surplus fund requirement. Provide upfront finance to meet business commitments.

3. Factors Necessitating Banker’s Role in the Economy Maturity preference differentials. Risk preference differentials. Denomination preference differentials. Existence of information and search cost. Existence of transaction and contracting cost.

4. Unique Nature of Banking Sector Low proportion of fixed assets. Dominant financial assets. Liabilities constitute larger percentage of assets. Most of the liabilities are short-term. Returns are interest components and expenses are also interest components. Indian banks have a unique characteristic of large Non Performing Assets (NPA)!.

5. Balance sheet of a Hypothetical Bank LiabilitiesAssets 1)Share Capital 500 1)Reserves with Central Bank and Cash in hand 1200 2)Reserve Fund 1000 2)Call Money1500 3)Saving (Demand) Deposits 3500 3)Bills Discounted 4300 4)Fixed (Time) Deposits 40004)Investments, Loans and Advances 2200 5)Borrowing from other banks 10005)Premises, Property etc.800 Total10,000Total10,000

6. Balance Sheet As At 31st March, Current Year (Amount in 000’s) As at 31-03 Current year As at 31-03 Previous year I. CAPITAL AND LIABILITIES Capital52,59,146 Reserves & Surplus12,96,90,06710,06,34,764 Deposits1,89,70,84,7971,50,01,19,812 Borrowings9,48,69,7637,17,24,490 Other Liabilities and Provisions12,81,13,89811,05,61,565 TOTAL2,25,50,17,6711,78,82,99,777 II. ASSETS Cash and Balances with Reserve Bank of India8,91,52,84511,74,18,505 Balances with Banks and Money at Call and Short Notice12,84,59,7115,97,55,389 Investments52,60,71,79141,80,28,767 Advances1,42,90,93,7381,13,47,63,264 Fixed Assets2,53,19,3472,42,60,671 Other Assets5,69,20,2393,40,73,181 TOTAL2,25,50,17,6711,78,82,99,777

7. PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH (Amount in 000‘s) For the Year ended 31-03-Current yearFor the Year ended 31-03-Previous year I. INCOME Interest earned16,34,73,57912,35,52,212 Other income3,05,18,6272,11,69,261 TOTAL19,39,92,20614,47,21,473 II. EXPENDITURE Interest expended10,84,84,5318,12,59,517 Operating expenses3,09,39,6332,64,49,874 Provisions and Contingencies2,44,94,5791,69,18,056 TOTAL16,39,18,74312,46,27,447 III. PROFIT Net Profit for the year3,00,73,4632,00,94,026 Add: Profit brought forward054,17,591 TOTAL3,00,73,4632,55,11,617 IV. APPROPRIATIONS Transfer to Statutory Reserve80,00,00070,00,000 Transfer to Revenue Reserve99,74,7141,50,96,101 Transfer to Capital Reserve56,92,5794,28,209 Transfer (from) / to Special Reserve - Currency Swap-9,26129,594 Interim Dividend (includeing dividend tax)18,43,2870 Final Dividend (including dividend tax)30,72,14424,57,713 Special Reserve (u/s Sec 36(1) (viii) of Income Tax Act, 196115,00,0005,00,000 Balance in Profit and Loss Account00 TOTAL3,00,73,4632,55,11,617 Earnings Per Share (Rs.)5741

8. Business of Scheduled Banks in India All Scheduled Banks Mar-PreviousMar-Current No. of Reporting Banks235232 I. Liabilities to the banking system104418105730 (a) Demand and time deposits from banks5313467371 (b) Borrowings from banks2950432376 (c) Other demand and time liabilities217805983 II. Liabilities to others in India43796685076365 (a) Aggregate deposits39526044635224 (i) Demand deposits534791660446 (ii) Time Deposits34178133974778 (b) Borrowings (other than from RBI, NABARD,EXIM Bank)115355106191 (c) Other demand and time liabilities311709334950 III. Assets with the banking system147546166946 Money at call and short notice2629533135 IV. Cash in Hand & Balances with RBI265699316120 V. Investment in India12055451437770 (a) Government securities11934561428470 (b) Other approved securities120899300 VI Bank Credit28595533337659 (a) Loans cash credit and overdrafts27575773212899 (b) Inland bills purchased1247012685 (c) Inland bills discounted4398763322 (d) Foreign bills purchased1865116205 (e) Foreign bills discounted2686832548 Reference: http://www.rbi.org.in/scripts/publications.aspx?publication=Annual

9. Deposits with Scheduled Banks Current DepositsSavings DepositsTerm DepositsTotal PreviousCurrentPreviousCurrentPreviousCurrentPreviousCurrent I. Government Sector 66281855126286185932318663393715447805565158 II. Private Corporate Sector 11135713362734873317317365449746432209586690 III. Financial Sector732234429340417732265648305942342912357968 IV. Household Sector 18301321267367089578593110741091E+0619280172E+06 V. Foreign Sector1535510394444795666610786510762216769917468 Reference: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13877

10. Composition of Deposits Current Deposits

11. Composition of Deposits Savings Deposits

12. Composition of Deposits Term Deposits

13. Bank Credit of Scheduled Banks Sector Amount Mining & Quarrying (including Coal) 18084 Food Processing 65677 Beverage & Tobacco 10969 Textiles 121374 Leather & Leather Products 6232 Wood & Wood Products 4371 Paper & Paper Products 19074 Petroleum, Coal Products & Nuclear Fuels 78579 Chemicals & Chemical Products 85713 Rubber, Plastic & their Products 15617 Glass & Glassware 4831 Cement & Cement Products 24722 Basic Metal & Metal Product 162929 All Engineering 73820 Vehicles, Vehicle Parts & Transport Equipment 38780 Gems & Jewellery 31751 Construction 44219 Infrastructure 379888 Industry Total 1311451 Reference: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13879

14. Composition of Credit Deployment Credit Deployment

15. Market Function Reference: http://www.rbi.org.in/scripts/publications.aspx?publication=Annual

16. Intermediation Function Households and Corporate enterprises. Government and Corporate enterprises. Social enterprises and Government.

17. Credit Creation Credit creation refers to the process of creating new purchasing power out of deposits. Only the central bank and the commercial banking system have the power to create credit.

18. Credit Approach There is no net new economic activity without net new purchasing power. The net purchasing power is created by the central bank and the banking system. This process is called ‘credit approach’ to net new economic activity. Economic term for this credit creation process is termed as ‘liquidity’. Monitoring credit creation provides the best possible way to forecast economic activity, the expected business cycle and trend in financial markets.

19. Broad Liquidity Aggregation of bank lending and central bank credit creation. Reference: http://www.rbi.org.in/scripts/AnnualReportMainDisplay.aspx

20. Private Liquidity Bank credit creation and credit creation in the private financial sector. Liquidity position as disclosed by Reserve Bank of India is given in the next slide.

21. Outstanding as on LAF (Liquidity Adjustment Facility) MSF (Marginal Standing Facility) Centre's SurplusTotal Previous Year April35,7202,737-28,8689,589 May6,215317-7,531-999 June-74,79531776,4311,953 July1,775016,68818,463 August11,815020,05431,869 September-30,250065,47735,227 October-1,17,660086,459-31,201 November-1,03,090093,425-9,665 December-1,13,41501,44,43731,022 Current Year January-76,73001,18,37141,641 February-72,005077,3975,392 March-1,06,005016,416-89,589 April-39,6050-35,399-75,004 May-75,7950-9,544-85,339 June-96,20508,339-87,866 July-48,5550-25,983-74,538 August-49,2150-21,192-70,407 September-82,6450-24,387-1,07,032 October-54,2700-32,883-87,153 Liquidity Position of Banks in India Source: http://www.rbi.org.in/scripts/AnnualReportMainDisplay.aspx, accessed on August 28, 2011.

22. Use of Bank Liquidity Lead time of broad credit aggregates over the economic and equity market cycle: approximately 9 to 15 months, central lead-time 1 year. The credit or liquidity approach is recommended for strategic asset allocation decisions whose time horizon is sufficiently long.

23. Credit Creation A major source of bank profit is creation and supply of credit money. Transactions in credit money are much in excess of the original cash deposits that the bank receives. Banks create credit and liabilities much in excess of their cash holding. The banking business is therefore a risky activity.

24. Modus Operandi In their credit creation activity commercial banks go by the saving habits of their depositors. Every advance creates a deposit.

25. Credit Creation by Banks DepositsReservesAdvances 01.10,0001,0009,000 02.9,0009008,100 03.8,1008107,290 04.7,2907296,561 05.6,5616565,905 06.5,9055915,314 07.5,3145314,789 08.4,7894784,305 09.4,3054313,874 10.3,8743873,486 ------- Final Total 1,00,00010,00090,000 Ability of Banks to Create Credit

26. Credit Creation in Practice Varies from 3 to 6 times of original deposits Convention Permission of the central bank General market conditions Demand for loans Alternative sources of issuing financial resources

27. Leakage in Credit Creation When the borrower of the loan immediately demands payment of it in cash. When depositors change their habits from investment to consumption. When the central bank reserve requirement is changed. When bankers emphasize safe business transactions to reduce their business risk.