August 26, 2020

Understanding the fundamental parts of Banking

Why do banks declare dividends?

Commercial organizations declare dividends when they make profits or surplus from their business. Part of the profits is shared with the share holders of the company in the form of dividends. Banks as commercial organizations, also adopt the same procedure for their shareholders.

Why do public sector banks present dividend cheques to the central government ?

The majority shareholders of public sector banks is the government and hence when dividends are declared the government is the biggest beneficiary.

The number of subsidiaries of SBI (State Bank of India) is reducing why?

The number of subsidiaries of SBI has come down to 5 from 7 after the merger of State Bank of Saurashtra earlier and State Bank of Indore recently in 2010, with the parent bank. This is as a consequence of making State Bank of India as the biggest bank in India and enlarging its size to complete with global banks.

What is the percentage of government holding in public sector banks?

The government holding in public sector banks cannot be reduced below 51 percent as per current law. The holding in individual banks may differ depending upon the stake of the government which at any given time is more than 51 percent.

Why do HDFC bank and ICICI bank not qualify as  Indian banks?

Any company with more than 51 percent foreign equity is considered as a foreign company. HDFC with 64 percent and ICICI with 79 percent foreign equity fall in this category through majority voting rights are with Indians.

What is meant by liquidity of banks?

Liquidity of banks indicates the ability to convert its assets into cash on demand. The liquid assets of a bank is defined by its holdings in cash balances with RBI, money at call and short notice, inter bank deposits due within 30 days. It is extremely important to have liquidity for banks and hence the need to maintain cash reserve ratio and statutory liquidity ratio which are cash and investments in government securities.

What are payment systems?

Payment systems have been defined as the instruments, rules and procedures that enable users to meet payment obligations. Types of payment instruments are cash, paper ( promissory notes, bill of exchange, drafts, cheques), plastic cards and electronic funds transfer methods.

Banks are supposed to observe Prudential norms. What are these Norms?

Banks are an important sector of the economy and hence need to be fully protected and safe. As per international best practices, bank are required to observe certain norms relating to capital adequacy, asset classification and provisioning for proper functioning.