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TITLE of the Project Report
Overview of Banking Sector in India With Reference to ICICI Bank & IDBI Bank
Dissertation Submitted to the
D.Y. Patil UniversityIn partial fulfillment of the requirements for the award of the Degree ofMASTERS IN BUSINESS ADMINISTRATION Submitted by:PRAJAKTA MARATHE
(Roll No.013022)
Research Guide: Prof. Dr. Pradip Manjarekar DeanD.Y. Patil University School of Management CBD Belapur, Navi MumbaiFEBRUARY 2014
DECLARATION
I hereby declare that the dissertation Overview of Banking Sector in India with Reference to ICICI Bank & IDBI Bank submitted for the MBA Degree at D.Y. Patil University School of Management is my original work and the dissertation has not formed the basis for the award of any degree, associate ship, fellowship or any other similar titles.
Place: Mumbai
Date:(Prajakta R. Marathe) Signature of the Student
CERTIFICATE
This is to certify that the dissertation entitled Overview of Banking Sector in India with Reference to ICICI Bank & IDBI Bank is the bona- fide research work carried out by Miss. Prajakta R. Marathe student of MBA, at D.Y. Patil University School of Management during the year 2013 -2015, in partial fulfillment of the requirements for the award of the Degree of Master in Business Management and that the dissertation has not formed the basis for the award previously of any degree, diploma, associate ship, fellowship or any other similar title.
Signature of the Director
(Dr.R.Gopal) Signature of the Guide
Director,
Padmashree Dr. D.Y. Patil University
Department of Business Mgt.
Place: Mumbai
Date:ACKNOWLEDGEMENTS
In the first place, I thank the D. Y. Patil University, School of Management, Navi Mumbai for giving me an opportunity to work on this project. I would also like to thank Prof. Dr. Pradip Manjarekar, Dean, D.Y. Patil University, School of Management, Navi Mumbai for having given me her valuable guidance for the project. Without her help it would have been impossible for me to complete the project.
I would also like to thank the various people from the ICICI Bank & IDBI Bank who have provided me with a lot of information and in fact even sharing some of the confidential Bank documents and data many of which I have used in this report and without which this project could not have been completed.
I would be failing in my duty if I do not acknowledge with a deep sense of
Gratitude of sacrificing
Signature of the student.
TABLE OF CONTENTS
CHAPTER NO.TITLEPAGE NO.
AList Of Tables
8
BList Of Abbreviations
9
CExecutive Summary
12
1.Introduction
14
2.History Of Banking In India
16
2.1 Introduction
16
2.2Pre-Nationalization Era
16
2.3Nationalization Stage
17
2.4Post-Liberalization Era
20
3.What Is Banks?
23
4.Major Banks In India
24
5.Reserve Bank Of India
25
5.1Introduction
25
5.2Main Functions
34
5.3Classification of RBI
37
6.Banking In India
39
6.1 Overview Of Banking
39
6.2Role Of Bank
41
6.3Main Objectives
43
7.Kinds Of Banks
47
7.1Commercial Banks
47
7.2Co-Operative Banks
48
7.3Central Banks
52
7.4Industrial Banks
55
7.5 Agriculture Banks
55
7.6Foreign Exchange Banks
56
8.Role Of Banks In A Developing Economy
57
9. Challenges Faced By Banking Industry In India
58
10.Products And Service Offered By Banks
62
11.LPG In Banking And Financial Sectors
73
12.Recommendations Of Narsimham Committee On Commercial Banking System (1991)
74
12.1Narsimham Committee On Banking Sector Reforms (1998)
77
13.ICICI
79
13.1History
79
13.2Balance Sheet Of Last 3 Years
83
13.3Profit & Loss A/C Of Last 3 Years
85
13.4Cash Flow Statement Of Last 3 Years
87
13.5Key Financial Ratios Of Last 3 Years
89
14.IDBI
91
14.1History
91
14.2Balance Sheet Of Last 3 Years
93
14.3Profit & Loss A/C Of Last 3years
95
14.4Cash Flow Statement Of Last 3 Years
97
14.5Key Financial Ratios Of Last 3 Years
98
15.Comparison between ICICI bank and IDBI bank
102
16.Objectives Of The Study
103
17.Literature Review
104
18.Research Methodology
107
18.1Data analysis of ICICI bank
109
18.2Data analysis of IDBI bank
127
19.Conclusion
145
20.Recommendations & Suggestions
146
21.Bibliography
147
22.Limitations
148
23.Annexure
149
A. LIST OF TABLES
Table
NoTitlePage
No
13.2Balance Sheet of last 3 years of ICICI Bank83
13.3Profit & Loss of last 3 years of ICICI Bank85
13.4Cash flow of last 3 years of ICICI Bank87
13.5Key Financial Ratio89
14.2Balance Sheet of last 3 years of IDBI Bank93
14.3Profit & Loss of last 3 years of IDBI Bank95
14.4Cash flow of last 3 years of IDBI Bank97
14.5Key Financial Ratio98
18.1Data Analysis of ICICI Bank109
18.2Data Analysis of IDBI Bank127
B. LIST OF ABBREVIATIONS
RBIReserve Bank of India
SBIState Bank of India
HDFCHousing Development Finance Corporation Ltd
ICICIIndustrial Credit & Investment Corporation of India
IDBIIndustrial Development of India
HSBCHong Kong & Shanghai Bank Corporation
PNBPunjab National Bank
IIBIIndustrial Investment Bank of India
SIDBISmall Industries Development Bank of India
UTIUnit Trust of India
LICLife Insurance Corporation of India
SEBISecurities & Exchange Board of India
SLRStatutory Liquidity Ratio
NHBNational Housing Bank
DICGCDeposit Insurance & credit Guarantee Corporation of India
BRBNMPLBharatiya Reserve Bank Note Mudran Private Limited
BFSBoard for Financial Supervision
DBSDepartment of Banking Supervision
DNBSDepartment of Non-banking supervision
FIDFinancial Institutions Division
IGIDRIndira Gandhi Institute for Development Research
IDRBTInstitute for Development & Research in Banking Technology
NABARDNational Bank for Agriculture & Rural Development
FERAForeign Exchange Regulation Act
IFCIIndustrial Finance Co-operation of India
NAFCUBNational Federation Urban Cooperative Banks & credit societies
Ltd
SCBsState Co-operative Banks
CCBsCentral Co-operative Banks
UCBsUrban Co-operative Banks
LDBsLand Development Banks
CRRCash Reserve Ratio
QCCQuick Cheques Collection Service
ECSElectronic Clearance Service
KRAKey Result Area
ATMAutomatic Teller Machine
IBAIndian Bank Association
EFTElectronic Funds Transfer
SMSShort Messaging System
WAPWireless Application Protocol Technology
DPDepository Participant
CACCapital Account Convertibility
NPANon-Paying Assets
C. EXECUTIVE SUMMARY:
Till the end of late 18th century, Banks in India, in the modern sense of the term, werent there. During the time of the American Civil War, the supply of cotton to Lancashire (The textile hub of UK) stopped from the Americas. At that time some banks were opened, which functioned as entities to finance industry, including speculative trades in cotton. Most of the banks opened in India during that period could not survive and failed because of the high risk which came with large exposure to speculative ventures. It was a disaster for depositors who lost money and therefore lost interest in keeping deposits with banks.In the year 1786, The General Bank of India was the first bank to come into existence in India. And then, almost a century later, in the year 1870, The Bank of Hindustan became the 2nd bank in India. Unfortunately, both these banks are now defunct.
The oldest bank to be still in existence, that too as the largest bank in India, is the State Bank of India. Albeit, the name was not the same as today rather was "The Bank of Bengal which started its operations in Calcutta in June, 1806. Interestingly, if people think that the entry of foreign banks in India is only a post-reform phenomenon, they are absolutely incorrect. In fact, in as early as1850s, foreign banks like Credit Lyonnais started their Calcutta (now Kolkata) operations. At that point of time, Calcutta was the most active trading port, thanks to the trade of the British Empire, and due to which banking activity took roots there and prospered.The first fully Indian owned bank was the Allahabad Bank, which was established in 1865.By the 1900s, the market expanded with the establishment of banks such as
Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai
- Both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935.At least 94 banks in India failed during the years 1913 to 1918. This was really a turbulent time for the world as a whole and the banking sector in India specially. This was the period which witnessed the First World War (1914-1918). Since then through the end of the Second World War (1939-1945), and two years thereafter until India achieved independence, were very challenging period for Indian banking. The years of the First World War were turbulent, and it took toll on many banks which simply collapsed despite the Indian economy gaining indirect boost due to war-related economic activities.
CHAPTER 1.INTRODUCTION
Banking in India originated in the last decades of the 18th century. Banking sector performs a very vital role in any countrys growth and economy. This project report gives an outline of banking sector in India by defining various concepts and aspects in this sector. Indian banking sector has expensive organizational sector which has several types bank with its own significance. Banking industry has significant part of providing diverse forms of products and services to one person to different small and larger firms and industries in which RBI is known as bankers bank which also is responsible for providing various provisions and working procedures for other banks.
Indian banking sector is the pivot of economy. In India the banking sector is segregated into public and private sector banks and nationalized banks. Thebanking system is central to a nations economy. Banks are special as they are
not only accept and deploy large amounts of uncollateralized public funds in a fiduciary capacity, but also leverage such funds through credit creation. A health banking system is essential for any economy striving to achieve good growth and yet remain stable in an increasingly global business environment.
IDBI Bank has been in the forefront in leveraging Information Technology (IT) to extend better service / products to the customers and other stakeholders, it recognizes the need for effective IT risk management. Apart from Information Security aspects, IDBI Bank's IT risk mitigation strategy includes aspects of compliance & privacy also. IDBI Bank has put in place an Information Security Policy (ISP) to ensure that information is protected from unauthorized access and confidentiality & integrity of the information are maintained along with timely availability of IT resources to legitimate users. A high-level Information Security Steering Committee (ISSC) of IDBI Bank ensures that provisions are in place for continued protection of IT resources of IDBI Bank. Apart from conducting regular information security awareness programs for the employees, IDBI Bank also communicates with the customers.
ICICI Bank is Indias second largest bank. ICICI bank has a network of about1308 branches in India and presence in 18 countries. The principal objective was to create a development financial institution for providing medium-term and long term project financing to Indian businesses.
CHAPTER 2.HISTORY OF BANKING IN INDIA
There are three different phases in the history of banking in India.Pre-Nationalization Era.Nationalization Stage.Post Liberalization Era.
1. PRE-NATIONALIZATION ERA:
In India the business of banking and credit was practices even in very early times. The remittance of money through Hundies, an indigenous credit instrument, was very popular. The hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different parts of the country.
The modern type of banking, however, was developed by the Agency Houses of Calcutta and Bombay after the establishment of Rule by the East India Company in 18th and 19th centuries.
During the early part of the 19th Century, ht volume of foreign trade was relatively small. Later on as the trade expanded, the need for banks of the European type was felt and the government of the East India Company took interest in having its own bank. The government of Bengal took the initiative and the first presidency bank, the Bank of Calcutta (Bank of Bengal) was established in 180. In 1840, the Bank of Bombay and IN 1843, the Bank of Madras was also set up.These three banks also known as Presidency Bank. The Presidency Banks had their branches in important trading centers but mostly lacked in uniformity in their operational policies. In 1899, the Government proposed to amalgamate these three banks in to one so that it could also function as a Central Bank, but the Presidency Banks did not favor the idea. However, the conditions obtaining during world war period (1914-1918) emphasized the need for a unified banking institution, as a result of which the Imperial Bank was set up in1921. The Imperial Bank of India acted like a Central bank and as a banker for other banks.
The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of the Country. In 1949, the Banking Regulation act was passed and the RBI was nationalized and acquired extensive regulatory powers over the commercial banks.
In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India, Cooperative banks, Exchange banks and Indian Joint Stock banks.
2. NATIONALIZATION STAGES:
After Independence, in 1951, the All India Rural Credit survey, committee of Direction with Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial Bank of India and ten others banks into a newly established bank called the State Bank of India (SBI). The Government of India accepted the recommendations of the committee and introduced the State Bank of India bill in the Lok Sabha on 16th April 1955 and it was passed by Parliament and got the presidents assent on 8th May 1955. The Act came into force on 1st July 1955, and the Imperial Bank of India was nationalized in 1955 as the State Bank of India.
The main objective of establishing SBI by nationalizing the Imperial Bank of India was to extend banking facilities on a large scale more particularly in the rural and semi-urban areas and to diverse other public purposes.
In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight state-associated banks were taken over by the SBI as its subsidiaries.Name of the Bank Subsidiary with effect from
1. State Bank of Hyderabad 1st October 1959
2. State Bank of Bikaner 1st January 1960
3. State Bank of Jaipur 1st January 1960
4. State Bank of Saurashtra 1st May 1960
5. State Bank of Patiala 1st April 1960
6. State Bank of Mysore 1st March 1960
7. State Bank of Indore 1st January 1968
8. State Bank of Travancore 1st January 1960With effect from 1st January 1963, the State Bank of Bikaner and State Bank of Jaipur with head office located at Jaipur. Thus, seven subsidiary banks State Bank of India formed the SBI Group.
The SBI Group under statutory obligations was required to open new offices in rural and semi-urban areas and modern banking was taken to these unbanked remote areas.
On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the nationalization of 14 major scheduled Commercial Banks each having deposits worth Rs. 50 crore and above. This was a turning point in the history of commercial banking in India.
Later the Government Nationalized six more commercial private sector banks with deposit liability of not less than Rs. 200 crores on 15th April 1980, viz.Andhra Bank.Corporation Bank.New Bank if India.Oriental Bank of Commerce.Punjab and Sind Bank.Vijaya Bank.
In 1969, the Lead Bank Scheme was introduced to extend banking facilities to every corner of the country. Later in 1975, Regional Rural Banks were set up to supplement the activities of the commercial banks and to especially meet the credit needs of the weaker sections of the rural society.
Nationalization of banks paved way for retail banking and as a result there has been an alt round growth in the branch network, the deposit mobilization, credit disposals and of course employment.
The first year after nationalization witnessed the total growth in the agricultural loans and the loans made to SSI by 87% and 48% respectively. The overall growth in the deposits and the advances indicates the improvement that has taken place in the banking habits of the people in the rural and semi-urban areas where the branch network has spread. Such credit expansion enabled the banks to achieve the goals of nationalization, it was however, achieved at the coast of profitability of the banks.
CONSEQUENCES OF NATIONALIZATION:
The quality of credit assets fell because of liberal credit extension policy.Political interference has been as additional malady.Poor appraisal involved during the loan meals conducted for credit disbursals.The credit facilities extended to the priority sector at concessional rates.The high level of low yielding SLR investments adversely affected the profitability of the banks.The rapid branch expansion has been the squeeze on profitability of banks emanating primarily due to the increase in the fixed costs.There was downward trend in the quality of services and efficiency of the banks.
3. POST-LIBERALIZATION ERATHRUST ON QUALITY AND PROFITABILITY:
By the beginning of 1990, the social banking goals set for the banking industry made most of the public sector resulted in the presumption that there was no need to look at the fundamental financial strength of this bank. Consequently they remained undercapitalized. Revamping this structure of the banking industry was of extreme importance, as the health of the financial sector in particular and the economy was a whole would be reflected by its performance.
The need for restructuring the banking industry was felt greater with the initiation of the real sector reform process in 1992. the reforms have enhanced the opportunities and challenges for the real sector making them operate in a borderless global market place. However, to harness the benefits of globalization, there should be an efficient financial sector to support the structural reforms taking place in the real economy. Hence, along with the reforms of the real sector, the banking sector reformation was also addressed.
The route causes for the lackluster performance of banks, formed the elements of the banking sector reforms. Some of the factors that led to the dismal performance of banks were.Regulated interest rate structure.Lack of focus on profitability.Lack of transparency in the banks balance sheet.Lack of competition.Excessive regulation on organization structure and managerial resource.Excessive support from government.
Against this background, the financial sector reforms were initiated to bring about a paradigm shift in the banking industry, by addressing the factors for its dismal performance.
In this context, the recommendations made by a high level committee on financial sector, chaired by M. Narasimham, laid the foundation for the banking sector reforms. These reforms tried to enhance the viability and efficiency of the banking sector. The Narasimham Committee suggested that there should be functional autonomy, flexibility in operations, dilution of banking strangulations, reduction in reserve requirements and adequate financial infrastructure in terms of supervision, audit and technology. The committee further advocated introduction of prudential forms, transparency in operations and improvement in productivity, only aimed at liberalizing the regulatory framework, but also to keep them in time with international standards. The emphasis shifted to efficient and prudential banking linked to better customer care and customer services.
CHAPTER 3. WHAT IS BANK?
A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links customers that have capital deficits and customers with capital surpluses.Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. The current sets of global bank capital standards are called Basel II. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of a cross-shareholding entity known as the keiretsu. In Iceland banks had very light regulation prior to the 2008 collapse.
The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in
Siena, Italy, and has been operating continuously since 1472.
CHAPTER 4.
MAJOR BANKS IN INDIA:
LIST OF BANKS IN INDIA
RBIABN AMRO BankAndhra Bank
Axis BankBank of BarodaBank Of India
Barclays BankCanara BankCentral Bank of India
CitibankCorporation BankDena Bank
Deutsche BankGE FinancialHDFC
HSBCICICIIDBI
India bulls Financial
ServicesIndian BankIndian Overseas Bank
ING VysyaKotak Mahindra BankLIC Housing Finance
Corporation
National Housing BankOriental Bank of
CommercePNB
Punjab & Sind BankReliance MoneySBI
Standard CharteredSyndicate BankUnion Bank of India
United Bank of India
CHAPTER 5.RESERVE BANK OF INDIA
RBIFORMATION:The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century. The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.The Bank was constituted to: Regulate the issue of banknotes Maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.
The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon. Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma and later up to April, 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan up to June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally set up as a shareholder's bank, was nationalized in 1949.
An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavors, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practice of using finance to catalyze development. The Bank was also instrumental in institutional development and helped set up institutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country.
With liberalization, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets.
PREAMBLE
The Preamble of the Reserve Bank of India describes the basic functions of the
Reserve Bank as:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."
Central Board
The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.
Appointed/nominated for a period of four years
Constitution:
o Official Directors
Full-time : Governor and not more than four Deputy Governors
o Non-Official Directors
Nominated by Government: ten Directors from various fields and one government Official Others: four Directors - one each from four local boards
Local Boards
One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi Membership:
consist of five members each
appointed by the Central Government
for a term of four years
Functions: To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time.
Financial Supervision
The Reserve Bank of India performs this function under the guidance of the
Board for Financial Supervision (BFS). The Board was constituted in November
1994 as a committee of the Central Board of Directors of the Reserve Bank of
India.
Objective
Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non- banking finance companies.
Constitution
The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board.
BFS meetings
The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members.
The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory andsupervisory issues.
Functions
Some of the initiatives taken by BFS include:
i. Restructuring of the system of bank inspections. ii. Introduction of off-site surveillance.iii. strengthening of the role of statutory auditors and
iv. Strengthening of the internal defenses of supervised institutions.
The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of empanelment and appointment of statutory auditors, the quality and coverage of statutory audit reports, and the important issue of greater transparency and disclosure in the published accounts of supervised institutions.
Current Focus
supervision of financial institutions
consolidated accounting
legal issues in bank frauds
divergence in assessments of non-performing assets and
Supervisory rating model for banks.
Legal Framework
Umbrella Acts
Reserve Bank of India Act, 1934: governs the Reserve Bank functions.
Banking Regulation Act, 1949: governs the financial sector.
Acts governing specific functions
Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market Securities Contract (Regulation) Act, 1956: Regulates government securities market. Indian Coinage Act, 1906: Governs currency and coins.
Foreign Exchange Regulation Act, 1973/Foreign Exchange Management
Act, 1999: Governs trade and foreign exchange market
"Payment and Settlement Systems Act, 2007: Provides for regulation and supervision of payment systems in India"
Acts governing Banking Operations
Companies Act, 1956:Governs banks as companies
Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970/1980: Relates to nationalization of banks
Bankers' Books Evidence Act
Banking Secrecy Act
Negotiable Instruments Act, 1881
Acts governing Individual Institutions
State Bank of India Act, 1954
The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 The Industrial Finance Corporation (Transfer of Undertaking and Repeal)
Act, 1993
National Bank for Agriculture and Rural Development Act
National Housing Bank Act
Deposit Insurance and Credit Guarantee Corporation Act
Offices
Has 22 regional offices, most of them in state capitals.
Training Establishments
Has six training establishments
Three, namely, College of Agricultural Banking, Bankers Training College and Reserve Bank of India Staff College are part of the Reserve Bank Others are autonomous, such as, National Institute for Bank Management, Indira Gandhi Institute for Development Research (IGIDR), Institute for Development and Research in Banking Technology (IDRBT)
Subsidiaries
Fully owned: National Housing Bank(NHB), Deposit Insurance and Credit Guarantee Corporation of India(DICGC), Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL)
Majority stake: National Bank for Agriculture and Rural Development
(NABARD) .The Reserve Bank of India has recently divested its stake in State
Bank of India to the Government of India.
MAJOR FUNCTIONS OF THE RBI ARE AS FOLLOWS:1. Issue Of Bank Notes: The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared unlimited legal tender throughout the country.This concentration of notes issue function with the Reserve Bank has a number of advantages: (i) it brings uniformity in notes issue; (ii) it makes possible effective state supervision; (iii) it is easier to control and regulate credit in accordance with the requirements in the economy; and (iv) it keeps faith of the public in the paper currency.2. Banker To Government: As banker to the government the Reserve Bank manages the banking needs of the government. It has to-maintain and operate the governments deposit accounts. Itcollects receipts of funds and makes payments on behalf of the government. It represents the Government of India as the member of the IMF and the World Bank.3. Custodian Of Cash Reserves Of Commercial Banks: The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash reserves of the commercial banks.4. Custodian Of Countrys Foreign Currency Reserves: The Reserve Bank has the custody of the countrys reserves of international currency, and this enables the Reserve Bank to deal with crisis connected with adverse balance of payments position.
5. Lender Of Last Resort: The commercial banks approach the Reserve Bank in times of emergency to tide over financial difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest.
6. Central Clearance And Accounts Settlement: Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier to deal with each other and settle the claim of each on the other through book keeping entries in the books of the Reserve Bank. The clearing of accounts has now become an essential function of the Reserve Bank.
7. Controller Of Credit: Since credit money forms the most important part of supply of money, and since the supply of money has important implications for economic stability, the importance of control of credit becomes obvious. Credit is controlled by the Reserve Bank in accordance with the economic priorities of the government.Promotional Functions Of Reserve Bank of India! The functions of the Reserve Bank of India are multi-dimensional. The bank performs a number of developmental and promotional functions. Apart from credit regulation, the Reserve Bank effectively channelizes credit, especially to priority sectors, such as agriculture, exports, transport operations, and small scale industries. It makes institutional arrangements for rural and industrial finance. For instance, special agricultural credit cells have been set-up by the bank. The Industrial Development Bank of India has been set-up to solve the allied problems of industries. The bank also assists the government in its economic planning. The banks credit planning is devised and coordinated with the five-year plans of the country. The Reserve Bank of India is also keen on improving the working of the Indian money market. In this regard, it has introduced two Bill Market Schemes in 1952 and 1971. The Bank has also established the Discount and Finance House of India Ltd. (DFHI) in 1988. With the object of providing security to depositors with the banks, and thereby promoting the growth of banking in the country, the Reserve Bank of India took initiative to set-up the Deposit Insurance Corporation of India in 1962. The Reserve Bank of India has also assisted the emergence and growth of development banking and other term-lending institutions, such as the Unit Trust of India (UTI). The Reserve Bank of India appoints ad hoc committees/ expert groups, from time to time, to enquire into specific money/banking problems and make recommendations to solve them. Recently, for instance, the bank had appointed the Chakravarty Committee to review the functioning of the monetary system in India. The Committee submitted its Report in 1985.
CLASSIFICATION OF RBIS FUNCTION:
1) The RBI: The RBI is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all scheduled banks and hence is known as the Reserve Bank.
2) Public Sector Banks:
a .State Bank of India and its associate banks called the State Bank Group. b. 20 nationalized banks.c. Regional rural banks mainly sponsored by public sector banks
3) Private Sector Banks:
a. Old generation private banks b. New generation private banksc. foreign banks operating in India d. Scheduled co-operative bankse. Non-scheduled banks
4) Co-operative Sector Banks:
The co-operative sector is very much useful for rural people. The co- operative banking sector is divided into the following categories.
State Co-operative Banks
Primary Agricultural Credit Societies
Land Development Banks
State Land Development Banks
Central Co-operative banks
5) Development Banks: Development Banks mostly provide long term finance for setting up industries. They also provide short-term finance (for export and import activities)
Industrial Finance Co-operation of India (IFCI)
Industrial Development of India (IDBI)
Industrial Investment Bank of India (IIBI)
Small Industries Development Bank of India (SIDBI)
National Bank for Agriculture and Rural Development (NABARD)
Export-Import Bank of India
CHAPTER 6.BANKING IN INDIA:
Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India
Overview of Banking:
Banking Regulation Act of India, 1949 defines Banking as accepting, for the purpose of lending or of investment of deposits of money from the public, repayable on demand or otherwise or withdrawable by Cheque, draft order or otherwise. The Reserve Bank of India Act, 1934 and the Banking RegulationAct, 1949, govern the banking operations in India.
Organizational Structure of Banks in India:
Sources: www.google.com
ROLE OF BANKS:
A proper financial sector is of special importance for the economic growth of developing and underdeveloped countries. The commercial banking sector which forms one of the backbones of the financial sector should be well organized and efficient for the growth dynamics of a growing economy. No underdeveloped country can progress without first setting up a sound system of commercial banking. The importance of a sound system of commercial banking for a developing country may be depicted as follows:
Capital Formation: The rate of saving is generally low in an underdeveloped economy due to the existence of deep-rooted poverty among the people. Even the potential savings of the country cannot be realized due to lack of adequate banking facilities in the country. To mobilize dormant savings and to make them available to the entrepreneurs for productive purposes, the development of a sound system of commercial banking is essential for a developing economy.
Monetization: An underdeveloped economy is characterized by the existence of a large non monetized sector, particularly, in the backward and inaccessible areas of the country. The existence of this non monetized sector is a hindrance in the economic development of the country. The banks, by opening branches in rural and backward areas, can promote the process of monetization in the economy.
Innovations: Innovations are an essential prerequisite for economic progress. These innovations are mostly financed by bank credit in the developed countries. But the entrepreneurs in underdeveloped countries cannot bring aboutthese innovations for lack of bank credit in an adequate measure. The banks should, therefore, pay special attention to the financing of business innovations by providing adequate and cheap credit to entrepreneurs.
Finance for Priority Sectors: The commercial banks in underdeveloped countries generally hesitate in extending financial accommodation to such sectors as agriculture and small scale industries, on account of the risks involved there in. They mostly extend credit to trade and commerce where the risk involved is far less .But for the development of these countries it is essential that the banks take risk in extending credit facilities to the priority sectors, such as agriculture and small scale industries.
Provision for Medium and Long term Finance: The commercial banks in underdeveloped countries invariably give loans and advances for a short period of time. They generally hesitate to extend medium and long term loans to businessmen. As is well known, the new business need medium and long term loans for their proper establishment. The commercial banks should, therefore, change their policies in favor of granting medium and long term accommodation to business and industry.
Cheap Money Policy: The commercial banks in an underdeveloped economy should follow cheap money policy to stimulate economic activity or to meet the threat of business recession. In fact, cheap money policy is the only policy which can help promote the economic growth of an underdeveloped country. It is heartening to note that recently the commercialbanks have reduced their lending interest rates considerably.Need for a Sound Banking System: A sound system of commercial banking is an essential prerequisite for the economic development of a backward country.
MAIN OBJECTIVE:
Monetary authority
The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the financial market reforms of the 1990s.
The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the designof the rupee banknotes as well as coins.
Manager of exchange control
The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency
The bank issues and exchanges or destroys currency and coins not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves.
Developmental role
The central bank has to perform a wide range of promotional functions to support national objectives and industries. The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of these problems are results of thedominant part of the public sector.
Related functions
The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition. The institution maintains banking accounts of all scheduled banks, too.
There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above. The recent financial turmoil world-over, has however, vindicated the Reserve Bank's role in maintaining financial stability in India.
Supervisory Functions:
In addition to its traditional central functions, the Reserve bank has certain non- monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and cooperative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapiddevelopment of the economy and realization of certain desired social objectives.
The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.
Promotional Functions:
With economic growth assuming a new urgency since Independence, the range of the Reserve Banks functions have steadily widened. The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi- urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve bank has helped in the setting up of the IFCI and the SFC: it set up the Deposit Insurance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the RBI set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Banks role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate money-lenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-termfinance to farmers.
CHAPTER 7.KINDS OF BANKS:
COMMERCIAL BANKS:
A commercial bank (or business bank) is a type of financial institution and intermediary. It is a bank that provides transactional, savings, and money market accounts and that accepts time deposits.
After the implementation of the GlassSteagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct to consumers. Many banks offer both commercial and retail banking services.
Features of Commercial Banks:
A commercial bank is the one that generally has the following features:
Accepts Deposits, Makes Business Loans and offers related service.
Allows a variety of deposit account such as checking, savings and time deposits. Run to make a profit and owned by a group of individuals.Offer services to individual and are primarily concerned with receiving deposits and lending to businesses.
CO-OPERATIVE BANKS:
The Co-operative bank has a history of almost 100 years. The Co- operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfill, their number, and the number of offices they operate. The co-operative movement originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of co- operative banks.
While the co-operative banks in rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery, personal finance etc. along with some small scale industries and self-employment driven activities, the co- operative banks in urban areas mainly finance various categories of people for self-employment, industries, small scale units, home finance, consumer finance, personal finance, etc. Some of the co-operative banks are quite forward looking and have developed sufficient core competencies to challenge state and private sector banks.According to NAFCUB the total deposits & lendings of Co-operative Banks is much more than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Co-operative Banks is attributed mainly to their much better local reach, personal interaction with customers, and their ability to catch the nerve of the local clientele. Though registered under the Co-operative Societies Act of the Respective States (where formed originally) the bankingrelated activities of the co-operative banks are also regulated by the Reserve
Bank of India. They are governed by the Banking Regulations Act 1949 and
Banking Laws (Co-operative Societies) Act, 1965.
There are two main categories of the co-operative banks:
(a) Short term lending oriented co-operative Banks within this category there are three sub categories of banks viz state co-operative banks, District co- operative banks and Primary Agricultural co-operative societies.
(b) Long term lending oriented co-operative Banks within the second category there are land development banks at three levels state level, district level and village level.
Features of Cooperative Banks
Co-operative Banks are organized and managed on the principal of co-operation, self-help, and mutual help. They function with the rule of one member, one vote. Function on no profit, no loss basis. Co-operative banks, as a principle, do not pursue the goal of profit maximization. Co-operative bank performs all the main banking functions of deposit mobilization, supply of credit and provision of remittance facilities. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also.
UCBs provide working capital loans and term loan as well.
The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and
Urban Co- operative Banks (UCBs) can normally extend housing loans upto Rs
1 lakh to an individual. The scheduled UCBs, however, can lend upto Rs 3 lakh for housing purposes.
The UCBs can provide advances against shares and debentures also. Co- operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also.The urban and non-agricultural business of these banks has grown over the years. The co-operative banks demonstrate a shift from rural to urban, while the commercial banks, from urban to rural. Co-operative banks are perhaps the first government sponsored, government-supported, and government-subsidized financial agency in India. They get financial and other help from the Reserve Bank of India NABARD, central government and state governments. They constitute the most favoured banking sector with risk of nationalization. For commercial banks, the Reserve Bank of India is lender of last resort, but co- operative banks it is the lender of first resort which provides financial resources in the form of contribution to the initial capital (through state government), working capital, refinance.Co-operative Banks belong to the money market as well as to the capital market. Primary agricultural credit societies provide short term and medium term loans. Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short term and term loans. Co-operative banks are financial intermediaries only partially. The sources of their funds (resources) are (a) central and state government, (b) the Reserve Bank of India and NABARD, (c) other co-operative institutions, (d) ownership funds and, (e) deposits or debenture issues. It is interesting to note that intra-sectoral flows of funds aremuch greater in co-operative banking than in commercial banking. Inter-bank
deposits, borrowings, and credit from a significant part of assets and liabilities of co-operative banks. This means that intra-sectoral competition is absent and intra-sectoral integration is high for co-operative bank.Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other co- operative banks are non-scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act.Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and non- scheduled banks are. However, their requirements are less than commercial banks. Since 1966 the lending and deposit rate of commercial banks have been directly regulated by the Reserve Bank of India. Although the Reserve Bank of India had power to regulate the rate co-operative bank but this have been exercised only after 1979 in respect of non-agricultural advances they were free to charge any rates at their discretion. Although the main aim of the co-operative bank is to provide cheaper credit to their members and not to maximize profits, they may access the money market to improve their income so as to remain viable.
Central Banks:
Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realization of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly'Swadeshi Bank'. In fact, such was the extent of pride felt by Sir SorabjiPochkhanawala that he proclaimed Central Bank of India as the 'property of the nation and the country's asset'. He also added that 'Central Bank of India lives on people's faith and regards itself as the people's own bank'.
During the past 99 years of history the Bank has weathered many storms and faced many challenges. The Bank could successfully transform every threat into business opportunity and excelled over its peers in the Banking industry.
A number of innovative and unique banking activities have been launched byCentral Bank of India and a brief mention of some of its pioneering services are as under:
1921Introduction to the Home Savings Safe Deposit Scheme to build saving/thrift habits in all sections of the society.
1924An Exclusive Ladies Department to cater to the Bank's women clientele.
1926Safe Deposit Locker facility and Rupee Travellers' Cheques.
1929Setting up of the Executor and Trustee Department.
1932Deposit Insurance Benefit Scheme.
1962Recurring Deposit Scheme.
Subsequently, even after the nationalization of the Bank in the year 1969,
Central Bank continued to introduce a number of innovative banking services as
under:
1976The Merchant Banking Cell was established.
1980Central card, the credit card of the Bank was introduced.
1986'Platinum Jubilee Money Back Deposit Scheme' was launched.
1989The housing subsidiary Cent Bank Home Finance Ltd. was started with its headquarters at Bhopal in Madhya Pradesh.
1994Quick Cheques Collection Service (QCC) & Express Service was set up to enable speedy collection of outstation cheques.
Further in line with the guidelines from Reserve Bank of India as also the Government of India, Central Bank has been playing an increasingly active role in promoting the key thrust areas of agriculture, small scale industries as also medium and large industries. The Bank also introduced a number of Self Employment Schemes to promote employment among the educated youth.
Among the Public Sector Banks, Central Bank of India can be truly described as an All India Bank, due to distribution of its large network in 27 out of 29States as also in 3 out of 7 Union Territories in India. Central Bank of India holds a very prominent place among the Public Sector Banks on account of its network of 3656 branches and 178 extension counters at various centers throughout the length and breadth of the country.
Customers' confidence in Central Bank of India's wide ranging services can very well be judged from the list of major corporate clients such as ICICI, IDBI, UTI,
LIC, HDFC has also almost all major corporate houses in the country.
INDUSTRIAL BANKS:
Ordinarily, the industrial banks perform three main functions:
Firstly, acceptance of Long term deposits: Since the industrial bank give long term loans; they cannot accept short term deposits from the public. Secondly, Meeting the credit requirements of companies: Firstly the industries require purchasing land to erect buildings and purchase heavy machinery. Secondly the industries require short term loans to buy raw materials & to make payment of wages to workers. Thirdly it does some Other Functions - The industrial banks tender advice to big industrial firms regarding the sale & purchase of shares & debentures.
AGRICULTURAL BANKS:
As the commercial & the industrial Banks are not in a position to meet the
Credit requirements of agriculture, there arises the need for setting up special types of banks to finance agriculture. Firstly, the farmers require short term loans to buy seeds, fertilizers, ploughs and other inputs. Secondly, the farmers require long term loans to purchase land, to effect permanent improvements on the land to buy equipment & to provide forirrigation works.
FOREIGN EXCHANGE BANKS:
Their main functions is to make international payments through the
Purchase and sale of exchange bills. As is well known, the exporters of a country prefer to receive the payment for their exports in their own currency Hence their arises the problem of converting the currency of one country into the currency of another. The foreign exchange banks try to solve this problem.These banks specialize in financing foreign trade.
CHAPTER 8.
ROLE OF BANKS IN A INDIAN ECONOMY:
In India, as in many developing countries, the commercial banking sector has been the dominant element in the countrys financial system. The sector has performed the key functions of providing liquidity and payment services to the real sector and has accounted for the Bulk of the financial intermediation process. Besides institutionalizing savings, the banking sector has contributed to the process of economic development by serving as a major source of credit to households, government, and business and to weaker sectors of the economy like village and small-scale industries and agriculture. Over the years, over 30-40% of gross household savings have been in the form of bank deposits and around 60% of the assets of all financial institutions accounted for by commercial banks. An important landmark in the development of banking sector in recent years has been the initiation if reforms following the recommendations of the first Narasimham Committee on Financial System. In reviewing the strengths and weaknesses of these banks, the Committee suggested several measures to transform the Indian banking sector from a highly regulated to amore market oriented system and to enable it to compete effectively in an increasingly globalized environment. Many of the recommendations of the Committee especially those pertaining to Interest rate, an institution of prudential regulation and transparent accounting norms were in line with banking policy reforms implemented by a host of developing countries since1970s.
CHAPTER 9.
CHALLENGES FACING BANKING INDUSTRY IN INDIA:
The banking industry in India is undergoing a major transformation due to changes in economic conditions and continuous deregulation. These multiple changes happening one after other has a ripple effect on a bank trying to graduate from completely regulated seller market to completed deregulated customers market.
Efficiency: This in turn has made it necessary to look for efficiencies in the business. Banks need to access low cost funds and simultaneously improve the efficiency. The Banks are facing pricing pressure, squeeze on spread and have to give thrust on retail Assets.
Diffused Customer loyalty: This will definitely impact Customer preferences, as they are bound to react to the value added offerings. Customers have become demanding and the loyalties are diffused. There are multiple choices; the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery.
Misaligned mindset: These changes are creating challenges, as employees are made to adapt to changing conditions. There is resistance to change from employees and the Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slowlycreeping in but the utilization is not maximized.
Competency Gap: Placing the right skill at the right place will determine success. The Competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. The focus of people will be on doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.Strategic options with banks to cope with the challenges
Leading players in the industry have embarked on a series of strategic and tactical initiatives to sustain leadership. The major initiatives include:
Investing in state of the art technology as the back bone to ensure reliable service deliveryLeveraging the branch network and sales structure to mobilize low cost current and savings depositsMaking aggressive forays in the retail advances segment of home and personal loansImplementing organization wide initiatives involving people, process and technology to reduce the fixed costs and cost per transaction. Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade services) Innovating Products to capture customer mind share to begin with and
later the wallet share
Improving the asset quality as per Base II norms
Transformation initiatives needed for banks
The ECS value proposition for helping banks in their transformation
agendaWe at ECS have vast experience in partnering with leading players in banking for addressing these challenges in a holistic manner. Our expertise is reflected in our product offerings for addressing the key challenges. A select few are outlined below:
Strategy
Sales & Marketing strategy for both retail & wholesale banking
Expanding geographies
Brand
Understanding the values of the brand
Repositioning the brand to communicate the values
Organization restructuring
Re organization of the bank in line with the strategic thrust
Re-engineering of the key business processes
Redesign of Sales processes to increase conversion ratio
Six Sigma process improvements for branch channel, Call Center & back office processes Centralization of branch operations and deferred processes to free up resources
Cost efficiency
Reduction in Total cost of acquisition
Reduction in transaction costs
Reduction in fixed and overheads cost
Right sizing and matching of skills
Manpower modeling for branch & back office at various volume scenarios
Productivity improvement for sales & service functions
Competency Assessments & profiling
Creating a high performing organization
Define new roles & responsibilities, KRA
Assessing competencies of people across levels and match the position with
the skillset
Designing and implementing a new PMS for restructured organization
Change management & creating a new mind set
Developing critical mass of champions and drive Change across the
organization to move from conventional banking to new age banking
CHAPTER 10.
PRODUCTS & SERVICES OFFERED BY BANKS:
Broad Classification of Products in a bank:
The different products in a bank can be broadly classified into:
Retail Banking.
Trade Finance.
Treasury Operations.
Retail Banking and Trade finance operations are conducted at the branch level while the wholesale banking operations, which cover treasury operations, are at the hand office or a designated branch.
Retail Banking:
Deposits
Loans, Cash Credit and Overdraft
Negotiating for Loans and advances
Remittances
Book-Keeping (maintaining all accounting records)
Receiving all kinds of bonds valuable for safe keeping
Trade Finance:
Issuing and confirming of letter of credit.
Drawing, accepting, discounting, buying, selling, collecting of bills of
exchange, promissory notes, drafts, bill of lading and other securities.
Treasury Operations:
Buying and selling of bullion. Foreign exchange
Acquiring, holding, underwriting and dealing in shares, debentures, etc.
Purchasing and selling of bonds and securities on behalf of constituents.
The banks can also act as an agent of the Government or local authority. They insure, guarantee, underwrite, participate in managing and carrying out issue of shares, debentures, etc. Apart from the above-mentioned functions of the bank, the bank provides a whole lot of other services like investment counseling for individuals, short-term funds management and portfolio management for individuals and companies. It undertakes the inward and outward remittances with reference to foreign exchange and collection of varied types for the Government.
Common Banking Products Available:
Some of common available banking products are explained below:
1) Credit Card: Credit Card is postpaid or pay later card that draws from a credit line-money made available by the card issuer (bank) and gives one a grace period to pay. If the amount is not paid full by the end of the period, one is charged interest.A credit card is nothing but a very small card containing a means of identification, such as a signature and a small photo. It authorizes the holder to change goods or services to his account, on which he is billed. The bank receives the bills from the merchants and pays on behalf of the card holder.
BANKING SERVICES IN INDIAThese bills are assembled in the bank and the amount is paid to the bank by the card holder totally or by installments. The bank charges the customer a smallamount for these services. The card holder need not have to carry money/cash with him when he travels or goes for purchasing.Credit cards have found wide spread acceptance in the metros and big cities. Credit cards are joining popularity for online payments. The major players in the Credit Card market are the foreign banks and some big public sector banks like SBI and Bank of Baroda. India at present has about 3 million credit cards in circulation.
2) Debit Cards: Debit Card is a prepaid or pay now card with some stored value. Debit Cards quickly debit or subtract money from ones savings account, or if one were taking out cash. Every time a person uses the card, the merchant who in turn can get the money transferred to his account from the bank of the buyers, by debiting an exact amount of purchase from the card. To get a debit card along with a Personal Identification Number (PIN).When he makes a purchase, he enters this number on the shops PIN pad. When the card is swiped through the electronic terminal, it dials the acquiring bank system either Master Card or Visa that validates the PIN and finds out from the issuing bank whether to accept or decline the transaction. The customer never overspread because the amount spent is debited immediately from the customers account. So, for the debit card to work, one must already have the money in the account to cover the transaction. There is no grace period for a debit card purchase. Some debit cards have monthly or per transaction fees.Debit Card holder need not carry a bulky checkbook or large sums of cash when he/she goes at for shopping. This is a fast and easy way of payment one can get debit card facility as debit cards use ones own money at the time of sale, so they are often easier than credit cards to obtain. The major limitation of DebitCard is that currently only some 3000-4000 shops country wide accepts it. Also,
a person cant operate it in case the telephone lines are down.
3) Automatic Teller Machine: The introduction of ATMs has given the customers the facility of round the clock banking. The ATMs are used by banks for making the customers dealing easier. ATM card is a device that allows customer who has an ATM card to perform routine banking transaction at any time without interacting with human teller. It provides exchange services. This service helps the customer to withdraw money even when the banks ate closed. This can be done by inserting the card in the ATM and entering the Personal Identification Number and secret Password.ATMs are currently becoming popular in India that enables the customer to withdraw their money 24 hours a day and 365 days. It provides the customers with the ability to withdraw or deposit funds, check account balances, transfer funds and check statement information. The advantages of ATMs are many. It increases existing business and generates new business. It allows the customers.
To transfer money to and from accounts.
To view account information.
To order cash.
To receive cash.
Advantages of ATMs:
To the Customers
ATMs provide 24 hrs, 7 days and 365 days a year service.
Service is quick and efficient
Privacy in transaction Wider flexibility in place and time of withdrawals.
The transaction is completely secure you need to key in Personal
Identification Number (Unique number for every customer).
To Banks
Alternative to extend banking hours.
Crowding at bank counters considerably reduced.
Alternative to new branches and to reduce operating expenses.
Relieves bank employees to focus on more analytical and innovative
Work.
Increased market penetration.
ATMs can be installed anywhere like Airports, Railway Stations, Petrol Pumps, Big Business arcades, markets, etc. Hence, it gives easy access to the customers, for obtaining cash.The ATM services provided first by the foreign banks like Citibank, Grind lays bank and now by many private and public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc. The ICICI has launched ATM Services to its customers in all the Metropolitan Cities in India. By the end of 1990 Indian Private Banks and public sector banks have come up with their own ATM Network in the form of SWADHAN. Over the past year upto 44 banks in Mumbai, Vashi and Thane, have become a part of SWADHAN a system of shared payments networks, introduced by the Indian Bank Association (IBA).
4) E-Cheques: The e-cheques consists five primary facts. They are the consumers, the merchant, consumers bank the merchants bank and the e-mint and the clearing process. This cheaquring system uses the network services toissue and process payment that emulates real world cheaquring. The payer issuesa digital cheques to the payee ant the entire transactions are done through internet. Electronic version of cheques are issued, received and processed. A typical electronic cheques transaction takes place in the following manner: The customer accesses the merchant server and the merchant server presents its
goods to the customer.
The consumer selects the goods and purchases them by sending an e-cheque to the merchant. The merchant validates the e-cheques with its bank for payment authorization.
The merchant electronically forwards the e-cheques to its bank.
The merchants bank forwards the e-cheques to the clearing house for cashing.
The clearing house jointly works with the consumers bank clears the cheques and transfers the money to the merchants banks. The merchants bank updates the merchants account.
The consumers bank updates the consumers account with the withdrawal
information.
The e-cheaquring is a great boon to big corporate as well as small retailers. Most major banks accept e-cheques. Thus this system offers secure means of collecting payments, transferring value and managing cash flows.
5) Electronic Funds Transfer (EFT): Many modern banks have computerized their cheques handling process with computer networks and other electronic equipments. These banks are dispensing with the use of paper cheques. The system called electronic fund transfer (EFT) automatically transfers money from one account to another. This system facilitates speedier transfer of funds electronically from any branch to any other branch. In this system the sender andthe receiver of funds may be located in different cities and may even bank withdifferent banks. Funds transfer within the same city is also permitted. The scheme has been in operation since February 7, 1996, in India.The other important type of facility in the EFT system is automated clearing houses. These are the computer centers that handle the bills meant for deposits and the bills meant for payment. In big companies pay is not disbursed by issued cheques or issuing cash. The payment office directs the computer to credit an employees account with the persons pay.
6) Telebanking: Telebanking refers to banking on phone services. A customer can access information about his/her account through a telephone call and by giving the coded Personal Identification Number (PIN) to the bank. Telebanking is extensively user friendly and effective in nature. To get a particular work done through the bank, the users may leave his
instructions in the form of message with bank.
Facility to stop payment on request. One can easily know about the cheques status. Information on the current interest rates.
Information with regard to foreign exchange rates.
Request for a DD or pay order.
D-Mat Account related services.
And other similar services.
7) Mobile Banking: A new revolution in the realm of e-banking is the emergence of mobile banking. On-line banking is now moving to the mobile world, giving everybody with a mobile phone access to real-time bankingservices, regardless of their location. But there is much more to mobile banking
from just on-lie banking. It provides a new way to pick up information and interact with the banks to carry out the relevant banking business. The potential of mobile banking is limitless and is expected to be a big success. Booking and paying for travel and even tickets is also expected to be a growth area.According to this system, customer can access account details on mobile using the Short Messaging System (SMS) technology6 where select data is pushed to the mobile device. The wireless application protocol (WAP) technology, which will allow user to surf the net on their mobiles to access anything and everything. This is a very flexible way of transacting banking business.Already ICICI and HDFC banks have tied up cellular service provides such as Airtel, Orange, Sky Cell, etc. in Delhi and Mumbai to offer these mobile banking services to their customers.
8) Internet Banking: Internet banking involves use of internet for delivery of banking products and services. With internet banking is now no longer confirmed to the branches where one has to approach the branch in person, to withdraw cash or deposits a cheque or requests a statement of accounts. In internet banking, any inquiry or transaction is processed online without any reference to the branch (anywhere banking) at any time.The Internet Banking now is more of a normal rather than an exception due to the fact that it is the cheapest way of providing banking services. As indicated by McKinsey Quarterly research, presently traditional banking costs the banks, more than a dollar per person, ATM banking costs 27 cents and internet banking costs below 4 cents approximately. ICICI bank was the first one to offer InternetBanking in India.
Benefits of Internet Banking:
Reduce the transaction costs of offering several banking services and diminishes the need for longer numbers of expensive brick and mortar branches and staff. Increase convenience for customers, since they can conduct many banking
transaction 24 hours a day.
Increase customer loyalty.
Improve customer access.
Attract new customers.
Easy online application for all accounts, including personal loans and
mortgages
Financial Transaction on the Internet:
Electronic Cash: Companies are developing electronic replicas of all existing payment system: cash, cheques, credit cards and coins.
Automatic Payments: Utility companies, loans payments, and other businesses use on automatic payment system with bills paid through direct withdrawal from a bank account.
Direct Deposits: Earnings (or Government payments) automatically deposited into bank accounts, saving time, effort and money.
Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls, laundry service, library fees and school lunches.
Point of Sale transactions: Acceptance of ATM/Cheques at retail stores and restaurants for payment of goods and services. This system has made functioning of the stock Market very smooth and efficient.
Cyber Banking: It refers to banking through online services. Banks with web site Cyber branches allowed customers to check balances, pay bills, transfer funds, and apply for loans on the Internet.
9) Demat: Demat is short for de-materialization of shares. In short, Demat is a process where at the customers request the physical stock is converted into electronic entries in the depository system. In January 1998 SEBI (Securities and Exchange Board of India) initiated DEMAT ACCOUNTANCY System to regulate and to improve stock investing. As on date, to trade on shares it has become compulsory to have a share demat account and all trades take place through demat.
How to Operate DEMAT ACCOUNT?
One needs to open a Demat Account with any of the branches of the bank. After opening an account with any bank, by filling the demat request form one can handover the securities. The rest will be taken care by the bank and the customer will receive credit of shares as soon as it is confirmed by the Company/Register and Transfer Agent. There is no physical movement of share certification any more. Any buying or selling of shares is done via electronictransfers.
1) If the investor wants to sell his shares, he has to place an order with his broker and give a Delivery Instruction to his DP (Depository Participant). The DP will debit his account with the number of shares sold by him.2) If one wants to buy shares, he has to inform his broker about his Depository Account Number so that the shares bought by him are credited in to his account.3) Payment for the electronic shares bought or sold is to be made
in the same way as in the case of physical securities.
CHAPTER 11.
LPG IN BANKING & FINANCIAL SECTOR:
Liberalization:
In the early 1990s the then Narasimham Rao government embarked on a policy of liberalization and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as Global Trust Bank which later amalgamated with Oriental Bank of commerce, ICICI Bank,HDFC Bank.
Privatization:
Privatization is the incidence or process of transferring ownership of business from the public sector to the private sector. In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.
Globalization:
Globalization in a literal sense is international integration; it can be described as a process by which the people of the world are unified into a single society and functioning together. Globalization, as a term, is very often used to refer to economic globalization that is integration of national economies into the international economy through trade, foreign direct investment, capital flow,migration, and spread technology.
CHAPTER 12.
RECOMMENDATION OF NARASIMHAM COMMITTEE ON COMMERCIAL BANKING SYSTEM (1991)
The Narasimham committee (1991) assumed that the financial resources of the commercial banks from the general public and were by the banks in trust and that the bank funds were to be deployed for maximum benefit of the depositors. This assumption automatically implied that even the government had no business to endanger the solvency, health and efficiency of the nationalized banks under the pretext of using banks funds for social banking, poverty eradication, etc. Accordingly, the Narasimham committee aimed at achieving three major changes in the banking sector in India;
Ensuring a degree of operational flexibility.
Internal autonomy for the banks in their decision making process.
Greater degree of professionalism in banking operations.
Towards this end, Narasimham committee recommendations covered such subjects as directed investments, directed credit programmes, structural of rate of interest, structural reorganization of the Indian banking system, and organization, methods and procedures of banks in India.
In Structural Reorganization of the Banking System
To bring about greater efficiency in banking operations, the Narasimham committee (1991) proposed substantial reduction in number of public sector banks through mergers and acquisition. According to committee, the broadpattern should consist of;
Three or four large banks including SBI should become international in character. Eight to ten banks should national bank with wide network of branches throughout the country. The rest should remain as local banks with operations are confined to a specific region. RBI should permit the establishment of new banks in the private sector, provided they conform to the minimum start-up capital and other requirements. The government should make declaration that no further banks be nationalized. Foreign banks are allowed to open their branches in India either as fully owned or subsidiaries. This would improve efficiency. Foreign banks and Indian banks are allowed to set-up joint ventures in regard to merchant and investment banking. Since the country had already a network of rural and semi-urban branches, the system of licensing of branches with the objective of spreading the banking habit should be discontinued. Banks should have freedom to open branches.
On Organization and Methods and Procedures in Banks
In order to tone up the working of the banks, the Narasimham committee (1991)
recommended that;
Each bank should be free and autonomous.
Every bank should go for a radical change in working technology and culture, so to become competitive internally and to be in step with wide-ranging innovations taking place.
Over- regulation and over- administration should be avoided and greater reliance should be placed on internal audit and internal inspection. The various guidelines issued by government or RBI in regard to internal administration should be examined in the context of the independence and autonomy of bank. The quality of control over the banking system between RBI and the banking division of ministry and finance should end forthwith and RBI should be the primary agency for regulation. The appointment of chief executive of bank and the board of directors should not be based on political considerations but on professionalism and integrity.
So despite impressive quantitative achievements in resources mobilization and in extending the credit reach, several distortions had crept into the banking system over the years. Several public sector banks had become weak financially and were unable to meet the challenges of the competitive environment. The Narasimham committee was forthright in apportioning the blame to the government of India and the finance ministry of this sad state of affairs. The public sector banks has been used and abused by the government, the officials and the bank employees and the trade unions. The recommendations of Narasimham committee(1991) has been revolutionary in many aspects and were opposed by trade unions and even by finance ministry of central government and of course, the progressive economist who generally championed the public sector banks. The government however accepted many of the recommendationsof the Narasimham committee (1991).
NARASIMHAM COMMITTEE ON BANKING SECTOR REFORMS (1998):
The finance ministry of government of India appointed Mr. M. Narasimham as chairman of one more committee, this time it was called as the committee on banking sector reforms. The committee was asked to review the progress of banking sector reforms to the date and chart a programmes on financial sector reforms necessary to strengthen Indias financial system and make it internationally competitive. The Narasimham committee on banking sector reforms submitted this report to the government in April 1998. This report covers the entire issues relating to capital adequacy, bank mergers, the condition of global sized banks, recasting of banks boards etc. some important findings are as follows; Need For Stronger Banking System: The Narasimham committee has
