banking structure (1)

Banking Structure

NTRODUCTION India has a well developed Banking system. The banking industry originated in India in the 18th century and since then it has undergone significant number of changes. The commercial banking industry in India over the past few decades has been revolutionized by a number of factors such as independence, nationalization, deregulation, rise of the Internet, etc. The commercial banking structure in India consists of Scheduled Banks and Unscheduled Banks. In the past the banks did not find any attraction in the Indian economy because of the low level of economic activities and little business prospects. Today we find positive changes in the National business development policy. Earlier, the money lenders had a strong hold over the rural population which resulted in exploitation of small and marginal savers. The private sector banks failed in serving the society. This resulted in the nationalization of 14 commercial banks in 1969. Nationalization of commercial banks paved ways for the development of Indian economy and channelized financial resources for the up liftment of weaker sections of the society. The passage of financial modernization legislation by Congress in 1999 removed barriers, allowing banks to expand product offerings, while the potential of the Internet as a sales, marketing and delivery tool, widened the avenues to sell and deliver these products. The main products of the commercial banking industry-insurance, securities, mortgages, mutual funds and consumer credit-have all benefited from these changes. This report will examine the extent to which increased product sales have influenced overall bank assets and how commercial banks' increased market share in each of these products areas over the next five years will raise overall bank income and assets. Currently (2011), banking industry in India is generally fairly mature in terms of supply, product range and reach-even though reaches in rural India stillSydenham College of Comm. & Eco.Page 1

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remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rateand this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect mergers and acquisitions, takeovers, and asset sales.

Sydenham College of Comm. & Eco.

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REVIEW OF LITERATURE Indian banking system, over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private banks may not extend the kind of cooperation in providing credit support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, State-sponsored, State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59 the associate banks came into the fold of public sector banking. Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal, more particularly to the unorganised sector. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed in organised sectors of industry and trade, while the farmers, small entrepreneurs, transporters , professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans andSydenham College of Comm. & Eco.Page 3

Banking Structure

advances so as to ensure optimum and efficient utilisation of resources. The scheme however, did not provide any remedy. Though a no. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors. On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs.28.50cr, deposits of Rs.2629cr, loans of Rs.1813cr and with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI introduced the Lead Bank Scheme on the

recommendations of FK Narsimhan Committee. Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance cover to the depositors. In the post-nationalization period, there was substantial increase in the no. of branches opened in rural/semi-urban centers bringing down the population per bank branch to 12000 appx. During 1976, RRBs were established (on the recommendations of M. Narasimham Committee report). The Service Area Approach was introduced during 1989.While the 1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s and more particularly during early 90s, with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991.


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OBJECTIVES OF THE STUDY The objectives of project are as follows: To find out the earlier banking structure that prevailed in India. To assess the various factors that lead to the change in the Indian banking structure To assess the impact of all these factors on the banking structure. To draw a contrast between the old and the new Indian banking structure. To determine the various services offered by banks earlier and currently To determine the future of Indian Banking Markets To study the comparison of china banking structure and india structure To draw conclusions of the impact of the changes in banking sector.


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RESEARCH METHODOLOGY Secondary data is the data which is collected for some other purpose. The data used for preparing the project report was secondary data. It was collected from various websites, newspapers and books. Research follows a specific plan of procedure. Research requires a clear articulation of a goal. Research is guided by the specific research problem & question.

SCOPE OF STUDY The project entitled BANKING STRUCTURE. The study will focus on how banking structure is implemented in India, its impact , changes, concerns with a various parts .


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Banking Structure

BANKING SECTOR IN THE PAST Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. 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. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. At the beginning of the 20th century, Indian economy was passing through a relative period of stability. Around five decades have elapsed since the India's First war of Independence, and the social, industrial and other infrastructure have developed. At that time there were very small banks operated by Indians. The banking in India was controlled and dominated by the presidency banks, namely, the Bank of Bombay, the Bank of Bengal, and the Bank of Madras which later on merged to form the Imperial Bank of India, and Imperial Bank of India.


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BANKING STRUCTURE IN INDIA


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Banking Structure

Scheduled bank in India Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalised banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks.

A]

Commercial Banks in India

Commercial Banks in India are broadly categorized into Scheduled Commercial Banks and Unscheduled Commercial Banks. The Scheduled Commercial Banks have been listed under the Second Schedule of the Reserve Bank of India Act, 1934. The selection measure for listing a bank under the Second Schedule was provided in section 42 (6) (a) of the Reserve Bank of India Act, 1934. Commercial bank is the term used for a normal bank to distinguish it from an investment bank or retail bank. It can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking).


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Activities of Commercial Banks The modern Commercial Banks in India cater to the financial needs of different sectors. The main functions of the commercial banks comprise: transfer of funds acceptance of deposits offering those deposits as loans for the establishment of industries purchase of houses, equipments, capital investment purposes etc. The banks are allowed to act as trustees. On account of the knowledge of the financial market of India the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture. The Indian Government presently hires the

commercial banks for various purposes like tax collection and refunds, payment of pensions etc.

Functions of Commercial Banks The functions of commercial banks are divided into two categories: i) Primary functions, and ii) Secondary functions including agency functions.

i) Primary functions: The primary functions of a commercial bank include: a) Accepting deposits; and b) Granting loans and advances;

i i ) Secondary function Be sides the primary functions of a accepting deposits and lending money, banks perform a number of other function which are called secondary functions.


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These are as follows Issuing letter of credit, traveller cheques, circular notes etc. Undertaking safe custody of valuables, important documents and securities by providing safe deposit locker Providing customers with facilities of foreign exchange. Transferring money from one place to another; and from one branch to another branch of the bank. Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc Collecting and supplying business information; Providing reports on the credit worthiness of customers. List of Commercial Banks in India State Bank of India State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala

I]

Nationalised Banks in India

Nationalised banks in India are the major players in Indian banking system dominating the industry. Not only that, the nationalised banks in India also play pivotal role in the economic development of the country at the same time. The history of nationalization of Indian banks dates back to the year 1955 when the Imperial Bank of India was nationalized and re-christened as State Bank of India (under the SBI Act, 1955). Later on July 19, 1960, the 7 subsidiaries of


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SBI viz. State Bank of Hyderabad (SBH), State Bank of Indore, State Bank of Saurashtra (SBS), State Bank of Mysore (SBM), State Bank of Bikaner and Jaipur (SBBJ), State Bank of Patiala (SBP) and State Bank of Travancore (SBT) were also nationalized with deposits more than 200 crores.

Nationalised Banks: Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank IDBI Bank Ltd. Indian Bank Punjab & Sind Bank Punjab National Bank Syndicate Bank Union Bank of India United Bank of India

II]

Private sector banks in India

Private banking in India was practiced since the beginning of banking system in India. The first Private bank in India to be set up in Private Sector Banks in India was Induslnd Bank. It is one of the fastest growing Private Sector Banks in India. IDBI ranks the tength largest Development bank in the world as


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Private Banks in India and has promoted a world class institutions in India. The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in India as part of the RBI's liberalisation of the Indian Banking Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled Commercial Bank in January 1995. ING Vysya, yet another Private Bank of India was incorporated in the year 1930. Bangalore has a pride of place for having the first branch inception in the year 1934. With successive years of patronage and constantly setting new standards in banking, ING Vysya Bank has many credits to its account.

List of Private Banks in India Bank of Punjab Bank of Rajasthan Centurion Bank City Union Bank Dhanalakshmi Bank Development Credit Bank Federal Bank HDFC Bank ICICI Bank Jammu & Kashmir Bank Karnataka Bank South Indian Bank United Western Bank UTI Bank


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III]

Regional rural banks in India

Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focussed upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas Regional Rural Banks in India are an integral part of the rural credit structure of the country. Since the very beginning, when the Regional Rural Banks in India (RRBs) were established in October 2, 1975, these banks played a pivotal role in the economic development of the rural India. The main goal of establishing regional rural banks in India was to provide credit to the rural people who are not economically strong enough, especially the small and marginal farmers, artisans, agricultural labours, and even small entrepreneurs. Apart from SBI, there are many other banks which function for the development of the rural areas in India. These banks are listed below: Chhattisgarh Gramin Bank Madhya Bihar Gramin Bank Dena Gujarat Gramin Bank Baroda Gujarat Gramin Bank Harayana Gramin Bank Gurgaon Gramin Bank Assam Gramin Vikash Bank Jharkhand Gramin Bank Madhya Bharath Gramin Bank Chambal-Gwalior Kshetriya Gramin BankSydenham College of Comm. & Eco.Page 14

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Himachal Gramin Bank Punjab Gramin Bank Aurangabad -Jalna Gramin Bank Thane Gramin Bank Baroda Rajasthan Gramin Bank Rajasthan Gramin Bank Baroda Western Uttar Pradesh Gramin Bank


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B]

Co-operative bank in India

The Cooperative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co operative, the expectations the co operative is supposed to fulfil, their number, and the number of offices the cooperative bank operate. Though the co operative movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India play an important role even today in rural financing. The businesses of cooperative bank in the urban areas also have increased phenomenally in recent years due to the sharp increase in the number of primary co-operative banks. Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. Features of Cooperative Banks Co-operative Banks are organised and managed on the principal of cooperation, 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 maximisation. Co-operative bank performs all the main banking functions of deposit mobilisation, 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


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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-subsidised 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 nationalisation. 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. Cooperative 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 central and state government, the Reserve Bank of India and NABARD, other co-operative institutions, ownership funds and, deposits or debenture issues.


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NAFSCOB The National Federation of State Cooperative Banks Ltd. (NAFSCOB), was established on 19th May 1964 with a view to facilitate the operations of State and Central Cooperative Banks in general and Development of Cooperative Credit in particular. The objectives of NAFSCOB are:

To provide a common forum to the member banks to examine the problems of cooperative credit, banking and allied matters and evolve suitable strategies to deal with them.

Promote and protect the interests of the member banks in all spheres of their activities and to give expression to the views of the member banks.

Co-ordinate and liaison with Government of India , Reserve Bank of India respective State Governments, NABARD and other higher financing institutions for the development of cooperative credit on behalf of the member banks.

Provide research and consultancy inputs to the member banks in order to facilitate them to strengthen their own organizations.

Organise conferences/seminars/workshops/meeting to share the views of common interest with a view to contribute for better policy decisions.

The Federation functions with three of its wings, viz. Planning, Research and Development (PRD) All India Mutual Arrangement Scheme (AIMAS) and Computer Services Division (CSD).


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I]

Rural Cooperative Banking

Rural Cooperative Banking and Credit Institutions play an important role in meeting the growing credit needs of rural India. The volume of credit flowing through these institutions has increased. The performance of these institutions, however (apparent in the share of total institutional credit and the indicators of their financial health), has been less than satisfactory and is deteriorating rapidly. Of late, a number of Committees have gone into the reasons for this situation and suggested remedial measures, but there has been little progress in implementing their recommendations. The Government of India, which is committed to reviving and revitalising the rural cooperative credit structure (CCS) and attributes high priority and urgency to it, felt it necessary To commission a fresh review. The Union Government constituted a Task Force (vide Government of India notification dated 05 August 2004 reproduced in Annexure I) to formulate a practical and implementable plan of action to rejuvenate the rural cooperative credit structure. 1) Short-term Rural Co-operatives: The short-term rural co-operatives provide crop and other working capital loans to farmers and rural artisans primarily for short-term purpose. These institutions have federal three-tier structure. At the Apex of the system is a State Co-operative bank in each state. At the middle (or district) level, there are Central Co-operative Banks also known as District Co-operative banks. At the lowest (or village) level, are the Primary Agricultural Credit Societies.


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i.

State Co-operative Banks:

State Co-operative Banks are the apex of the three-tier Co-operative structure dispensing mainly short/medium term credit. It is the principal society in a State which is registered or deemed to be registered under the Government Societies Act, 1912, or any other law for the time being in force in India relating to cooperative societies and the primary object of which is the financing of the other societies in the State which are registered or deemed to be registered. The State Co-operative Banks receive current and fixed deposits from its constituent banks as well as savings, current and fixed deposits from the general public and from local boards, other local authorities, etc. Further, they receive loans from the RBI and NABARD. NABARD is the supervisory authority for State Cooperative Banks. The state government contributes the certain portion of their working capital. The principal function of State Co-operative Banks is to assist the Central Co-operative Banks and to balance excesses and deficiencies in the resources of Central Co-operative Banks. It also act as the balancing centre for Central Co-operative Banks in the sense that surplus fund of some of these banks are made available to other needy banks. It also serves the link between RBI and the Central Co-operative Banks and Primary Agriculture Credit Societies. But the connection between the State Co-operative Banks and Primary Co-operative Societies is not direct. The Central Co-operative Banks are acting as intermediaries between the State Co-operative Banks and Primary societies.


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ii.

Central Co-operative Banks:

Central Co-operative Banks form the middle tier of Co-operative credit institutions. These are the independent units in as much as the State Cooperative Banks have control to control or supervise their affairs. They are of two kinds i.e. pure and mixed. Those banks are the membership of which is confined to co-operative organizations only are included in pure type, while those banks the membership of which is open to co-operative organizations as well as to the individuals are included in mixed type. The pure type of Central Banks can be seen in Kerala, Bombay, Orissa, etc., while the mixed type can be seen in Andhra Pradesh, Assam, Tamil Nadu, etc. The pure type of banks is based on strict co-operative principles. However, the mixed type has an advantage over the pure type in so far as they can draw their funds from the non-agricultural sector too. The Central Co-operative Banks draw their funds from share capital, deposits, loans from the State C-operative Banks and where State Banks do not exist from the RBI, NABARD and commercial banks. NABARD is the supervisory authority for Central Co-operative Banks. Deposits constitute the major component of sources of funds, followed by borrowings. The main function of Central Co-operative Banks is to finance the primary credit societies. In addition they carry on Commercial banking activities like acceptance of deposits, granting of loans and advances on the security of first class guiltedged securities, fixed deposit receipts, gold, bullion, goods and documents of title to goods, collection of bills, cheques, etc., safe custody of valuables and agency services. They are expected to attract deposits from the general public. They also act as balancing centres, making available access funds of one primary to another which is in need of them.


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The central co-operative banks are located at the district headquarters or some prominent town of the district. These banks have a few private individuals also who provide both finance and management. The central co-operative banks have three sources of funds,

Their own share capital and reserves Deposits from the public and Loans from the state co-operative banks Primary Agriculture Credit Societies:

iii.

Primary Agricultural Credit Societies is the foundation of the co-operative credit system on which the superstructure of the short-term co-operative credit system rests. It deals directly with individual farmers, provide short and medium term credit, supply agricultural inputs, distribute consume articles and also arrange for the marketing of products of its members through a c-operative marketing societies. These societies form the basic unit of co-operative credit system in India. These voluntary societies based on principle of one man one vote has posed challenge to exploitative practices of the village moneylenders. The farmers and other small-time borrowers come in direct contact with these societies. The success of the co-operative credit movement depend largely on the strength of these village level societies. The major objective of Primary agricultural Credit Societies is to serve the need of weaker sections of these society. For this purpose, the people with limited means, particularly with schedules castes and scheduled tribes, are encouraged to become members of these societies. So, they must function effectively as well-managed and multi-purpose institutions mobilizing the savings of the rural people and providing the package of services including credit, supply of agricultural inputs and implements, consumer goods, marketing services and


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technical guidance with focus on weaker sections. Government has promoted multi-purpose societies in tribal areas for the benefit of people living there. 2) Long-term Rural Co-operatives: The long-term rural co-operative provide typically medium and long-term loans for making investments in agriculture, rural industries and, in the recent period, housing. Generally, these co-operatives have two tiers, i.e. State Co-operative Agriculture and Development Banks (SCARBDs) at the state level and Primary Co-operative Agriculture and Rural Development Banks (PCARDBs) at the taluka or tehsil level. However, some States have a unitary structure with the state level banks operating through their own branches.

i.

State

Co-operative

Agriculture

and

Development

Banks

(SCARBDs): State Co-operative Agriculture and Development Banks constitute the upper-tier of long term co-operative credit structure. Though long term credit cooperatives have been allowed to access public deposits under certain conditions, such deposits constitute a relatively small proportion of their total liabilities. They are mostly dependent on borrowings for on-lending.

The main objective of the Co-operative State Agriculture and Rural Development bank is to finance primary agriculture and rural development banks. The bank undertakes the following functions to achieve the above objectives:-


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(a) (b) (c)

Floatation of Debentures, Receiving Deposits; Grant of loans to primary cooperative agriculture and rural development banks for purposes approved by the National Bank for Agricultural and Rural Development and Registrar of Cooperative Societies;

(d)

To function as the agent of any cooperative bank subject to such conditions as the Registrar may specify;

(e)

To develop, assist and coordinate the work of affiliated primary cooperative agriculture and rural development banks.

The bank issues long term and medium term loans towards agricultural and allied activities like construction of godowns, cattle shed, farm house, purchase of lands etc., and for minor irrigation purposes like construction of new wells, deepening of existing wells etc., In addition, long term loans are also sanctioned for animal husbandry, fisheries, plantation, farm mechanization, non-farm sector and other non-minor irrigation schemes.


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ii.

Primary Co-operative Agriculture and Rural Development Banks (PCARDBs):

Primary Co-operative Agriculture and Rural Development Banks are the lowest layer of long term credit co-operatives. It is primarily dependent on the borrowings for their lending business. They provide credit for developmental purposes like minor irrigation, cultivation of plantation crops and for diversified purposes like poultry, dairying and sericulture on schematic basis. They get requisite financial assistance from the Cooperative State Agriculture and Rural Development Bank. In order to widen their scope of lending to compete with other financial agencies, the primary cooperative agriculture and rural development banks have been permitted to finance artisans, craftmen and small scale entrepreneurs. They have also been permitted to issue loans to small road transport operators in rural areas for purchase of goods carriers and passenger vehicles. As a result, during 2007-08, the Primary Cooperative Agriculture and Rural Development Banks have again started lending for the Non-Farm Sector including Jewel Loans.

B]

Urban Co-operative Banks

The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centred around communities, localities work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.


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The origins of the urban cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany such societies were set up in India. Cooperative societies are based on the principles of cooperation, - mutual help, democratic decision making and open membership. Cooperatives represented a new and alternative approach to organisation as against proprietary firms, partnership firms and joint stock companies which represent the dominant form of commercial organisation.


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Improving health The tally of financially weak urban banks declined (grade III and IV banks) to 330 in 2009-10 from 392 in 2008-09. Due to the consolidation process in the sector, the percentage of banks in grades III and IV witnessed a declining trend during recent years.There was an improvement in the asset quality of the entire UCB sector in both absolute and percentage terms as at end-March over the previous year. Gross bad loans declined by Rs 135 crore to Rs 12,727 crore. However, both gross as well as net non-performing loans of the UCB sector continued to be on the higher side, RBI said, in its Trends and Progress report for the banking sector in 2009-10.Along with a decline in non-performing loans, there was also an increase in the coverage ratio of UCBs as of end-March over the previous year, indicating improvement in financial soundness. The provision coverage ratio improved to 62.9 per cent at the end of 2009-10 from 59.9 a year before.


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C]

All India financial institution

AIFIs With the progressive blurring of functions between banks and financial institutions, the AIFIs are fast losing ground and adopting the business model of a bank to remain viable in the long run (Table 3.11). The merger of ICICI with ICICI bank on March 30, 2002 was the beginning of conversion of AIFIs into universal banks. Taking into account the changing operating environment following the initiation of economic reforms in the early1990s, the Government decided to transform IDBI into a commercial bank without eschewing its traditional development finance obligations. The migration to the new business model of commercial banking, with its access to low cost, current/saving bank deposits is expected to enable it to overcome most of the limitations of the current model of development finance and also to diversify its client/asset base.

I.

NABARD

The National Bank for Agriculture and Rural Development (Nabard) is seriously mulling a proposal to provide Credit Plus services through the Farmers Clubs. Nabard regional office chief general manager Venkatesh Tagat said North Karnataka offers ample scope for construction of rural godowns and the banks should hold talks with farmers and explore the possibility of godown construction especially in the chilly growing belt. Addressing the farmers during an interaction session organised at Neeralakatti village in Dharwad taluk recently, he said refinance facility from Nabard would be available for the purpose with subsidy of up to 25 per cent of the project cost. Likewise, Nabard was also extending subsidy for units producing organic manure. Villages covered 100 per cent under solar energy units, would get a special package from Nabard, he revealed.


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II.

EXIM

Export-Import Bank of India is the premier export finance institution of the country, set up in 1982 under the Export-Import Bank of India Act 1981. Government of India launched the institution with a mandate, not just to enhance exports from India, but to integrate the countrys foreign trade and investment with the overall economic growth. Since its inception, Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment. Commencing operations as a purveyor of export credit, like other Export Credit Agencies in the world, Exim Bank of India has, over the period, evolved into an institution that plays a major role in partnering Indian industries, particularly the Small and Medium Enterprises, in their globalisation efforts, through a wide range of products and services offered at all stages of the business cycle, starting from import of technology and export product development to export production, export marketing, pre-shipment and post-shipment and overseas investment.

III.

Small Industries Development Bank of India

It is an independent financial institution aimed to aid the growth and development of micro, small and medium-scale enterprises in India. Set up on April 2, 1990 through an act of parliament, it was incorporated initially as a wholly owned subsidiary of Industrial Development Bank of India. Current shareholding is widely spread among various state-owned banks, insurance companies and financial institutions. Beginning as a refinancing agency to banks and state level financial institutions for their credit to small industries, it has expanded its activities, including direct credit to the SME through 100 branches in all major industrial clusters in India. Besides, it has been playing the development role in several ways such as support to micro-finance institutionsSydenham College of Comm. & Eco.Page 29

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for capacity building and on lending. Recently it has opened seven branches christened as Micro Finance branches, aimed especially at dispensing loans up to Rs. 5.00 lakh. It is an apex body and nodal agency for formulating, coordination and monitoring the policies and programmed for promotion and development of small scale industries. IV. Industries Development Bank of India

The Industrial Development Bank of India (IDBI) was established on 1 July 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting and developing industry in the country. Although Government shareholding in the Bank came down below 100% following IDBIs public issue in July 1995, the former continues to be the major shareholder (current shareholding: 65.14%). IDBI provides financial assistance, both in rupee and foreign currencies, for green-field projects as also for expansion, modernisation and diversification purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI also provides indirect financial assistance by way of refinancing of loans extended by State-level financial institutions and banks and by way of rediscounting of bills of exchange arising out of sale of indigenous machinery on deferred payment terms. IDBIs transformation into a commercial bank would provide a gateway to lowcost deposits like Current and Savings Bank Deposits. This would have a positive impact on the Banks overall cost of funds and facilitate lending atSydenham College of Comm. & Eco.Page 30

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more competitive rates to its clients. The new entity would offer various retail products, leveraging upon its existing relationship with retail investors under its existing Suvidha Flexi-bond schemes. The responsibility for maintaining standards of corporate governance lies with its Board of Directors. Two Committees of the Board viz. the Executive Committee and the Audit Committee are adequately empowered to monitor implementation of good corporate governance practices and making necessary disclosures within the framework of legal provisions and banking conventions.


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Mini-Case Study HDFC Bank Ltd.: A Leader in Making HDFC Bank was incorporated in the year of 1994 by Housing Development Finance Corporation Limited (HDFC), Indias premier housing finance company. It was among the first companies to receive an in principle approval from the Reserve Bank of India (RBI) to set up a bank in the private sector. The Bank commenced its operations as a Scheduled Commercial Bank in January 1995 with the help of RBIs liberalization policies. In a milestone transaction in the Indian banking industry, Times Bank Limited (promoted by Bennett, Coleman & Co./Times Group) was merged with HDFC Bank Ltd., in 2000. This was the first merger of two private banks in India. As per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank. In 2008 HDFC Bank acquired Centurian Bank and its total branches became more than 1,000. The amalgamated bank emerged with a strong deposit base of around Rs. 1,22,000 crore and net advances of around Rs. 89,000 crore. The amalgamation added significant value to HDFC Bank in terms of increased branch network, geographic reach, and customer base, and a bigger pool of skilled manpower.


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Business Focus HDFC Bank deals with three key business segments Wholesale Banking Services, Retail Banking Services and Treasury. It has entered the banking consortia of over 50 corporate for providing working capital finance, trade services, corporate finance and merchant banking. It is also providing sophisticated product structures in areas of foreign exchange and derivatives, money markets and debt trading and equity research. Wholesale Banking Services The Banks target markets are large, blue-chip manufacturing companies, small & mid-sized companies and agro-based businesses. For these customers, the Bank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. The bank is also a leading provider of structured solutions, which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers. HDFC Bank has made significant inroads into the banking consortia of a number of leading Indian corporate including multinationals, companies from the domestic business houses and prime public sector companies. It is recognized as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks. Retail Banking Services The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements. The products are backed by world-class services and delivered to customers through the growing branchSydenham College of Comm. & Eco.Page 33

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network, as well as through alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile Banking. HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Master card and Maestro debit card as well. It launched its credit card business in late 2001. By March 2009, the bank had a total card base (debit and credit cards) of over 13 million. It is also one of the leading players in the merchant acquiring business with over 70,000 Point-of-sale (POS) terminals for debit/credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc. Treasury Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. These services are provided through the banks Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio.


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Distribution Network HDFC Bank is headquartered in Mumbai. The Bank has a network of 1,725 branches spread in 771 cities across India. All branches are linked on an online real-time basis. Customers in over 500 locations are also serviced through Telephone Banking. The Bank has a presence in all major industrial and commercial centers across the country. Being a clearing/settlement bank to various leading stock exchanges, the Bank has branches in the centers where the NSE/BSE has a strong and active member base. The Bank also has 3,898 networked ATMs across these cities. Moreover, HDFC Banks ATM network can be accessed by all domestic and international Visa/MasterCard, Visa Electron/ Maestro, Plus/Cirrus and American Express Credit/Charge cardholders.


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Comparison of Banking Structure in China and India A comparison of China and India is both exciting and challenging, and should ideally lead to a serious consideration of various policy implications. In this context, our conference today marks the beginning of a long journey. In my remarks, I will try to compare the banking sectors in China and India, largely focusing on structure and robustness as well as the effectiveness of the banking supervisory systems. As far as the banking sector is concerned, it may well be true that the two countries share many attributes, particularly in terms of industry structure. First of all, the two countries heavily depend on bank finance to support economic growth, and capital markets are less developed. In China, the total assets in the banking sector represent more than 90 percent of the assets in the financial sector. And in India, the commercial banking sector represents about 74 percent of total financial system assets. Nonbank financial institutions make up the balance in India, of which 8.6 percent are term-lending institutions and 15.4 percent are investment institutions. Some of these institutions could be considered as banking institutions according to the broader definition in China. Moreover, the proportion of commercial banking sector financial assets in both countries is likely to rise further. Another strikingly common attribute of the banking system in the two economies is dominant state ownership. This stands in stark contrast to other developing economies and has strong implications for the conduct and performance of the banking sector in general. In China, until very recently, all major commercial banks except one or two were controlled by the central and local governments, as are virtually all small commercial banks. Chinas banking sector is relatively concentrated. The four large banks, known as state-owned commercial banks until the recent diversification of ownership, plus the Bank of Communications (BOCom),


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also largely owned by the central government, account for nearly two-thirds of commercial bank assets. The Indian banking system can be characterized by a large number of banks with mixed ownership. However, 27 public sector banksnamely, banks owned and controlled by the statecontinue to dominate the Indian commercial banking landscape. Together, these banks account for three quarters of the market share. Even though these public sector banks have access to capital markets, government policy is to ensure that its equity interest does not, as a result of public issues by banks, go below 51 percent. As is the case with many developed and developing countries, the efficiency of the state-owned banks has been a concern for both the Chinese and Indian governments. And the Indian government also openly admitted that public sector banks have been consistently outperformed by private sector banks. The effort to restructure the state-owned banks is still a work in progress in the two countries. Both governments have continued to launch many new initiatives to further promote progress in this area.


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INDIAN BANKING SCENARIO 2010 The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favorably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. However, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. Indias banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. Opportunities And Challenges For Players The bar for what it means to be a successful player in the sector has been raised. Four challenges must be addressed before success can be achieved. First, the market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. Second, banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks. Third, with increased interest in India, competition from foreign banks will only intensify. Fourth, given the demographic shifts resulting from changes in age profile and household income, consumers willSydenham College of Comm. & Eco.Page 38

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increasingly demand enhanced institutional capabilities and service levels from banks. FUTURE OF INDIAN BANKING MARKET The Indian banking market is growing at an astonishing rate, with assets expected to reach US$1 trillion by 2010. An expanding economy, middle class, and technological innovations are all contributing to this growth. A new Celent report, Overview of Indian Banking Market, examines the impressive growth of this industry, largely due to an expanding economy and growing consumer middle class in need of financial services. India's economy is growing at a rate of 8%, with banking assets increasing at a CAGR of 24% from 2001 to 2008, from US$374.4 billion in 2003 to US$616.15 billion in 2008. While public sector banks still dominate Indias banking industry, the private sector is growing, with global players now actively competing with domestic banks.


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CHANGES IN BANKING STRUCTURE

The opening up of the Indian banking sector to private players acted as 'the tipping point' for this transformation. The deregulatory efforts prompted many financial institutions (like HDFC and ICICI) and non-financial institutions enter the banking arena. With the entry of private players into retail banking and with multi-nationals focusing on the individual consumer in a big way, the banking system underwent a phenomenal change. Multi-channel banking gained prominence. For the first time consumers got the choice of conducting transactions either the traditional way (through the bank branch), through ATMs, the telephone or through the Net. Technology played a key role in providing this multi-service platform. The entry of private players combined with new RBI guidelines forced nationalized banks to redefine their core banking strategy. And technology was central to this change. Today banks have to look much beyond just providing a multi-channel service platform for its customers. There are other pressing issues that banks need to address in order to chalk-out aroadmap for the future. Here are the top three concerns in the mind of every bank's CEO.

Customer retention: Customer retention is one of the main priorities for banks today. With the entry of new players and multiple channels, customers have become more discerning and less 'loyal' to banks. Given the various options, it is now possible to open a new account within minutes. Or for that matter shift accounts within a couple of hours. This makes it imperative that banks provide best levels of service to ensure customer satisfaction.


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Cost pressures: Cost pressures come into play when banks are not able to afford the cost of a certain service or initiative although they want to or need to have it in place. This is primarily because the cost structure at the backend is not efficient enough to offer that kind of service to the marketplace.

Increased competition: The entry of new players into the banking space is leading to increased competition. A recent example would be of Kotak Mahindra Finance Limited (KMFL)a financial services company focused on investment consulting, auto finance, insurance, etc morphing into Kotak Bank. Many other such players are waiting on the sidelines. Technology makes it easier for any company with the right channel infrastructure and money reserves to get into banking. This has been one of the major reasons behind this kind of competition from players who do not have a banking background. Kotak Bank overcame the initial costs of setting up its own ATM network by getting into a sharing agreement with UTI bank. New entrants with strategies such as these make the banking game tough


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IMPACT OF CHANGE IN BANKING STRUCTURE ON ECONOMY Financial and Banking reforms The last decade witnessed the maturity of India's financial markets. Since 1991, every governments India took major steps in reforming the financial sector of the country. The important achievements the following fields are discussed under separate heads: Financial Markets In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial banking and asset management business. With the openings in the insurance sector for these institutions, they started making debt in the market. Competition among financial intermediaries gradually helped the interest rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high price while depositors had incentives to save. It was something between the nominal rate of interest and the expected rate of inflation. Regulators The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more independent. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators.


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Development Finance Institutions Financial institution's access to SLR funds reduced. Now they have to approach the capital market for debt and equity funds. Convertibility clause no longer obligatory for assistance to corporate sanctioned by term-lending institutions. Capital adequacy norms extended to financial institutions. DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking, asset management and insurance through separate ventures. The move to universal banking has started. Non-banking finance companies In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net owned funds, has been raised to Rs.2 crores. Until recently, the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. The secondary market was underdeveloped and lacked liquidity. Several measures have been initiated and include new money market instruments, strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI).The RBI conducts its sales of dated securities and treasury bills through its open market operations (OMO) window. Primary dealers bid for these securities and also trade in them. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions. On account of the substantial issue of government debt, the gilt- edged market occupies an important position in the financial set- up. The Securities Trading Corporation of India (STCI), which started operations in June 1994, has a mandate to develop the secondary market in government securities. Long-term debt market. After bringing some order to the equity market, the SEBI has nowSydenham College of Comm. & Eco.Page 43

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decided to concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of dematerialization of debt instruments in order to encourage paperless trading. The Capital Market The number of shareholders in India is estimated at 25 million. However, only an estimated two lakh persons actively trade in stocks. There has been a dramatic improvement in the country's stock market trading infrastructure during the last few years. Expectations are that India will bean attractive emerging market with tremendous potential. Unfortunately, during recent times the stock markets have been constrained by some unsavory developments, which have led to retail investors deserting the stock markets. Deregulation of Banking System Prudential norms were introduced for income recognition, asset classification, provisioning for delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy norms, substantial capital were provided by the Government to PSBs. Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated. New private sector banks allowed promoting and encouraging competition. PSBs were encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate quicker recovery of loan arrears. Bank lending norms liberalized and a loan system to ensure better control over credit introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk management systems in banks encompassing credit, market and operational risks. A credit


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information bureau being established to identify bad risks. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced. Capital Market Developments The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital Issues was abolished and the initial share pricing were decontrolled. SEBI, the capital market regulator was established in 1992. Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after registration with the SEBI. Indian companies were permitted to access international capital markets through euro issues. The National Stock Exchange (NSE), with nationwide stock trading and electronic display, clearing and settlement facilities was established. Several local stock exchanges changed over from floor based trading to screen based trading. Private Mutual Funds Permitted The Depositories Act had given a legal framework for the establishment of depositories to record ownership deals in book entry form. Dematerialization of stocks encouraged paperless trading. Companies were required to disclose all material facts and specific risk factors associated with their projects while making public issues. To reduce the cost of issue, underwriting by the issuer were made optional, subject to conditions. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued by SEBI. SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy norms for brokers, and made rules for making client or broker relationship more transparent which included separation of client and broker accounts.


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Buy Back Of Shares Allowed The SEBI started insisting on greater corporate disclosures. Steps were taken to improve corporate governance based on the report of a committee SEBI issued detailed employee stock option scheme and employee stock purchase scheme for listed companies. Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies given the freedom to issue dematerialized shares in any denomination. Derivatives trading starts with index options and futures. A system of rolling settlements introduced. SEBI empowered to register and regulate venture capital funds. The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India.


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CONCLUSIONS AND SUGGESTIONS 1. The Indian banking can be broadly categorized into nationalized (government owned), private banks and specialized banking institutions. The Reserve Bank of India is the apex institution in the Indian banking system & acts a regulator and a centralized body for monitoring any discrepancies and shortcoming in the system. 2. Before Nationalisation, banks in the beginning faced severs financial crisis. During and after World War I, 87 banks were liquidated. Development of banks in India was characterized by bank failures. After Independence, the Indian banking underwent a thorough and moral change. The government of India announced Banking Regulations Act in 1949 to consolidate and regulate the banking growth in India 3. After Nationalisation, however, growth of banking during the first 3 plan periods resembles that of capitalist growth. There was need for stimulating the savings and investment to meet the growing demand for bank credit for economic development. Therefore government focused on social banking than capitalistic banking. Hence, in February 1961, announcement of 14 banks was made for the purpose of nationalisation. Since then, the performance of banking has been remarkable in the many aspects such as branch expansion, expansion of business, priority sector advances, development and spread of banking. 4. Currently, banking system has entered into the third phase of development which is characterized by innovation & diversification in order to meet new challenges. New services have been started such as merchant banking, investment banking, housing finance, investment banking, internet banking, telebanking, branch banking, electronic money transfers, SMS banking, mobile banking, proxy banking, plastic money such as credit cards, ATM cards, debit cards, smart cards, etc.Sydenham College of Comm. & Eco.Page 47

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5. Banks have indulged in activities such as service area approach, mutual funds, housing finance, factoring services, commercial papers, certificate of deposit, stock invest and other money and capital market instruments. 6. The unleashing of products and services through the net has galvanized players at all levels of the banking and financial institutions market grid to look anew at their existing portfolio offering. Banks have been benefited a lot with the internet and information technology. As a result banks have become more efficient and cost-effective. Indian nationalized banks continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization. However there is a need to create more awareness regarding social development. There is need for taking decisive actions . 7. Industry estimates indicate that out of 274 commercial banks operating in India, 223 banks are in the public sector & 51 are in the private sector. The private sector bank grid also includes 24 foreign banks. 8. Indian banking market is growing at an astonishing rate, with assets expected to reach US$1 trillion by 2010. The Indian banking industry is in the middle of an IT revolution, focusing on the expansion of retail and rural banking. Players are becoming increasingly customer-centric in their approach, which has resulted in innovative methods of offering new banking products & services. Banks are now realizing the importance of being a big player & are beginning to focus their attention on mergers & acquisitions to take advantage of economies of scale.


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BIBLIOGRAPHY

There was immense need and flow of the information while preparing the project report which was gathered through various sources mentioned below:

Websites:

www.rbi.org.in www.business-standard.com www.finance.indiamart.com www.thehindubusinessline.com www.google.com www.wikipedia.com www.banknetindia.com www.bankingindiaupdate.com

Newspapers: The Economic Times


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