“BANKING STRUCTURE”

PROJECT REPORT BY

MS. PRATIBHA KUMARI

T.Y.B.B.I (SEMESTER V)

PROJECT GUIDE

PROF. dr s.s.SHETE

THE DEPARTMENT OF BANKING &

INSURANCE

SYDENHAM COLLEGE OF COMMERCE &

ECONOMICS B- ROAD, CHURCHGATE,

MUMBAI-400020

2011-2012

DECLARATIONDECLARATION

I, Pratibha kumari studying in T.Y.B.B.I hereby declare that I have

done a project on “Banking structure”. As required by the university rules, I

state that the work presented in this project is original in nature and to the

best my knowledge, has not been submitted so far to any other university.

Whenever references have been made to the work of others, it is

clearly indicated in the sources of information in references.

Place: Mumbai Pratibha kumari

Date:

PREFACE

The project has been prepared not only because it involves marks and is the

requirement of the university but I understand the underlying intention of the

board which definitely imparts priceless knowledge and I believe that

practical exposure is equally important for every student.

I firmly decided to prepare my project on “banking structure” as I eager to

know the meaning both theoretical as well as practical. I have chosen this

topic because to be honest I love doing projects related to the technology.

There is nothing more that excites me than good execution done through an

electronic medium and hence I choose this topic.

I have put my sincere efforts in the project and hope I have done a decent job

to portray that technology has proven to be a boon to banking

Place: Mumbai Pratibha kumara

Date:

ACKNOWLEDGEMENT

I have taken efforts in this project. However, it would not have been possible

without the kind support and help of many individuals and organizations. I

would like to extend my sincere thanks to all of them.

I am highly indebted to PROF. DR S.S.SHETE for their guidance and constant

supervision as well as for providing necessary information regarding the

project & also for their support in completing the project.

I would like to express my gratitude towards my parents & faculty of B.B.I

Dept. for their kind co-operation and encouragement which help me in

completion of this project.

I would like to express my special gratitude and thanks to industry persons

for giving me such attention and time.

My thanks and appreciations also go to my colleague in developing the project

and people who have willingly helped me out with their abilities.

Place: Mumbai Pratibha kumari

INTRODUCTION

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 upliftment 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 (2009), banking industry in India is generally fairly mature in terms

of supply, product range and reach-even though reaches in rural India still

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 rate-and 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.

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 and 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.

In these five decades since independence, banking in India has evolved

through four distinct phases:

Foundation phase can be considered to cover 1950s and 1960s till the

nationalisation of banks in 1969. The focus during this period was to lay the

foundation for a sound banking system in the country. As a result the phase

witnessed the development of necessary legislative framework for facilitating

re-organization and consolidation of the banking system, for meeting the

requirement of Indian economy. A major development was transformation of

Imperial Bank of India into State Bank of India in 1955 and nationalisation of

14 majar private banks during 1969.

Expansion phase had begun in mid-60s but gained momentum after

nationalisation of banks and continued till 1984. A determined effort was

made to make banking facilities available to the masses. Branch network of

the banks was widened at a very fast pace covering the rural and semi-urban

population, which had no access to banking hitherto. Most importantly, credit

flows were guided towards the priority sectors. However this weakened the

lines of supervision and affected the quality of assets of banks and pressurized

their profitability and brought competitive efficiency of the system at low ebb.

Consolidation phase: The phase started in 1985 when a series of policy

initiatives were taken by RBI which saw marked slowdown in the branch

expansion. Attention was paid to improving house-keeping, customer service,

credit management, staff productivity and profitability of banks. Measures

were also taken to reduce the structural constraints that obstructed the

growth of money market.

Reforms phase: The macro-economic crisis faced by the country in 1991

paved the way for extensive financial sector reforms which brought

deregulation of interest rates, more competition, technological changes,

prudential guidelines on asset classification and income recognition, capital

adequacy, autonomy packages etc.

OBJECTIVES OF THE STUDY

The objectives of project are as follows:

1. To find out the earlier banking structure that prevailed in India.

2. To assess the various factors that lead to the change in the Indian banking

structure

3. To assess the impact of all these factors on the banking structure.

4. To assess the change in the performance and efficiency of the banks in

India.

5. To draw a contrast between the old and the new Indian banking structure.

6. To determine the various services offered by banks earlier and currently

7. To determine the future of Indian Banking Markets

8. To assess the impact of information technology on the banking sector.

9. To study how new distribution channels such as Internet Banking, ATM

facility, Phone Banking have changed the face of the Banking industry.

10. To draw conclusions of the impact of the changes in banking sector.

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.

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.

BANKING STRUCTURE IN INDIA

RESERVE BANK OF INDIA

Reserve Bank of India

Commercial banks Cooperative Banks

Public Sector Banks

Primary Credit Societies

Central Co-operative Banks

State Co-operative Banks

Regional Rural Banks

Private Sector Banks

foreignIndian

The central bank of the country is the Reserve Bank of India (RBI). It was

established in April 1935 under the RBI Act, 1934 with a share capital of Rs. 5

crores on the basis of the recommendations of the Hilton Young Commission.

The share capital was divided into 5,00,000 shares of Rs. 100 each fully paid

which was entirely owned by private shareholders in the beginning. The

Government held shares of nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalised in the year 1949. The general

superintendence and direction of the Bank is entrusted to Central Board of

Directors of 20 members, the Governor and four Deputy Governors, one

Government official from the Ministry of Finance, ten nominated Directors by

the Government to give representation to important elements in the economic

life of the country, and four nominated Directors by the Central Government

to represent the four local Boards with the headquarters at Mumbai, Kolkata,

Chennai and New Delhi. Local Boards consist of five members each Central

Government appointed for a term of four years to represent territorial and

economic interests and the interests of co-operative and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The

RBI Act, 1934 provides the statutory basis of the functioning of the Bank. It is

so called as it maintains cash reserves of all the commercial banks in India

with itself. It is also referred to as Central Bank.

Objectives of constituting the Reserve Bank of India:

To regulate the issue of bank notes.

To maintain reserves with a view to securing monetary stability.

To operate the credit and currency system of the country to its

advantage.

To act as a regulator and supervisor of the financial system

Management of foreign exchange control

Banker to the Government because it performs merchant banking

function for the central and the state governments; also acts as their

banker.

Development of banks.

Supervision and licensing of banks.

Role of the Reserve Bank of India

The Reserve Bank of India performs an important role in monitoring and

development of Indian economy. The same can be demonstrated with the

1. Bank of Issue: The Reserve Bank of India enjoys the monopoly of note

issue. The Reserve Bank is authorized to issue currency notes of Rs. 2, 5, 10,

20, 50, 100, 500 and 1000. The one rupee note is issued by the Government of

India. RBI has the issue department which is entirely responsible for the issue

of coins and notes. The RBI required to follows certain principles in order to

prevent misuse of issuing of notes. Against the issue of notes the RBI is

required to maintain gold and foreign exchange reserve of Rs. 200 Crores, Rs.

115 Crores gold and the remaining Rs. 85 Crores in foreign securities.

Monopoly power of note issue with the Reverse Bank of India has a number of

advantage which are as follows:

(a) Uniformity: As all notes in India are issued by the RBI, there is uniformity

in note issue, widely accepted and the people of the country have full faith in

the currency.

(b) Effective Control: The RBI has on effective control on commercial banks

that create deposits in the process of advancing loans to its customers.

(c) Supervision of Control: The RBI maintains a proper supervision and

control over the supply of money in the economy.

2. Bankers Bank and Lender of the Last Resort: As the bankers bank, the

RBI performs the same functions as performed by commercial bank for their

customers. On behalf of the Government the RBI receives the cheques, draft

and deposit of cash etc. For the payment of salaries and wages it provide cash

to the government. It also buys and sells foreign currencies.

Every scheduled bank, according to the RBI, Act, 1934, was required to

maintain with the Reserve Bank a Cash balance equivalent to 5 percent of its

demand liabilities and 2 percent of its time liabilities in India. The demand

and time liabilities was abolished by an amendment of 1962, and now the

bank require cash reserves equal to 3 percent of their aggregate deposit

liabilities with the RBI. The RBI at any time can change the minimum cash

reserve. As the word say ‘lender of the last resort’ it simply means that the RBI

provides all financial assistance whether directly or indirectly to commercial

bank at the time of financial crises through loans, advances and discounting of

approved securities.

3. Fiscal Agent and Advisor to the Government: On behalf of the

Government the RBI issues new loans, receives subscriptions and pays

interest on them and at last repay these loans.

As the financial advisor, the RBI advises the government on all monetary and

banking matter like floating of loans, on industrial and agricultural finance,

control of inflation or deflation, budgetary policy, financial aspects of

planning, etc.

4. Controller of Credit: RBI is the controller of credit. For the smooth

functioning of the economy, the supply of credit must be regulated and

controlled, the RBI can do so through changing, the bank rate or through open

market operations. According to the Banking Regulation act of 1949, the RBI

can ask any particulars bank or the whole banking system not to lend to

particular groups of persons or on the basis of certain type of securities.

5. Custodian of Nations Foreign Exchange Reserve: The custodian of

nation’s foreign exchange reserve is one of the most important functions of

the RBI. The RBI controls both the receipts and payment of foreign exchange,

and in the regard it tries to maintain stability of the exchange rate. This can be

possible only when it buys or sell foreign currencies in the market.

After India became a member of the international monetary fund, the RBI has

the responsibility of maintaining fixed exchange rates with all other member

countries of the IMF.

6. Clearing house for Transfer and Settlement: Reserve Bank provides

clearing house facilities to the member banks. The customers of various bank

issue cheques drawn on their bank. So the need arises regarding the

settlement claims of the commercial bank on each other. It is very easy to

settle claims between them by making transfer entries in their account

because the commercial bank keeps their cash reserve with the RBI. So it is

simple, economical and time saving device for settling the claims of

commercial bank on each other.

7. Promotional Functions: With economic growth assuming a new urgency

since independence, The Reverse Bank of India not only performs the

traditional function explained in point 1 to 6 above, but it also performs

various development and promotional functions with were considered as

outside the scope of RBI at one time. For developing and promoting a strong

banking system the responsibility is on the hand of RBI, and in this regard it

provides cheap and liberal rediscounting facilities and also gives various types

of concessions to commercial banks from time to time.

The Reserve bank has helped in the setting up of the IFCI and the SFC to

provide various funds for the development of agriculture, industry and service

sector of the economy.

8. Supervisory Functions: Now the supervision is in the hand of the RBI, to

see whether the commercial banks are performing better or not for the

development of the economy. The Banking Regulation Act 1949, have given

wide power to RBI regarding proper control and supervision over commercial

banks regarding licensing and establishment, expansion of branch, liquidity of

their assets, management and method of working of commercial banks.

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 (60 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).

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 a 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. 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 deposite 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

SBI & Associates:

1. State Bank of India

2. State Bank of Bikaner & Jaipur

3. State Bank of Hyderabad

4. State Bank of Indore

5. State Bank of Mysore

6. State Bank of Patiala

Public Sector Banks

Among the Public Sector Banks in India, United Bank of India is one of the 14

major banks which were nationalised on July 19, 1969. Its predecessor, in the

Public Sector Banks, the United Bank of India Ltd., was formed in 1950 with

the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914),

Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly

Bank Ltd. (1932).

Oriental Bank of Commerce (OBC), a Government of India Undertaking offers

Domestic, NRI and Commercial banking services. OBC is implementing a

GRAMEEN PROJECT in Dehradun District (UP) and Hanumangarh District

(Rajasthan) disbursing small loans. This Public Sector Bank India has

implemented 14 point action plan for strengthening of credit delivery to

women and has designated 5 branches as specialized branches for women

entrepreneurs.

The following are the list of Public Sector Banks in India

1. Andhra Bank

2. Bank of Baroda

3. Bank of India

4. Bank of Maharastra

5. Canara Bank

6. Corporation Bank

7. Dena Bank

8. Indian Bank

9. Punjab National Bank

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

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

HDFC Bank

ICICI Bank

Jammu & Kashmir Bank

Karnataka Bank

UTI Bank

Mini-Case

HDFC Bank Ltd.: A Leader in Making

HDFC Bank was incorporated in the year of 1994 by Housing Development

Finance Corporation Limited (HDFC), India’s 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 RBI’s 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.

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 Bank’s 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

branch 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 bank’s 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.

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

Bank’s ATM network can be accessed by all domestic and international

Visa/MasterCard, Visa Electron/ Maestro, Plus/Cirrus and American Express

Credit/Charge cardholders.

Foreign Banks

Foreign Banks in India always brought an explanation about the prompt

services to customers. After the set up foreign banks in India, the banking

sector in India also become competitive and accurative.

New rules announced by the Reserve Bank of India for the foreign banks in

India in this budget have put up great hopes among foreign banks which allow

them to grow unfettered. Now foreign banks in India are permitted to set up

local subsidiaries. The policy conveys that foreign banks in India may not

acquire Indian ones (except for weak banks identified by the RBI, on its terms)

and their Indian subsidiaries will not be able to open branches freely. Please

see the list of foreign banks in India till date.

List of Foreign Banks in India

ABN-AMRO Bank

Abu Dhabi Commercial Bank

Bank of Ceylon

BNP Paribas Bank

Citi Bank

Deutsche Bank

HSBC

Sonali Bank

JPMorgan Chase Bank

Regional Rural Banks

Rural banking in India started since the establishment of banking sector in

India. Rural Banks in those days mainly focused 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.

There are 197 RRB’s in India. SBI has 30 Regional Rural Banks in India known

as RRBs. The rural banks of SBI are 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.

Apart from SBI, there are other few banks which functions for the

development of the rural areas in India. Few of them are as follows:

Haryana State Cooperative Apex Bank Limited

National Bank for Agriculture and Rural Development (NABARD)

Sindhanur Urban Souharda Co-operative Bank

United Bank of India

Syndicate Bank

Co-Operative Banks

The Co operative 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 fulfill, 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 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 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

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. 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

central and state government,

the Reserve Bank of India and NABARD,

other co-operative institutions,

ownership funds and,

deposits or debenture issues.

It is interesting to note that intra- sectoral flows of funds are much 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 bank is 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.

Cooperative banks in India finance rural areas under:

Farming

Cattle

Milk

Hatchery

Personal finance

Cooperative banks in India finance urban areas under:

Self-employment

Industries

Small scale units

Home finance

Consumer finance

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 co-operative 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 Co-operative 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.

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 Co-operative 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 guilt-edged 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.

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:

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

technical guidance with focus on weaker sections. Government has promoted

multi-purpose societies in tribal areas for the benefit of people living there.

INDIAN BANKING SCENARIO 2010

Towards a High-performing Sector

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. India’s 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 will 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 India’s banking industry, the private sector is

growing, with global players now actively competing with domestic banks.

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.

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 k ind 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

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.

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 i ts sa les of dated

securi t ies and treasury bi l ls through i ts 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 operat ions 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 now 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.

Mutual Funds

The mutual funds industry is now regulated under the SEBI (Mutual Funds)

Regulations, 1996and amendments thereto. With the issuance of SEBI

guidelines, the industry had a framework for the establishment of many more

players, both Indian and foreign players. The Unit Trust of India remains

easily the biggest mutual fund controlling a corpus of

nearlyRs.70,000 crores, but its share is going down. The biggest

shock to the mutual fund industry during recent times was the insecurity

generated in the minds of investors regarding the US 64schemes. With the

growth in the securities markets and tax advantages granted for i n

m u t u a l f u n d s u n i t s , m u t u a l f u n d s s t a r t e d

b e c o m i n g p o p u l a r . The foreign owned AMCs are the ones which are

now setting the pace for the industry. They are introducing new products,

setting new standards of customer service, improving disclosure

standards and experimenting with new types of distribution. The insurance

industry is the latest to be thrown open to competition from the

private sector including foreign players . Foreign companies can

only enter jo int ventures with Indian companies, with

participation restricted to 26 per cent of equity. It is too early to

conclude whether the erstwhi le publ ic sector monopol ies wi l l

successful ly be able to face up to the competition posed by the new

players, but it can be expected that the customer will gain from improved

service.

The new players will need to bring in innovative products as well as fresh

ideas on marketing and distribution, in order to improve the low per

capita insurance coverage. Good regulation will, of course, be essential.

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 a l lowed promoting and encouraging competi t ion .

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. B a n k l e n d i n g n o r m s l i b e r a l i z e d a n d a

l o a n s y s t e m t o e n s u r e b e t t e r c o n t r o l o v e r c r e d i t

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 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.

Buy Back Of Shares Allowed

The SEBI started insist ing on greater corporate disc losures .

Steps were taken to improve c o r p o r a t e g o v e r n a n c e

b a s e d o n t h e r e p o r t o f a c o m m i t t e e . 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.

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.

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.