Economic & Technological Reforms in Indian Banking System

Economic & Technological Reforms in Indian Banking System
CHAPTER I
INTRODUCTION AND RESEARCH METHODOLOGY
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1.1 GENERAL INTRODUCTION OF THE PROJECT

INDIAN BANKING SECTOR Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is theState Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955.
History Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period fey and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century.
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Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony,
followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahorein 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
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The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara (South Kanara) district. Four nationalized banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (19141918) through the end of the Second World War (19391945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:
Years
Number of banks that failed
Authorised capital (Rs. Lakhs)
Paid-up Capital (Rs. Lakhs)
1913
12
274
35
1914
42
710
109
1915
11
56
1916
13
231
1917
76
25
1918
209
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Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was established in April 1934, but was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."
The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.
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NATIONALIZATION
Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalization." The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
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LIBERALIZATION
In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.
Currently (2010), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach 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 rateand this has mostly been true.
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With the growth in the Indian economy expected to be strong for quite some timeespecially 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 M&As, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide
ADOPTION OF BANKING TECHNOLOGY

The IT revolution had a great impact in the Indian banking system. The use of computers had led to introduction of online banking in India. The use of the modern innovation and computerization of the banking sector of India has increased many fold after the economic liberalization of 1991 as the country's banking sector has been exposed to the world's market. The Indian banks were finding it difficult to compete with the international banks in terms of the customer service without the use of the information technology and computers.
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The RBI in 1984 formed Committee on Mechanization in the Banking Industry (1984) whose chairman was Dr C Rangarajan, Deputy Governor, Reserve Bank of India. The major recommendations of this committee were introducing
MICR Technology in all the banks in the metropolis in India. This provided use of standardized cheque forms and encoders.
In 1988, the RBI set up Committee on Computerization in Banks (1988) headed by Dr. C.R. Rangarajan which emphasized that settlement operation must be computerized in the clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there should be National Clearing of intercity cheques at Kolkata, Mumbai, Delhi, Chennai and MICR should be made Operational. It also focused on computerization of branches and increasing connectivity among branches through computers. It also suggested modalities for implementing online banking. The committee submitted its reports in 1989 and computerization began form 1993 with the settlement between IBA and bank employees' association. IN 1994, Committee on Technology Issues relating to Payments System, Cheque Clearing and Securities Settlement in the Banking Industry (1994) was set up with chairman Shri WS Saraf, Executive Director, Reserve Bank of India. It emphasized on Electronic Funds Transfer (EFT) system, with the BANKNET communications network as its carrier. It also said that MICR clearing should be set up in all branches of all banks with more than 100 branches. Committee for proposing Legislation on Electronic Funds Transfer and other Electronic Payments (1995) emphasized on EFT system. Electronic banking refers to DOING BANKING by using technologies like computers, internet and networking, MICR, EFT so as to increase efficiency, quick service, productivity and transparency in the transaction.
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Apart from the above mentioned innovations the banks have been selling the third party products like Mutual Funds, insurances to its clients. Total numbers of ATMs installed in India by various banks as on end March 2005 is 17,642.The New Private Sector Banks in India is having the largest numbers of ATMs which is followed by SBI Group, Nationalized banks, Old private banks and foreign banks. This total off site ATM is highest for the SBI and its subsidiaries and then it is followed by New Private Banks, Nationalized banks and foreign banks. While on site is highest for the nationalized banks of India.
BANK GROUP NATIONALISED BANKS STATE BANK OF INDIA OLD PRIVATE SECTOR BANKS NEW PRIVATE SECTOR BANKS FOREIGN BANKS
NUMBER OF BRANCHES 33627 13661 4511
ON SITE OFF SITE ATM 3205 1548 800 ATM 1567 3672 441
TOTAL ATM 4772 5220 1241
1685 242
1883 218
3729 579
5612 797
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1.2 OBJECTIVES OF STUDY:

To understand the structure of Indian Banking system. To study impact of banking sector reforms since 1990s on Indian banking system. To study the changes in Indian banking industry due to globalization. To study the evolution of Indian Banking system-Manual to computerized.
1.3 SCOPE OF STUDY:

The scope of study is limited to the reforms since 1990s till date; it will help to understand the evolution of banking system. The reforms will include the economic as well as technological ones. Time constraint will limit the scope of study.
1.4 SIGNIFICANCE OF STUDY:

This study will help to get an insight into the banking reforms taken place since 1990s. Through the survey carried out, the customer response was analyzed, thus could understand the customer knowledge about banking reforms.
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1.5 RESEARCH METHODOLOGY:

1.5.1 Formation of Problem: Studying the Economic and technological reforms and its impact on Indian Banking system 1.5.2 Collection of data: For the purpose of data collection, Secondary data used- (journals, newspapers, RBI website, SBI website etc.), Primary data used-customer survey. 1.5.3 Research Instrument: The research instrument used is-Study available information and Surveys and questionnaires. The questionnaire is available in the annexure
1.5.4 Research limitations: The limitation of this study is that, the data collected is majorly from secondary source. Therefore there are chances of coming across ambiguous data.
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CHAPTER II
REVIEW OF LITERATURE
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REVIEW OF LITERATURE
ABSTRACT NO.1 Using the Indian banking industry as a case study, this paper proposes and tests hypotheses regarding the possibility of a relationship between three elements of the Economic Reforms (ERs) - namely, fiscal reforms, financial reforms, and private investment liberalization - and bank efficiency in developing countries. Bank efficiency is measured using data envelopment analysis (DEA); the relationship between the measured efficiency and various bank-specific characteristics and environmental factors associated with the ERs is examined using the OLS and the GMM estimations. Our results show an improvement in the efficiency of banks, especially that of foreign banks, after the ERs. We find a positive relationship between the level of competition and bank efficiency. However, a negative relationship between the presence of foreign banks and bank efficiency is found, which we attribute to a short-run increase in costs due to the introduction of new banking technology by foreign banks. Furthermore, we find that fiscal deficits negatively influence bank sufficiency. URL-http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1026106
Date posted: November 02, 2007 Hang Le Nottingham Trent University - Division of Economics Ali Ataullah Loughborough University - Business School
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ABSTRACT NO. 2 The Indian banking system has undergone significant transformation following financial sector reforms. It is adopting international best practices with a vision to strengthen the banking sector. Several prudential and provisioning norms have been introduced, and these are pressurizing banks to improve efficiency and trim down NPAs to improve the financial health in the banking system. In the background of these developments, this study strives to examine the state of affair of the Non-performing Assets (NPAs) of the public sector banks and private sector banks in India with special reference to weaker sections. The study is based on the secondary data retrieved from Report on Trend and Progress of Banking in India. The scope of the study is limited to the analysis of NPAs of the public sector banks and private sector banks NPAs pertaining to only weaker sections for the period seven (7) years i.e. from 2004-2010. It examines trend of NPAs in weaker sections in both public sector and private sector banks .The data has been analyzed by statistical tools such as percentages and Compound Annual Growth Rate (CAGR). The study observed that the public sector banks have achieved a greater penetration compared to the private sector banks vis-a-vis the weaker sections. URL- http://ideas.repec.org/a/aes/ijeptp/v1y2011i2p77-87.html
PachaMalyadri
(drpm16@yahoo.co.in) (Principal, Government Degree College, Osmania University, Andhra Pradesh, India)
S. Sirisha
(sirisha@itm.edu) (Institute of Technology and Management, Warangal, Andhra Pradesh, India)
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ABSTRACT NO. 3 This paper discusses the technological change and financial innovation that commercial banking has experienced during the past twenty-five years. This article indicates the role of financial system in economics and how technological change and financial innovation can improve social welfare. The literature review is relating to several financial innovations, which focuses the new products or services, production processes or organizational forms. In this article to find out the past quarter century has been a period of substantial change in terms of banking products, services, and production technologies. Moreover, while much effort has been devoted to understanding the characteristics of users and adopters of financial innovations and the attendant welfare implications, and to know little about how and why financial innovations are initially developed. URL- http://www.indianmba.com/Faculty_Column/FC1165/fc1165.html
Mr. BirenjanDigal Faculty Department of Management Studies Al-Ameen Institute of Management Studies Bangalore
ABSTRACT NO. 4 Using the Indian banking industry as a case study, this paper proposes and tests hypotheses regarding the possibility of a relationship between three elements of the Economic Reforms (ERs) - namely, fiscal reforms, financial reforms, and private investment liberalization - and bank efficiency in developing countries. Bank efficiency is measured using data envelopment analysis (DEA); the relationship between the
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measured efficiency and various bank-specific characteristics and environmental factors associated with the ERs is examined using the OLS and the GMM estimations. Our results show an improvement in the efficiency of banks, especially that of foreign banks, after the ERs. We find a positive relationship between the level of competition and bank efficiency. However, a negative relationship between the presence of foreign banks and bank efficiency is found, which we attribute to a short-run increase in costs due to the introduction of new banking technology by foreign banks. Furthermore, we find that fiscal deficits negatively influence bank efficiency. Amit Kumar Dwivedi D. Kumara Charyulu
http://eprints.icrisat.ac.in/3010/1/Efficiencyof_Indian_Banking_IIM2011.pdf
ABSTRACT NO. 5 India's financial sector reforms, introduced in 1992, may have influenced the performance of commercial banks through a variety of channels. The present study is an attempt to examine the efficiency levels of Indian banks for the period 19852004. We employ stochastic frontier analysis to estimate bank-specific cost, profit and advance efficiencies. Our results show that while loan advance efficiency has not shown much improvement after deregulation, cost and profit efficiencies show varying trends for different bank groups. Public sector banks rank first in two of the three efficiency measures, indicating that, as opposed to the general perception, these banks do not lag behind their private counterparts in efficiency. Our results also show that competition has a significant impact on the efficiency levels of commercial banks across all three efficiency measures. The impact of various factors captured in the study is clearly based on performance in a given setting, and the rapid changes in the financial sector that are underway will keep influencing the performance of the banking industry.
H.P. Mahesh
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1. H.P. Mahesh is Ph. D. Fellow at the Institute for Social and Economic Change, Nagarbhavi, Bangalore 560072; e-mail: maheshhp@yahoo.com ShashankaBhide 1. ShashankaBhide is Senior Research Counsellor, National Council of Applied Economic Research, ParisalaBhavan, New Delhi 110 002; e-mail: sbhide@ncaer.org.in URL- http://mar.sagepub.com/content/2/4/415.abstract
ABSTRACT NO. 6 The banking industry in India is undergoing a transformation since the beginning of liberalization. Interest rates have declined considerably but there is evidence of under lending by the banks. The social objectives of banking measured in terms of rural credit are, expectedly, taking a back seat. The performance of the banks has improved slightly over time with the public sector banks doing the worst among all banks. The banking sector as a whole and particularly the public sector banks still suffer from considerable NPAs, but the situation has improved over time. New legal developments like the SARFAESI Act provide new options to banks in their struggle against NPAs. The adoption of Basel-II norms however implies new challenges for Indian banks as well as regulators. Over time, the Indian banking industry has become more competitive and less concentrated. The new private sector banks have been the most efficient though the recent collapse of Global Trust bank has raised issues about efficiency and regulatory effectiveness. Rajesh Chakrabarti College of Management, Georgia Tech 800 West Peachtree Street, Atlanta GA 30332, USA Tel: 404-894-5109
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URL- http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan025796.pdf
ABSTRACT NO. 7 The purpose of this paper is to analyze the impact of IFRS on the Indian banking industry after the implementation on and after 01st April. 2011. This paper is based upon the critical analysis of financial statements of the Indian banking industry, such as business per employee, Capital and reserve, Investments and advances, Net NPA Ratios, and the impact thereon of relevant provisions of IFRS. The limitation of this paper is that it covers only the Indian banking industry and excludes all other industries in India. This paper shows the areas in which Indian banking industry is required to focus before and after the implementation of IFRS and their consequences on the financial statements of the Bank.
AUTHOR- CA. Mohammad Firoz (Corresponding author) Cambridge University Press New Delhi, India Tel: 919-910-612-165 E-mail: mohammad.firoz@icai.org
Prof. A. Aziz Ansari Department of Commerce & Business Studies JamiaMilliaIslamia, New Delhi, India E-mail: aaansari54@yahoo.com
KahkashanAkhtar Department of Commerce & Business Studies JamiaMilliaIslamia, New Delhi, India Tel: 919-899-313-271 E-mail: kasan_akhtar2403@yahoo.co.in
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ABSTRACT NO. 8 Reforms of the financial sector constitute the most important component of India's programme towards economic liberalization. The recent economic liberalization measures have opened the door to foreign competitors to enter into our domestic market. Deregulation in the form of elimination of exchange controls and interest rate ceilings have made the market more competitive. Innovation has become a must for survival. Many of the providers and users of capital have changed their roles all over the world. Financial intermediaries have come out of their traditional approach and they are ready to assume more credit risks. As a consequence, many innovations have taken place in the global financial sector which has its own impact on the domestic sector also. The emergences of various financial institutions and regulatory bodies have transformed the financial services sector from being a conservative industry to a very dynamic one. In this process this sector is facing a number of challenges. In this changed context, the financial services industry in India has to play a very positive and dynamic role in the years to come by offering many innovative products to suit the varied requirements of the millions of prospective investors spread throughout the country. URL- http://www.articlesbase.com/finance-articles/impact-of-globalization-on-indianfinancial-services-industry-737929.html Dr.V.V.S.K.PRASAD., M.Com.,M.B.A.,Ph.D., Professor and Head E-Mail: vskprasad.vempati@gmail.com
ABSTRACT NO. 9
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The paper investigates the performance of Indian commercial banking sector during the post reform period 1992-2004. The results indicate high levels of efficiency in costs and lower levels in profits, reflecting the importance of inefficiencies on the revenue side of banking activity. The decomposition of profit efficiency shows that a large portion of outlay lost is due to allocate inefficiency. The proximate determinants of profit efficiency appear to suggest that big state-owned banks performed reasonably well and are more likely to operate at higher levels of profit efficiency. A close relationship is observed between efficiency and soundness as determined by banks capital adequacy ratio. The empirical results also show that the profit efficient banks are those that have, on an average, less non-performing loans. Financial Deregulation and Profit Efficiency: A Non-parametric Analysis of Indian Banks Ghosh, Saibal (2009): Financial Deregulation and Profit Efficiency: A Non-parametric Analysis of Indian Banks. Published in: Journal of Economics and Business, Vol. 61, No. 6 (November 2009): pp. 509-528. URL- http://mpra.ub.uni-muenchen.de/24292/
ABSTRACT NO. 10 Information technology Services is considered as the key driver for the changes taking place around the world. Internet banking (IB) is the latest and most innovative service and is the new trend among the consumers. The shift from the formal banking to ebanking has been a 'leap' change. This study determines the factors influencing the consumers adoption of internet banking in India and hence investigates the influence of perceived usefulness, perceived ease of use and perceived risk on use of IB. It is an essential part of a banks strategy formulation process in an emerging economy like India. Survey based questionnaire design with empirical test was carried out. The results have supported the hypothesis.
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CHAPTER III
STRUCTURE OF BANKING SECTOR IN INDIA
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The Indian banking industry has its foundations in the 18th century, and has had a varied evolutionary experience since then. The initial banks in India were primarily traders banks engaged only in financing activities. Banking industry in the preindependence era developed with the Presidency Banks, which were transformed into the Imperial Bank of India and subsequently into the State Bank of India. The initial days of the industry saw a majority private ownership and a highly volatile work
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environment. Major strides towards public ownership and accountability were made with nationalization in 1969 and 1980 which transformed the face of banking in India. The industry in recent times has recognized the importance of private and foreign players in a competitive scenario and has moved towards greater liberalization. In the evolution of this strategic industry spanning over two centuries, immense developments have been made in terms of the regulations governing it, the ownership structure, products and services offered and the technology deployed. The entire evolution can be classified into four distinct phases.

Phase I- Pre-Nationalization Phase (prior to 1955) Phase II- Era of Nationalization and Consolidation (1955-1990) Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial Liberalization (1990-2004)
Phase IV- Period of Increased Liberalization (2004 onwards)
I.
CURRENT STRUCTURE
Currently the Indian banking industry has a diverse structure. The present structure of the Indian banking industry has been analyzed on the basis of its organized status, business as well as product segmentation.
II.
ORGANIZATIONAL STRUCTURE
The entire organized banking system comprises of scheduled and non-scheduled banks. Largely, this segment comprises of the scheduled banks, with the unscheduled ones forming a very small component. Banking needs of the financially excluded population is catered to by other unorganized entities distinct from banks, such as, moneylenders, pawnbrokers and indigenous bankers.
1. SCHEDULED BANKS
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A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In order to be included under this schedule of the RBI Act, banks have to fulfill certain conditions such as having a paid up capital and reserves of at least 0.5 million and satisfying the Reserve Bank that its affairs are not being conducted in a manner prejudicial to the interests of its depositors. Scheduled banks are further classified into commercial and cooperative banks. The basic difference between scheduled commercial banks and scheduled cooperative banks is in their holding pattern. Scheduled cooperative banks are cooperative credit institutions that are registered under the Cooperative Societies Act. These banks work according to the cooperative principles of mutual assistance.
2. SCHEDULED COMMERCIAL BANKS (SCBS): Scheduled commercial banks (SCBs) account for a major proportion of the business of the scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in India are categorized into the five groups based on their ownership and/or their nature of operations. State Bank of India and its six associates (excluding State Bank of Saurashtra, which has been merged with the SBI with effect from August 13, 2008) are recognized as a separate category of SCBs, because of the distinct statutes (SBI Act, 1955 and SBI Subsidiary Banks Act, 1959) that govern them. Nationalized banks (10) and SBI and associates (7), together form the public sector banks group and control around 70% of the total credit and deposits businesses in India. IDBI ltd. has been included in the nationalized banks group since December 2004. Private sector banks include the old private sector banks and the new generation private sector banks- which were incorporated according to the revised guidelines issued by the RBI regarding the entry of private sector banks in 1993. As at end-March 2009, there were 15 old and 7 new generation private sector banks operating in India.
3. FOREIGN BANKS Foreign banks are present in the country either through complete branch/subsidiary route presence or through their representative offices. At end-June 2009, 32 foreign
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banks were operating in India with 293 branches. Besides, 43 foreign banks were also operating in India through representative offices.
4. REGIONAL RURAL BANKS (RRBS) Regional Rural Banks were set up in September 1975 in order to develop the rural economy by providing banking services in such areas by combining the cooperative specialty of local orientation and the sound resource base which is the characteristic of commercial banks. RRBs have a unique structure, in the sense that their equity holding is jointly held by the central government, the concerned state government and the sponsor bank (in the ratio 50:15:35), which is responsible for assisting the RRB by providing financial, managerial and training aid and also subscribing to its share capital. Between 1975 and 1987, 196 RRBs were established. RRBs have grown in geographical coverage, reaching out to increasing number of rural clientele. At the end of June 2008, they covered 585 out of the 622 districts of the country. Despite growing in geographical coverage, the number of RRBs operational in the country has been declining over the past five years due to rapid consolidation among them. As a result of state wise amalgamation of RRBs sponsored by the same sponsor bank, the number of RRBs fell to 86 by end March 2009.
5. SCHEDULED COOPERATIVE BANKS: Scheduled cooperative banks in India can be broadly classified into urban credit cooperative institutions and rural cooperative credit institutions. Rural cooperative banks undertake long term as well as short term lending. Credit cooperatives in most states have a three tier structure (primary, district and state level).
6. NON-SCHEDULED BANKS: Non-scheduled banks also function in the Indian banking space, in the form of Local Area Banks (LAB). As at end-March 2009 there were only 4 LABs operating in India.
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Local area banks are banks that are set up under the scheme announced by the government of India in 1996, for the establishment of new private banks of a local nature; with jurisdiction over a maximum of three contiguous districts. LABs aid in the mobilization of funds of rural and semi urban districts. Six LABs were originally licensed, but the license of one of them was cancelled due to irregularities in operations, and the other was amalgamated with Bank of Baroda in 2004 due to its weak financial position.
III.
BUSINESS SEGMENTATION
The entire range of banking operations are segmented into four broad heads- retail banking businesses, wholesale banking businesses, treasury operations and other banking activities. Banks have dedicated business units and branches for retail banking, wholesale banking (divided again into large corporate, mid corporate) etc.
1. RETAIL BANKING It includes exposures to individuals or small businesses. Retail banking activities are identified based on four criteria of orientation, granularity, product criterion and low value of individual exposures. In essence, these qualifiers imply that retail exposures should be to individuals or small businesses (whose annual turnover is limited to Rs. 0.50 billion) and could take any form of credit like cash credit, overdrafts etc. Retail banking exposures to one entity is limited to the extent of 0.2% of the total retail portfolio of the bank or the absolute limit of Rs. 50 million. Retail banking products on the liability side includes all types of deposit accounts and mortgages and loans (personal, housing, educational etc) on the assets side of banks. It also includes other ancillary products and services like credit cards, demat accounts etc.
The retail portfolio of banks accounted for around 21.3% of the total loans and advances of SCBs as at end-March 2009. The major component of the retail portfolio of banks is housing loans, followed by auto loans. Retail banking segment is a well-diversified business segment. Most banks have a significant portion of their business contributed by
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retail banking activities. The largest players in retail banking in India are ICICI Bank, SBI, PNB, BOI, HDFC and Canara Bank.
Among the large banks, ICICI bank is a major player in the retail banking space which has had definitive strategies in place to boost its retail portfolio. It has a strong focus on movement towards cheaper channels of distribution, which is vital for the transaction intensive retail business. SBIs retail business is also fast growing and a strategic business unit for the bank. Among the smaller banks, many have a visible presence especially in the auto loans business. Among these banks the reliance on their respective retail portfolio is high, as many of these banks have advance portfolios that are concentrated in certain usages, such as auto or consumer durables. Foreign banks have had a somewhat restricted retail portfolio till recently. However, they are fast expanding in this business segment. The retail banking industry is likely to see a high competition scenario in the near future.
2. WHOLESALE BANKING Wholesale banking includes high ticket exposures primarily to corporates. Internal processes of most banks classify wholesale banking into mid corporates and large corporates according to the size of exposure to the clients. A large portion of wholesale banking clients also account for off balance sheet businesses. Hedging solutions form a significant portion of exposures coming from corporates. Hence, wholesale banking clients are strategic for the banks with the view to gain other business from them. Various forms of financing, like project finance, leasing finance, finance for working capital, term finance etc form part of wholesale banking transactions. Syndication services and merchant banking services are also provided to wholesale clients in addition to the variety of products and services offered.
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Wholesale banking is also a well-diversified banking vertical. Most banks have a presence in wholesale banking. But this vertical is largely dominated by large Indian banks. While a large portion of the business of foreign banks comes from wholesale banking, their market share is still smaller than that of the larger Indian banks. A number of large private players among Indian banks are also very active in this segment. Among the players with the largest footprint in the wholesale banking space are SBI, ICICI Bank, IDBI Bank, Canara Bank, Bank of India, Punjab National Bank and Central Bank of India. Bank of Baroda has also been exhibiting quite robust results from its wholesale banking operations.
3. TREASURY OPERATIONS Treasury operations include investments in debt market (sovereign and corporate), equity market, mutual funds, derivatives, and trading and forex operations. These functions can be proprietary activities, or can be undertaken on customers account. Treasury operations are important for managing the funding of the bank. Apart from core banking activities, which comprises primarily of lending, deposit taking functions and services; treasury income is a significant component of the earnings of banks. Treasury deals with the entire investment portfolio of banks (categories of HTM, AFS and HFT) and provides a range of products and services that deal primarily with foreign exchange, derivatives and securities. Treasury involves the front office (dealing room), mid office (risk management including independent reporting to the asset liability committee) and back office (settlement of deals executed, statutory funds management etc.).
4. OTHER BANKING BUSINESSES This is considered as a residual category which includes all those businesses of banks that do not fall under any of the aforesaid categories. This category includes para banking activities like hire purchase activities, leasing business, merchant banking, factoring activities etc.
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IV.
PRODUCTS OF THE BANKING INDUSTRY
The products of the banking industry broadly include deposit products, credit products and customized banking services. Most banks offer the same kind of products with minor variations. The basic differentiation is attained through quality of service and the delivery channels that are adopted. Apart from the generic products like deposits (demand deposits current, savings and term deposits), loans and advances (short term and long term loans) and services, there have been innovations in terms and products such as the flexible term deposit, convertible savings deposit (wherein idle cash in savings account can be transferred to a fixed deposit), etc. Innovations have been increasingly directed towards the delivery channels used, with the focus shifting towards ATM transactions, phone and internet banking. Product differentiating services have been attached to most products, such as debit/ATM cards, credit cards, and nomination and Demat services.
Other banking products include fee-based services that provide non-interest income to the banks. Corporate fee-based services offered by banks include treasury products; cash management services; letter of credit and bank guarantee; bill discounting; factoring and forfeiting services; foreign exchange services; merchant banking; leasing; credit rating; underwriting and custodial services. Retail fee-based services include remittances and payment facilities, wealth management, trading facilities and other value added services.
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CHAPTER IV
EVOLUTION OF INDIAN BANKING
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EVOLUTION OF INDIAN BANKING

The Beginnings - 1926 to 1935 Date Event Royal Commission on Indian Currency (Hilton Young 1926 Commission) recommends the establishment of a central bank to be called the 'Reserve Bank of India'. Indian Central Banking Enquiry Committee revives the issue 1931 of the establishment of the Reserve Bank of India as the Central Bank for India. 5 March 1934 Reserve Bank of India Act, 1934, (II of 1934) constitutes the statutory basis on which the Bank is established.
The Early Years - 1935 to 1949 Date Event Reserve Bank of India commences operations. Sir Osborne Smith the first Governor of the Bank. The Bank was constituted as a shareholders' bank. Scheduled banks required to maintain the Cash Reserve Ratio, i.e., hold cash balances with the RBI equivalent to 5% of their Demand Liabilities and 2% of their Time Liabilities.
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1 Apr 1935
5 Jul 1935
Oct 1935 1 Nov 1936 15 Jan 1937 1 July 1937
London Office of the Reserve Bank set up. This was closed on September 30, 1963. Resignation of the first Governor, Sir Osborne Smith, wef July 1, 1937. Indian Companies (Amendment) Act, 1936 devotes a separate chapter exclusively to Banks.
Sir James Braid Taylor assumes office as Governor.
1937
RBI acts as banker to the Government of Burma and also responsible for note issue in Burma.
Jan 1938 First Reserve Bank notes issued. The Failure of the Travancore National and Quilon Bank, the largest bank in the Travancore region, underlined the need for comprehensive banking reform and legislation. Introduction of Exchange Controls in India under Defense of India Rules.
21 Jun 1938
3 Sep 1939 11 Mar 1940
RBI Accounting Year changed from Jan-Dec to July-June.
The silver rupee replaced by the quaternary alloy rupee. One 1940 Rupee note reintroduced. This note had the status of a rupee coin and represented the introduction of official fiat money in India.
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11 Aug 1943
Sir C. D. Deshmukh assumes office of Governor.
1944
The security thread on notes introduced for the first time in India as a security feature. Laws relating to Government securities and to the
1944
management of Public Debt by the Reserve Bank of India consolidated on the basis of the Public Debt Act, 1944. Speculative activity in the financial and bullion markets.
26 May 1945
Defense of India Rules invoked to authorize the Reserve Bank to collect information from banks in respect of advances. This was to check advances against bullion for speculation. Reserve Bank of India entrusted with the Currency & Coinage of the British Military Administration of Burma as well as Banker to BMA. High Denomination Bank Notes of Rs 500, Rs 1000 and Rs 10,000 Demonetized to curb unaccounted money. Interim arrangements for Bank Supervision were put in place by ordinances which were later replaced by the Banking
9 Jun 1945
12 Jan 1946
1946
Companies Act, 1949. These Ordinances empowered the Reserve Bank to inspect banks, as well as authorise the licensing of bank branches.
30 Jun 1948
RBI ceased to function as the Central Bank of Pakistan. State Bank of Pakistan commenced operations wef July 1, 1949.
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1 Jan 1949
Reserve Bank of India nationalized.
Coming into force of the Banking Companies Act, 1949. This formed the statutory basis of bank supervision and 16 Mar 1949 regulation in India. The Statutory Liquidity Ratio (SLR) requiring banks to maintain liquid assets was introduced for the first time. The Banking Companies Act was later renamed the Banking Regulation Act. 1 Jul 1949
Sir Benegal Rama Rau assumes office as Governor
19 Sep 1949
Rupee devalued by 30.5 % as a defensive measure consequent to the devaluation by other 'sterling area' countries.
Republic India: Towards a Planned Economy - 1950 to 1960 Date Oct 1950 Event Department of Banking Development created together with the new post of Executive Director. Reserve Bank of India (Amendment) Act, 1951 enabled the 1951 Bank to become Banker to Part B states after executing agreements with them. First Five Year Plan launched.
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Bill Market Scheme introduced to enable banks to obtain 1 Jan 1952 advances from the Reserve Bank against self-liquidating bills. It was aimed at allowing currency to expand to meet seasonal requirements. State Financial Corporations Act, 1951 came into effect. It 1 Aug 1952 Enabled state governments to establish Financial corporations for meeting the credit needs of medium and small scale industries. Banks Holdings of the capital of SFCs taken over by the IDBI in 1976. All-India Rural Credit Survey Committee Report submitted. Aug 1954 Its recommendations led to bringing rural credit onto the centre stage of central bank activism. Led to the formation of the State Bank of India. 14 Sep 1954 1 Apr 1955 Bankers Training College to provide training to banking personnel established at Bombay (Mumbai) inaugurated. HaliSicca Rupees which had a circulation of about OS 48 crores ceased to be legal tender in the erstwhile Hyderabad State. These were replaced by Indian Rupees. Imperial Bank of India converted to a state owned institution, State Bank of India on July 1, 1955. One of the 1 Jul 1955 immediate objectives was to establish additional branches particularly at district headquarters. It was also expected to provide remittance and other facilities to co-operative and other banks and attempt to mobilize rural savings. Second Five Year Plan commences 17 May 1956 Selective Credit Controls were deployed for first time.
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System of Note Issue changed from Proportional Reserve 6 Oct 1956 System requiring the Reserve Bank to maintain 40% gold and Forex reserves against note issue to a minimum reserve system. This was to enable the expanding currency requirements of the economy to be met. 14 Jan 1957 14 Jan 1957 1 Mar 1957 31 Oct 1957 Resignation of Governor, Sir Benegal Rama Rau.
K.G. Ambegaonkar appointed governor till February 28th.
HVR Iengar appointed governor
Minimum reserves against note issue relaxed further. State Bank of India (Subsidiary Banks) Act, 1959 made the banks of the erstwhile Princely Sates of India the subsidiaries of the State Bank of India. These were The Bank of Bikaner, The Bank of Jaipur, The Bank of Indore. The Bank of
1959
Mysore, The Bank of Patiala, The Bank of Hyderabad, The Bank of Saurashtra and The Bank of Travancore were made subsidiaries of The State Bank of India. The Bank of Bikaner and The Bank of Jaipur were amalgamated in 1963 to form the State Bank of Bikaner and Jaipur.
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Institution Building - 1960 to 1971 Date Event The failure of Laxmi Bank and the subsequent failure of the Palai Central Bank catalyzed the introduction of deposit insurance in India. Policy of reconstruction / compulsory amalgamation of banks 1960 introduced to consolidate the Banking sector. Powers to do so acquire by RBI Act amendment. Between 1960 and 1982, over 200 banks were merged or liquidated. 1961 Third Five Year Plan commences. Deposit Insurance introduced in India as a depositor protection measure. 7 Dec 1961 It was intended to increase the confidence of the depositors in the banking system, to facilitate the mobilization of deposits and promote greater stability and growth of the banking system. The Reserve Bank of India Act, 1934, the Indian Coinage Act, 1906 and the Currency Ordinance, 1940 extended to Goa, Daman and Diu consequent to their liberation.
May 1960
15 May 1962
1 Mar 1962
P.C. Bhattacharyya appointed Governor.
May 1962
New Bank Branch Licensing policy laid stress on opening of offices in unbanked and underdeveloped areas.
16 Sep 1962
Cash Reserve Ratio of banks was fixed uniformly at 3 % of their Demand and Time Liabilities with the flexibility to vary it between 3
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and 15%. Chapter IIIA incorporated in RBI Act empowered the Bank to collect information in regard to credit facilities granted by individual banks and 1962 notified financial institutions to their constituents. 1974 the scope of the term credit information was enlarged to cover the means antecedents, history of financial transactions and the creditworthiness of any borrower or class of borrowers. The Banking Regulation Act amended. Scheduled Banks to maintain 1962 minimum liquid assets (SLR) of not less than 25% of the Demand and Time Liabilities. Agricultural Refinance Corporation (ARC) set up to provide Refinance 1 Jul 1962 to central land mortgage banks, state coop banks, scheduled commercial banks who were shareholders. 26 Aug 1963 1 Feb 1964 Staff Training College established at Madras started a pilot course representing one of the early HRD endeavors in the services sector. RBI empowered to regulate the deposit acceptance activities of nonbanking institutions. New chapter IIIB inserted in RBI Act. Unit Trust of India established to extend facilities for an equity type Feb 1964 investment to small investors and also mobilize resources and channel them into investments so as to facilitate the growth of the economy. Commenced operations in July 1964. IDBI established as a subsidiary of the Reserve Bank of India with the 1 Jul 1964 purpose of providing long term industrial finance. Took over business of Refinance Corporation for Industry in September, 1964.
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20 Nov 1965 1 Mar 1966
Credit Regulation introduced to align the growth of bank credit with Plan requirements. Later evolved into the Credit Authorization Scheme . Operations of co-operative banking system brought under the regulatory ambit of the RBI. Banking Laws. A new Department of Non-Banking Companies established at RBI Calcutta. Rupee devalued by 36.5 %
Mar 1966
6 Jun 1966 The US Dollar which earlier was equivalent to Rs 4.75 now rose to Rs 7.50. 2 Jul 1966 17 Apr 1967 12 State Cooperative Banks included in Second Schedule of RBI Act.
Size of Bank notes reduced.
Social Controls, the Nationalization of Banks and the era of bank expansion - 1968 to 1985 Date Event Introduction of Social Controls over banks with a view to securing a better alignment of the banking system to the needs of economic policy. National Credit Council set up to provide a forum to discuss and assess credit priorities on an all India basis. Council was to assist RBI and government to allocate credit. Quaternary Alloy Rupee Coins demonetized.
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Dec 1967
22 Dec 1967
01 Apr
1968 Gold (Control) Act passed to bring the administration of the control on a permanent statutory footing. (see: 1966 Gold Control Rules) Export Credit (Interest Subsidy) Scheme, 1968 introduced to promote 1968 exports. Pre-shipment Credit Scheme introduced wef Jan 1969 as an export promotion measure. This allowed banks to get refinance from the Reserve Bank. Setting up of the Banking Commission by GOI to report on (i) Banking costs; ( ii) legislations affecting banking; (iii) indigenous banking; (iv) bank procedures; (v) non-banking financial intermediaries. Gold Holdings of RBI revalued at the current official IMF rate of 01 Feb 1969 0.118489 grams of fine gold per rupee (to take into account the devaluation of the Rupee by 36.5 % in June 1966) The profit on revaluation transferred to the reserve fund. 14 major Indian Scheduled Commercial Banks with deposits of over Rs 50 crores nationalized ' to serve better the needs of development of the economy in conformity with national policy objectives'. On February 10, 1970 the Supreme Court held the Act void mainly on the 19 Jul 1969 grounds that it was discriminatory against the 14 banks and that the compensation proposed to be paid by Govt. was not fair compensation. A fresh Ordinance was issued on February 14 which was later replaced by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. (5 of 1970). 24 Sep National Institute of Bank Management (NIBM) established at Bombay
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01 Sep 1968
29 Jan 1969
1969
(Mumbai). Shifted to its Pune campus in the mid-1980s. Cooperative Bankers Training College (CBTC) established at Poona (Pune) to provide training to the cooperative sector. Later renamed College of Agricultural Banking (CAB) in 1974. Lead Bank Scheme introduced which envisaged an area approach to banking to meet the credit gaps in the economy. Special Drawing Rights (SDR) created by the IMF to enhance international liquidity. RBI prescribed for the first time the minimum interest rate to be charged by banks on advances against sensitive commodities. The Agricultural Credit Board set up with Governor as Chairman to formulate and review policies in the sphere of rural credit. The Managing Agency system abolished by the Companies Amendment Act, 1969.
29 Sep 1969
Dec 1969
01 Jan 1970
Jan 1970
Feb 1970
03 Apr 1970 04 May 1970 16 Jun 1970 Between Feb & Aug 1970
B.N. Adarkar appointed Governor till June 15
S. Jagannathan appointed Governor.
Inflationary trends led to concern and strong measures including increasing bank rate and raising SLR from 25 to 28%.
01 Nov
New Bills Rediscounting Scheme introduced was expected to impart flexibility to the Money Market, even out liquidity within the banking
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1970
system and enable the Reserve Bank to exercise more effective control over the money market. Credit Guarantee Corporation of India Ltd. established. To facilitate bank lending to the priority sectors. It guaranteed credit extended by scheduled commercial banks to small borrowers and for other priority purposes. Concerns related to Industrial sickness led to the establishment of the Industrial Reconstruction Corporation of India Ltd.
14 Jan 1971
12 Apr 1971 01 Jul 1971
Deposit Insurance cover extended to cooperative banks.
Convertibility of USD suspended. This brought to an end the system of 15 Aug 1971 fixed exchange rates embodied in the Bretton Woods System. After an interim arrangement which lasted up to 1973, the world shifted to a floating exchange rate regime. State Level Bankers Committees set up to consider problems requiring inter-bank coordination. Hindi Version of RBI Annual Report and Trend and Progress of Banking in India for the year ended 30 June, 1971. Differential Interest Rate Scheme Introduced which envisaged concessional interest rates on advances made by Public Sector Banks to selected low income groups. Import Policy for 72-73 stressed the importance of achieving self reliance reflecting the views of the times. Special payment arrangements with the erstwhile COMECON group of
Oct 1971
25 Mar 1972
03 Apr 1972 03 Nov
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1972
countries where payments were settled in rupees through bilateral trade which was a type of barter arrangement. "Oil Shock" when oil prices quadrupled. This led to double digit inflation as well as global recession.
1973
As a response the Bank deployed a series of restricted measures to contain / moderate the expansion of bank credit. Call money rate rose to an all-time high of 30% prompting the Indian Banks' Association to intervene and fix a ceiling of 15%. Miscellaneous Non-Banking Companies (Reserve Bank) Direction, 1973 sought to regulate the acceptance of deposits by companies conducting prize chits, lucky draws savings schemes, etc. Quantitative credit ceiling on non-food bank credit prescribed for the first time for the busy season of 1973-74. Restrictions on SBI and its subsidiaries removed to bring them on par with other commercial banks. Foreign Exchange Regulation Act, 1973 came into force to conserve foreign exchange. Its administration was entrusted to the Reserve Bank. Asian Clearing Union (ACU) established to facilitate payments for current
01 Sep 1973
08 Sep 1973
Nov 1973
01 Jan 1974
09 Dec 1974
international transactions on a multilateral basis. Clearing operations were to be denominated in members currency or AMU which would be equivalent to 1 SDR. Clearing operations commenced November, 1975.
13 Dec 1974
Reserve Bank of India (Amendment) Act, 1974 widened the powers of the Bank. N. C. Sengupta appointed governor up to August 19.
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19 May
1975 Tandon Committee Report emphasized need to correlate bank credit to the 09 Aug 1975 business/ production plans and own resources of borrowers. Entailed a shift from security based to need based approach to bank credit. The new norms formed the basis of bank lending for working capital requirements. 20 Aug 1975 25 Sep 1975
K.R. Puri appointed governor
Exchange value of Rupee linked to movements in a basket of selected foreign currencies (major trading partners) Regional Rural Banks were set up as alternative agencies to provide credit
26 Sep 1975
to rural people in the context of the 20 Point Programme. These were expected to "combine the rural touch and local feel, with the modern business organization.
01 Nov 1975
Foreign Currency (Non Resident) Account Scheme introduced in USD and GBP To encourage private remittance from abroad. Agricultural Refinance Corporation (ARC) renamed Agricultural Refinance and Development Corporation (ARDC) and its activities widened. 20 point economic programme introduced. Duty Draw back credit scheme introduced as an export promotion measure. Village Adoption Scheme for banks introduced.
16 Nov 1975
1975 01 Feb 1976 1976
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A new series of Money supply introduced the concepts of M1, M2, M3 etc. Money supply with the public consisted of Apr 1977 (a) currency with the public, (b) demand deposits of all commercial banks, of state, central and urban cooperative banks and of salary earners societies, and (c) Other deposits with Reserve Bank of India. 02 May 1977
M. Narasimham appointed Governor up to November 30.
1977
Integrated Rural Development Programme (IRDP) initiated as a poverty alleviation measure.
01 Dec 1977
I.G. Patel appointed Governor.
16 Jan 1978
Notes of Rs 1,000/-, Rs 5,000/- and Rs 10,000/- denominations demonetized to curb the illicit transfer of money for financing transactions which are harmful to the national economy. RBI commenced gold auctions on behalf of Government of India out of government stock at fortnightly intervals. The Deposit Insurance Corporation (DIC) took over the undertaking of the Credit Guarantee Corporation of India Ltd. (CGCI) to form the Deposit Insurance and Credit Guarantee Corporation (DICGC) wef July 15, 1978. RBI Act amended. The amendments were made mainly to enable the more effective utilization of foreign exchange reserves. Prize Chit and Money Circulation Schemes (Banning) Act, 1978 came into force wef 12 December, 1978.
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03 May 1978
27 May 1978
03 June 1978 12 Dec 1978
Annual Appraisal of Banks introduced in the nature of management audit introduced. Emphasis mainly on the examination of the organizational set1978 up, manpower planning , machinery for supervision and control over branches, systems & procedures in key areas, funds management and management of credit. 30 Mar 1979 Penalty for non-compliance of CRR & SLR introduced to give the Reserve Bank teeth to implement Monetary Policy measures more effectively. Rural Planning and Credit Cell set up in the Reserve Bank of India to 1979 ensure proper implementation of the multi-agency approach to credit in rural areas. Credit Information Review started being published every month To Aug 1979 disseminate in simple language and without delay the credit and banking policy decisions of the Reserve Bank. 17 Jan 1980
International gold prices soar to all-time highs.
Mar 1980
Banks are required to provide financial support to implementation of 20 point programme to improve lot of weaker sections. Sixth Five Year Plan. Six private sector banks nationalized in order further control the
15 Apr 1980
heights of the economy, to meet progressively, and serve better, the needs of the development of the economy and to promote the welfare of the people in conformity with the policy of the State Recommendations of Chore Committee related to the cash credit system, adopted. Emphasis on increasing contribution for working capital
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Dec 1980
requirements by borrowers out of internal resources. 01 Jan 1981 15 Jan 1981
Neighbourhood Travel Scheme (NTS) introduced.
GOI announced special bearer bond To mop up unaccounted money and channelize it to productive purposes. Major Organizational internal restructuring in the Reserve Bank. New Departments set up. Buildup of inflationary pressures and adverse movement in foreign trade
Apr 1981
1981
following the hike in oil prices. Bank rate raised to 10%, CRR raised to 7.5%, SLR to 35%. Ordinance prohibiting companies (including Banking Companies)
11 July 1981
cooperative societies, firms, to repay any person any deposit otherwise than by an account payee cheque / bank draft when such repayment amounted to Rs. 10,000 or more. Export Import Bank of India established with the objective of providing comprehensive package of financial and allied services to exporters and importers.
01 Jan 1982
01 Jan 1982
New 20 point programme announced by the PM.
National Bank for Agriculture and Rural Development (NABARD) 12 July 1982 established on the basis of the National Bank for Agriculture and Rural Development Act, 1981. For providing credit for the promotion of agriculture, small scale industries, cottage and village industries, handicrafts, and other rural crafts for promoting integrated rural
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development and securing rural prosperity. 16 Sep 1982
Manmohan Singh appointed Governor.
1983
C D Deshmukh Memorial Lecture introduced as an annual event in Governor Deshmukh'shonour National Clearing Cell (NCC) set up by the bank to introduce mechanized cheque processing and the national clearing of cheques. Banking Laws (Amendment) Act, 1983 widened the activities that banks
Nov 1983
12 Jan 1984
could undertake (such as leasing), provided nomination facilities to account holders, strengthened the powers of the Reserve Bank, streamlined returns and prohibited unincorporated bodies from accepting deposits from the public except to a specified extent amongst others.
01 Feb 1984 01 May 1984 15 Jan 1985 04 Feb 1985
Urban Banks Department formed to supervise the affairs of Urban Cooperative Banks. Authorized capital of the Deposit Insurance and Credit Guarantee Corporation raised to Rs 50 crores.
A Ghosh appointed Governor up to February 4
RN Malhotra appointed
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Developing the Markets : Seeds of Liberalization - 1985 to 1991 Date Event S. Chakravarty Committee was set up to review the working of monetary system. Its recommendations had far reaching consequences. By mid-1985, the statutory preemption on banks' resources 1985 in the form of the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR) exceeded 45%. Nov 1986
10 Apr 1985
182 day TB introduced.
Board for Industrial and Financial Reconstruction set up and Jan 1987 became operational wef May 1987 reflecting concerns related to Industrial Sickness. Magnetic Ink Character Recognition (MICR) technology introduced for cheque clearing. Efforts at mechanizing cheque clearing operations. Indira Gandhi Institute of Development Research (IGIDR) 28 Dec 1987 was established by Reserve Bank as an advanced studies institute to promote research on Development issues from a multi-disciplinary point of view.
Mar 1987
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Apr 1988
Security & Exchange Board of India (SEBI) established to deal with the development and regulation of the securities market and investor protection. The Discount and Finance House of India set up as a money market institution, commenced operations. The National Housing Bank established as an apex body of
Apr 1988
Jul 1988
housing finance and to promote activities in housing development.
Aug 1988 Oct 1988
Stock Holding Corporation of India Ltd. (SHCIL) a depository institution commenced operations. Maximum lending rate abolished. Banks free to charge customers according to their credit record. Certificates of Deposit (CDs) and Commercial Paper (CPs) introduced in India to widen the monetary instruments and give investors greater flexibility. Banking, Public Financial Institution and Negotiable
Mar 1989
Apr 1989
Instruments Laws (Amendment) Act, 1988 enacted to encourage the culture of use of cheques in India. It introduced penalties for the dishonor of cheques.
Apr 1989
Service Area Approach for rural lending became operational.
1 Jul 1989
CRR raised to 15 per cent taking statutory preemptions of banks' resources in the form of the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR) to over 53%.
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15 May 1990
Agriculture and Rural Debt Relief Scheme, 1990 providing debt relief up to Rs 10,000 to small borrowers from Public Sector Banks and Regional Rural Banks announced.
22 Dec 1990
S. Venkitaramanan Governor.
Crisis and Reforms - 1991 to 2000 Date 1&3 Jul 1991 Event External Payments Crisis. Rupee Devalued in two stages. Cumulative devaluation about 18 percent in USD terms. The Narsimahmam Committee Report suggested far Nov 1991 reaching reforms in the Indian Banking sector. These included a phased reduction in the SLR and CRR as well as accounting standards, income recognition norms and capital adequacy norms. A dual exchange rate system called Liberalized Exchange Mar 1992 Rate Management System (LERMS) introduced. This was the initial step to enable a transition to a market determined exchange rate system. Income recognition and asset classification norms Apr 1992 introduced. Provisioning and Capital adequacy standards specified. Indian Banks are required to fulfill these norms by 1994 and 1996.
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22 Dec 1992 1992 1993
C. Rangarajan appointed Governor.
SEBI formulated Insider Trading Regulations. Unified Exchange rate. Guidelines for the establishment of private sector banks
1993
issued. This herald a new policy approach aimed at fostering greater competition.
15 Jul 1994
Nationalized Banks allowed to tap the capital market to strengthen their capital base.
Jun 1994 National Stock Exchange commenced operations Committee on Reform of the Insurance Sector, RN Malhotra. Rupee made convertible on the Current Account. Acceptance of Article VIII of the Articles of Agreement of the IMF. Lending rates of commercial banks deregulated. Banks are required to declare their Prime Lending Rates (PLR). Bharatiya Reserve Bank Note Mudran Limited established as 3 Feb 1995 a fully owned subsidiary of the Reserve bank. Commenced printing of Notes at Mysore on June 1 and at Salboni on December 11. The Office of the Banking Ombudsman established for expeditious & inexpensive resolution of customer complaints
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1994
Aug 1994 Oct 1994
Jun 1995
related to Banking services.
Oct 1995 17 Sep 1996
Banks are allowed to fix their own interest rates on domestic term deposits with maturity of two years.
RBI Web site made operational.
1 Apr 1997
RBI & Government of India agree to replace the system of ad hoc Treasury Bills with Ways and Means Advances ending automatic monetization of fiscal deficits. RBI Conducts first auction of 14 day Treasury Bills. In October, auction of 28 day Treasury Bills was introduced. Foreign Institutional Investors (debt funds) permitted to invest in dated Government Securities.
6 Jun 1997 10 Jul 1997 22 Nov 1997 28 Nov 1997
Bimal Jalan appointed Governor.
A series of measures introduced in response to the Asian Currency Crisis. Fixed rate repos in G-Secs introduced to give maneuverability in liquidity management; and to bring orderly conditions in money and forex markets. Capital Index Bonds introduced for first time. Inflation hedged instrument linked to Wholesale Price Index.
28 Nov 1997
19 Dec 1997
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Apr 1998
Recommendations on the harmonization of the Role and Operations of Development Financial Institutions and Banks paved the way for universal banking in India.
11 Dec 1998 20 Apr 1999
RBI Monetary Museum Web Site launched.
Interim Liquidity Adjustment Facility introduced.
Jul 1999
Interest Rate Swaps (IRS) and Forward Rate Agreements (FRAs) introduced as OTC derivatives. RBI issued guidelines to banks for the issuance of debit cards and smart cards to ease pressure on physical cash. Foreign Exchange Management Act, 1999 replaces FERA, 1973 with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of foreign exchange market in India. The new act became operative from June 2000 along with a sunset clause.
Nov 1999
1999
Consolidating the Gains - 2000 Onwards Date Jun 2000 Event Stock Index Futures introduced by as an exchange traded derivative.
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Mar 2001 19 Apr 2001 19 Apr 2001
Kissan Credit Cards introduced.
Effective week commencing August 11, inter-bank term liabilities greater than 15 days maturity exempt from CRR. Banks allowed to formulate special Fixed Deposit Schemes for senior citizen offering higher rates of interest. Clearing Corporation of India established to address the
30 Apr 2001
need for an integrated clearing and settlement system across different markets, viz., government securities, forex and money markets. Commenced operations wef February 2002.
Jun 2001 21 Nov 2001
RBI issues guidelines for internet banking heralding in a new era in banking.
Floating Rate Bonds auctioned for the first time.
RBI commenced announcing the reference rate for Euro, 1 Jan 2002 which replaced the currencies of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Portugal, Spain and The Netherlands. The Securitisation and Reconstruction of Financial Assets 21 Jun 2002 and Enforcement of Security Interest Ordinance came into force, paving the way for setting up asset reconstruction companies and for faster recovery of money by banks and financial institutions. 7 Sep Schemes to open Offshore Banking Units in Special
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2002
Economic Zones by banks introduced. These units would be virtually foreign branches of Indian Banks but located in India.
11 Dec 2002
Auction format of 91 day Treasury Bills changed from uniform price auction to the multiple price auction method Select stock exchanges commence retail trading in Government securities.
Jan 2003
Apr 2003 3 Jun 2003 7 Aug 2003 6 Sep 2003
Risk based supervision of Banks introduced.
Guidelines for exchange traded interest rate derivatives issued. Clearing Corporation of India launches its forex clearing system FX CLEAR
Y V Reddy assumes office as Governor
Chronology of Bank rate, CRR and SLR Changes
Bank Rate Rate 1 Effective Date 2
Cash Reserve Ratio* Rate 1 Effective Date 2
Statutory Liquidity Ratio** Rate 1 Effective Date 2

Page | 57
3.5
5/7/1935
(a)5% of DL (b)2% of TL
5/7/1935
20
16-03-1949
28-11-1935
(a)5% of DL (b)2% of TL @ (a)5% of DL (b)2% of TL @
6/3/1960
25
16-09-1964
6/5/1960
3.5
15-11-1951
(a)5% of DL (b)2% of TL 3
11/11/196 0
26
5/2/1970
27 16-091962 29-061973 8/9/1973 22-091973 1/7/1974 14-121974 28-1229 30
24-04-1970
28
28-08-1970
5 4 16-05-1957 6 7 5 4.5 4.5 3/1/1963 4
4/8/1972 17-11-1972
Page | 58
1974 5 6 4/9/1976 13-111976 14-011977 1/7/1978 5/6/1979 31-071981 21-081981 27-111981 25-121981 29-011982 9/4/1982 11/6/1982 27-051983 29-071983 27-081983
Page | 59
32
8/12/1973
6@ 5 26-09-1964 6@ 6@ 6.5
33
1/7/1974
34
1/12/1978
17-02-1965
7.25
7.5
7.75 7.25 5 2/3/1968 7@ 7.5 @
34.5 35
25-09-1981 30-10-1981
35.5
28-07-1984
8@
36
1/9/1984
8.5 @
9/1/1971
8.5 @ 9@ 9@ 9@
12/11/198 3 4/2/1984 27-101984 1/12/1984 26-101985 22-111986 28-021987 23-051987 24-101987 23-041988 2/7/1988 30-071988 1/7/1989 4/5/1991 11/1/1992 (21-041992)
Page | 60
36.5 37
8/6/1985 6/7/1985
31-05-1973
9@
9@
9.5 @
37.5
25-04-1987
9.5 @
23-07-1974
10 @
10 @ 10.5 @ 11 @ 10 12/7/1981 15 @ 15 @ 15 @ 15 @
38
2/1/1988
38.5
22-09-1990
11
4/7/1991
15 @ 14.5
8/10/1992 17-041993
38.5 + #
(29-02-1992)
12
9/10/1991
14 14.5 14.75 15
15-051993 11/6/1994 9/7/1994 6/8/1994 11/11/199 5 9/12/1995 27-041996 11/5/1996 6/7/1996 26-101996 34.25 ^ 20-08-1994 38.25 + 38 + 37.75 + 37.5 + 37.25 + 34.75 ^ $ 9/1/1993 6/2/1993 6/3/1993 21-08-1993 18-09-1993 16-10-1993
11
16-04-1997
14.5 14
10
26-06-1997
13.5 13
22-10-1997
12 11.5
11 10.5 11 17-01-1998 10 9.75
9/11/1996 4/1/1997 18-011997 25-101997
33.75 ^ 31.5 !&
17-09-1994 29-10-1994
10.5
19-03-1998
9.5 10
22-111997 6/12/1997
25
25-10-1997
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10
3/4/1998
10.5 10.25
17-011998 28-031998
29-04-1998
10 11
11/4/1998 29-081998
10.5 10 8 2/3/1999 9.5 @@ 9
13-031999 8/5/1999 6/11/1999 20-111999
2/4/2000
8.5 8
8/4/2000 22-042000
22-07-2000
8.25 8.5
29-072000 12/8/2000 24-022001 10/3/2001 19-052001 3/11/2001 29-12Page | 62
7.5
17-02-2001
8.25 8
7 6.5 6.25
2/3/2001 23-10-2001 30.10.2002
7.5 5.75 5.5
2001 5 01.06.2002
DL : Demand Liabilities TL : Time Liabilities Date in brackets refer to announcement dates. The data for CRR are as percentage of domestic Net Demand and time liabilities (NDTL) which pertain only to domestic deposits.
Accompanied with additional reserve requirements of CRR on incremental NDTL.
Till March 29, 1985 the banks were required to maintain statutory liquidity ratio as a prescribed proportion of gross DTL as on every Friday in the following week on daily basis. Thereafter, it is maintained daily on a fortnightly basis as a prescribed portion of net DTL as on last Friday of second preceding fortnight. The data pertains only to domestic deposits.
SLR on net DTL as on April 3, 1992. In addition there was 30% SLR on the increase in net DTL over April 3, 1992 level.
SLR on net DTL as on September 17, 1993. In addition there was 25% SLR on the increase in net DTL over September 17, 1993 level.
SLR on net DTL as on September 30, 1994. In addition there was 25% SLR on the increase in net DTL over September 30, 1994 level.
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In order to improve the cash management by the banks, effective from the fortnight CRR will be maintained by every Scheduled Commercial Bank based on its NDTL as on the last Friday of the second preceding fortnight. Further to facilitate banks to tide over the contingency during the millennium change, it has been decide to treat cash in hand maintained by banks for compliance of CRR for a limited period of two months commencing from December 1,1999 to January 31, 2000. The cash in hand which will be counted for CRR purpose, during the above period cannot be treated as eligible asset for SLR purpose simultaneously.
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A RETROSPECT ON SOME ASPECTS OF EVOLUTION IN INDIAN BANKING
INSTITUTIONAL EVOLUTION OF THE INDIAN BANKING
As most of you would, no doubt, be aware, the indigenous system of banking had existed in India for many centuries, and catered to the credit needs of the economy of that time. The famous Kautilya Arthashastra, which is ascribed to be dating back to the 400 the century BC, contains references to creditors and lending. For instance, it says If anyone became bankrupt, debts owed to the state had priority over other creditors. Similarly, there is also a reference to Interest on commodities loaned (PRAYOGPRATYADANAM) to be accounted as revenue of the state. Thus, it appears that lending activities were not entirely unknown in the medieval India and the concepts such as priority of claims of creditors and commodity lending were established business practices.
During the period of modern history, however, the roots of commercial banking in India can be traced back to the early eighteenth century when the Bank of Calcutta was established in June 1806 which was renamed as Bank of Bengal in January 1809 mainly to fund General Wellesleys wars. This was followed by the establishment of the Bank of Madras in July 1843, as a joint stock company, through the reorganization and amalgamation of four banks viz., Madras Bank,
Carnatic Bank, Bank of Madras and the Asiatic Bank. This bank brought about major innovations in banking such as use of joint stock system, conferring of limited liability on shareholders, acceptance of deposits from the general public, etc. The Bank of Bombay, the last bank to be set up under the British Raj pursuant to the Charter of the
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then British East India Company, was established in 1868, about a decade after the Indias first war of independence. The three Presidency Banks, as these were then known, were amalgamated in January 1921 to form the Imperial Bank of India, which acquired the three-fold role: of a commercial bank, of a bankers bank and of a banker to the government. It is interesting to note here that merger of banks and consolidation in the banking system in India, is not as recent a phenomenon as is often thought to be, and dates back to at least1843 and the process, of course, still continues. With the formation of the Reserve Bank of India in 1935, some of the central banking functions of the Imperial Bank were taken over by the RBI and subsequently. The Special Address delivered by Shri V Leeladhar, Deputy Governor, Reserve Bank of India at the Bankers Conference (BANCON) 2007 on November 26, 2007 at Hotel TajLands End, Mumbai. The State Bank of India, set up in July 1955, assumed the other functions of the Imperial Bank and became the successor to the Imperial Bank of India.
EVOLUTION OF LEGISLATIVE REGULATION OF BANKING IN INDIA
In the very early phase of commercial banking in India, the regulatory framework was somewhat diffused and the Presidency Banks were regulated and governed by their Royal Charter, the East India Company and the Government of India of that time. Though the Company law was introduced in India way back in
1850, it did not apply to the banking companies. The banking crisis of 1913, however, had revealed several weaknesses in the Indian banking system, such as the low proportion of liquid assets of the banks and connected lending practices, resulting in large-scale bank failures. The recommendations of the Indian Central Banking Enquiry Committee (1929-31), which looked into the issue of bank failures, paved the way for legislation for banking regulation in the country.
Though the RBI, as part of its monetary management mandate, had, from the very beginning, been vested with the powers, under the RBI Act, 1934, to regulate the volume and cost of bank credit in the economy through the instruments of
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general credit control, it was not until 1949 that a comprehensive enactment, applicable only to the banking sector, came into existence. Prior to 1949, the banking companies, in common with other companies, were governed by the Indian Companies Act, 1913, which itself was a comprehensive re-enactment of the earlier company law of 1850. This Act, however, contained a few provisions
especially applicable to banks. There were also a few ad hoc enactments, such as the Banking Companies (Inspection) Ordinance, 1946, and the Banking Companies (Restriction of Branches)Act, 1946, covering specific regulatory aspects. In this
backdrop, in March 1949, a special legislation, called the Banking Companies Act, 1949, applicable exclusively to the banking companies, was passed; this Act was renamed as the Banking Regulation Act from March 1966. The Act vested in the Reserve Bank the responsibility relating to licensing of banks, branch expansion, liquidity of their assets, management and methods of working,
amalgamation, reconstruction and liquidation. Important changes in several provisions of the Act were made from time to time, designed to enlarge or amplify the
responsibilities of the RBI or to impart flexibility to the relative provisions, commensurate with the imperatives of the banking sector developments.
It is interesting to note that till March 1966, the Reserve Bank had practically no role in relation to the functioning of the urban co-operative banks. However, by the enactment of the Banking Laws(Application to Co-operative Societies) Act, 1965, certain provisions of the Banking Regulation Act, regarding the matters relating to banking business, were extended to the urban co-operative banks also. Thus, for the first time in 1966, the urban co-operative banks too came within the regulatory purview of the RBI.
PRUDENTIAL POLICY FRAMEWORK FOR BANKING REGULATION AND SUPERVISION
The basic rationale for exercising fairly close regulation and supervision of banking institutions, all over the world, is premised on the fact that the banks are special for
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several reasons. The banks accept uncollateralized public deposits, are part of the payment and settlement system, enjoy the safety net of deposit insurance funded by the public money, and are an important channel for monetary policy deposit insurance funded by the public money, and are an important channel for monetary policy transmission. Thus, the banks become a keystone in the edifice of financial stability of the system which is a public good that the public authorities are committed to provide. Preventing the spread of contagion through the banking system, therefore, becomes an obvious corollary of regulating the banks to preempt any systemic crisis, which can entail enormous costs for the economy as a whole. This is particularly so on account of the inevitable linkages that the banks have by virtue of the nature of their role in the financial system. Ensuring safety and soundness of the banking system, therefore, becomes a predominant objective of the financial regulators. While the modalities of exercising regulation and supervision overbanks have evolved over the decades, in tandem with the market and technological developments, the fundamental objective underlying the exercise has hardly changed. Of course, a well-regulated and efficient banking sector also enhances the allocative efficiency of the financial system, thereby facilitating economic growth. In this backdrop, as the functions of the RBI evolved over the years, the focus of its role as a regulator and supervisor of the banking system has shifted gradually from micro regulation to macro prudential supervision. A journey through the major landmarks in the evolution of the RBIs role vis--vis the commercial banks provide interesting insights. Allow me to very briefly dwell on the salient aspects of this evolutionary process. As regard the prudential regulatory framework f or the banking system, we have come a long way from the administered interest rate regime to deregulated interest rates, from the system of Health Codes for an eight-fold judgmental loan classification to the prudential asset classification based on objective criteria, from the concept of simple statutory minimum capital and capitaldeposit ratio to the risk-sensitive capital adequacy norms initially under Basel I framework and now under the Basel II regime. There is much greater focus now on improving the corporate governance set up through fit and proper criteria, on encouraging integrated risk management systems in the banks and on promoting market discipline through more transparent disclosure standards. The policy endeavor has all
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along been to benchmark our regulatory norms with the international best practices, of course, keeping in view the domestic imperatives and the country context. The consultative approach of the RBI in formulating the prudential regulations has been the hallmark of the current regulatory regime which enables taking account of a wide diversity of views on the issues at hand.
PRIVATE BANKS IN INDIA SCORE OVER PUBLIC SECTOR BANKS
The article discusses about the relative performance of new private sector banks vis--vis the public sector banks of India during the period 2009-11 on many key aspects such as the banks network, banks growth, productivity, capital adequacy, asset quality, management quality, earnings quality and liquidity. The above period is chosen since it is very important to know how different banks fared after sub-prime mortgage crisis of 2008. Further it also helps us to understand if another recession hits the corner who will be in a better position to survive it. For this Data Envelopment Analysis (DEA) has been done for a pool of 12 banks which comprises of 5 new private sector banks and 7 public sector banks of India to better understand the above argument.
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INTRODUCTION:
The private sector banks of India have made significant progress in the last few years. It was in mid-90s when some new private sector banks entered into the foray and in the period between 2002 -2007 these banks have grown by leaps and bounds. They have increased their incomes, margins, asset sizes and outperformed their public sector counterparts in many areas. The new private sector banks include Axis, Development Credit, HDFC, ICICI, Indusind, Kotak Mahindra and Yes Bank whereas the public sector banks consists of 19 nationalized banks, IDBI bank and State Bank group. The performance of the two sectors is being judged on eight key parameters that enable banks to achieve better bottom line and remain competitive in a highly volatile and regulatory environment.
PARAMETER 1: BANKS NETWORK Today banks follow a willful strategy of building a network of branches and ATMs with effective penetration so that they can continue to enlarge their geographical coverage of centers with potential for growth. The banks try to deeply entrench across the country with significant density in areas conducive to the growth of their businesses.
Fig.1 % YoY growth in Banks network (Source: RBI) The private sector banks are spreading its wings at a much faster rate than public sector banks. The customer base of these banks has grown manifold since they are able to provide innovative services to the customers at a much faster pace. This is leading them
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to capture more market share and eating up some of the share of their public sector counterparts.
PARAMETER 2: BANKS GROWTH Every bank aspires to grow and its growth can be judged by various parameters like growth in balance sheet size i.e. asset base, improvement in the bottom line and many others. % Growth in Balance Sheet Size 2010 New Private Sector Banks Public Sector Banks 17.93% 19.21% 12.46% 16.71% 10.86% 23.51% -2.19% 14.63% 2011 % Growth in Total Income 2010 2011
Fig.2 % Growth in banks Balance Sheet & Income (Source: RBI)
The public sector banks asset base and income grew at a decent rate in the last 2 years whereas there was a great fluctuation in case of new private sector banks mainly due to recession. But the growth of these banks was phenomenal during 2010-11 that shows their ability to recover fast after such a catastrophe.
PARAMETER 3: PRODUCTIVITY Productivity can be considered as one measure of efficiency of banks. Productivity growth is important to the banks because it means that the firm can meet its obligations to employees, shareholders, and governments (taxes and regulation), and still remain competitive in the market place. It is a ratio of what is produced to what is required to
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produce. In the banking scenario productivity can be measured by profit per employee, business per employee.
Fig.3 Productivity (Source: RBI) These ratios can be misleading since banks can improve these ratios by trimming their employees during recessionary environment. This is evident since asset base and profit levels declined during 2009-10 for new private sector banks but still the above ratios showing a continuous increasing trend. This was only possible when there is large layoff of employees which is actually what had happened with these banks during the period 2008-10. It was only in 2010 when the business started to pick up back again they started to hire. Overall public sector banks scores higher when it comes to employee retention which is also evident from the graph.
PARAMETER 4: CAPITAL ADEQUACY Capital Adequacy signals the banks ability to maintain capital commensurate with the nature and extent of all types of risk and the ability of management to identify, measure, monitor and control these risks. It also tells about the ability of bank to absorb a reasonable amount of loss and still complies with statutory Capital requirements. Currently Reserve Bank of India (RBI) prescribes banks to maintain Capital Adequacy Ratio (CAR) of 9% with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8% prescribed in BASEL framework.
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Fig.4 Capital Adequacy Ratio (BASEL-II) (Source: RBI) The Capital Adequacy ratio (BASEL-II) of new private sector banks is way above RBIs minimum requirement of 9%. This shows that these banks are in comfortable position to absorb losses since they have more capital to cover for their risk weighted assets. Or on the other hand they have less risky assets in their portfolio for a fixed capital base.
PARAMETER5: ASSET QUALITY Asset Quality reflects the amount of existing credit risk associated with the loan and investment portfolio as well as off-balance sheet activities.
Loan & Investment Portfolio: The asset quality of banks can be judged by the nonperforming assets (NPA) ratio. Non-performing assets (NPA) are assets which fail to make either interest or principal payments for more than 90 days. RBI has set guidelines to classify NPA into different categories like sub-standard, doubtful or loss assets. There are two effects of NPA on bank financial statements: 1) Loss incurred due to non-payment of principal and interest by borrowers 2) Reduction of capital base due to its allocation to provision for doubtful assets It is mandatory for all banks to have their asset base well diversified so that risk can be mitigated. It has been seen that this practice has been followed by both private and public sector banks meticulously.
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Fig.5 Asset Quality (Source: RBI) However there is huge difference in asset qualities of public & new private sector banks. The main reason being that public sector banks have higher NPAs in services sector. The NPAs in other sectors like Agriculture, Industry and Personal Loans are almost similar for these banks. The asset quality of a bank directly affects its credit rating for example recently Moody downgraded State Bank of India (SBI) credit rating due to its low asset quality.
Off-Balance Sheet (BS) activities: These are activities of banks which are not recorded on its balance sheet. It is very important to consider the effect of these items since it can have disastrous effect on banks business.
Fig.6 Off- Balance Sheet Exposure (Source: RBI)
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The Off-Balance Sheet (BS) activities under the purview of New Private Sector banks are astoundingly large as compared to public sector banks. The main reason being the liability of these banks on outstanding derivative contracts like Interest rate swaps, currency options and interest rate futures. This makes their business highly susceptible to market risk but these banks generally get involved in these activities because it gives them huge opportunity to earn commission, exchange, brokerage fees and also to make profit on exchange transactions.
PARAMETER 6: MANAGEMENT EFFICIENCY Sound management is a key element to bank performance but is very difficult to measure since it is primarily a qualitative factor. However several indicators can be used to measure the efficiency for example ratio of non-interest exp to total assets which explains the management controls on operating expenses. Similarly efficiency ratios like Asset Turnover ratio can be used to assess how efficiently company is using its assets to earn the revenue.
Fig.7(a) Management Efficiency (Source: RBI)
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Management Efficiency The efficiency ratios of new private sector banks are better than public sector banks which eventually lead to enhanced bottom line. The asset turnover of both sectors banks is decreasing over the last 3 years which is mainly due to a combination of decrease in non-interest income and increase in asset base.
PARAMETER 7: EARNINGS QUALITY This parameter reflects not only the quantity and trend in earnings but also the factors that may affect the sustainability or quality or earnings. Fig.8 Earnings Quality (Source: RBI) The above two graphs signifying the new private sector banks have better ratios since: a) The interest expense is less in
comparison to interest income due to better asset liability management which is good for banks.
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b)
The share of fee income is more in total income which in a way is good since it
reflects that banks have other options to earn money like in exchanges, commissions, brokerages etc. This becomes essentially important for banks in volatile interest rate environments.
PARAMETER 8: LIQUIDITY Liquidity reflects the adequacy of the institutions current and prospective sources of liquidity and funds management practices. The inadequacy of liquidity in a bank causes liquidity risk which is the risk of inability to meet financial commitments as they fall due, through available cash flows or through sale of assets at fair market value. Liquidity risk is two-dimensional: risk of being unable to fund portfolio of assets at appropriate maturity and rates (liability dimension) and the risk of being unable to liquidate assets in a timely manner at a reasonable price (asset dimension).
Liquidity (Source: RBI)
The credit deposit (C-D) ratio of any bank signifies the proportion of loan-assets created by banks from the deposits received. The higher this ratio good it is for the banks since they earn more on interest income but higher ratio also indicates that the bank doesnt hold cash with itself which may create liquidity problems. Similarly the investment deposit (I-D) ratio signifies the amount of investment bank has done from the deposits received. The higher this ratio good it is as it increases the opportunity of earning but on the other hand may also create liquidity problems. Therefore it is essential for the banks to have a pool of short-term investments which have higher liquidity.
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DEA ANALYSIS
Data envelopment analysis (DEA) is a linear programming methodology which is used to measure the efficiency of multiple decision-making units (DMUs) when there are multiple inputs and multiple outputs inconsideration. A comparative analysis of 12 Indian banks is being done here using DEA that includes seven public sector banks and five new private sector banks. The multiple inputs considered for evaluation were equity capital; labor, loanable funds and the multiple outputs were Net Interest Income, Fee Income. The data used for this analysis is the average of all the above mentioned inputs & outputs over the period 2009-11. Banks Rankings Fig.10 Banks Rankings Yes Bank Punjab National Bank HDFC Bank Kotak Mahindra Bank State Bank of India Axis Bank Bank of Baroda ICICI Bank Indian Bank Canara Bank Allahabad Bank Bank of India 1 2 3 4 5 6 7 8 9 10 11 12
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Bank
Rank
CONCLUSION
It can be concluded that most of the new private sector banks have shown better performance than their public sector counterparts during the period 2009-11. This in a way is very good for Indian banking system since past says that private banks are the most hit during recession. The main reasons for their better performance were: a) New private sector banks have shown better net interest income margin and fee income than most of the public sector banks. b) The credit-deposit & investment-deposit ratio of new private sector banks were higher which reflected in higher interest income. c) The operating efficiency was higher for most of the new private sector banks. d) The Return on Equity (ROE) was higher due to better asset quality.
The private sector banks have made tremendous strides in the last few years. It was in mid-1990's when Indian banking scenario witnessed the entry of some new private sector banks and in the period between 2002 -2007 these banks have grown by leaps and bounds. They have increased their incomes, asset sizes and outperformed their public sector counterparts in many areas. This growth was accompanied by a rapid branch expansion. The network of private sector bank grew at almost three times of all scheduled commercial banks and more than four times that of public sector banks (refer to the table below). The star performers among these banks were the Centurion Bank of Punjab (CBoP), HDFC Bank, ICICI Bank, and the Axis Bank (formerly UTI Bank). These big four expanded their branch network at a rapid rate of 14-16 percent per annum in terms of compound growth rates. Another trend in the banking sector during this period was the increase in staff strength by private sector banks, while the public sector banks witnessed a decline in the number of employees. The private sector banks recorded a compounded growth of 24% in their staff strength. The decline in public sector bank staff can be attributed to restructuring and adoption of IT infrastructure.
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Private sector recorded a growth ranging from 30% to 68% in terms of capital, reserves and surplus. The deposits increased in the range of 32% to 51%, while the advances showed a growth trend between 39% and 71%. The net profits by private sector banks recorded a compound annual growth of 27% to 36%. The table below shows the progress of private sector banks:
Operations of Private Sector Banks: Progress Compound Item 1 2002-03 2 2003-04 3 2004-05 4 2005-06 5 2006-07 6 growth (%) 7
No. of branches Centurion Bank of Punjab HDFC Bank ICICI Bank UTI Bank/Axis Bank All Private Sector Banks All Public Sector Banks All Scheduled Commercial 53,768 54,474 55,669 56,893 59,031 2.4
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62 215 392
63 295 419
77 446 515
242 515 569
279 638 713
45.6 31.2 16.1
137
185
250
352
501
38.3
5,592
5,950
6,453
6,813
7,363
7.1
47,963
48,299
48,970
49,817
51,392
1.7
Banks No. of employees Centurion Bank of Punjab HDFC Bank ICICI Bank UTI Bank/Axis Bank All Private Sector Banks All Public Sector Banks All Scheduled Commercial Banks Net profits (Rupees billion) Centurion Bank of Punjab HDFC Bank ICICI Bank -0 4 12 -1 5 16 0 7 20 1 9 25 1 11 31 -31.0 26.7 828,328 847,945 856,671 876,955 896,307 2.0 757,251 752,627 738,110 744,333 729,172 -0.9 59,374 81,120 90,530 110,505 139,285 23.8 2,338 3,447 4,761 6,553 9,980 43.7 945 4,791 11,544 1112 5673 13,609 1,374 9,030 18,029 4,471 14,878 25,384 14,458 21,477 33,321 97.8 45.5 30.3
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UTI Bank/Axis Bank All Private Sector Banks All Public Sector Banks All Scheduled Commercial Banks Deposits (Rupees billion) Centurion Bank of Punjab HDFC Bank ICICI Bank UTI Bank/Axis Bank All Private Sector Banks All Public Sector Banks 10,794 12,268 14,365 16,225 19,942 16.6 2069 2,686 3,146 4,285 5,520 27.8 170 210 317 401 588 36.4 28 224 482 30 304 681 35 434 998 94 558 1,651 149 683 2,305 51.3 32.2 47.9 170 223 210 246 312 16.4 123 16 154 165 201 13.1 29 35 35 50 65 22.1 2 3 3 5 7 36.1
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All Scheduled Commercial Banks Advances (Rupees billion) Centurion Bank of Punjab HDFC Bank ICICI Bank UTI Bank/Axis Bank All Private Sector Banks All Public Sector Banks All Scheduled Commercial Banks Note: Centurion Bank of Punjab was formed in October 2005 as a result of the merger of Centurion Bank with Bank of Punjab. Data for Centurion Bank of Punjab for 2005-06 and 2006-07 reflect the data of the combined entity, while that for the prior period pertain only to the Centurion Bank. Sources: 1. Annual Accounts of Scheduled Commercial Banks, 1979-2004, Reserve Bank of India. 2. A Profile of Banks, 2006-07, Reserve Bank of India.
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14,045
15,755
18,376
21,647
26,970
17.7
13 118 533
16 178 627
22 256 914
65 351 1,462
1,122 470 1,959
70.9 41.4 38.5
72
94
156
223
369
50.5
1,377
1,704
2,213
3,130
4,148
31.7
5,493 7,600
6,327 8,636
8,542 11,508
11,063 15,168
14,401 19,812
27.2 27.1
The mandate is pretty clear, Private Sector Banks have clearly outgrown their public sector counterparts in all these parameters and it looks like that the trend will continue in the near future.
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CHAPTER V
ECONOMIC REFORMS
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IMPACT OF NARASIMHAM COMMITTEE REPORT
From the 1991 India economic crisis to its status of fourth largest economy in the world by 2010, India has grown significantly in terms of economic development. So has its banking sector. During this period, recognizing the evolving needs of the sector, the Finance Ministry of Government of India (GOI) set up various committees with the task of analyzing India's banking sector and recommending legislation and regulations to make it more effective, competitive and efficient.[1] Two such expert Committees were set up under the chairmanship of M. Narasimham. They submitted their recommendations in the 1990s in reports widely known as the Narasimham CommitteeI (1991) report and the Narasimham Committee-II (1998) Report. These recommendations not only helped unleash the potential of banking in India, they are also recognized as a factor towards minimizing the impact of global financial crisis starting in 2007. Unlike the socialist-democratic era of the 1960s to 1980s, India is no longer insulated from the global economy and yet its banks survived the 2008 financial crisis relatively unscathed, a feat due in part to these Narasimham Committees.
BACKGROUND
During the decades of the 60s and the 70s, India nationalized most of its banks. This culminated with the balance of payments crisis of the Indian economy where India had to airlift gold to International Monetary Fund (IMF) to loan money to meet its financial obligations. This event called into question the previous banking policies of India and triggered the era of economic liberalization in India in 1991. Given that rigidities and weaknesses had made serious inroads into the Indian banking system by the late 1980s, the Government of India (GOI), post-crisis, took several steps to remodel the country's financial system. (Some claim that these reforms were influenced by the IMF and the World Bank, as part of their loan conditionality to India in 1991). The banking sector, handling 80% of the flow of money in the economy, needed serious reforms to make it
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internationally reputable, accelerate the pace of reforms and develop it into a constructive usher of an efficient, vibrant and competitive economy by adequately supporting the country's financial needs.[4] In the light of these requirements, two expert Committees were set up in 1990s under the chairmanship of M. Narasimham (an exRBI (Reserve Bank of India) governor) which are widely credited for spearheading the financial sector reform in India.[3] The first Narasimhan Committee (Committee on the Financial System - CFS) was appointed by Manmohan Singh as India's Finance Minister on 14 August 1991, and the second one was appointed by P.Chidambaram as Finance Minister in December 1997. Subsequently, the first one widely came to be known as the Narasimham Committee-I (1991) and the second one as Narasimham-II Committee (1998). This article is about the recommendations of the Second Narasimham Committee, the Committee on Banking Sector Reforms. The purpose of the Narasimham-I Committee was to study all aspects relating to the structure, organization, functions and procedures of the financial systems and to recommend improvements in their efficiency and productivity. The Committee submitted its report to the Finance Minister in November 1991 which was tabled in Parliament on 17 December 1991. The Narasimham-II Committee was tasked with the progress review of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India.[4] It focussed on issues like size of banks and capital adequacy ratio among other things.[9] M. Narasimham, Chairman, submitted the report of the Committee on Banking Sector Reforms (Committee-II) to the Finance MinistesrYashwantSinha in April 1998.
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RECOMMENDATIONS OF THE COMMITTEE

The 1998 report of the Committee to the GOI made the following major recommendations:
AUTONOMY IN BANKING Greater autonomy was proposed for the public sector banks in order for them to function with equivalent professionalism as their international counterparts. For this the panel recommended that recruitment procedures, training and remuneration policies of public sector banks be brought in line with the best-market-practices of professional bank management. Secondly, the committee recommended GOI equity in nationalized banks be reduced to 33% for increased autonomy. It also recommended the RBI relinquish its seats on the board of directors of these banks. The committee further added that given that the government nominees to the board of banks are often members of parliament, politicians, bureaucrats, etc., they often interfere in the day-to-day operations of the bank in the form of the behest-lending.[4] As such the committee recommended a review of functions of banks boards with a view to make them responsible for enhancing shareholder value through formulation of corporate strategy and reduction of government equity. To implement this, criteria for autonomous status was identified by March 1999 (among other implementation measures) and 17 banks were considered eligible for autonomy. But some recommendations like reduction in Government's equity to 33%, the issue of greater professionalism and independence of the board of directors of public sector banks is still awaiting Government follow-through and implementation.
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REFORM IN THE ROLE OF RBI First, the committee recommended that the RBI withdraw from the 91-day treasury bills market and that interbank call money and term money markets be restricted to banks and primary dealers. Second, the Committee proposed a segregation of the roles of RBI as a regulator of banks and owner of bank. It observed that "The Reserve Bank as a regulator of the monetary system should not be the owner of a bank in view of a possible conflict of interest". As such, it highlighted that RBI's role of effective supervision was not adequate and wanted it to divest its holdings in banks and financial institutions. Pursuant to the recommendations, the RBI introduced a Liquidity Adjustment Facility (LAF) operated through repo and reverse repos in order to set a corridor for money market interest rates. To begin with, in April 1999, an Interim Liquidity Adjustment Facility (ILAF) was introduced pending further up gradation in technology and legal/procedural changes to facilitate electronic transfer. As for the second recommendation, the RBI decided to transfer its respective shareholdings of public banks like State Bank of India (SBI), National Housing Bank (NHB) and National Bank for Agriculture and Rural Development (NABARD) to GOI. Subsequently, in 2007-08, GOI decided to acquire entire stake of RBI in SBI, NHB and NABARD. Of these, the terms of sale for SBI were finalized in 2007-08 themselves.
STRONGER BANKING SYSTEM The Committee recommended for merger of large Indian banks to make them strong enough for supporting international trade. It recommended a three tier banking structure in India through establishment of three large banks with international presence, eight to ten national banks and a large number of regional and local banks. This proposal had been severely criticized by the RBI employees union The Committee recommended the use of mergers to build the size and strength of operations for each bank However, it cautioned that large banks should merge only with banks of equivalent size and not with
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weaker banks, which should be closed down if unable to revitalize themselves. Given the large percentage of non-performing assets for weaker banks, some as high as 20% of their total assets, the concept of "narrow banking" was proposed to assist in their rehabilitation. There were a string of mergers in banks of India during the late 90s and early 2000s, encouraged strongly by the Government of India GOI in line with the Committee's recommendations. However, the recommended degree of consolidation is still awaiting sufficient government impetus.
NON-PERFORMING ASSETS Non-performing assets had been the single largest cause of irritation of the banking sector of India.[4] Earlier the Narasimham Committee-I had broadly concluded that the main reason for the reduced profitability of the commercial banks in India was the priority sector lending. The committee had highlighted that 'priority sector lending' was leading to the buildup of non-performing assets of the banks and thus it recommended it to be phased out. Subsequently, the Narasimham Committee-II also highlighted the need for 'zero' non-performing assets for all Indian banks with International presence. The 1998 report further blamed poor credit decisions, behest-lending and cyclical economic factors among other reasons for the buildup of the non-performing assets of these banks to uncomfortably high levels. The Committee recommended creation of Asset Reconstruction Funds or Asset Reconstruction Companies to take over the bad debts of banks, allowing them to start on a clean-slate. The option of recapitalization through budgetary provisions was ruled out. Overall the committee wanted a proper system to identify and classify NPAs, NPAs to be brought down to 3% by 2002 and for an independent loan review mechanism for improved management of loan portfolios. The committee's recommendations let to introduction of a new legislation which was subsequently implemented as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and came into force with effect from 21 June 2002.
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CAPITAL ADEQUACY AND TIGHTENING OF PROVISIONING NORMS In order to improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribed capital adequacy norms. This would also improve their risk taking ability. The committee targeted raising the capital adequacy ratio to 9% by 2000 and 10% by 2002 and have penal provisions for banks that fail to meet these requirements. For asset classification, the Committee recommended a mandatory 1% in case of standard assets and for the accrual of interest income to be done every 90 days instead of 180 days. To implement these recommendations, the RBI in Oct 1998, initiated the second phase of financial sector reforms by raising the banks' capital adequacy ratio by 1% and tightening the prudential norms for provisioning and asset classification in a phased manner on the lines of the Narasimham Committee-II report. The RBI targeted to bring the capital adequacy ratio to 9% by March 2001. The mid-term Review of the Monetary and Credit Policy of RBI announced another series of reforms, in line with the recommendations with the Committee, in October 1999.
ENTRY OF FOREIGN BANKS The committee suggested that the foreign banks seeking to set up business in India should have a minimum start-up capital of $25 million as against the existing requirement of $10 million. It said that foreign banks can be allowed to set up subsidiaries and joint ventures that should be treated on a par with private banks.
IMPLEMENTATION OF RECOMMENDATIONS In 1998, RBI Governor BimalJalan informed the banks that the RBI had a three to four year perspective on the implementation of the Committee's recommendations. Based on the other recommendations of the committee, the concept of a universal bank was
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discussed by the RBI and finally ICICI bank became the first universal bank of India. The RBI published an "Actions Taken on the Recommendations" report on 31 October 2001 on its own website. Most of the recommendations of the Committee have been acted upon (as discussed above) although some major recommendations are still awaiting action from the Government of India.
CRITICISM There were protests by employee unions of banks in India against the report. The Union of RBI employees made a strong protest against the Narasimham II Report. There were other plans by the United Forum of Bank Unions (UFBU), representing about 1.3 million bank employees in India, to meet in Delhi and to work out a plan of action in the wake of the Narasimham Committee report on banking reforms. The committee was also criticized in some quarters as "anti-poor". According to some, the committees failed to recommend measures for faster alleviation of poverty in India by generating new employment. This caused some suffering to small borrowers (both individuals and businesses in tiny, micro and small sectors).
RECEPTION Initially, the recommendations were well received in all quarters, including the Planning Commission of India leading to successful implementation of most of its recommendations.[32] Then it turned out that during the 2008 economic crisis of major economies worldwide, performance of Indian banking sector was far better than their international counterparts. This was also credited to the successful implementation of the recommendations of the Narasimham Committee-II with particular reference to the capital adequacy norms and the recapitalization of the public sector banks. The impact of the two committees has been so significant that elite politicians and financial sectors professionals have been discussing these reports for more than a decade since their first submission applauding their positive contribution
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BASEL II
Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. Basel II, initially published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face. One focus was to maintain sufficient consistency of regulations so that this does not become a source of competitive inequality amongst internationally active banks. Advocates of Basel II believed that such an international standard could help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In theory, Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. Politically, it was difficult to implement Basel II in the regulatory environment prior to 2008, and progress was generally slow until that year's major banking crisis caused mostly by credit default swaps, mortgage-backed security markets and similar derivatives. As Basel III was negotiated, this was top of mind, and accordingly much more stringent standards were contemplated, and quickly adopted in some key countries including the USA.
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OBJECTIVES The final version aims at: 1. Ensuring that capital allocation is more risk sensitive; 2. Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution; 3. Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques; 4. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic capital. Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place.
THE ACCORD IN OPERATION Basel II uses a "three pillars" concept (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline. The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.
THE FIRST PILLAR The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this stage.
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The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or STA, and the internal measurement approach (an advanced form of which is the advanced measurement approach or AMA). For market risk the preferred approach is VaR (value at risk). As the Basel 2 recommendations are phased in by the banking industry it will move from standardized requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In future there will be closer links between the concepts of economic profit and regulatory capital. Credit Risk can be calculated by using one of three approaches: 1. Standardized Approach 2. Foundation IRB 3. Advanced IRB Approach The standardized approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories used under Basel 1 were 0% for government bonds, 20% for exposures to OECD Banks, 50% for first line residential mortgages and 100% weighting on consumer loans and unsecured commercial loans. Basel II introduced a new 150% weighting for borrowers with lower credit ratings. The minimum capital required remained at 8% of risk weighted assets, with Tier 1 capital making up not less than half of this amount. Banks that decide to adopt the standardized ratings approach must rely on the ratings generated by external agencies. Certain banks used the IRB approach as a result.
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THE SECOND PILLAR The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. Internal Capital Adequacy Assessment Process (ICAAP) is the result of Pillar II of Basel II accords.
THE THIRD PILLAR This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution. Market discipline supplements regulation as sharing of information facilitates assessment of the bank by others including investors, analysts, customers, other banks and rating agencies which leads to good corporate governance. The aim of pillar 3 is to allow market discipline to operate by requiring institutions to disclose details on the scope of application, capital, risk exposures, risk assessment processes and the capital adequacy of the institution. It must be consistent with how the senior management including the board assess and manage the risks of the institution. When market participants have a sufficient understanding of a banks activities and the controls it has in place to manage its exposures, they are better able to distinguish between banking organizations so that they can reward those that manage their risks prudently and penalize those that do not. These disclosures are required to be made at least twice a year, except qualitative disclosures providing a summary of the general risk management objectives and policies which can be made annually. Institutions are also required to create a formal
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policy on what will be disclosed, controls around them along with the validation and frequency of these disclosures. In general, the disclosures under Pillar 3 apply to the top consolidated level of the banking group to which the Basel II framework applies.
RECENT CHRONOLOGICAL UPDATES
September 2005 update On September 30, 2005, the four US Federal banking agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision) announced their revised plans for the U.S. implementation of the Basel II accord. This delays implementation of the accord for US banks by 12 months. November 2005 update On November 15, 2005, the committee released a revised version of the Accord, incorporating changes to the calculations for market risk and the treatment of double default effects. These changes had been flagged well in advance, as part of a paper released in July 2005. July 2006 update On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. No new elements have been introduced in this compilation. This version is now the current version.
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November 2007 update On November 1, 2007, the Office of the Comptroller of the Currency (U.S. Department of the Treasury) approved a final rule implementing the advanced approaches of the Basel II Capital Accord. This rule establishes regulatory and supervisory expectations for credit risk, through the Internal Ratings Based Approach (IRB), and operational risk, through the Advanced Measurement Approach (AMA), and articulates enhanced standards for the supervisory review of capital adequacy and public disclosures for the largest U.S. banks. July 16, 2008 update On July 16, 2008 the federal banking and thrift agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision) issued a final guidance outlining the supervisory review process for the banking institutions that are implementing the new advanced capital adequacy framework (known as Basel II). The final guidance, relating to the supervisory review, is aimed at helping banking institutions meet certain qualification requirements in the advanced approaches rule, which took effect on April 1, 2008. January 16, 2009 update For public consultation, a series of proposals to enhance the Basel II framework was announced by the Basel Committee. It releases a consultative package that includes: the revisions to the Basel II market risk framework; the guidelines for computing capital for incremental risk in the trading book; and the proposed enhancements to the Basel II framework. July 89, 2009 update A final package of measures to enhance the three pillars of the Basel II framework and to strengthen the 1996 rules governing trading book capital was issued by the newly
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expanded Basel Committee. These measures include the enhancements to the Basel II framework, the revisions to the Basel II market-risk framework and the guidelines for computing capital for incremental risk in the trading book.
Basel II and the regulators One of the most difficult aspects of implementing an international agreement is the need to accommodate differing cultures, varying structural models, and the complexities of public policy and existing regulation. Banks senior management will determine corporate strategy, as well as the country in which to base a particular type of business, based in part on how Basel II is ultimately interpreted by various countries' legislatures and regulators. To assist banks operating with multiple reporting requirements for different regulators according to geographic location, there are several software applications available. These include capital calculation engines and extend to automated reporting solutions which include the reports required under COREP/FINREP. For example, U.S. Federal Deposit Insurance Corporation Chair Sheila Bair explained in June 2007 the purpose of capital adequacy requirements for banks, such as the accord: There are strong reasons for believing that banks left to their own devices would maintain less capital not more than would be prudent. The fact is, banks do benefit from implicit and explicit government safety nets. Investing in a bank is perceived as a safe bet. Without proper capital regulation, banks can operate in the marketplace with little or no capital. And governments and deposit insurers end up holding the bag, bearing much of the risk and cost of failure. History shows this problem is very real as we saw with the U.S. banking and S & L crisis in the late 1980s and 1990s. The final bill for inadequate capital regulation can be very heavy. In short, regulators can't leave capital decisions totally to the banks. We wouldn't be doing our jobs or serving the public interest if we did.
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Implementation progress Regulators in most jurisdictions around the world plan to implement the new accord, but with widely varying timelines and use of the varying methodologies being restricted. The United States' various regulators have agreed on a final approach. They have required the Internal Ratings-Based approach for the largest banks, and the standardized approach will be available for smaller banks. In India, Reserve Bank of India has implemented the Basel II standardized norms on 31 March 2009 and is moving to internal ratings in credit and AMA (Advanced Measurement Approach) norms for operational risks in banks. Existing RBI norms for banks in India (as of September 2010): Common equity (incl of buffer): 3.6 %( Buffer Basel 2 requirement requirements are zero.); Tier 1 requirement: 6%. Total Capital: 9 % of risk weighted assets. According to the draft guidelines published by RBI the capital ratios are set to become: Common Equity as 5% + 2.5% (Capital Conservation Buffer) + 0-2.5% (Counter Cyclical Buffer), 7% of tier I capital and minimum capital adequacy ratio (excluding Capital Conservation Buffer) 9% of Risk Weighted Assets. Thus the actual capital requirement is between 11-13.5% (including Capital Conservation Buffer and Counter Cyclical Buffer). In response to a questionnaire released by the Financial Stability Institute (FSI), 95 national regulators indicated they were to implement Basel II, in some form or another, by 2015. The European Union has already implemented the Accord via the EU Capital Requirements Directives and many European banks already report their capital adequacy ratios according to the new system. All the credit institutions adopted it by 2008.
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Australia, through its Australian Prudential Regulation Authority, implemented the Basel II Framework on 1 January 2008. Basel II and the global financial crisis The role of Basel II, both before and after the global financial crisis, has been discussed widely. While some argue that the crisis demonstrated weaknesses in the framework,
others
have criticized it for actually increasing the effect of the crisis. In response to the
financial crisis, the Basel Committee on Banking Supervision published revised global standards, popularly known as Basel III. The Committee claimed that the new standards would lead to a better quality of capital, increased coverage of risk for capital market activities and better liquidity standards among other benefits. NoutWellink, former Chairman of the BCBS, wrote an article in September 2009 outlining some of the strategic responses which the Committee should take as response to the crisis. He proposed a stronger regulatory framework which comprises five key components: (a) better quality of regulatory capital, (b) better liquidity management and supervision, (c) better risk management and supervision including enhanced Pillar 2 guidelines, (d) enhanced Pillar 3 disclosures related to securitization, off-balance sheet exposures and trading activities which would promote transparency, and (e) crossborder supervisory cooperation. Given one of the major factors which drove the crisis was the evaporation of liquidity in the financial markets, the BCBS also published principles for better liquidity management and supervision in September 2008. A recent OECD study suggest that bank regulation based on the Basel accords
encourage unconventional business practices and contributed to or even reinforced adverse systemic shocks that materialized during the financial crisis. According to the study, capital regulation based on risk-weighted assets encourages innovation designed to circumvent regulatory requirements and shifts banks focus away from their core economic functions. Tighter capital requirements based on risk-weighted assets, introduced in the Basel III, may further contribute to these skewed incentives. New liquidity regulation, notwithstanding its good intentions, is another likely candidate to increase bank incentives to exploit regulation.
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Think-tanks such as the World Pensions Council have also argued that European legislators have pushed dogmatically and naively for the adoption of the Basel II recommendations, adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, they forced private banks, central banks, and bank regulators to rely more on assessments of credit risk by private rating agencies. Thus, part of the regulatory authority was abdicated in favor of private rating agencies.
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TARAPORE COMMITTEE REPORT

The Reserve Bank of India has released the Report of the Tarapore Committee, which was set up to prepare a roadmap for capital account convertibility, on September 1, 2006. The CPI (M) had, at the very outset, expressed its opposition to the move towards fuller capital account convertibility, when an announcement in this regard was made by the Prime Minister at Mumbai on 18th March 2006.
The Tarapore Committee has recommended a phased increase in the cap on outward remittances by resident Indians to $ 200000 in five years and the removal of restrictions on overseas investments by Indian non-Bank Financial Companies and Corporates. This would facilitate increased capital outflow from India at a time when the Government itself claims that domestic savings is constraining domestic investment. Besides t his will increase the possibility of massive capital outflows by resident Indians following sudden reversal of investor sentiments. The recommended easing of norms for external commercial borrowing including their end-use by Indian corporates and banks would encourage reckless borrowing, especially for speculative purposes. The Tarapore Committee has failed to draw the most important lesson from the spate of currency crises faced by several developing countries over the past one decade. The common feature of all the crisis-afflicted countries was their liberalized capital account. India could avoid such a predicament precisely because of the capital controls, much of which has survived till date despite the recommendations to remove them by the first Tarapore Committee of 1997.
The nature of capital inflows into India in the recent past is a cause of serious concern. The latest RBI Report on Foreign Exchange Reserves shows that the ratio of short-term debt to foreign exchange reserves has increased from 4.2 per cent at end-March 2004 to 7.0 percent at end-March 2006. Similarly, the ratio of volatile capital flows (cumulative portfolio inflows and short-term debt) to reserves increased from 35.2 per cent at endMarch 2004 to 43.2 percent at end-March 2006. Rather than taking note of such serious
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developments, the Committee has suggested that the RBI should undertake an in-depth examination of the coverage and accuracy of these data. Thus data from the RBI itself has been challenged by the Committee, since the data did not conform to its premeditated conclusions. Given such an arbitrary approach, the assessment of the Committee that the current level of foreign exchange reserves at $ 151.6 billion are comfortable in relation to various parameters, cannot be taken seriously. The recommendations related to allowing foreign corporates directly investing in Indian stock markets or raising capital through convertible rupee bonds and liberalizing norms for FII investment in the domestic debt market including government securities, are all meant to increase portfolio investments into India, which have not contributed anything to the Indian economy so far, besides creating a bubble in the equity market. The crash experienced in the stock market in May 2006 which was precipitated by heavy fund pullout by FIIs, has thoroughly exposed the volatile nature of such capital inflows. The Report notes that the Preconditions/Signposts recommended by the 1997 Tarapore Committee, in terms of the gross fiscal deficit of the Central Government and the average effective CRR for the banking system have not been met till 2006, even when they were supposed to be attained by 2000. The target inflation rate has barely been met, although its sustainability is doubtful in the context of the recent inflationary trend. All this point towards both the impracticability, if not the undesirability, of meeting such arbitrary fiscal, monetary and banking policy targets set in the name of moving towards capital account convertibility, as if all other economic policy objectives like employment generation, poverty alleviation, social sector achievements and development of agriculture and industry are less important. The Committee has nevertheless continued with the same approach through its suggested Concomitants for a Move to Fuller Capital Account Convertibility. Besides recommending strict adherence to the FRBM targets, it also goes on to suggest that the Central Government should generate a revenue surplus to the tune of 1.0 per cent of GDP by 2010-11 in order to meet its repayment liabilities. This extreme display of fiscal conservatism is also accompanied by a call for Central Bank autonomy, an euphemism for taking monetary policy out of the purview of any democratic accountability. Moreover, there are a host of recommendations regarding the banking sector including bringing down
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government stakes in public sector banks to 33%, allowing industrial houses to own stakes in Indian banks or promote new banks and doing away with the cap on voting rights in the bank boards, all meant to promote the interests of the private corporates at the cost of public sector banks. The fact that such sweeping recommendations related to fiscal, monetary and banking policies have been made in a backdrop, where farmers are committing suicide in our country due to unbearable indebtedness and the commitments made in the NCMP on employment, agriculture, health and education are crying out for more fund allocation, show how much the Tarapore Committee is out of sync with the current Indian realities.
There are a few recommendations of the Tarapore Committee with which the CPI (M) agrees. They include banning fresh issues and phasing out of Participatory Notes, doing away with tax exemptions enjoyed by the NRIs and review of the Double Taxation Avoidance Agreements. However, these had already been recommended by the RBI and the CAG much before the Tarapore Committee was set up. These should therefore be considered on a standalone basis.
The CPI (M) is opposed to all the other recommendations of the Tarapore Committee related to greater liberalization of inflows and outflows of capital. Dilution of such capital controls will only lead to greater flows of speculative finance capital into the Indian economy. It will also increase the risks of a currency crisis, since along with nonresidents like the FIIs, Indian residents would also be able to take large amounts of money out of the economy without any restrictions. The National Common Minimum Programme is committed to reducing the "vulnerability of the financial system to the flow of speculative capital". The Polit Bureau of the CPI (M) calls upon the UPA government to strictly adhere to that commitment and reject the Tarapore Committee recommendations for moving towards fuller capital account convertibility.
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TARAPORE COMMITTEE ON CAPITAL ACCOUNT CONVERTIBILITY
Jumping into capital account convertibility game without considering the downside of the step can harm the economy. The Committee on Capital Account Convertibility (CAC) or Tarapore Committee was constituted by the Reserve Bank of India for suggesting a roadmap on full convertibility of Rupee on Capital Account. The committee submitted its report in May 1997. The committee observed that there is no clear definition of CAC. The CAC as per the standards refers to the freedom to convert the local financial assets into foreign financial assets or vice versa at the market determined rates of exchange. The Tarapore committee observed that the Capital controls can be useful in insulating the economy of the country from the volatile capital flows during the transitional periods and also in providing time to the authorities, so that they can pursue discretionary domestic policies to strengthen the initial conditions. The CAC Committee recommended the implementation of Capital Account Convertibility for a 3 year period viz. 1997-98, 1998-99 and 1999-2000. But this committee had laid down some pre conditions as follows: 1. Gross fiscal deficit to GDP ratio has to come down from a budgeted 4.5 per cent in 1997-98 to 3.5%in 1999-2000. 2. A consolidated sinking fund has to be set up to meet government's debt repayment needs; to be financed by increased in RBI's profit transfer to the govt. and disinvestment proceeds. 3. Inflation rate should remain between an average 3-5 per cent for the 3-year period 1997-2000.4. Gross NPAs of the public sector banking system needs to be brought down from the present 13.7%to 5% by 2000. At the same time, average effective CRR needs to be brought down from the current 9.3% to 3%.
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5. RBI should have a Monitoring Exchange Rate Band of plus minus 5% around a neutral Real Effective Exchange Rate RBI should be transparent about the changes in REER 6. External sector policies should be designed to increase current receipts to GDP ratio and bring down the debt servicing ratio from 25% to 20% 7. Four indicators should be used for evaluating adequacy of foreign exchange reserves to safeguard against any contingency. Plus, a minimum net foreign asset to currency ratio of 40 per cent should be prescribed by law in the RBI Act. The above committee's report was not translated into any actions. India is still a country with partial con variability.
However, some important measures in "that direction" were taken and they are summarized as below: 1. The Indian Corporate were allowed full convertibility in an automatic route up to the $ 500 million overseas ventures. This means that the limited companies were allowed to invest in foreign countries. 2. Indian corporate was allowed to prepay their external commercial borrowings via automatic route if the loan is above $ 500 million. 3. Individuals were allowed to invest in foreign assets, shares up to $ 2, 00,000 per year. 4. Unlimited amount of Gold was allowed to be imported. "The last measure, i.e. allowing unlimited amount of Gold is equal to allowing the full convertibility in capital account via current account route"
The Second Tarapore Committee on Capital Account Convertibility Reserve Bank of India appointed the second Tarapore committee to set out the framework for fuller Capital Account Convertibility. The committee was established by RBI in consultation with the Government to revisit the subject of fuller capital account convertibility in the context of the progress in economic reforms, the stability of the external and financial sectors, accelerated growth and global integration. The report of this committee was made public by RBI on 1st September 2006. In this report, the
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committee suggested 3 phases of adopting the full convertibility of rupee in capital account. 1. First Phase in 2006-7 2. Second phase in 2007-09 3. Third Phase by 2011
Following were some important recommendations of this committee: 1. The ceiling for External Commercial Borrowings (ECB) should be raised for automatic approval. 2. NRI should be allowed to invest in capital markets 3. NRI deposits should be given tax benefits. 4. Improvement of the Banking regulation. 5. FII (Foreign Institutional Investors) should be prohibited from investing fresh money raised to participatory notes. 6. Existing PN holders should be given an exit route to phase out completely the PN notes. At present the rupee is fully convertible on the current account, but only partially convertible on the Capital account.
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CHAPTER VI
TECHNOLOGICAL REFORMS
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IMPACT OF TECHNOLOGICAL REFORMS

The commercial banking business has changed dramatically over the past 25 years, due in large part to technological change. Advances in telecommunications, information technology, and financial theory and practice have jointly transformed many of the relationship focused intermediaries of yesteryear into data-intensive risk management operations of today. Consistent with this, we now find may commercial banks embedded as part of global financial institutions that engage in a wide variety of financial activities. In recent time, Indian banking industry has been consistently working towards the Development of technological changes and its usage in the banking operations for the improvement of their efficiency. To get the benefits of enhanced technologies, Indian banks are continuously encouraging the investment in information technology (IT), i.e. ATMs, e-banking or net banking, mobile and tele-banking, CRM, computerization in the banks, increasing use of plastic money, establishment of call centers, etc. RBI has also adopted IT in endorsing the payment systems functionality and modernization on an ongoing basis by the development of Electronic Clearing Services (ECS), Electronic Funds Transfer (EFT), Indian Financial Network (INFINET), a Real-Time Gross Settlement (RTGS) System, Centralized Funds Management System (CFMS), Negotiated Dealing System (NDS), Electronic Payment Systems with the Vision Document, the Structured Financial Messaging System (SFMS) and India Card a domestic card initiative, implemented recently (2011). Therefore, Indian banking environment has become more compatible as compare to the standards of international financial system, by the positive impact of all these efforts. This study makes an attempt to map the impact of IT on banking sector for scheduled commercial banks operating in India including public, private and foreign sector banks in India. The study uses a nonparametric linear programming based technique. The results convey that all SCBs have shown a significant and improving trend in their performance due to the adoption of IT. This adoption is required mandatory to take the country into the 21st century. One of the major objectives of Indian banking sector reforms was to encourage operational selfsufficiency, flexibility and competition in the system and to increase the banking
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standards in India to the international best practices. The second phase of reforms began in 1997 with aim to reorganization measures, human capital development, technological up-gradation, structural development which helped them for achieving universal benchmarks in terms of prudential norms and pre-eminent practices. This paper seeks to determine the impact of various market and regulatory initiatives on efficiency improvements of Indian banks. Efficiency of firm is measured in terms of its relative performance that is, efficiency of a firm relative to the efficiencies of firms in a sample. Data Envelopment Analysis (DEA) has used to identify banks that are on the output frontier given the various inputs at their disposal. The present study is confined only to the Constant-Return-to-Scale (CRS) assumption of decision making units (DMUs). Variable returns to scale (VRS) assumption for estimating the efficiency was not attempted. It was found from the results that national banks, new private banks and foreign banks have showed high efficiency over a period time than remaining banks. To be more specific, technological changes relating to telecommunications and data processing have spurred financial innovations that have altered bank products and services and production processes. For example, the ability to use applied statistics costeffectively (via software and computing power) has markedly altered the process of financial intermediation. Retail loan applications are now routinely evaluated using credit scoring tools, rather than using human judgment. Such an approach makes underwriting much more transparent to third parties and hence facilities secondary markets for retail credits (e.g., mortgages and credit card receivables) via securitization. Statistically based risk measurement tools are also used to measure and manage other types of credit risks- as well as interest rate risks-on an ongoing basis across entire portfolios. Indeed, tools like value-at-risk are even used to determine the appropriate allocation of risk-based capital for actively managed portfolios. It will describe how technological change has spurred financial innovations that have driven the aforementioned changes in commercial banking over the past 25 years. In this respect, the analysis distinguishes itself by reviewing the literature on a large number of new banking technologies and synthesizing these studies in the context of the broader economics literature on innovation.
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The various innovations in banking and financial sector are ECS, RTGS, EFT, NEFT, ATM, Retail Banking, Debit & Credit cards, free advisory services, implementation of standing instructions of customers, payments of utility bills, fund transfers, internet banking, telephone banking, mobile banking, selling insurance products, issue of free cheque books, travel cheques and many more value added services. The economy can be divided in the entire spectrum of economic activity into the real and monetary sectors. The real sector is where production takes place while the monetary sector supports this production and in a way is the means to the end. We know and we accept the financial system is critical to the working of the rest of the economy. In fact, the Asian crisis of the nineties, or for that matter what happened in Latin America and Russia subsequently and also Dubai Crisis have shown how a fragile financial sector can wreak havoc on the rest of the economy. Therefore the banking sector is crucial and we want to express our views to explore how this sector can work in harmony with the real sector to achieve the desired objectives. The Banking sector has been immensely benefited from the implementation of superior technology during the recent past, almost in every nation in the world. Productivity enhancement, innovative products, speedy transactions seamless transfer of funds, real time information system, and efficient risk management are some of the advantage derived through the technology. Information technology has also improved the efficiency and robustness of business processes across banking sector. India's banking sector has made rapid strides in reforming and aligning itself to the new competitive business environment. Indian banking industry is the midst of an IT revolution. Technological infrastructure has become an indispensable part of the reforms process in the banking system, with the gradual development of sophisticated instruments and innovations in market practices.
IT IN BANKING Indian banking industry, today is in the midst of an IT revolution. A combination of regulatory and competitive reasons has led to increasing importance of total banking automation in the Indian Banking Industry. Information Technology has basically been
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used under two different avenues in Banking. One is Communication and Connectivity and other is Business Process Reengineering. Information technology enables sophisticated product development, better market infrastructure, implementation of reliable techniques for control of risks and helps the financial intermediaries to reach geographically distant and diversified markets. The bank which used the right technology to supply timely information will see productivity increase and thereby gain a competitive edge. To compete in an economy which is opening up, it is imperative for the Indian Banks to observe the latest technology and modify it to suit their environment. Not only banks need greatly enhanced use of technology to the customer friendly, efficient and competitive existing services and business, they also need technology for providing newer products and newer forms of services in an increasingly dynamic and globalize environment. Information technology offers a chance for banks to build new systems that address a wide range of customer needs including many that may not be imaginable today.
Following are the innovative services offered by the industry in the recent past:
ELECTRONIC PAYMENT SERVICES E CHEQUES Nowadays we are hearing about e-governance, e-mail, e-commerce, e-tail etc. In the same manner, a new technology is being developed in US for introduction of e-cheque, which will eventually replace the conventional paper cheque. India, as harbinger to the introduction of e-cheque, the Negotiable Instruments Act has already been amended to include; Truncated cheque and E-cheque instruments.
REAL TIME GROSS SETTLEMENT (RTGS) Real Time Gross Settlement system, introduced in India since March 2004, is a system through which electronics instructions can be given by banks to transfer funds from their account to the account of another bank. The RTGS system is maintained and operated by the RBI and provides a means of efficient and faster funds transfer among banks
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facilitating their financial operations. As the name suggests, funds transfer between banks takes place on a Real Time' basis. Therefore, money can reach the beneficiary instantaneously and the beneficiary's bank has the responsibility to credit the beneficiary's account within two hours.
ELECTRONIC FUNDS TRANSFER (EFT) Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make payment to another person/company etc. can approach his bank and make cash payment or give instructions/authorization to transfer funds directly from his own account to the bank account of the receiver/beneficiary. Complete details such as the receiver's name, bank account number, account type (savings or current account), bank name, city, branch name etc. should be furnished to the bank at the time of requesting for such transfers so that the amount reaches the beneficiaries' account correctly and faster. RBI is the service provider of EFT.
ELECTRONIC CLEARING SERVICE (ECS) Electronic Clearing Service is a retail payment system that can be used to make bulk payments/ receipts of a similar nature especially where each individual payment is of a repetitive nature and of relatively smaller amount. This facility is meant for companies and government departments to make/receive large volumes of payments rather than for funds transfers by individuals.
AUTOMATIC TELLER MACHINE (ATM) Automatic Teller Machine is the most popular devise in India, which enables the customers to withdraw their money 24 hours a day 7 days a week. It is a device that allows customer who has an ATM card to perform routine banking transactions without interacting with a human teller. In addition to cash withdrawal, ATMs can be used for payment of utility bills, funds transfer between accounts, deposit of cheques and cash into accounts, balance enquiry etc.
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POINT OF SALE TERMINAL Point of Sale Terminal is a computer terminal that is linked online to the computerized customer information files in a bank and magnetically encoded plastic transaction card that identifies the customer to the computer. During a transaction, the customer's account is debited and the retailer's account is credited by the computer for the amount of purchase.
TELE BANKING Tele Banking facilitates the customer to do entire non-cash related banking on telephone. Under this devise Automatic Voice Recorder is used for simpler queries and transactions. For complicated queries and transactions, manned phone terminals are used.
ELECTRONIC DATA INTERCHANGE (EDI) Electronic Data Interchange is the electronic exchange of business documents like purchase order, invoices, shipping notices, receiving advices etc. in a standard, computer processed, universally accepted format between trading partners. EDI can also be used to transmit financial information and payments in electronic form.
IMPLICATIONS The banks were quickly responded to the changes in the industry; especially the new generation banks. The continuance of the trend has re-defined and re-engineered the banking operations as whole with more customization through leveraging technology. As technology makes banking convenient, customers can access banking services and do banking transactions any time and from any ware. The importance of physical branches is going down.
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GLOBALISATION OF BANKS
It is becoming increasingly imperative for banks to assess and ascertain the benefits of technology implementation. The fruits of technology will certainly taste a lot sweeter when the returns can be measured in absolute terms but it needs precautions and the safety nets. It has not been a smooth sailing for banks keen to jump onto the IT bandwagon. There have been impediments in the path like the obduracy once shown by trade unions who felt that IT could turn out to be a threat to secure employment. Further, the expansion of banks into remote nooks and corners of the country, where logistics continues to be a handicap, proved to be another stumbling stock. Another challenge the banks have had to face concerns the inability of banks to retain the trained and talented personnel, especially those with a good knowledge of IT. The increasing use of technology in banks has also brought up security' concerns. To avoid any pitfalls or mishaps on this account, banks ought to have in place a welldocumented security policy including network security and internal security. The passing of the Information Technology Act has come as a boon to the banking sector, and banks should now ensure to abide strictly by its covenants. An effort should also be made to cover e-business in the country's consumer laws. Some are investing in it to drive the business growth, while others are having no option but to invest, to stay in business. The choice of right channel, justification of IT investment on ROI, e-governance, customer relationship management, security concerns, technological obsolescence, mergers and acquisitions, penetration of IT in rural areas, and outsourcing of IT operations are the major challenges and issues in the use of IT in banking operations. The main challenge, however, remains to motivate the customers to increasingly make use of IT while transacting with banks. For small banks, heavy investment requirement is the compressing need in addition to their capital requirements. The coming years will see even more investment in banking technology, but reaping ROI will call for more strategic thinking.
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FUTURE OUTLOOK
Everyone today is convinced that the technology is going to hold the key to future of banking. The achievements in the banking today would not have make possible without IT revolution. Therefore, the key point is while changing to the current environment the banks has to understand properly the trigger for change and accordingly find out the suitable departure point for the change. Although, the adoption of technology in banks continues at a rapid pace, the concentration is perceptibly more in the metros and urban areas. The benefit of Information Technology is yet to percolate sufficiently to the common man living in his rural hamlet. More and more programs and software in regional languages could be introduced to attract more and more people from the rural segments also. Standards based messaging systems should be increasingly deployed in order to address cross platform transactions. The surplus manpower generated by the use of IT should be used for marketing new schemes and banks should form a brains trust' comprising domain experts and technology specialists. The banking today is re-defined and re-engineered with the use of Information Technology and it is sure that the future of banking will offer more sophisticated services to the customers with the continuous product and process innovations. Thus, there is a paradigm shift from the seller's market to buyer's market in the industry and finally it affected at the bankers level to change their approach from "conventional banking to convenience banking" and "mass banking to class banking". The shift has also increased the degree of accessibility of a common man to bank for his variety of needs and requirements.
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CHAPTER VII
DATA ANALYSIS AND FINDINGS
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DATA ANALYSIS
Q 1)
Do you have a bank account?
Yes No
38 1
97% 3%
2%
98%
Yes
This shows almost everyone has their own bank account
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Q 2) Which of the following banking services are you aware of?
Internet Banking Retail Banking Personnel Banking Investment Banking
38 24 26 23
97% 62% 67% 59%
40 35 30 25 20 15 10 5 0
Series1 Series2 Series3
This shows majority of people are aware of internet banking compared to other banking services.
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Q 3) Occupation
Student Working Individual Currently not employed Retired
28 9 0 2
72% 23% 0% 5%
Student Working Individual Currently not employed Retired
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Q 4) Which online features do you use regularly?
Make account inquiry Transfer funds between accounts Wire transfer(credit transfer) Ordering Cheque books N/A
1900% 1800% 300% 600% 13
49% 46% 8% 15% 33%
Make account inquiry Transfer funds between accounts
Making account inquiry and transferring funds between accounts are more frequently used by customers as compared to other online features.
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Q 5) Which of the following mobile banking features do you use?
Balance inquiry Internal a/c transfer Cheque book request Credit card payment details Open an account N/A
21 11 5 5 3 17
54% 28% 13% 13% 8% 44%
N/A Open an account Credit card payment details Series2 Cheque book request Internal a/c transfer Balance inquiry 0 5 10 15 20 25 Series1
Many people dont own mobiles having advanced internet access, therefore basic use of mobile internet i.e balance inquiry is done majorly.
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Q 6) What would you prefer amongst following? State one reason to support your answer
Manual banking Internet and mobile banking
9 30
23% 77%
Manual banking
1 2
77% of respondents have opted for internet banking instead of manual banking. As per the category of respondents 97% are students so are from todays technology world, hence would definitely incline towards internet banking.
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Q 7) Which of the following do you think are dominant sectors in banking industry?
Public sector banks Private sector banks Other
26 16 0
68% 42% 0%
Other
Private sector banks Public sector banks 0 10 20 30
Series1 Series2
Public sector banks according to 68% respondents are preferable than private sector banks because of trust and security factors.
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Q 8) Are you aware of the term 'Financial Inclusion? Your opinion.
Yes, I am aware and It is a boon for low income segments of society. No. I am not aware of this term.
14
36%
24
62%
Yes, I am aware and It is a boon for low income segments of society.

1 2
Majority of respondents are unaware of the term Financial inclusion, awareness should be created amongst people regarding all other facilities made available to them.
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Q 9) Your take on Introduction of plastic money. (Precisely-Credit cards)
Very convenient alternative to paying by cash
23
59 %
Cheaper for short-term borrowing - interest is only paid on the remaining debt One may become an impulsive buyer and tend to overspend
8%
23 %
Use of a large number of credit cards can get you into debt
8%
Very convenient alternative to paying by cash
Credit card as per 67% respondents is viewed as a boon over all more than a bane, even after opting for credit cards majorly in the next question.
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Q 10) According to you, which is the greatest potential for default for any bank?
Personal loan Corporate loans Credit cards Other
12 8 17 2
31% 21% 44% 5%
Personal loan Corporate loans Credit cards Other
As such corporate loans are the greatest potential for default for any bank, but as per this survey 44% have opted for credit cards as greatest potential default for any bank.
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Q11)Benefits of Core Banking.
Anywhere and Anytime Banking. Improved quality and efficiency of the customer services rendered Cheque deposit machines in WAN connectivity ATM service Other
33 14
87% 37%
5 23 0
13% 61% 0%
Other ATM service Cheque deposit machines Improved quality and Anywhere and Anytime 0 10 20 30 40 Series2 Series1
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Q 12) What do you think are the challenges faced by Indian Banking Industry?
Ever rising customer expectations Risk management Maintaining the growth rate Human resource management Making a global mark Employee retention
20 16 16 6 17 3
53% 42% 42% 16% 45% 8%
Employee retention Making a global mark Human resource Maintaining the growth rate Risk management Ever rising customer 0 5 10 15 20 25 Series2 Series1
Employee retention and human resource management according to 8% and 16% respondents respectively are not important challenges faced by Indian Banking industry.
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Q 13) Which of the following has majorly helped Indian Banking Industry to be considered as an upcoming industry as of date?
Innovation and Customization Cost-Reduction Cross-selling and Technology up gradation Credit Discipline Other
20 9 20 11 2
53% 24% 53% 29% 5%
Other Credit Discipline Cross-selling and Technology Cost-Reduction Innovation and Customization 0 5 10 15 20 25 Series2 Series1
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FINDINGS
1. According to the survey carried out majority of respondents are unaware of the term Financial inclusion, awareness should be created amongst people regarding all the facilities made available to them. 2. Customers are really satisfied with the technological reforms taken place, for example core banking, introduction of plastic money etc. 3. Depending on the age group, peoples preference for internet or manual banking can be analyzed. 4. Trends that changed the banking industry viz. 1) Consolidation of players through mergers and acquisitions, 2) Globalization of operations, 3) Development of new technology and 4) Universalization of banking 5. The biggest challenge before regulators is of avoiding instability in financial system. 6. Growing integration of economies and the markets around the world is making global banking a reality 7. The scene-large number of small banks is changing to small number of large banks.
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CHAPTER VIII
CONCLUSION
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CONCLUSION
Contemporary and future Issues in Indian Banking
Banking scenario has changed since 1990s. Technology has made tremendous impact in Indian banking industry. Anywhere banking and Anytime banking has become a reality. Financial sector operates in a more competitive environment and intermediates large volume of international financial flows. The biggest challenge before regulators is of avoiding instability in financial system.
Economic outlook and banking sector performance
Government of India today released its much awaited Economic Outlook for 2011-12 that pegs the Indias GDP growth rate for 2011-12 at 8.2% as compared to 8.5% registered last year. Given the current adverse global circumstances and high Inflation to boot, expected growth rate of 8.2% looks quite good. Indian banks, the dominant financial intermediaries in India, have made good progress over the last five years, as is evident from several parameters, including annual credit growth, profitability, and trend in gross non-performing assets (NPAs). While the annual rate of credit growth clocked 23% during the last five years, profitability (average Return on Net Worth) was maintained at around 15% during the same period, and gross NPAs fell from 3.3% as on March 31, 2006 to 2.3% as on March 31, 2011. Currently, Indian banks face several challenges, such as increase in interest rates on saving deposits, possible deregulation of interest rates on saving deposits, a tighter monetary policy, a large government
deficit, increased stress in some sectors (such as, State utilities, airlines, and microfinance), restructured loan accounts, unamortized pension/gratuity liabilities, increasing infrastructure loans, and implementation of Basel III.
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Technology is the key
Technological reforms are the new challenges to banking sector. For the new entrants, they are well versed with computers and its functionalities but no banking experience. Whereas the middle and senior level staff in the banks are rich in banking experience but low computer literacy. Thus they feel handicapped in this since technology has become an indispensable tool in banking. Foreign and new private sector banks embraced technology right from inception of their operations therefore adapted themselves to the changes in technology easily. Whereas public sector banks and old private banks have not been able to keep pace with their developments. Globalization of financial services
Growing integration of economies and the markets around the world is making global banking a reality. The surge in globalization of finance has also gained momentum with technological advancements which have effectively overcome the national borders in financial business. Widespread use of internet banking has widened frontiers of global banking and it is now possible to market financial products and services on a global base. This gives Indian financial sector including banks an opportunity to expand this business on a quid pro basis. Indian banks at global stage-A reality check
As per Indian Banks Association report, Banking Industry Vision, there would be greater presence of international players in Indian financial system and some of the Indian banks would become global players. Competition is not only on foreign turf but also in the domestic field as well from foreign banks operating in India.
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Is size only the constraint for Indian banks?
Lacking size is not the only problem for Indian banks. They have the necessary production and human resources capabilities. Implementation of Basel II norms has raised the bar for Indian banks seeking an international presence. The top international banks can lower their capital requirements through the use of sophisticated risk management techniques and thus compete more aggressively. What is being done to prepare Indian banks to meet global challenges?
The scope disclosure and transparency has also been raised in accordance with international practices. India has compiled with almost all core principles of Effective Banking Supervision. Changes observed- consolidation and moving towards Universal Banking. The scenelarge number of small banks is changing to small number of large banks.
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CHAPTER IX
RECOMMENDATIONS
Page | 137
RECOMMENDATIONS
Computerization of banks should be implemented in all banks especially in PSUs. The staff should be trained exclusively for the same. Retail banking is an upcoming banking trend, therefore customer service needs to be upgraded up to customer expectations and satisfaction. Globalization of banks should be encouraged by the government of India. The internet banking including secured and new facilities for electronic payment and transfer of money should be introduced by majority of banks which will ease banking process. Example:- SBI has introduced Online SBI for all internet banking for its customers. For public sector banks working hours must be extended or concept of working in shifts must be introduced. Reducing government control on public sector banks. Private sector banks to give priority sector loans. The banks have given freedom to quote interest rate on bulk deposits as per their requirements. Market related interest rates on government securities, CRR, SLR. (SLR-24% CRR-6%) Implementation of Basel I and Basel II prudential norms. Licenses to new generation private sector banks.
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CHAPTER X
ANNEXURE
Page | 139
Questionnaire
*Required Name * Occupation * Student Working Individual Currently not employed Retired Age Limit * 18-25 26-50 50 up Do you have a bank account? * Yes No Name any 2 Banks where you have your account *
Which of the following banking services are you aware of? Internet Banking Retail Banking Personnel Banking Investment Banking Which online features do you use regularly? *
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Make account inquiry Transfer funds between accounts Wire transfer(credit transfer) Ordering Cheque books N/A Which of the following mobile banking features do you use? * Balance inquiry Internal a/c transfer Cheque book request Credit card payment details Open an account N/A What would you prefer amongst following? State one reason to support your answer* Manual banking Internet and mobile banking Required
Survey Continued...
Which of the following do you think are dominant sectors in banking industry? * Public sector banks Private sector banks Other: Are you aware of the term 'Financial Inclusion' ? Your opinion. * Yes, I am aware and It is a boon for low income segments of society. No. I am not aware of this term. Your take on Introduction of plastic money. ( Precisely-Credit cards) * Very convenient alternative to paying by cash Cheaper for short-term borrowing - interest is only paid on the remaining debt
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One may become an impulsive buyer and tend to overspend Use of a large number of credit cards can get you into debt According to you, which is the greatest potential for default for any bank? * Personal loan Corporate loans Credit cards Other: Benefits of Core Banking. *Your experience Anywhere and Anytime Banking. Improved quality and efficiency of the customer services rendered Cheque deposit machines in WAN connectivity ATM service Other: What do you think are the challenges faced by Indian Banking Industry? * Ever rising customer expectations Risk management Maintaining the growth rate Human resource management Making a global mark Employee retention Which of the following has majorly helped Indian Banking Industry to be considered as an upcoming industry as of date? * Innovation and Customization Cost-Reduction Cross-selling and Technology upgradation Credit Discipline Other:
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CHAPTER XI
BIBLIOGRAPHY
Page | 143
Journals/E-Books/pdf
1. B.S.Bodla & Richa Verma, Determinants of Profitability of banks in India: A
Multivariate Analysis, Journal of Services Research, Volume 6, No.-2, (Oct2006 March2007).

2. Chanchal Chattarjee, Future Trend and Challenges in Indian Banking: A fresh Look The Chartered Accountant, June2009.
3. The Economic Times, Banking & Finance, 16, Feb 2012 4. The Times of India, Times Business, 16, Feb 2012. 5. Report on Trend and Progress of Banking in India, supplement to RBI Bulletin, December 2011
6. http://www.bankingawareness.com/current-affairs/economic-survey-2012-2013/ 7. http://www.icra.in/Files/ticker/Banking%20note-final.pdf
8. http://seminarprojects.com/Thread-banking-sector-reforms-fullreport#ixzz1pAhAz7UG
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INTRODUCTION AND RESEARCH METHODOLOGY