Banking Sector Reforms

TO
PROF. AKSHA MEMON
FROM TYBMS
Name
Roll no

INDEX

Insha ghaswala
13

Sr
no

Topics

Banking

Introduction

Highlights of Narasimham Committee

Recommendations on Banking
Reforms in India

Performance of commercial bank in

India

The new technologies that are been use

in banks

6
Bibliography

What is banking ????

Banking in India in the modern sense originated in the last decades of the 18th century.
Among the first banks were the Bank of Hindustan, which was established in 1770 and
liquidated in 1829-32; and the General Bank of India, established 1786 but failed in 1791
The largest bank, and the oldest still in existence, is the State Bank of India. It originated as
the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was
one of the three banks funded by a presidency government, the other two were the Bank of
Bombay and the Bank of Madras. The three banks were merged in 1921 to form the Imperial
Bank of India, which upon India's independence, became the State Bank of India in 1955. For
many years the presidency banks had acted as quasi-central banks, as did their successors,
until the Reserve Bank of India was established in 1935, under the Reserve Bank of India
Act, 1934.
In 1960, the State Banks of India was given control of eight state-associated banks under the
State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate
banks. In 1969 the Indian government nationalised 14 major private banks. In 1980, 6 more
private banks were nationalized. These nationalized banks are the majority of lenders in
the Indian economy. They dominate the banking sector because of their large size and
widespread networks.
The Indian banking sector is broadly classified into scheduled banks and non-scheduled
banks. The scheduled banks are those which are included under the 2nd Schedule of the
Reserve Bank of India Act, 1934. The scheduled banks are further classified into: nationalised
banks; State Bank of India and its associates; Regional Rural Banks (RRBs); foreign banks;
and other Indian private sector banks.[6] The term commercial banks refers to both scheduled
and non-scheduled commercial banks which are regulated under the Banking Regulation Act,
1949.[9]
Generally banking in India was fairly mature in terms of supply, product range and reacheven though reach in rural India and to the poor still remains a challenge. The government
has developed initiatives to address this through the State Bank of India expanding its branch
network and through the National Bank for Agriculture and Rural Development with things
likemicrofinance.

INTRODUCTION
The financial development was given impetus with the adoption of social control over banks
in 1967 and subsequently nationalsation of 14 major scheduled banks in July 1969. Since
then the banking system has formed the core of the Indian financial system. In the three
decades following the first round of nationalization (the second round consisted of 6
commercial banks in April, 1980), aggregate deposits of scheduled commercial banks have
increased at a compound annual average growth rate of 17.8 per cent during this period (1969
to1999), while bank credit expanded at the rate of 16.3 per cent per annum. With branches of
more than 67,000 of which 48.7 percent being rural, touching the lives of millions of people
everyday, the Indian banking sector constitutes the most significant segment of the financial
system of India. Despite this commendable progress serious problems have emerged due to
the reasons beyond the control of banking sector. While nationalization achieved the
widening of the banking industry in India, the task of deepening their services was still left
unattended. By the beginning of 1990, the social banking goals set for the banking industry
made most of the public sector banks unprofitable. The resultant financial repression led to
the decline in productivity and efficiency and erosion of profitability of the banking sector in
general. It is against the background of these circumstances, that the development of a sound
banking system was considered essential for the future growth of the financial system.
Financial sector reforms were initiated in the country in 1992 with a view to improving the
efficiency in the process of financial intermediation, enhancing the effectiveness in the
conduct of monetary policy and creating conducive environment for the integration of
domestic financial sector with the global system. International Research Journal of
Commerce Arts and Science http:www.casirj.com Page 274 The financial sector reforms
started in 1991 had provided the necessary platform for the banking sector to operate based
on operational flexibility and functional autonomy enhancing productivity, efficiency and
profitability (Talwar, 2005). While several committees have gone in to the problems of
commercial banking in India, the two most important of them are:
Narasimham Committee I (1991)
Narasimham Committee II (1998)
These committees proposed various reforms in order to improve the profitability and
efficiency of the banking system.
Highlights of Narasimham Committee Recommendations on Banking Reforms in India!
The main recommendations of Narasimham Committee (1991) on the Financial (Banking)
System are as follows;

(i) Statutory Liquidity Ratio (SLR) is brought down in a phased manner to 25 percent (the
minimum prescribed under the law) over a period of about five years to give banks more
funds to carry business and to curtail easy and captive finance.
(ii) The RBI should reduce Cash Reserve Ratio (CRR) from its present high level.
(iii) Directed Credit Programme i.e., credit allocation under government direction, not by
commercial judgement of banks under a free market competitive system, should be phased
out. The priority sector should be scaled down from present high level of 40 percent of
aggregate credit to 10 percent. Also the priority sector should be redefined.
(iv) Interest rates to be deregulated to reflect emerging market conditions.
(v) Banks whose operations have been profitable is given permission to raise fresh capital
from the public through the capital market.
(vi) Balance sheets of banks and financial institutions are made more transparent.
(vii) Set up special tribunals to help banks recover their debt speedily.
(viii) Changes be introduced in the bank structure 3-4 large banks with international
character, 8- 10 national banks with branches throughout the country, local banks confined to
specific region of the country, rural banks confined to rural areas.
(ix) Greater emphasis is laid on internal audit and internal inspection in the banks.
(x) Government should indicate that there would be no further nationalisation of banks, the
new banks in the private sector should be welcome subject to normal requirements of the

RBI, branch licensing should be abolished and policy towards foreign banks should be more
liberal.
(xi) Quality of control over the banking system by the RBI and the Banking Division or the
Ministry of Finance should be ended and the RBI should be made primary agency for
regulation of banking system.
(xii) A new financial institution called the Assets Reconstruction Fund (ARF). Should be
established which would take over from banks and financial institutions a portion of their bad
and doubtful debts at a discount (based on realisable value of assets), and subsequently
follow up on the recovery of the dues owed to them from the primary borrowers.
Follow-up Action:
(i) Statutory Liquidity Ratio (SLR) on incremental Net Domestic and Time Liabilities
(NDTL) reduced from 38.5 percent in 1991-92 to 28 percent by December 1996.
(ii) Effective Cash Reserve Ratio (CRR) on the NDTL reduced from 14 percent to 10 percent
in January 1997.
(iii) In April, 1992 the RBI introduced a risk assets ratio system for banks (including foreign
banks) in India as a capital adequacy measure. Under this banks will have to achieve a
Capital to Risk Weighted Asset ratio (CRAR) of 8 percent. By March, 1996 out of 27 public
sector banks 19 banks (including SBI and all its subsidiaries) have attained 8 percent CRAR
norm. In case of foreign banks, all of them have already attained these norms.
(iv) New prudential norms for income recognition, classification of assets and provisioning of
bad debts introduced in 1992.

(v) In regard to regulated interest ratio structure: (i) considerable rationalisation has been
effected in banks lending rates with the number of concessive slabs reduced and some of the
ratio have been raised thereby reducing the element of subsidy; (ii) regulated deposit late has
been replaced by single prescription of not exceeding 13 (revised to 11 percent) per annum
for all deposit maturities of 46 days and above.
(vi) The SBI and some other nationalised banks have been allowed to seek capital market
access.
(vii) Less strong nationalised banks are being recapitalised by government through budget
provisions of Rs. 15000 crore till 1994-95.
(viii) Existing private sector banks given signal for expansion, more private sector banks
allowed to set up branches provided they confirms to the RBI guidelines.
(ix) Supervision system of the RBI is being strengthened with establishment of new board for
Financial Bank Supervision within the RBI.
(x) Banks given freedom to open new branches and upgrade extension counters on attaining
capital adequacy norms and prudential accounting standards. They are permitted to close nonviable branches other than in rural areas.
(xi) Rapid computerization of banks being undertaken.
(xii) Agreement signed between the public sector bank and RBI to improve their managerial
and quality of performance.

(xiii) Recovery of debts due to banks and the Financial Institution Act 1993 recently passed
to facilitate quicker recovery of loans and arrears. Accordingly 6 special Debt Recovery
Tribunals were set up along with an Appellate Tribunal at Mumbai to expedite the recovery of
bank loan arrears.
(xiv) Under the Banking Ombudsmen Scheme 1995. Eleven Ombudsmen already functioning
out of a total of 15 to expedite inexpensive resolution of customers complaints.
(xv) Ten new private banks have started functioning out of the thirteen in principle
approvals given for setting up new banks in private sector.
Performance of commercial Banks in India
Against the backdrop of a slowdown in the domestic economy and tepid global recovery, the
growth of the Indian banking sector slowed down for the second consecutive year in 2012-13.
There was also a decline in the growth of profits of scheduled commercial banks (SCBs) as
credit off-take slowed down and interest rates softened. The asset quality also deteriorated,
more perceptibly for public sector banks. On the positive side, capital positions of Indian
banks, including public sector banks, remained strong and above the stipulated minimum to
face any unforeseen losses. There was also a significant expansion in the outreach of banking
in unbanked rural centres, as financial inclusion plans completed three years. In the shortterm, the Indian banking sector needs to lend support to productive sectors facilitating
economic recovery, while remaining vigilant about asset quality. In the medium to long-term,
sustained improvements in efficiency and inclusiveness remain key areas of concern.
1. Introduction
4.1 The Indian financial landscape is dominated by the banking sector with banking flows
accounting for over half of the total financial flows in the economy1. Banks play a major role
in not just purveying credit to the productive sectors of the economy but also as facilitators of
financial inclusion. Although the Indian banking sector exhibited considerable resilience in
the immediate aftermath of the global financial crisis, it has been impacted by the global and
domestic economic slowdown over the last two years. The year 2011-12, against the
backdrop of a muted domestic growth, witnessed a slowdown in the overall growth of the
banking sector coupled with a deterioration in asset quality and lower profitability2. The
performance of the banking sector in 2012-13 too was conditioned by a further slowdown of

the domestic economy, although there was some respite from inflationary pressures leading to
an environment of lower interest rates.
4.2 Against this backdrop, this chapter discusses developments in the Indian banking sector in
2012-13 in a comparative perspective with the earlier year/s to bring out trends in balance
sheets, profitability, and financial soundness of the sector taking data on 89 scheduled
commercial banks (SCBs). The chapter also spells out key issues relating to other aspects of
operations of SCBs, viz., sectoral distribution of credit, financial inclusion, customer
services, technological developments, and their overseas operations apart from separately
analysis the trends in two segments closely related to the SCB sector, namely regional rural
banks (RRBs) and local area banks (LABs).
The New technologies that are being used in banks are

National Electronic Funds Transfer (NEFT)

National Electronic Funds Transfer (NEFT) is an Indian system of electronic transfer of

money from one bank or bank branch to another.
The banks or their branches that support such transactions have to participate in the NEFT
network. An updated list of banks and branches that are NEFT-enabled can be found on
theReserve Bank of India (RBI) website.
The transfer of money from the customer remitting it to the beneficiary account usually takes
place on the same day. Settlement or clearance of funds takes place in batches as specified by
the guidelines by the RBI. Any amount of money can be transferred using NEFT, making it
usually the best method for retail remittances. Customers with Internet banking accounts can
use the NEFT facility to transfer funds nationwide on their own. Funds can also be
transferred via NEFT by customers by walking into any bank branch (which is NEFTenabled) and leaving relevant instructions for such transfer - either from their bank accounts
or by payment of cash. Transfer of funds to Nepal using NEFT, is also allowed subject to
limits.
In order to make a remittance via NEFT, the customer initiating the transfer needs to have the
IFSC (Indian Financial System Code) of the bank branch where the beneficiary account is

located. IFSC is an alphanumeric 11-digit code that functions as a unique address for a
particular branch. Customers will also need to input the beneficiary account number and
name as well as the name of the bank being transferred to.

Credit Card

A credit card is a payment card issued to users as a system of payment. It allows the
cardholder to pay for goods and services based on the holder's promise to pay for them. The
issuer of the card creates a revolving account and grants a line of credit to the cardholder,
from which the user can borrow money for payment to a merchant or as a cash advance.
A credit card is different from a charge card: a charge card requires the balance to be paid in
full each month. In contrast, credit cards allow the consumers a continuing balance of debt,
subject to interest being charged. A credit card also differs from a cash card, which can be
used like currency by the owner of the card. A credit card differs from a charge card also in
that a credit card typically involves a third-party entity that pays the seller and is reimbursed
by the buyer, whereas a charge card simply defers payment by the buyer until a later date.
The size of most credit cards is 3 38 2 18 in (85.60 53.98 mm), conforming to
the ISO/IEC 7810 ID-1 standard. Credit cards have a printed[4] or embossed bank card

number complying with the ISO/IEC 7812 numbering standard. Both of these standards are
maintained and further developed by ISO/IEC JTC 1/SC 17/WG 1. Before magnetic stripe
readers came into widespread use, plastic credit cards issued by many department stores were
produced on stock ("Princess" or "CR-50") slightly longer and narrower than 7810. Some
modern credit cards have a computer chip embedded in them for security reasons.

Debit card

A debit card (also known as a bank card or check card) is a plastic payment card that
provides the cardholder electronic access to their bank account(s) at a financial institution.
Some cards may bear a stored value with which a payment is made, while most relay a
message to the cardholder's bank to withdraw funds from a payer's designated bank account.
The card, where accepted, can be used instead of cash when making purchases. In some
cases, the primary account number is assigned exclusively for use on the Internet and there is
no physical card.
In many countries, the use of debit cards has become so widespread that their volume has
overtaken or entirely replaced chequesand, in some instances, cash transactions. The
development of debit cards, unlike credit cards and charge cards, has generally been country
specific resulting in a number of different systems around the world, which were often
incompatible. Since the mid-2000s, a number of initiatives have allowed debit cards issued in
one country to be used in other countries and allowed their use for internet and phone
purchases.
Unlike credit and charge cards, payments using a debit card are immediately transferred from
the cardholder's designated bank account, instead of them paying the money back at a later
date.

Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for
withdrawing cash. Merchants may also offercashback facilities to customers, where a
customer can withdraw cash along with their purchase

Telephone banking

Telephone banking is a service provided by a bank or other financial institution, that

enables customers to perform a range of financial transactions over the telephone, without the
need to visit a bank branch or automated teller machine. Telephone banking times are usually
longer than branch opening times, and some financial institutions offer the service on a 24hour basis.
From the bank's point of view, telephone banking minimises the cost of handling transactions
by reducing the need for customers to visit a bank branch for non-cash withdrawal and
deposit transactions.

Internet Banking

Online banking (OLB) is an electronic payment system that enables customers of a financial
institution to conduct financial transactions on a website operated by the institution, such as a
retail bank, virtual bank, credit union or building society. Online banking is also referred
as Internet banking, e-banking, virtual banking and by other terms.
To access a financial institution's online banking facility, a customer with Internet access
would need to register with the institution for the service, and set up some password (under
various names) for customer verification. The password for online banking is normally not
the same as for telephone banking. Financial institutions now routinely allocate customers
numbers (also under various names), whether or not customers have indicated an intention to
access their online banking facility. Customers' numbers are normally not the same as account
numbers, because a number of customer accounts can be linked to the one customer number.
The customer can link to the customer number any account which the customer controls,
which may be cheque, savings, loan, credit card and other accounts. Customer numbers will
also not be the same as any debit or credit card issued by the financial institution to the
customer.
To access online banking, a customer would go to the financial institution's secured website,
and enter the online banking facility using the customer number and password previously
setup. Some financial institutions have set up additional security steps for access to online
banking, but there is no consistency to the approach adopted.

Mobile banking

Mobile banking is a term used to refer to systems that allow customers of a financial
institution to conduct a number of financial transactions through a mobile device such as
a mobile phone or tablet.
Mobile banking differs from mobile payments, which involve the use of a mobile device to
pay for goods or services either at thepoint of sale or remotely,[1] analogously to the use of a
debit or credit card to effect an EFTPOS payment.
The earliest mobile banking services were offered over SMS, a service known as SMS
banking. With the introduction of smart phones with WAP support enabling the use of
the mobile web in 1999, the first European banks started to offer mobile banking on this
platform to their customers.
Mobile banking has until recently (2010) most often been performed via SMS or the mobile
web. Apple's initial success with iPhoneand the rapid growth of phones based
on Google's Android (operating system) have led to increasing use of special client programs,
called apps, downloaded to the mobile device. With that said, advancements in web
technologies such as HTML5, CSS3 andJavaScript have seen more banks launching mobile
web based services to complement native applications. A recent study (May 2012) by Mapa
Research suggests that over a third of banks have mobile device detection upon visiting the
banks' main website. A number of things can happen on mobile detection such as redirecting
to an app store, redirection to a mobile banking specific website or providing a menu of
mobile banking options for the user to choose from.

Doorstep Banking

Salient Features of Doorstep Banking Services (safe & secure)

: Bank is offering the DSBS to its customers (Individual /Non Individual/Corporate) who are
interested to avail the said services, for pick up of cash and delivery of cash from the door
step of customer: The services are to be offered only to those customers in whose case proper
KYC procedures have been followed. The service should be offered either at the residence or
at the office of the customer.

Point Of Sale (POS)

The point of sale (POS) is the time and place where a retail transaction is completed. It is the
point at which a customer makes a payment to the merchant in exchange for goods or after
provision of a service. At the point of sale, the merchant would prepare an invoice for the
customer (which may be a cash register printout) or otherwise calculate the amount owed by
the customer and provide options for the customer to make payment. After receiving
payment, the merchant will also normally issue a receipt for the transaction. Usually the
receipt is printed, but it is increasingly being dispensed electronically.[1][2][3]
The POS in various retail situations would use customized hardware and software tailored to
their particular requirements. Retailers may utilize weighing scales, scanners, electronic and
manual cash registers, EFTPOS terminals, touch screens and a variety of other hardware and
software available. For example, a grocery or candy store may use a scale at the point of sale,
while a bar and restaurant may use software to customize the item or service sold when a
customer has a meal or drink request.
The point of sale is often referred to as the point of service because it is not just a point of
sale but also a point of return or customer order. Additionally, today POS software may
include additional features to cater for different functionality, such as inventory management,
CRM, financials, warehousing, etc.

AUTOMATED TELLER MACHINE - ATM

An electronic banking outlet, which allows customers to complete basic transactions without
the aid of a branch representative or teller.
There are two primary types of automated teller machines, or ATMs. The basic units allow
the customer to only withdraw cash and receive a report of the account's balance. The more
complex machines will accept deposits, facilitate credit card payments and report account
information. To access the advanced features of the complex units, you will usually need to
be a member of the bank that operates the machine.

Virtual Banking

A direct bank is a bank without any branch

network that offers its services remotely via online banking and telephone
banking and may also provides access via ATMs (often through interbank
network alliances), mail and mobile. By eliminating the costs associated with bank branches
, directbanks can make significant savings which they may pass on to clients via higher intere
st rates or lowerservice charges.

The concept of a direct bank gained prominence with the advent of online banking technolog
y in the early1990s which led to a number of direct banks being created, although many were
owned by traditionalbanks. A number of direct banks offer only online savings
account and these banks typically offerhigher interest rates that their traditional competitors a
s these banks can be very cost efficient tooperate. Since mid-2000s online and telephone bank
ing has become a mainstay of retail
banking andmost banks have incorporated these into their core services and transforming or r
educing their branchnetwork to mirror the advantages that direct banks have.

Electronic Clearing Services (ECS)

Payments are an indispensable part of our daily transactions, be it a consumer to a business, a

business to a consumer or a business to a business. Payments raise the GDP of a country thus
it is mandatory that the payment systems of the country are safe, secure, sound, efficient,
accessible and authorize, as stated by the mission statement of the Reserve Bank of Indias
publication on Payment Systems in India (200912). The Reserve Bank of India continually
strives towards ensuring the smooth progress of the payments system. In India it is the BPSS
(Board for Regulation of Payment and Settlement Systems) which is in charge of regulating
these systems.
India has multiple payments and settlement systems. RBI Still continues to evolve new
payment methods and slowly revamping the payments and settlement capability in India.
India supports a variety of electronic payments and settlement system, both Gross as well as
Net settlement systems

BIBLIOGRAPHY

http://www.yourarticlelibrary.com/banking/highlights-of-narasimham-committeerecommendations-on-banking-reforms-in-india/23497/
http://searchcio.techtarget.in/definition/National-Electronic-Funds-Transfer-NEFT
https://en.wikipedia.org/wiki/Credit_card
https://en.wikipedia.org/wiki/Debit_card
https://en.wikipedia.org/wiki/Telephone_banking
https://en.wikipedia.org/wiki/Online_banking
https://en.wikipedia.org/wiki/Mobile_banking

https://en.wikipedia.org/wiki/Point_of_sale
http://www.investopedia.com/terms/a/atm.asp
http://encyclopedia.thefreedictionary.com/Virtual+Bank
https://en.wikipedia.org/wiki/Payment_and_settlement_systems_in_India