Banking Structure
NTRODUCTION India has a well developed Banking system. The
banking industry originated in India in the 18th century and since
then it has undergone significant number of changes. The commercial
banking industry in India over the past few decades has been
revolutionized by a number of factors such as independence,
nationalization, deregulation, rise of the Internet, etc. The
commercial banking structure in India consists of Scheduled Banks
and Unscheduled Banks. In the past the banks did not find any
attraction in the Indian economy because of the low level of
economic activities and little business prospects. Today we find
positive changes in the National business development policy.
Earlier, the money lenders had a strong hold over the rural
population which resulted in exploitation of small and marginal
savers. The private sector banks failed in serving the society.
This resulted in the nationalization of 14 commercial banks in
1969. Nationalization of commercial banks paved ways for the
development of Indian economy and channelized financial resources
for the up liftment of weaker sections of the society. The passage
of financial modernization legislation by Congress in 1999 removed
barriers, allowing banks to expand product offerings, while the
potential of the Internet as a sales, marketing and delivery tool,
widened the avenues to sell and deliver these products. The main
products of the commercial banking industry-insurance, securities,
mortgages, mutual funds and consumer credit-have all benefited from
these changes. This report will examine the extent to which
increased product sales have influenced overall bank assets and how
commercial banks' increased market share in each of these products
areas over the next five years will raise overall bank income and
assets. Currently (2011), banking industry in India is generally
fairly mature in terms of supply, product range and reach-even
though reaches in rural India stillSydenham College of Comm. &
Eco.Page 1
Banking Structure
remains a challenge for the private sector and foreign banks. In
terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets
relative to other banks in comparable economies in its region. The
Reserve Bank of India is an autonomous body, with minimal pressure
from the government. The stated policy of the Bank on the Indian
Rupee is to manage volatility but without any fixed exchange
rateand this has mostly been true. With the growth in the Indian
economy expected to be strong for quite some time-especially in its
services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be
strong. One may also expect mergers and acquisitions, takeovers,
and asset sales.
Sydenham College of Comm. & Eco.
Page 2
Banking Structure
REVIEW OF LITERATURE Indian banking system, over the years has
gone through various phases after establishment of Reserve Bank of
India in 1935 during the British rule, to function as Central Bank
of the country. Earlier to creation of RBI, the central bank
functions were being looked after by the Imperial Bank of India.
With the 5-year plan having acquired an important place after the
independence, the Govt. felt that the private banks may not extend
the kind of cooperation in providing credit support, the economy
may need. In 1954 the All India Rural Credit Survey Committee
submitted its report recommending creation of a strong, integrated,
State-sponsored, State-partnered commercial banking institution
with an effective machinery of branches spread all over the
country. The recommendations of this committee led to establishment
of first Public Sector Bank in the name of State Bank of India on
July 01, 1955 by acquiring the substantial part of share capital by
RBI, of the then Imperial Bank of India. Similarly during 1956-59
the associate banks came into the fold of public sector banking.
Another evaluation of the banking in India was undertaken during
1966 as the private banks were still not extending the required
support in the form of credit disbursal, more particularly to the
unorganised sector. Each leading industrial house in the country at
that time was closely associated with the promotion and control of
one or more banking companies. The bulk of the deposits collected,
were being deployed in organised sectors of industry and trade,
while the farmers, small entrepreneurs, transporters ,
professionals and self-employed had to depend on money lenders who
used to exploit them by charging higher interest rates. In February
1966, a Scheme of Social Control was set-up whose main function was
to periodically assess the demand for bank credit from various
sectors of the economy to determine the priorities for grant of
loans andSydenham College of Comm. & Eco.Page 3
Banking Structure
advances so as to ensure optimum and efficient utilisation of
resources. The scheme however, did not provide any remedy. Though a
no. of branches were opened in rural area but the lending
activities of the private banks were not oriented towards meeting
the credit requirements of the priority/weaker sectors. On July 19,
1969, the Govt. promulgated Banking Companies (Acquisition and
Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger
commercial bank with paid up capital of Rs.28.50cr, deposits of
Rs.2629cr, loans of Rs.1813cr and with 4134 branches accounting for
80% of advances. Subsequently in 1980, 6 more banks were
nationalised which brought 91% of the deposits and 84% of the
advances in Public Sector Banking. During December 1969, RBI
introduced the Lead Bank Scheme on the
recommendations of FK Narsimhan Committee. Meanwhile, during
1962 Deposit Insurance Corporation was established to provide
insurance cover to the depositors. In the post-nationalization
period, there was substantial increase in the no. of branches
opened in rural/semi-urban centers bringing down the population per
bank branch to 12000 appx. During 1976, RRBs were established (on
the recommendations of M. Narasimham Committee report). The Service
Area Approach was introduced during 1989.While the 1970s and 1980s
saw the high growth rate of branch banking net-work, the
consolidation phase started in late 80s and more particularly
during early 90s, with the submission of report by the Narasimham
Committee on Reforms in Financial Services Sector during 1991.
Sydenham College of Comm. & Eco.
Page 4
Banking Structure
OBJECTIVES OF THE STUDY The objectives of project are as
follows: To find out the earlier banking structure that prevailed
in India. To assess the various factors that lead to the change in
the Indian banking structure To assess the impact of all these
factors on the banking structure. To draw a contrast between the
old and the new Indian banking structure. To determine the various
services offered by banks earlier and currently To determine the
future of Indian Banking Markets To study the comparison of china
banking structure and india structure To draw conclusions of the
impact of the changes in banking sector.
Sydenham College of Comm. & Eco.
Page 5
Banking Structure
RESEARCH METHODOLOGY Secondary data is the data which is
collected for some other purpose. The data used for preparing the
project report was secondary data. It was collected from various
websites, newspapers and books. Research follows a specific plan of
procedure. Research requires a clear articulation of a goal.
Research is guided by the specific research problem &
question.
SCOPE OF STUDY The project entitled BANKING STRUCTURE. The study
will focus on how banking structure is implemented in India, its
impact , changes, concerns with a various parts .
Sydenham College of Comm. & Eco.
Page 6
Banking Structure
BANKING SECTOR IN THE PAST Banking in India originated in the
first decade of 18th century with The General Bank of India coming
into existence in 1786. This was followed by Bank of Hindustan.
Both these banks are now defunct. The oldest bank in existence in
India is the State Bank of India being established as "The Bank of
Bengal" in Calcutta in June 1806. A couple of decades later,
foreign banks like Credit Lyonnais started their Calcutta
operations in the 1850s. The first fully Indian owned bank was the
Allahabad Bank, which was established in 1865.By the 1900s, the
market expanded with the establishment of banks such as Punjab
National Bank, in 1895 in Lahore and Bank of India, in 1906, in
Mumbai - both of which were founded under private ownership. The
Reserve Bank of India formally took on the responsibility of
regulating the Indian banking sector from 1935. After India's
independence in 1947, the Reserve Bank was nationalized and given
broader powers. At the beginning of the 20th century, Indian
economy was passing through a relative period of stability. Around
five decades have elapsed since the India's First war of
Independence, and the social, industrial and other infrastructure
have developed. At that time there were very small banks operated
by Indians. The banking in India was controlled and dominated by
the presidency banks, namely, the Bank of Bombay, the Bank of
Bengal, and the Bank of Madras which later on merged to form the
Imperial Bank of India, and Imperial Bank of India.
Sydenham College of Comm. & Eco.
Page 7
Banking Structure
BANKING STRUCTURE IN INDIA
Sydenham College of Comm. & Eco.
Page 8
Banking Structure
Scheduled bank in India Scheduled Banks in India constitute
those banks which have been included in the Second Schedule of
Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only
those banks in this schedule which satisfy the criteria laid down
vide section 42 (6) (a) of the Act. As on 30th June, 1999, there
were 300 scheduled banks in India having a total network of 64,918
branches. The scheduled commercial banks in India comprise of State
bank of India and its associates (8), nationalised banks (19),
foreign banks (45), private sector banks (32), co-operative banks
and regional rural banks.
A]
Commercial Banks in India
Commercial Banks in India are broadly categorized into Scheduled
Commercial Banks and Unscheduled Commercial Banks. The Scheduled
Commercial Banks have been listed under the Second Schedule of the
Reserve Bank of India Act, 1934. The selection measure for listing
a bank under the Second Schedule was provided in section 42 (6) (a)
of the Reserve Bank of India Act, 1934. Commercial bank is the term
used for a normal bank to distinguish it from an investment bank or
retail bank. It can also refer to a bank or a division of a bank
that mostly deals with deposits and loans from corporations or
large businesses, as opposed to normal individual members of the
public (retail banking).
Sydenham College of Comm. & Eco.
Page 9
Banking Structure
Activities of Commercial Banks The modern Commercial Banks in
India cater to the financial needs of different sectors. The main
functions of the commercial banks comprise: transfer of funds
acceptance of deposits offering those deposits as loans for the
establishment of industries purchase of houses, equipments, capital
investment purposes etc. The banks are allowed to act as trustees.
On account of the knowledge of the financial market of India the
financial companies are attracted towards them to act as trustees
to take the responsibility of the security for the financial
instrument like a debenture. The Indian Government presently hires
the
commercial banks for various purposes like tax collection and
refunds, payment of pensions etc.
Functions of Commercial Banks The functions of commercial banks
are divided into two categories: i) Primary functions, and ii)
Secondary functions including agency functions.
i) Primary functions: The primary functions of a commercial bank
include: a) Accepting deposits; and b) Granting loans and
advances;
i i ) Secondary function Be sides the primary functions of a
accepting deposits and lending money, banks perform a number of
other function which are called secondary functions.
Sydenham College of Comm. & Eco.
Page 10
Banking Structure
These are as follows Issuing letter of credit, traveller
cheques, circular notes etc. Undertaking safe custody of valuables,
important documents and securities by providing safe deposit locker
Providing customers with facilities of foreign exchange.
Transferring money from one place to another; and from one branch
to another branch of the bank. Standing guarantee on behalf of its
customers, for making payments for purchase of goods, machinery,
vehicles etc Collecting and supplying business information;
Providing reports on the credit worthiness of customers. List of
Commercial Banks in India State Bank of India State Bank of Bikaner
& Jaipur State Bank of Hyderabad State Bank of Indore State
Bank of Mysore State Bank of Patiala
I]
Nationalised Banks in India
Nationalised banks in India are the major players in Indian
banking system dominating the industry. Not only that, the
nationalised banks in India also play pivotal role in the economic
development of the country at the same time. The history of
nationalization of Indian banks dates back to the year 1955 when
the Imperial Bank of India was nationalized and re-christened as
State Bank of India (under the SBI Act, 1955). Later on July 19,
1960, the 7 subsidiaries of
Sydenham College of Comm. & Eco.
Page 11
Banking Structure
SBI viz. State Bank of Hyderabad (SBH), State Bank of Indore,
State Bank of Saurashtra (SBS), State Bank of Mysore (SBM), State
Bank of Bikaner and Jaipur (SBBJ), State Bank of Patiala (SBP) and
State Bank of Travancore (SBT) were also nationalized with deposits
more than 200 crores.
Nationalised Banks: Allahabad Bank Andhra Bank Bank of Baroda
Bank of India Bank of Maharashtra Canara Bank Central Bank of India
Corporation Bank Dena Bank IDBI Bank Ltd. Indian Bank Punjab &
Sind Bank Punjab National Bank Syndicate Bank Union Bank of India
United Bank of India
II]
Private sector banks in India
Private banking in India was practiced since the beginning of
banking system in India. The first Private bank in India to be set
up in Private Sector Banks in India was Induslnd Bank. It is one of
the fastest growing Private Sector Banks in India. IDBI ranks the
tength largest Development bank in the world as
Sydenham College of Comm. & Eco.
Page 12
Banking Structure
Private Banks in India and has promoted a world class
institutions in India. The first Private Bank in India to receive
an in principle approval from the Reserve Bank of India was Housing
Development Finance Corporation Limited, to set up a bank in the
private sector banks in India as part of the RBI's liberalisation
of the Indian Banking Industry. It was incorporated in August 1994
as HDFC Bank Limited with registered office in Mumbai and commenced
operations as Scheduled Commercial Bank in January 1995. ING Vysya,
yet another Private Bank of India was incorporated in the year
1930. Bangalore has a pride of place for having the first branch
inception in the year 1934. With successive years of patronage and
constantly setting new standards in banking, ING Vysya Bank has
many credits to its account.
List of Private Banks in India Bank of Punjab Bank of Rajasthan
Centurion Bank City Union Bank Dhanalakshmi Bank Development Credit
Bank Federal Bank HDFC Bank ICICI Bank Jammu & Kashmir Bank
Karnataka Bank South Indian Bank United Western Bank UTI Bank
Sydenham College of Comm. & Eco.
Page 13
Banking Structure
III]
Regional rural banks in India
Rural banking in India started since the establishment of
banking sector in India. Rural Banks in those days mainly focussed
upon the agro sector. Regional rural banks in India penetrated
every corner of the country and extended a helping hand in the
growth process of the country. SBI has 30 Regional Rural Banks in
India known as RRBs. The rural banks of SBI is spread in 13 states
extending from Kashmir to Karnataka and Himachal Pradesh to North
East. The total number of SBIs Regional Rural Banks in India
branches is 2349 (16%). Till date in rural banking in India, there
are 14,475 rural banks in the country of which 2126 (91%) are
located in remote rural areas Regional Rural Banks in India are an
integral part of the rural credit structure of the country. Since
the very beginning, when the Regional Rural Banks in India (RRBs)
were established in October 2, 1975, these banks played a pivotal
role in the economic development of the rural India. The main goal
of establishing regional rural banks in India was to provide credit
to the rural people who are not economically strong enough,
especially the small and marginal farmers, artisans, agricultural
labours, and even small entrepreneurs. Apart from SBI, there are
many other banks which function for the development of the rural
areas in India. These banks are listed below: Chhattisgarh Gramin
Bank Madhya Bihar Gramin Bank Dena Gujarat Gramin Bank Baroda
Gujarat Gramin Bank Harayana Gramin Bank Gurgaon Gramin Bank Assam
Gramin Vikash Bank Jharkhand Gramin Bank Madhya Bharath Gramin Bank
Chambal-Gwalior Kshetriya Gramin BankSydenham College of Comm.
& Eco.Page 14
Banking Structure
Himachal Gramin Bank Punjab Gramin Bank Aurangabad -Jalna Gramin
Bank Thane Gramin Bank Baroda Rajasthan Gramin Bank Rajasthan
Gramin Bank Baroda Western Uttar Pradesh Gramin Bank
Sydenham College of Comm. & Eco.
Page 15
Banking Structure
B]
Co-operative bank in India
The Cooperative banks in India started functioning almost 100
years ago. The Cooperative bank is an important constituent of the
Indian Financial System, judging by the role assigned to co
operative, the expectations the co operative is supposed to fulfil,
their number, and the number of offices the cooperative bank
operate. Though the co operative movement originated in the West,
but the importance of such banks have assumed in India is rarely
paralleled anywhere else in the world. The cooperative banks in
India play an important role even today in rural financing. The
businesses of cooperative bank in the urban areas also have
increased phenomenally in recent years due to the sharp increase in
the number of primary co-operative banks. Co operative Banks in
India are registered under the Co-operative Societies Act. The
cooperative bank is also regulated by the RBI. They are governed by
the Banking Regulations Act 1949 and Banking Laws (Co-operative
Societies) Act, 1965. Features of Cooperative Banks Co-operative
Banks are organised and managed on the principal of cooperation,
self-help, and mutual help. They function with the rule of "one
member, one vote". function on "no profit, no loss" basis. Co-
operative banks, as a principle, do not pursue the goal of profit
maximisation. Co-operative bank performs all the main banking
functions of deposit mobilisation, supply of credit and provision
of remittance facilities. Co-operative Banks provide limited
banking products and are functionally specialists in agriculture
related products. However, co-operative banks now provide housing
loans also. UCBs provide working capital loans and term loan as
well. The State Co-operative Banks (SCBs), Central Co-operative
Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally
extend housing loans upto Rs 1 lakh to an individual. The scheduled
UCBs, however, can lend
Sydenham College of Comm. & Eco.
Page 16
Banking Structure
upto Rs 3 lakh for housing purposes. The UCBs can provide
advances against shares and debentures also. Co-operative bank do
banking business mainly in the agriculture and rural sector.
However, UCBs, SCBs, and CCBs operate in semi urban, urban, and
metropolitan areas also. The urban and non-agricultural business of
these banks has grown over the years. The co-operative banks
demonstrate a shift from rural to urban, while the commercial
banks, from urban to rural. Co-operative banks are perhaps the
first government sponsored, government-supported, and
government-subsidised financial agency in India. They get financial
and other help from the Reserve Bank of India NABARD, central
government and state governments. They constitute the "most
favoured" banking sector with risk of nationalisation. For
commercial banks, the Reserve Bank of India is lender of last
resort, but co-operative banks it is the lender of first resort
which provides financial resources in the form of contribution to
the initial capital (through state government), working capital,
refinance. Cooperative Banks belong to the money market as well as
to the capital market. Primary agricultural credit societies
provide short term and medium term loans. Land Development Banks
(LDBs) provide long-term loans. SCBs and CCBs also provide both
short term and term loans. Co-operative banks are financial
intermediaries only partially. The sources of their funds
(resources) are central and state government, the Reserve Bank of
India and NABARD, other co-operative institutions, ownership funds
and, deposits or debenture issues.
Sydenham College of Comm. & Eco.
Page 17
Banking Structure
NAFSCOB The National Federation of State Cooperative Banks Ltd.
(NAFSCOB), was established on 19th May 1964 with a view to
facilitate the operations of State and Central Cooperative Banks in
general and Development of Cooperative Credit in particular. The
objectives of NAFSCOB are:
To provide a common forum to the member banks to examine the
problems of cooperative credit, banking and allied matters and
evolve suitable strategies to deal with them.
Promote and protect the interests of the member banks in all
spheres of their activities and to give expression to the views of
the member banks.
Co-ordinate and liaison with Government of India , Reserve Bank
of India respective State Governments, NABARD and other higher
financing institutions for the development of cooperative credit on
behalf of the member banks.
Provide research and consultancy inputs to the member banks in
order to facilitate them to strengthen their own organizations.
Organise conferences/seminars/workshops/meeting to share the
views of common interest with a view to contribute for better
policy decisions.
The Federation functions with three of its wings, viz. Planning,
Research and Development (PRD) All India Mutual Arrangement Scheme
(AIMAS) and Computer Services Division (CSD).
Sydenham College of Comm. & Eco.
Page 18
Banking Structure
I]
Rural Cooperative Banking
Rural Cooperative Banking and Credit Institutions play an
important role in meeting the growing credit needs of rural India.
The volume of credit flowing through these institutions has
increased. The performance of these institutions, however (apparent
in the share of total institutional credit and the indicators of
their financial health), has been less than satisfactory and is
deteriorating rapidly. Of late, a number of Committees have gone
into the reasons for this situation and suggested remedial
measures, but there has been little progress in implementing their
recommendations. The Government of India, which is committed to
reviving and revitalising the rural cooperative credit structure
(CCS) and attributes high priority and urgency to it, felt it
necessary To commission a fresh review. The Union Government
constituted a Task Force (vide Government of India notification
dated 05 August 2004 reproduced in Annexure I) to formulate a
practical and implementable plan of action to rejuvenate the rural
cooperative credit structure. 1) Short-term Rural Co-operatives:
The short-term rural co-operatives provide crop and other working
capital loans to farmers and rural artisans primarily for
short-term purpose. These institutions have federal three-tier
structure. At the Apex of the system is a State Co-operative bank
in each state. At the middle (or district) level, there are Central
Co-operative Banks also known as District Co-operative banks. At
the lowest (or village) level, are the Primary Agricultural Credit
Societies.
Sydenham College of Comm. & Eco.
Page 19
Banking Structure
i.
State Co-operative Banks:
State Co-operative Banks are the apex of the three-tier
Co-operative structure dispensing mainly short/medium term credit.
It is the principal society in a State which is registered or
deemed to be registered under the Government Societies Act, 1912,
or any other law for the time being in force in India relating to
cooperative societies and the primary object of which is the
financing of the other societies in the State which are registered
or deemed to be registered. The State Co-operative Banks receive
current and fixed deposits from its constituent banks as well as
savings, current and fixed deposits from the general public and
from local boards, other local authorities, etc. Further, they
receive loans from the RBI and NABARD. NABARD is the supervisory
authority for State Cooperative Banks. The state government
contributes the certain portion of their working capital. The
principal function of State Co-operative Banks is to assist the
Central Co-operative Banks and to balance excesses and deficiencies
in the resources of Central Co-operative Banks. It also act as the
balancing centre for Central Co-operative Banks in the sense that
surplus fund of some of these banks are made available to other
needy banks. It also serves the link between RBI and the Central
Co-operative Banks and Primary Agriculture Credit Societies. But
the connection between the State Co-operative Banks and Primary
Co-operative Societies is not direct. The Central Co-operative
Banks are acting as intermediaries between the State Co-operative
Banks and Primary societies.
Sydenham College of Comm. & Eco.
Page 20
Banking Structure
ii.
Central Co-operative Banks:
Central Co-operative Banks form the middle tier of Co-operative
credit institutions. These are the independent units in as much as
the State Cooperative Banks have control to control or supervise
their affairs. They are of two kinds i.e. pure and mixed. Those
banks are the membership of which is confined to co-operative
organizations only are included in pure type, while those banks the
membership of which is open to co-operative organizations as well
as to the individuals are included in mixed type. The pure type of
Central Banks can be seen in Kerala, Bombay, Orissa, etc., while
the mixed type can be seen in Andhra Pradesh, Assam, Tamil Nadu,
etc. The pure type of banks is based on strict co-operative
principles. However, the mixed type has an advantage over the pure
type in so far as they can draw their funds from the
non-agricultural sector too. The Central Co-operative Banks draw
their funds from share capital, deposits, loans from the State
C-operative Banks and where State Banks do not exist from the RBI,
NABARD and commercial banks. NABARD is the supervisory authority
for Central Co-operative Banks. Deposits constitute the major
component of sources of funds, followed by borrowings. The main
function of Central Co-operative Banks is to finance the primary
credit societies. In addition they carry on Commercial banking
activities like acceptance of deposits, granting of loans and
advances on the security of first class guiltedged securities,
fixed deposit receipts, gold, bullion, goods and documents of title
to goods, collection of bills, cheques, etc., safe custody of
valuables and agency services. They are expected to attract
deposits from the general public. They also act as balancing
centres, making available access funds of one primary to another
which is in need of them.
Sydenham College of Comm. & Eco.
Page 21
Banking Structure
The central co-operative banks are located at the district
headquarters or some prominent town of the district. These banks
have a few private individuals also who provide both finance and
management. The central co-operative banks have three sources of
funds,
Their own share capital and reserves Deposits from the public
and Loans from the state co-operative banks Primary Agriculture
Credit Societies:
iii.
Primary Agricultural Credit Societies is the foundation of the
co-operative credit system on which the superstructure of the
short-term co-operative credit system rests. It deals directly with
individual farmers, provide short and medium term credit, supply
agricultural inputs, distribute consume articles and also arrange
for the marketing of products of its members through a c-operative
marketing societies. These societies form the basic unit of
co-operative credit system in India. These voluntary societies
based on principle of one man one vote has posed challenge to
exploitative practices of the village moneylenders. The farmers and
other small-time borrowers come in direct contact with these
societies. The success of the co-operative credit movement depend
largely on the strength of these village level societies. The major
objective of Primary agricultural Credit Societies is to serve the
need of weaker sections of these society. For this purpose, the
people with limited means, particularly with schedules castes and
scheduled tribes, are encouraged to become members of these
societies. So, they must function effectively as well-managed and
multi-purpose institutions mobilizing the savings of the rural
people and providing the package of services including credit,
supply of agricultural inputs and implements, consumer goods,
marketing services and
Sydenham College of Comm. & Eco.
Page 22
Banking Structure
technical guidance with focus on weaker sections. Government has
promoted multi-purpose societies in tribal areas for the benefit of
people living there. 2) Long-term Rural Co-operatives: The
long-term rural co-operative provide typically medium and long-term
loans for making investments in agriculture, rural industries and,
in the recent period, housing. Generally, these co-operatives have
two tiers, i.e. State Co-operative Agriculture and Development
Banks (SCARBDs) at the state level and Primary Co-operative
Agriculture and Rural Development Banks (PCARDBs) at the taluka or
tehsil level. However, some States have a unitary structure with
the state level banks operating through their own branches.
i.
State
Co-operative
Agriculture
and
Development
Banks
(SCARBDs): State Co-operative Agriculture and Development Banks
constitute the upper-tier of long term co-operative credit
structure. Though long term credit cooperatives have been allowed
to access public deposits under certain conditions, such deposits
constitute a relatively small proportion of their total
liabilities. They are mostly dependent on borrowings for
on-lending.
The main objective of the Co-operative State Agriculture and
Rural Development bank is to finance primary agriculture and rural
development banks. The bank undertakes the following functions to
achieve the above objectives:-
Sydenham College of Comm. & Eco.
Page 23
Banking Structure
(a) (b) (c)
Floatation of Debentures, Receiving Deposits; Grant of loans to
primary cooperative agriculture and rural development banks for
purposes approved by the National Bank for Agricultural and Rural
Development and Registrar of Cooperative Societies;
(d)
To function as the agent of any cooperative bank subject to such
conditions as the Registrar may specify;
(e)
To develop, assist and coordinate the work of affiliated primary
cooperative agriculture and rural development banks.
The bank issues long term and medium term loans towards
agricultural and allied activities like construction of godowns,
cattle shed, farm house, purchase of lands etc., and for minor
irrigation purposes like construction of new wells, deepening of
existing wells etc., In addition, long term loans are also
sanctioned for animal husbandry, fisheries, plantation, farm
mechanization, non-farm sector and other non-minor irrigation
schemes.
Sydenham College of Comm. & Eco.
Page 24
Banking Structure
ii.
Primary Co-operative Agriculture and Rural Development Banks
(PCARDBs):
Primary Co-operative Agriculture and Rural Development Banks are
the lowest layer of long term credit co-operatives. It is primarily
dependent on the borrowings for their lending business. They
provide credit for developmental purposes like minor irrigation,
cultivation of plantation crops and for diversified purposes like
poultry, dairying and sericulture on schematic basis. They get
requisite financial assistance from the Cooperative State
Agriculture and Rural Development Bank. In order to widen their
scope of lending to compete with other financial agencies, the
primary cooperative agriculture and rural development banks have
been permitted to finance artisans, craftmen and small scale
entrepreneurs. They have also been permitted to issue loans to
small road transport operators in rural areas for purchase of goods
carriers and passenger vehicles. As a result, during 2007-08, the
Primary Cooperative Agriculture and Rural Development Banks have
again started lending for the Non-Farm Sector including Jewel
Loans.
B]
Urban Co-operative Banks
The term Urban Co-operative Banks (UCBs), though not formally
defined, refers to primary cooperative banks located in urban and
semi-urban areas. These banks, till 1996, were allowed to lend
money only for non-agricultural purposes. This distinction does not
hold today. These banks were traditionally centred around
communities, localities work place groups. They essentially lent to
small borrowers and businesses. Today, their scope of operations
has widened considerably.
Sydenham College of Comm. & Eco.
Page 25
Banking Structure
The origins of the urban cooperative banking movement in India
can be traced to the close of nineteenth century when, inspired by
the success of the experiments related to the cooperative movement
in Britain and the cooperative credit movement in Germany such
societies were set up in India. Cooperative societies are based on
the principles of cooperation, - mutual help, democratic decision
making and open membership. Cooperatives represented a new and
alternative approach to organisation as against proprietary firms,
partnership firms and joint stock companies which represent the
dominant form of commercial organisation.
Sydenham College of Comm. & Eco.
Page 26
Banking Structure
Improving health The tally of financially weak urban banks
declined (grade III and IV banks) to 330 in 2009-10 from 392 in
2008-09. Due to the consolidation process in the sector, the
percentage of banks in grades III and IV witnessed a declining
trend during recent years.There was an improvement in the asset
quality of the entire UCB sector in both absolute and percentage
terms as at end-March over the previous year. Gross bad loans
declined by Rs 135 crore to Rs 12,727 crore. However, both gross as
well as net non-performing loans of the UCB sector continued to be
on the higher side, RBI said, in its Trends and Progress report for
the banking sector in 2009-10.Along with a decline in
non-performing loans, there was also an increase in the coverage
ratio of UCBs as of end-March over the previous year, indicating
improvement in financial soundness. The provision coverage ratio
improved to 62.9 per cent at the end of 2009-10 from 59.9 a year
before.
Sydenham College of Comm. & Eco.
Page 27
Banking Structure
C]
All India financial institution
AIFIs With the progressive blurring of functions between banks
and financial institutions, the AIFIs are fast losing ground and
adopting the business model of a bank to remain viable in the long
run (Table 3.11). The merger of ICICI with ICICI bank on March 30,
2002 was the beginning of conversion of AIFIs into universal banks.
Taking into account the changing operating environment following
the initiation of economic reforms in the early1990s, the
Government decided to transform IDBI into a commercial bank without
eschewing its traditional development finance obligations. The
migration to the new business model of commercial banking, with its
access to low cost, current/saving bank deposits is expected to
enable it to overcome most of the limitations of the current model
of development finance and also to diversify its client/asset
base.
I.
NABARD
The National Bank for Agriculture and Rural Development (Nabard)
is seriously mulling a proposal to provide Credit Plus services
through the Farmers Clubs. Nabard regional office chief general
manager Venkatesh Tagat said North Karnataka offers ample scope for
construction of rural godowns and the banks should hold talks with
farmers and explore the possibility of godown construction
especially in the chilly growing belt. Addressing the farmers
during an interaction session organised at Neeralakatti village in
Dharwad taluk recently, he said refinance facility from Nabard
would be available for the purpose with subsidy of up to 25 per
cent of the project cost. Likewise, Nabard was also extending
subsidy for units producing organic manure. Villages covered 100
per cent under solar energy units, would get a special package from
Nabard, he revealed.
Sydenham College of Comm. & Eco.
Page 28
Banking Structure
II.
EXIM
Export-Import Bank of India is the premier export finance
institution of the country, set up in 1982 under the Export-Import
Bank of India Act 1981. Government of India launched the
institution with a mandate, not just to enhance exports from India,
but to integrate the countrys foreign trade and investment with the
overall economic growth. Since its inception, Exim Bank of India
has been both a catalyst and a key player in the promotion of cross
border trade and investment. Commencing operations as a purveyor of
export credit, like other Export Credit Agencies in the world, Exim
Bank of India has, over the period, evolved into an institution
that plays a major role in partnering Indian industries,
particularly the Small and Medium Enterprises, in their
globalisation efforts, through a wide range of products and
services offered at all stages of the business cycle, starting from
import of technology and export product development to export
production, export marketing, pre-shipment and post-shipment and
overseas investment.
III.
Small Industries Development Bank of India
It is an independent financial institution aimed to aid the
growth and development of micro, small and medium-scale enterprises
in India. Set up on April 2, 1990 through an act of parliament, it
was incorporated initially as a wholly owned subsidiary of
Industrial Development Bank of India. Current shareholding is
widely spread among various state-owned banks, insurance companies
and financial institutions. Beginning as a refinancing agency to
banks and state level financial institutions for their credit to
small industries, it has expanded its activities, including direct
credit to the SME through 100 branches in all major industrial
clusters in India. Besides, it has been playing the development
role in several ways such as support to micro-finance
institutionsSydenham College of Comm. & Eco.Page 29
Banking Structure
for capacity building and on lending. Recently it has opened
seven branches christened as Micro Finance branches, aimed
especially at dispensing loans up to Rs. 5.00 lakh. It is an apex
body and nodal agency for formulating, coordination and monitoring
the policies and programmed for promotion and development of small
scale industries. IV. Industries Development Bank of India
The Industrial Development Bank of India (IDBI) was established
on 1 July 1964 under an Act of Parliament as a wholly owned
subsidiary of the Reserve Bank of India. In 16 February 1976, the
ownership of IDBI was transferred to the Government of India and it
was made the principal financial institution for coordinating the
activities of institutions engaged in financing, promoting and
developing industry in the country. Although Government
shareholding in the Bank came down below 100% following IDBIs
public issue in July 1995, the former continues to be the major
shareholder (current shareholding: 65.14%). IDBI provides financial
assistance, both in rupee and foreign currencies, for green-field
projects as also for expansion, modernisation and diversification
purposes. In the wake of financial sector reforms unveiled by the
government since 1992, IDBI also provides indirect financial
assistance by way of refinancing of loans extended by State-level
financial institutions and banks and by way of rediscounting of
bills of exchange arising out of sale of indigenous machinery on
deferred payment terms. IDBIs transformation into a commercial bank
would provide a gateway to lowcost deposits like Current and
Savings Bank Deposits. This would have a positive impact on the
Banks overall cost of funds and facilitate lending atSydenham
College of Comm. & Eco.Page 30
Banking Structure
more competitive rates to its clients. The new entity would
offer various retail products, leveraging upon its existing
relationship with retail investors under its existing Suvidha
Flexi-bond schemes. The responsibility for maintaining standards of
corporate governance lies with its Board of Directors. Two
Committees of the Board viz. the Executive Committee and the Audit
Committee are adequately empowered to monitor implementation of
good corporate governance practices and making necessary
disclosures within the framework of legal provisions and banking
conventions.
Sydenham College of Comm. & Eco.
Page 31
Banking Structure
Mini-Case Study HDFC Bank Ltd.: A Leader in Making HDFC Bank was
incorporated in the year of 1994 by Housing Development Finance
Corporation Limited (HDFC), Indias premier housing finance company.
It was among the first companies to receive an in principle
approval from the Reserve Bank of India (RBI) to set up a bank in
the private sector. The Bank commenced its operations as a
Scheduled Commercial Bank in January 1995 with the help of RBIs
liberalization policies. In a milestone transaction in the Indian
banking industry, Times Bank Limited (promoted by Bennett, Coleman
& Co./Times Group) was merged with HDFC Bank Ltd., in 2000.
This was the first merger of two private banks in India. As per the
scheme of amalgamation approved by the shareholders of both banks
and the Reserve Bank of India, shareholders of Times Bank received
1 share of HDFC Bank for every 5.75 shares of Times Bank. In 2008
HDFC Bank acquired Centurian Bank and its total branches became
more than 1,000. The amalgamated bank emerged with a strong deposit
base of around Rs. 1,22,000 crore and net advances of around Rs.
89,000 crore. The amalgamation added significant value to HDFC Bank
in terms of increased branch network, geographic reach, and
customer base, and a bigger pool of skilled manpower.
Sydenham College of Comm. & Eco.
Page 32
Banking Structure
Business Focus HDFC Bank deals with three key business segments
Wholesale Banking Services, Retail Banking Services and Treasury.
It has entered the banking consortia of over 50 corporate for
providing working capital finance, trade services, corporate
finance and merchant banking. It is also providing sophisticated
product structures in areas of foreign exchange and derivatives,
money markets and debt trading and equity research. Wholesale
Banking Services The Banks target markets are large, blue-chip
manufacturing companies, small & mid-sized companies and
agro-based businesses. For these customers, the Bank provides a
wide range of commercial and transactional banking services,
including working capital finance, trade services, transactional
services, cash management, etc. The bank is also a leading provider
of structured solutions, which combine cash management services
with vendor and distributor finance for facilitating superior
supply chain management for its corporate customers. HDFC Bank has
made significant inroads into the banking consortia of a number of
leading Indian corporate including multinationals, companies from
the domestic business houses and prime public sector companies. It
is recognized as a leading provider of cash management and
transactional banking solutions to corporate customers, mutual
funds, stock exchange members and banks. Retail Banking Services
The objective of the Retail Bank is to provide its target market
customers a full range of financial products and banking services,
giving the customer a one-stop window for all his/her banking
requirements. The products are backed by world-class services and
delivered to customers through the growing branchSydenham College
of Comm. & Eco.Page 33
Banking Structure
network, as well as through alternative delivery channels like
ATMs, Phone Banking, Net Banking and Mobile Banking. HDFC Bank was
the first bank in India to launch an International Debit Card in
association with VISA (VISA Electron) and issues the Master card
and Maestro debit card as well. It launched its credit card
business in late 2001. By March 2009, the bank had a total card
base (debit and credit cards) of over 13 million. It is also one of
the leading players in the merchant acquiring business with over
70,000 Point-of-sale (POS) terminals for debit/credit cards
acceptance at merchant establishments. The Bank is well positioned
as a leader in various net based B2C opportunities including a wide
range of internet banking services for Fixed Deposits, Loans, Bill
Payments, etc. Treasury Within this business, the bank has three
main product areas - Foreign Exchange and Derivatives, Local
Currency Money Market & Debt Securities, and Equities. These
services are provided through the banks Treasury team. To comply
with statutory reserve requirements, the bank is required to hold
25% of its deposits in government securities. The Treasury business
is responsible for managing the returns and market risk on this
investment portfolio.
Sydenham College of Comm. & Eco.
Page 34
Banking Structure
Distribution Network HDFC Bank is headquartered in Mumbai. The
Bank has a network of 1,725 branches spread in 771 cities across
India. All branches are linked on an online real-time basis.
Customers in over 500 locations are also serviced through Telephone
Banking. The Bank has a presence in all major industrial and
commercial centers across the country. Being a clearing/settlement
bank to various leading stock exchanges, the Bank has branches in
the centers where the NSE/BSE has a strong and active member base.
The Bank also has 3,898 networked ATMs across these cities.
Moreover, HDFC Banks ATM network can be accessed by all domestic
and international Visa/MasterCard, Visa Electron/ Maestro,
Plus/Cirrus and American Express Credit/Charge cardholders.
Sydenham College of Comm. & Eco.
Page 35
Banking Structure
Comparison of Banking Structure in China and India A comparison
of China and India is both exciting and challenging, and should
ideally lead to a serious consideration of various policy
implications. In this context, our conference today marks the
beginning of a long journey. In my remarks, I will try to compare
the banking sectors in China and India, largely focusing on
structure and robustness as well as the effectiveness of the
banking supervisory systems. As far as the banking sector is
concerned, it may well be true that the two countries share many
attributes, particularly in terms of industry structure. First of
all, the two countries heavily depend on bank finance to support
economic growth, and capital markets are less developed. In China,
the total assets in the banking sector represent more than 90
percent of the assets in the financial sector. And in India, the
commercial banking sector represents about 74 percent of total
financial system assets. Nonbank financial institutions make up the
balance in India, of which 8.6 percent are term-lending
institutions and 15.4 percent are investment institutions. Some of
these institutions could be considered as banking institutions
according to the broader definition in China. Moreover, the
proportion of commercial banking sector financial assets in both
countries is likely to rise further. Another strikingly common
attribute of the banking system in the two economies is dominant
state ownership. This stands in stark contrast to other developing
economies and has strong implications for the conduct and
performance of the banking sector in general. In China, until very
recently, all major commercial banks except one or two were
controlled by the central and local governments, as are virtually
all small commercial banks. Chinas banking sector is relatively
concentrated. The four large banks, known as state-owned commercial
banks until the recent diversification of ownership, plus the Bank
of Communications (BOCom),
Sydenham College of Comm. & Eco.
Page 36
Banking Structure
also largely owned by the central government, account for nearly
two-thirds of commercial bank assets. The Indian banking system can
be characterized by a large number of banks with mixed ownership.
However, 27 public sector banksnamely, banks owned and controlled
by the statecontinue to dominate the Indian commercial banking
landscape. Together, these banks account for three quarters of the
market share. Even though these public sector banks have access to
capital markets, government policy is to ensure that its equity
interest does not, as a result of public issues by banks, go below
51 percent. As is the case with many developed and developing
countries, the efficiency of the state-owned banks has been a
concern for both the Chinese and Indian governments. And the Indian
government also openly admitted that public sector banks have been
consistently outperformed by private sector banks. The effort to
restructure the state-owned banks is still a work in progress in
the two countries. Both governments have continued to launch many
new initiatives to further promote progress in this area.
Sydenham College of Comm. & Eco.
Page 37
Banking Structure
INDIAN BANKING SCENARIO 2010 The last decade has seen many
positive developments in the Indian banking sector. The policy
makers, which comprise the Reserve Bank of India (RBI), Ministry of
Finance and related government and financial sector regulatory
entities, have made several notable efforts to improve regulation
in the sector. The sector now compares favorably with banking
sectors in the region on metrics like growth, profitability and
non-performing assets (NPAs). A few banks have established an
outstanding track record of innovation, growth and value creation.
This is reflected in their market valuation. However, improved
regulations, innovation, growth and value creation in the sector
remain limited to a small part of it. The cost of banking
intermediation in India is higher and bank penetration is far lower
than in other markets. Indias banking industry must strengthen
itself significantly if it has to support the modern and vibrant
economy which India aspires to be. Opportunities And Challenges For
Players The bar for what it means to be a successful player in the
sector has been raised. Four challenges must be addressed before
success can be achieved. First, the market is seeing discontinuous
growth driven by new products and services that include
opportunities in credit cards, consumer finance and wealth
management on the retail side, and in fee-based income and
investment banking on the wholesale banking side. These require new
skills in sales & marketing, credit and operations. Second,
banks will no longer enjoy windfall treasury gains that the
decade-long secular decline in interest rates provided. This will
expose the weaker banks. Third, with increased interest in India,
competition from foreign banks will only intensify. Fourth, given
the demographic shifts resulting from changes in age profile and
household income, consumers willSydenham College of Comm. &
Eco.Page 38
Banking Structure
increasingly demand enhanced institutional capabilities and
service levels from banks. FUTURE OF INDIAN BANKING MARKET The
Indian banking market is growing at an astonishing rate, with
assets expected to reach US$1 trillion by 2010. An expanding
economy, middle class, and technological innovations are all
contributing to this growth. A new Celent report, Overview of
Indian Banking Market, examines the impressive growth of this
industry, largely due to an expanding economy and growing consumer
middle class in need of financial services. India's economy is
growing at a rate of 8%, with banking assets increasing at a CAGR
of 24% from 2001 to 2008, from US$374.4 billion in 2003 to
US$616.15 billion in 2008. While public sector banks still dominate
Indias banking industry, the private sector is growing, with global
players now actively competing with domestic banks.
Sydenham College of Comm. & Eco.
Page 39
Banking Structure
CHANGES IN BANKING STRUCTURE
The opening up of the Indian banking sector to private players
acted as 'the tipping point' for this transformation. The
deregulatory efforts prompted many financial institutions (like
HDFC and ICICI) and non-financial institutions enter the banking
arena. With the entry of private players into retail banking and
with multi-nationals focusing on the individual consumer in a big
way, the banking system underwent a phenomenal change.
Multi-channel banking gained prominence. For the first time
consumers got the choice of conducting transactions either the
traditional way (through the bank branch), through ATMs, the
telephone or through the Net. Technology played a key role in
providing this multi-service platform. The entry of private players
combined with new RBI guidelines forced nationalized banks to
redefine their core banking strategy. And technology was central to
this change. Today banks have to look much beyond just providing a
multi-channel service platform for its customers. There are other
pressing issues that banks need to address in order to chalk-out
aroadmap for the future. Here are the top three concerns in the
mind of every bank's CEO.
Customer retention: Customer retention is one of the main
priorities for banks today. With the entry of new players and
multiple channels, customers have become more discerning and less
'loyal' to banks. Given the various options, it is now possible to
open a new account within minutes. Or for that matter shift
accounts within a couple of hours. This makes it imperative that
banks provide best levels of service to ensure customer
satisfaction.
Sydenham College of Comm. & Eco.
Page 40
Banking Structure
Cost pressures: Cost pressures come into play when banks are not
able to afford the cost of a certain service or initiative although
they want to or need to have it in place. This is primarily because
the cost structure at the backend is not efficient enough to offer
that kind of service to the marketplace.
Increased competition: The entry of new players into the banking
space is leading to increased competition. A recent example would
be of Kotak Mahindra Finance Limited (KMFL)a financial services
company focused on investment consulting, auto finance, insurance,
etc morphing into Kotak Bank. Many other such players are waiting
on the sidelines. Technology makes it easier for any company with
the right channel infrastructure and money reserves to get into
banking. This has been one of the major reasons behind this kind of
competition from players who do not have a banking background.
Kotak Bank overcame the initial costs of setting up its own ATM
network by getting into a sharing agreement with UTI bank. New
entrants with strategies such as these make the banking game
tough
Sydenham College of Comm. & Eco.
Page 41
Banking Structure
IMPACT OF CHANGE IN BANKING STRUCTURE ON ECONOMY Financial and
Banking reforms The last decade witnessed the maturity of India's
financial markets. Since 1991, every governments India took major
steps in reforming the financial sector of the country. The
important achievements the following fields are discussed under
separate heads: Financial Markets In the last decade, Private
Sector Institutions played an important role. They grew rapidly in
commercial banking and asset management business. With the openings
in the insurance sector for these institutions, they started making
debt in the market. Competition among financial intermediaries
gradually helped the interest rates to decline. Deregulation added
to it. The real interest rate was maintained. The borrowers did not
pay high price while depositors had incentives to save. It was
something between the nominal rate of interest and the expected
rate of inflation. Regulators The Finance Ministry continuously
formulated major policies in the field of financial sector of the
country. The Government accepted the important role of regulators.
The Reserve Bank of India (RBI) has become more independent.
Securities and Exchange Board of India (SEBI) and the Insurance
Regulatory and Development Authority (IRDA) became important
institutions. Opinions are also there that there should be a
super-regulator for the financial services sector instead of
multiplicity of regulators.
Sydenham College of Comm. & Eco.
Page 42
Banking Structure
Development Finance Institutions Financial institution's access
to SLR funds reduced. Now they have to approach the capital market
for debt and equity funds. Convertibility clause no longer
obligatory for assistance to corporate sanctioned by term-lending
institutions. Capital adequacy norms extended to financial
institutions. DFIs such as IDBI and ICICI have entered other
segments of financial services such as commercial banking, asset
management and insurance through separate ventures. The move to
universal banking has started. Non-banking finance companies In the
case of new NBFCs seeking registration with the RBI, the
requirement of minimum net owned funds, has been raised to Rs.2
crores. Until recently, the money market in India was narrow and
circumscribed by tight regulations over interest rates and
participants. The secondary market was underdeveloped and lacked
liquidity. Several measures have been initiated and include new
money market instruments, strengthening of existing instruments and
setting up of the Discount and Finance House of India (DFHI).The
RBI conducts its sales of dated securities and treasury bills
through its open market operations (OMO) window. Primary dealers
bid for these securities and also trade in them. The DFHI is the
principal agency for developing a secondary market for money market
instruments and Government of India treasury bills. The RBI has
introduced a liquidity adjustment facility (LAF) in which liquidity
is injected through reverse repo auctions and liquidity is sucked
out through repo auctions. On account of the substantial issue of
government debt, the gilt- edged market occupies an important
position in the financial set- up. The Securities Trading
Corporation of India (STCI), which started operations in June 1994,
has a mandate to develop the secondary market in government
securities. Long-term debt market. After bringing some order to the
equity market, the SEBI has nowSydenham College of Comm. &
Eco.Page 43
Banking Structure
decided to concentrate on the development of the debt market.
Stamp duty is being withdrawn at the time of dematerialization of
debt instruments in order to encourage paperless trading. The
Capital Market The number of shareholders in India is estimated at
25 million. However, only an estimated two lakh persons actively
trade in stocks. There has been a dramatic improvement in the
country's stock market trading infrastructure during the last few
years. Expectations are that India will bean attractive emerging
market with tremendous potential. Unfortunately, during recent
times the stock markets have been constrained by some unsavory
developments, which have led to retail investors deserting the
stock markets. Deregulation of Banking System Prudential norms were
introduced for income recognition, asset classification,
provisioning for delinquent loans and for capital adequacy. In
order to reach the stipulated capital adequacy norms, substantial
capital were provided by the Government to PSBs. Government
pre-emption of banks' resources through statutory liquidity ratio
(SLR) and cash reserve ratio (CRR) brought down in steps. Interest
rates on the deposits and lending sides almost entirely were
deregulated. New private sector banks allowed promoting and
encouraging competition. PSBs were encouraged to approach the
public for raising resources. Recovery of debts due to banks and
the Financial Institutions Act, 1993 was passed, and special
recovery tribunals set up to facilitate quicker recovery of loan
arrears. Bank lending norms liberalized and a loan system to ensure
better control over credit introduced. Banks asked to set up asset
liability management (ALM) systems. RBI guidelines issued for risk
management systems in banks encompassing credit, market and
operational risks. A credit
Sydenham College of Comm. & Eco.
Page 44
Banking Structure
information bureau being established to identify bad risks.
Derivative products such as forward rate agreements (FRAs) and
interest rate swaps (IRSs) introduced. Capital Market Developments
The Capital Issues (Control) Act, 1947, repealed, office of the
Controller of Capital Issues was abolished and the initial share
pricing were decontrolled. SEBI, the capital market regulator was
established in 1992. Foreign institutional investors (FIIs) were
allowed to invest in Indian capital markets after registration with
the SEBI. Indian companies were permitted to access international
capital markets through euro issues. The National Stock Exchange
(NSE), with nationwide stock trading and electronic display,
clearing and settlement facilities was established. Several local
stock exchanges changed over from floor based trading to screen
based trading. Private Mutual Funds Permitted The Depositories Act
had given a legal framework for the establishment of depositories
to record ownership deals in book entry form. Dematerialization of
stocks encouraged paperless trading. Companies were required to
disclose all material facts and specific risk factors associated
with their projects while making public issues. To reduce the cost
of issue, underwriting by the issuer were made optional, subject to
conditions. The practice of making preferential allotment of shares
at prices unrelated to the prevailing market prices stopped and
fresh guidelines were issued by SEBI. SEBI reconstituted governing
boards of the stock exchanges, introduced capital adequacy norms
for brokers, and made rules for making client or broker
relationship more transparent which included separation of client
and broker accounts.
Sydenham College of Comm. & Eco.
Page 45
Banking Structure
Buy Back Of Shares Allowed The SEBI started insisting on greater
corporate disclosures. Steps were taken to improve corporate
governance based on the report of a committee SEBI issued detailed
employee stock option scheme and employee stock purchase scheme for
listed companies. Standard denomination for equity shares of Rs. 10
and Rs. 100 were abolished. Companies given the freedom to issue
dematerialized shares in any denomination. Derivatives trading
starts with index options and futures. A system of rolling
settlements introduced. SEBI empowered to register and regulate
venture capital funds. The SEBI (Credit Rating Agencies)
Regulations, 1999 issued for regulating new credit rating agencies
as well as introducing a code of conduct for all credit rating
agencies operating in India.
Sydenham College of Comm. & Eco.
Page 46
Banking Structure
CONCLUSIONS AND SUGGESTIONS 1. The Indian banking can be broadly
categorized into nationalized (government owned), private banks and
specialized banking institutions. The Reserve Bank of India is the
apex institution in the Indian banking system & acts a
regulator and a centralized body for monitoring any discrepancies
and shortcoming in the system. 2. Before Nationalisation, banks in
the beginning faced severs financial crisis. During and after World
War I, 87 banks were liquidated. Development of banks in India was
characterized by bank failures. After Independence, the Indian
banking underwent a thorough and moral change. The government of
India announced Banking Regulations Act in 1949 to consolidate and
regulate the banking growth in India 3. After Nationalisation,
however, growth of banking during the first 3 plan periods
resembles that of capitalist growth. There was need for stimulating
the savings and investment to meet the growing demand for bank
credit for economic development. Therefore government focused on
social banking than capitalistic banking. Hence, in February 1961,
announcement of 14 banks was made for the purpose of
nationalisation. Since then, the performance of banking has been
remarkable in the many aspects such as branch expansion, expansion
of business, priority sector advances, development and spread of
banking. 4. Currently, banking system has entered into the third
phase of development which is characterized by innovation &
diversification in order to meet new challenges. New services have
been started such as merchant banking, investment banking, housing
finance, investment banking, internet banking, telebanking, branch
banking, electronic money transfers, SMS banking, mobile banking,
proxy banking, plastic money such as credit cards, ATM cards, debit
cards, smart cards, etc.Sydenham College of Comm. & Eco.Page
47
Banking Structure
5. Banks have indulged in activities such as service area
approach, mutual funds, housing finance, factoring services,
commercial papers, certificate of deposit, stock invest and other
money and capital market instruments. 6. The unleashing of products
and services through the net has galvanized players at all levels
of the banking and financial institutions market grid to look anew
at their existing portfolio offering. Banks have been benefited a
lot with the internet and information technology. As a result banks
have become more efficient and cost-effective. Indian nationalized
banks continue to be the major lenders in the economy due to their
sheer size and penetrative networks which assures them high deposit
mobilization. However there is a need to create more awareness
regarding social development. There is need for taking decisive
actions . 7. Industry estimates indicate that out of 274 commercial
banks operating in India, 223 banks are in the public sector &
51 are in the private sector. The private sector bank grid also
includes 24 foreign banks. 8. Indian banking market is growing at
an astonishing rate, with assets expected to reach US$1 trillion by
2010. The Indian banking industry is in the middle of an IT
revolution, focusing on the expansion of retail and rural banking.
Players are becoming increasingly customer-centric in their
approach, which has resulted in innovative methods of offering new
banking products & services. Banks are now realizing the
importance of being a big player & are beginning to focus their
attention on mergers & acquisitions to take advantage of
economies of scale.
Sydenham College of Comm. & Eco.
Page 48
Banking Structure
BIBLIOGRAPHY
There was immense need and flow of the information while
preparing the project report which was gathered through various
sources mentioned below:
Websites:
www.rbi.org.in www.business-standard.com
www.finance.indiamart.com www.thehindubusinessline.com
www.google.com www.wikipedia.com www.banknetindia.com
www.bankingindiaupdate.com
Newspapers: The Economic Times
Sydenham College of Comm. & Eco.
Page 49