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A PROJECT REPORT ON
BANKING STRUCTURE
Submitted by
NACHIKET SHILOTRI
Roll NO: 39
In partial fulfilment for award of the degree
Of
BACHELOR OF COMMERCE
In
BANKING & INSURANCE
SEMESTER V (2014-2015)
Under guidance of
KRISHNAN SIR
SREE NARAYANA GURU COLLEGE OF COMMERCE
Re-accredited by NAAC Grade B (CGPA: 2.73)
P.L Lokhande Marg, Chembur, Mumbai-400089
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CERTIFICATE
This is to certify that MR. Nachiket .M. Shilotri of Bachelor of Commerce in Banking &
Insurance Semester V (2014-2015) has successfully completed the project on BANKINGSTRUCTURE under the guidance of Mr KRISHNAN
________________________ ______________________
Course Co-ordinator Principal
Name & Signature Name &Signature
__________________ _____________________
Project Guide External Examiner
Name & Signature Name & Signature
____________________
College Seal
Name& signature
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DECLARATION
I, Nachiket Shilotri studying in T.Y.B .B.I hereby declare that I have
done a project on Banking structure . As required by the university rules, I
state that the work presented in this project is original in nature and to the best
my knowledge.
Place: Mumbai Nachiket Shilotri
Date:
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PREFACE
The project has been prepared not only because it involves marks and is
the requirement of the university but I understand the underlying intention
of the board which definitely imparts priceless knowledge and I believe
that practical exposure is equally important for every student.
I firmly decided to prepare my project on banking structure as I eager toknow the meaning both theoretical as well as practical. I have chosen this
topic because to be honest I love doing projects related to the technology.
There is nothing more that excites me than good execution done through an
electronic medium and hence I choose this topic.
I have put my sincere efforts in the project and hope I have done a decent
job to portray that technology has proven to be a boon to banking
Place: Mumbai Nachiket
Shilotri Date:
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ACKNOWLEDGEMENT
The present research work cannot see the light of the day unless it isblessed by the begin assistance of eminent person. The help and co-
ordination that I have received from various quarters of in bringing this
work to completion makes me feel deeply indebted. This is not a work of
individual but a number of persons who helped me directly or indirectly in
this journey. So, I wish to express great fullness to all those who have
helped & assisted me in bringing the final shape of this report.
First of all, I wish to express my deep sense of gratitude to our Supervisor
Prof Mr. Krishnan Sir for his guidance and moral support all along the
period of my study in the institute.
I am deeply indebted to my project guide Prof Mr. Krishnan Sir for his
kind advice, encouragement, support & proper guidance. During the
course of preparation of this project, I got tremendous support in
mastering fact & figures from her. Really she had been a great source of
information during the period of study.
Last but not the least I wish to express my deep sense of gratitude to all
those who were knowingly or unknowingly with me during the project
tenure.
Signature of the student
NACHIKET SHILOTRI
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INTRODUCTION
India has a well developed Banking system. The banking industry originated in India in the18 th century and since then it has undergone significant number of changes. The commercial
banking industry in India over the past few decades has been revolutionized by a number of
factors such as independence, nationalization, deregulation, rise of the Internet, etc. The
commercial banking structure in India consists of Scheduled Banks and Unscheduled Banks.
In the past the banks did not find any attraction in the Indian economy because of the low
level of economic activities and little business prospects. Today we find positive changes in
the National business development policy. Earlier, the money lenders had a strong hold over
the rural population which resulted in exploitation of small and marginal savers. The private
sector banks failed in serving the society. This resulted in the nationalization of 14
commercial banks in 1969. Nationalization of commercial banks paved ways for the
development of Indian economy and channelized financial resources for the upliftment of
weaker sections of the society. The passage of financial modernization legislation by
Congress in 1999 removed barriers, allowing banks to expand product offerings, while the
potential of the Internet as a sales, marketing and delivery tool, widened the avenues to selland 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, banking industry in India is generally fairly mature in terms of supply, product
range and reach-even though reaches in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is
to manage volatility but without any fixed exchange rate-and this has mostly been true.
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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 Narasimhan 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 centres bringing down the population per bank branch to 12000
approx. During 1976, RRBs were established. 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 Narasimhan Committee on Reforms in Financial Services
Sector during 1991.
In these five decades since independence, banking in India has evolved through four distinct
phases:
FOUNDATION PHASE
Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks
in 1969. The focus during this period was to lay the foundation for a sound banking system in
the country. As a result the phase witnessed the development of necessary legislative
framework for facilitating re-organization and consolidation of the banking system, for
meeting the requirement of Indian economy. A major development was transformation of
Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969.
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EXPANSION PHASE
Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks
and continued till 1984. A determined effort was made to make banking facilities available to
the masses. Branch network of the banks was widened at a very fast pace covering the rural
and semi-urban population, which had no access to banking hitherto. Most importantly, credit
flows were guided towards the priority sectors. However this weakened the lines of
supervision and affected the quality of assets of banks and pressurized their profitability and
brought competitive efficiency of the system at low ebb.
CONSOLIDATION PHASE
The phase started in 1985 when a series of policy initiatives were taken by RBI which saw
marked slowdown in the branch expansion. Attention was paid to improving house-keeping,
customer service, credit management, staff productivity and profitability of banks. Measures
were also taken to reduce the structural constraints that obstructed the growth of money
market.
REFORMS PHASE
The macro-economic crisis faced by the country in 1991 paved the way for extensive
financial sector reforms which brought deregulation of interest rates, more competition,
technological changes, prudential guidelines on asset classification and income recognition,
capital adequacy, autonomy packages etc.
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OBJECTIVES OF THE STUDY
The objectives of project are as follows:
To find out the earlier banking structure that prevailed in India.
To assess the various factors that lead to the change in the Indian banking structure
To assess the impact of all these factors on the banking structure.
To assess the change in the performance and efficiency of the banks in India.
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 assess the impact of information technology on the banking sector.
To study how new distribution channels such as Internet Banking, ATM facility, Phone
Banking have changed the face of the Banking industry.
To draw conclusions of the impact of the changes in banking sector.
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RESEARCH METHODOLOGY
Secondary data is the data which is collected for some other purpose.
The data used for preparing the project report was secondary data. It was collected from
various websites, newspapers and books.
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FUNCTIONS OF A BANK
The main functions of commercial banks are accepting deposits from the public andadvancing them loans.
However, besides these functions there are many other functions which these banks perform.All these functions can be divided under the following heads:
1. Accepting deposits
2. Giving loans
3. Overdraft
4. Discounting of Bills of Exchange
5. Investment of Funds
6. Agency Functions
7. Miscellaneous Functions
1. Accepting Deposits:
The most important function of commercial banks is to accept deposits from the public.Various sections of society, according to their needs and economic condition, deposit theirsavings with the banks.
For example, fixed and low income group people deposit their savings in small amounts fromthe points of view of security, income and saving promotion. On the other hand, traders and
businessmen deposit their savings in the banks for the convenience of payment.
Therefore, keeping the needs and interests of various sections of society, banks formulatevarious deposit schemes. Generally, their are three types of deposits which are as follows:
Current Deposits:
The depositors of such deposits can withdraw and deposit money whenever they desire. Since banks have to keep the deposited amount of such accounts in cash always, they carry eitherno interest or very low rate of interest. These deposits are called as Demand Deposits becausethese can be demanded or withdrawn by the depositors at any time they want.
Such deposit accounts are highly useful for traders and big business firms because they have
to make payments and accept payments many times in a day.
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6. Agency Functions:
Banks function in the form of agents and representatives of their customers. Customers givetheir consent for performing such functions. The important functions of these types are asfollows:
(i) Banks collect cheques, drafts, bills of exchange and dividends of the shares for theircustomers.
(ii) Banks make payment for their clients and at times accept the bills of exchange: of theircustomers for which payment is made at the fixed time.
(iii) Banks pay insurance premium of their customers. Besides this, they also deposit loaninstalments, income-tax, interest etc. as per directions.
(iv) Banks purchase and sell securities, shares and debentures on behalf of their customers.
(v) Banks arrange to send money from one place to another for the convenience of theircustomers.
7. Miscellaneous Functions:
Besides the functions mentioned above, banks perform many other functions of generalutility which are as follows:
(i) Banks make arrangement of lockers for the safe custody of valuable assets of theircustomers such as gold, silver, legal documents etc.
(ii) Banks give reference for their customers.
(iii) Banks collect necessary and useful statistics relating to trade and industry.
(iv) For facilitating foreign trade, banks undertake to sell and purchase foreign exchange.
(v) Banks advise their clients relating to investment decisions as specialist
(vi) Bank does the under-writing of shares and debentures also.
(vii) Banks issue letters of credit.
(viii) During natural calamities, banks are highly useful in mobilizing funds and donations.
(ix) Banks provide loans for consumer durables like Car, Air-conditioner, and Fridge etc.
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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.
http://en.wikipedia.org/wiki/18th_centuryhttp://en.wikipedia.org/wiki/1786http://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/1806http://en.wikipedia.org/wiki/Credit_Lyonnaishttp://en.wikipedia.org/wiki/Kolkatahttp://en.wikipedia.org/wiki/1850http://en.wikipedia.org/wiki/Allahabad_Bankhttp://en.wikipedia.org/wiki/1865http://en.wikipedia.org/wiki/1900http://en.wikipedia.org/wiki/Punjab_National_Bankhttp://en.wikipedia.org/wiki/Bank_of_Indiahttp://en.wikipedia.org/wiki/1906http://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/1935http://en.wikipedia.org/wiki/1947http://en.wikipedia.org/wiki/Indian_rebellion_of_1857http://en.wikipedia.org/wiki/Bank_of_Bombayhttp://en.wikipedia.org/wiki/Bank_of_Bengalhttp://en.wikipedia.org/wiki/Bank_of_Madrashttp://en.wikipedia.org/wiki/Bank_of_Madrashttp://en.wikipedia.org/wiki/Imperial_Bank_of_Indiahttp://en.wikipedia.org/wiki/Imperial_Bank_of_Indiahttp://en.wikipedia.org/wiki/Bank_of_Madrashttp://en.wikipedia.org/wiki/Bank_of_Madrashttp://en.wikipedia.org/wiki/Bank_of_Bengalhttp://en.wikipedia.org/wiki/Bank_of_Bombayhttp://en.wikipedia.org/wiki/Indian_rebellion_of_1857http://en.wikipedia.org/wiki/1947http://en.wikipedia.org/wiki/1935http://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/1906http://en.wikipedia.org/wiki/Bank_of_Indiahttp://en.wikipedia.org/wiki/Punjab_National_Bankhttp://en.wikipedia.org/wiki/1900http://en.wikipedia.org/wiki/1865http://en.wikipedia.org/wiki/Allahabad_Bankhttp://en.wikipedia.org/wiki/1850http://en.wikipedia.org/wiki/Kolkatahttp://en.wikipedia.org/wiki/Credit_Lyonnaishttp://en.wikipedia.org/wiki/1806http://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/1786http://en.wikipedia.org/wiki/18th_century8/10/2019 Banking Structure 100 Marks New
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RESERVE BANK OF INDIA
The central bank of the country is the Reserve Bank of India (RBI). It was established in
April 1935 under the RBI Act, 1934 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission. The share capital was divided into
5,00,000 shares of Rs. 100 each fully paid which was entirely owned by private shareholders
in the beginning. The Government held shares of nominal value of Rs. 2,20,000.
Reserve Bank of India was nationalised in the year 1949. The general superintendence and
direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor
and four Deputy Governors, one Government official from the Ministry of Finance, ten
nominated Directors by the Government to give representation to important elements in the
economic life of the country, and four nominated Directors by the Central Government to
represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New
Delhi. Local Boards consist of five members each Central Government appointed for a term
of four years to represent territorial and economic interests and the interests of co-operative
and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The RBI Act, 1934
provides the statutory basis of the functioning of the Bank. It is so called as it maintains cash
reserves of all the commercial banks in India with itself. It is also referred to as Central Bank.
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Objectives of constituting the Reserve Bank of India:
To regulate the issue of bank notes.
To maintain reserves with a view to securing monetary stability.
To operate the credit and currency system of the country to its advantage.
To act as a regulator and supervisor of the financial system
Management of foreign exchange control
Banker to the Government because it performs merchant banking function for the
central and the state governments; also acts as their banker.
Development of banks.
Supervision and licensing of banks.
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1. Bank of Issue :The Reserve Bank of India enjoys the monopoly of note issue. The Reserve Bank is
authorized to issue currency notes of Rs. 2, 5, 10, 20, 50, 100, 500 and 1000. The one
rupee note is issued by the Government of India. RBI has the issue department whichis entirely responsible for the issue of coins and notes. The RBI required to follows
certain principles in order to prevent misuse of issuing of notes. Against the issue of
notes the RBI is required to maintain gold and foreign exchange reserve of Rs. 200
Crores, Rs. 115 Crores gold and the remaining Rs. 85 Crores in foreign securities.
Monopoly power of note issue with the Reverse Bank of India has a number of
advantages which are as follows:
(a) Uniformity: As all notes in India are issued by the RBI, there is uniformity in note issue,widely accepted and the people of the country have full faith in the currency.
(b) Effective Control: The RBI has on effective control on commercial banks that create
deposits in the process of advancing loans to its customers.
(c) Supervision of Control: The RBI maintains a proper supervision and control over the
supply of money in the economy.
2. Bankers Bank and Lender of the Last Resort: As the bankers bank, the RBI performs the same functions as performed by
commercial bank for their customers. On behalf of the Government the RBI receives
the cheques, draft and deposit of cash etc. For the payment of salaries and wages it
provide cash to the government. It also buys and sells foreign currencies. Every
scheduled bank, according to the RBI, Act, 1934, was required to maintain with the
Reserve Bank a Cash balance equivalent to 5 percent of its demand liabilities and 2 percent of its time liabilities in India. The demand and time liabilities was abolished
by an amendment of 1962, and now the bank require cash reserves equal to 3 percent
of their aggregate deposit liabilities with the RBI. The RBI at any time can change the
minimum cash reserve. As the word say lender of the last resort it simply means that
the RBI provides all financial assistance whether directly or indirectly to commercial
bank at the time of financial crises through loans, advances and discounting of
approved securities.
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3. Fiscal Agent and Advisor to the Government:On behalf of the Government the RBI issues new loans, receives subscriptions and
pays interest on them and at last repay these loans. As the financial advisor, the RBI
advises the government on all monetary and banking matter like floating of loans, onindustrial and agricultural finance, control of inflation or deflation, budgetary policy,
financial aspects of planning, etc.
4. Controller of Credit: RBI is the controller of credit. For the smooth functioning of the economy, the supply
of credit must be regulated and controlled, the RBI can do so through changing, the
bank rate or through open market operations. According to the Banking Regulation
act of 1949, the RBI can ask any particulars bank or the whole banking system not tolend to particular groups of persons or on the basis of certain type of securities.
5. Custodian of Nations Foreign Exchange Reserve: The custodian of nations foreign exchange reserve is one of the most important
functions of the RBI. The RBI controls both the receipts and payment of foreign
exchange, and in the regard it tries to maintain stability of the exchange rate. This can
be possible only when it buys or sell foreign currencies in the market.After India
became a member of the international monetary fund, the RBI has the responsibilityof maintaining fixed exchange rates with all other member countries of the IMF.
6. Clearing house for Transfer and Settlement: Reserve Bank provides clearing house facilities to the member banks. The customers
of various bank issue cheques drawn on their bank. So the need arises regarding the
settlement claims of the commercial bank on each other. It is very easy to settle
claims between them by making transfer entries in their account because the
commercial bank keeps their cash reserve with the RBI. So it is simple, economicaland time saving device for settling the claims of commercial bank on each other.
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7. Promotional Functions: With economic growth assuming a new urgency since independence, The Reverse
Bank of India not only performs the traditional function explained in point 1 to 6
above, but it also performs various development and promotional functions with wereconsidered as outside the scope of RBI at one time. For developing and promoting a
strong banking system the responsibility is on the hand of RBI, and in this regard it
provides cheap and liberal rediscounting facilities and also gives various types of
concessions to commercial banks from time to time. The Reserve bank has helped in
the setting up of the IFCI and the SFC to provide various funds for the development
of agriculture, industry and service sector of the economy.
8. Supervisory Functions: Now the supervision is in the hand of the RBI, to see whether the commercial banks
are performing better or not for the development of the economy. The Banking
Regulation Act 1949, have given wide power to RBI regarding proper control and
supervision over commercial banks regarding licensing and establishment, expansion
of branch, liquidity of their assets, management and method of working of
commercial banks .
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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 underthe Second Schedule of the Reserve Bank of India Act, 1934. The selection measure for
listing a bank under the Second Schedule was provided in section 42 (60 of the Reserve Bank
of India Act, 1934.
Commercial bank is the term used for a normal bank to distinguish it from an
investment bank or retail bank. It can also refer to a bank or a division of a bank that
mostly deals with deposits and loans from corporations or large businesses, as opposed to
normal individual members of the public (retail banking).
Activities of Commercial Banks
The modern Commercial Banks in India cater to the financial needs of different sectors. The
main functions of the commercial banks comprise:
transfer of funds
acceptance of deposits
offering those deposits as loans for the establishment of industries purchase of houses,
equipments, capital investment purposes etc.
The banks are allowed to act as trustees. On account of the knowledge of the financial market
of India the financial companies are attracted towards them to act as trustees to take the
responsibility of the security for the financial instrument like a debenture. The Indian
Government presently hires the commercial banks for various purposes like tax collection
and refunds, payment of pensions etc.
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Functions of Commercial Banks
The functions of a commercial banks are divided into two catego ri es :
i) Prim ary fun ctions, and
ii) Second ary fun ctions including agency fu nctions.
i) Primary functions:
The pri mary fun ctions of a commercial bank include:
a) Accepting deposits; and
b) Gr anti ng loans and advances;
i i ) Secondary function
Be sides the primary functions of a accepting deposits and lending money, banks perform a
number of other function which are called secondary functions. These are as follows-
Issuing letter of credit, traveller cheques, circular notes etc.
Undertaking safe custody of valuables, important documents and securities by
providing safe 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
SBI & Associates:
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
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Public Sector Banks
Among the Public Sector Banks in India, United Bank of India is one of the 14 major bankswhich were nationalised on July 19, 1969. Its predecessor, in the Public Sector Banks, the
United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz.
Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union
Bank Ltd. (1922) and Hooghly Bank Ltd. (1932).
Oriental Bank of Commerce (OBC), a Government of India Undertaking offers Domestic,
NRI and Commercial banking services. OBC is implementing a GRAMEEN PROJECT in
Dehradun District (UP) and Hanumangarh District (Rajasthan) disbursing small loans. This
Public Sector Bank India has implemented 14 point action plan for strengthening of credit
delivery to women and has designated 5 branches as specialized branches for women
entrepreneurs.
The following are the list of some of the Public Sector Banks in India
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharastra
Canara Bank
Corporation Bank
Dena Bank
Indian Bank
Punjab National Bank
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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. Itis one of the fastest growing Private Sector Banks in India. IDBI ranks the tenth largest
Development bank in the world as Private Banks in India and has promoted a world class
institutions in India. The first Private Bank in India to receive an in principle approval from
the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up
a bank in the private sector banks in India as part of the RBI's liberalisation of the Indian
Banking Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered
office in Mumbai and commenced operations as Scheduled Commercial Bank in January1995. ING Vysya, yet another Private Bank of India was incorporated in the year 1930.
Bangalore has a pride of place for having the first branch inception in the year 1934. With
successive years of patronage and constantly setting new standards in banking, ING Vysya
Bank has many credits to its account. List of Private Banks in India
Bank of Punjab
Bank of Rajasthan
Centurion Bank
HDFC Bank
ICICI Bank
Jammu & Kashmir Bank
Karnataka Bank
UTI Bank
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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 th e Reserve Bank of India (RBI) toset 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.
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.
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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, tradeservices, 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 exchangemembers and banks.
Retail Banking Services
The objective of the Retail Bank is to provide its target market customers a full range of
financial products and banking services, giving the customer a one-stop window for all
his/her banking requirements. The products are backed by world-class services and delivered
to customers through the growing branch network, as well as through alternative delivery
channels like ATMs, Phone Banking, Net Banking and Mobile Banking.
HDFC Bank was the first bank in India to launch an International Debit Card in association
with VISA (VISA Electron) and issues the Master card and Maestro debit card as well. It
launched its credit card business in late 2001. By March 2009, the bank had a total card base
(debit and credit cards) of over 13 million. It is also one of the leading players in the
merchant acquiring business with over 70,000 Point -of-sale (POS) terminals for
debit/credit cards acceptance at merchant establishments. The Bank is well positioned as a
leader in various net based B2C opportunities including a wide range of internet banking
services for Fixed Deposits, Loans, Bill Payments, etc.
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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 reserverequirements, the bank is required to hold 25% of its deposits in government securities. The
Treasury business is responsible for managing the returns and market risk on this investment
portfolio.
Distribution Network
HDFC Bank is headquartered in Mumbai. The Bank has a network of 1,725 branches spread
in 771 cities across India. All branches are linked on an online real-time basis. Customers in
over 500 locations are also serviced through Telephone Banking. The Bank has a presence in
all major industrial and commercial centres across the country. Being a clearing/settlement
bank to various leading stock exchanges, the Bank has branches in the centres where the
NSE/BSE has a strong and active member base.
The Bank also h as 3,898 networked ATMs across these cities. Moreover, HDFC Banks
ATM network can be accessed by all domestic and international Visa/MasterCard, Visa
Electron/ Maestro, Plus/Cirrus and American Express Credit/Charge cardholders.
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Regional Rural Banks
Rural banking in India started since the establishment of banking sector in India. Rural Banks
in those days mainly focused upon the agro sector. Regional rural banks in India penetrated
every corner of the country and extended a helping hand in the growth process of the country.
There are 197 RRBs in India. SBI has 30 Regional Rural Ba nks in India known as RRBs.
The rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and
Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India
branches is 2349 (16%). Till date in rural banking in India, there are 14,475 rural banks in the
country of which 2126 (91%) are located in remote rural areas.
Apart from SBI, there are other few banks which functions for the development of the rural
areas in India. Few of them are as follows:
National Bank for Agriculture and Rural Development (NABARD)
United Bank of India
Syndicate Bank
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central government and state governments. They constitute the "most favoured" banking
sector with risk of nationalisation. For commercial banks, the Reserve Bank of India is lender
of last resort, but co-operative banks it is the lender of first resort which provides financial
resources in the form of contribution to the initial capital (through state government),
working capital, refinance. Co-operative Banks belong to the money market as well as to the
capital market. Primary agricultural credit societies provide short term and medium term
loans. Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also
provide both short term and term loans. Co-operative banks are financial intermediaries only
partially. The sources of their funds (resources) are
central and state government,
the Reserve Bank of India and NABARD,
other co-operative institutions,
ownership funds and,
deposits or debenture issues.
It is interesting to note that intra- sectoral flows of funds are much greater in co-operative
banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a
significant part of assets and liabilities of co-operative banks. This means that intra-sectoral
competition is absent and intra-sectoral integration is high for co- operative bank.
Some co-operative bank is scheduled banks, while others are non-scheduled banks. For
instance, SCBs and some UCBs are scheduled banks but other co-operative banks are non-
scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over
Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act. Co-
operative Banks are subject to CRR and liquidity requirements as other scheduled and non-
scheduled banks are. However, their requirements are less than commercial banks.
Since 1966 the lending and deposit rate of commercial banks have been directly regulated
by the Reserve Bank of India. Although the Reserve Bank of India had power to regulate the
rate co-operative bank but this have been exercised only after 1979 in respect of non-
agricultural advances they were free to charge any rates at their discretion. Although the main
aim of the co-operative bank is to provide cheaper credit to their members and not to
maximize profits, they may access the money market to improve their income so as to remain
viable.
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Cooperative banks in India financing rural areas under:
Farming
Cattle
Milk
Hatchery
Personal finance
Cooperative banks in India finance urban areas under:
Self-employment
Industries
Small scale units
Home finance
Consumer finance
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State Co-operative Banks:
State Co-operative Banks are the apex of the three-tier
Co-operative structure dispensing mainly short/medium term credit. It is the principal society
in a State which is registered or deemed to be registered under the Government Societies Act,
1912, or any other law for the time being in force in India relating to co-operative societies
and the primary object of which is the financing of the other societies in the State which are
registered or deemed to be registered. The State Co-operative Banks receive current and fixed
deposits from its constituent banks as well as savings, current and fixed deposits from the
general public and from local boards, other local authorities, etc. Further, they receive loans
from the RBI and NABARD. NABARD is the supervisory authority for State Co-operative
Banks. The state government contributes the certain portion of their working capital. The
principal function of State Co-operative Banks is to assist the Central Co-operative Banks
and to balance excesses and deficiencies in the resources of Central Co-operative Banks. It
also acts as the balancing centre for Central Co -operative Banks in the sense that surplus
fund of some of these banks are made available to other needy banks. It also serves the link
between RBI and the Central Co-operative Banks and Primary Agriculture Credit Societies.
But the connection between the State Co-operative Banks and Primary Co-operative Societies
is not direct. The Central Co-operative Banks are acting as intermediaries between the State
Co-operative Banks and Primary societies.
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Central Co-operative Banks
Central Co-operative Banks form the middle tier of Co-
Operative credit institutions. These are the independent units in as much as the State Co-
operative Banks have control to control or supervise their affairs. They are of two kinds i.e.
pure and mixed. Those banks are the membership of which is confined to co -operative
organizations only are included in pure type, while those banks the membership of which is
open to co-operative organizations as well as to the indiv iduals are included in mixed type.
The pure type of Central Banks can be seen in Kerala, Bombay, Orissa, etc., while the mixed
type can be seen in Andhra Pradesh, Assam, Tamil Nadu, etc. The pure type of banks is
based on strict co-operative principles. However, the mixed type has an advantage over the
pure type in so far as they can draw their funds from the non-agricultural sector too.
The Central Co-operative Banks draw their funds from share capital, deposits,
loans from the State C-operative Banks and where State Banks do not exist from the RBI,
NABARD and commercial banks. NABARD is the supervisory authority for Central Co-
operative Banks. Deposits constitute the major component of sources of funds, followed by
borrowings. The main function of Central Co-operative Banks is to finance the primary credit
societies. In addition they carry on Commercial banking activities like acceptance of deposits,
granting of loans and advances on the security of first class guilt-edged securities, fixed
deposit receipts, gold, bullion, goods and documents of title to goods, collection of bills,
cheques, etc., safe custody of valuables and agency services. They are expected to attract
deposits from the general public. They also act as balancing centres, making av ailable
access funds of one primary to another which is in need of them.
The central co-operative banks are located at the district headquarters or some
prominent town of the district. These banks have a few private individuals also who provide
both finance and management. The central co-operative banks have three sources of funds,
Their own share capital and reserves
Deposits from the public and
Loans from the state co-operative banks
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Primary Agriculture Credit Societies:
Primary Agricultural Credit Societies is the foundation
of the co-operative credit system on which the superstructure of the short-term co-operative
credit system rests. It deals directly with individual farmers, provide short and medium term
credit, supply agricultural inputs, distribute consume articles and also arrange for the
marketing of products of its members through a c-operative marketing societies. These
societies form the basic unit of co-operative credit system in India. These voluntary societies
based on principle of one man one vote have 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 depends largely on the
strength of these village level societies.
The major objective of Primary agricultural Credit Societies is to serve the
need of weaker sections of these society. For this purpose, the people with limited means,
particularly with schedules castes and scheduled tribes, are encouraged to become members
of these societies. So, they must function effectively as well-managed and multi-purpose
institutions mobilizing the savings of the rural people and providing the package of services
including credit, supply of agricultural inputs and implements, consumer goods, marketing
services and technical guidance with focus on weaker sections. Government has promoted
multi-purpose societies in tribal areas for the benefit of people living there.
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INDIAN BANKING SCENARIO 2010
The last decade has seen many positive developments in the Indian banking sector. The
policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and
related government and financial sector regulatory entities, have made several notable efforts
to improve regulation in the sector. The sector now compares favourably 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 retailside, and in fee-based income and investment banking on the wholesale banking side. These
require new skills in sales & marketing, credit and operations. Second, banks will no longer
enjoy windfall treasury gains that the decade-long secular decline in interest rates provided.
This will expose the weaker banks. Third, with increased interest in India, competition from
foreign banks will only intensify. Fourth, given the demographic shifts resulting from
changes in age profile and household income, consumers will increasingly demand enhanced
institutional capabilities and service levels from banks.
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CHANGES IN BANKING STRUCTURE
The opening up of the Indian banking sector to private players acted as 'the
tipping point' for this transformation. The deregulatory efforts prompted many financialinstitutions (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 RBIguidelines 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 issu es that banks need to address in order
to chalk-out a road map 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
playe rs an d mu ltiple ch an nel s, cust omers hav e become mo re disce rni ng and le ss
'loyal' to banks. Given the various options, it is now possible to open a new
account within minutes. Or for that matter shift accounts within a couple of hours. This
makes it imperative that banks provide best levels of service to ensure customer satisfaction.
Cost pressures:Cost pressures come into play when banks are not able to afford the cost of a certain service
or initiative although they want to or need to have it in place. This is primarily because the
cost structure at the backend is not efficient enough to offer that kind of service to the
marketplace.
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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
in f ra s t ruc tu re and money re se rves t o ge t i n to bank ing . Th i s has been one
of the major reasons beh ind th i s k ind of compet i t ion f rom p layers who do
not have a banking background. Kotak Bank ov ercame the initial costs of setting
up its o wn ATM netwo rk by get ting in to a sha ring ag reement wi th UTI bank. New
entrants with strategies such as these make the banking game tough
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IMPACT OF CHANGE IN BANKING STRUCTURE ON ECONOMY
Financial and Banking reforms
The last decade witnessed the maturity of India's financial markets. Since 1991, every
governments India took major steps in reforming the financial sector of the country. The
important achievements the following fields are discussed under separate heads:
Financial Markets
In the last decade, Private Sector Institutions played an important role. They
grew rapidly in commercial banking and asset management business. With the openings in
the insurance sector for these institutions, they started making debt in the market.
Competition among financial intermediaries gradually helped the interest rates to
decline. Deregulation added to it. The real interest rate was maintained. The borrowers did
not pay high price while depositors had incentives to save. It was something
bet ween the nomi nal 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 su per-re gulat or for the fi nan ci al servic es sector instead of multiplicity of
regulators.
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Development Finance Institutions
Financial institution's access to SLR funds reduced. Now they have to approach the capital
market for debt and equity funds. Convertibility clause no longer obligatory for assistance to
corporate sanctioned by term-lending institutions. Capital adequacy norms extended tofinancial 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. Unti l r ece ntl y, the money market in Ind ia
was narrow and circumscribed by tight regulations over interest rates and
par ticip ant s. Th e second ary mark et was und erdev el oped and lac ked liqui dity.
Several measures have been initiated and include new money market
instruments, strengthening of existing instruments and setting up of the Discount and
Finance House of India (DFHI).The RBI conducts i ts 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, hasa mandate to develop the secondary market in government securities. Long-
term debt market. After bringing some order to the equity market, the SEBI has
now decided to concentrate on the development of the debt market. Stamp duty is being
withdrawn at the time of dematerialization of debt instruments in order to encourage
paperless trading.
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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 s ides a lmost ent irely were deregula ted . New pr i va t e s ec t or ba nks
a l lowed promot ing and encourag ing compet i t ion . PSBs were encouraged to
approach the public for raising resources. Recovery of debts due to banks and the Financial
Institutions Act, 1993 was passed, and special recovery tribunals set up to
faci l i ta te quicker recovery of loan arrears. Bank lending norms l iberal ized
a n d a l o a n s y s t e m t o e n s u r e b e t t e r c o n t r o l o v e r c r e d i t i n t r o d u c e d .
Banks asked to set up asset liability management (ALM) systems. RBI guidelines
issued for risk management systems in banks encompassing credit, market and operational
risks. A credit information bureau being established to identify bad risks. Derivative products
such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced.
Capital Market DevelopmentsThe 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.
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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 factorsassociated with their projects while making public issues.
To reduce the cost of issue, underwriting by the issuer were made optional, subject to
conditions. The practice of making preferential allotment of shares at prices unrelated to the
prevailing market prices stopped and fresh guidelines were issued by SEBI.
SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy
norms for brokers, and made rules for making client or broker relationship more transparent
which included separation of client and broker accounts.
Buy Back Of Shares Allowed
T h e S E B I s t a r t e d i n s i s t i n g o n g r e a t e r c o r p o r a t e d i s c l o s u r e s . S t e p s w e r e
t a k e n t o i m p r o v e c o r p o r a t e g o v e r n a n c e b a s e d o n t h e
r e p o r t o f a c o m m i t t e e . SEBI issued detailed employee stock option scheme
and employee stock purchase scheme for listed companies. Standard denomination for
equity shares of Rs. 10 and Rs. 100 were abolished. Companies given the freedom
to issue dematerialized shares in any denomination. Derivatives trading starts with index
options and futures. A system of rolling settlements introduced. SEBI empowered to register
and regulate venture capital funds.
The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new
credit rating agencies as well as introducing a code of conduct for all credit
rating agencie s oper ating in India.
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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 .
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.
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.