CHAPTER II ORIGIN AND GROWTH OF COMMERCIAL BANKS AND THEIR SERVICES IN INDIA 2.1 INTRODUCTION 2.2 IMPORTANCE OF COMMERCIAL BANKS 2.3 BANKING SYSTEM IN INDIA 2.4 GROWTH OF COMMERCIAL BANKS IN INDIA 2.5 GROWTH OF COMMERCIAL BANKS IN TAMIL NADU 2.6 GROWTH OF COMMERCIAL BANKS IN MADURAI DISTRICT 2.7 CUSTOMER SERVICES OF COMMERCIAL BANKS 2.8 CONCLUSION
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CHAPTER II
ORIGIN AND GROWTH OF COMMERCIAL BANKS AND
THEIR SERVICES IN INDIA
2.1 INTRODUCTION
2.2 IMPORTANCE OF COMMERCIAL BANKS
2.3 BANKING SYSTEM IN INDIA
2.4 GROWTH OF COMMERCIAL BANKS IN INDIA
2.5 GROWTH OF COMMERCIAL BANKS IN TAMIL NADU
2.6 GROWTH OF COMMERCIAL BANKS IN MADURAI
DISTRICT
2.7 CUSTOMER SERVICES OF COMMERCIAL BANKS
2.8 CONCLUSION
46
2.1 INTRODUCTION
In this chapter an attempt is made to analyze the importance of commercial
banks, banking system and banking structure in the Indian economy. The origin,
growth, traditional and modern banking systems, and challenges facing banking
industry in India, Tamil Nadu and Madurai district are discussed herein. The
varied aspects of customer services of commercial banks and the benefits
customers derive from them are also analyzed.
2.2 IMPORTANCE OF COMMERCIAL BANKS
Today banks have permeated into our life more the ever before. There was
a time when the urbanites alone had the privilege of enjoying the banking services.
Now banks have spread far and wide in the nook and corner of the country.
Besides performing their traditional business oriented function catering to the
needs of the vast masses of rural and urban people, they are also engaged in the
country’s economic reconstruction and development. They cater to the needs of
agriculturists, industrialists, traders and to all the other sections of the society.
They accelerate the economic growth of the country and steer the wheels of the
economy towards its goal of “self reliance in all sectors”.
The concept of banking industry has drastically changed in modern times
from a business dealing with money transactions to a business, related to
information on financial transactions. This implies that information technology
plays a vital role in providing better services to customers at a lower cost.
Particularly, in the emerging competitive global banking scenario, technology
47
management holds the key to success. The future leaders in banking will be those
who can successfully integrate their technology acumen with their business
strategies. The expectations of the customers from the banking industry are
manifold and ever increasing. Both managers and the employees of banking sector
realize that only through innovative thinking they can contribute significantly to
the profitability and sustenance of the banking industry.
Customers have come to gauge the ‘technical factors’ of services such as
core and systematization of the service delivery as the yardstick in differentiating
good and bad performance. Researches had also shown that organizations in the
service sector are more susceptible to brand loyalty erosions due to falling
customer perception of the service.
Customer service is an important adjunct in any undertaking especially in
business and service organizations like banks. Day in and day out banks deal with
customers, be it the depositors or borrowers or any one who walks into its portals
for transacting any financial business. They now offer a basketful of services to
their customers. They are trying to make their customer a “pleased customer” and
above all a “satisfied customer” by offering more services than the ingenuity of a
customer can demand.
Now a days, a stiff competition between commercial banks has arisen in
providing world class financial services to customers by using information
technology, reducing costs, increasing profits and compete with international
banks. In the era of technologically backed competition, the awareness level of
customers is raising everyday. Expectations of customers from banks are
48
mounting to have a wide choice of products and services. The concept of
generation to generation banking has also undergone changes. Customer’s loyalty
is now conditioned by the quality of products of service and their delivery
mechanism. All these have necessitated the banks to render warm and excellent
customer service.
2.3 BANKING SYSTEM IN INDIA
The structure of banking sector differs from country to country depending
upon their economic conditions, political structure and the financial system. Banks
can be classified on the basis of volume of operations, business pattern and areas
of operations. They are termed as systems of banking.1 The commonly identified
systems are as follows.
1 B. Santhanam, “Banking and Financial System”, Margham Publications, Chennai, 2007, pp. 1.3
to 1.10
49
Indian Banking System
FIGURE 2.1
2.3.1 Origin of Banking
Since the banking activities were commenced in different countries in
different periods, there is no unanimous view regarding the origin of the word
‘bank’. The word, ‘bank’ is said to have derived from the French word ‘Banco’, or
‘Bancus’ or ‘Banc’ or ‘Banque’ which means, a ‘bench’. In fact the early Jews in
Lombardly transacted their banking business by sitting on benches. When their
Banking System
Ownership Types Kinds Business
Public sector
Private sector
Foreign
Regional Rural
Cooperative
sector
Unit Bank
Branch Bank
Group Bank
Chain Bank
Correspondent
Bank
Commercial
Banks
Industrial Banks
Cooperative
Banks
Agricultural
Development
Banks
Central Banks
Savings Banks
Exchange Banks
Deposit
Investment
Mixed
Wholesale
Retail
50
business failed, the benches were broken and hence the word ‘bankrupt’ came into
vogue. According to Macleod, the money changers were never called ‘Benchieri’
in the Middle Ages. So, this derivation may be a mere conjecture.
Another commonly-held view is that the word ‘bank’ might be originated
from the German word ‘back’ which meant a joint stock fund. A bank essentially
deals with funds. In due course, it was Italianized into “banco”, Frenchised into
‘bank’ and finally Anglicised into ‘bank’. This view is most prevalent even today.2
2.3.2 History of Indian Banking
The first bank in India, was established in a modest form in 1786. The
journey of Indian banking system can be segregated into three distinct phases.3
They are
Early phase from 1786 to 1969
Nationalization of banks and upto 1991 prior to Indian banking sector
reforms.
New phase of Indian banking system with the advent of Indian Financial
and Banking Sector Reforms after 1991.
The scenario can be prefixed as Phase I, Phase II and Phase III.
2.3.2.1 Phase I
The General Bank of India was set up in the year 1786. Next came the
Bank of Hindustan and Bengal Bank. The East India Company established Bank
2 Gordon and Natarajan, “Banking Theory, Law and Practice”, Himalaya Publishing House,
Mumbai, 2006, p.1
3 www.mbaknol.com
51
of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called them as Presidency banks. These three banks were
amalgamated in 1920 and christened as the Imperial Bank of India. Imperial Bank
started as private shareholders banks, mostly comprising Europeans shareholders.
In 1865 Allahabad Bank was established exclusively by Indians, Punjab National
Bank Ltd., came up in 1894 with headquarters at Lahore. Between 1906 and 1913,
Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank,
and Bank of Mysore were founded. Reserve Bank of India began functioning from
1935.
During the first phase the growth was very slow and tardy. Banks
experienced periodic failures between 1913 and 1948. There were approximately
1100 banks, mostly small in size. To streamline the functioning and activities of
commercial banks, the Government of India enacted The Banking Companies Act,
1949 which was later renamed as Banking Regulation Act 1949 as per the
amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India as
government’s bank was vested with extensive powers for the supervision of
banking in India as the Central Banking Authority. During those days public has
lesser faith in the banks. As a result deposit mobilization was slow. Alternatively
the savings bank facility offered by the Postal department was comparatively
safer. Moreover, funds were largely lent to traders by the banks.
52
2.3.2.2 Phase II
Government took major steps in this Indian banking sector reform after
independence. In 1955, it nationalized the Imperial Bank of India with extensive
banking facilities on a large scale especially in rural and semi-urban areas. In the
place of Imperial Bank it formed the State Bank of India to act as the principal
agent of RBI and to handle banking transactions of the Union and State
Governments
Seven banks forming subsidiaries of State Bank of India were nationalized
in 1959. It was by the effort of the then Prime Minister of India, Mrs. Indira
Gandhi. 14 major commercial banks in the country were nationalized in July 1969.
The second phase of nationalization of Indian banking sector was carried
out in 1980 adding seven more banks to the public sector. This step brought 80 per
cent of the banking segment in India under Government ownership.
The following are the measures taken by the Government of India to
regulate banking institutions in the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of Credit Guarantee Corporation.
53
1975: Creation of Regional Rural Banks.
1980: Nationalization of seven more banks with deposits over Rs.200
crores.
After the nationalization of banks, the branches of the public sector banks
in were India expanded to approximately 800 per cent. The deposits and advances
in the banks took a quantum leap by 11,000 per cent. Banking sector basking in
the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions4. Large masses of people
took to banking habits. Savings and deposits were mobilized. Loans for
investment and consumption purposes were given at a fast pace. In short the era of
banking revolution had begun in the country.
2.3.2.3 Phase III
This phase has introduced many more products and facilities in the banking
sector in its reforms measure. In 1991, under the chairmanship of M. Narasimham,
a Committee was set up to chalk out a scheme for the liberalization of banking
practices.
Today the country is flooded with domestic and foreign banks and their
ATM centres. Efforts are being made to give a satisfactory service to customers.
Phone banking and net banking are introduced. The entire banking system became
more convenient and swift. The financial system of India has shown a great deal
of resilience. It is insulated from the crisis triggered by the external
4 www.mbaknol.com
54
macroeconomic shock that the East Asian countries suffered from. This is all due
to a flexible exchange rate regime, the increasing foreign currency reserves not
fully convertible, the capital account and limited foreign exchange exposure of
banker and their customers.
2.3.3 Structure of the Indian Banking Industry
The Indian banking industry had a wide spectrum of banks comprising both
the public sector and the private sector banks. There are 25 public sector banks,
covering 19 nationalized banks, State bank of India and its five associates. In
addition, there are 22 private sector banks (15 are old and 7 are new) and 34
foreign banks. The presence of monolithic structure in the financial sector was
mainly due to the unparalleled growth achieved in the post – nationalization era
(1969 onwards) that has paved way for a wide geographical spread, greater
quantum of resource mobilization and various progressive policy directives.
Although the Indian banking industry provides space for private banks to
grow, the public sector banks control over 80 per cent of the banking assets. With
regard to technology advancement and international banking standards, it is
catching up with the developed countries gradually.
The banking industry in India is under the control of the Reserve Bank of
India. The banking industry is classified into Scheduled Commercial Banks and
Scheduled Cooperative Banks. The details of these banks are given in figure 2.2.
In this study the only the scheduled commercial banks growth (public and private)
and its services are analyzed.
55
IND
IAN
BA
NK
ING
IN
DU
ST
RY
FIG
UR
E 2
.2
Res
erv
e B
an
k o
f In
dia
Sch
edu
led
Co
mm
erci
al
Ba
nk
s
Sch
edu
led
Coop
erati
ve
Ban
ks
Pu
bli
c S
ecto
r B
an
ks
Pri
va
te S
ecto
r B
an
ks
Reg
ion
al
Ru
ral
Ban
ks
Fo
reig
n B
an
ks Na
tio
na
lize
d B
an
ks
(in
clu
din
g I
DB
I)
SB
I &
Ass
oci
ate
s
Old
Pri
vate
Sec
tor
New
Pri
va
te S
ecto
r
Ru
ral
Co
op
era
tive
Ban
ks
Urb
an
Coo
per
ati
ve
Ban
ks
Sh
ort
Ter
m
Lon
g T
erm
Sta
te, d
istr
ict
an
d
pri
ma
ry l
evel
coo
per
ati
ve
Ba
nk
s
SC
AR
DB
s &
PC
AR
DB
s
Sin
gle
-sta
te
Mu
lti-
state
55
56
2.3.3.1 Commercial Banks
A bank, which undertakes all kinds of ordinary banking business is called a
commercial bank. It is so called because it provides credit for commercial and
trade activities. They receive short and medium term deposits from the public,
grant short-term loans, and advances. They supply working capital to industries to
enable them to carry on manufacturing activities. They grant loans and advances
on the stocks of agricultural commodities, industrial goods and the like. They
discount internal and foreign bills and thereby finance the international trade. They
also perform certain agency services such as collection of cheques, dividends,
interest on investments, issue of drafts, letter of credit, traveller’s cheques,
investment advisory services and the like.
Commercial banks in India are organized as joint stock companies known
as banking companies. These banks are primarily classified into scheduled banks
and non-scheduled banks. The Second Schedule of the Reserve Bank of India Act
contains a list of banks which are described as “scheduled banks”. Scheduled
banks include nationalized banks, State Bank of India and its subsidiaries, private
sector and foreign banks. Non-scheduled banks are those which are not included in
the 2nd
Schedule of the Reserve Banks of India Act.
2.3.3.2 Public Sector Banks
Public sector banks are owned by the Government in India. Public sector
banking had a three stage development. First the conversion of the then existing
Imperial Bank of India into State Bank of India in 1955 followed by the
57
establishment of its seven subsidiary banks. Second, the nationalization of 14
major commercial banks on July 19, 1969 and last the nationalization of additional
commercial banks on April 15th
1980. On the whole, 25 banks constituted as
public sector banks in Indian banking system. The public sector banks (PSB’s) are
those in which the government of India holds a major stake. They have laid the
foundations for the total banking industry assets. The details of public sector banks
as on 31 March 2010, are presented vide table 2.1 below.
TABLE 2.1
Public Sector Banks as on 31st March 2010
Sl. No. Name of the Bank Year of
Incorporation
No. of
BranchesATMs
State Bank of India and Its Associates
1 State Bank of India 1955 12437 16294
2 State Bank of Bikaner & Jaipur 1966 866 950
3 State Bank of Hyderabad 1941 1125 1066
4 State Bank of Indore* 1960 471 607
5 State Bank of Mysore 1913 687 608
6 State Bank of Patiala 1917 890 727
7 State Bank of Travancore 1945 753 726
Nationalized Banks
1 Allahabad Bank 1865 2231 211
2 Andhra Bank 1923 1549 859
3 Bank of Baroda 1908 3088 1315
4 Bank of India 1906 3024 820
58
5 Bank of Maharashtra 1935 1435 345
6 Canara Bank 1906 3045 2015
7 Central Bank of India 1911 3585 402
8 Corporation Bank 1906 1079 1079
9 Dena Bank 1938 1123 396
10 Indian Bank 1907 1703 1005
11 Indian Overseas Bank 1937 2015 771
12 Oriental Bank of Commerce 1943 1510 980
13 Punjab & Sind Bank 1908 864 59
14 Punjab National Bank 1895 4713 3544
15 Syndicate Bank 1925 2326 1187
16 UCO Bank 1943 2105 478
17 Union Bank of India 1919 2832 2326
18 United Bank of India 1950 1524 274
19 Vijaya Bank 1931 1154 435
Other Public Sector Bank
1 IDBI Bank Limited 1994 691 1201
*Now it is merged with SBI as on August 2010.
2.3.3.3 Private Sector Banks
Private banking in India was practiced since the beginning of banking
system in India. The first private bank be set up in India was the IndusInd Bank. It
was one of the fastest growing banks, among private sector banks in India. IDBI
ranked the tenth largest private development bank in the world and has promoted
world class institutions in India. The Housing Development Finance Corporation
Limited established a bank in the private sector as part of the RBI's liberalization
59
of the Indian banking industry. The private banks have made banking more
efficient and customer friendly. In the process, they have jolted public sector
banks out of complacency and forced them to become more competitive. The
following are the details of private sector banks as on 31 March 2010, vide table
2.2.
TABLE 2.2
Private Sector Banks as on 31st March 2010
Sl. No. Name of the Bank Year of
Incorporation
No. of
Branches
ATMs
Old Private Sector Banks
1 Bank of Rajasthan 1943 458 127
2 Catholic Syrian Bank 1920 360 147
3 City Union Bank 1904 224 152
4 Dhanalakshmi Bank 1927 243 280
5 Federal Bank 1931 670 732
6 ING Vysya Bank 1930 474 357
7 Jammu & Kashmir Bank 1938 491 292
8 Karnataka Bank 1924 469 217
9 Karur Vysya Bank 1926 335 376
10 Lakshmi Vilas Bank 1926 265 175
11 Nainital Bank 1922 101 -
12 Ratnakar Bank 1943 87 9
13 SBI Commercial & International Bank 1993 2 -
14 South Indian Bank 1929 556 373
15 Tamilnad Mercantile Bank 1921 217 141
New Private Sector Banks
1 Axis Bank 1994 966 4293
2 Development Credit Bank 1995 82 110
3 HDFC Bank 1994 1715 4235
4 ICICI Bank 1994 1698 5219
5 IndusInd Bank 1995 213 497
6 Kotak Mahindra Bank 1985 250 492
7 Yes Bank 2003 151 211
60
2.3.4 Traditional Banking System
Traditionally the relationship between the bank and its customers had been
on a one-to-one level via the branch network. This was put into operation with
clearing and decision making responsibilities concentrated at the individual branch
level. The head office had the responsibility for the overall clearing, the size and
the training of staff in the branch network. The bank monitored the organization’s
performance and set the decision making parameters, but the information made
available to both branch staff and their customers was limited to one geographical
location. The following chart clearly explains about the traditional banking system
in India.
TRADITIONAL BANKING SYSTEM IN INDIA
FIGURE 2.3
CUSTOMER CUSTOMER CUSTOMER
BANK BRANCH BANK BRANCH BANK BRANCH
CLEARING DECISION CLEARING DECISION CLEARING DECISION
HEAD OFFICE CENTRAL CLEARING
61
2.3.5 Modern Banking System
The modern bank cannot rely on its branch network alone. Customers are
now demanding new, more convenient delivery systems and services such as
internet banking. They provide traditional banking services, but additionally offer
much greater access to information on their account status and on the bank’s many
other services. To do this to banks had to create account information layers which
can be accessed both by the bank staff as well as by the customers themselves. The
use of interactive electronic links via the internet could go a long way in providing
the customers with greater degree of information about both their own financial
situation and services offered by the commercial banks. The following chart
explains the modern banking system in India.
MODERN BANKING SYSTEM IN INDIA
FIGURE 2.4
CUSTOMER
TELEPHONE, BRANCH, ELECTRONIC BANKING
SHARED INFORMATION
HEAD OFFICE RISK MONITORING CENTRAL CLEARING
62
2.3.6 Banks and Economic Development
Banks play a very significant role in the economic development of every
nation. They have control over a large part of the supply of money in circulation.
Through their control over the volume of bank money, they can influence the
nature and character of production in any country.
Economic development is a dynamic and continuous process. Banks are the
mainstay of the economic progress of a country. Economic development of any
country highly depends upon the extent of mobilization of resources and
investment and on the operational efficiency of the various segments of the
economy.5 The major roles played by the banks in the development of the
economy of a country can be summarized as follows:
ECONOMIC DEVELOPMENT THROUGH BANKING SYSTEM
FIGURE 2.5
5 S. Natarajan and R. Parameswaran, “Indian Banking”, S.Chand & Company Ltd., 2010, p. 21.
63
2.3.7 CHALLENGES FACING BANKING INDUSTRY IN INDIA
The banking industry in India is undergoing a major transformation due to
changes in the economic conditions and continuous deregulation. These multiple
changes happening one after another has a ripple effect on a bank trying to emerge
out from a completely regulated sellers market to a completed deregulated
customers market.
2.3.7.1 Deregulation
This continuous deregulation of the economy has made the banking market
extremely competitive with greater autonomy, operational flexibility, decontrolled
interest rate and liberalized norms for foreign exchange. The deregulation of the
industry coupled with decontrol in interest rates had led to the entry of many
players in the banking industry. At the same time reduced corporate credit off take
due to the sluggish economy had resulted in a large number of competitors battling
for the same pie.
2.3.7.2 New Rules
Under the circumstances, the market place has been redefined with new
rules of the game. Banks are transforming to universal banking, adding new
channels with lucrative pricing and freebees to offer. As a natural fall out of this
has led to a series of innovative product offerings catering to various customer
segments, specifically retail credit.
64
2.3.7.3 Efficiency
This in turn has made it necessary to look for efficiency in the business.
Banks need to access low cost funds and simultaneously improve their efficiency.
The banks are facing pricing pressure, squeeze on spread and have to give thrust
on retail assets
2.3.7.4 Diffused Customer Loyalty
The customers nowadays are in favour of value added offerings. Customers
have become demanding and the loyalties are diffused. There are multiple choices,
the per bank share of the customer money is reduced with demand on flexibility
and customization. Given the relatively low switching costs the customer retention
by the banks calls for customized services and hassle free, flawless service
delivery.
2.3.7.5 Misaligned Mindset
These changes are creating challenges, as employees are made to adapt to
changing conditions. There is resistance to change from employees. The seller
market mindset is yet to be changed coupled with fear of uncertainty and control
orientation. Acceptance of modern technology is slowly creeping in but its
utilization is not maximized.
2.3.7.6 Competency Gap
The competency gap needs to be addressed simultaneously otherwise there
will be missed opportunities. The focus of people will be on doing work but not
65
providing solutions, on escalating problems rather than solving them and on
disposing customers instead of using the opportunity to cross sell.
2.4 GROWTH OF COMMERCIAL BANKS IN INDIA
The banking system in a country is effective, efficient and disciplined. It
brings about a rapid growth in the various sectors of Indian economy. Table 2.3
explains the growth of commercial banks in India.
66
TA
BL
E 2
.3
Gro
wth
of
Com
mer
cia
l B
an
ks
Sl.
No
Part
icu
lars
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1
No. of
Ban
ks
296
293
288
286
285
218
179
170
166
163
2
No. of
Bra
nch
es
67937
68195
68500
69170
70373
71685
74346
78666
82794
87768
3
No. of
Em
plo
yee
s 926518
901288
901149
881722
900433
900124
899407
838769
869412
944620
4D
eposi
ts
(` i
n c
rore
s)
950705
947142
1272316
1517207
1753172
2093
040
2598821
3228810
3937337
4601924
5C
redit
s
(` i
n c
rore
s)
556436
563747
764671
890864
1157809
1517
501
1949565
2394565
2857526
3345618
6E
arn
ing
s
(` i
n c
rore
s)
136937
156590
172116
183764
190223
222208
274714
368884
463702
494271
7E
xp
ense
s
(` i
n c
rore
s)
116461
125999
131521
131087
139206
165641
208733
285212
352804
371853
8P
rofi
ts
(` i
n c
rore
s)
7100
12
18
61
702
8
22
27
82
09
52
2
46
00
31
20
7
42
73
35
27
50
5
71
09
9
No. of
AT
Ms
- -
--
17642
21147
27
08
83
4,7
89
43
,65
16
0,1
53
So
urc
e: R
BI
An
nu
al R
epo
rts
20
01
to
20
10
.
66
67
2.4.1 Growth of Commercial Banks – Banks, Branches and Employees
Table 2.4 presents the growth trend of commercial banks, branches and
employees in India during the year 2001 to 2010.
TABLE 2.4
Growth – Banks, Branches and Employees
Years No. of
Banks
% of
increase
No. of
Branches
% of
increase
No. of
Employees
% of
increase
2001 296 - 67937 - 926518 -
2002 293 -1.01 68195 0.38 901288 -2.72
2003 288 -1.71 68500 0.45 901149 -0.02
2004 286 -0.69 69170 0.98 881722 -2.16
2005 285 -0.35 70373 1.74 900433 2.12
+2006 281 -1.40 71685 1.86 900124 -0.03
2007 179 -36.30 74346 3.71 899407 -0.08
2008 170 -5.03 78666 5.81 838769 -6.74
2009 166 -2.35 82794 5.25 869412 3.65
2010 163 -1.81 87768 6.01 944620 8.65
Source: www.rbi.org.in
It is observed from the table that the number of commercial banks showed a
declining trend year after the year. This decrease is due to the mergers of
commercial banks. The branches of commercial banks had risen every year and
the percentage of branches had also confirmed the expanding trend. The staff
strength of commercial banks showed a decreasing trend every year except in the
years 2005, 2009 and 2010. The banks entered the era of computer technology
68
which resulted in the reduction of staff. However in the year 2010 the staff
strength of banks had shown an increasing trend by 8.65 per cent. This showed
that the private banking sector is alive, kicking and buoyant.
2.4.2 Growth of Deposits and Credits of Commercial Banks
Table 2.5 presents the growth of deposits and credits of commercial banks
during the year 2001 to 2010.
TABLE 2.5
Commercial Banks – Deposits and Credits
(` in crores)
Years Deposits % of increase Credits % of increase
2001 950705 - 556436 -
2002 947142 -0.38 563747 1.31
2003 1272316 34.33 764671 35.64
2004 1517207 19.25 890864 16.50
2005 1753172 15.55 1157809 29.97
2006 2093040 19.39 1517501 31.07
2007 2598821 24.17 1949565 28.47
2008 3228810 24.24 2394565 22.83
2009 3937337 21.94 2857526 19.33
2010 4601924 16.88 3345618 17.08
Source: www.rbi.org.in
It is seen from the table that there was a steady increase in the deposits of
commercial banks during the period from 2001 to 2010 and credit also was
69
steadily increasing during the same period. But the percentage of increase was in a
fluctuating trend in both deposits and credits in all the years. There was six times
increase in credit from 2001 to 2010 and nearly fivefold increase in deposits also.
This was due to the fact that the banks were issuing most of the deposits as loan
for increasing credits. More over as the banks had fixed high interest rates for
deposits they were able to attract a larger amount as deposits.
2.4.3 Commercial Banks – Earnings, Expenses and Profits
Table 2.6 presents that the growth of earnings, expenses and profits of
commercial banks in India during the year 2001 to 2010.
TABLE 2.6
Commercial Banks – Earnings, Expenses and Profits
(` in crores)
Years Earnings % of
increaseExpenses
% of
increaseProfits
% of
increase
2001 136937 - 116461 - 7100 -
2002 156590 14.35 125999 8.19 12186 71.63
2003 172116 9.92 131521 4.38 17028 39.73
2004 183764 6.76 131087 -0.33 22278 30.83
2005 190223 3.52 139206 6.19 20952 -5.95
2006 222208 16.82 165641 18.99 24600 17.41
2007 274714 23.63 208733 26.02 31207 26.86
2008 368884 34.28 285212 36.64 42733 36.93
2009 463702 25.70 352804 23.70 52750 23.44
2010 494271 6.59 371853 5.40 57109 8.26
Source: www.rbi.org.in
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Earnings of the commercial banks had increased year after year. Expenses
of the commercial banks had also increased every year except in 2004 (-0.33
percentage). The profits of the commercial banks had increased annually except in
the years 2005 (-6.33 percentage). This was due to the fact that during the 2005
most of the banks were computerized and hence the profits declined.
2.4.4 Growth of ATMs of Commercial Banks
Table 2.7 presents that the growth of ATMs in commercial banks in India
during the years 2001 to 2010.
TABLE 2.7
Growth of Commercial Banks – ATMs
Years No. of ATMs % of increase On site % of
increase
Off
site
% of
increase
2001 NA - NA - NA -
2002 NA - NA - NA -
2003 NA - NA - NA -
2004 NA - NA - NA -
2005 17642 - 7654 - 9988 -
2006 21523 22.00 10263 34.09 11260 12.74
2007 27088 25.86 14796 44.17 12292 9.17
2008 34789 28.43 18486 24.94 16303 32.63
2009 43651 25.47 24645 33.32 19006 16.58
2010 60153 37.80 32679 32.60 27474 44.55
Source: www.rbi.org.in
71
It is inferred from table 2.7 that there was a steady increase in the ATMs of
commercial banks during the period from 2005 to 2010. When compared to on site
ATMs to off site ATMs there were more numbers of ATMs functioning in on site
only. So commercial banks should try to increase more number off site ATMs
because if the customers withdraw their money from off site ATMs there is no
need to go bank for withdraw money.
2.5 GROWTH OF COMMERCIAL BANKS IN TAMIL NADU
In this Section, the growth of commercial banks in Tamil Nadu during the
period of 2001 to 2010 is discussed.
2.5.1 Branches and Employees
Table 2.8 presents the growth of commercial bank branches and staff in
Tamil Nadu during the years 2001 to 2010.
TABLE 2.8
Commercial Banks in Tamil Nadu – Branches and Employees
Years No. of
Branches% of increase
No. of
Employees
% of
increase
2001 4921 - 76942 -
2002 4912 -0.18 74867 -2.70
2003 4916 0.08 74058 -1.08
2004 4960 0.90 71623 -3.29
2005 5049 1.79 72870 1.74
2006 5111 1.23 72455 -0.57
2007 5403 5.71 73051 0.82
2008 5727 6.00 71940 -1.52
2009 6159 7.54 75051 4.32
2010 6527 5.98 NA -
Source: www.rbi.org.in
72
It is observed from the table that the branches of commercial banks in
Tamil Nadu had increased year after year except in the year 2002. The percentage
increase in branches can be seen from their increasing trend. In case of staff of
commercial banks it was in a decreasing trend annually except in the years 2005,
2007 and 2009. Computerization of banks was the most important cause for
reduction of staff strength.
2.5.2 Growth of Deposits and Credits of Commercial Banks in Tamil Nadu
Table 2.9 explains the growth of deposits and credits of commercial banks
in Tamil Nadu during the years 2001 to 2010.
TABLE 2.9
Commercial Banks in Tamil Nadu – Deposits and Credits
(` in crores)
Years Deposits % of increase Credits % of increase
2001 63488 - 57518 -
2002 46364 -26.97 38615 -32.87
2003 85716 84.88 74157 92.04
2004 98873 15.35 88622 19.51
2005 110330 11.59 108606 22.55
2006 133418 20.93 141255 30.06
2007 163166 22.30 183161 29.67
2008 199949 22.54 226830 23.84
2009 246992 23.53 268963 18.58
2010 285337 15.53 321418 19.50
Source: www.rbi.org.in
73
It is inferred from table 2.9 that there was a steady increase in the deposits
of commercial banks in Tamil Nadu year to year except in 2002. The credit
quantum was also steadily increasing every year except in 2002. But the
percentage of increase in credits was in a fluctuating trend in both deposits and
credits in all the years. There were nearly six times increase in credit from 2001 to
2010 and nearly fivefold increase in deposit also.
2.6 GROWTH OF COMMERCIAL BANKS IN MADURAI DISTRICT
In the following paragraphs growth of commercial banks in Madurai
district during the period of 2001 to 2010 is analyzed.
2.6.1 Growth of Commercial Banks – Branches in Madurai District
Table 2.10 presents the growth of commercial bank branches in Madurai
district during the years 2001 to 2010.
TABLE 2.10
Commercial Bank Branches in Madurai District
Years Branches % of increase
2001 236 -
2002 246 4.24
2003 246 0
2004 246 0
2005 252 2.44
2006 250 -0.79
2007 252 0.80
2008 270 7.14
2009 284 5.19
2010 297 4.58
Source: Lead Bank (Canara Bank) Report, Madurai District, 2001-2010.
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It is observed from above table that the branches of commercial banks in
Madurai were increasing from year to year except in the years 2003, 2004 and
2006. The percentage of branch increase could be seen all through the years except
in the years 2003 and 2004. There was a decreasing trend in the year 2006.
2.6.2 Growth of Deposits and Credits of Commercial Banks in Madurai
District
Table 2.11 explains the growth of deposits and credits of commercial banks
in Madurai district during the years 2001 to 2010.
TABLE 2.11
Deposits and Credits of Commercial Banks – Madurai District
(` in Crores)
Years Deposits % of increase Credits % of increase
2001 2696.00 - 1820.00 -
2002 3220.55 19.46 2127.77 16.91
2003 3521.55 9.35 2492.72 17.15
2004 3840.94 9.07 2880.59 15.56
2005 3883.39 1.11 2923.66 1.50
2006 4520.26 16.40 4602.99 57.44
2007 5079.66 12.38 5142.82 11.73
2008 6917.62 36.18 7309.42 42.13
2009 8398.02 21.40 8110.81 10.96
2010 9755.49 16.16 9184.50 13.24
Source: Lead Bank (Canara Bank) Report, Madurai District, 2001-2010.
75
It can be inferred from table 2.10 that there was a steady growth in the
deposits of commercial banks in Madurai district from year to year and credit also
steadily was growing from every year. But the percentage of increase was in a
fluctuating trend in the case of both the deposits and credits in all the years. There
were nearly five times increase in credits from 2001 to 2010 and nearly fourfold
increase in deposits also. This is because of the high interest rate for deposits and
giving liberal credit to the public.
2.7 CUSTOMER SERVICES OF COMMERCIAL BANKS
Customer service is a series of activities designed to enhance the level of
customer satisfaction. It amounted to a feeling that a product or service had met
the customer’s expectation. The banks strongly believed that customer service
would be the most important factor in maintaining and improving its leadership in
India’s banking industry. The qualities of customer services were highly variable
as they depend on the service provider. We can see the service provider but not the
service. Customer service cannot emerge from training, reading of circulars or
even rigidly enforced discipline. People create memorable experiences through
attitudes and behaviour that turn transactions into relationships and persons into
friends.6
Customer service is the commitment to providing value added services
compressive attitude knowledge, technical support and quality of service in a
timely manner to external and internal customer. It is providing service to
6 Uttra Dasgupta, “Managing Customer Expectations and Customer Experiences”, customer care
– publications of SBI, January, 2008, p. 2.
76
customers before, during and after a purchase. It is the service provided in support
of a bank’s core products. It often includes answering questions and handling
complaints. It can occur on site (as when an onstage staff helps a customer or
answers a question) or it can occur over the phone or the internet. Quality
customer service is essential for building a cordial customer relationship.
A service is an activity that one party can offer to another which is
essentially intangible and does not result in the ownership of anything. Customer
service implies the satisfaction of customers needs. They are the backbone of the
success of every organization including commercial banks and there is no
exception to this.
Banking is a service industry and bankers have to be identified by the
customer for whom the services are extended. It is the starting point, where the
banker comes into contact with the customer. Therefore, banker should have a
good attitude, appeal with good appearance at that point of time. Bankers have to
cultivate a good relationship with the customers. These factors have a great impact
in customer service. In such situations, customers will become loyal to the banker
and patronize the banker. Banking industry mainly depends upon its customers. A
successful banker should treat the customers well. Banking is not purely a profit
making industry. With the concept of welfare state, the idea of banking has
undergone a change in the modern days. Banks are expected to contribute to social
welfare. Therefore modern banks are aware that the success of the bank depends
77
on the goodwill of its customers. The customer should be dealt with in such a way
they would like to be treated.7
Good service will certainly enhance the bank’s image, goodwill and
increase the market share. Customer service has a direct impact on the working of
a bank and its profitability. A five per cent increase in customer retention may
increase the profitability by 35 per cent in banking business.8 The growth and
profitability of banks to a large extent depend on customer service.
2.7.1 Customer
Customer is anyone who comes to the bank having some work to do with
the bank. It is not necessary that he must be an account holder or a direct user of
banks services. The word customer denotes the following aspects.
C – ustomised care
U – niqueness
S – ervice orientation
T – enderness
O – penness
M – anagerial ability
E – ffectiveness
R – esponsiveness
7 Dr.A.Subbiah and S.Jeyakumar, “Customer Service in Commercial Banks – A Theoretical
View”, Banking Finance, August 2009, p.7.
8 Tamilarasan R., “Customer Service –Banking – Focus on Common Man” Professional banker,
March 2008, p.35.
78
According to Sir. John Pahot “to constitute a customer, there must be some
recognizable course or habit of dealing in the nature of regular banking business”.
In above definition of Sir. John Pahot, two conditions are given
A customer is one who deals with the bank.
The dealing of the customer must be in the nature of regular banking
business.
2.7.2 Types of Customers
We can classify the customers into the following four types based on their
behavioral patterns.
New customer.
Satisfied existing customer.
Dissatisfied existing customer willing to exit the bank.
Dissatisfied customer who had left the bank permanently.
2.7.2.1 New Customer
A new customer gets introduced to the bank with the collective
effort of a strong sales team.
He is enthusiastic and has high expectations on the bank.
He has several queries about the facilities offered by the bank.
A good and well-responding customer care center can help the banks
meet the needs of the customers successfully. This can, in turn, make
him stick to a particular bank forever.
79
2.7.2.2 Satisfied Existing Customer
He is aware of all the schemes, offers, facilities, charges and waivers
if any, offered by the bank.
He appreciates updation provided by the customer care unit.
He shows much interest in buying any new products offered by the
bank.
Gives a word-of-mouth publicity about the bank.
He can introduce more loyal clients to the bank.
He expects certain benefits out of the existing relationship.
He prefers to continue with the bank unless he comes across a bad
experience.
2.7.2.3 Dissatisfied Existing Customer Willing to Exit the Bank
A client’s patience should never be tested. If done, it might annoy
him and force him to look out for an alternative.
An unhappy customer gives a bad publicity which may lead to
further loss of business.
A dissatisfied customer would enquire about the foreclosure
procedures of the account.
He would maintain ‘low or nil’ balance in his account.
Such an account can be read as an index of an unhappy customer’s
mind.
80
2.7.2.4 Dissatisfied Customer Who had Left the Bank Permanently
When the limit of the customer’s patience is crossed, he tends to leave his
accounts non-operative, foreclose all the credit facilities availed by him and report
ill remarks about the bank.9 This certainly amounts to loss of a precious customer.
2.7.3 Customer Perception
Customer perception is an important component of bank’s relationship with
its customers. Customer satisfaction is a mental state which results from the
customer’s comparison of expectations prior to a purchase with performance
perceptions after a purchase. A customer may make such comparisons for each
part of an offer called ‘‘domain-specific satisfaction’’ or for the offer in total
called ‘‘global satisfaction’’. Moreover, this mental state, which is viewed as a
cognitive judgment, is conceived of as falling somewhere on a bipolar continuum
bounded at the lower end by a low level of satisfaction where expectations exceed
performance perceptions and at the higher end by a high level of satisfaction
where performance perceptions exceed expectations.
The customer perception is changing day by day. Peter Drucker said twenty
five years ago that “the purpose of a business is to attract and retain a customer”. It
sounds simple but too many businessmen have forgotten it at their risk. There has
been a phenomenal change and paradigm shift towards customer focus for the past
five decades. In the first decade in 1950’s to 1960’s the goal was for serving the
customer, focus was between 1960’s to 1980’s it amounted to satisfying the
9 Kalyan Ram Addanki M, “Customer Retention in the Banking Sector”, Professional Banker,
May 2009, pp. 44-47.
81
customer, in the third decade 1980’s to 1990’s it was to please the customer, in
1990’s to 2000 AD it was went up to delighting the customer and in the last
decade 2000 it went beyond retaining the customer.10
The working of the customer's mind is a mystery which is difficult to
unfathom and understanding the nuances of what perception the customer has to
attain satisfaction is, a challenging task. This gives the banks an insight into the
parameters of customer satisfaction and their measurement. This vital information
will help the banks to build satisfaction amongst the customers and customer
loyalty in the long run which is an integral part of any business. The customer's
requirements if translated and quantified into measurable targets, will provide an
easy way to monitor improvements and deciding upon the attributes that need to
be concentrated in order to improve customer satisfaction. The banks would
recognize where they need to make changes to create improvements and determine
if these changes, after implementation, have led to increased customer satisfaction.
2.7.4 Service offered by the Commercial Banks
Today, all banks basically offer similar types of services and facilities to
the customers. Customer services may be classified into three heads. The
following figure explains the type of services offered by the banks.
10 Jeyalakshmi S., and Asok A., “WTO and Indian Banking Sector: An Overview”, Southern
Economist, December 1, 2008 p.41.
82
SERVICES OFFERED BY COMMERCIAL BANKS
FIGURE 2.6
83
2.7.4.1 PRIMARY SERVICES
The first and foremost services of commercial banks are accepting deposits
and granting loans and advances to their customers. The following are the primary
services of commercial banks in India.
2.7.4.1.1 Accepting deposits
The most important activity of a commercial bank is to mobilize deposits from
the public. People who have surplus income and savings find it convenient to
deposit the amounts with banks. Depending upon the nature of deposits, funds
deposited with bank also earn interest. Thus, deposits with the bank grow along
with the interest earned. If the rate of interest is higher, public are motivated to
deposit more funds with the bank. There is also safety of funds deposited with the
bank.
Current Deposit
A current account is an account which is generally opened by
business people for their convenience. Money can be deposited and
withdrawn at any time. Money can be withdrawn only by means of
cheques. Usually, a banker does not allow any interest as the amount
deposited in these accounts is repayable on demand without any restriction.
Even then, people come forward to deposit money on current account
because of two important privileges which they can enjoy in a current
account, namely; Overdraft facility, and other facilities like collection of
84
cheques, transfer of money and rendering agency and general utility
services. Current deposit is also called ‘demand deposit’.11
Savings Deposit/Savings Bank Accounts
Savings deposit account is meant for individuals who wish to deposit
small amounts out of their current income. It helps in safe guarding their
future and also earning interest on the savings. A saving account can be
opened with or without cheque book facility. There are restrictions on the
withdrawals from this account. Savings account holders are also allowed to
deposit cheques, drafts, dividend warrants, etc. drawn in their favour for
collection by the bank. To open a savings account, it is necessary for the
depositor to be introduced by a person having a current or savings account
with the same bank.
Fixed Deposit
The term fixed deposit means deposit repayable after the expiry of a
specified period. Since it is repayable only after a fixed period of time,
which is to be determined at the time of opening of the account, it is also
known as time deposit. Fixed deposits are most useful for a commercial
bank. Since they are repayable only after a fixed period, the bank may
invest these funds more profitably by lending at higher rates of interest and
for relatively longer periods. The rate of interest on fixed deposits depends
11 Gordon and Natarajan, “Banking – Theory, Law and Practice”, Himalaya Publishing House,
Mumbai, 2006, p.31.
85
upon the period of deposits. The longer the period, the higher is the rate of
interest offered. The rate of interest to be allowed on fixed deposits is
governed by rules laid down by the Reserve Bank of India.
Recurring Deposits
Recurring deposits are gaining wide popularity these days. Under
this type of deposit, the depositor is required to deposit a fixed amount of
money every month for a specific period of time. Each installment may
vary from `5/- or more per month and the period of account may vary from
12 months to 72 months. After the completion of the specified period, the
customer gets back his deposited amount along with the cumulative interest
accrued on the deposits.
Miscellaneous Deposits
In addition to the above, a mushroom growth of deposits has come
into practice. In fact, for most of the above deposits, recurring deposit
scheme forms the basis. Banks have introduced several deposit schemes to
attract deposits from different types of people, like home construction
deposit scheme, sickness benefit deposit scheme, children gift plan, old age
pension scheme, mini deposit scheme and the like.
2.7.4.1.2 Grant of Loans and Advances
The second important service of a commercial bank is to grant loans and
advances. Such loans and advances are given to members of the public and to the
86
business community at a higher rate of interest than allowed by banks on various
deposit accounts. The rate of interest charged on loans and advances varies
depending upon the purpose, period and the mode of repayment. The difference
between the rate of interest allowed on deposits and the rate charged on the loans
is the main source of a bank’s income.
Cash Credit
A cash credit is an arrangement whereby the bank agrees to lend money
to the borrower upto a certain limit. The bank puts this amount of money to the
credit of the borrower. The borrower draws the money as and when he needs.
Interest is charged only on the amount actually drawn and not on the amount
placed to the credit of borrower’s account. Cash credit is generally granted on a
bond of credit or certain other securities. This is a very popular method of
lending in our country.
Loans
A specified amount sanctioned by a bank to the customer is called a
‘loan’. It is granted for a fixed period, say six months, or a year. The specified
amount is put on the credit of the borrower’s account. He can withdraw this
amount in lump sum or can draw cheques against this sum for any amount.
Interest is charged on the full amount even if the borrower does not utilize it.
The rate of interest is lower on loans in comparison to cash credit. A loan is
generally granted against the security of property or personal security. The loan
may be repaid in lump sum or in installments. Every bank has its own
87
procedure of granting loans. Hence a bank is at liberty to grant loan depending
on its own resources. The loan can be granted as a) Demand loan b) Term loan.
a) Demand Loan
Demand loan is repayable on demand. In other words it is repayable at
short notice. The entire amount of demand loan is disbursed at one time and
the borrower has to pay interest on it. The borrower can repay the loan either in
lump sum (one time) or as agreed with the bank. Loans are normally granted
by the bank against tangible securities including securities like N.S.C., Kisan
Vikas Patra, Life Insurance policies and U.T.I. certificates.
b) Term Loans
Medium and long term loans are called ‘term loans’. Term loans are
granted for more than one year and repayment of such loans is spread over a
longer period. The repayment is generally made in suitable installments of
fixed amount. These loans are repayable over a period of 5 years and
maximum upto 15 years. Term loan is required for the purpose of setting up of
new business activity, renovation, modernization, expansion/extension of
existing units, purchase of plant and machinery, vehicles, loan for setting up a
factory, construction of factory building or purchase of other immovable
assets. These loans are generally secured against the mortgage of land, plant
and machinery, building and other securities. The normal rate of interest
charged for such loans is generally quite high.
88
Bank Overdraft
Overdraft facility is more or less similar to cash credit facility.
Overdraft facility is the result of an agreement with the bank by which a
current account holder is allowed to withdraw a specified amount over and
above the credit balance in his/her account. It is a short term facility. This
facility is made available to current account holders who operate their account
through cheques. The customer is permitted to withdraw the amount as and
when he/she needs it and to repay it through deposits in his account as and
when it is convenient to him/her. Overdraft facility is generally granted by
bank on the basis of a written request by the customer. Some times, banks also
insist on either a promissory note from the borrower or personal security to
ensure safety of funds. Interest is charged on actual amount withdrawn by the
customer. The interest rate on overdraft is higher than that of the rate on loan.
Discounting of Bills
Apart from granting cash credit, loans and overdraft, banks also grant
financial assistance to customers by discounting bills of exchange. Banks
purchase the bills at face value minus interest at current rate of interest for the
period of the bill. This is known as ‘discounting of bills’. Bills of exchange are
negotiable instruments and enable the debtors to discharge their obligations
towards their creditors. Such bills of exchange arise out of commercial
transactions both in internal and external trade. By discounting these bills
before they are due for a nominal amount, the banks help the business
89
community. Of course, the banks recover the full amount of these bills from
the persons liable to make payment.
2.7.4.2 SECONDARY SERVICES
The secondary services of commercial banks are classified into agency
services and general utility services. The following are the secondary services of
commercial banks.
2.7.4.2.1 Agency Services
Agency services are those services which are rendered by the commercial
banks as agents of their customers. They include:
Collection and payment of cheques and bills on behalf of the customers.
Collection of dividends, interest and rent, etc. on behalf of customers, if so
instructed by customers.
Purchase and sale of shares and securities on behalf of customers.
Payment of rent, interest, insurance premium, subscriptions etc. on behalf
of customers, if so instructed.
Acting as a trustee or executor.
Acting as agents or correspondents on behalf of customers for other banks
and financial institutions at home and abroad.
Bancassurance services to their customers by commercial banks.
Bancassurance as a means of distribution of insurance products is already
in force.
90
2.7.4.2.2 General Utility Services
General utility services are those services which are rendered by
commercial banks not only to the customers but also to the general public. These
are available to the public on payment of a fee or charge. They include:
Issuing letters of credit, travellers’ cheques and gift cheques.
Underwriting of shares, debentures, etc.
Safe-keeping of valuables in safe deposit locker.
Underwriting loans floated by government and public bodies.
Supplying trade information and statistical data useful to customers.
Acting as a referee regarding the financial status of customers.
Undertaking foreign exchange business.
Door step banking like pick up of cash, pick up of instruments, delivery of
cash against cheques received at the counter and delivery of demand draft.
Merchant banking like financial, technical and managerial services under
one roof.
2.7.4.3 TECHNOLOGICAL SERVICES
Banking activities through the traditional delivery channel of branch
networks were on the decline and customers could do banking business from the
comfortable confines of their homes using most modern electronic delivery
channels.12
Banks were able to deliver their products more cheaply than the
traditional branch networks loaded with expensive staff. The information
12 Gordon and Natarajan, “Banking – Theory, Law and Practice”, Himalaya Publishing House,
Mumbai, 2006, p.450.
91
technology had enabled banks to increase the range of their products also and
market them more effectively. The popular technological services are the
following:
2.7.4.3.1 ATM (Automated Teller Machine)
ATM is cash rending teller machine. This helps a bank customer to
withdraw money from his account without having to go to the bank. ATM is a
user-friendly computer driven system, which operates 24 hours a day, 7 days a
week. It is totally a menu-driven system and displays easy to follow, step by step
instructions in customers regional language. ATM can effectively reach out a large
customer base at low cost. At present, banks have started outsourcing and sharing
of ATM services to reduce cost. Most banks are used to cross-sell other products
also so as to meet the varied requirements of customers. Banks have started
dispensing railway tickets, air tickets, movie tickets and the like through ATMs.
Voice activated ATMs, ATMs with finger print scanning technology and the like
are on the anvil. If they become operative, they can save the customers from the
hassle of carrying a card. In future, a bank’s ATM would function like a Kisok
delivering more on non-cash transactions, thereby reducing fixed and operating
cost.13
ATMs are currently becoming more popular in India that enables the
customers to withdraw their money anywhere and anytime. It provides the
customers with the ability to withdraw or deposit funds, check account balances,
13 Gordon and Natarajan, “Banking – Theory, Law and Practice”, Himalaya Publishing House,
Mumbai, 2006, p.451.
92
transfer funds and check statement information. The advantages of ATMs to the
customer as well as banks are many. It increases existing business and generates
new business.
2.7.4.3.2 Credit Card
Credit card is “post paid” or “pay later” card that draws from a credit line-
money made available by the bank and gives one a grace period to pay. If the
amount is not paid in full by the end of the period, one is charged interest. A credit
card is nothing but a very small card containing a means of identification, such as
a signature and a small photo. It authorizes the holder to charge goods or services
to his account on which he is billed. The bank receives the bills from the
merchants and pays on behalf of the card holder.
These bills are assembled in the bank and the amount is paid to the bank by
the card holder totally or by installment. The bank charges the customer a small
amount for these services. The card holder need not have to carry money/cash with
him when he travels or goes for purchasing. Credit cards have found wide spread
acceptance in the ‘metros’ and big cities. Credit cards are gaining popularity for
online payments. The major players in the credit card market are the foreign banks
and some big public sector banks like State Bank of India and Bank of Baroda.
India at present has about 3 million credit cards in circulation.
2.7.4.3.3 Debit Card
Debit Card is a “prepaid” or “pay now” card with some stored value. Debit
cards allow for direct withdrawal of funds from a customer’s bank account. The
93
spending limit is determined by the customer’s bank depending upon an available
balance in the account of user. It is a special plastic card connected with
electromagnetic identification that one can use to pay for things purchased directly
from his bank account. Debit cards quickly debit or subtract money from one’s
savings account. Every time a person uses the card, the merchant who in turn can
get the money transferred to his account from the bank of the buyers by debiting
an exact amount of purchase from the card. Hence, under debit card, the card
holder must have adequate balance in his account. This system is intended to
replace the cheque system of payment. Issue of debit card by banks in India should
be approved by the respective bank’s Board as well as by Reserve Bank of India.14
Personal Identification Number (PIN) is used for withdrawing cash or for
purchasing goods and services at a merchant establishment. The PIN should be
confidential known only to the user.
2.7.4.3.4 Smart Card
Banks are adding chops to their current magnetic stripe cards to enhance
security and offer new service called Smart Card. Smart cards technology is
widely used by bankers to market their products. Smart card, which is a chip-
based card, is a kind of an electronic purse. Embedded in the smart card is a
microchip which will store a monetary value. When a transaction is made using
the card, the value is debited and the balance comes down automatically. Once the
monetary value comes down to nil, the balance is to be restored all over again so
14 Natarajan S., and Parameswaran R., “Indian Banking”, S. Chand & Company Ltd, New Delhi,
2010, p.218.
94
that the card becomes operational as usual. It is more secured that ATM, debit and
credit cards because card related frauds and crimes cannot take place in a smart
card. It provides communication security as it verifies whether the signature is
genuine or not. The card also recognizes different voices and compares with the
recorded original voice. It is used for making purchases without the necessity of
requiring the authorization of personal identification number as in a debit card. It
does away with all the problems associated with the traditional currency. Smart
cards allow thousands of times of information storable on magnetic stripe cards.
They hold a large amount of personal information, from medical and health care to
personal banking and personal preferences.
2.7.4.3.5 Internet Banking
Internet has enabled banking at the click of a mouse. Internet banking is all
poised to emerge as the most profound technological service in the near future.
Internet banking reduces banks operating expenses mainly due to savings on
prohibitive estate costs and expensive staff salary. It is estimated that the cost per
transaction in internet banking will be only one-tenth of a regular branch
truncations. Internet banking is a platform for electronic delivery of banking
services to the customers. In internet banking, customer of a bank with a PC and a
browser, can have accounts to his bank’s website, and thereafter perform various
banking functions. Thus, the customer can avail of the bank’s services from
anywhere and at anytime.
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Internet banking involves use of internet for delivery of banking products
and services. With internet banking is now no longer confined to the branches
where one has to approach the branch in person, to withdraw cash or deposit a
cheque or to request a statement of accounts. In internet banking, any inquiry or
transaction is processed online without any reference to the branch (anywhere
banking) at any time. The internet banking now is more of a normal rather than an
exception due to the fact that it is the cheapest way of providing banking services.
The following services are available through internet banking or online banking:
fund transfer, bill payments, railway pass, recharge on prepaid phone, shopping,
investing and the like.
2.7.4.3.6 Core Banking
Banking industry has witnessed a long transformation since the era of
liberalization. With the changing environment, banks implemented tele banking,
internet banking, mobile banking, ATM, etc., one after another for better customer
services. Now it is the turn of core banking solution where the whole banking
industry focuses attention on real time banking. Core banking solution provides a
wide range of banking operations. It enables banks to offer the highest level of
customer service through highly scalable products, capable of handling large
transactions volumes on a real time basis. It provides flexibility in implementation
as it can be configured to run in both centralized and distributed environments.15
Core bank is an integrated set of banking components designed to meet the
15 Mrutyunjaya Pradham., “Core Banking: Solution with Multi Dimensions”, The Indian
Bankers, June, 2006, p.14.
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challenges of new banking demands. A banking institution within a core banking
platform can adjust its strategic business activities with the changing market
conditions.
Core banking enables banks to know their customers more closely and their
requirements, thus enabling them in enhancing customer relationship and
improving customer satisfaction and their market share. With the implementation
of CBS across the branches, the post transaction work is reduced to a greater
extent like back up works at branches. Precious manpower and time saved in
branches can be best utilised in marketing the bank’s products and services. With
CBS the “Branch-Customer” concept is done away with and the “Bank –
Customer” concept is introduced. The branch becomes just a service outlet and
thus the importance of a particular branch gets reduced.16
CBS is a total end to end
solution which takes care of all essential banking activities. It is the main
accounting and centralized transaction processing engine on which the entire
gamut of retail and corporate banking products move. The services offered under
core banking are deposits and withdrawals, fund transfers, settlements, corrections
reversals, online validations, accounts balancing, real time account enquiries,
back-dating, future value dating, foreign currency exchange routines, control over
error accounts, funds availability and the like.
16 Ramani.D “Core Banking – An Overview”, Industrial Herald, August, 2006, p.27.
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2.7.4.3.7 Mobile Banking
A new revolution in the realm of e-banking is the emergence of mobile
banking. Online banking is now moving to the mobile world, giving everybody
with a mobile phone access to real-time banking services, regardless of their
location. But there is much more to mobile banking from just online banking.
Mobile banking is a technology enabled service offering from bank to its
customers, permitting them to operate selected banking services over their mobile
phones. Mobile banking is also known us M-banking or mbanking, SMS banking
etc., is a term used for performing balance checks, account transactions, payments,
mobile recharging etc., via a mobile internet but can also use special programs
called clients downloaded to the mobile device such as a mobile phone. Services
are available through mobile banking are fund transfer, mini-statements, bill
payments, mobile recharge, balance enquiry, credit/debit alerts, cheque status
enquiry, cheque book request and the like.
2.7.4.3.8 Tele-banking
Tele-banking refers to banking on phone services, a customer can access
information about his/her account through a telephone call and by giving the
coded personal identification number (PIN) to the bank. Tele-banking is
increasingly used as a delivery channel for marketing banking services. A
customer can do entire non-cash related banking over the phone anywhere and at
anytime. Automatic Voice Recorders (AVR) or ID numbers are used for rendering
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tele-banking services which have added convenience to customers. Tele-banking
is extensively user friendly and effective in nature.
2.7.4.3.9 E-Cheques
An e-cheque is an electronic funds transfer product that will withdraw
money directly from customer’s bank account. It is just like writing a cheque,
done electronically. Any one with a bank account can now make payment online
and no credit card is required. The customer accesses the merchant server and the
merchant server presents its goods to the customer. The customer selects the goods
and purchases them by sending an e-cheque to the merchant. The merchant
validates the e-cheque with its bank for payment authorization. The merchant
electronically forwards the e-cheque to his bank. The clearing house jointly works
with the customer’s bank clears the cheque and transfers the money to the
merchant’s bank. The merchant’s bank updates the merchant’s account. The
customer’s bank updates the customer’s account with the withdrawal information.
The e-chequing is a great boon to big corporates as well as small retailers.
Most major banks accept e-cheques. Thus, this system offers secured means of
collecting payments, transferring value and managing cash flows.
2.7.4.3.10 Electronic Funds Transfer (EFT)
Many modern banks have computerized their cheque handling process with
computer networks and other electronic equipments. These banks are dispensing
with the use of paper cheques. The system is called electronic fund transfer (EFT)
which automatically transfers money from one account to another. This system
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facilitates a speedier transfer of funds electronically from any branch to any other
branch. In this system the sender and the receiver of funds may be located in
different cities and may even bank with different banks. Funds transfer within the
same city is also made feasible. The scheme has been in operation since February
7, 1996. The other important type of facility in the EFT system is automated
clearing houses. These are the computer centers that handle the bills meant for
deposits and for payment. In major companies the staff salary is not disbursed by
issue of cheques or issuing cash. The payment office programmes the computer to
credit an employee’s account with his pay.
EFT facilitates transfer of funds from the bank account of one customer to
the bank account of another customer. The account holders having savings /
current / cash credit with the bank can use the EFT facility presently available at
Mumbai, Calcutta, New Delhi and Chennai. The upper limit for individual EFT
transaction is `500000. Most of the commercial banks are the participating banks
under the EFT system.
2.7.4.3.11 Electronic Clearing Services (ECS)
Another mode of effective payment was the introduction of electronic
clearing service. It is a simple reliable and cost effective solution for bulk and
repetitive payment transactions like salaries, pensions, interests, commissions and
dividends by public or private companies and government departments through
commercial banks.
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Under the credit clearing scheme, companies who have to make bulk
payments to a large number of beneficiaries prepare the credit instruments on the
magnetic media and submit the same to RBI through their bankers. RBI processes
the data, arrive at inter bank settlement and provides bank and branch wise reports
containing the details of payments to facilitate fast payments to the beneficiaries.
This scheme was introduced in Chennai and Mumbai in April 199517
.
Electronic debit clearing was introduced in March 1996 by RBI18
. This
scheme covers the payment activities like telephone bills, electricity bills, loan
installments, insurance premium, school, college, and club membership fees,
credit card dues, water taxes, property taxes and other regular payments. With the
slow progress in the initial stage, now this scheme has become popular among
customers. Banks also get benefit because of reduced overheads.
2.7.4.3.12 Shared Payment Network System (SPNS)
SPNS namely SWADHAN is a large net work of ATMs, first spread over
the city of Mumbai, Vashi and Thane at the time of introduction. Most of the
banks now provide this facility to their customers. The objective behind the
forming of SWADHAN net work is to provide 24 hours, 365 days a year
electronic banking service to customers. The SWADHAN project is the first of its
kind in India. Any time and any where basic banking services are made available
to the ATM card holders. The customer can transact essential banking business
like cash withdrawal, deposits balance enquiry and the like from any SWADHAN
17 K.S Rajashekara, “Application of IT in Banking “, Southern Economist, May 2004, p. 12.
18 Ibid p. 12.
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member banks ATM at any point of time. The locational and round the clock
convenience of ATM’s improves the level of customer satisfaction. A well
positioned ATM system can be a highly effective marketing tool, for the entire
banks image.
2.7.4.3.13 Real Time Gross Settlement (RTGS)
The Real Time Gross Settlement (RTGS) is a new system of payments
evolved in the Indian banking environment. Its main objective is to enable online
clearing and settlement of payments on a real-time basis across banks in different
cities. The RTGS is an upgraded technology aimed at reducing dependence on
payments through cheques. It is radically different from the present day paper-
based clearing system. It not only permits net settlements between banks but also
eliminates systematic risk due to advanced technological innovations.
2.7.4.3.14 National Electronic Funds Transfer (NEFT)
NEFT facilitates transfer of Funds from the bank account of one customer
to the bank account of another customer. This facility is available to customers
who have bank accounts. There is no limit of amount for transfer. Money can be
transferred only to those branches of banks where this NEFT facility is enabled.
Once the transaction is put through, customer cannot stop the payment. It is an
efficient, secure, economical, reliable, expeditious and super fast mode of
domestic money transfer and clearing in the banking sector through out India. It
relieves the stress on the existing paper based funds transfer and clearing system.
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It is mostly used by corporate customers. RBI has introduced NEFT system
mainly to send small value payments at nominal cost.
2.7.4.3.15 Demat
Demat is short for de-materialization of shares. In short, demat is a process
where at the customer’s request the physical stock is converted into electronic
entries in the depository system. In January 1998 SEBI (Securities and Exchange
Board of India) initiated DEMAT ACCOUNTANCY System to regulate and to
improve stock investing. As on date, to trade on shares it has become compulsory
to have a share demat account and all trades take place through demat. Access to
the demat account requires an internet password and a transaction password.
Transfers or purchases of securities can then be initiated. Purchases and sales of
securities on the demat account are automatically made once transactions are
confirmed and completed.
A demat account reduces brokerage charges (which are usually around
2.5%), makes pledging/hypothecation of shares easier, enables quick ownership of
securities on settlement resulting in increased liquidity, avoids confusion in the
ownership title of securities, and provides easy receipts for public issue allotments
or initial public offerings (IPOs). A demat account also helps avoid problems
typically associated with physical share certificates, like delivery failures caused
by signature mismatch, postal delays and loss of certificate during transit. Further,
it eliminates the risks associated with forgery and loss due to damaged stock
certificates. Demat account holders also avoid stamp duty (as against 0.5 per cent
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payable on physical shares) and filling up of transfer deeds. Demat account
holders usually obtain quicker receipts of benefits like stock splits and bonuses.
2.7.4.4 Benefits of Technological Services
Some of the benefits that accrue through the technological services
provided by commercial banks are
Service is quick and efficient.
Privacy in transaction.
Wider flexibility in place and time of withdrawals.
The transaction is completely secure
Crowding at bank counters is considerably reduced.
Avoids opening new branches and reduces operating expenses.
Enable bank staff to focus on a more analytical and innovative work.
Increased market penetration.
Unlimited network to the bank.
Quick response.
Time saved during operations.
Anywhere banking service no matter wherever the customer is in the world.
Anytime banking – managing funds in real time and most importantly, 24
hours a day, seven days a week.
Convenience acts as a tremendous psychological benefit all the time.
Brings down “cost of banking” to the customer over a period of time.
Cash withdrawal from any branch / ATM
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On-line purchase of goods and services including online payment for the
same.
Innovative scheme, addresses competition and present the bank as
technology driven in the banking sector market
Reduces customer visits to the branch and thereby human intervention
Inter-branch reconciliation is immediate thereby reducing chances of fraud
and misappropriation
On-line banking is an effective medium of promotion of various schemes of
the bank.
Integrated customer data paves way for individualized and customized
services.
2.8 CONCLUSION
The origin, growth and the product services of commercial banks were
discussed in this chapter. The major theme of the thesis, viz., perception of
commercial banks activities as seen by the customers and their expectations in this
regard are discussed the forthcoming chapters. In the next chapter the socio
economic profile of the respondents is brought out.
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