Introduction

Banking occupies one of the most important portions in the modern economic world. It is necessary for trade and industry hence it is one of the great agencies of commerce. Although banking in one form or another has been in existence from very early times, modern banking is of recent origin. It is one of the result of the industrial revolution and the child of the economic necessity. Its presence is very helpful to the economic activity and industrial progress of a country.

Meaning and definitions

The banking companies act of India defines a bank as, A bank is a financial institution which accepts money from the public for the purpose of leading or investment repayable on demand or demand or otherwise with withdrawal by check, drafts or order or otherwise. Thus we can say that a bank is a financial institution, which deals in debits and credits. It is accepts deposits leads money and also creates money. It bridges the gap between the savers and borrower banks are not merely traders in money but also the manufacturers of money.

Origin of banking
The terms bank is derived from the Italian word banco the Latin word bancas and the French word bahque which means a bench..European moneylenders & moneychangers in the part used benches to exhibit coins of different countries in the market places. As such the word Bank but banking in the modern sense in began in England with gold

smiths certificates large sums of money in the form of gold were deposited with gold smith for safe custody goldsmiths issued receipt. Acknowledging the receipt of gold in course of time these receipt began to be circulated as money. Later goldsmiths began to lend the accumulated gold deposits on profitable terms thus receiving deposits payable on demand & granting of loans marked the beginning of modern banking up to this stage all deposits and bank notes were fully backed by metals and metallic coins but soon the bankers discovered that to meet their promises to pay money on demand they did not need to hold metals or metallic coins equal to 10% of their outstanding debts. They started keeping only a specific fraction of there. Outstanding debts in cash or coins and lent the remaining portion to the

creditworthy traders the bankers paid interest on the balances and charged interest from the borrowers. The fractional reserve principal is the back bone of modern banking it has given the bank a great power of increasing or decreasing the total money supply by the mechanism of credit creation or contraction. Bank of Venice started in Italy is said to be the oldest banking institution in the world the bank of Barcelona was started in 1401 and the bank of Genoa in 1407 the bank of Amsterdam was launched in 1609 the Lombard who migrated to Europe and England from Italy were responsible for development of modern their business suffered when king Charles II imposed severs restrictions on them. The goldsmiths were gradually replaced by private bankers the growth of joint stock commercial banking started often the banking act was passed in 1833 in England thus seeds were sown for the growth of modern commercial banking during the 19th century.

Evolution of Banking Sector

Ancient Hindi scriptures provide enough evidence of the existence of money lending business in India. Mahajans, shroffs, sahukars, etc. were engaged in banking business. In the beginning of the 18th century the east India Company set up a few commercial banks on modern lines in 1770. First Indian bank known as the bank of Hindustan was started and was classed down. Twenty years later the east India Company started. Three presidency bank with govt. participation these were the bank of Calcutta (1806) the bank of Bombay (1840) and the bank of madras (1843) these banks had the financial participation by the government also. During the 18jth-century agency houses in madras and Calcutta all these banks failed also opened some other banks. Since all the banks emerged due to the failure of agency houses the need of banking regulation India was seriously felt. As a result banking companies act, 1833 was brought into force the . impact other agency houses got slowly reduced. Allahabad bank came into existence in 1865 and alliance bank of simla in 1875 the first peruly Indian jaint stock bank known as the oudh commercial bank was setup in 1880. The Punjab national bank was launched in 1894. The swadeshi movement in the country in 1906 encouraged the Indian entrepreneurs to start many new banks there were as many as 648 commercial banks in India by the end of 1947 as many as 161 bank failed in succession during 1913-1914 and the peoples faith in the banking system was shaken thus

there was great needs of a institution to control and regulate banking in the country as a result, the reserve bank of India was setup in 1935 for regulating the banks in the country and to act as a banker to the government.

Banking After Independence

When the country attained independence in 1947 there were 648 commercial banks with 4819 branches in India. Because of frequent failure of banks in the country the government of India decided to regulate and reform the banking system the reserve bank of India was nationalized in 1949 and the banking companies act was passed in the same years. The name of this act was later changed to banking regulation act in 1965 enhancement of the banking companies act was an important landmark for the smooth progress of commercial banks in the country. A scheme of social control on banks was enforced through statutory measures with effect from 1st Feb 1969 the banking. The banking industry saw a revolution after 14 major commercial banks were nationalized in June 1969 more tan 90% of the bank deposits came under the control of government. Regional rural banks scheme was launched and 2-10-1975 six more leading commercial banks were nationalized in 1980 as a result of the recommendations of sivaraman committee, agricultural credit department. Rural planning and credit cell and agricultural refinance and development corporation were combined together to setup national bank for agriculture and rural

development (NABARD) in July 1982 later. The export and import bank of India ( Exim bank ) and the national housing bank were setup in 1984 and 1988 respectively.

Meaning of Commercial bank

A commercial bank is a profit seeking business firm dealing in money and credit it is financial institution dealing money in the sense that it accepts deposits of money from the public to keep them in its custody for safety so also it deals in credit i.e. it creates credit by making advances out of the funds received as deposited to the needy people. It thus functions as amboliser of saving in the economy bank is therefore like a reservoir into which flow the savings. The economy a bank is therefore like a reservoir into which flow the savings the idle surplus money of house holds and from which loans are given an interest to business and others who need them for unrutment or productive uses.

Changing profile of Indian Banking

Banking industry in India has undergone some significant changes after opening up of the sector in 1990. These changes can be summarized as follows 1. SHIFT FROM SECURITY ORIENTATION TO PURPOSE ORIENTATION Earlier the bank credit was mostly given to credit worthy customer based an their tangible assets offered as security. So people of means could get bank finance this concept had not met the need based finance which is one of the social objectives that any bank should perform. Hence the concept of purpose orientation was introduced where in the due

important was given to technical competence of borrower operational flexibility and the economic viability of the project. Also the recognition of priority sector for financing was an important step towards bringing up the so for neglected sector of the economy. So as a result of this priority sector lending rose from 307 crores in 1966 to 53.197 crores in 1994. 2. CORRECTION OF REGIONAL IMBALANCE After the nationalized banks started the expansion of network branches to unbanked areas of the country. There were 6600 branches in 1966 and in 1969 it rose to 8260 but at present its statistics reached to 66.179 branch serving 1600 people for every branch. Another approach of banks to correct regional imbalance is lead bank scheme lead banks are engaged in Preparing credit plans to assist in the economic development of rural area and to bring above a more systematic involvement of commercial banks in grass root level development. 3. DEVELOPMENT OF BANKING HABIT Change from class bearing to mass bearing the banking system in the country has made sustained efforts to develop banking habit among large population . it includes influencing people to keep a part of the savings as bank deposits and to expand and diversify their leading portfolio to cover a considerable large numbers of borrowers than before.

Banking system efforts are notable as the volume of banking transaction. If in relation to GDP has increased deposits amounted to 13% of GDP and advances amounted to 10% in 1969, but it rose to 41% and 24% respectively in 1993. This can also be witnessed by increase use of cheques in the economy. STEP TOWARDS PAPERLESS BANKING Western countries have introduced electronic transfer system (ETS) in which funds are transferred electronically over telephone. It replaces the present system of funds. Transfer through paper documents which tables not less than 3 days. Chore committee constituted in 1995 has strongly recommended, that there is the need for a new EFT system after considering the various legal implications. The RBI has called upon all rationalized banks to prepare themselves for EFT system. 4. ESTABLISHMENT OF SPECIALIZED BRANCHES The recent trend in banking system is established of specialized branches to cater to the needs of specific segment of clientele viz. NRI branch To cater the needs of NRI clients Industrial Finance Branch exclusively for industrial clients Overseas branch to specifically concentrate on EXIM business Recovery branch to exclusively concentrate on recovery of NPA SSI branch to deal with small scale industries exclusively

Professional branch to cater the needs of professionals Agricultural finance branch to cater the needs of hi-tech agro products

exporrt clients 6. DIVESIFICATION OF BANKING The bank activities have been diversified by setting up of subsidiaries/mutual funds or contributory to equity to companies offering financial services . thus many bank have now entered into the field of merchant banking services factoring services asset management services etc. Also bank lending has been extended to long term finance to industries for their development purpose so transformation of commercial bank from being money lenders to development bankers is a recent phenomenon in the Indian banking system. 7. CUSTOMER FOCUS Todays customers are more quality conscious than a few years back. However hard a bank may try to meet customer expectations there will always be an occasions for customer complaints. Hence RBI has introduction the banking ombudsman scheme. Its main objective is to crate a forum the speedy redressal of complaints above the provision of banking services one to facilitate the settlement or withdrawal of such grievances. 8. EMERGENCE OF RECTAL BANKING

The retail banking has become more population from the recent past where in the deposits are mobilized from individuals and different types of loans are provided to them. The reasons that made banks to focus much on the so far ignored sector are : Increasing competition from non banks and the capital market The margin allowed in corporate lending is much less than retail lending. Existence of huge retail market in India because of all these reasons the

retailer banking has gained its importance now a days and in this customer is crowed as king. 9. INCOME RECOGNITION AND ASSETS CLASSIFICATION There was a time when all lending of the banks were treated as assets and the interest was charged an all loans with our giving importance to its recovery but in recent years from 1993 onwards. The due importance has been given to performance i.e. interest payment and installment repayment loans based on the new guidelines of RBI assets been classified as a. standard assets b. sub-standard asset c. doubtful asset d. loss asset

a. Standard asset :It is an asset where interest payment and loan repayment are reckoned normally without any dues. Even for this asset 0.25% provision must be provided. b. Sub-standard asset :If in any advance no interest and installment is collected continuously for 90 days. Then it will be treated as sub-standard asset and no interest is further charged on that advance 10% of the portion and 100% of the unsecured portion is provided as provision. c.

Doubtful Asset :-

There are three classification of doubtful asset D1 :- where interest payment and a loan repayment is not reckoned for one and a half years for this 20% secured portion and 100% of unsecured portion is provided as provision. D2 :- if interest and installment are not collected continuously for three and a half years it will become D2 asset and a provision of 30% of secured portion and 100% unsecured portion is made. D3 :- if interest and installments are not collected for four and half years that advances is called D3 asset and treatment for this is 50% of secured portion and 100% unsecured portion as provision.

d.

Loss asset :If there is no interest and installment repayment continuously for five and a half years

that assets is treatment as loss asset and 100% provision is made for that. 10. REAL TIME GROSS SETTLEMENT (RTGS) RTGS is system in which the settlement of inter bank transactions takes place instantaneously. It helps in speedy settlement of transactions instant transfer and credit of funds obtaining the need for traditional funds transfer mechanisms like pay order demand drafts, mail transfer, telegraphic transfer etc. It services vendor logica CMG is offering the technique solution some of the private bank like ING Vysya. Indus bank have already signed up for its implementation. RBI and some foreign banks like citi bank have already implemented it public sector bank will be implementing the same due course.

Functions of banks
Prof. Sayers in his book modern banking has desirable the functions of a modern bank in the following words. Ordinary banking business consists of changing cash from bank deposit for cash transferring bank deposits from one person to another and giving bank deposits in exchanger of bill of exchange government bonds the secured promised of business men to repay and so forth. The above quotation briefly sum up the main function for the banks. The various functions of modern bank are as follows.

a) ACCEPTING DEPOSITS FROM THE PUBLIC Accepting various types of deposits is an important function of the commercial bank those who have cash balance want to keep them in safe place i.e. deposit the sum in bank they protect as well as provide a convenient method transfer found through cheques. The bank accept three types of deposits 1. fixed deposits 2. current deposit 3. savings deposit A fixed deposit is one who where a customer keeps a certain amount to money in a bank for specific period. It carries higher rates of interest then that allowed to savings deposits the longer the period the higher the interest rates and vice versa. Savings deposits are those deposit on which the bank pays a certain rates of interest to the depositors subject to certain condition. A person can open the account with a small amount and go on depositing any amount the customers are expected to maintain a minimum balance in the account. There is certain restriction with regarding to withdrawals. Bank fix the minimum number of withdraw in a year withdrawals can be made either buy made withdrawals stips or cheque those customer who want to use cheques have to maintain a balance at higher amount savings accounts are intended to these who have small incomes.

Current deposits are these deposits which can be withdrawals at any time by mean of cheques the bank does not pay interest an current deposits. There are no restrictions on withdrawals generally traders and businessmen keep their money in their account they can withdraw over and above their account balance. This is called over draft. b) MAKING LOANS AND ADVANCES Bank receive deposits with a view to lend it is one the most important functions of banks direct loans and advances are given to all types of person against the security of movable properties the difference types of loans given by the banks are as follows. Direct loans Cash credits Bills discounted Overdrafts

c) AGENCY SERVICES Customers can arrange for dividend to be sent to their banks and paid in to their accounts. Orders for the purchase of sale of stock exchange securities are excited through the banks.

 Banks will make application an behalf of their customer for all assortment arising from new capital issues pay calls as they fall due. Obtain the share certification or documents of title On certain agreed terms the banks will allow their hands to appear an approved prospectors or other document as bankers for the issue of new capital. Banks undertake payment of Subscriptions Premier Rents Collections of cheques, bills promissory notes on behalf of customer It also acts as representative of customer to other banks and financial corporations They aims to provide a complete charge of trustee, executor to adviser services for small charge. Most banks will undertake on behalf of their customer the preparation of income tax return and claims for recovery of overpaid tax. d) GENERAL UTILITY SERVICES It includes the issue of credit instruments like letter of credit and travelers cheque. i. The acceptance of bill of exchange

ii. The safe custody of valuables and documents iii. The transactions of foreign exchange business iv. Acting as a referee as to the respectabilitys and financial standing of customer and providing specialized advisory services to customers. e) OVERSEAS TRADING SERVICES Recognition of overseas trade has led modern banks to the setup branches specializing in the finance of foreign trade and some banks in some banks in some countries have been taken interest in export houses and factoring of organizations. They provide credit and enable the companies to release the capital, which would otherwise to tied up in the goods exported. f) INFORMATION AND OTHER SERVICES Some banks produce regular bulletins on trade and economic conditions at home and abroad and special reference on commodities markets. Advice an appointment of suitable agents. For business travelling abroad letters of introduction. On request banks obtain for customer for business purposes confidential opinions on the financial standing of COs.

PRINCIPLE TO BE OBSERVED IN DISTRIBUTING THE FUNDS OF THE BANK liquidity profitability and safety productivity diversity salabity of securities shift ability other conditions

Achievement of indian banking system

banks have brought about organizational changes to meet customers changing need effectively. Change from whole sale character to retail character of banking. Purpose orientation in lending. Credit planning to calculate funds to priority sectors . Reduction of regional imbalances.

 Development of banking habit and deposit mobilization. Increase in the volume of credit. Increase in advances to priority sector and weaker sections.

Drawbacks of Indian banking system

Poor capital base

The capital resources of Indian banks are very low when compared to international standard. Inefficient organizational structure Institutional overlapping

Unhealthy competition Double financing Poor and declining customer service Declining profitability Poor recovery of advances

THE NEW FACE OF INDIAN BANKING A survey was conducted by business India, to rank the major players in Indian banking industry. The critical parameters used for ranking includes Capital adequacy Net non performing assets Advances to assets This survey ranked the banks in the following categories I. II. Resources deployed Earnings quality

Secured and unsecured advances

The bank advances are broadly classified into two categories :