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BANKING SERVICES IN INDIA

I. HISTORY OF BANKING IN INDIA

There are three different phases in the history of banking in India.

1) Pre-Nationalization Era.
2) Nationalization Stage.
3) Post Liberalization Era.

1) Pre-Nationalization Era:

In India the business of banking and credit was practices


even in very early times. The remittance of money through Hundies,
an indigenous credit instrument, was very popular. The hundies were
issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans
in different parts of the country.

The modern type of banking, however, was developed by


the Agency Houses of Calcutta and Bombay after the establishment of
Rule by the East India Company in 18th and 19th centuries.

During the early part of the 19th Century, ht volume of


foreign trade was relatively small. Later on as the trade expanded, the
need for banks of the European type was felt and the government of
the East India Company took interest in having its own bank. The
government of Bengal took the initiative and the first presidency bank,
the Bank of Calcutta (Bank of Bengal) was established in 180. In

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1840, the Bank of Bombay and IN 1843, the Bank of Madras was also
set up.

These three banks also known as “Presidency Bank”. The Presidency


Banks had their branches in important trading centers but mostly
lacked in uniformity in their operational policies. In 1899, the
Government proposed to amalgamate these three banks in to one so
that it could also function as a Central Bank, but the Presidency
Banks did not favor the idea. However, the conditions obtaining
during world war period (1914-1918) emphasized the need for a
unified banking institution, as a result of which the Imperial Bank was
set up in1921. The Imperial Bank of India acted like a Central bank
and as a banker for other banks.

The RBI (Reserve Bank of India) was established in 1935


as the Central Bank of the Country. In 1949, the Banking Regulation
act was passed and the RBI was nationalized and acquired extensive
regulatory powers over the commercial banks.

In 1950, the Indian Banking system comprised of the RBI,


the Imperial Bank of India, Cooperative banks, Exchange banks and
Indian Joint Stock banks.

2) Nationalization Stages:

After Independence, in 1951, the All India Rural Credit survey,


committee of Direction with Shri. A. D. Gorwala as Chairman
recommended amalgamation of the Imperial Bank of India and ten
others banks into a newly established bank called the State Bank of

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India (SBI). The Government of India accepted the recommendations
of the committee and introduced the State Bank of India bill in the
Lok Sabha on 16th April 1955 and it was passed by Parliament and got
the president’s assent on 8th May 1955. The Act came into force on 1st
July 1955, and the Imperial Bank of India was nationalized in 1955 as
the State Bank of India.

The main objective of establishing SBI by nationalizing the Imperial


Bank of India was “to extend banking facilities on a large scale more
particularly in the rural and semi-urban areas and to diverse other
public purposes.”

In 1959, the SBI (Subsidiary Bank) act was proposed and


the following eight state-associated banks were taken over by the SBI
as its subsidiaries.

Name of the Bank Subsidiary with effect from

1. State Bank of Hyderabad 1st October 1959

2. State Bank of Bikaner 1st January 1960

3. State Bank of Jaipur 1st January 1960

4. State Bank of Saurashtra 1st May 1960

5. State Bank of Patiala 1st April 1960

6. State Bank of Mysore 1st March 1960

7. State Bank of Indore 1st January 1968

8. State Bank of Travancore 1st January 1960

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With effect from 1st January 1963, the State Bank of
Bikaner and State Bank of Jaipur with head office located at Jaipur.
Thus, seven subsidiary banks State Bank of India formed the SBI
Group.

The SBI Group under statutory obligations was required


to open new offices in rural and semi-urban areas and modern
banking was taken to these unbanked remote areas.

On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi
announced the nationalization of 14 major scheduled Commercial
Banks each having deposits worth Rs. 50 crore and above. This was a
turning point in the history of commercial banking in India.
Later the Government Nationalized six more
commercial private sector banks with deposit liability of not less
than Rs. 200 crores on 15th April 1980, viz.
i) Andhra Bank.
ii) Corporation Bank.
iii) New Bankof India.
iv) Oriental Bank of Commerce.
v) Punjab and Sind Bank.
vi) Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend


banking facilities to every corner of the country. Later in 1975,
Regional Rural Banks were set up to supplement the activities of the

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commercial banks and to especially meet the credit needs of the
weaker sections of the rural society.

Nationalization of banks paved way for retail banking and


as a result there has been an alt round growth in the branch network,
the deposit mobilization, credit disposals and of course employment.

The first year after nationalization witnessed the total growth in the
agricultural loans and the loans made to SSI by 87% and 48%
respectively. The overall growth in the deposits and the advances
indicates the improvement that has taken place in the banking habits
of the people in the rural and semi-urban areas where the branch
network has spread. Such credit expansion enabled the banks to
achieve the goals of nationalization, it was however, achieved at the
coast of profitability of the banks.

Consequences of Nationalization:
 The quality of credit assets fell because of liberal credit
extension policy.
 Political interference has been as additional malady.
 Poor appraisal involved during the loan meals conducted for
credit disbursals.
 The credit facilities extended to the priority sector at
concessional rates.
 The high level of low yielding SLR investments adversely
affected the profitability of the banks.
 The rapid branch expansion has been the squeeze on
profitability of banks emanating primarily due to the increase in
the fixed costs.
 There was downward trend in the quality of services and
efficiency of the banks.
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3) Post-Liberalization Era---Thrust on Quality and Profitability:
By the beginning of 1990, the social banking goals set for
the banking industry made most of the public sector resulted in the
presumption that there was no need to look at the fundamental
financial strength of this bank. Consequently they remained
undercapitalized. Revamping this structure of the banking industry
was of extreme importance, as the health of the financial sector in
particular and the economy was a whole would be reflected by its
performance.
The need for restructuring the banking industry was felt
greater with the initiation of the real sector reform process in 1992. the
reforms have enhanced the opportunities and challenges for the real
sector making them operate in a borderless global market place.
However, to harness the benefits of globalization, there should be an
efficient financial sector to support the structural reforms taking place
in the real economy. Hence, along with the reforms of the real sector,
the banking sector reformation was also addressed.
The route causes for the lackluster performance of banks,
formed the elements of the banking sector reforms. Some of the
factors that led to the dismal performance of banks were.
 Regulated interest rate structure.
 Lack of focus on profitability.
 Lack of transparency in the bank’s balance sheet.
 Lack of competition.

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 Excessive regulation on organization structure and managerial
resource.
 Excessive support from government.

Against this background, the financial sector reforms were initiated to


bring about a paradigm shift in the banking industry, by addressing
the factors for its dismal performance.
In this context, the recommendations made by a high level
committee on financial sector, chaired by M. Narasimham, laid the
foundation for the banking sector reforms. These reforms tried to
enhance the viability and efficiency of the banking sector. The
Narasimham Committee suggested that there should be functional
autonomy, flexibility in operations, dilution of banking strangulations,
reduction in reserve requirements and adequate financial
infrastructure in terms of supervision, audit and technology. The
committee further advocated introduction of prudential forms,
transparency in operations and improvement in productivity, only
aimed at liberalizing the regulatory framework, but also to keep them
in time with international standards. The emphasis shifted to efficient
and prudential banking linked to better customer care and customer
services.

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Private Sector Banks

Private banking in India was practiced since the begining


of banking system in India. The first private bank in India to be set up
in Private Sector Banks in India was Indus Ind Bank. It is one of the
fastest growing Bank Private Sector Banks in India. IDBI ranks the
tenth largest development bank in the world as Private Banks in
India and has promoted a world class institutions in India.

The first Private Bank in India to receive an in principle


approval from the Reserve Bank of India was Housing Development
Finance Corporation Limited, to set up a bank in the private sector
banks in India as part of the RBI's liberalization of the Indian
Banking Industry. It was incorporated in August 1994 as HDFC Bank
Limited with registered office in Mumbai and commenced operations
as Scheduled Commercial Bank in January 1995.

ING Vaysya, yet another Private Bank of India was


incorporated in the year 1930. Bangalore has a pride of place for
having the first branch inception in the year 1934. With successive
years of patronage and constantly setting new standards in banking,
ING Vaysya Bank has many credits to its account.

Entry of Private Sector Banks:


There has been a paradigm shift in mindsets both at the
Government level in the banking industry over the years since
Nationalization of Banks in 1969, particularly during the last decade
(1990-2000). Having achieved the objectives of Nationalization, the

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most important issue before the industry at present is survival and
growth in the environment generated by the economic liberalization
greater competition with a view to achieving higher productivity and
efficiency in January 1993 for the entry of Private Sector banks based
on the Nationalization Committee report of 1991, which envisaged a
larger role for Private Sector Banks.

The RBI prescribed a minimum paid up capital of Rs. 100 crores for
the new bank and the shares are to be listed at stock exchange. Also
the new bank after being granted license under the Banking
Regulation Act shall be registered as a public limited company under
the companies Act, 1956.

Private Sector Banks

Old Pvt. Sector Banks (25) New Pvt. Sector Banks (9)

Subsequently 9 new commercial banks have been granted


license to start banking operations. The new private sector banks have
been very aggressive in business expansion and is also reporting
higher profile levels taking the advantage of technology and skilled
manpower. In certain areas, these banks have even our crossed the
other group of banks including foreign banks.

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Current scenario

Currently (2007), overall, banking in India is considered


as fairly mature in terms of supply, product range and reach-even
though reach in rural India still remains a challenge for the private
sector and foreign banks. Even in terms of quality of assets and capital
adequacy, Indian banks are considered to have clean, strong and
transparent balance sheets-as compared to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous
body, with minimal pressure from the government. The stated policy
of the Bank on the Indian Rupee is to manage volatility-without any
stated exchange rate-and this has mostly been true. With the growth in
the Indian economy expected to be strong for quite some time-
especially in its services sector, the demand for banking services-
especially retail banking, mortgages and investment services are
expected to be strong. M&As, takeovers, asset sales and much more
action (as it is unraveling in China) will happen on this front in India.

In March 2006, the Reserve Bank of India allowed


Warburg Pincus to increase its stake in Kotak Mahindra Bank (a
private sector bank) to 10%. This is the first time an investor has been
allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private
sector banks would need to be vetted by them. Currently, India has 88
Scheduled Commercial Banks (SCBs) - 28 public sector banks (that is
with the Government of India holding a stake), 29 private banks (these

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do not have government stake; they may be publicly listed and traded
on stock exchanges) and 31 foreign banks.

They have a combined network of over 53,000 branches


and 17,000 ATMs. According to a report by ICRA Limited, a rating
agency, the public sector banks hold over 75 percent of total assets of
the banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively.

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II. BANKING IN INDIA

Overview of Banking:

Banking Regulation Act of India, 1949 defines Banking as


“accepting, for the purpose of lending or of investment of deposits of
money from the public, repayable on demand or otherwise or
withdrawable by cheque, draft order or otherwise.” The Reserve Bank
of India Act, 1934 and the Banking Regulation Act, 1949, govern the
banking operations in India.

Organizational Structure of Banks in India:

In India banks are classified in various categories


according to different criteria. The following charts indicate the

Reserve Bank of India

Commercial Banks Co-operative Banks Development Banks

Nationalized Private Short-term Long-term


credit credit

Agricultural Urban
EXIM Industrial Agricultural
Credit Credit

banking structure:

Broad Classification of Banks in India:

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1) The RBI: The RBI is the supreme monetary and banking
authority in the country and has the responsibility to control the
banking system in the country. It keeps the reserves of all
scheduled banks and hence is known as the “Reserve Bank”.
2) Public Sector Banks:
• State Bank of India and its Associates (8)
• Nationalized Banks (19)
• Regional Rural Banks Sponsored by Public Sector Banks (196)

(3) Private Sector Banks:

• Old Generation Private Banks (22)


• Foreign New Generation Private Banks (8)
• Banks in India (40)

(4) Co-operative Sector Banks:

• State Co-operative Banks


• Central Co-operative Banks
• Primary Agricultural Credit Societies
• Land Development Banks
• State Land Development Banks

(5) Development Banks: Development Banks mostly provide long


term finance for setting up industries. They also provide short-term
finance (for export and import activities)

• Industrial Finance Co-operation of India (IFCI)


• Industrial Development of India (IDBI)

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• Industrial Investment Bank of India (IIBI)
• Small Industries Development Bank of India (SIDBI)
• National Bank for Agriculture and Rural Development (NABARD)
• Export-Import Bank of India

Role of Banks:

Banks play a positive role in economic development of a


country as repositories of community’s savings and as purveyors of
credit. Indian Banking has aided the economic development during
the last fifty years in an effective way. The banking sector has shown a
remarkable responsiveness to the needs of planned economy. It has
brought about a considerable progress in its efforts at deposit
mobilization and has taken a number of measures in the recent past
for accelerating the rate of growth of deposits. As recourse to this, the
commercial banks opened branches in urban, semi-urban and rural
areas and have introduced a number of attractive schemes to foster
economic development.

The activities of commercial banking have growth in


multi-directional ways as well as multi-dimensional manner. Banks
have been playing a catalytic role in area development, backward area
development, extended assistance to rural development all along
helping agriculture, industry, international trade in a significant
manner. In a way, commercial banks have emerged as key financial
agencies for rapid economic development.

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By pooling the savings together, banks can make available
funds to specialized institutions which finance different sectors of the
economy, needing capital for various purposes, risks and durations.
By contributing to government securities, bonds and debentures of
term-lending institutions in the fields of agriculture, industries and
now housing, banks are also providing these institutions with an access
to the common pool of savings mobilized by them, to that extent
relieving them of the responsibility of directly approaching the saver.
This intermediation role of banks is particularly important in the
early stages of economic development and financial specification. A
country like India, with different regions at different stages of
development, presents an interesting spectrum of the evolving role of
banks, in the matter of inter-mediation and beyond.

Mobilization of resources forms an integral part of the


development process in India. In this process of mobilization, banks
are at a great advantage, chiefly because of their network of branches
in the country. And banks have to place considerable reliance on the
mobilization of deposits from the public to finance development
programmes. Further, deposit mobalization by banks in India
acquired greater significance in their new role in economic
development.

Commercial banks provide short-term and medium-term


financial assistance. The short-term credit facilities are granted for
working capital requirements. The medium-term loans are for the

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acquisition of land, construction of factory premises and purchase of
machinery and equipment. These loans are generally granted for
periods ranging from five to seven years. They also establish letters of
credit on behalf of their clients favouring suppliers of raw
materials/machinery (both Indian and foreign) which extend the
banker’s assurance for payment and thus help their delivery. Certain
transaction, particularly those in contracts of sale of Government
Departments, may require guarantees being issued in lieu of security
earnest money deposits for release of advance money, supply of raw
materials for processing, full payment of bills on the assurance of the
performance etc. Commercial banks issue such guarantees also.

The Role of Reserve Bank of India (RBI) – Banker’s Bank:

The Reserve Bank of India (RBI) is the central bank of


India, and was established on April 1, 1935 in accordance with the
provisions of the Reserve Bank of India Act, 1934. Since its inception,
it has been headquartered in Mumbai. Though originally privately
owned, RBI has been fully owned by the Government of India since
nationalization in 1949.

RBI is governed by a central board (headed by a


Governor) appointed by the Central Government. The current
governor of RBI is Dr.Y.Venugopal Reddy (who succeeded Dr. Bimal
Jalan on September 6, 2003). RBI has 22 regional offices across
India.The Reserve Bank of India was set up on the recommendations

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of the Hilton Young Commission. The commission submitted its report
in the year 1926, though the bank was not set up for nine years.

Main Objective:

Monetary Authority
• Formulates, implements and monitors the monetary policy.
• Objective: maintaining price stability and ensuring adequate
flow of credit to productive sectors.

Regulator and supervisor of the financial system

• Prescribes broad parameters of banking operations within


which the country’s banking and financial system functions.
• Objective: maintain public confidence in the system, protect
depositors’ interest and provide cost-effective banking services
to the public. The Banking Ombudsman Scheme has been
formulated by the Reserve Bank of India (RBI) for effective
redressal of complaints by bank customers

Manager of Exchange Control

• Manages the Foreign Exchange Management Act, 1999.


• Objective: to facilitate external trade and payment and promote
orderly development and maintenance of foreign exchange
market in India.

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Issuer of currency

• Issues and exchanges or destroys currency and coins not fit for
circulation.
• Objective: to give the public adequate quantity of supplies of
currency notes and coins and in good quality.

Developmental role

• Performs a wide range of promotional functions to support


national objectives.

Related Functions

• Banker to the Government: performs merchant banking


function for the central and the state governments; also acts as
their banker.
• Banker to banks: maintains banking accounts of all scheduled
banks.
• Owner and operator of the depository (SGL) and exchange
(NDS) for government bonds.

There is now an international consensus about the need to focus the


tasks of a central bank upon central banking. RBI is far out of touch
with such a principle, owing to the sprawling mandate described
above.

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Supervisory Functions:

In addition to its traditional central functions, the Reserve


bank has certain non-monetary functions of the nature of supervision
of banks and promotion of sound banking in India. The Reserve Bank
Act, 1934, and the Banking Regulation Act, 1949 have given the RBI
wide powers of supervision and control over commercial and
cooperative banks, relating to licensing and establishments, branch
expansion, liquidity of their assets, management and methods of
working, amalgamation, reconstruction and liquidation. The RBI is
authorized to carry out periodical inspections of the banks and to call
for returns and necessary information from them. The nationalization
of 14 major Indian scheduled banks in July 1969 has imposed new
responsibilities on the RBI for directing the growth of banking and
credit policies towards more rapid development of the economy and
realization of certain desired social objectives. The supervisory
functions of the RBI have helped a great deal in improving the
standard of banking in India to develop on sound lines and to improve
the methods of their operation.

Promotional Functions:

With economic growth assuming a new urgency since


Independence, the range of the Reserve Bank’s functions have steadily
widened. The Bank now performs a variety of developmental and
promotional functions, which, at one time, were regarded as outside
the normal scope of central banking. The Reserve Bank was asked to

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promote banking habit, extend banking facilities to rural and semi-
urban areas, and establish and promote new specialized financing
agencies. Accordingly, the Reserve bank has helped in the setting up of
the IFCI and the SFC: it set up the Deposit Insurance Corporation of
India in 1963 and the Industrial Reconstruction Corporation of India
in 1972. These institutions were set up directly or indirectly by the
Reserve Bank to promote saving habit and to mobilize savings, and to
provide industrial finance as well as agricultural finance. As far back
as 1935, the RBI set up the Agricultural Credit Department to provide
agricultural credit. But only since 1951 the Bank’s role in this field has
become extremely important. The Bank has developed the co-
operative credit movement to encourage saving, to eliminate money-
lenders from the villages and to route its short term credit to
agriculture. The RBI has set up the Agricultural Refinance and
Development Corporation to provide long-term finance to farmers.

Co-operative Banks:

The Co-operative bank has a history of almost 100 years.


The Co-operative banks are an important constituent of the Indian
Financial System, judging by the role assigned to them, the
expectations they are supposed to fulfill, their number, and the
number of offices they operate. The co-operative movement originated
in the West, but the importance that such banks have assumed in
India is rarely paralleled anywhere else in the world. Their role in
rural financing continues to be important even today, and their
business in the urban areas also has increased phenomenally in recent

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years mainly due to the sharp increase in the number of co-operative
banks.

While the co-operative banks in rural areas mainly


finance agricultural based activities including farming, cattle, milk,
hatchery, personal finance etc. along with some small scale industries
and self-employment driven activities, the co-operative banks in urban
areas mainly finance various categories of people for self-employment,
industries, small scale units, home finance, consumer finance, personal
finance, etc. Some of the co-operative banks are quite forward looking
and have developed sufficient core competencies to challenge state and
private sector banks.

According to NAFCUB the total deposits & lendings of


Co-operative Banks is much more than Old Private Sector Banks &
also the New Private Sector Banks. This exponential growth of Co-
operative Banks is attributed mainly to their much better local reach,
personal interaction with customers, their ability to catch the nerve of
the local clientele. Though registered under the Co-operative Societies
Act of the Respective States (where formed originally) the banking
related activities of the co-operative banks are also regulated by the
Reserve Bank of India. They are governed by the Banking Regulations
Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

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There are two main categories of the co-operative banks.

(a) Short term lending oriented co-operative Banks – within this


category there are three sub categories of banks viz state co-operative
banks, District co-operative banks and Primary Agricultural co-
operative societies.

(b) Long term lending oriented co-operative Banks – within the second
category there are land development banks at three levels state level,
district level and village level.

Features of Cooperative Banks

Co-operative Banks are organized and managed on the principal of


co-operation, self-help, and mutual help. They function with the rule
of “one member, one vote”. Function on “no profit, no loss” basis. Co-
operative banks, as a principle, do not pursue the goal of profit
maximization. Co-operative bank performs all the main banking
functions of deposit mobilization, supply of credit and provision of
remittance facilities. Co-operative Banks provide limited banking
products and are functionally specialists in agriculture related
products. However, co-operative banks now provide housing loans
also.

UCBs provide working capital loans and term loan as well.


The State Co-operative Banks (SCBs), Central Co-operative Banks
(CCBs) and Urban Co-operative Banks (UCBs) can normally extend

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housing loans upto Rs 1 lakh to an individual. The scheduled UCBs,
however, can lend upto Rs 3 lakh for housing purposes.

The UCBs can provide advances against shares and


debentures also. Co-operative bank do banking business mainly in the
agriculture and rural sector. However, UCBs, SCBs, and CCBs
operate in semi urban, urban, and metropolitan areas also.

The urban and non-agricultural business of these banks


has grown over the years. The co-operative banks demonstrate a shift
from rural to urban, while the commercial banks, from urban to
rural. Co-operative banks are perhaps the first government
sponsored, government-supported, and government-subsidized
financial agency in India. They get financial and other help from the
Reserve Bank of India NABARD, central government and state
governments. They constitute the “most favoured” banking sector
with risk of nationalization. For commercial banks, the Reserve Bank
of India is lender of last resort, but co-operative banks it is the lender
of first resort which provides financial resources in the form of
contribution to the initial capital (through state government), working
capital, refinance.

Co-operative Banks belong to the money market as well as


to the capital market. Primary agricultural credit societies provide
short term and medium term loans. Land Development Banks (LDBs)
provide long-term loans. SCBs and CCBs also provide both short term
and term loans. Co-operative banks are financial intermediaries only
partially. The sources of their funds (resources) are (a) central and

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state government, (b) the Reserve Bank of India and NABARD, (c)
other co-operative institutions, (d) ownership funds and, (e) deposits
or debenture issues. It is interesting to note that intra-sectoral flows of
funds are much greater in co-operative banking than in commercial
banking. Inter-bank deposits, borrowings, and credit from a
significant part of assets and liabilities of co-operative banks. This
means that intra-sectoral competition is absent and intra-sectoral
integration is high for co-operative bank.

Some co-operative banks are scheduled banks, while others are non-
scheduled banks. For instance, SCBs and some UCBs are scheduled
banks but other co-operative bank are non-scheduled banks. At
present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over
Rs 50 crore each included in the Second Schedule of the Reserve Bank
of India Act.

Co-operative Banks are subject to CRR and liquidity requirements as other scheduled
and non-scheduled banks are. However, their requirements are less than commercial
banks. Since 1966 the lending and deposit rate of commercial banks have been directly
regulated by the Reserve Bank of India. Although the Reserve Bank of India had power
to regulate the rate co-operative bank but this have been exercised only after 1979 in
respect of non-agricultural advances they were free to charge any rates at their
discretion. Although the main aim of the co-operative bank is to provide cheaper credit
to their members and not to maximize profits, they may access the money market to
improve their income so as to remain viable.

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III. PRODUCTS AND SERVICES OFFERED BY BANKS

Broad Classification of Products in a bank:

The different products in a bank can be broadly classified into:

• Retail Banking.
• Trade Finance.
• Treasury Operations.

Retail Banking and Trade finance operations are conducted at the


branch level while the wholesale banking operations, which cover
treasury operations, are at the hand office or a designated branch.

Retail Banking:

• Deposits
• Loans, Cash Credit and Overdraft
• Negotiating for Loans and advances
• Remittances
• Book-Keeping (maintaining all accounting records)
• Receiving all kinds of bonds valuable for safe keeping

Trade Finance:

• Issuing and confirming of letter of credit.

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• Drawing, accepting, discounting, buying, selling, collecting of
bills of exchange, promissory notes, drafts, bill of lading and
other securities.

Treasury Operations:

• Buying and selling of bullion. Foreign exchange


• Acquiring, holding, underwriting and dealing in shares,
debentures, etc.
• Purchasing and selling of bonds and securities on behalf of
constituents.

The banks can also act as an agent of the Government or


local authority. They insure, guarantee, underwrite, participate in
managing and carrying out issue of shares, debentures, etc.

Apart from the above-mentioned functions of the bank,


the bank provides a whole lot of other services like investment
counseling for individuals, short-term funds management and
portfolio management for individuals and companies. It undertakes
the inward and outward remittances with reference to foreign
exchange and collection of varied types for the Government.

Common Banking Products Available:

Some of common available banking products are


explained below:

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1) Credit Card:

Credit Card is “post paid” or “pay later” card that draws


from a credit line-money made available by the card issuer
(bank) and gives one a grace period to pay. If the amount is not paid
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 change 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 installments. 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 joining popularity for online
payments. The major players in the Credit Card market are the
foreign banks and some big public sector banks like SBI and Bank of
Baroda. India at present has about 3 million credit cards in
circulation.

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(2) Debit Cards:

Debit Card is a “prepaid” or “pay now” card with some


stored value. Debit Cards quickly debit or subtract
money from one’s savings account, or if one were taking
out cash.

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. To get
a debit card along with a Personal Identification Number (PIN).

When he makes a purchase, he enters this number on the


shop’s PIN pad. When the card is swiped through the electronic
terminal, it dials the acquiring bank system – either Master Card or
Visa that validates the PIN and finds out from the issuing bank
whether to accept or decline the transaction. The customer never
overspread because the amount spent is debited immediately from the
customers account. So, for the debit card to work, one must already
have the money in the account to cover the transaction. There is no
grace period for a debit card purchase. Some debit cards have
monthly or per transaction fees.

Debit Card holder need not carry a bulky checkbook or


large sums of cash when he/she goes at for shopping. This is a fast and
easy way of payment one can get debit card facility as debit cards use
one’s own money at the time of sale, so they are often easier than
credit cards to obtain.

28
The major limitation of Debit Card is that currently only
some 3000-4000 shops country wide accepts it. Also, a person can’t
operate it in case the telephone lines are down.

3) Automatic Teller Machine: The introduction of ATM’s has


given the customers the facility of round the clock banking. The
ATM’s are used by banks for making the customers dealing easier.
ATM card is a device that allows customer who has an ATM card to
perform routine banking transaction at any time without interacting
with human teller. It provides exchange services. This service helps the
customer to withdraw money even when the banks ate closed. This can
be done by inserting the card in the ATM and entering the Personal
Identification Number and secret Password.

ATM’s are currently becoming popular in India that


enables the customer to withdraw their money 24 hours a day and 365
days. It provides the customers with the ability to withdraw or deposit
funds, check account balances, transfer funds and check statement
information. The advantages of ATM’s are many. It increases existing
business and generates new business. It allows the customers.

• To transfer money to and from accounts.


• To view account information.
• To order cash.
• To receive cash.

Advantages of ATM’s:

To the Customers

29
• ATM’s provide 24 hrs., 7 days and 365 days a year service.
• Service is quick and efficient
• Privacy in transaction
• Wider flexibility in place and time of withdrawals.
• The transaction is completely secure – you need to key in
Personal Identification Number (Unique number for every
customer).

To Banks

• Alternative to extend banking hours.


• Crowding at bank counters considerably reduced.
• Alternative to new branches and to reduce operating expenses.
• Relieves bank employees to focus an more analytical and
innovative work.
• Increased market penetration.

ATM’s can be installed anywhere like Airports, Railway


Stations, Petrol Pumps, Big Business arcades, markets, etc. Hence, it
gives easy access to the customers, for obtaining cash.

The ATM services provided first by the foreign banks like


Citibank, Grind lays bank and now by many private and public sector
banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc. The
ICICI has launched ATM Services to its customers in all the
Metropolitan Cities in India. By the end of 1990 Indian Private Banks
and public sector banks have come up with their own ATM Network
in the form of “SWADHAN”. Over the past year upto 44 banks in

30
Mumbai, Vashi and Thane, have became a part of “SWADHAN” a
system of shared payments networks, introduced by the Indian Bank
Association (IBA).

4) E-Cheaques: The e-cheaques consists five primary facts. They


are the consumers, the merchant, consumer’s bank the merchant’s
bank and the e-mint and the clearing process. This cheaquring system
uses the network services to issue and process payment that emulates
real world cheaquing. The payer issue a digital cheaques to the payee
ant the entire transactions are done through internet. Electronic
version of cheaques are issued, received and processed. A typical
electronic cheque transaction takes place in the following manner:

• The customer accesses the merchant server and the merchant


server presents its goods to the customer.
• The consumer 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
authorisation.
• The merchant electronically forwards the e-cheque to its bank.
• The merchant’s bank forwards the e-cheque to the clearing
house for cashing.
• The clearing house jointly works with the consumer’s bank
clears the cheque and transfers the money to the merchant’s
banks.
• The merchant’s bank updates the merchant’s account.

31
• The consumer’s bank updates the consumer’s account with the
withdrawal information.

The e-chequing is a great boon to big corporate as well as


small retailers. Most major banks accept e-cheques. Thus this system
offers secure means of collecting payments, transferring value and
managing cash flows.

(5) Electronic Funds Transfer (EFT): Many modern banks have


computerised their cheque handling process with computer networks
and other electronic equipments. These banks are dispensing with the
use of paper cheques. The system called electronic fund transfer (EFT)
automatically transfers money from one account to another. This
system facilitates 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 permitted.
The scheme has been in operation since February 7, 1996, in India.

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 the bills meant for payment. In
big companies pay is not disbursed by issued cheques or issuing cash.
The payment office directs the computer to credit an employee’s
account with the person’s pay.

6)Telebanking: Telebanking 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

32
(PIN) to the bank. Telebanking is extensively user friendly and
effective in nature.

• To get a particular work done through the bank, the users may
leave his instructions in the form of message with bank.
• Facility to stop payment on request. One can easily know about
the cheque status.
• Information on the current interest rates.
• Information with regard to foreign exchange rates.
• Request for a DD or pay order.
• D-Mat Account related services.
• And other similar services.

5)Mobile Banking: A new revolution in the realm of e-banking is the


emergence of mobile banking. On-line 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 on-lie banking. It provides a new
way to pick up information and interact with the banks to carry out
the relevant banking business. The potential of mobile banking is
limitless and is expected to be a big success. Booking and paying for
travel and even tickets is also expected to be a growth area.

According to this system, customer can access account


details on mobile using the Short Messaging System (SMS)
technology6 where select data is pushed to the mobile device. The
wireless application protocol (WAP) technology, which will allow user

33
to surf the net on their mobiles to access anything and everything. This
is a very flexible way of transacting banking business.

Already ICICI and HDFC banks have tied up cellular


service provides such as Airtel, Orange, Sky Cell, etc. in Delhi and
Mumbai to offer these mobile banking services to their customers.

5) Internet Banking: Internet banking involves use of internet


for delivery of banking products and services. With internet
banking is now no longer confirmed to the branches where
one has to approach the branch in person, to withdraw cash
or deposits a cheque or 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. As indicated by McKinsey Quarterly
research, presently traditional banking costs the banks, more than a
dollar per person, ATM banking costs 27 cents and internet banking
costs below 4 cents approximately. ICICI bank was the first one to
offer Internet Banking in India.

Benefits of Internet Banking:

• Reduce the transaction costs of offering several banking services


and diminishes the need for longer numbers of expensive brick
and mortar branches and staff.

34
• Increase convenience for customers, since they can conduct
many banking transaction 24 hours a day.
• Increase customer loyalty.
• Improve customer access.
• Attract new customers.
• Easy online application for all accounts, including personal
loans and mortgages

Financial Transaction on the Internet:

Electronic Cash: Companies are developing electronic replicas of all


existing payment system: cash, cheque, credit cards and coins.

Automatic Payments: Utility companies, loans payments, and other


businesses use on automatic payment system with bills paid through
direct withdrawal from a bank account.

Direct Deposits: Earnings (or Government payments) automatically


deposited into bank accounts, saving time, effort and money.

Stored Value Cards: Prepaid cards for telephone service, transit fares,
highway tolls, laundry service, library fees and school lunches.

Point of Sale transactions: Acceptance of ATM/Cheque at retail stores


and restaurants for payment of goods and services. This system has
made functioning of the stock Market very smooth and efficient.

Cyber Banking: It refers to banking through online services. Banks


with web site “Cyber” branches allowed customers to check balances,
pay bills, transfer funds, and apply for loans on the Internet.

35
9)Demat: Demat is short for de-materialisation 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.

How to Operate DEMAT ACCOUNT?

One needs to open a Demat Account with any of the


branches of the bank. After opening an account with any bank, by
filling the demat request form one can handover the securities. The
rest will be taken care by the bank and the customer will receive credit
of shares as soon as it is confirmed by the Company/Register and
Transfer Agent. There is no physical movement of share certification
any more. Any buying or selling of shares is done via electronic
transfers.

1) If the investor wants to sell his shares, he has to place an order


with his broker and give a “Delivery Instruction” to his DP
(Depository Participant). The DP will debit hi s account with the
number of shares sold by him.
2) If one wants to buy shares, he has to inform his broker about his
Depository Account Number so that the shares bought by him
are credited in to his account.Payment for the electronic shares

36
bought or sold is to be made in the same way as in the case of
physical securities.

IV. BANKING SERVICES

Banking covers so many services that it is difficult to define it.


However, these basic services have always been recognized as the
hallmark of the genuine banker. These are…

• The receipt of the customer’s deposits


• The collection of his cheques drawn on other banks
• The payment of the customer’s cheques drawn on himself

There are other various types of banking services like:

1) Advances – Overdraft, Cash Credit, etc.


2) Deposits – Saving Account, Current Account, etc.
3) Financial Services – Bill discounting etc.
4) Foreign Services – Providing foreign currency, travelers
cheques, etc.
5) Money Transmission – Funds transfer etc.
6) Savings – Fixed deposits, etc.

37
7) Services of place or time – ATM Services.
8) Status – Debit Cards, Credit Cards, etc.

Customer Services in Commercial Banks:

Customer service is the service provided in support of a


bank’s core products. Customer service often includes answering
questions; handling complaints. Customer service can occur on site (as
when an onstage employee helps a customer or answers a question) or
it can occur over the phone or the Internet. Quality customer service is
essential to building cordial customer relationship.

Banking being a service industry, a lot depends on


efficient and prompt customer service. Customer service is the most
important duty of the banking operations. Prompt and efficient
service with smile will develop good public relations reduce complaints
and increase business.

Why is Customer Service Important?

 Changing customer expectations: Today the customer is more


demanding and more sophisticated than he or she was thirty
years ago.
 The increased importance of customer service: With changing
customer expectations, competitors are seeing customer service
as a competitive weapon with which they differentiate their
products and services.

38
 The need for a relationship strategy: To ensure that a customer
service strategy that will create a value preposition for
customers should be formulated implemented and controlled. It
is necessary to give it a central role and not one that is subsumed
in the various elements of the marketing mix.

The customer is the kingpim in growth organizations like


commercial banks. Only those institutions which work according to
his dictates will flourish. Quality, Consistency and Durability at low
price are the final expectations of a customer. Quality will have to be
unambiguous, of world class quality. Quality cannot be of minimum
acceptable standards. Customer responsiveness must be quick and
also competent. Speed, performance and cost will be the new values
“mantra” for success.

The ten key areas of customer’s services to be attended


timely and regularly are:

i. Submission of statement of A/Cs to customers


ii. Updating of savings pass books.
iii. Teller system efficiency.
iv. Cleanliness and Upkeep of premises.
v. Intermediate Credit for institution cheques/land bills.
vi. Advance intimation to customers for rewards of Term Deposits
Receipts on maturity.
vii. Advance for Debit/credit to accounts.
viii. Punctuality of staff.
ix. Handling of complaint register.

39
x. Maintain a complaint register.

Customer’s dissatisfaction in the banking industry is


neither recent nor unknown. This is mainly due to delays in handling
transactions across the counter in collections, update of passbooks
supply of statements of accounts, etc.

Failure to provide prompt and efficient customer service


is likely to lead to reduction in the number of customers and they may
have to face closure. To event such situation the following
improvements in the customer services may be carried out:

1) Personal relations of the bank employee with customers will


improve customer satisfaction. 1 service with smile should be the
motto of every bank employee.
2) Rapid customer services should be provided through
automation of work and simplification of procedures.
3) ATM’s may be introduced in all the branches of the banks,
based upon the volume of transactions. This shall facilitate non-
stop banking.
4) Credit Cards Services, Debit Card Services, which should be
provided to the customers, must a link service with all the banks
and branches if possible to facilitate the customer and the
business organizations.
5) E-mail service made freely available at all banking centers.
6) Foreign Exchange transactions are to be extended to all the
branches to facilitate trade and industries.

40
7) All the customers are not homogenous in their needs. Hence
need based schemes may be introduced.
8) Totally deregulated interest rate structure should be there.
9) The banking staff must be trained to understand the customer’s
psychology, so they may provide customer service in a qualified
manner.
10) Educating the customers will increases better utilisation
of banking services.

V. BANK MARKETING:

The banking business is essentially other people’s money


and banker’s brain. The secret of its success lies in satisfying customer
needs for which the banks have to rediscover the marketing cmocept.

It is right to mention that bank marketing is a managerial


process by which services are matched with markets. The matching of
services with market is meant formulation of overall marketing
strategies which suit the taste, temperament, needs and requitements
of customers.

In view of the above, marketing of banking services is


concerned with product, promotion, pricing, and place. In addition, it
is also concerned with people, process and physical appearance.

Objectives of Bank Marketing:

 Profitability

41
 Providing high return on investment
 Achieving certain market share/growth
 Development of an image
 Developing new products to meet emerging customer
requirements.
 Increase in deposits and loans
 Directing customers to certain products
 Increasing awareness
 Increasing customer base through greater customer satisfaction.

VI. ROLE OF INFORMATION TECHNOLOGY (IT)


IN THE BANKING SECTOR

Banking environment has become highly competitive


today. To be able to survive and grow in the changing market
environment banks are going for the latest technologies, which is being
perceived as an ‘enabling resource’ that can help in developing learner
and more flexible structure that can respond quickly to the dynamics
of a fast changing market scenario. It is also viewed as an instrument
of cost reduction and effective communication eith people and
institutions associated with the banking business.

The Software Packages for Banking Applications in India


had their beginnings in the middle of 80s, when the Banks started
computerising the branches in a limited manner. The early 90s saw the
plummeting hardware prices and advent of cheap and inexpensive but
high powered PC’s and Services and banks went in for what was
called Total Branch Automation (TBA) packages. The middle and late

42
90s witnessed the tornado of financial reforms, deregulation
globalisation etc. coupled eith rapid revolution in communication
technologies and evolution of novel concept of convergence of
communication technologies, like internet, mobile/cell phones etc.
Technology has continuously played on important role in the working
of banking institutions and the services provided by them. Safekeeping
of public money, transfer of money, issuing drafts, exploring
investment opportunities and lending drafts, exploring investment
being provided.

Information Technology enables sophisticated product development,


better market infrastructure, implementation of reliable techniques
for control of risks and helps the financial intermediaries to reach
geographically distant and diversified markets. Internet has
significantly influenced delivery channels of the banks. Internet has
emerged as an important medium for delivery of banking products
and services.

The customers can view the accounts; get account


statements, transfer funds and purchase drafts by just punching on
few keys. The smart card’s i.e., cards with micro processor chip have
added new dimension to the scenario. An introduction of ‘Cyber Cash’
the exchange of cash takes place entirely through ‘Cyber-books’.
Collection of Electricity bills and telephone bills has become easy. The
upgradeability and flexibility of internet technology after
unprecedented opportunities for the banks to reach out to its
customers. No doubt banking services have undergone drastic changes

43
and so also the expectation of customers from the banks has increased
greater.

IT is increasingly moving from a back office function to a


prime assistant in increasing the value of a bank over time. IT does so
by maximizing banks of pro-active measures such as strengthening
and standardising banks infrastructure in respect of security,
communication and networking, achieving inter branch connectivity,
moving towards Real Time gross settlement (RTGS) environment the
forecasting of liquidity by building real time databases, use of
Magnetic Ink Character Recognition and Imaging technology for
cheque clearing to name a few. Indian banks are going for the retail
banking in a big way

The key driver to charge has largely been the increasing


sophistication in technology and the growing popularity of the
Internet. The shift from traditional banking to e-banking is changing
customer’s expectations.\

E-Banking:

E-banking made its debut in UK and USA 1920s. It


becomes prominently popular during 1960, through electronic funds
transfer and credit cards. The concept of web-based baking came into
existence in Eutope and USA in the beginning of 1980.

44
In India e-banking is of recent origin. The traditional
model for growth has been through branch banking. Only in the early
1990s has there been a start in the non-branch banking services. The
new pribate sector banks and the foreign banks are handicapped by
the lack of a strong branch network in comparison with the public
sector banks. In the absence of such networks, the market place has
been the emergence of a lot of innovative services by these players
through direct distribution strategies of non-branch delivery. All these
banks are using home banking as a key “pull’ factor to remove
customers away from the well entered public sector banks.

Many banks have modernized their services with the


facilities of computer and electronic equipments. The electronics
revolution has made it possible to provide ease and flexibility in
banking operations to the benefit of the customer. The e-banking has
made the customer say good-bye to huge account registers and large
paper bank accounts. The e-banks, which may call as easy bank offers
the following services to its customers:

 Credit Cards – Debit Cards


 ATM
 E-Cheques
 EFT (Electronic Funds Transfer)
 D-MAT Accounts
 Mobile Banking
 Telephone Banking
 Internet Banking

45
 EDI (Electronic Data Interchange)

Benefits of E-banking:

 To the Customer:
 Anywhere Banking no matter wherever the customer is in
the world. Balance enquiry, request for services, issuing
instructions etc., from anywhere in the world is possible.
 Anytime Banking – Managing funds in real time and most
importantly, 24 hours a day, 7days a week.
 Convenience acts as a tremendous psychological benefit all
the time.
 Brings down “Cost of Banking” to the customer over a
period a period of time.
 Cash withdrawal from any branch / ATM
 On-line purchase of goods and services including online
payment for the same.
 To the Bank:
 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, a marketing tool indeed.

46
 Integrated customer data paves way for individualised
and customised services.

Impact of IT on the Service Quality:

The most visible impact of technology is reflected in the


way the banks respond strategically for making its effective use for
efficient service delivery. This impact on service quality can be
summed up as below:

 With automation, service no longer remains a marketing edge


with the large banks only. Small and relatively new banks with
limited network of branches become better placed to compete
with the established banks, by integrating IT in their operations.
 The technology has commoditising some of the financial
services. Therefore the banks cannot take a lifetime relationship
with the customers as granted and they have to work
continuously to foster this relationship and retain customer
loyalty.
 The technology on one hand serves as a powerful tool for
customer servicing, on the other hand, it itself results in
depersonalising of the banking services. This has an adverse
effect on relationship banking. A decade of computerization can
probably never substitute a simple or a warm handshake.
 In order to reduce service delivery cost, banks need to automate
routine customer inquiries through self-service channels. To do
this they need to invest in call centers, kiosks, ATM’s and

47
Internet Banking today require IT infrastructure integrated
with their business strategy to be customer centric.

Impact of IT on Banking System:

The banking system is slowly shifting from the Traditional Banking


towards relationship banking. Traditionally the relationship between
the bank and its customers has 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 responsibility for the overall clearing
network, the size of the branch network and the training of staff in the
branch network. The bank monitored the organisation’s performance
and set the decision making parameters, but the information available
to both branch staff and their customers was limited to one
geographical location.

Traditional Banking Sector

48
CUSTOMER CUSTOMER
CUSTOMER

BANK BRANCH BANK BRANCH


BANK BRANCH

CLEARING DECISION CLEARING DECISION


CLEARING DECISION

CENTRAL CLEARING HEAD OFFICE

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 have a dual role to the customer.
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 banks have to create account
information layers, which can be accessed both by the bank staff as
well as by th customers themselves.
The use of interactive electronic links via the Internet
could go a ling way in providing the customers with greater level of
information about both their own financial situation and about the
services offered by the bank.

The New Relationship Oriented Bank

49
CUSTOMER

TELEPHONE, BRANCH, ELECTRONIC BANKING, etc

SHARED INFORMATION

CLEARING SYSTEM HEAD OFFICE RISK MONITOIRING

Impact of IT on Privacy and Confidentiality of Data:

Data being stored in the computers, is now being displayed when


required on through internet banking mobile banking, ATM’s etc. all
this has given rise to the issues of privacy and confidentially of data
are:

50
 The data processing capabilities of the computer, particularly
the rapid throughput, integration, and retrieval capabilities, give
rise to doubts in the minds of individuals as to whether the
privacy of the individuals is being eroded.
 So long as the individual data items are available only to those
directly concerned, everything seems to be in proper place, but
the incidence of data being cross referenced to create detailed
individual dossiers gives rise to privacy problems.
 Customers feel threatened about the inadequacy of privacy
being maintained by the banks with regard to their transactions
and link at computerised systems with suspicion.

Aside from any constitutional aspect, many nations deem


privacy to be a subject of human right and consider it to be the
responsibility of those who concerned with computer data processing
for ensuring that the computer use does not revolve to the stage where
different data about people can be collected, integrated and retrieved
quickly. Another important responsibility is to ensure the data is used
only for the purpose intended.

VII. RECENT TRENDS IN BANKING

Today, we are having a fairly well developed banking


system with different classes of banks – public sector banks, foreign
banks, private sector banks – both old and new generation, regional
rural banks and co-operative banks with the Reserve Bank of India as
the fountain Head of the system.

51
In the banking field, there has been an unprecedented
growth and diversification of banking industry has been so stupendous
that it has no parallel in the annals of banking anywhere in the world.

During the last 39 years since 1969, tremendous changes


have taken place in the banking industry. The banks have shed their
traditional functions and have been innovating, improving and coming
out with new types of the services to cater to the emerging needs of
their customers.

Massive branch expansion in the rural and


underdeveloped areas, mobilisation of savings and diversification of
credit facilities to the either to neglected areas like small scale
industrial sector, agricultural and other preferred areas like export
sector etc. have resulted in the widening and deepening of the financial
infrastructure and transferred the fundamental character of class
banking into mass banking.

There has been considerable innovation and


diversification in the business of major commercial banks. Some of
them have engaged in the areas of consumer credit, credit cards,
merchant banking, leasing, mutual funds etc. A few banks have
already set up subsidiaries for merchant banking, leasing and mutual
funds and many more are in the process of doing so. Some banks have
commenced factoring business.

The major challenges faced by banks today are as to how


to cope with competitive forces and strengthen their balance sheet.
Today, banks are groaning with burden of NPA’s. It is rightly felt that

52
these contaminated debts, if not recovered, will eat into the very vitals
of the banks. Another major anxiety before the banking industry is the
high transaction cost of carrying Non Performing Assets in their
books. The resolution of the NPA problem requires greater
accountability on the part of the corporate, greater disclosure in the
case of defaults, an efficient credit information sharing system and an
appropriate legal framework pertaining to the banking system so that
court procedures can be streamlined and actual recoveries made
within an acceptable time frame. The banking industry cannot afford
to sustain itself with such high levels of NPA’s thus, “lend, but lent for
a purpose and with a purpose ought to be the slogan for salvation.”

The Indian banks are subject to tremendous pressures to


perform as otherwise their very survival would be at stake. IT plays
an important role in the banking sector as it would not only ensure
smooth passage of interrelated transactions over the electric medium
but will also facilitate complex financial product innovation and
product development. The application of IT and e-banking is
becoming the order of the day with the banking system heading
towards virtual banking.

As an extreme case of e-banking World Wide Banking


(WWB) on the pattern of World Wide Web (WWW) can be visualised.
That means all banks would be interlinked and individual bank
identity, as far as the customer is concerned, does not exist. There is no
need to have large number of physical bank branches, extension
counters. There is no need of person-to-person physical interaction or
dealings. Customers would be able to do all their banking operations

53
sitting in their offices or homes and operating through internet. This
would be the case of banking reaching the customers.

Banking landscape is changing very fast. Many new


players with different muscle powers will enter the market. The
Reserve Bank in its bid to move towards the best international
banking practices will further sharpen the prudential norms and
strengthen its supervisor mechanism. There will be more transparency
and disclosures.

In the days to come, banks are expected to play a very


useful role in the economic development and the emerging market will
provide ample business opportunities to harness. Human Resources
Management is assuming to be of greater importance. As banking in
India will become more and more knowledge supported, human
capital will emerge as the finest assets of the banking system.
Ultimately banking is people and not just figures.

VIII. STRAINS AND CHALLNGES

Liberalisation process has increasingly exposed Indian


Industry to international competition and banking being a service
industry is also not an exception. Banking Sector in India too faces
same strains and challenges at local, national and international level.

54
Indian Banks, functionally diverse and geographically
widespread, have played a crucial role in the socio-economic progress
of the country after independence. However, the growth led to strains
in the operational efficiency of banks and the accumulation of non-
performing assets (NPA’s) in their loan portfolios.

Banks face increasing pressure to stand out from the


crowd. On the Internet, this means offering your target customers an
increasingly broader range of services than your competitors and that
too in unique way.

All this has resulted in a challenge to managers of banks to


develop the right mix of acquired and internally grown IT applications
which suits customer’s expectations.

Banking sector reforms and liberalisation process raised


many challenges before Indian Banks and for sustainable development
it has become necessary to face these challenges effectively:

 Intense Competition: The RBI and Government of India kept


banking industry open for the participants of private sector
banks and foreign banks. The foreign banks were also permitted
to set up shop on India either as branches or as subsidiaries. Due
to this lowered entry barriers many new players have entered
the market such as private banks, foreign banks, non-banking
finance companies, etc. The foreign banks and new private
sector banks have spearheaded the hi-tech revolution. Heavy
weight foreign banks with huge

55
base, latest technology innovative and globally tested products
are spreading their wings and wooing away customers form
other banks. For survival and growth in highly competitive
environment banks have to follow the new “Guru Mantra” of
prompt and efficient customer service, which calls for
appropriate customer centric policies and customer friendly
procedures.

 Technological Up gradation: Already electronic transfers,


clearings, settlements have reduced translation times. To face
competition it is necessary for banks to absorb the technology
and upgrade their services.

However use of High-Tech sophisticated technology leaves the


predominantly rural, poor and even illiterate mans in the lurch
to which the level of automation and efficiency of services are
immaterial.

 Privacy and Safety: Among the most important aspects, of


savings, i.e., safety liquidity and profitability, safety has to be
accorded top most priority. The safety aspect assumes more
significance in the emerging scenario as the economic loss
caused internationally by these types of crimes might risk area
and any lacunae is safety would result in erosion of confidence
and the same might possibly paralyse the entire network. The
areas among other things, which might endanger security in e-
banking can be:

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 Changes in input data such as changing the amount in
ledges, increasing the limits in accounts or face value of
cheaques. Though these trends could be detected
consequently, prevention is a major problem with these
types of crimes.
 Use of stolen or falsified cards in ATM machines.

 Computer forgery could be committed by way of


gaining access to other account, deliberate damage
through viruses on data stored in computers. In this case,
same criminals might gain entry into the computers and
cause damage to the system. This apart, another through
which security and privacy are maintained. If a hacker
has found out the password, he can cause havoc to the
entire network. Also, if the password is stolen money could
be transferred from one account to another.
 Software privacy is another area of potential danger
faced by the banking industry. In this the entire software
could be stolen. If this is done, the hackers could operate a
parallel network.
 Human Resources Management: In the recent
past the human resource Policies in banks were mainly guided
by the comcept of permanent employment and its necessary
concomitants of creating career paths, terminal benfits, etc. for
the employees. In today’s fast-changing world of employee
mobility both horizontally and vertically and value systems, the
public sector banks need to hire the right talent at market

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related compensation and to shed surplus manpower/staff. Thus
many banks are going for URS schemes to reduce the burden of
excessive staff. Schemes like VRS are going to change the nature
of workforce with many senior and experienced persons opting
for it.

The key elements that shall provide a competitive edge to


banking sector will not be physical assets but knowledge assets
and information. Therefore, banks must understand how to
retain knowledge based employees and prevent them to
migrating to some other organisation. Banks must believe in
people, customer orientation, and continuous improvement of
excellence. Therefore it becomes necessary for banks to
encourage all employees to take risks and work towards
continuous improvements and breakthroughs.

Successful banks overcoming the challenges will be those that


harness technology in a customer friendly yet cost effective way. This
requires enormous internal and external management and the crux of
the solution lies in blending human resources with information
technology.

IX. CASE STUDY

CO-OPERATIVE BANK AND ITS SERVICES

SARASWAT CO-OPERATIVE BANK LIMITED

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The Bank has a very humble but a very inspiring
beginning. On 14th September 1918, "The Saraswat Co-operative
Banking Society" was founded. Mr. J.K. Parulkar became its first
Chairman, Mr. N.B. Thakur, the first Vice-Chairman, Mr. P.N.
Warde, the first Secretary and Mr. Shivram Gopal Rajadhyaksha, the
first Treasurer. These were the people with deep and abiding ideals,
faith, vision, optimism and entrepreneurial skills. These dedicated
men in charge of the Society had a commendable sense of service and
duty imbibed in them. Even today, our honourable founders inspire a
sense of awe and respect in the Bank and amongst the shareholders.

The Society was initially set up to help families in distress.


Its objective was to provide temporary accommodation to its members
in eventualities such as weddings of dependent members of the family,
repayment of debt and expenses of medical treatment etc. The Society
was converted into a full-fledged Urban Co-operative Bank in the year
1933.

The Bank has the unique distinction of being a witness to


History. The Bank, which was originally founded in 1918, i.e. close on
the heels of the Russian Revolution, also witnessed as a Society and as
Bank-the First World War, the Second World War, India's freedom
Movement and the glorious chapter of post-independence India.
During this cataclysmic cavalcade of history, the Bank as a financial
institution and its members could not of course remain unaffected by
the economic consequences of the major events. The two wars in
particular brought in their wake, paucities of all kinds and realities
and stand by its members in distress as a solid bulwark of strength.

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The Founder Members and the later-day management's of
the Bank continued to demonstrate their unwavering faith in the
destiny of the common man and the co-operative movement and they
encouraged the shareholder to save despite all odds.

MISSION STATEMENT
"To emerge as one of the premier and most preferred
banks in the country by adopting highest standards of professionalism
and excellence in all the areas of working.”

MILESTONES
Thanks to these sustained and assiduous efforts over 25
years after its inception, the Bank had gained Strong foundation in
terms of its membership, resources, assets and profits. By 1942, the
Bank was fulfilling all the banking needs of its customers.

During the late fifties, the Bank grew from strength to


strength. The Bank had established five branches within the city of
Mumbai and one each at Pune and Belgaum. In its 50th year, the
Bank chose a bee motif to symbolise the Bank's emblem - a fitting and
appropriate characteristics of a Bank that believed in hard work, a
search for all that is good, a team spirit to achieve its objectives and a
selfless service to its members and customers. The Bank has grown in
stature, progressed in its social and economic objectives and produced
an image of what an ideal bank should be. Resultantly, in the year

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1977-78, the Bank's gross income crossed the Rs.3.00 crore mark for
the first time.

Last two decades the bank has witnessed a steady growth


in the business. The bank has a network of 86 fully computerised
branches covering five states viz. Maharashtra, Gujarat, Madhya
Pradesh, Karnataka and Goa. The Bank is providing 24- hour service
through ATM at 41 locations.

In 1988 the bank was conferred with "Scheduled" status


by Reserve Bank of India.The bank is the first co-operative bank to
provide Merchant Banking services. The bank got a permanent license
to deal in foreign exchange in 1978. Presently the Bank is having
correspondent relationship in 45 countries covering 9 currencies with
over 125 banks

SERVICES PROVIDED

Saraswat Co-operative Bank being the No.1 co-operative


bank in Asia, our efforts are always directed towards developing and
offering competitive and innovative products and services. In the
wholesale banking business, the Saraswat Co-operative Bank Ltd.
provides a wide range of products from a traditional term loans to
short term products like Bills discounting under Letter of Credit etc.

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The Bank also offers a bouquet of Retail Loan Products such as Vastu
Siddhi Home Loan, Saraswati Education Loan, Car Loan etc. and
wide array of Deposit schemes with customer friendly features and
attractive Rate of Interest. With a view of fulfilling all the needs of the
customers under one roof Bank has entered into tie-ups with various
premium institutions, through which we are offering third party
products like Life and non-Life Insurance, Mutual Funds and Demat
Services.

Following are the Services Provided by the Saraswat Bank

PERSONAL

 Deposits Scheme
 Personal Loans

1. Deposits Scheme

Saraswat Bank provides information of it's various deposit


schemes customers can avail of with the bank.

 CUBS Deposit

 Current Deposit

 Elite Savings
 Janhit Account (No frills account)

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 Savings Deposit
 Co-operative Societies

 Savings for Kids (CUBS)

Features:

a) You should be a minor/student (upto the age of 21 years)


to become 'CUBS' account holder.
b) Initial deposit of Cubs account is Rs 50/- and subsequent
deposits in multiples of Rs 10/- no periodic compulsion for
subsequent Deposit.
c) Starting with a small amount of Rs. 50/-, a CUB Account
holder has to save Rs. 500 /- over a period of one year.
d) Facility to deposit cash in school premises on
predetermined days.
e) After completion of 14 years of age minor/student can
operate the account
Cheque book facility not available.
f) No charges for non-maintenance of minimum balance for
first year.

Benefits
"Free Gift" for all account holders.
Earn Interest @ 3.5 p.a. every quarter possess specially designed
passbook.

Minimum Balance:
Account opening - Rs. 50/- with further deposit of Rs. 10/- Rs. 500/-
after one year of opening account.

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 Current Deposits

Features:

Minimum Average Balance.


Eligibility - Individual, Businessmen, Organizations.
Minimum Balance of Rs 5000/- .
Free ATM cards.
Non-Maintenance of minimum average quarterly balance
require to pay service charges of Rs. 200/- per month.

If account is closed within 6 months Rs. 30/- plus Rs. 2/-


per unused cheaques.

 Elite Savings

Eligibility: Individuals, Minor by guardian, Organisations, Co-


operative Societies.

Minimum Balance: Rs. 5000/- (Average Quarterly Balance)

Rate of Interest: 3.50% p.a.

Penalty for Non-maintenance of minimum balance:

Minimum quarterly average balance:

Below Rs. 4000/- to Rs. 4999/- - Rs. 50 per quarter.

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Below Rs. 4000/- - Rs. 100 per quarter.

Special features / facilities:

• Free Personal Accident Insurance Cover of Rs. 2.00 Lakhs for


one year.
• Free Utility Bills Payment facility.
• Free Issue of Demand Draft / Pay Order (one occasion per
month without ceiling on maximum amount)
• Free ATM Card.

 Janhit Account (No Frills Account)

Eligibility:

1) Persons whose balances do not exceed Rs 50,000/- in all the


accounts taken together.
2) Total credits to the Janhit account should not exceed Rs 1 lakh
in a year.
3) Once a customer opens a Janhit Account with the Bank, he/she
will have to close all other transaction accounts with any other
bank within a period of 60 days from the date of opening the
Janhit Account with our bank.
4) The initial deposit amount required to open account would be

Rs.250/-.

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Minimum Balance:
Minimum Balance required to be maintained would be Rs.100/-.

 Savings Deposits

Minimum Average Balance


Rs. 1000 /- with or without Cheque Book
Free ATM card

Interest
3.5% p.a. with quarterly rest

Penalty / Service Charges


Non-Maintenance of minimum average quarterly balance of Rs 1000/-
require to pay Rs 50/- per month
If account is closed within 6 months
Without cheque book - Rs. 10 /-
With cheque book - Rs. 15 /- plus Rs. 2 per unused cheque

 Co-operative Societies

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Eligibility
Co-operative societies
Minimum Amount
Minimum quarterly average balance of Rs. 15000/- in Saving/Current
Account
Minimum Rs. 3.00 lacs in Term Deposit
Rate Of Interest
0.5% extra interest as compared to General Public for Term Deposit.

For Saving Account 3.5%


For Current Account – Nil

Special Features/Facilities

• Free Affinity Card


• Free Cheque Collection Service.
• Free delivery of Statement of Account (once in a month)
• Free Utility Bill Payment (Easy Pay Scheme)
• Free transfer of Funds from the account of member of the
Society to Society’s account for monthly maintenance
• Free issue of D.D./P.O. upto Rs. 25000/- each.

IX. Personal Loans

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Saraswat Co-operative Bank offers various loans to its customers, one
can opt for any of the below listed loans for their assortment of needs.

 Medical Loan

Purpose
Term Loan for acquiring Nucleus Cochlear Implant

Banking Relation
Previous banking relations are not compulsory.
Applicant should be residing in the city where the branch is located.

Eligibility
Hearing Impaired individual OR their Parents

Limit of Loan
Rs. 10.00 Lakhs

100% of the cost of equipment and hospitalisation and allied charges


70% of the Market value based on valuation by approved valuer of the
commercial or residential property

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EMI
Fixed Monthly Installments: ( For Rs 1.00 Lakh )

Year 1 2 3 4 5
Amount 8839 4661 3274 2585 2175

Repayment Period
Maximum 5 Years

Security
Equitable mortgage of residential / commercial premises Pledge of
tangible securities viz. NSCs, KVPs.LIC policies, FDRs, Gold or any
other approved securities 2 Guarantors of well placed means

 Property Loan

Purpose
Acquiring another asset, for any other purpose, but end use should be
ensured.

Limit of Loan
Minimum - Rs.2 lakhs
Maximum - Rs. 50 Lakhs

Basis of Advance
a) 25 times of net salary in case of salaried person Or

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b) 3 times of net cash accruals.(Net of tax and drawing plus
depreciation) Or
c) 60% of agreement cost (If the property is less than 3 years old.). In
other cases, 60% of value as per valuation report.

a,b,c Whichever is lower

Eligibility
a) Individual who are salaried employees having minimum net salary
of Rs.10000/- p.m. (The income of the spouse may be added)
b) Professional, Self-Employed and others who are income tax assessee
having net annual taxable income of Rs.150000/- for at least 3 years
continuously.
c) Firm/Company, whose net annual taxable income is Rs.150000/- p.a.
and firm/company, is in operation for last 3 years and making cash
profit for last 3 years, at the above level.

Rate of Interest
Term loan - 12.50% on Daily Reducing Balance
Cash credit - 13% on Daily Reducing Balance

Repayment Period
Term Loan - Maximum 5 years
Cash Credit - with reducing limit (in 60 monthly installments) subject
to renewal every year.

Security
Equitable Mortgage of Residential, commercial or industrial property.

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Guarantor:
Need not be obtained however in case of firms, companies, guarantee
of partners, directors to be obtained.

 Home Loan

Purpose of Loans
Purchase of flat / bungalow

Limits of Loans
Maximum Rs.25.00 lakhs.

Basis of Advance/ Eligibility.


95% of cost of land & construction or cost of flat + registration
charges + stamp duty.
100% of cost on case to case basis with 10% collateral security in the
form of approved liquid securities like Term Deposit, Govt. Securities,
NSC, KVP, LIC etc.

Option I(Regular Repayment) - 60 times of net monthly salary (avg.


for the last three months)Or 3 times of Net Cash accruals (average for
the last 2-3 years net profit after adding back of depreciation) of
applicant, spouse and close blood relative

Option II (Bullet Repayment) & Option III (Progressive Repayment)-


65 times of net salary (avg. for the last three months) or 3 times of net

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cash accruals (average for the last 2-3 years net profit after adding
back of depreciation) of the applicant, spouse, and dependent blood
relative, if applicant opts for Bullet payment mode.

Repayment Period
Maximum 15 years

Rate of Interest
Flexi Fixed : 11.00% p.a. - Varying every 3 years
Floating : 11.50% p.a.
Fixed : 12.50% p.a.

CORPORATE

“Customer is not an intervention; he is the very reason for our


existence.”

The Bank realises this. We provide a wide array of commercial and


electronic Banking products to corporate/ mid corporate/SME.
Despite rapid growth in credit portfolio, Banks asset quality has
shown constant improvement. Your Bank has a wide exposure to
various industries. We are providing various facilities from funded to
none funded from short term to long term ensuring that you get
finance as per your needs.

 Mid Corporate Products


 Small & Medium Enterprises (SMEs)

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1) Mid Corporate Products.

Bank provides variety of credit facilities to its Corporate Clients as


under:

• Working Capital

The Bank with a team of technically qualified competent customer


driven relationship managers possessing wide industry experience in
various segments, the Bank has taken lot of efforts to understand
customers & empathizing with their needs.

They can offer you working capital finance by way of cash credit or
loans suitably structured to your need and risk profile in consortium
or as a lead banker. Our working capital solutions are based on
financial, quantitative & qualitative evaluation of your business
through our technically qualified experts.

• Term Loan

The Bank provides term finance/term loans for business expansion, up


gradation of existing facilities etc to ease the pressures on margins of
the company .The Bank is providing structured term loans to meet
your short term as well as long term funding requirements. We offer
specific solution so as to match repayment with your cash flows to
repay the debt thereby enhancing your profitability.

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2) Small & Medium Enterprises (SMEs)

For a business on the growth phase with a wide range of opportunities


to explore, timely availability of credit is essential to scale new
heights. At Saraswat Bank we see ourselves as partners to Clients
business enabling you to focus on your business needs.

• Working Capital

The Bank with a team of technically qualified competent customer


driven relationship managers possessing wide industry experience in
various segments. The Bank has taken lot of efforts to understand
customers & empathizing with their needs.

The can offer you working capital finance by way of cash credit or
loans suitably structured to your need and risk profile in consortium
or as a lead banker. Their working capital solutions are based on
financial, quantitative & qualitative evaluation of your business
through our technically qualified experts.

• Import Finance

Bank is providing import finance to its valuable customers by


providing letter of credit facility for its customers to purchase their
raw materials. These are generally provided for 90 to 180 days.

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SERVICES

Saraswat Co-operative Bank provides information of


various Value added services that the Bank provides for it's esteemed
Customers under this section.

EASY PAY

Here is one more exciting facility the Bank has offered to


relieve you, its esteemed client, from their valuable time standing in a
queue for routine utility bill payments.

All they have to do is to walk into any of the branch and


register themselves under: “Easy Pay” scheme for all their recurring
utility bill payments such as Telephone, Electricity Bills, Cellular
Phone Bills, Insurance Premium & many more. Once the customers
are registered all their future bills will be paid automatically through
their bank account with bank.

Any Customer can download the form and submit it to


nearby branch.

ATM SERVICES
Please do not waste the valuable "Time" for "Money", as the "Time"
itself is "Money".

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The Saraswat Co-operative Bank issue ATM card to all
their clients who open account with the Bank.

Being A Saraswat Bank ATM cardholder, the account


holder enjoy the privilege and convenience of withdrawing cash at
their convenience at time during day and night on all 365 days in a
year. They can draw cash from ATMs of Saraswat Bank as well as
over 2461 ATMs of 20 members Banks in "BANCS" network. For
drawing cash from the ATMs of Consortium banks, no charges are
levied.

To avail ATM Card, account holder can download the


form and submit it to nearby branch.

INSURANCE

It is the Bank’s earnest endeavor to offer suite of new and


competitive financial products and services. The Bank has for this
purpose tied up with various insurance companies. The details of tie-
up and products offered are given below:

[A] LIFE INURANCE.


For Life Insurance products, we have entered into a tie-up with
M/s. HDFC Standard Life Insurance Company Limited. We
offer following products:

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1) Endowment Plan:
This being a popular savings plan is useful for meeting all
long/ short-term financial needs and also covers the risk of
the applicant's life. Tax benefit under Sec 80 C is also
available.

2) Children’s Double benefit plan:


It is the most popular plan which helps you save and secure
your child's future to meet expenses for education, marriage
etc. It is also known as double benefit plan as on death of life
insured the beneficiary (child) gets the sum assured on death
of applicant as well as on maturity of the policy. Tax benefit
under Sec 80 C is also available.

3) Term Assurance plan:


It is purely life risk cover plan. On death of the life insured
the nominee gets the policy amount. Tax benefit under Sec 80
C is available.

4) Regular Personal Pension Plan:


It is plan, which provides annuity at the retirement age. This
plan is a with profit pension plan suitable for everyone to
help provide regular financial security to the family. Plan
takes care of retirement age, return on investment, inflation
etc. Tax benefit under Sec 80 C available.

[B] NON-LIFE INURANCE:


For Non-Life Insurance we have a tie-up with M/s. Bajaj

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Alliance General Insurance Co Ltd. Under the arrangement we
offer following insurance products:

1) Health guard:
This plan provides for reimbursement of Hospitalisation
expenses incurred for illness/ diseases or injury sustained.
The key features are lowest premium, takes care of pre and
post hospitalisation expenses, ambulance charges, family
discount, cashless facility with network of 600 hospitals
across India. Tax benefit under Sec 80 D is available.

2) Travel Companion:
It is an Overseas Travel Insurance that covers
reimbursement of medical expenses at abroad, along with
loss of passport/ baggage during overseas travel.

3) Personal Accident Insurance: It covers risk of death on


accident.

4) Vehicle Insurance: It insures your vehicle incase of damage


or loss to the vehicle.

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X. CONCLUSION

The banking scenario has changed drastically. The


changes which have taken place in the last ten years are more than the
changes took place in last fifty years because of the institutionalisation,
liberalisation, globalisation and automation in the banking industry.

Indian banking system has several outstanding


achievements to its credit, the most striking of which is its reach.
Indian banks are now spread out into the remote corners of our
country. In terms of the number of branches, India’s banking system
is one of the largest in the world. According to the Banker 2004, India
has 20 banks within the world’s top 1000 out of which only 6 are
within the top 500 banks.

Today banking sector is marked by high customer


expectations and technological innovations. Technology is playing a
crucial role in the day to day functioning of the banks. These banks
that have harnessed and leveraged technology best have a strategic
advantage. To face competition it is necessary for banks to absorb the
technology and upgrade their services.

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In today’s context banks are following the strategy of
“relationship banking” than “mass banking” which is need of the
hour. The customer services are playing a very significant role in
banking business. In India major events leading to deregulation,
liberalisation and privatisation have unleashed forces of competition,
making the banks run for their business, not only to create the
customer, but more difficult to run for their business, not only to
create the customer, but more difficult to retain the customer. Prompt
and efficient customer service, thus, has become very significant.
Relationship banking is the new paradigm for survival and success,
embracing a ‘share of customer’ approach to growth by identifying,
protecting and expanding customer relationship.

XI BIBLIOGRAPHY

 Websites Visited
• www.google.com
• www.answers.com
• http://www.saraswatbank.in

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