CHAPTER 1

INTRODUCTION

India has a well developed Banking system. The banking industry originated in India in the 18th
century and since then it has undergone significant number of changes. The commercial
banking industry in India over the past few decades has been revolutionized by a number of
factors such as independence, nationalization, deregulation, rise of the Internet, etc.The
commercial banking structure in India consists of Scheduled Banks and Unscheduled Banks.
In the past the banks did not find any attraction in the Indian economy because of the low level
of economic activities and little business prospects. Today we find positive changes in the
National business development policy. Earlier, the money lenders had a strong hold over the
rural population which resulted in exploitation of small and marginal savers. The private sector
banks failed in serving the society. This resulted in the nationalization of 14 commercial banks
in 1969. Nationalization of commercial banks paved ways for the development of Indian
economy and channelized financial resources for the upliftment of weaker sections of the
society. The passage of financial modernization legislation by Congress in 1999 removed
barriers, allowing banks to expand product offerings, while the potential of the Internet as a
sales, marketing and delivery tool, widened the avenues to sell and deliver these products. The
main products of the commercial banking industry-insurance, securities, mortgages, mutual
funds and consumer credit-have all benefited from these changes. This report will examine the
extent to which increased product sales have influenced overall bank assets and how
commercial banks' increased market share in each of these products areas over the next five
years will raise overall bank income and assets.
Currently (2009), banking industry in India is generally fairly mature in terms of supply,
product range and reach-even though reaches in rural India still remains a challenge for the
private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian
banks are considered to have clean, strong and transparent balance sheets relative to other banks
in comparable economies in its region. The Reserve Bank of India is an autonomous body, with

1
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to
manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-especially in
its services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect mergers and acquisitions,
takeovers, and asset sales.

REVIEW OF LITERATURE

Indian banking system, over the years has gone through various phases after establishment of
Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the
country. Earlier to creation of RBI, the central bank functions were being looked after by the
Imperial Bank of India. With the 5-year plan having acquired an important place after the
independence, the Govt. felt that the private banks may not extend the kind of cooperation in
providing credit support, the economy may need. In 1954 the All India Rural Credit Survey
Committee submitted its report recommending creation of a strong, integrated, State-sponsored,
State-partnered commercial banking institution with an effective machinery of branches spread
all over the country. The recommendations of this committee led to establishment of first Public
Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial
part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59 the
associate banks came into the fold of public sector banking.

Another evaluation of the banking in India was undertaken during 1966 as the private banks
were still not extending the required support in the form of credit disbursal, more particularly to
the unorganised sector. Each leading industrial house in the country at that time was closely
associated with the promotion and control of one or more banking companies. The bulk of the
deposits collected, were being deployed in organised sectors of industry and trade, while the
farmers, small entrepreneurs, transporters , professionals and self-employed had to depend on

2
money lenders who used to exploit them by charging higher interest rates. In February 1966, a
Scheme of Social Control was set-up whose main function was to periodically assess the
demand for bank credit from various sectors of the economy to determine the priorities for grant
of loans and advances so as to ensure optimum and efficient utilisation of resources. The
scheme however, did not provide any remedy. Though a no. of branches were opened in rural
area but the lending activities of the private banks were not oriented towards meeting the credit
requirements of the priority/weaker sectors.
On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of
Rs.28.50cr, deposits of Rs.2629cr, loans of Rs.1813cr and with 4134 branches accounting for
80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought 91% of
the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI
introduced the Lead Bank Scheme on the recommendations of FK Narsimhan Committee.
Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance
cover to the depositors.
In the post-nationalization period, there was substantial increase in the no. of branches opened
in rural/semi-urban centers bringing down the population per bank branch to 12000 appx.
During 1976, RRBs were established (on the recommendations of M. Narasimham Committee
report). The Service Area Approach was introduced during 1989.While the 1970s and 1980s
saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s
and more particularly during early 90s, with the submission of report by the Narasimham
Committee on Reforms in Financial Services Sector during 1991.
In these five decades since independence, banking in India has evolved through four distinct
phases:

Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks
in 1969. The focus during this period was to lay the foundation for a sound banking system in
the country. As a result the phase witnessed the development of necessary legislative framework
for facilitating re-organization and consolidation of the banking system, for meeting the
3
requirement of Indian economy. A major development was transformation of Imperial Bank of
India into State Bank of India in 1955 and nationalisation of 14 major private banks during
1969.

Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks
and continued till 1984. A determined effort was made to make banking facilities available to
the masses. Branch network of the banks was widened at a very fast pace covering the rural and
semi-urban population, which had no access to banking hitherto. Most importantly, credit flows
were guided towards the priority sectors. However this weakened the lines of supervision and
affected the quality of assets of banks and pressurized their profitability and brought
competitive efficiency of the system at low ebb.

Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken
by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving
house-keeping, customer service, credit management, staff productivity and profitability of
banks. Measures were also taken to reduce the structural constraints that obstructed the growth
of money market.

Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for
extensive financial sector reforms which brought deregulation of interest rates, more
competition, technological changes, prudential guidelines on asset classification and income
recognition, capital adequacy, autonomy packages etc.

CHAPTER 2
4
 OBJECTIVES OF THE STUDY

The objectives of project are as follows:

• To find out the earlier banking structure that prevailed in India.

• To assess the various factors that lead to the change in the Indian banking structure
• To assess the impact of all these factors on the banking structure.
• To assess the change in the performance and efficiency of the banks in India.
• To draw a contrast between the old and the new Indian banking structure.
• To determine the various services offered by banks earlier and currently
• To determine the future of Indian Banking Markets
• To assess the impact of information technology on the banking sector.
• To study how new distribution channels such as Internet Banking, ATM facility, Phone
Banking have changed the face of the Banking industry.
• To draw conclusions of the impact of the changes in banking sector.

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 CHAPTER 3

RESEARCH METHODOLOGY

Secondary Data:

Secondary data is the data which is collected for some other purpose.
The data used for preparing the project report was secondary data. It was collected from various
websites, newspapers and books.

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 CHAPTER 4

BANKING SECTOR IN THE PAST

Banking in India originated in the first decade of 18th century with The General Bank of India
coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are
now defunct. The oldest bank in existence in India is the State Bank of India being established
as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like
Credit Lyonnais started their Calcutta operations in the 1850s. The first fully Indian owned bank
was the Allahabad Bank, which was established in 1865.By the 1900s, the market expanded
with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of
India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve
Bank of India formally took on the responsibility of regulating the Indian banking sector from
1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader
powers.

Early History

At the time of the American Civil War, a void was created as the supply of cotton to Lancashire
stopped from the Americas. Some banks were opened at that time which functioned as entities
to finance industry, including speculative trades in cotton. Subsequently, banking in India
remained the exclusive domain of Europeans for next several decades until the beginning of the
20th century.

The Bank of Bengal, which later became the State Bank of India.

At the beginning of the 20th century, Indian economy was passing through a relative period of
stability. Around five decades have elapsed since the India's First war of Independence, and the
social, industrial and other infrastructure have developed. At that time there were very small
banks operated by Indians. The banking in India was controlled and dominated by the
presidency banks, namely, the Bank of Bombay, the Bank of Bengal, and the Bank of Madras -
which later on merged to form the Imperial Bank of India, and Imperial Bank of India, upon
7
India's independence, was renamed the State Bank of India. The presidency banks were like the
central banks and discharged most of the functions of central banks. They were established
under charters from the British East India Company. Many Indians came forward to set up
banks, and many banks were set up at that time, a number of which have survived to the present
such as Bank of India and Corporation Bank, Indian Bank, Bank of Baroda, and Canara Bank

Post-Independence

The partition of India in 1947 had adversely impacted the economies of Punjab and West
Bengal, and banking activities had remained paralyzed for months. The Government of India
initiated measures to play an active role in the economic life of the nation. The major steps to
regulate banking included:

• In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and
it became an institution owned by the Government of India.
• In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of
India (RBI) "to regulate, control, and inspect the banks in India."
• The Banking Regulation Act also provided that no new bank or branch of an existing bank
may be opened without a license from the RBI, and no two banks could have common
directors.
However, despite these provisions, control and regulations, banks in India except the State Bank
of India, continued to be owned and operated by private persons.

Nationalisation

By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. Indira Gandhi’s move was swift and sudden, and the GOI
issued an ordinance and nationalised the 14 largest commercial banks.

8
A second dose of nationalisation of 6 more commercial banks followed in 1980. The
nationalisation was to give the government more control of credit delivery. With the second
dose of nationalisation, the GOI controlled around 91% of the banking business of India.

Liberalization

In 1990s Narsimha Rao government embarked on a policy of liberalization and gave licenses to
a small number of private banks, which included banks i.e. Global Trust Bank which later
amalgamated with Oriental Bank of Commerce, UTI Bank, ICICI Bank and HDFC Bank. This
move, along with the rapid growth in the economy of India, kick started the banking sector in
India, which has seen rapid growth with strong contribution from all the banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms
for FDI, where all Foreign Investors in banks may be given voting rights which could exceed
the present cap of 10%, at present it has gone up to 49% with some restrictions.
The new policy shook the Banking sector in India completely. The new wave ushered in a
modern outlook and tech-savvy methods of working for traditional banks. All this led to the
retail boom in India. People not just demanded more from their banks but also received more.

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 SERVICES OFFERED BY BANKS EARLIER

Banks in India have traditionally offered mass banking products. Most common deposit
products being Savings Bank, Current Account, Term deposit Account and lending products
being Cash Credit and Term Loans. Due to Reserve Bank of India guidelines, Banks have had
little to do besides accepting deposits at rates fixed by Reserve Bank of India and lend amount
arrived by the formula stipulated by Reserve Bank of India at rates prescribed by the latter. PLR
(Prime lending rate) was the benchmark for interest on the lending products. But PLR itself was,
more often than not, dictated by RBI. Further, remittance products were limited to issuance of
Drafts, Telegraphic Transfers, Bankers Cheque and Internal Transfer of funds.

CHANGES IN BANKING STRUCTURE

The Tipping Point

The opening up of the Indian banking sector to private players acted as 'the tipping point' for
this transformation. The deregulatory efforts prompted many financial institutions (like HDFC
and ICICI) and non-financial institutions enter the banking arena.

With the entry of private players into retail banking and with multi-nationals focusing on the
individual consumer in a big way, the banking system underwent a phenomenal change. Multi-
channel banking gained prominence. For the first time consumers got the choice of conducting
transactions either the traditional way (through the bank branch), through ATMs, the telephone
or through the Net. Technology played a key role in providing this multi-service platform.

The entry of private players combined with new RBI guidelines forced nationalized banks to
redefine their core banking strategy. And technology was central to this change.

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 Pressing Issues

Today banks have to look much beyond just providing a multi-channel service platform for its
customers. There are other pressing issues that banks need to address in order to chalk-out a
roadmap for the future. Here are the top three concerns in the mind of every bank's CEO.

Customer retention: Customer retention is one of the main priorities for banks today. With the
entry of new players and multiple channels, customers have become more discerning and less
'loyal' to banks. Given the various options, it is now possible to open a new account within
minutes. Or for that matter shift accounts within a couple of hours. This makes it imperative that
banks provide best levels of service to ensure customer satisfaction.

Cost pressures: Cost pressures come into play when banks are not able to afford the cost of a
certain service or initiative although they want to or need to have it in place. This is primarily
because the cost structure at the backend is not efficient enough to offer that kind of service to
the marketplace.

Increased competition: The entry of new players into the banking space is leading to increased
competition. A recent example would be of Kotak Mahindra Finance Limited (KMFL)—a
financial services company focused on investment consulting, auto finance, insurance, etc—
morphing into Kotak Bank. Many other such players are waiting on the sidelines.

Technology makes it easier for any company with the right channel infrastructure and money
reserves to get into banking. This has been one of the major reasons behind this kind of
competition from players who do not have a banking background. Kotak Bank overcame the
initial costs of setting up its own ATM network by getting into a sharing agreement with UTI
bank. New entrants with strategies such as these make the banking game tougher.

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 Redefining Objectives

To cope with cost pressures and increased competition as well as to retain existing customers,
banks have started venturing into newer territories.
This is one of the main reasons why banks are focused on retail banking in a big way. The main
advantage of getting into retail banking is that the risks involved are lesser in this segment.
There are lower Non Performing Assets (NPAs) in retail banking. This is one of the reasons
why loans such as those for housing, automotive, etc are being touted by banks like never
before. Credit cards and debit cards are another focus area for banks. With this banks have
redefined their business priorities. They are now focused on:

• Cost reduction
• Product differentiation
• Customer-centric services

Although the ways in which banks implement these vary, the underlying objectives remain the
same.

Cost Reductions

Reduced costs basically translate to higher profit margins. If banks can reduce costs, it can go a
long way in increasing profits.

The focus is on increasing the profit margins by cutting costs where it matters—on the
operations side. Banks have woken up to the fact that they need to get into shape fast in order to
handle competition.

Differentiation

The customer is interested in how he/she can benefit from the bank and its products. That's why
it becomes necessary for a bank to differentiate its products from the others. Some of the ways

12
in which differentiation can be introduced are through specialization, new products, and
increasing the value.

Specialization basically means that the bank gets involved only in selected areas. For example,
the bank might be getting involved only in housing finance. Or, it could be limiting its services
just for corporate banking clients. Another way to specialize could be by handling just specific
sets of portfolios.

Banks can differentiate themselves by adding new products to their range of services. This will
provide the bank with better yields per contact. Increasing the added value of products is
another way of differentiation for banks. Operational excellence is also a key factor in effective
differentiation from the competition.

Customer-Centric Model

Indian banks have realized that it no longer pays to have a 'transaction-based' operating model.
This has led to the development of a relationship oriented model of operations focusing on
customer-centric services.

While banks have to ensure product superiority and operational excellence, the biggest
challenge today is to establish customer intimacy without which the other two are meaningless.
In this context, it is very important that banks identify and understand customer needs.

This will help banks in tailoring their products according to customer needs. It also helps in new
business opportunities like cross-selling and 'upselling,' which takes cues from customer
aspirations and transaction patterns.

Customer relationships have to be managed in the best possible manner. This will ensure that
the customer comes back to the bank. In addition to good customer retention rates, it will also
provide better income generation capability. This is because a major chunk of income of most
banks comes from existing customers, rather than from new customers.

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 Emergence Of Information Technology

In India, banks as well as other financial entities entered the world of information technology
and with Indian Financial Net (INFINET). INFINET, a wide area satellite based network
(WAN) using VSAT (Very Small Aperture Terminals) technology, was jointly set up by the
Reserve Bank and Institute for Development and Research in Banking Technology in 1999.
The Indian Financial Network (INFINET) which initially comprised only the public sector
banks was opened up for participation by other categories of members. The first set of
applications that could benefit greatly from the use of technological advances in the computer
and communications area relate to the Payment systems which form the lifeline of any banking
activity. The process of reforms in payment and settlement systems has gained momentum with
the implementation of projects such as NDS (Negotiated Dealing System), CFMS (Centralised
Funds Management System) for better funds management by banks and SFMS (Structured
Financial Messaging Solution) for secure message transfer. This would result in funds transfers
and funds-related message transfer to be routed electronically across banks using the medium of
the INFINET. NDS, which has become operational since February 2002 and RTGS (Real Time
Gross Settlement system) scheduled towards the end of 2003 are other major developments in
the area.

Internet has significantly influenced delivery channels of the banks. Internet has emerged as an
important medium for delivery of banking products & services. Detailed guidelines of RBI for
Internet Banking has prepared the necessary ground for growth of Internet Banking in India. To
reap the full benefits of such electronic message transfers, it is necessary that banks bestow
sufficient attention on the computerisation and networking of the branches situated at
commercially important centres on a time-bound basis. Intra-city and intra-bank networking
would facilitate in quick and efficient funds transfers across the country".

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Advantages of Information Technology

• Globalization: IT has not only brought the world closer together, but it has allowed the
world's economy to become a single interdependent system. This means that we can not
only share information quickly and efficiently, but we can also bring down barriers of
linguistic and geographic boundaries. The world has developed into a global village due
to the help of information technology allowing countries like Chile and Japan who are not
only separated by distance but also by language to share ideas and information.
• Communication: With the help of information technology, communication has also
become cheaper, quicker and more efficient. We can now communicate with anyone
around the globe by simply text messaging them or sending them an email for an almost
instantaneous response. The internet has also opened up face to face direct
communication from different parts of the world thanks to the helps of video
conferencing.
• Cost effectiveness: Information technology has helped to computerize the business
process thus streamlining businesses to make them extremely cost effective money
making machines. This in turn increases productivity which ultimately gives rise to
profits that means better pay and less strenuous working.
• Bridging the cultural gap: Information technology has helped to bridge the cultural gap
by helping people from different cultures to communicate with one another, and allow for
the exchange of views and ideas, thus increasing awareness.
• More time: IT has made it possible for businesses to be open 24 x7 all over the globe.
This means that a business can be open anytime anywhere, making purchases from
different countries easier and convenient. It also means that you can have your goods
delivered right to your doorstep with having to move a single muscle.
• Creation of new jobs: Probably the best advantage of information technology is the
creation of new jobs. Computer programmers, Systems analyzers, Hardware and Software

15
 developers and Web designers are just some of the new employment opportunities
created with the help of information technology.

Disadvantages of Information Technology

• Unemployment: While information technology may have streamlined the business

process it has also crated job redundancies, downsizing and outsourcing. This means that
a lot of lower and middle level jobs have been done away with causing more people to
become unemployed.
• Privacy: Though IT may have made communication quicker, easier and more convenient,
it has also bought along privacy issues. From cell phone signal interceptions to email
hacking, people are now worried about their once private information becoming public
knowledge.
• Lack of job security: Industry experts believe that the internet has made job security a
big issue as since technology keeps on changing with each day. This means that one has
to be in a constant learning mode, if he or she wishes for their job to be secure.
• Dominant culture: While information technology may have made the world a global
village, it has also contributed to one culture dominating another weaker one. For
example it is now argued that US influences how most young teenagers all over the world
now act, dress and behave. Languages too have become overshadowed, with English
becoming the primary mode of communication for business and everything else.

16
 NEW SERVICES OFFERED BY BANKS
Banking Services In India

Bouquets of services are at customers demand in today’s banking system. Different types of
accounts and loans, facilitating with plastic money and money transfer across the globe.

With years, banks are also adding services to their customers. The Indian banking industry is
passing through a phase of customers market. The customers have more choices in choosing
their banks. A competition has been established within the banks operating in India.
With stiff competition and advancement of technology, the services provided by banks have
become more easy and convenient. The past days are witness to an hour wait before
withdrawing cash from accounts or a cheque from north of the country being cleared in one
month in the south.
This section of banking deals with the latest discovery in the banking instruments along with the
polished version of their old systems.
A few foreign & private sector banks have already introduced customized banking products like
Investment Advisory Services, SGL II accounts, Photo-credit cards, Cash Management services,
Investment products and Tax Advisory services. A few banks have gone in to market mutual
fund schemes. Eventually, the Banks plan to market bonds and debentures, when allowed.
Insurance peddling by Banks will be a reality soon. The recent Credit Policy of RBI announced
on 27.4.2000 has further facilitated the entry of banks in this sector. Banks also offer advisory
services termed as 'private banking' - to "high relationship - value" clients.

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Following are the services being offered:

Bank Accounts

Open bank account - the most common and first service of the banking sector. There are
different types of bank account in Indian banking sector. The bank accounts are as follows:

• Bank Savings Account - Bank Savings Account can be opened for eligible person /
persons and certain organizations / agencies (as advised by Reserve Bank of India (RBI)
from time to time)

• Bank Current Account - Bank Current Account can be opened by individuals /

partnership firms / Private and Public Limited Companies / HUFs / Specified Associates /
Societies / Trusts, etc.

• Bank Term Deposits Account - Bank Term Deposits Account can be opened by
individuals / partnership firms / Private and Public Limited Companies / HUFs/ Specified
Associates / Societies / Trusts, etc.

• Bank Account Online - With the advancement of technology, the major banks in the
public and private sector has facilitated their customer to open bank account online. Bank
account online is registered through a PC with an internet connection. The advent of bank
account online has saved both the cost of operation for banks as well as the time taken in
opening an account.

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 Plastic Money

• From barter to coin, from coin to paper and now from paper to plastic money, the
monetary mechanism has witnessed radical changes. The modern banking system has the
credit of simplifying the process which provides things at ease. The plastic money is in
true sense, like a credit instrument that helps in making payments at centres without
limits but with some negligible amount. Plastic money saves the botheration of carrying
cash. It can be flashed at outlets and especially in times of emergency it provides an
opportunity to withdraw cash at any hour of the day. Economy has developed a craze for
plastic money which in turn is encouraging agencies in exploiting the credit card holders.
• The first card was issued in India by Visa in 1981. The first international credit card was
issued to a restricted number of customers by Andhra Bank in 1987 through the Visa
program, after getting special permission from the Reserve Bank of India. The credit
cards are shape and size, as specified by the ISO 7810 standard. It is generally of plastic
quality.
• There are number of banks and financial institutions which are engaged in this business
such as CITIBANK, HDFC Bank, ICICI Bank, American Express, Punjab National
Bank, State Bank of India and many more.
• Following are some of the forms of plastic money being used :

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 Credit Cards

Credit cards in India are gaining ground. A number of banks in India are encouraging people to
use credit card. The concept of credit card was used in 1950 with the launch of charge cards in
USA by Diners Club and American Express. Credit card however became more popular with
use of magnetic strip in 1970.

Credit card in India became popular with the introduction of foreign banks in the country.

Credit cards are financial instruments, which can be used more than once to borrow money or
buy products and services on credit. Basically banks, retail stores and other businesses issue
these.

Master Card

MasterCard is a product of MasterCard International and along with VISA are distributed by
financial institutions around the world. Cardholders borrow money against a line of credit and
pay it back with interest if the balance is carried over from month to month. Its products are
issued by 23,000 financial institutions in 220 countries and territories.

Visa Card

VISA cards is a product of VISA USA and along with MasterCard is distributed by financial
institutions around the world. A VISA cardholder borrows money against a credit line and
repays the money with interest if the balance is carried over from month to month in a revolving
line of credit. Nearly 600 million cards carry one of the VISA brands and more than 14 million
locations accept VISA cards.

American Express

The world's favorite card is American Express Credit Card. More than 57 million cards are in
circulation and growing and it is still growing further. Around US $ 123 billion was spent last
year through American Express Cards and it is poised to be the world's No. 1 card in the near
20
future. In a regressive US economy last year, the total amount spent on American Express cards
rose by 4 percent. American Express cards are very popular in the U.S., Canada, Europe and
Asia and are used widely in the retail and everyday expenses segment.

Other cards:

• Standard Card - It is the most basic card (sans all frills) offered by issuers.

• Classic Card - Brand name for the standard card issued by VISA.

• Gold Card/Executive Card - A credit card that offers a higher line of credit than a
standard card. Income eligibility is also higher. In addition, issuers provide extra perks or
incentives to cardholders.

• Platinum Card - A credit card with a higher limit and additional perks than a gold card.

• Titanium Card - A card with an even higher limit than a platinum card.

The following are some of the plus features of credit card in India

• Hotel discounts
• Travel fare discounts
• Free global calling card
• Lost baggage insurance
• Accident insurance
• Insurance on goods purchased
• Waiver of payment in case of accidental death
• Household insurance

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 Debit Cards

Debit cards also known as check cards look like credit cards or ATM cards (automated teller
machine card). It operates like cash or a personal check. Debit cards are different from credit
cards. Credit card is a way to "pay later," whereas debit card is a way to "pay now." When we
use a debit card, our money is quickly deducted from the bank account.

Debit cards are accepted at many locations, including grocery stores, retail stores, gasoline
stations, and restaurants. It’s an alternative to carrying a checkbook or cash.
With debit card, we use our own money and not the issuer's money.
In India almost all the banks issue debit card to its account holders.
Features of Debit Card

• Obtaining a debit card is often easier than obtaining a credit card.

• Using a debit card instead of writing checks saves you from showing identification or
giving out personal information at the time of the transaction.

• Using a debit card frees you from carrying cash or a checkbook.

• Using a debit card means you no longer have to stock up on traveler's checks or cash when
you travel.

• Debit cards may be more readily accepted by merchants than checks, especially in other
states or countries wherever your card brand is accepted.

• The debit card is a quick, "pay now" product, giving you no grace period.

•Using a debit card may mean you have less protection than with a credit card purchase for
items which are never delivered, are defective, or were misrepresented. But, as with credit
cards, you may dispute unauthorized charges or other mistakes within 60 days.

•Returning goods or canceling services purchased with a debit card is treated as if the
purchase were made with cash or a check.
22
 ATM Cards

Automated Teller machine (ATM) cards are capable of doing variety of functions. It can
perform both cash and non-cash transactions in secured environment. ATM Cash Transactions
includes deposits and withdrawals.

Non cash transactions incude:

• Providing Mini Statement of last five transactions. In some banks upto last ten
transactions.
• Balance enquiry.
• Stop Payment instructions.
• Transfer of funds between accounts.
• Requisition of Cheque books, drafts etc.
• Bill payments (electricity bills, telephone bills etc).

Loans

Banks in India with the way of development have become easy to apply in loan market. The
following loans are given by almost all the banks in the country:

• Personal Loan
• Car Loan or Auto Loan
• Loan against Shares
• Home Loan
• Education Loan or Student Loan

Almost all the banks have jumped into the market of car loan which is also sometimes termed as
auto loan. It is one of the fast moving financial product of banks. Car loan / auto loan are

23
sanctioned to the extent of 85% upon the ex-showroom price of the car with some simple paper
works and a small amount of processing fee.

Home loan is the latest craze in the banking sector with the development of the infrastructure.
Now people are moving to township outside the city. More number of townships are coming up
to meet the demand of 'house for all'. The RBI has also liberalised the interest rates of home
loan in order to match the repayment capability of even middle class people. Almost all banks
are dealing in home loan. Again SBI, ICICI, HDFC, HSBC are leading.
The educational loan, rather to be termed as student loan, is a good banking product for the
mass. Students with certain academic brilliance, studying at recognized colleges/universities in
India and abroad are generally given education loan / student loan so as to meet the expenses on
tuition fee/ maintenance cost/books and other equipment.

Money Transfer

Besides lending and depositing money, banks also carry money from one corner of the globe to
another. This act of banks is known as transfer of money. This activity is termed as remittance
business. Banks generally issue Demand Drafts, Banker's Cheques, Money Orders or other such
instruments for transferring the money. This is a type of Telegraphic Transfer or Tele Cash
Orders.

It has been only a couple of years that banks have jumped into the money transfer businesses in
India. The international money transfer market grew 9.3% from 2003 to 2004 i.e. from US$213
bn. to US$233 bn. in 2004. Economists say that the market of money transfer will further grow
at a cumulative 10.1% average growth rate through 2008.

With the use of high technology and varieties of product it seems that "Free" money transfers
will become commonplace. Many banks will even use money transfer services as loss-leaders in
order to generate account openings and cross-sell opportunities. The price evolution of money
transfer products for banks will be similar to that of consumer bill pay-the product is worth
24
giving away as an account acquisition tool to win overall market share and establish banking
relationships.

ATM money transfer card products have had terrible bank adoption rates since being introduced
in the last three to four years. Money transfer to India is one of the most important parts played
by the banks. This service provides peace of mind to either the NRIs or to the visitors to India.
Many Indian banks have ATM'S (automatic teller machine), enable to draw foreign currency in
India.

By 2010, we will see a good percent of all foreign-born households doing some level of online
banking. First-mover banks will start having a window of opportunity to include online transfer
functionality within the next couple of years, which currently frequents traditional money
transmitters such as Western Union. There is a terrific opportunity for banks and non-banks to
offer more robust global inter-institutional funds transfer services online. More than half of
Western Union's customers today are already banked, and most do not have an alternative
product marketed by their bank that is painless, quick, and cost-effective. That will change as
banks offer transfer services through their online channel.

Money Transfer to India

Apart from banks few financial institutions and online portals gives services of money transfer
to India. Some of them are as under:

• Western Union Money Transfer

• Union Money Transfer
• IKobo Money Transfer
• Cash2india.com
• Remit2india
• Samachar Money Transfer
• Wells Fergo International Money Transfer
• Travellers Express
25
Visa Money Transfer

Visa has recently introduced the 'Visa Money Transfer' option for its savings and current
account holder of any bank with a visa debit card. This facility helps its customer to transfer
funds from his bank account to any visa card, either debit or credit within India.

A Visa Money Transfer is of similar kind, in many respects, to the third-party fund transfer
option given by some banks to its account holders through e-cheque, but this is restricted to only
visa cardholders.

Automated Teller Machines (ATM)

The first bank to introduce the ATM concept in India was the Hong Kong and Shanghai
Banking Corporation (HSBC). It was in the year 1987. Now, almost every commercial bank
gives ATM facilities to its customers.

The first bank to cross 1,000 marks in installing ATMs in India is ICICI. SBI is following the
concept of 'ATMs in Quantity'. But Private Sector Banks have taken the lead. ICICI, UTI,
HDFC and IDBI count more than 50% of the total ATMs in India.

Public Sector Banks are also taking the installation of ATMs seriously for Indian market. They
are either setting up their own ATM centers or entering into tie-ups with other banks. The
Corporation Bank has the second largest network of ATMs amongst the Public Sector Banks in
India.

The Indian banks have also come up with a 'Swadhan' scheme. Under this scheme, the banks
can use each other's ATM at a cost, usually Rs. 35 extra from their customers. The main feature
of ‘Swadhan Card’ is as follows:

• No exchange fee charged to change an old ATM card for a Swadhan card.

26
 • Rs. 3,000 fixed as the ceiling on withdrawal.

• Exception made for select customers who can withdraw up to Rs10,000. Still, this is
lower than the average withdrawal of Rs15,000 by regular ATMs.

• IBA gives banks the discretion to decide a higher maximum amount for withdrawal.

• Transactions conducted through any of the member banks appear on a bank statement,
which is given only by your own bank.

• All transactions conducted in any of the member banks appear on the bank statement, but
only your own bank will provide this.

Mobile Banking

"The account that travels with you". This is needed in today's fast business environment with
unending deadlines for fulfillment and loads of appointments to meet and meetings to attend.
With mobile banking facilities, one can bank from anywhere, at anytime and in any condition or
anyhow. The system is either through SMS or through WAP

Mobile Banking is the hottest area of development in the banking sector and is expected to
replace the credit/debit card system in future. In past two years, mobile banking users have
increased three times if we compare the use of either debit card or credit card. Moreover 85-
90% mobile users do not own credit cards.

Mobile banking uses the same infrastructure like the ATM solution. But it is extremely easy and
inexpensive to implement. It reduces the cost of operation for bankers in comparison to the use
of ATMs.

Using compact HTML and WAP technologies, the following operations can be conducted
through advanced mobile phones which can is further viewed on channels such as the Internet
via the Channel Manager.
27
 • Bill payments
• Fund transfers
• Check balances
• Any many more which is also available in SMS Banking

In countries like Korea, two SIM Cards are used in mobile phones. One for the telephonic
purpose and the other for banking. Bank account data is encrypted on a smart-card chip. About
3.3 million transactions were reported by Bank of Korea in 2004.

SMS Banking

Businesses are in move. So is to be your money. You may have to thank the banks which are
providing banking at the send-of-your-sms. The technology is at its highest level to move your
money while you are on the move. If you are having non-WAP enabled mobile handset, you can
use the facility of SMS services. The following operations can be easily used by the service
provider:

• Balance enquiry
• Last three transactions
• Cheque payment status
• Cheque book request
• Statement request
• Demat - Free Balance Holding
• Demat - Last two Transactions
• Bill Payment

The SMS facility brings peace of mind to customers and opens doors to many more
technological possibilities and innovative services. It is very similar to how an ATM works.

28
To use ATM, a card is necessary and to use SMS service, a mobile phone is needed. In both the
cases, secret number is necessary to access.
SMS banking is also very much safe. First, one authenticates the mobile number with the
authentications key. Second, the customer uses secret Mobile Personal Identification Number
(MPIN).

A new concept has been developed by Bank of Punjab Ltd. They call it "Mobile Wallet". With
the support of this technology, a customer can make payment and receive payment of account of
buy/sell (merchants) through SMS.

Net Banking

Net Banking is conducting ones banking or bank account online through a computer and a net
connection. The system is updated immediately after every transaction automatically. In other
words it is said that it is updated 'on-line, real time'. Through net banking one can check the
status of his/her account, place queries and also can be facilitated with a wide range of
transactions simultaneously.

In India, the regulatory body has not yet sanctioned virtual bank, in abroad there are banks like
EGG Bank or NET Bank, which only have a virtual presence without any physical branches.

Net Banking has three basic features. They are as follows:

• The banks offer only relevant information about their products and services to the mass.

• Few banks provide interaction facility between the banks and its customers.

• Banks are coming up with arrangements of utility payments, like telephone bills,
electricity bills, etc.

29
The current statistics show that hardly 10 per cent of Indian customers use the internet for
banking. Among all the facilities provided the maximum of them uses only for checking balance
or requesting for a cheque book. Very few customers uses the advance interactive services
provided by the banks.

Services provided by Net Banking

Queries

• Check Balance
• See Statement
• Inquire about cheque status
• Ask for a Statement
• Ask for a Cheque Book
• Inquire about TDS details
• See Demat Account
• Update profile

Transactions

• Stop a Cheque
• Pay Bills
• Ask for a Demand Draft
• Transfer funds between your accounts
• Transfer funds to a third party
• Request for a new Fixed Deposit
• Shop Online
• Pay Bank Credit Card Dues

30
Advantages of Net Banking

• It removes the traditional geographical barriers as it could reach out to customers of

different countries/legal jurisdiction. This has raised the question of jurisdiction of
law/supervisory system to which such transactions should be subjected.
• It has added a new dimension to different kinds of risks traditionally associated with
banking, heightening some of them and throwing new risk control challenges.
• Security of banking transactions, validity of electronic contract, customers' privacy, etc.,
which have all along been concerns of both bankers and supervisors have assumed
different dimensions given that Internet is a public domain, not subject to control by any
single authority or group of users.

Proxy Banking

Indian villages were miles away from mutual funds, insurance and even equity trading. Thanks
to Internet Kiosk and the ATM duo which has made it possible for rural India. This kiosk has
been set up by ICICI Bank in partnership with network n-Logue Communications in remote
villages of Southern part of the country. This is known as Proxy Banking. With the help of fibre
optic cables, this kiosk works on wireless in local loop technology.

Reasons for setting-up of Proxy Banking

• 58% of rural households still do not have bank accounts.

• Only 21% of rural households have access to credit from a formal source.

• 70% of marginal farmers do not have deposit account.

• 87% households have no formal credit.

31
 • Only 1% rural households rely on a loan from a financial intermediary. · The loans take
between 24 to 33 weeks to get sanctioned.

• Consumers bribe officials to get loans approved which varies between 10 and 20 per cent
of the loan amount.

• Branch banking in rural is a loss-making.

Benefits to Rural

• Small loans given for buying buffaloes.

• Loans for setting up a tea shop.
• Life and non-life insurance provided.
• Weather insurance given to farmers.
• Insurance policies sold to farmers like groundnut, castor, soya, paddy crop, etc.

The Proxy Banking is an innovative approach to rural lending and will add to the government's
expanding base of Kisan credit cards and the good old guidelines for agricultural lending.

Telephone Banking

Tele banking (telephone banking) can be considered as a form of remote or virtual banking,
which is essentially the delivery channel of branch financial services via telecommunication
devices where the bank customers can perform retail banking transactions by dialing a touch-
tone telephone or mobile communication unit, which is connected to an automated system of the
bank by utilizing Automated Voice Response (AVR) technology. Telebanking has numerous
benefits for both customers and banks. As far as the customers are concerned, it provides
increased convenience, expanded access and significant time saving. On the other hand, from
the banks’ perspective, the costs of delivering telephone-based services are substantially lower
than those of branch based services. It has almost all the impact on productivity of ATMs,
32
except that it lacks the productivity generated from cash dispensing by the ATMs. It offers retail
banking services to customers at their offices/homes as an alternative to going to the bank
branch/ATM. This saves customers time, and gives more convenience for higher productivity.

Personal Computer Banking

PC-Banking is a service which allows the bank’s customers to access information about their
accounts via a proprietary network, usually with the help of proprietary software installed on
their personal computer. Once access is gained, the customer can perform a lot of retail banking
functions. The increasing awareness of the importance of computer literacy has resulted in
increasing the use of personal computers. This certainly supports the growth of PC banking
which virtually establishes a branch in the customers’ home or office, and offers 24-hour
service, seven days a week. It also has the benefits of Telephone Banking and ATMs.

Branch Networking

Networking of branches is the computerization and inter-connecting of geographically scattered

stand-alone bank branches, into one unified system in the form of a Wide Area Network (WAN)
or Enterprise Network (EN) for the creating and sharing of consolidated customer
information/records.

It offers quicker rate of inter-branch transactions as the consequence of distance and time are
eliminated. Hence, there is more productivity per time period. Also, with the several networked
branches serving the customer populace as one system, there is simulated division of labour
among bank branches with its associated positive impact on productivity among the branches.
Furthermore, as it curtails customer travel distance to bank branches it offers more time for
customers’ productive activities.

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 Electronic Fund Transfer At Point Of Sale (EFTPoS)

An Electronic Funds Transfer at the Point of Sale is an on-line system that allows customers to
transfer funds instantaneously from their bank accounts to merchant accounts when making
purchases (at purchase points). A POS uses a debit card to activate an Electronic Fund Transfer
Process (Chorafas, 1988).

Increased banking productivity results from the use of EFTPoS to service customers shopping
payment requirements in stead of clerical duties in handling cheques and cash withdrawals for
shopping. Furthermore, the system continues after banking hours, hence continual productivity
for the bank even after banking hours. It also saves customers time and energy in getting to
bank branches or ATMs for cash withdrawals which can be harnessed into other productive
activities.

Technological developments particularly in the area of Telecommunications and Information

Technology are revolutionizing the way business is done. Electronic commerce is now thought
to hold the promise of a new commercial revolution by offering an inexpensive and direct way
to exchange information and to sell or buy products and services. This revolution in the market
place has set in motion a revolution in the banking sector for the provision of a payment system
that is compatible with the demands of the electronic marketplace. The advances in IT have
certainly introduced new delivery channels in the Indian banking industry.

Very Small Aperture Terminals (VSATs) In Banking

Very Small Aperture Terminals work with the help of the satellite. They are briefly known as
VSATs. VSATs use small antennas which may have variable size of 1.8 meters or 3.8 meters
and these acts as small earth stations. Through satellites, VSATs technology has made banking
services very simple and speedy. The terminals used in VSATs have very small apertures.
VSATs are very useful in banking industry, stock exchanges, reservations, retail trade,

34
corporate networking, weather forecasting, industries, international services, document services
etc.

Characteristics
• These terminals can exchange and transmit information.
• These earth stations normally use bit rate which is less than megabyte per second.
• VSATs cannot directly transmit messages to each other. The transmission through a
larger earth station which is called Hub-Station. The size of antennas Hub-Station ranges
between 7.5 m to 11m.
• VSATs can function at ‘C-Band’.

Uses of VSATs

The activities relating to VSATs technology has now started. The whole project is has incurred
expenditure of Rs. 135 crores out of which Rs. 35 crores were arranged by RBI and Rs. 100
crores were arranged by the public sector banks. This network links 2800 bank branches with
one another.

The following operations can be performed by using this technology:

• The quality of customer service at the counters has improved to a large extent.
• Payment system has been made more effective.
• Exchange of information has geared up and speedy clearing of pending entries has been
made possible.
• The shortcomings of telecommunications have been overcome with the help of VSATs.
• File work can be easily transferred.
• The currency chest operation has become more fast and accurate.

35
 • The use of e-mail is made more effective through VSATs.
• Through VSATs technology every organization is able to develop its own system of
communications.
• The banks offer specialized telephone facilities through this network.
• The self owned communication system can be operationalised by the institution.

Banking Services For NRI’s

Almost all the Indian Banks provide services to the NRIs. There are different types of accounts
for them. They are:

• Non-Resident (Ordinary) Account - NRO A/c

• Non-Resident (External) Rupee Account - NRE A/c
• Non-Resident (Foreign Currency) Account - FCNR A/c

An Indian resident who is earning foreign exchange can also maintain Foreign Currency
account in the country with an authorized dealer.

36
 IMPACT OF CHANGE IN BANKING STRUCTURE ON ECONOMY

Financial and Banking reforms

The last decade witnessed the maturity of India's financial markets. Since 1991, every governments
India took major steps in reforming the financial sector of the country. The important achievements
the following fields are discussed under separate heads:

Financial Markets

In the last decade, Private Sector Institutions played an important role. They grew rapidly in
commercial banking and asset management business. With the openings in the insurance sector
for these institutions, they started making debt in the market.

Competition among financial intermediaries gradually helped the interest rates to decline.
Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high
price while depositors had incentives to save. It was something between the nominal rate of
interest and the expected rate of inflation.

Regulators

The Finance Ministry continuously formulated major policies in the field of financial sector of
the country. The Government accepted the important role of regulators. The Reserve Bank of
India (RBI) has become more independent. Securities and Exchange Board of India (SEBI) and
the Insurance Regulatory and Development Authority (IRDA) became important institutions.
Opinions are also there that there should be a super-regulator for the financial services sector
instead of multiplicity of regulators.

Development Finance Institutions

Financial institution's access to SLR funds reduced. Now they have to approach the capital
market for debt and equity funds. Convertibility clause no longer obligatory for assistance to
corporate sanctioned by term-lending institutions. Capital adequacy norms extended to financial
37
institutions.
DFIs such as IDBI and ICICI have entered other segments of financial services such as
commercial banking, asset management and insurance through separate ventures. The move to
universal banking has started.

Non-banking finance companies

In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net
owned funds, has been raised to Rs.2 crores.

Until recently, the money market in India was narrow and circumscribed by tight regulations
over interest rates and participants. The secondary market was underdeveloped and lacked
liquidity. Several measures have been initiated and include new money market instruments,
strengthening of existing instruments and setting up of the Discount and Finance House of India
(DFHI).
The RBI conducts its sales of dated securities and treasury bills through its open market
operations (OMO) window. Primary dealers bid for these securities and also trade in them. The
DFHI is the principal agency for developing a secondary market for money market instruments
and Government of India treasury bills. The RBI has introduced a liquidity adjustment facility
(LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out
through repo auctions.
On account of the substantial issue of government debt, the gilt- edged market occupies an
important position in the financial set- up. The Securities Trading Corporation of India (STCI),
which started operations in June 1994, has a mandate to develop the secondary market in
government securities.
Long-term debt market. After bringing some order to the equity market, the SEBI has now
decided to concentrate on the development of the debt market. Stamp duty is being withdrawn
at the time of dematerialization of debt instruments in order to encourage paperless trading.

38
 The Capital Market

The number of shareholders in India is estimated at 25 million. However, only an estimated two
lakh persons actively trade in stocks. There has been a dramatic improvement in the country's
stock market trading infrastructure during the last few years. Expectations are that India will be
an attractive emerging market with tremendous potential. Unfortunately, during recent times the
stock markets have been constrained by some unsavory developments, which have led to retail
investors deserting the stock markets.

Mutual Funds

The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996
and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework
for the establishment of many more players, both Indian and foreign players.

The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly
Rs.70,000 crores, but its share is going down. The biggest shock to the mutual fund industry
during recent times was the insecurity generated in the minds of investors regarding the US 64
schemes. With the growth in the securities markets and tax advantages granted for investment in
mutual fund units, mutual funds started becoming popular.
The foreign owned AMCs are the ones which are now setting the pace for the industry. They are
introducing new products, setting new standards of customer service, improving disclosure
standards and experimenting with new types of distribution.
The insurance industry is the latest to be thrown open to competition from the private sector
including foreign players. Foreign companies can only enter joint ventures with Indian
companies, with participation restricted to 26 per cent of equity. It is too early to conclude
whether the erstwhile public sector monopolies will successfully be able to face up to the
competition posed by the new players, but it can be expected that the customer will gain from
improved service.

39
The new players will need to bring in innovative products as well as fresh ideas on marketing
and distribution, in order to improve the low per capita insurance coverage. Good regulation
will, of course, be essential.

Deregulation Of Banking System

Prudential norms were introduced for income recognition, asset classification, provisioning for
delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy
norms, substantial capital were provided by the Government to PSBs.

Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash
reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides
almost entirely were deregulated.
New private sector banks allowed promoting and encouraging competition. PSBs were
encouraged to approach the public for raising resources. Recovery of debts due to banks and the
Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate
quicker recovery of loan arrears.
Bank lending norms liberalized and a loan system to ensure better control over credit
introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines
issued for risk management systems in banks encompassing credit, market and operational risks.
A credit information bureau being established to identify bad risks. Derivative products such as
forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced.

Capital Market Developments

The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital Issues was
abolished and the initial share pricing were decontrolled. SEBI, the capital market regulator was
established in 1992.

40
Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after
registration with the SEBI. Indian companies were permitted to access international capital
markets through euro issues.
The National Stock Exchange (NSE), with nationwide stock trading and electronic display,
clearing and settlement facilities was established. Several local stock exchanges changed over
from floor based trading to screen based trading.

Private Mutual Funds Permitted

The Depositories Act had given a legal framework for the establishment of depositories to
record ownership deals in book entry form. Dematerialization of stocks encouraged paperless
trading. Companies were required to disclose all material facts and specific risk factors
associated with their projects while making public issues.
To reduce the cost of issue, underwriting by the issuer were made optional, subject to
conditions. The practice of making preferential allotment of shares at prices unrelated to the
prevailing market prices stopped and fresh guidelines were issued by SEBI.
SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy norms
for brokers, and made rules for making client or broker relationship more transparent which
included separation of client and broker accounts.

Buy Back Of Shares Allowed

The SEBI started insisting on greater corporate disclosures. Steps were taken to improve
corporate governance based on the report of a committee.
SEBI issued detailed employee stock option scheme and employee stock purchase scheme for
listed companies.

Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies
given the freedom to issue dematerialized shares in any denomination. Derivatives trading starts
with index options and futures. A system of rolling settlements introduced. SEBI empowered to
register and regulate venture capital funds.
41
The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new credit rating
agencies as well as introducing a code of conduct for all credit rating agencies operating in
India.

BANKING STRUCTURE IN INDIA

Public Sector Banks

Among the Public Sector Banks in India, United Bank of India is one of the 14 major banks
which were nationalised on July 19, 1969. Its predecessor, in the Public Sector Banks, the
United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz.
42
Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union
Bank Ltd. (1922) and Hooghly Bank Ltd. (1932).

Oriental Bank of Commerce (OBC), a Government of India Undertaking offers Domestic, NRI
and Commercial banking services. OBC is implementing a GRAMEEN PROJECT in Dehradun
District (UP) and Hanumangarh District (Rajasthan) disbursing small loans. This Public Sector
Bank India has implemented 14 point action plan for strengthening of credit delivery to women
and has designated 5 branches as specialized branches for women entrepreneurs.

The following are the list of Public Sector Banks in India

1. Allahabad Bank
2. Andhra Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharastra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab & Sind Bank
14. Punjab National Bank
15. Syndicate Bank
16. UCO Bank
17. Union Bank of India
18. United Bank of India
19. Vijaya Bank

43
List of State Bank of India and its subsidiary, a Public Sector Banks

• State Bank of India

o State Bank of Bikaner & Jaipur (SBBJ)
o State Bank of Hyderabad (SBH)
o State Bank of Indore (SBIr)
o State Bank of Mysore (SBM)
o State Bank of Patiala (SBP)
o State Bank of Travancore (SBT)

Private Sector Banks

Private banking in India was practiced since the beginning of banking system in India. The first
private bank in India to be set up in Private Sector Banks in India was IndusInd 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
institution in India.

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

Major Private Banks in India are:

44
• Bank of Rajasthan
• Catholic Syrian Bank
• Bharat Overseas Bank
• Centurion Bank of Punjab
• Dhanalakshmi Bank
• Federal Bank
• HDFC Bank
• ICICI Bank
• IDBI Bank
• IndusInd Bank
• ING Vysya Bank
• Jammu & Kashmir Bank
• Karnataka Bank
• Karur Vysya Bank
• Kotak Mahindra Bank
• SBI Commercial & International Bank
• South Indian Bank
• United Western Bank
• UTI Bank
• YES Bank
• City Union Bank
• Nainital Bank
• Tamilnad Mercantile Bank
• Lord Krishna Bank
• Lakshmi Vilas Bank
• Ratnakar Bank

45
 Co-Operative Banks

The Co operative banks in India started functioning almost 100 years ago. The Cooperative
bank is an important constituent of the Indian Financial System, judging by the role assigned to
co operative, the expectations the co operative is supposed to fulfill, their number, and the
number of offices the cooperative bank operate. Though the co operative movement originated
in the West, but the importance of such banks have assumed in India is rarely paralleled
anywhere else in the world. The cooperative banks in India play an important role even today in
rural financing. The businesses of cooperative bank in the urban areas also have increased
phenomenally in recent years due to the sharp increase in the number of primary co-operative
banks.
Co operative Banks in India are registered under the Co-operative Societies Act. The
cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations
Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Cooperative banks in India finance rural areas under:

• Farming
• Cattle
• Milk
• Hatchery
• Personal finance

Cooperative banks in India finance urban areas under:

• Self-employment
• Industries
• Small scale units
• Home finance
• Consumer finance

Regional Rural Banks

46
Rural banking in India started since the establishment of banking sector in India. Rural Banks in
those days mainly focused upon the agro sector. Regional rural banks in India penetrated every
corner of the country and extended a helping hand in the growth process of the country.

There are 197 RRB’s in India. SBI has 30 Regional Rural Banks in India known as RRBs. The
rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and Himachal
Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is
2349 (16%). Till date in rural banking in India, there are 14,475 rural banks in the country of
which 2126 (91%) are located in remote rural areas.

Apart from SBI, there are other few banks which functions for the development of the rural
areas in India. Few of them are as follows:

• Haryana State Cooperative Apex Bank Limited

• National Bank for Agriculture and Rural Development (NABARD)
• Sindhanur Urban Souharda Co-operative Bank
• United Bank of India
• Syndicate Bank
Foreign Banks

Foreign Banks in India always brought an explanation about the prompt services to customers.
After the set up foreign banks in India, the banking sector in India also become competitive and
accurative.

New rules announced by the Reserve Bank of India for the foreign banks in India in this budget
have put up great hopes among foreign banks which allow them to grow unfettered. Now
foreign banks in India are permitted to set up local subsidiaries. The policy conveys that foreign
banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its
terms) and their Indian subsidiaries will not be able to open branches freely. Please see the list
of foreign banks in India till date.

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List of Foreign Banks in India

• ABN-AMRO Bank
• Abu Dhabi Commercial Bank
• Bank of Ceylon
• BNP Paribas Bank
• Citi Bank
• Deutsche Bank
• HSBC
• Sonali Bank
• JPMorgan Chase Bank
• Standard Chartered Bank
• Scotia Bank
• Bank of America
• American Express Bank
• DBS Bank
• Krung Thai Bank
• Chinatrust Commercial Bank
• Arab Bangladesh Bank
• Mizuho Corporate Bank
• Oman International Bank
• Calyon Bank

By the year 2009, the list of foreign banks in India is going to become more quantitative as a
number of foreign banks are still waiting with baggage to start business in India.

Upcoming Foreign Banks In India

48
By 2009 few more names is going to be added in the list of foreign banks in India. This is as an
aftermath of the sudden interest shown by Reserve Bank of India paving roadmap for foreign
banks in India greater freedom in India.

List of foreign banks going to set up business in India:

• Royal Bank of Scotland

• Switzerland's UBS
• US-based GE Capital
• Credit Suisse Group
• Industrial and Commercial Bank of China

RESERVE BANK OF INDIA

The central bank of the country is the Reserve Bank of India (RBI). It was established in April
1935 under the RBI Act, 1934 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission. The share capital was divided into
5,00,000 shares of Rs. 100 each fully paid which was entirely owned by private shareholders in
the beginning. The Government held shares of nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalised in the year 1949. The general superintendence and
direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor
and four Deputy Governors, one Government official from the Ministry of Finance, ten
nominated Directors by the Government to give representation to important elements in the
economic life of the country, and four nominated Directors by the Central Government to
represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New
Delhi. Local Boards consist of five members each Central Government appointed for a term of
four years to represent territorial and economic interests and the interests of co-operative and
indigenous banks.

49
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The RBI Act, 1934
provides the statutory basis of the functioning of the Bank. It is so called as it maintains cash
reserves of all the commercial banks in India with itself. It is also referred to as Central Bank.

Objectives of constituting the Reserve Bank of India:

• To regulate the issue of bank notes.

• To maintain reserves with a view to securing monetary stability.
• To operate the credit and currency system of the country to its advantage.
• To act as a regulator and supervisor of the financial system
• Management of foreign exchange control
• Banker to the Government because it performs merchant banking function for the central
and the state governments; also acts as their banker.
• Development of banks.
• Supervision and licensing of banks.

Functions Of Reserve Bank Of India

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank in
the Reserve Bank of India. These are as follows:

Bank Of Issue

RBI is also known as the Bank of Issue as it enjoys monopoly in issuing currency throughout
the country. Under Section 22 of the Reserve Bank of India Act, the Bank has the sole
right to issue bank notes of all denominations. The distribution of one rupee notes and
coins and small coins all over the country is undertaken by the Reserve Bank as agent of
the Government. The Reserve Bank has a separate Issue Department which is entrusted
with the issue of currency notes. The assets and liabilities of the Issue Department are kept
separate from those of the Banking Department. Originally, the assets of the Issue
50
 Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling
securities provided the amount of gold was not less than Rs. 40 crores in value. The
remaining three-fifths of the assets might be held in rupee coins, Government of India
rupee securities, eligible bills of exchange and promissory notes payable in India. Due to
the exigencies of the Second World War and the post-war period, these provisions were
considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold
and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be
in gold. The system as it exists today is known as the minimum reserve system.

Following are the advantages of giving monopoly power to central bank:-

It brings uniformity in the notes issue.
It ensures flexibility in the money supply
It ensures general public’s faith in the currency system of the country.
It adds to the government treasury.

Banker To Government

The second important function of the Reserve Bank of India is to act as Government banker,
agent and adviser. The Reserve Bank is agent of Central Government and of all State
Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the
obligation to transact Government business, via. to keep the cash balances as deposits free
of interest, to receive and to make payments on behalf of the Government and to carry out
their exchange remittances and other banking operations. It makes loans and advances to
the States and local authorities. It acts as adviser to the Government on all monetary and
banking matters. The RBI acts as a financial advisor and performs agency functions for the
government also.

Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the
Banking Companies Act of 1949, every scheduled bank was required to maintain with the
51
 Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its
time liabilities in India. By an amendment of 1962, the distinction between demand and
time liabilities was abolished and banks have been asked to keep cash reserves equal to 3
per cent of their aggregate deposit liabilities. The minimum cash requirements can be
changed by the Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible
securities or get financial accommodation in times of need or stringency by rediscounting
bills of exchange. Since commercial banks can always expect the Reserve Bank of India to
come to their help in times of banking crisis the Reserve Bank becomes not only the
banker's bank but also the lender of the last resort. The main objective behind this is that
no investment opportunity should go unutilized just due to the scarcity of funds.

Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the
volume of credit created by banks in India. It can do so through changing the Bank rate or
through open market operations. According to the Banking Regulation Act of 1949, the
Reserve Bank of India can ask any particular bank or the whole banking system not to lend
to particular groups or persons on the basis of certain types of securities. Since 1956,
selective controls of credit are increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian money
market. Every bank has to get a license from the Reserve Bank of India to do banking
business within India, the license can be cancelled by the Reserve Bank of certain
stipulated conditions are not fulfilled. Every bank will have to get the permission of the
Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly
return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the
Bank to call for information is also intended to give it effective control of the credit

52
 system. The Reserve Bank has also the power to inspect the accounts of any commercial
bank.

As supreme banking authority in the country, the Reserve Bank of India, therefore, has the
following powers:

It holds the cash reserves of all the scheduled banks.

It controls the credit operations of banks through quantitative and qualitative controls.

It controls the banking system through the system of licensing, inspection and calling for
information.

It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the official rate of exchange.
According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell
at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of
exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange
rate fixed at lsh.6d. though there were periods of extreme pressure in favour of or against
the rupee. After India became a member of the International Monetary Fund in 1946, the
Reserve Bank has the responsibility of maintaining fixed exchange rates with all other
member countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the
custodian of India's reserve of international currencies. The vast sterling balances were
acquired and managed by the Bank. Further, the RBI has the responsibility of
administering the exchange controls of the country. The RBI not only has to hold these
foreign exchange reserves but also take various steps to enhance the volume of these
reserves with it.
53
 Supervisory functions

In addition to its traditional central banking 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 co-operative banks,
relating to licensing and establishments, branch expansion, liquidity of their assets,
management and methods of working, amalgamation, reconstruction, and liquidation. The
RBI is authorised to carry out periodical inspections of the banks and to call for returns and
necessary information from them. The nationalisation 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
realisation 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 has 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 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 in 1962, the Unit Trust of India in
1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance
54
 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 mobilise savings, and to provide industrial finance as well as
agricultural finance. As far back as 1935, the Reserve Bank of India 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 moneylenders 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.

Being the central bank of the country, Reserve Bank Of India took several measures in the
development of the banking sector. No bank can undertake any activity without the approval of
RBI and thus RBI played a major role in the introduction of the information technology in the
banking sector. The initiatives taken by RBI are as follows:

Implementation of Centralised Funds Management System

The centralised funds management system provides for a centralised viewing of balance
positions of the account holders across different accounts maintained at various locations of
RBI. While the first phase of the system covering the centralised funds enquiry system has been
made available to the users, the second phase comprising the centralised funds transfer system
would be made available by the middle of 2003. So far, 54 banks have implemented the system
at their treasuries/funds management branches.

Certification and Digital Signatures

The mid-term Review of October 2002 indicated the need for information security on the
network and the use of public key infrastructure (PKI) by banks. The Controller of Certifying
Authorities, Government of India, have approved the Institute for Development and Research in
Banking Technology as a Certification Authority(CA)for digital signatures. Consequently, the
process of setting up of registration authorities under the CA has commenced at various banks.
55
In addition to the negotiated dealing system, the electronic clearing service and electronic funds
transfer (EFT) are also being enhanced in terms of security by means of implementation of PKI
and digital signatures using the facilities offered by the CA.

Committee on Payment Systems

In order to examine the entire gamut of the process of reforms in payment and settlement
systems which would be culminating with the real time gross settlement (RTGS) system, a
Committee on Payment Systems (Chairman: Dr. R.H. Patil) was set up in 2002. The Committee,
after examining the various aspects relating to payment and settlement systems, submitted its
report in September 2002 along with a draft Payment Systems Bill. The draft Bill provides a
legal basis for netting, apart from empowering RBI to have regulatory and oversight powers
over payment and settlement systems of the country. The report of the Committee was put on
the RBI website for wider dissemination. The draft Bill has been forwarded to the Government.

Multi-application Smart Cards

Recognising the need for technology based payment products and the growing importance of
smart card based payment flows, a pilot project for multi-application smart cards in conjunction
with a few banks and vendors, under the aegis of the Ministry of Communications and
Information Technology, Government of India, has been initiated. The project is aimed at the
formulation of standards for multi-application smart cards on the basis of inter-operable systems
and technological components of the entire system.

Special Electronic Funds Transfer

As indicated in the mid-term Review of October 2002, national EFT (NEFT) is being
introduced using the backbone of the structured financial messaging system (SFMS) of the
IDRBT. NEFT would provide for movement of electronic transfer of funds in a safe, secure and
quick manner across branches of any bank to any other bank through a central gateway of each
56
bank, with the inter-bank settlement being effected in the books of account of banks maintained
at RBI. Since this scheme requires connectivity across a large number of branches at many
cities, a special EFT was introduced in April 2003 covering about 3000 branches in 500 cities.
This has facilitated same day transfer of funds across accounts of constituents at all these
branches.

National Settlement System(NSS)

The clearing and settlement activities are dispersed through 1,047 clearing houses managed by
RBI, the SBI and its associates, public sector banks and other institutions. In order to facilitate
banks to have better control over their funds, it is proposed to introduce national settlement
system in a phased manner.

Reporting of Call/Notice Money Market Transactions on NDS Platform

Negotiated dealing system (NDS), which has become operational since February 2002, enables
on-line dealing and dissemination of trade information relating to instruments in money,
government securities and foreign exchange markets. Membership in NDS is open to all
institutions which are members of INFINET and are maintaining subsidiary general ledger
(SGL) Account with RBI. These include banks, financial institutions (FIs), primary dealers
(PDs), insurance companies, mutual funds and any other institution as admitted by RBI. At
present, all deals in government securities, call/notice/term money, CDs and CP executed
among NDS members have to be reported automatically through NDS, if the deal is done
on NDS and within 15 minutes of concluding the deal, if done outside NDS.

The following are some of the offerings of Central Bank of India.

• The Home Savings Safe Deposit Scheme to build saving/thrift habits in all sections of the
society.

• An Exclusive Ladies Department to cater to the Bank's women clientele.

57
 • Safe Deposit Locker facility and Rupee Travelers’ Cheques.

• Setting up of the Executor and Trustee Department.

• Deposit Insurance Benefit Scheme.

• Recurring Deposit Scheme.

• The Merchant Banking Cell was established.

• Central card, the credit card of the Bank was introduced.

• 'Platinum Jubilee Money Back Deposit Scheme' was launched.

• The housing subsidiary Cent Bank Home Finance Ltd. was started with its headquarters
at Bhopal in Madhya Pradesh.

• Quick Cheque Collection Service (QCC) & Express Service was set up to enable speedy
collection of outstation cheques.

MERGERS AND ACQUISITIONS IN BANKING SECTOR

Mergers and acquisitions (M&As) are a global phenomenon, with an estimated 4,000 deals
taking place every year. Developed countries are the most important sellers and buyers in cross-
border M&As, accounting for close to 90 per cent and 95 per cent of sales/purchases in 1998-
99, respectively.

Acquisitions are considerably more important than mergers in developing and transition
countries. In developing countries, cross-border M&A sales fell in 1999. In developing Asia,
they continued to grow, including in the countries most affected by the 1997 financial crisis.

This M&A-driven consolidation is raising important public policy concerns, notably with
respect to employment. Indeed, the announcement of a merger is usually accompanied by an

58
announcement of cost-cutting redundancies in the merging organizations, often on a massive
scale. To gain full merger benefits, two overlapping organizations are compressed into one,
trimming duplicated operations which entails redundancies at all levels. It is nevertheless
difficult to disentangle the employment effects of M&As from those of other factors such as
increased competitive pressures, automation or the introduction of information and
communication technologies which are similarly inciting organizations to restructure even in the
absence of M&As.

A 1999 KPMG survey of company directors whose companies had participated in major cross-
border M&A deals between 1996 and 1998 found that 82 per cent of respondents believed the
deals they had been involved in had been a success.

More bank mergers in India

The Indian government should infuse more capital into state-run banks or move to cut its stakes
below 51 per cent to meet the growing needs of the economy, a top economic adviser to the
government said yesterday.

Consolidation in the Indian banking sector was likely to gain prominence in the near future and
this must be driven by commercial factors, C. Rangarajan, who heads the prime minister's
economic advisory panel, told a banking conference.

"The government will have to make up its mind either to bring in additional capital or move
towards reducing its share from 51 per cent through appropriate statutory changes," Rangarajan
said in his speech, a copy of which was seen by Reuters.

YES BANK IN TALKS WITH FOREIGN MAJORS

The private sector YES Bank is in talks with foreign banks, both for strategic investment as well
as for business correspondent relationships.
59
Large MNC banks are keen on expanding in India and looking at significant minority or near
majority stake in Indian banks. Banks such as YES bank will be in a privileged position to talk
to foreign banks when the Reserve Bank of India guidelines become conducive, said Mr. Rajat
Monga, Chief Financial Officer, YES Bank. Foreign banks are expected to get more leeway in
expanding their network in India after 2009. By then, YES Bank would be in a better position to
attract foreign partners, as it will have a bigger network & larger share of SME and retail
business, Mr. Monga said.

The net profit of the bank for the quarter ended March 31, 2008 more than doubled to Rs 64
crore from Rs 31 crore in the same period a year ago. The bank also reported a net NPA of 0.09
per cent for the first time and made higher provisions of Rs 22.8 crore as against Rs 12.7 crore.

Mr. Rana Kapoor, Chief Executive Officer and Managing Director, said the bank did not have
any delinquency in its marked-to-market (MTM) derivatives exposure. The bank has 130 forex
clients across large corporates and mid corporates. Out of the total MTM derivatives exposure,
large corporates account for about 70 per cent, while mid-corporates or emerging corporates
account for the remaining 30 per cent.
“We do not have a single derivatives exposure to the SME sector. We have filtered our clients
very carefully,” Mr. Kapoor said.

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 INDIAN BANKING SCENARIO 2010

Towards a High-performing Sector

The last decade has seen many positive developments in the Indian banking sector. The policy
makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related
government and financial sector regulatory entities, have made several notable efforts to
improve regulation in the sector. The sector now compares favorably with banking sectors in the
region on metrics like growth, profitability and non-performing assets (NPAs). A few banks
have established an outstanding track record of innovation, growth and value creation. This is
reflected in their market valuation. However, improved regulations, innovation, growth and
value creation in the sector remain limited to a small part of it. The cost of banking
intermediation in India is higher and bank penetration is far lower than in other markets. India’s
banking industry must strengthen itself significantly if it has to support the modern and vibrant
economy which India aspires to be.

Opportunities And Challenges For Players

The bar for what it means to be a successful player in the sector has been raised. Four
challenges must be addressed before success can be achieved.

First, the market is seeing discontinuous growth driven by new products and services that
include opportunities in credit cards, consumer finance and wealth management on the retail
side, and in fee-based income and investment banking on the wholesale banking side. These
61
require new skills in sales & marketing, credit and operations. Second, banks will no longer
enjoy windfall treasury gains that the decade-long secular decline in interest rates provided.
This will expose the weaker banks. Third, with increased interest in India, competition from
foreign banks will only intensify. Fourth, given the demographic shifts resulting from changes
in age profile and household income, consumers will increasingly demand enhanced
institutional capabilities and service levels from banks.

FUTURE OF INDIAN BANKING MARKET

The Indian banking market is growing at an astonishing rate, with assets expected to reach
US$1 trillion by 2010. An expanding economy, middle class, and technological innovations are
all contributing to this growth.
A new Celent report, Overview of Indian Banking Market, examines the impressive growth of
this industry, largely due to an expanding economy and growing consumer middle class in need
of financial services. India's economy is growing at a rate of 8%, with banking assets increasing
at a CAGR of 24% from 2001 to 2008, from US$374.4 billion in 2003 to US$616.15 billion in
2008. While public sector banks still dominate India’s banking industry, the private sector is
growing, with global players now actively competing with domestic banks.

62
 LIMITATIONS

• This study is based on the secondary data collected from various newspapers, journals
and books and no other efforts have been made to verify their correctness.
• Due to paucity of time only the important factors have been discussed.

63
 CHAPTER 5

CONCLUSIONS AND SUGGESTIONS

• The Indian banking can be broadly categorized into nationalized (government owned),
private banks and specialized banking institutions. The Reserve Bank of India is the apex
institution in the Indian banking system & acts a regulator and a centralized body for
monitoring any discrepancies and shortcoming in the system.
• Before Nationalisation, banks in the beginning faced severs financial crisis. During and
after World War I, 87 banks were liquidated. Development of banks in India was characterized
by bank failures. After Independence, the Indian banking underwent a thorough and moral
change. The government of India announced Banking Regulations Act in 1949 to consolidate
and regulate the banking growth in India
• After Nationalisation, however, growth of banking during the first 3 plan periods
resembles that of capitalist growth. There was need for stimulating the savings and investment
to meet the growing demand for bank credit for economic development. Therefore government
focused on social banking than capitalistic banking. Hence, in February 1961, announcement of
14 banks was made for the purpose of nationalisation. Since then, the performance of banking
has been remarkable in the many aspects such as branch expansion, expansion of business,
priority sector advances, development and spread of banking.
• Currently, banking system has entered into the third phase of development which is
characterized by innovation & diversification in order to meet new challenges. New services
have been started such as merchant banking, investment banking, housing finance, investment
banking, internet banking, telebanking, branch banking, electronic money transfers, SMS
banking, mobile banking, proxy banking, plastic money such as credit cards, ATM cards, debit
cards, smart cards, etc.

64
 Banks have indulged in activities such as service area approach, mutual funds, housing
finance, factoring services, commercial papers, certificate of deposit, stock invest and other
money and capital market instruments.
• The unleashing of products and services through the net has galvanized players at all
levels of the banking and financial institutions market grid to look anew at their existing
portfolio offering. Banks have been benefited a lot with the internet and information
technology. As a result banks have become more efficient and cost-effective. Indian
nationalized banks continue to be the major lenders in the economy due to their sheer size and
penetrative networks which assures them high deposit mobilization. However there is a need to
create more awareness regarding social development. There is need for taking decisive actions .
• Industry estimates indicate that out of 274 commercial banks operating in India, 223
banks are in the public sector & 51 are in the private sector. The private sector bank grid also
includes 24 foreign banks.
• Indian banking market is growing at an astonishing rate, with assets expected to reach
US$1 trillion by 2010. The Indian banking industry is in the middle of an IT revolution,
focusing on the expansion of retail and rural banking. Players are becoming increasingly
customer-centric in their approach, which has resulted in innovative methods of offering new
banking products & services. Banks are now realizing the importance of being a big player &
are beginning to focus their attention on mergers & acquisitions to take advantage of economies
of scale.

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 BIBLIOGRAPHY

There was immense need and flow of the information while preparing the project report which
was gathered through various sources mentioned below:

Websites:

www.rbi.org.in accessed in March 2009

www.business-standard.com accessed in March 2009
www.finance.indiamart.com accessed in March 2009
www.thehindubusinessline.com accessed in March 2009
www.google.com accessed in March 2009
www.wikipedia.com accessed in March 2009
www.banknetindia.com accessed in March 2009
www.bankingindiaupdate.com accessed in March 2009

Newspapers:

The Economic Times

Books:

T. D Malhotra, Eletronic Banking & Information Technology in Banks, First Edition 2002,
Sultan Chand & Sons , New Delhi

Parmod Kumar, Banking Sector Efficiency in Globalised Economy

M&A in Indian Banking System- An Executive Handbook, 2005, Mumbai

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67