A Project report On Banking industry

Guided by: Prof. Kaushal mandalia

Prepared by: Bhavin Vadhadiya submitted to: prof. kaushal mandalia

Certificate by the guide

The satisfaction and joy that accompanies the successful completion of a task is incomplete without mentioning the name of the person who extended his help and support in making it a success.

I am greatly indebted to Prof. Kaushal Mandalia (Faculty of MEFGI), my Project Guide and Mentor for devoting his valuable time and efforts towards my project. I thank him for being a constant source of knowledge, inspiration and help during this period of making project.

Objectives of the project

Banking is an essential industry. It is where we often wind up when we are seeking a problem in financial crisis and money related query. Banking is one of the most regulated businesses in the world. Banks remain important source for career opportunities for people. It is vital system for developing economy for the nation. Banks can play a dynamic role in delivery and purchase of consumer durables.

Table of Contents
INTRODUCTION: ...................................................................................................................................... 7 BANKING STRUCTURE ............................................................................................................................. 8 INDIAN BANKING SYSTEM....................................................................................................................... 9 INDIAN BANKING INDUSTRY ANALYSIS ................................................................................................. 10 Role of Banking ..................................................................................................................................... 12 Organizational STRUCTURE OF A BANK BRANCH ................................................................................. 20 Small/Medium Branch ...................................................................................................................... 20 Very Large Branch ............................................................................................................................. 21 Michael Porters Five Forces modle ...................................................................................................... 26 Rivalry Among Existing Competitors: ................................................................................................ 27 Threat of Substitute Products of Services:........................................................................................ 29 Bargaining Power of Buyers: ............................................................................................................. 29 Bargaining Power of Suppliers: ......................................................................................................... 29 Threat of New Entrants:.................................................................................................................... 30 Perception of Indian Banks in 2020 ...................................................................................................... 38 Conclusion ............................................................................................................................................. 41 Bibliography .......................................................................................................................................... 43

INTRODUCTION:
Banking is nearly as old as civilization. The history of banking could be said to have started with the appearance of money. The first record of minted metal coins was in Mesopotamia in about 2500B.C. the first European banknotes, which was handwritten appeared in1661, in Sweden. Cheque and printed paper money appeared in the 1700s and 1800s, with many banks created to deal with increasing trade.

The history of banking in each country runs in lines with the development of trade and industry, and with the level of political confidence and stability. The ancient Romans developed an advanced banking system to serve their vast trade network, which extended throughout Europe, Asia and Africa.

Modern banking began in Venice. The word bank comes from the Italian word ban co, meaning bench, because moneylenders worked on benches in market places. The bank of Venice was established in 1171 to help the government raise finance for a war.

At the same time, in England merchant started to ask goldsmiths to hold gold and silver in their safes in return for a fee. Receipts given to the Merchant were sometimes used to buy or sell, with the metal itself staying under lock and key. The goldsmith realized that they could lend out some of the gold and silver that they had and charge interest, as not all of the merchants would ask for the gold and silver back at the same time. Eventually, instead of charging the merchants, the goldsmiths paid them to deposit their gold and silver.

The bank of England was formed in 1694 to borrow money from the public for the government to finance the war of Augsburg against France. By 1709, goldsmith were using bank of England notes of their own receipts.

New technology transformed the banking industry in the 1900s round the world, banks merged into larger and fewer groups and expanded into other country.

BANKING STRUCTURE

In todays dynamic world banks are inevitable for the development of a country. Banks play a pivotal role in enhancing each and every sector. They have helped bring a draw of development on the worlds horizon and developing country like India is no exception.

Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for moving finance from those who have surplus money to (however temporarily) those who have deficit. In everyday branch terms the banks channel funds from depositors whose accounts are in credit to borrowers who are in debit.

Without the intermediary of the banks both their depositors and their borrowers would have to contact each other directly. This can and does happen of course. This is what has lead to the very foundation of financial institution like banks.

Before few decades there existed some influential people who used to land money. But a substantially high rate of interest was charged which made borrowing of money out of the reach of the majority of the people so there arose a need for a financial intermediate.

The Bank have developed their roles to such an extent that a direct contact between the depositors and borrowers in now known as disintermediation.

Banking industry has always revolved around the traditional function of taking deposits, money transfer and making advances. Those three are closely related to each other, the objective being to lend money, which is the profitable activity of the three. Taking deposits generates funds for lending and money transfer services are necessary for the attention of deposits. The Bank have introduced progressively more sophisticated versions of these services and have diversified introduction in numerable areas of activity not directly relating to this traditional trinity.

INDIAN BANKING SYSTEM

Reserve Bank of India

Schedule Banks Central co-op Banks and Primary Cr. Societies

Non-Schedule Banks

State co-op Banks

Commercial Banks

Commercial Banks

Indian

Foreign

Public Sector Banks

Private Sector Banks

HDFC, ICICI etc.

State Bank of India and its Subsidiaries

Other Nationalized Banks

Regional Rural Banks

INDIAN BANKING INDUSTRY ANALYSIS

The banking scenario in India has been changing at fast pace from being just the borrowers and lenders traditionally, the focus has shifted to more differentiated and customized product/service provider from regulation to liberalization in the year 1991, from planned economy to market.

Economy, from licensing to integration with Global Economics, the changes have been swift. All most all the sector operating in the economy was affected and banking sector is no exception to this. Thus the whole of the banking system in the country has undergone a radical change. Let us see how banking has evolved in the past 57 years of independence.

After independence in 1947 and proclamation in 1950 the country set about drawing its road map for the future public ownership of banks was seen inevitable and SBI was created in 1955 to spearhead the expansion of banking into rural India and speed up the process of magnetization.

Political compulsions brought about nationalization of bank in 1969 and lobbying by bank employees and their unions added to the list of nationalized banks a few years later.

Slowly the unions grew in strength, while bank management stagnated. The casualty was to the customer service declined, complaints increased and bank management was unable to item the rot.

In the meantime, technology was becoming a global phenomenon lacking a vision of the future and the banks erred badly in opposing the technology up gradation of banks. They mistakenly believed the technology would lead to retrenchment and eventually the marginalization of unions.

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The problem faced by the banking industry soon surfaced in their balance sheets. But the prevailing accounting practices unable banks to dodge the issue.

The rules of the game under which banks operated changed in 1993. Norms or income Recognition, Assets classification and loan loss provisioning were put in place and capital adequacy ratio become mandatory. The cumulative impact of all these changes has been on the concept of state ownership in banks. It is increasingly becoming clear that the state ownership in bank is no longer sustainable.

The amendment of banking regulation act in 1993 saw the entry of new private sector banks and foreign banks.

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Role of Banking

Banks provide funds for business as well as personal needs of individuals. They play a significant role in the economy of a nation. Let us know about the role of banking. It encourages savings habit amongst people and thereby makes funds available for productive use. It acts as an intermediary between people having surplus money and those requiring money for various business activities. It facilitates business transactions through receipts and payments by cheques instead of currency. It provides loans and advances to businessmen for short term and long-term purposes. It also facilitates import export transactions. It helps in national development by providing credit to farmers, small-scale industries and self-employed people as well as to large business houses which lead to balanced economic development in the country. It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles, etc.

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DIFFERENT TYPES OF BANKS

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TYPES OF BANKS

Central Bank

Development Banks

RBI, in India

Co-operative Banks Commercial Banks

Primary Credit Societies, Central State Co-operative, Banks Co-operative Banks Public Sector Banks-27, Private Sector Banks-29, Foreign Banks-31

Specialised Banks

EXIM Bank SIDBI, NABARD

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Central Bank:
A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Governments banker; maintain deposit accounts of all other banks and advances money to other banks, when needed. The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the bankers bank. The Reserve Bank of India is the central bank of our country. The Central Bank maintains record of Government revenue and expenditure under various heads. It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other bank than the Central Bank can issue currency.

Commercial Banks:
Commercial Banks are banking institutions that accept deposits and grant shortterm loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a longterm basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson.

Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks, Private sector banks and Foreign banks. (I) Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Baroda and Dena Bank, etc. (ii) Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank, etc. (iii) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC),

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Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Development Banks:
Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.

Co-operative Banks:
People who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a licence from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State. As regards banking business, the society must follow the guidelines set and issued by the Reserve Bank of India.

Types of Co-operative Banks: There are three types of co-operative banks operating in our country. They are primary credit societies, central co-operative banks and state co-operative banks. These banks are organized at three levels, village or town level, district level and state level. (I) Primary Credit Societies: These are formed at the village or town level with borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds. (ii) Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks.

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(iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all the states of the country. They mobilize funds and help in its proper channelization among various sectors. The money reaches the individual borrowers from the state cooperative banks through the central co-operative banks and the primary credit societies.

Specialised Banks:
There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity and thus, are called specialized banks. Let us know about them.

i. Export Import Bank of India (EXIM Bank): If you want to set up a business for exporting products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc. ii. Small Industries Development Bank of India (SIDBI): If you want to establish a small-scale business unit or industry, loan on easy terms can be available through SIDBI. It also finances modernization of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop smallscale industries. iii. National Bank for Agricultural and Rural Development (NABARD): It is a central or apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas.

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E-banking (Electronic Banking)

With advancement in information and communication technology, banking services are also made available through computer. Now, in most of the branches you see computers being used to record banking transactions. Information about the balance in your deposit account can be known through computers. In most banks now a days human or manual teller counter is being replaced by the Automated Teller Machine (ATM). Banking activity carried on through computers and other electronic means of communication is called electronic banking or e-banking. Let us now discuss about some of these modern trends in banking in India.

Automated Teller Machine Banks have now installed their own Automated Teller Machine (ATM) throughout the country at convenient locations. By using this, customers can deposit or withdraw money from their own account any time. Debit Card Banks are now providing Debit Cards to their customers having saving or current account in the banks. The customers can use this card for purchasing goods and services at different places in lieu of cash. The amount paid through debit card is automatically debited (deducted) from the customers account. Credit Card Credit cards are issued by the bank to persons who may or may not have an account in the bank. Just like debit cards, credit cards are used to make payments for purchase, so that the individual does not have to carry cash. Banks allow certain credit period to the credit cardholder to make payment of the credit amount. Interest is charged if a cardholder is not able to pay back the credit extended to him within a stipulated period. This interest rate is generally quite high. Net Banking With the extensive use of computer and Internet, banks have now started transactions over Internet. The customer having an account in the bank can log into the banks website and access his bank account. He can make payments for bills; give instructions for money transfers, fixed deposits and collection of bill, etc.

Phone Banking
In case of phone banking, a customer of the bank having an account can get information of his account; make banking transactions like, fixed deposits, money transfers, demand draft, collection and payment of bills, etc. by using telephone. As more and more people are now using mobile phones, phone banking is possible through mobile phones. In

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mobile phone a customer can receive and send messages (SMS) from and to the bank in addition to all the functions possible through phone banking.

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Organizational STRUCTURE OF A BANK BRANCH

Small/Medium Branch

BRANCH MANAGER (B.M.)

ACCOUNTANT/ASSISTANT BRANCH MANAGER (A.B.M.)

OFFICER

CLERKS

SUB-STAFF

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Very Large Branch

BRANCH MANAGER

ACCOUNTANT/ASSISTANT BRANCH MANAGER

MANAGER

MANAGER

MANAGER

ADVANCES

OPERATIONS

ADMINISTRATI ON 3, OFFICERS

3, OFFICERS

3, OFFICERS

2, CLERK & SUB-STAFF

2, CLERK & SUB-STAFF

2, CLERK & SUB-STAFF

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BANK ORGANIZATION SYSTEM IN INDIA

The large volume of work passing through the banking system every day in the form of cash, cheque, and other credit instruments, together with the complexity of the many services rendered, calls not only for a high degree of skill, accuracy and knowledge on the part of the officials, but also up-to-date and efficient methods of organization, accountancy and control.

Shareholders and directors The Branch Manager

General Managers

Head office Administration

Branch Administration

Foreign Departments

The Chief Clerk

The Security Clerk

The cashier

The Remittance or Waste Clerk The junior Clerk

The Ledger-Keeper

The day-book or Control Clerk Rotation of Duties

The Shorthand Typist

Modern Banking Methods

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Government controlled bank dominate Percentage share of total assets

Foreign Bank 7% Privete Sector Bank 19%

GovtControlled Bank 74%

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Industrial lending the biggest segment Percentage share of total assets

Farm Sector and Others 13%

Personal Lending 19%

Industry 44%

Services 24%

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Michael Porters Five Forces modle

Threat of New Entrants

Bargaining Power of Suppliers

Rivalry Among Existing Competitors

Bargaining Power of Buyers

Threat of Substitute Products of Services

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It is a model of pure competition, which implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure. Any strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. The manager can then use the analysis as a basic tool for strategic decision making for the current situation or future. The banking sector of Tanzania can also consider the application of this model for some strategic decision processes. A discussion of each component of the model is as follows;

Rivalry Among Existing Competitors:

In the traditional economic model, competition among rival firms drives profits to zero. However, competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms (banks) strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences. These differences give some firms a competitive advantage while to others a disadvantage. These differences also pose a challenge to the uniform application of this model across the board. Economists measure rivalry by indicators of industry concentration. The Concentration Ratio (CR) is one of such measures. A high concentration ratio indicates that a high concentration of market share is held by the largest firms - the industry is concentrated. With only a few firms holding a large market share, the competitive landscape is less competitive. A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive. The concentration ratio is not the only available measure; the trend is to define industries in terms that convey more information than distribution of market share. If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may result from the industry's history of competition, the role of a leading firm, or informal compliance with a generally understood code of conduct. Explicit collusion generally is illegal and not an option; in low-rivalry industries competitive moves must be constrained informally. However, a maverick firm seeking a competitive advantage can displace the otherwise disciplined market. The intensity of rivalry is influenced by the following industry characteristics: (i) A larger number of firms increase rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if the firms have similar market share, leading to a struggle for market leadership. Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market.

(ii)

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(iii) High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of products, high levels of production lead to a fight for market share and results in increased rivalry. (iii) High storage costs or highly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies. Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. In the case of banking sector in Tanzania, the switching cost has become very low. Some competing banks a located just adjacent to one another. Some of the banks are located in the same building. Low levels of product differentiation are associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry. Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry. High exit barriers place a high cost on abandoning the product. The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A common exit barrier is asset specificity.

(iv)

(v)

(vi)

(vii)

(ix) A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is volatile and can be intense. (x) Industry Shakeout. A growing market and the potential for high profits induce new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply. The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures. The founder of Boston Consulting Group (BCG) model, Bruce Henderson, generalized this observation as the Rule of Three and Four. A stable market will not have more than three significant competitors, and the largest competitor will have no more than four times the market share of the smallest. If this rule is true, it implies that. If there are a larger number of competitors, a shakeout is inevitable. Surviving rivals will have to grow faster than the market. Eventual losers will have a negative cash flow if they attempt to grow. All except the two largest rivals will be losers.

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 The definition of what constitutes the "market" is strategically important. Whatever the merits of this rule (Three & Four) for stable markets, it is clear that market stability and changes in supply and demand affect rivalry. Cyclical demand tends to create cutthroat competition.

Threat of Substitute Products of Services:

In Porter's model, substitute products refer to products in other industry. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms (banks) in an industry to raise prices. The competition engendered by a Threat of Substitute comes from products outside the industry. In the banking sector, there are so many products and at the same time there are so many substitute products. For example if someone is looking for a travelers cheque and that could not be provided, one might decide to opt for Telegraphic Transfer.

Bargaining Power of Buyers:

The power of buyers is the impact that customers have on a buying process of the products from a certain industry. In general, when buyers power is strong, the relationship to the industry is near to what an economist terms a monophony - a market in which there are many suppliers and one buyer. Under such market conditions, the buyer v sets the price. In reality few pure monopolies exist, but frequently there is some asymmetry between a producing industry and buyers. The same case can as well be applied to the service industry, as nowadays there is no pure-manufacturing or pure-service industry. The combination is the way forward. The only vital difference is the definition of the core product. For instance much as we consider banks to be under the service industry, physical properties like furniture, building, computers, etc are vital to make the service a possibility.

Bargaining Power of Suppliers:

A producing industry requires raw materials - labour, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. In a service sector there is no direct supplier of raw material. However the supply of supporting facilities like cheque books, furniture, stationeries, etc can give the same analogy.

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Threat of New Entrants:

It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These are barriers to entry. Barriers to entry are more than the normal equilibrium adjustments that markets typically make. For example, when industry profits increase, we would expect additional firms to enter the market to take advantage of the high profit levels, over time driving down profits for all firms in the industry. When profits decrease, we would expect some firms to exit the market thus restoring market equilibrium. Falling prices, or the expectation that future prices will fall, deters rivals from entering a market. Firms also may be reluctant to enter markets that are extremely uncertain, especially if entering involves expensive start-up costs. These are normal accommodations to market conditions. But if firms individually keep prices artificially low as a strategy to prevent potential entrants from entering the market, such entry-deterring pricing establishes a barrier. Barriers to entry are unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm's competitive advantage. If it happens that for a certain industry there are low entry barriers but high exit barriers, then this situation is referred as the worst situation of competition in that particular industry.

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Indian banks have compared favourably on growth, asset quality and profitability

with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. Bank lending has been a significant driver of GDP growth and employment. Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. 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. India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

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 Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.

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PSBs need to fundamentally strengthen institutional skill levels especially in sales

and marketing, service operations, risk management and the overall organizational performance ethic & strengthen human capital. Old private sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus. Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital.

Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.

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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 require new skills in sales & marketing, credit and operations. Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks. With increased interest in India, competition from foreign banks will only intensify. 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. New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity Foreign banks committed to making a play in India will need to adopt alternative approaches to win the race for the customer and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term. Maintaining a fundamentally long-term value-creation mindset. reach in rural India for the private sector and foreign banks.

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 With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. the Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives. Liberalization of ECB norms: The government also liberalized the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets. Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity. Significantly, FII and NRI investment limits in these securities have been fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.

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Threat of stability of the system: failure of some weak banks has often threatened

the stability of the system. Rise in inflation figures which would lead to increase in interest rates. Increase in the number of foreign players would pose a threat to the PSB as well as the private players.

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Perception of Indian Banks in 2020

As the saying goes, change is the only certainty. And it is this change that would govern the banking industry, which is graduating from financial intermediary into risk intermediary. The repetitive and overlapping systems and procedures have given way to simple key-press technology, ensuring accuracy and speed of data flow to improve overall efficiency through Knowledge Management. The emerging Information Technology (IT) facilitates in utilising Knowledge Management effectively and efficiently to improve both product range and service quality in the banking sector.

Definitely by 2020, the vast and enormous differences in the ambience presently noticed between public sector banks and the new- generation private sector as well as foreign banks would be noticeably narrowed down. But the dominance of public sector banks, which accounts for nearly 80% share in the banking sector, is likely to reduce considerably by 2020.

Technology has played a vital role in the evolution of banking sector, through speed creation, accuracy and efficiency of operation and reduction in the transaction cost. Banking services are now oriented to anyhow, anywhere, anytime and any type banking. The regulatory requirements and compliance regime in post- Basel II scenario and SarbanesOxley Act and Anti- money Laundering requirements, complicates the processing of voluminous data besides the process of their storage and retrieval in the desired form and at desired speed. Banks may have to move on to behaviour analysis approach for fine-tuning their products.

Many financial institutions, particularly banks, may not survive in the new millennium because they are relying on late 1990s surveys to plan third-millennium products and services and thus they may land up with the wrong products, perhaps designed for consumers who no longer exist. Most people see the future as more of the same. Unless one can visualise tomorrow as history so as to perceive what may happen day after tomorrow,

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perhaps one cannot visualise what will happen a decade or so later. The likely key drivers in the banking industry are as follows:

CHANNELS:
Instead of merely providing what the bank concerned could offer from its fold, banking may encompass extension of all the services that are required and dictated by customers. Clients should get services from the banks on a 24x7 basis on an online ATM connected to the network. Whosoever the banker may be, a customer should be able to access his or her bank account through a PC/laptop/mobile or an ATM around the corner. The time spent by the bank with customers would be reduced, thereby improving profitability through low operational cost that would ensure time saving for the customers, as a by-product.

A large branch network is generally considered to be the fountain head of administrative problems. But with IT making inroads into the functioning of banks in the form of virtual banking, e-banking, offer banking at customers doorsteps. The newgeneration banks started off with all branches fully networked and, in fact, some of them now operate with a fully centralized database that optimises costs compared to inter-connection of distributed database in widespread branches. Many banks, including PSU banks, would have online ATMs, phone banking, virtual banking, e- banking, Internet banking, etc. by 2020. In the last five years, most large financial institutions, particularly banks, underestimated the likely role of the Internet in various spheres of business and administrative functions. There has been solid growth in the number of people going online, as well as in the value of financial services conducted, in the breadth of financial products traded and in the depth of relationships conducted using digital channels.

The next conspicuous mistake made by financial institutions is the failure to recognize the power of the digital economy to make a deeper transformation of corporate and wholesale finance. The digital economy has consistently caught financial institutions off-balance,

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lurching from one leg to another, each time trying to correct a previous mistake. Market research only tells us about today and reveals nothing about tomorrow.

We should not rely too much on market research and lose sight of the future. Fundamental changes were taking place in three areas. E-mail replaced fax and people began to expect near- instant answers. No one has time to go through a detailed note but prefers to have interactive presentations on PowerPoint. High-flying schedules of many executives resulted in laptops being the prime luggage of many frequent fliers.

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Conclusion

We can conclude that every aspect of banking will be transformed by new technology by 2020. Customer-friendly products, delivery channels, relationship banking, dependency on IT systems and competitive pricing would be the driving forces, but a pressure-cooker atmosphere cannot be avoided. The most successful institutions will be those that combine visionary technology and very competitive pricing with strong relationships and brands built on trust with previous in-depth experience of the client business. Banks would have adopted the following strategies to move to high-tech banking as a necessity of e-commerce, e-banking, etc. a. Identification of select branches from out of the entire spread of the branch network to provide innovative services.

b. In the scenario of severe competition and escalating expectation of the customers for newer products and improved as well as alternative delivery channels, the nerve centre of banking activities will be redefined.

c. The key to survival of banks, therefore, is retention of customer loyalty by providing value-added services tailored to their needs, using state-of-the-art technology, instead of relying on outdated practices.

d. With the identified select number of branches for creating hi-tech banking, an ideal centralised solution can be considered. A countrywide network of computers could offer banking products to select corporate clients and high net worth individuals.

e. Needless to say, flawless security and seamless integration of operations through untiring efforts of employees and cohesive support from the management would be

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the key factors that will enable banks to make successful inroads into e- enabled New Age banking.

f. Once the centralised topography is put in place, the infrastructure required for ebanking and e-commerce (with the necessary security) can be built to provide stateof-the-art innovative services.

g.

Flexi-work atmosphere with banking officials working out of their homes, without the need to go to offices, may be put in place. Instead of intra-bank cross- country transfers, there may be inter-bank movement of senior officials in the public sector domain, if at all it remains so.

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Bibliography

http://finance.indiabizclub.com/info/indian_banking_industry http://www.rncos.com/Banking.htm http://info.shine.com/Industry-Information/Finance-and-Banking/117.aspx http://allpaynews.com/content/indian-banking-sector-industry-profile http://www.fdic.gov/bank/historical/history/ http://www.slideshare.net/sidekick/banking-industry-overview http://www.dnb.co.in/topbanks/overview.asp http://www.scribd.com/doc/12756522/-Banking http://business.mapsofindia.com/project-report/on-banking.html http://www.bankingindiaupdate.com

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