Definition of a Bank

Oxford Dictionary defines a bank as "an establishment for custody of

money, which it pays out on customer's order."
.[9]
Generally banking in India is fairly mature in terms of supply, product range and
reach-even though reach in rural India and to the poor still remains a challenge.
The government has developed initiatives to address this through the State Bank of
India expanding its branch network and through the National Bank for Agriculture
and Rural Development with facilities like microfinance.
Contents
[hide]
1 History
o 1.1 Ancient India
o 1.2 Medieval era
o 1.3 Colonial era
o 1.4 Post-Independence
o 1.5 Nationalization in the 1960s
o 1.6 Liberalization in the 1990s
2 Current period
3 Banking codes and standards
4 Adoption of banking technology
o 4.1 Automated teller machine growth

o 4.2 Cheque truncation initiative

o 4.3 Expansion of banking infrastructure
5 See also
6 References
7 Further reading
8 External links
History[edit]
Ancient India[edit]
The Vedas (2000-1400 BCE) are earliest Indian texts to mention the concept of
usury. The word kusidin is translated as usurer. The Sutras (700-100 BCE) and the
Jatakas (600-400 BCE) also mention usury. Also, during this period, texts began to
condemn usury. Vasishtha forbade Brahmin and Kshatriya varnas from
participating in usury. By 2nd century CE, usury seems to have become more
acceptable.[10] The Manusmriti considers usury an acceptable means of acquiring
wealth or leading a livelihood.[11] It also considers money lending above a certain
rate, different ceiling rates for different caste, a grave sin.[12]
The Jatakas also mention the existence of loan deeds. These were called rnapatra
or rnapanna. The Dharmashastras also supported the use of loan deeds. Kautilya
has also mentioned the usage of loan deeds.[13] Loans deeds were also called
rnalekhaya.[14]
Later during the Mauryan period (321-185 BCE), an instrument called adesha was
in use, which was an order on a banker directing him to pay the sum on the note to
a third person, which corresponds to the definition of a modern bill of exchange.
The considerable use of these instruments have been recorded. In large towns,
merchants also gave letters of credit to one another.[14]
Medieval era[edit]
The use of loan deeds continued into the Mughal era and were called dastawez.
Two types of loans deeds have been recorded. The dastawez-e-indultalab was
payable on demand and dastawez-e-miadi was payable after a stipulated time. The

use of payment orders by royal treasuries, called barattes, have been also recorded.
There are also records of Indian bankers using issuing bills of exchange on foreign
countries. The evolution of hundis, a type of credit instrument, also occurred
during this period and they continue to be in use today.[14]
Colonial era[edit]
During the period of British rule merchants established the Union Bank of Calcutta
in 1869, first as a private joint stock association, then partnership. Its proprietors
were the owners of the earlier Commercial Bank and the Calcutta Bank, who by
mutual consent created Union Bank to replace these two banks. In 1840 it
established an agency at Singapore, and closed the one at Mirzapore that it had
opened in the previous year. Also in 1840 the Bank revealed that it had been the
subject of a fraud by the bank's accountant. Union Bank was incorporated in 1845
but failed in 1848, having been insolvent for some time and having used new
money from depositors to pay its dividends.[15]
The Allahabad Bank, established in 1865 and still functioning today, is the oldest
Joint Stock bank in India, it was not the first though. That honour belongs to the
Bank of Upper India, which was established in 1863, and which survived until
1913, when it failed, with some of its assets and liabilities being transferred to the
Alliance Bank of Simla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The
Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and another in
Bombay in 1862; branches in Madras and Pondicherry, then a French possession,
followed. HSBC established itself in Bengal in 1869. Calcutta was the most active
trading port in India, mainly due to the trade of the British Empire, and so became
a banking centre.
The first entirely Indian joint stock bank was the Oudh Commercial Bank,
established in 1881 in Faizabad. It failed in 1958. The next was the Punjab
National Bank, established in Lahore in 1894, which has survived to the present
and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a
relative period of stability. Around five decades had elapsed since the Indian
rebellion, and the social, industrial and other infrastructure had improved. Indians
had established small banks, most of which served particular ethnic and religious
communities.

The presidency banks dominated banking in India but there were also some
exchange banks and a number of Indian joint stock banks. All these banks operated
in different segments of the economy. The exchange banks, mostly owned by
Europeans, concentrated on financing foreign trade. Indian joint stock banks were
generally under capitalised and lacked the experience and maturity to compete with
the presidency and exchange banks. This segmentation let Lord Curzon to observe,
"In respect of banking it seems we are behind the times. We are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate and
cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the
Swadeshi movement. The Swadeshi movement inspired local businessmen and
political figures to found banks of and for the Indian community. A number of
banks established then have survived to the present such as Bank of India,
Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank
of India.
The fervour of Swadeshi movement lead to establishing of many private banks in
Dakshina Kannada and Udupi district which were unified earlier and known by the
name South Canara ( South Kanara ) district. Four nationalised banks started in
this district and also a leading private sector bank. Hence undivided Dakshina
Kannada district is known as "Cradle of Indian Banking".
During the First World War (19141918) through the end of the Second World War
(19391945), and two years thereafter until the independence of India were
challenging for Indian banking. The years of the First World War were turbulent,
and it took its toll with banks simply collapsing despite the Indian economy
gaining indirect boost due to war-related economic activities. At least 94 banks in
India failed between 1913 and 1918 as indicated in the following table:
Years

Number of banks
that failed

1913
1914
1915
1916
1917
1918
Post-Independence[edit]

12
42
11
13
9
7

Authorised Capital
( Lakhs)
274
710
56
231
76
209

Paid-up Capital
( Lakhs)
35
109
5
4
25
1

The partition of India in 1947 adversely impacted the economies of Punjab and
West Bengal, paralysing banking activities for months. India's independence
marked the end of a regime of the Laissez-faire for the Indian banking. The
Government of India initiated measures to play an active role in the economic life
of the nation, and the Industrial Policy Resolution adopted by the government in
1948 envisaged a mixed economy. This resulted into greater involvement of the
state in different segments of the economy including banking and finance. The
major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was
established in April 1935, but was nationalised on 1 January 1949 under the
terms of the Reserve Bank of India (Transfer to Public Ownership) Act,
1948 (RBI, 2005b).[16]
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 could be opened without a license from the RBI, and no two
banks could have common directors.
Nationalization in the 1960s[edit]
Despite the provisions, control and regulations of the Reserve Bank of India, banks
in India except the State Bank of India (SBI), continued to be owned and operated
by private persons. By the 1960s, the Indian banking industry had become an
important tool to facilitate the development of the Indian economy. At the same
time, it had emerged as a large employer, and a debate had ensued about the
nationalization of the banking industry. Indira Gandhi, the then Prime Minister of
India, expressed the intention of the Government of India in the annual conference
of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalization."[17] The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an
ordinance ('Banking Companies (Acquisition and Transfer of Undertakings)
Ordinance, 1969') and nationalised the 14 largest commercial banks with effect
from the midnight of 19 July 1969. These banks contained 85 percent of bank
deposits in the country.[17] Jayaprakash Narayan, a national leader of India,
described the step as a "masterstroke of political sagacity." Within two weeks of

the issue of the ordinance, the Parliament passed the Banking Companies
(Acquisition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9 August 1969.
A second dose of nationalisation of 6 more commercial banks followed in 1980.
The stated reason for the nationalisation was to give the government more control
of credit delivery. With the second dose of nationalisation, the Government of India
controlled around 91% of the banking business of India. Later on, in the year 1993,
the government merged New Bank of India with Punjab National Bank.[18] It was
the only merger between nationalised banks and resulted in the reduction of the
number of nationalised banks from 20 to 19. After this, until the 1990s, the
nationalised banks grew at a pace of around 4%, closer to the average growth rate
of the Indian economy.
Liberalization in the 1990s[edit]
In the early 1990s, the then government embarked on a policy of liberalization,
licensing a small number of private banks. These came to be known as New
Generation tech-savvy banks, and included Global Trust Bank (the first of such
new generation banks to be set up), which later amalgamated with Oriental Bank
of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC
Bank. This move, along with the rapid growth in the economy of India, revitalised
the banking sector in India, which has seen rapid growth with strong contribution
from all the three sectors of banks, namely, government banks, private banks and
foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation
in the norms for foreign direct investment, 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 74% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this
time, were used to the 464 method (borrow at 4%; lend at 6%; go home at 4) of
functioning. 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
demanded more from their banks and received more.
Current period[edit]
Main article: List of Banks in India

The Indian banking sector is broadly classified into scheduled banks and nonscheduled banks.All banks which are included in the Second Schedule to the
Reserve Bank of India Act, 1934 are Scheduled Banks. These banks comprise
Scheduled Commercial Banks and Scheduled Co-operative Banks. Scheduled Cooperative Banks consist of Scheduled State Co-operative Banks and Scheduled
Urban Cooperative Banks.Scheduled Commercial Banks in India are categorized
into five different groups according to their ownership and/or nature of operation:
State Bank of India and its Associates
Nationalised Banks
Private Sector Banks
Foreign Banks
Regional Rural Banks.
In the bank group-wise classification, IDBI Bank Ltd. is included in Nationalised
Banks.
Growth of Banking in India of Scheduled Commercial Banks[19]
31 March of
Indic
ators 2005 2006 2007 2008 2009 2010 2011 2012 2013
Num
ber of
Com
merci
284
218
178
169
166
163
163
169
151
al
Bank
s
Num
ber of
70,373 72,072 74,653 78,787 82,897 88,203 94,019 102,377 109,811
Branc
hes
Popul
16
16
15
15
15
14
13
13
12
ation
per
Bank

Growth of Banking in India of Scheduled Commercial Banks[19]

31 March of
Indic
ators 2005 2006 2007 2008 2009 2010 2011 2012 2013
s (in
thous
ands)
17002 21090 26119 31969 38341 44928 52078 59091 67504
Aggr
billion billion billion billion billion billion billion billion
.54
egate
(US$26 (US$32 (US$39 (US$48 (US$58 (US$68 (US$79 (US$89 billion
Depo
0 billio 0 billio 0 billio 0 billio 0 billio 0 billio 0 billio 0 billio (US$1.0
sits
n)
n)
n)
n)
n)
n)
n)
n) trillion)
11004 15071 19312 23619 27755 32448 39421 46119 52605
Bank billion billion billion billion billion billion billion billion billion
Credi (US$17 (US$23 (US$29 (US$36 (US$42 (US$49 (US$60 (US$70 (US$79
t
0 billio 0 billio 0 billio 0 billio 0 billio 0 billio 0 billio 0 billio 0 billion
n)
n)
n)
n)
n)
n)
n)
n)
)
Depo
sit as
perce
ntage
to
62%
64%
69%
73%
77%
78%
78%
78%
79%
GNP
(at
factor
cost)
Per
Capit 16281 19130 23382 28610 33919 39107 45505 50183 56380
a
(US$25 (US$29 (US$35 (US$43 (US$51 (US$59 (US$69 (US$76 (US$85
Depo
0)
0)
0)
0)
0)
0)
0)
0)
0)
sit
Per
Capit 10752 13869 17541 21218 24617 28431 34187 38874 44028
a
(US$16 (US$21 (US$26 (US$32 (US$37 (US$43 (US$52 (US$59 (US$66
Credi
0)
0)
0)
0)
0)
0)
0)
0)
0)
t
Credi
63%
70%
74%
75%
74%
74%
76%
79%
79%
t
Depo
sit

Growth of Banking in India of Scheduled Commercial Banks[19]

31 March of
Indic
ators 2005 2006 2007 2008 2009 2010 2011 2012
Ratio

2013

By 2010, banking in India was generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the
private sector and foreign banks. 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 minimal pressure from the government.
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. One may
also expect M&As, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time
an investor has been allowed to hold more than 5% in a private sector bank since
the RBI announced norms in 2005 that any stake exceeding 5% in the private
sector banks would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too
aggressive in their loan recovery efforts in connexion with housing, vehicle and
personal loans. There are press reports that the banks' loan recovery efforts have
driven defaulting borrowers to suicide.[20][21][22]
By 2013 the Indian Banking Industry employed 1,175,149 employees and had a
total of 109,811 branches in India and 171 branches abroad and manages an
aggregate deposit of 67504.54 billion (US$1.0 trillion or 1.0 trillion) and bank
credit of 52604.59 billion (US$790 billion or 780 billion). The net profit of the
banks operating in India was 1027.51 billion (US$16 billion or 15 billion)
against a turnover of 9148.59 billion (US$140 billion or 140 billion) for the
financial year 2012-13.[19]

On 28 Aug, 2014,Pradhan Mantri Jan Dhan Yojana (Hindi:

, English: Prime Minister's People Money Scheme) is a scheme for
comprehensive financial inclusion launched by the Prime Minister of India,
Narendra Modi.[23] Run by Department of Financial Services, Ministry of Finance,
on the inauguration day, 1.5 Crore (15 million) bank accounts were opened under
this scheme.[24][25] By 15 July 2015, 16.92 crore accounts were opened, with around
20288.37 crore (US$3.1 billion) were deposited under the scheme,[26] which also
has an option for opening new bank accounts with zero balance.
Banking codes and standards[edit]
Main article: The Banking codes and standards Board of India
The Banking Codes and standards Board of India is an independent and
autonomous banking industry which monitor all available banks in India while
delivering services to customers.To improve the quality of banking services in
India S S Tarapore(former deputy governor of RBI) came up with the idea to form
a committee
Adoption of banking technology[edit]
The IT[clarification needed] revolution has had a great impact on the Indian banking
system. The use of computers has led to the introduction of online banking in
India. The use of computers in the banking sector in India has increased many fold
after the economic liberalisation of 1991 as the country's banking sector has been
exposed to the world's market. Indian banks were finding it difficult to compete
with the international banks in terms of customer service, without the use of
information technology.
The RBI set up a number of committees to define and co-ordinate banking
technology. These have included:
In 1984 was formed the Committee on Mechanisation in the Banking
Industry (1984)[27] whose chairman was Dr. C Rangarajan, Deputy Governor,
Reserve Bank of India. The major recommendations of this committee were
introducing MICR technology in all the banks in the metropolises in India.[28]
This provided for the use of standardized cheque forms and encoders.
In 1988, the RBI set up the Committee on Computerisation in Banks (1988)
[29]
headed by Dr. C Rangarajan. It emphasized that settlement operation

must be computerized in the clearing houses of RBI in Bhubaneshwar,

Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there
should be National Clearing of inter-city cheques at Kolkata, Mumbai,
Delhi, Chennai and MICR should be made operational. It also focused on
computerisation of branches and increasing connectivity among branches
through computers. It also suggested modalities for implementing on-line
banking. The committee submitted its reports in 1989 and computerisation
began from 1993 with the settlement between IBA and bank employees'
associations.[30]
In 1994, the Committee on Technology Issues relating to Payment systems,
Cheque Clearing and Securities Settlement in the Banking Industry (1994)[31]
was set up under Chairman W S Saraf. It emphasized Electronic Funds
Transfer (EFT) system, with the BANKNET communications network as its
carrier. It also said that MICR clearing should be set up in all branches of all
those banks with more than 100 branches.
In 1995, the Committee for proposing Legislation on Electronic Funds
Transfer and other Electronic Payments (1995)[32] again emphasized EFT
system.[30]
Automated teller machine growth[edit]
The total number of automated teller machines (ATMs) installed in India by
various banks as of end June 2012 was 99,218.[33] The new private sector banks in
India have the most ATMs, followed by off-site ATMs belonging to SBI and its
subsidiaries and then by nationalised banks and foreign banks, while on-site is
highest for the nationalised banks of India.[30]
Branches and ATMs of Scheduled Commercial Banks as of end December, 2014
Number of
On-site
Off-site
Total
Bank type
branches
ATMs
ATMs
ATMs
Nationalised banks
33,627
38,606
22,265
60,871
State Bank of India
13,661
28,926
22,827
51,753
Old private sector
4,511
4,761
4,624
9,385
banks
New private sector
1,685
12,546
26,839
39,385
banks
Foreign banks
242
295
854
1,149

Branches and ATMs of Scheduled Commercial Banks as of end December, 2014

Number of
On-site
Off-site
Total
Bank type
branches
ATMs
ATMs
ATMs
TOTAL
53,726
85,134
77,409
1,62,543
Cheque truncation initiative[edit]
In 2008 the Reserve Bank of India introduced a system to allow cheque truncation
in India, the cheque truncation system as it was known was first rolled out in the
National Capital Region and then rolled out nationally.
Expansion of banking infrastructure[edit]
Physical as well as virtual expansion of banking through mobile banking, internet
banking, tele banking, bio-metric and mobile ATMs is taking place [34] since last
decade and has gained momentum in last few years.
See also[edit]
History of banking
Institute of Banking Personnel Selection
Banking Frontiers a monthly magazine, published in Mumbai
Indian Rupee
References[edit]
1.

Radhe Shyam Rungta (1970). The Rise of Business Corporations in

India, 1851-1900. CUP Archive. p. 221. GGKEY:NC1SA25Y2CB. Retrieved
12 January 2015.

2.

H. K. Mishra (1991). Famines and Poverty in India. APH Publishing.

p. 197. ISBN 978-81-7024-374-8. Retrieved 12 January 2015.

3.

Muthiah S (2011). Madras Miscellany. Westland. p. 933. ISBN 97893-80032-84-9. Retrieved 12 January 2015.

4.

"The Advent of Modern Banking in India: 1720 to 1850s". Reserve

Bank of India. Retrieved 12 January 2015.

5.

^ Jump up to: a b "Evolution of SBI". State Bank of India. Retrieved 12

January 2015.

6.

^ Jump up to: a b "Business Financing: Banks". Government of India.

Retrieved 12 January 2015.

7.

Jump up ^ "Social Controls, the Nationalisation of Banks and the

era of bank expansion - 1968 to 1985". Reserve Bank of India. Retrieved 12
January 2015.

8.

Jump up ^ D. Muraleedharan (2009). Modern Banking: Theory And

Practice. PHI Learning Pvt. Ltd. p. 2. ISBN 978-81-203-3655-1. Retrieved
12 January 2015.

9.

Jump up ^ "Directory of Bank Offices: Certain Concepts". Reserve

Bank of India. Retrieved 12 January 2015.

10.

Jump up ^ Fred Gottheil (1 January 2013). Principles of Economics.

Cengage Learning. p. 417. ISBN 1-133-96206-8. Retrieved 11 January
2015.

11.

Jump up ^ Santosh Kumar Das (1980). The economic history of

ancient India. Cosmo Publications. pp. 229. ISBN 978-81-307-0423-4.

12.

Jump up ^ Chris A. Gregory (1997). Savage Money: The

Anthropology and Politics of Commodity Exchange. Taylor & Francis.
p. 212. ISBN 978-90-5702-091-9. Retrieved 11 January 2015.

13.

Jump up ^ Md. Aquique (1974). Economic History of Mithila.

Abhinav Publications. p. 157. ISBN 978-81-7017-004-4. Retrieved 12
January 2015.

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Bank of India. 12 December 1998. Retrieved 12 January 2015.

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present condition of banking in India. (Printed by P.M. Cranenburgh, Bengal
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Reforms in India: From First to Second Generation and Beyond. Deep &
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^ Jump up to: a b "Statistical Tables Related to Banks in India Reserve Bank of India" (PDF).

20.

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alleged harassment by recovery agents". Parinda.com. Retrieved 28 July
2010.

21.

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farmers mother". The Hindu (Chennai, India). 30 June 2008. Retrieved 28
July 2010.

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launched; aims to open 1.5 crore bank accounts on first day". The Economic
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28.

Jump up ^ "MICR technology".

29.

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32.

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What is a Bank ? Introduction

Finance is the life blood of trade, commerce and industry. Now-a-days,

banking sector acts as the backbone of modern business. Development of
any country mainly depends upon the banking system.
The term bank is either derived from old Italian word banca or from a
French word banque both mean a Bench or money exchange table. In
olden days, European money lenders or money changers used to display
(show) coins of different countries in big heaps (quantity) on benches or
tables for the purpose of lending or exchanging.

Image Credits Tardiskey

A bank is a financial institution which deals with deposits and advances and
other related services. It receives money from those who want to save in
the form of deposits and it lends money to those who need it.

Definition of a Bank

Oxford Dictionary defines a bank as "an establishment for custody of

money, which it pays out on customer's order."

Phase I
The General Bank of India was set up in the year 1786. Next came Bank
of Hindustan and Bengal Bank. The East India Company established Bank of
Bengal(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent
units andcalled it Presidency Banks. These three banks were amalgamated in 1920
and ImperialBank of India was established which started as private shareholders
banks, mostlyEuropeans shareholders.In 1865 Allahabad Bank was established and

first time exclusively by Indians,Punjab National Bank Ltd. was set up in 1894
with headquarters at Lahore. Between1906 and 1913, Bank of India, Central Bank
of India, Bank of Baroda, Canara Bank,Indian Bank, and Bank of Mysore were set
up. Reserve Bank of India came in 1935.During the first phase the growth was
very slow and banks also experienced periodicfailures between 1913 and 1948.
There were approximately 1100 banks, mostly small. Tostreamline the functioning
and activities of commercial banks, the Government of Indiacame up with The
Banking Companies Act, 1949 which was later changed to BankingRegulation Act
1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India
was vested with extensive powers for the supervision of banking in India as
theCentral Banking Authority. During those days public has lesser confidence in
the banks.As an aftermath deposit mobilization was slow. Abreast of it the savings
bank facilityprovided by the Postal department was comparatively safer. Moreover,
funds werelargely given to traders.

Phase II
Government took major steps in this Indian Banking Sector Reform
afterindependence. In 1955, it nationalized Imperial Bank of India with extensive
bankingfacilities on a large scale especially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Unionand State Governments all over the
country.Seven banks forming subsidiary of State Bank of India was nationalized in
1960on 19th July, 1969, major process of nationalization was carried out. It was
the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major
commercial banks in thecountry were nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out
in1980 with seven more banks. This step brought 80% of the banking segment in
Indiaunder Government ownership. The following are the steps taken by the
Government of India to Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act.

1955 : Nationalization of State Bank of India.

1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalization of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalization of seven banks with deposits over 200 crore.After the
nationalization of banks, the branches of the public sector bank Indiarose to
approximately 800% in deposits and advances took a huge jump by
11,000%.Banking in the sunshine of Government ownership gave the public
implicit faith andimmense confidence about the sustainability of these institutions.

Phase III
This phase has introduced many more products and facilities in the banking
sectorin its reforms measure. In 1991, under the chairmanship of M Narasimham, a
committeewas set up by his name which worked for the liberalization of banking
practices.The country is flooded with foreign banks and their ATM stations. Efforts
arebeing put to give a satisfactory service to customers. Phone banking and net
banking isintroduced. The entire system became more convenient and swift. Time
is given moreimportance than money. The financial system of India has shown a
great deal of resilience. It is sheltered from any crisis triggered by any external
macroeconomics shock as other East Asian Countries suffered. This is all due to a
flexible exchange rate regime,the foreign reserves are high, the capital account is
not yet fully convertible, and banksand their customers have limited foreign
exchange exposure.

To regulate the issue of banknotes

To maintain reserves with a view to securing monetary stability and


To operate the credit and currency system of the country to its advantage.

Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important functions of a
central bank the Reserve Bank of India.

Bank of Issue
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 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-was 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. 115crores should
be in gold. The system as it exists today is known as the minimum reserve system.

Banker to Government
The second important function of the Reserve Bank of India is to act
asGovernment banker, agent and adviser. The Reserve Bank is agent of
CentralGovernment 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 thecash 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 bankingoperations. The Reserve Bank of India helps the
Government - both the Union and theStates to float new loans and to manage
public debt. The Bank makes ways and meansadvances to the Governments for 90

days. It makes loans and advances to the States andlocal authorities. It acts as
adviser to the Government on all monetary and bankingmatters.

Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the provisionsof
the Banking Companies Act of 1949, every scheduled bank was required to
maintainwith the Reserve Bank a cash balance equivalent to 5% of its demand
liabilities and 2 percent of its time liabilities in India. By an amendment of 1962,
the distinction betweendemand 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
cashrequirements 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 byrediscounting
bills of exchange. Since commercial banks can always expect the ReserveBank of
India to come to their help in times of banking crisis the Reserve Bank becomesnot
only the banker's bank but also the lender of the last resort.

Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power
toinfluence the volume of credit created by banks in India. It can do so through
changingthe Bank rate or through open market operations. According to the
Banking RegulationAct of 1949, the Reserve Bank of India can ask any particular
bank or the whole bankingsystem 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 theReserve Bank.The Reserve Bank of India is armed
with many more powers to control the Indianmoney market. Every bank has to get
a license from the Reserve Bank of India to dobanking 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 permissionof the Reserve Bank before
it can open a new branch. Each scheduled bank must send aweekly return to the
Reserve Bank showing, in detail, its assets and liabilities. This powerof the Bank to
call for information is also intended to give it effective control of the creditsystem.
The Reserve Bank has also the power to inspect the accounts of any
commercialbank. As supreme banking authority in the country, the Reserve Bank
of India, therefore,has the following powers:
(a)

It holds the cash reserves of all the scheduled banks.

(b)
It controls the credit operations of banks through quantitative andqualitative
controls.
(c)
It controls the banking system through the system of licensing, inspectionand
calling for information.
(d)
It acts as the lender of the last resort by providing rediscount facilities toscheduled
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 tobuy and sell at fixed rates any amount of sterling in lots of not less than
Rs. 10,000. Therate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank
was able to maintain theexchange rate fixed at lsh.6d. Though there were periods
of extreme pressure in favor of or against the rupee. After India became a member
of the International Monetary Fund in1946, the Reserve Bank has the
responsibility of maintaining fixed exchange rates withall other member countries
of the I.M.F.Besides maintaining the rate of exchange of the rupee, the Reserve
Bank has toact as the custodian of India's reserve of international currencies. The
vast sterlingbalances were acquired and managed by the Bank. Further, the RBI
has the responsibilityof administering the exchange controls of the country.

Supervisory functions
In addition to its traditional central banking functions, the Reserve bank hascertain
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 andco-operative banks, relating to licensing and establishments,
branch expansion, liquidityof their assets, management and methods of working,
amalgamation, reconstruction, andliquidation. The RBI is authorized to carry out
periodical inspections of the banks and tocall for returns and necessary information
from them. The nationalization of 14 majorIndian scheduled banks in July 1969

has imposed new responsibilities on the RBI fordirecting the growth of banking
and credit policies towards more rapid development of the economy and realization
of certain desired social objectives. The supervisoryfunctions of the RBI have
helped a great deal in improving the standard of banking inIndia 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
varietyof
developmental and promotional functions, which, at one time, were regarded as
outsidethe normal scope of central banking. The Reserve Bank was asked to
promote bankinghabit, extend banking facilities to rural and semi-urban areas, and
establish and promotenew specialized financing agencies. Accordingly, the
Reserve Bank has helped in thesetting 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
Corporation of India in 1963 and the Industrial ReconstructionCorporation of India
in 1972. These institutions were set up directly or indirectly by theReserve Bank to
promote saving habit and to mobilize savings, and to provide industrialfinance as
well as agricultural finance. As far back as 1935, the Reserve Bank of India setup
the Agricultural Credit Department to provide agricultural credit. But only since
1951the Bank's role in this field has become extremely important. The Bank has
developed theco-operative credit movement to encourage saving, to eliminate
moneylenders from thevillages and to route its short term credit to agriculture. The
RBI has set up theAgricultural Refinance and Development Corporation to provide
long-term finance tofarmers.

Classification of RBIs functions

The monetary functions also known as the central banking functions of the RBIare
related to control and regulation of money and credit, i.e., issue of currency,
controlof bank credit, control of foreign exchange operations, banker to the
Government and tothe money market. Monetary functions of the RBI are
significant as they control andregulate the volume of money and credit in the
country.Equally important, however, are the non-monetary functions of the RBI in
thecontext of India's economic backwardness. The supervisory function of the RBI
may beregarded as a non-monetary function (though many consider this a
monetary function).The promotion of sound banking in India is an important goal

of the RBI, the RBI hasbeen given wide and drastic powers, under the Banking
Regulation Act of 1949 - thesepowers relate to licensing of banks, branch
expansion, liquidity of their assets,management and methods of working,
inspection, amalgamation, reconstruction andliquidation. Under the RBI's
supervision and inspection, the working of banks has greatlyimproved.
Commercial banks have developed into financially and operationally sound
and viable units. The RBI's powers of supervision have now been extended to nonbanking financial intermediaries. Since independence, particularly after its
nationalization1949, the RBI has followed the promotional functions vigorously
and has beenresponsible for strong financial support to industrial and agricultural
development in thecountry.


NATURE OF BANKING IN INDIA
--------------------------- A banking company in India has been defined in the banking
companiesact,1949.as one
which transacts the business of banking which means the accepting,for the
purpose of lending or investment of deposits of money from the
public,repayable on demand or otherwise and withdraw able by cheque, draft,
order orotherwise
.Most of the activities a Bank performs are derived from the above definition.
Inaddition, Banks are allowed to perform certain activities which are ancillary to
thisbusiness of accepting deposits and lending. A bank's relationship with the
public,therefore, revolves around accepting deposits and lending money. Another
activity whichis assuming increasing importance is transfer of money - both
domestic and foreign -from one place to another. This activity is generally known
as "remittance business" inbanking parlance. The so called forex (foreign
exchange) business is largely a part of remittance albeit it involves buying and
selling of foreign currencies.

FUNCTIONING OF A BANK:Functioning of a Bank is among the more complicated of corporate

operations.Since Banking involves dealing directly with money, governments in
most countriesregulate this sector rather stringently. In India, the regulation
traditionally has been verystrict and in the opinion of certain quarters, responsible
for the present condition of banks, where NPAs are of a very high order. The
process of financial reforms, whichstarted in 1991, has cleared the cobwebs
somewhat but a lot remains to be done. Themultiplicity of policy and regulations
that a Bank has to work with makes its operationseven more complicated,
sometimes bordering on illogical. This section, which is alsointended for banking
professional, attempts to give an overview of the functions in assimple manner as
possible. Banking Regulation Act of India, 1949 defines Banking as"accepting, for
the purpose of lending or investment of deposits of money from thepublic,
repayable on demand or otherwise and withdraw able by cheques, draft, and
orderor otherwise."

KINDS OF BANKS

--------------------------------------------------------- Financial requirements in a modern

economy are of a diverse nature, distinctivevariety and large magnitude. Hence,
different types of banks have been instituted to caterto the varying needs of the
community.Banks in the organized sector may, however, be classified in to the
followingmajor forms:1.
Commercial banks2.
Co-operative banks3.
Specialized banks4.
Central bank
-: COMMERCIAL BANKS:Commercial banks are joint stock companies dealing in money and credit. InIndia,
however there is a mixed banking system, prior to
July 1969
, all the commercialbanks73 scheduled
and
26 non-scheduled
banks, except the state bank of India and itssubsidiaries-were under the control of
private sector. On
July 19, 1969
, however,
14
mejor commercial banks with deposits of over
50
Corers were nationalized. In
April1980
, another
six
commercial banks of high standing were taken over by the government.At present,
there are
20
nationalized banks plus the state bank of India and its 7subsidiaries constituting
public sector banking which controls over 90 per cent of thebanking business in the
country.
-:CO-OPERATIVE BANKS:-

Co-operative banks are a group of financial institutions organized under

theprovisions of the Co-operative societies Act of the states.The main objective of
co-operative banks is to provide cheap credits to theirmembers. They are based on
the principle of self-reliance and mutual co-operation.Co-operative banking system
in India has the shape of a pyramid a three tierstructure, constituted by:
Primarycreditsocieties[APEX]Central co-operative banks[District level]State cooperative banks[Villages, Towns, Cities]
-: SPECIALIZED BANKS:There are specialized forms of banks catering to some special needs with
thisunique nature of activities. There are thus,
1.
Foreign exchange banks,2.
Industrial banks,3.
Development banks,4.
Land development banks,5.
Exim bank
.
-: CENTRAL BANK:A central bank is the apex financial institution in the banking and financial
systemof a country. It is regarded as the highest monetary authority in the country.
It acts as theleader of the money market. It supervises, control and regulates the
activities of thecommercial banks. It is a service oriented financial institution.
Indias central bank is the reserve bank of India established in 1935
.a centralbank is usually state owned but it may also be a private organization. For
instance, thereserve bank of India (RBI), was started
as a shareholders organization in 1935
,however, it was nationalized after independence, in 1949.it is free from
parliamentarycontrol.

ROLE OF BANKS IN A DEVELOPING ECONOMY

-----Banks play a very useful and dynamic role in the economic life of every
modernstate. A study of the economic history of western country shows that
without theevolution of commercial banks in the 18
th
and 19
th
centuries, the industrial revolutionwould not have taken place in Europe. The
economic importance of commercial banks tothe developing countries may be
viewed thus:
1.
Promoting capital formation
2.
Encouraging innovation
3.
Monetsation
4.
Influence economic activity
5.
Facilitator of monetary policyAbove all view we can see in briefly, which are
given below:

PROMOTING CAPITAL FORMATION:A developing economy needs a high rate of capital formation to accelerate
thetempo of economic development, but the rate of capital formation depends upon
the rateof saving. Unfortunately, in underdeveloped countries, saving is very low.
Banks affordfacilities for saving and, thus encourage the habits of thrift and
industry in thecommunity. They mobilize the ideal and dormant capital of the
country and make itavailable for productive purposes.

ENCOURAGING INNOVATION:Innovation is another factor responsible for economic development.

Theentrepreneur in innovation is largely dependent on the manner in which bank

credit isallocated and utilized in the process of economic growth. Bank credit
enablesentrepreneurs to innovate and invest, and thus uplift economic activity and
progress.

MONETSATION:Banks are the manufactures of money and they allow many to play its role freely in
theeconomy. Banks monetize debts and also assist the backward subsistence sector
of therural economy by extending their branches in to the rural areas. They must be
replaced bythe modern commercial banks branches.

INFLUENCE ECONOMIC ACTIVITY:Banks are in a position to influence economic activity in a country by

theirinfluence on the rate interest. They can influence the rate of interest in the
money marketthrough its supply of funds. Banks may follow a cheap money policy
with low interestrates which will tend to stimulate economic activity.

FACILITATOR OF MONETARY POLICY:Thus monetary policy of a country should be conductive to economicdevelopment.

But a well-developed banking system is on essential pre-condition to theeffective
implementation of monetary policy. Under-developed countries cannot afford
toignore this fact.A fine, an efficient and comprehensive banking system is a
crucial factor of thedevelopmental process.

PRINCIPLES OF BANK LENDING POLICIES

---------------The main business of banking company is to grant loans and advances to
tradersas well as commercial and industrial institutes. The most important use of
banks money islending. Yet, there are risks in lending. So the banks follow certain
principles tominimize the risk:
1.
Safety
2.
Liquidity
3.

Profitability
4.
Purpose of loan
5.
Principle of diversification of risks

SAFETY:Normally the banker uses the money of depositors in granting loans and
advances.So first of all initially the banker while granting loans should think first
of the safety of depositors money. The purpose behind the safety is to see the
financial position of theborrower whether he can pay the debt as well as interest
easily.

LIQUIDITY:It is a legal duty of a banker to pay on demand the total deposited money to
thedepositor. So the banker has to keep certain percent cash of the total deposits on
hand.Moreover the bank grants loan. It is also for the addition of short term or
productivecapital. Such type of lending is recovered on demand.

PROFITABILITY:Commercial banking is profit earning institutes. Nationalized banks are also notan
exception. They should have planning of deposits in a profitability way pay
moreinterest to the depositors and more salary to the employees. Moreover the
banker can alsoincur business cost and can give more benefits to customer.

PURPOSE OF LOAN:Banks never lend or advance for any type of purpose. The banks grant loans
andadvances for the safety of its wealth, and certainty of recovery of loan and the
bank lendsonly for productive purposes. For example, the bank gives such loan for
the requirementfor unproductive purposes.

PRINCIPLE OF DIVERSIFICATION OF RISKS:-

While lending loans or advances the banks normally keep such securities andassets
as a supports so that lending may be safe and secured. Suppose, any particular
stateis hit by disasters but the bank shall get benefits from the lending to another
states units.Thus, he effect on the entire business of banking is reduced. There are
proverbs that
donot keep all the eggs in one basket.
--a principle of considerations of sound lending is:
1.
Safety
2.
Liquidity
3.
Shift ability
4.
Profitability.


BRANCH SETUP AND STRUCTURE
----------------------- Ever since major commercial banks were nationalized in two
phases in 1969 and1980, there has been a sea change in their functions, outlook
and perception.One of the main objectives of nationalization of banks has been to
help achievebalanced, regional, sectoral and sectional development of the economy
by way of makingthe banks reach out to the small man and to the remote areas of
the country.

RATIONAL OF A BANK STRUCTURE:An organization consists of people who carry out differentiated tasks which
arecoordinated so as to contribute and achieves planned goals. Organizations are
createdmainly for producing goods and services to the society for which they have
to incorporatea formal structure.Indian banking is now operating in a more
competitive setting with the inductionof new banks. Both Indian and foreign, who
will be bringing in new work technology andspecialist expertise and a variety of
new financing instruments.Branch is the primary unit of the banks business,
particularly for serving theweaker sections of the society. Branches have to
develop close relationship they professto serve. This leads to opening up or
specialized branches, like industrial finance, smallscale industries, and Hi-tech
agriculture, overseas and non-resident Indian, according tomarket segmentation.
This new vision entails a new chain of command, a new technologyand specific
delegation of authority.This calls for the branch manger to concentrate on his/her
styles, skills andsubordinates, goals, to shape the branch in the competitive
environment to become aprofit centre and to render better customer service. This
implies that the branch managershould have adequate supporting staff to relieve
him from the routine table work todevelopmental activities.In order to serve the
customer it is necessary that one should understand andaccept role and relationship
with other so as to make sure that none of the supporting staff would be deemed to
be independent of the branch manger. So the structure of branch
organization must, from time to time, conform to the demands and peculiarities of
thelocality in which the branch is functioning.Before looking in to the branch
structure of bank, it will be worthwhile examininghow a formal organizational
structure of a bank appears. After nationalization, generallybanks have a 4-tier
structure represented as under:During the mid-80s, banks started diversifying in to
various areas like merchantbanking, mutual funds, leasing, hire purchase, etc., to
improve their profitability and tocater to the needs of the customers. These

activities are performed by the banks either byseparate departments or as

subsidiaries. After liberalization and globalization of theeconomy, with a view to
meeting the customers needs and to avoid delays, a revisedorganizational structure
of banks was convened by removing one tier. Now banks aregoing in for a 3-tier
structure as under:The regional offices are given more powers and jurisdiction so
as to enable themto act quickly.
HHHEEEAAADDD OOOFFFFFFIIICCCEEE ZZZOOONNNAAALLL OO
OFFFFFFIIICCCEEE BBBRRRAAANNNCCCHHH OOOFFFFFFIIICCCE
EE HHHEEEAAADDD OOOFFFFFFIIICCCEEE BBBRRRAAANNNCCC
HHH OOOFFFFFFIIICCCEEE RRREEEGGGIIIOOONNNAAALLL OOO
FFFFFFIIICCCEEE CCCEEENNNTTTRRRAAALLL OOOFFFFFFIIICC
CEEE


ORGANISATIONAL STRUCTURE OF A BANK BRANCH
-Now let discuss the structure of a branch. The branch is the focal point of
allactivities. The structure of the branch may be as under:
Small/Medium Branch
This is the typical structure of a branch bank. In very large branches, the structure
willundergo slight changes as stated below:
Very Large Branch
OFF = OFFICER, CL = CLERK, SS = SUB-STAFF
BRANCH MANAGER (B.M.)ACCOUNTANT/ASSISTANT BRANCH
MANAGER(A.B.M.)OFFICERCLERKSSUB-STAFF
BRANCH MANAGERASST. BRANCH MANAGER (A.B.M.) / ACCOUNTANT
MANAGER MANAGER MANAGERADVANCES OPERATIONS
ADMINISTRATIONOF OF OF OF OF OF OF OF OFCL CL CL CLCL CL CL
CL CL CLCL CL
CL CL CL CL CL CLSS SS SS SS SS SS SS SS SS

From the structure we can see how the functional relationship works in a
branch.He structure also explains the reporting authority for each cadre of the

employees. Itindicates the communication flow in the branch with well-defined

accountability on thepart of the employees roles.

TYPES OF BRANCHES:According to locations, there are four types bank branches. They are rural, semiurban, urban and metropolitan branches. The B.M. has special role and functions
inmanaging different types of branches.

ORGANIZATION AND STRUCTURE OF COMMERCIAL BANK:UUUnnniiitttBBBaaannnkkkBBBrrraaannnccchhhBBBaaannnkkkiiinnnggg

GGGrrrooouuupppBBBaaannnkkkiiinnngggCCChhhaaaiiinnnBBBaaannnk
kkiiinnnggg MMMiiixxxeeedddBBBaaannnkkkiiinnngggCCCooorrrrrreeesss
pppooonnndddeeennntttBBBaaannnkkkiiinnnggg

BANK ORGANIZATION SYSTEM IN INDIA:The large volume of work passing through the banking system every day in
theform of cash, cheque, and other credit instruments, together with the complexity
of themany services rendered, calls not only for a high degree of skill, accuracy
and knowledgeon the part of the officials, but also up-to-date and efficient methods
of organization,accountancy and control.Shareholders anddirectorsGeneral
ManagersHead
officeAdministrationBranchAdministrationForeignD e a r t m e n t s The Branch
ManagerThe day-book orControl Clerk The Security Clerk The cashierThe Chief
Clerk Modern Banking MethodsThe Remittance orWaste Clerk The Shorthand
TypistRotation of DutiesThe junior Clerk The Ledger-Keeper
The Shorthand TypistThe Ledger-Keeper


RETAIL BANKING-THE NEW FLAVOR
----------------------
The Concept of Retail Banking:The retail banking encompasses deposit and assets linked products as well asother
financial services offered to individual for personal consumption. Generally,
thepure retail banking is conceived to be the provision of mass banking products
andservices to private individuals as opposed to wholesale banking which focuses
oncorporate clients. Over the years, the concept of retail banking has been
expanded toinclude in many cases the services provided to small and medium sized

businesses. Somebanks in Europe even include their private banking business i.e.
services to high networth net worth individuals in their retail Banking
portfolio.The concept of Retail banking is not new to banks. it is only now that it is
beingviewed as an attractive market segment, which offers opportunities for
growth withprofits. The diversified portfolio characteristic of retail banking gives
better comfort andspreads the essence of retail banking lies in individual
customers. Though the term RetailBanking and retail lending are often used
synonymously, yet the later is lust one side of Retail Banking. In retail banking, all
the banking needs of individual customers are takencare of in an integrated
manner.

Retail Lending Products:Major retail lending products offered by banks are the following:I.
Housing Loans
II.
Loan for Consumer goods
III.
Personal Loans for marriage, honeymoon, medical treatment and holding etc.
IV.
Education Loans
V.
Auto Loans
VI.
Gold Loans
VII.
Event Loans
VIII.
Festival Loans
IX.
Insurance Products

X.
Loan against Rent receivables
XI.
Loan against Pension receivables to senior citizens
XII.
Debit and Credit Cards
XIII.
Global and International Cards
XIV.
Loan to Doctors to set up their own Clinics or for purchase of medical equipments
XV.
Loan for Woman Empowerment for the Setting up of boutiques

Setting up of beauty parlours

Setting up of creches

Setting up of flower shops

For making jaipuri quilts etc.

Preparation and supply of Food Tiffins

XVI.
Loan for purchase of acoustic enclosures for Diesel Gen. Sets etc.

Retail Banking Products for Depositors:-

Retail banking products for depositors in various segments of customers

like;children, salaried persons. Senior citizens, professionals, technocrats business
men, retailtraders and farmers etc. include:
a.
Flexi deposit Accounts
b.
Savings Bank Accounts
c.
Recurring Deposit Accounts
d.
Short Term Deposits
e.
Deferred pension Linked Deposit SchemesToday pure deposit type products are
giving way to multi-benefit, multi-access genresof banking products. Most of the
innovation is taking place in saving bank accounts tomake the meager return of
3.5% p.a. that they earn, more attractive. Most of the banksnow offer Sweep in and
sweep out account, called 2-in-1 accounts or value added savingsbank accounts.
This account is a combination of savings bank and term deposit accountsand offers
twin benefit of liquidity of a savings bank account and higher interest earningof
term deposit accounts.

Add-ons and Freebies:To make their products and services more service more attractive so as to
woomaximum number of customers, the banks are vying with each other with
whole lot off rills, goodies, freebies are as under:
1.
Free collection of specified number of outstation instruments
2.
Instant credit of outstanding cheques up to Rs.15000/3.

Concession in exchange on demand drafts and pay-orders and commission onbills

of exchange
4.
Issuance of free personalized cheques books
5.
Free issuance of ATM, Debit, Credit and add-on Cards
6.
Free investment advisory services
7.
Grant of redeemable reward points on use of credit cards
8.
Free internet banking, phone banking and any where banking facilities
9.
Issuance of discount coupons for purchase of various products like
computeraccessories, music CDs, cassettes, books, toys, garments etc.etc.
10.
Last but not the least, issuance of free PVR, Trade Fair tickets etc. etc.
11.
Concession in rate of interest on Group advances
12.
Exemption in upfront feesThese concessions, freebies and add-ons are based on the
True Relationship Valueof customers and is calculated by the return on various
products and services of the banksavailed by them. These concessions and freebies
are usually offered for purchase of consumer goods but now they have become an
integral part of retail Banking productsand services also.

Other Retail Banking Services:Offer of several frills and goodies is not the end of the game. Banks also offer
followingRetail Banking services free of charges to customers:
1.

Payment of utility bills like water, electricity, telephone and mobile phone bills
2.
Payment of insurance premiums on due dates
3.
Payment of monthly/quarterly education fee of children to their respective schools
4.
Remittance of funds from one account to another
5.
Demating of shares, bonds, debentures, and mutual funds
6.
Payment of credit card bills on due dates
7.
Last but not the least, the filing of income tax returns and payment of income tax

Retail Lending at Point of Sale:More and more banks have since entered into tie up arrangement with
leadingautomobile, electronic and consumer goods dealers, builders and real estate
agents,universities and colleges etc. for promoting and selling their Retail Banking
productsincluding housing and educational loans to customer at the very point of
sale.

New delivery channels for Retail Banking Products and Services:The advent of new delivery channels viz. ATM, Interest and Telebanking
haverevolutionalised the retail banking activities. These channels enable Banks to
deliverretail Banking products and services in an efficient and cost effective
manner. Now-a-days the banks are under great pressure to attract new and retain
old customers, asmargins are turning wafer thin. In these circumstances reducing
administrative atransaction cost has become crucial. Banks are making special
offerings to customersthrough these channels. Retail banking has been immensely
benefited with the revolutionin IT. and communication technology. The automation
of the Banking processes isfacilitating extension of their reach and rationalization

of their costs as well. They are theengine for growth of retail banking business of
Banks. The networking of branches hasextended the scope of banking to anywhere
and anytime 24 * 7 days week banking. It hasenabled customer to be the customer
of a bank rather then the customers of a particularbranch only. Customers can
transact retail Banking transactions at any of the networkedbranches without any
extra cost. As a matter of fact the Retail Banking per se has takenoff because of the
advent of multiple banking channels. These channels have enabledbanks to go on a
massive customer acquisition mode since transaction volumes spreadover multiple
channels lessen the load on the brick and mortar bank branches.

The impact of Retail Banking:

The major impact of Retail Banking is that, the customers have become
theemperors the fulcrum of all banking activities, both on the asset side and
theliabilities front. The hitherto sellers market has transformed into buyers
market.The customers have multiple of choices before them now for cherry
pickingproducts and services, which suit their life styles and tastes and
financialrequirements as well. Banks now go to their customers more often than
thecustomers go to their banks.

The non-banking finance Companies which have hitherto been thriving on

retailbusiness due to high risk and high returns thereon have been dislodged from
theirprofit munching citadel.

Retail banking is transforming banks in to one stop financial super markets.

The share of retail loans is fast increasing in the loan books of banks.

Banks can foster lasting business relationship with customers and retain theexisting
customers and attract new ones. There is a rise in their service levels aswell.

Banks can cut costs and achieve economies of scale and improve their revenuesand
profits by robust growth in retail business. Reduction in costs offers a winwin
situation both for banks and the customers.

It has affected the interface of banking system through different

deliverymechanism.

It is not that banks are sharing the same pie of retail business. The pie itself
isgrowing exponentially; retail banking has fueled a considerable quantum
of purchasing power through a slew of retail products.

Banks can diversify risks in their credit portfolio and contain the menace of NPAs.

Re-engineering of business with sophisticated technology based products willlead

to business creation, reduction in transaction cost and enhancement inefficiency of
operations.

Draw-backs of Retail Banking :Despite the numerous advantage of Retail Banking there are some drew-Backs in
thisbusiness. These are as under:
a.
Management of large number of clients may become a problem if IT systems
arenot robust.
b.
Rapid evolution of products can lead to IT complications.
c.
The cost of maintaining large number of small value transactions in
branchnetworks will be relatively high, unless the customers use alternate
deliverychannels like ATMs, internet and phone banking etc. for carrying out
bankingtransactions.

The Future of Retail Banking :Though at present Retail Banking appears to be the best bet for banks to improve
theirtop and bottom line, yet the future of Retail banking in general, may not be all
roses as itappears to be. There are signs of slowdown in customer growth in some
countries, whichwill inevitably have an impact on Retail Banking business growth.
Secondly thepossibility of deterioration in asset quality cannot be ruled out. With
the boom in housingloan market, the sign of overheating has also started surfacing
with potential problem forbanks that have not exercised sufficient caution. Further
the pressure on margins ismounting partly because of fierce competition and partly
as a result of falling interestrates environment which has diminished to some extent
the endowment effect of substantial deposit bases from which most retail banks
have been deriving benefits. Butbanks, which have built a significant retail banking
portfolio may fare relatively well inthe current fiscal. Those banks which have a
dynamic retail strategy and are welldiversified in products, services and
distribution channels and have at the same timemanaged to achieve a good level of
cost efficiency are the ones that are most likely tosucceed in the longer term.

STRATEGIC ISSUES IN BANKING SERVICES---Strategic Planning:

is the process of analyzing the organizational external and internalenvironments;
developing the appropriate mission, vision, and overall goals; identifyingthe
general strategies to be pursued; and allocated resources.

Mission is an organization's current purpose or reason for existing.

Vision is an organization's fundamental aspirations and purpose that usuallyappeals

to its member's hearts and minds.

Goals are what an organization is committed to achieving.

Strategies are the major courses of action that an organization takes to

achievesgoals.

Resource Allocation is the earmarking of money, through budgets, for

variouspurposes.

Downsizing Strategy signals an organization's intent to rely on fewer resourcesprimarily human-to accomplish its goals.
Tactical Planning:
is the process of making detailed decisions about what to do, whichwill do it, and
how to do it-with a normal time and horizon of one year or less. Theprocess
generally includes:

Choosing specific goals and the means of implementing theorganization's strategic

plan,

Deciding on courses of action for improving current operations, and

Developing budgets for each department, division and project.Strategic issues in

banks services are known as or define by these ways, which are knownas,


NON-PERFORMING ASSETS OF THE BANKING SECTOR:There was a significant decline in the non-performing assets (NPAs) of SCBs
in2003-04, despite adoption of 90 day delinquency norm from March 31, 2004.
The GrossNPAs of SCBs declined from 4.0 per cent of total assets in 2002-03 to
3.3 percent in2003-04. The corresponding decline in net NPAs was from 1.9 per
cent to 1.2 per cent.Both gross NPAs and net NPAs declined in absolute terms.
While the gross NPAsdeclined from Rs. 68,717 crore in 2002-03 to Rs. 64,787
crore in 2003-04, net NPAsdeclined from Rs. 32,670 crore to Rs. 24,617 crore in
the same period. There was also asignificant decline in the proportion of net NPAs
to net advances from 4.4 per cent in2002-03 to 2.9 per cent in 2003-04. The
significant decline in the net NPAs by 24.7 percent in 2003-04 as compared to 8.1
per cent in 2002-03 was mainly on account of higherprovisions (up to 40.0 per
cent) for NPAs made by SCBs.The decline in NPAs in 2003-04 was witnessed
across all bank groups. Thedecline in net NPAs as a proportion of total assets was
quite significant in the case of newprivate sector banks, followed by PSBs. The
ratio of net NPAs to net advances of SCBsdeclined from 4.4 per cent in 2002-03 to
2.9 per cent in 2003-04. Among the bank groups, old private sector banks had the
highest ratio of net NPAs to net advances at 3.8per cent followed by PSBs (3.0 per
cent) new private sector banks (2.4 per cent) andforeign banks (1.5 per cent)An
analysis of NPAs by sectors reveals that in 2003-04, advances to nonprioritysectors accounted for bulk of the outstanding NPAs in the case of PSBs
(51.24 per cent of total) and for private sector banks (75.30 per cent of total).
While the share of NPAs inAgriculture sector and SSIs of PSBs declined in 200304, the share of other prioritysectors increased. The share of loans to other priority
sectors in priority sector lendingalso increased. Measures taken to reduce NPAs
include re schedulement, restructuring atthe bank level, corporate debt
restructuring, and recovery through Lok Adalats, CivilCourts, and debt recovery
tribunals and compromise settlements. The recoverymanagement received a major
fillip with the enactment of the Securitization andReconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI)Act, 2002 enabling banks
to realize their dues without intervention of courts andtribunals. The Supreme
Court in its judgment dated April 8, 2004, while upholding the

constitutional validity of the Act, struck down section 17 (2) of the Act
asunconstitutional and contrary to Article 14 of the Constitution of India. The
Governmentamended the relevant provisions of the Act to address the concerns
expressed by theSupreme Court regarding a fair deal to borrowers through an
ordinance dated November11, 2004. It is expected that the momentum in the
recovery of NPAs will be resumed withthe amendments to the Act.The revised
guidelines for compromise settlement of chronic NPAs of PSBs wereIssued in
January 2003 and were extended from time to time till July 31, 2004. The
casesfiled by SCBs in Lok Adalats for recovery of NPAs stood at 5.20 lakh
involving anamount of Rs. 2,674 crore (prov.). The recoveries effected in 1.69 lakh
cases amounted toRs.352 crore (prov.) as on September 30, 2004.The number of
cases filed in debtrecovery tribunals stood at 64, 941 as on June 30, 2004,
involving an amount of Rs.91,901 crore. Out of these, 29, 525 cases involving an
amount of Rs. 27,869 crore havebeen adjudicated. The amount recovered was to
Rs. 8,593 crore. Under the scheme of corporate debt restructuring introduced in
2001, the number of cases and value of assetsrestructured stood at 121 and Rs.
69,575 crore, respectively, as on December 31, 2004.Iron and steel, refinery,
fertilizers and telecommunication sectors were the majorbeneficiaries of the
scheme. These sectors accounted for more than two-third of thevalues of assets
restructured.As credit information is crucial for the development of the financial
system andfor addressing the problems of NPAs, dissemination of credit
information on suit-fileddefaulters is being undertaken by the Credit Information
Bureau of India Ltd. (CIBIL)

from March 2003. In its annual policy statement for 2004-05, the RBI advised
banks andfinancial institutions to review the measures taken for furnishing credit
information inrespect of all borrowers to CIBIL. In its mid-term review, the RBI
again urged the banksto make persistent efforts in obtaining consent from all the
borrowers, in order toestablish an efficient credit information system, which would
help in enhancing thequality of credit decisions, improve the asset quality, and
facilitate faster credit delivery.

CAPITAL ADEQUACY RATIO:The concept of minimum capital to risk weighted assets ratio (CRAR) has
beendeveloped to ensure that banks can absorb a reasonable level of losses.
Application of minimum CRAR protects the interest of depositors and promotes
stability and efficiencyof the financial system. At the end of March 31, 2004,
CRAR of PSBs stood at 13.2 percent, an improvement of 0.6 per centage point
from the previous year. There was also animprovement in the CRAR of old private
sector banks from 12.8 per cent in 2002-03 to13.7 per cent in 2003-04. The CRAR
of new private sector banks and foreign banksregistered a decline in 2003-04. For
the SCBs as a whole the CRAR improved from 12.7per cent in 2002-03 to 12.9 per
cent in 2003-04. All the bank groups had CRAR abovethe minimum 9 per cent
stipulated by the RBI.During the current year, there was further improvement in
the CRAR of SCBs.The ratio in the first half of 2004-05 improved to 13.4 per cent
as compared to 12.9 percent at the end of 2003-04. Among the bank groups, a
substantial improvement waswitnessed in the case of new private sector banks

from 10.2 per cent as at the end of 2003-04 to 13.5 per cent in the first half of
2004-05. While PSBs and old private banksmaintained the CRAR at almost the
same level as in the previous year, the CRAR of foreign banks declined to 14.0 per
cent in the first half of 2004-05 as compared to 15.0per cent as at the end of 200304.

TOTAL QUALITY MANAGEMENT:While Total Quality Management has proven to be an effective process
forimproving organizational functioning, its value can only be assured through
acomprehensive and well thought out implementation process. The purpose of this
chapteris to outline key aspects of implementation of large scale organizational
change whichmay enable a practitioner to more thoughtfully and successfully
implement TQM. First,the context will be set. TQM is, in fact, a large scale
systems change, and guidingprinciples and considerations regarding this scale of
change will be presented. Withoutattention to contextual factors, well intended
changes may not be adequately designed. Asanother aspect of context, the
expectations and perceptions of employees (workers andmanagers) will be
assessed, so that the implementation plan can address them.Specifically, sources of
resistance to change and ways of dealing with them will bediscussed. This is
important to allow a change agent to anticipate resistances and designfor them, so
that the process does not bog down or stall. Next, a model of implementationwill
be presented, including a discussion of key principles. Visionary leadership will
beoffered as an overriding perspective for someone instituting TQM. In recent
years theliterature on change management and leadership has grown steadily, and
applicationsbased on research findings will be more likely to succeed. Use of
tested principles willalso enable the change agent to avoid reinventing the
proverbial wheel. Implementationprinciples will be followed by a review of steps
in managing the transition to the newsystem and ways of helping institutionalize
the process as part of the organization'sculture. This section, too, will be informed
by current writing in transition managementand institutionalization of change.
Finally, some miscellaneous do's and dont will beoffered.Members of any
organization have stories to tell of the introduction of newprograms, techniques,
systems, or even, in current terminology, paradigms. Usually theemployee, who
can be anywhere from the line worker to the executive level, describessuch an
incident with a combination of cynicism and disappointment: some managerwent
to a conference or in some other way got a "great idea" (or did it based on threat
ordesperation such as an urgent need to cut costs) and came back to work
toenthusiastically present it, usually mandating its implementation. The "program"

probably raised people's expectations that this time things would improve,
thatmanagement would listen to their ideas. Such a program usually is introduced
withfanfare, plans are made, and things slowly return to normal. The manager
blamesunresponsive employees, line workers blame executives interested only in
looking good,and all complain about the resistant middle managers. Unfortunately,
the program itself isusually seen as worthless: "we tried team building (or
organization development orquality circles or what have you) and it didn't work;
neither will TQM". Planned changeprocesses often work, if conceptualized and
implemented properly; but, unfortunately,every organization is different, and the
processes are often adopted "off the shelf" "the'appliance model of organizational
change': buy a complete program, like a 'quality circlepackage,' from a dealer, plug
it in, and hope that it runs by itself" (Kanter, 1983, 249).Alternatively, especially in
the under funded public and not for profit sectors, partialapplications are tried, and
in spite of management and employee commitment do not bearfruit. This chapter
will focus on ways of preventing some of these disappointments.In summary, the
purpose here is to review principles of effective planned changeimplementation
and suggest specific TQM applications. Several assumptions areproposed:1. TQM
is a viable and effective planned change method, when properly installed2. Not all
organizations are appropriate or ready for TQM3. Preconditions (appropriateness,
readiness) for successful TQM can sometimes becreated4. Leadership commitment
to a large scale, long term, and cultural change is necessary.While problems in
adapting TQM in government and social service organizations havebeen identified,
TQM can be useful in such organizations if properly modified.For survival, banks
have to make efforts to improve their quality andcompetitiveness by planning and
taking innovative in fall areas:

Increase emphasis on customer focused activities

Intro a total quality program

Developing differential value added services

Educating employees through involvement programs

Increase quality through management and system


Increase effectiveness of product development

Developing product with lower uses costs

TQM principles

Customer satisfaction

Plan-do-check-act (PDCA) cycle

Management by 'fact' -- 5Ws (what, why, who, when, and where) + 1H(how)
approach

Respect for people

TQM elements

Total employee involvement (TEI)

Total waste elimination (TWE)

Total quality control (TQC)

TQM focus areas

Customer satisfaction

Product quality

Plant reliability


Waste elimination
Benefits achieved through TQM

Increased focus on the customer

Mindset of 'continuous improvement'

Better product quality

Better systems and procedures

Better cross-functional teamwork

Increased plant reliability

Waste elimination in offices and factories.

KNOWLEDGE MANAGEMENT
------------------------------------- According to Peter Drucker and Daniel Bell, the
management Gurus knowledge isthe only meaningful economic
resource.Knowledge management can be defined as a systematic and integrative
process of coordinating organization-wide activities of acquiring, creating, storing,
sharing,diffusing, developing and deploying knowledge by individual and groups

in the pursuit of major organizational goals. It also involves the creation of an

interacting learningenvironment where organization members transfer and share
what they know; and applyknowledge to solve problems, innovate and create new
knowledge.Knowledge management is as much about people and culture as it is
abouttechnology. Knowledge management thrives only when the human
communicationnetwork operates freely across the shortest path between the
knowledge providers andknowledge seekers. There must be a culture that promotes
and rewards the poolingtogether of knowledge resources. Thus organizations must
build a culture that motivatespeople to create, share and use knowledge.After the
preoccupation with system and procedures to collect data ad translate itinto
information, its time for firms to focus on the next plane- knowledge.
Knowledgemanagement is not a buzzword. Every knowledge management
solution, if currentlyimplemented, has definite measurable business benefits.Future
business success increasingly depends on the retention and the creative useof the
knowledge ideas and experiences of an organization and its employees. And
inknowledge economy corporations need for workers will be more than the
workers needfor employer.The work will demand more formal education and more
cutting edge knowledgeaccumulation.

INNOVATION IN BANK
---------------------------------------------------- Innovation drives organizations to grow,
prosper and transform in sync with thechanges in the environment, both internal
and external. Banking is no exception to this.In fact, this sector has witnessed
radical transformation of late, based on manyinnovations in products, processes,
services, systems, business models, technology,governance and regulation. A
liberalized and globalize financial infrastructure hasprovided an additional impetus

to this gigantic effort.The pervasive influence of in formation technology has

revolutionalized banking.Transaction costs have crumbled and handling of
astronomical number of transactions inno time has become a reality.
Internationally, the number brick and mortar structure hasbeen rapidly yielding
ground to click and order electronic banking with a plethora of newproducts.
Banking has become boundary less and virtual with a 24 * 7 model. Banks
whostrongly rely on the merits of relationship banking as a time tested way of
targeting andserving clients, have readily embraced Customer Relationship
Management (CRM), withsharp focus on customer centricity, facilitated by the
availability of superior technology.CRM has, therefore, become the new mantra in
customer service management, which isboth relationship based and information
intensive.Risk management is no longer a mere regulatory issue.basel-2 has
accorded aprimacy of place to this fascinating exercise by repositioning it as the
core of banking.We now see the evolution of many novel deferral products like
credit derivatives,especially the Credit Risk Transfer (CRT) mechanism, as a
consequence. CRT,characterized by significant product innovation, is a very useful
credit risk managementtool that enhances liquidity and market efficiency.
Securitization is yet another examplein this regard, whose strategic use has been
rapidly rising globally. So is outsourcing.

SOME RECENT INNOVATIONS IN INDIAN BANKING:Tandon can, however, usefully cast an eye at one way of shopping
withoutrevealing his credit card number. HDFC Banks Net Safe card is a onetime use cardwith a limit thats specified, taken from Tendons credit or debit card.
Even if Tandon
fails to utilize the full amount within 24 hours of creating the card, the card simply
diesand the unspent amount in the temporary card reverts to his original credit or
debit card.Welcome to one of the myriad ways in which bankers have been trying
to innovate.Theyre bringing ATMs, cash and even foreign exchange to their
customers doorsteps.Indeed, innovation has become the hottest banking game in
town.Want to buy a house but dont want to go through the hassles of haggling
withbrokers and the mounds of paperwork? Not to worry. Your bank will tackle all
this. Itsready to come every step of the way for you to buy a house. Standard
Chartered, forinstance, has property advisors to guide a customer through the entire
process of selectingand buying a house. They also lend a hand with the
cumbersome documentationformalities and the registration.Dont fret if youve
already bought your house or car you can do other thingswith both. You can
leverage your new house or car these days with banks like ICICIBank and
Stanchart ready to extend loans against either, till its about five years old.Loans

are available to all car owners for almost all brands of cars manufactured in
Indiathat are up to five years old.Still, innovation is more evident in retail banking.
True, all banks offer prettymuch the same suite of asset and liability products. But
its the small tweaking here andthere that makes all the difference. Take, for
example, the once staid deposits. Some bank accounts combine a savings deposit
account with a fixed deposit. A sweep-in account, asit is called, works like this: the
account will have a cut-off, say, Rs 25,000; any amountover and above that gets
automatically transferred to a fixed deposit which will earn thecustomer a clean 2
per cent more than the returns that a savings account gives.Last month, Kotak
Mahindra Bank introduced a variant of the sweep-in account.If the balance tops Rs
1.5 lakh, the excess runs into Kotaks liquid mutual fund. Even if the money is
there only for the weekend, a liquid fund can earn you a clean 4.5 per centper
annum, points out Shashi Arora, vice president, marketing, Kotak Mahindra
Bank.Thats not a small gain considering that your current account does not pay
you anyinterest. And if, meanwhile, you want to buy a big-ticket home theatre
system, the minuteyou swipe your card the invested sum will return to your
account.Theres plenty of innovation on home loans. ABN Amro sent the home
mortgage marketafire with its 6 per cent home loan offering last year. The product
offers a 6 per centinterest rate for two years after which the interest rate is reset in
tune with the prevailing
market rate. All the other big home loan players slashed their rates after this
wasannounced.Look too at the home saver product and its variants from Citibank,
HSBC andStanchart. The interest rate on the loan is determined by the balance you
maintain in thesavings account with the bank. The home builder can maintain a
higher balance in his orher savings account and bring down the interest rate on the
home loan. The rate iscalculated on a daily basis on the net loan amount. Stanchart
claims that since the launchof its home saver product in April 2002, close to 40 per
cent of its customers have chosenit. Says Vishu Ramachandran, regional head,
consumer banking, Standard Chartered:We believe that there are several ways to
innovate and create value in the process, evenin developed product areas.Banks
are also attempting to reach out to residents of metropolitan cities wherepeople are
pressed for time (what with long commuting hours, traffic jams and bothspouses
working), beyond conventional banking hours. ICICI Bank, for
example,introduced eight to eight banking hours, seven days of the week, in major
cities. Not to beoutdone, some of the other private banks have also done this too.
HDFC Bank even has a24-hour branch at Mumbais international airport.Several
banks are even bringing ATMs to customer doorsteps. ICICI Bank, StateBank of
India and Bank of India now have mobile ATMs or vans that go along aparticular
route in a city and are stationed at strategic locations for a few hours every
day.This saves the bank infrastructure costs since it has one mobile ATM instead of

multiplestationary ones.Thats not all. Even money is delivered to customers at

home. Kotak MahindraBank, a late entrant into private banking, delivers cash at
the doorstep. A customer canwithdraw a minimum of Rs 5,000 and up to a
maximum of Rs 2 lakh and get the moneyat home. And, mind you, Kotak is not
alone. The list of banks offering a similar serviceincludes Citibank, Stanchart,
ABN Amro and HDFC Bank. HDFC Bank brings evenforeign exchange, whether
travellers cheques or cash, to your doorstep courtesy its tie-upwith Travelex India.
All one has to do is call up the branch or HDFC Banks phonebanking number. The
banks country head, retail, Neeraj Swaroop, believes thatcontinuous innovation
will always make a difference, with customer needs changing dayby day.
Innovation will never become less important for us, he says.
HDFC Bank has pioneered other innovations. Take point of sale (POS) terminals,a
prerequisite in any store or restaurant worth its name in the country. Earlier this
year, ittied up with Reliance Infocomm to offer mobile POS terminals. Although
this mightsound a tad too fancy today, there could soon be a day when you can
swipe your card topay your cabby, the pizza home delivery boy and even for the
groceries from the localkirana store.But internet banking and shopping have been
slow starters, given the lowcomputer penetration in the country but banks are going
all out to get the customeronline. Not only is electronic fund transfer between
banks across cities possible throughinternet banking today but banks also offer
other features that benefit the customer.HDFC Bank, for instance, has an option
called One View on its internet banking sitewhich provides customers a
comprehensive view of their investments and fundmovements. Customers can look
at their accounts in six different banks on one screen.These include HDFC Bank
accounts and demat accounts, ICICI Bank, Citibank, HSBCand Standard Chartered
Bank accounts, apart from details of Citibank credit card duesand so on.Banks are
also innovating on the company and treasury operations fronts. Incorporate loans,
plain loans are passe. Mumbai inter-bank offered rate (MIBOR)-linkedand
commercial paper-linked interest rates on loans are common. MIBOR is a
referencerate arrived at every day at 4 pm by Reuters. It is the weighted average
rate of call moneybusiness transacted by 22 institutions, including banks, primary
dealers and financialinstitutions.The State Bank of India was the first to usher in
MIBOR-linked loans for topcompanies. Soon enough, other banks followed. ICICI
Bank carried out the worlds firstever securitization of a micro finance portfolio
last year. The bank securitized Rs 4.2crore for Bharatiya Samruddhi Finance Ltd
for crop production. Banks, of course, realizethat innovation gives them only a first
mover advantage until their rivals catch up. Butthen, they can console themselves.
Isnt imitation the best form of flattery?

TECHNOLOGY IN BANKING
---------------------------------------Nobel Laureate Robert Solow had once remarked that computers are
seeneverywhere excepting in productivity statistics. More recent developments
have shownhow far this state of affairs has changed. Innovation in technology and
worldwiderevolution in information and communication technology (ICT) have
emerged asdynamic sources of productivity growth. The relationship between IT
and banking isfundamentally symbiotic. In the banking sector, IT can reduce costs,
increase volumes,and facilitate customized products; similarly, IT requires banking
and financial servicesto facilitate its growth. As far as the banking system is
concerned, the payment system isperhaps the most important mechanism through
which such interactive dynamics getsmanifested.Recognizing the importance of
payments and settlement systems in the economy,we have embarked on technology
based solutions for the improvement of the paymentand settlement system
infrastructure, coupled with the introduction of new paymentproducts such as the
computerized settlement of clearing transactions, use of MagneticInk Character
Recognition (MICR) technology for cheque clearing which currentlyaccounts for
65 per cent of the value of cheques processed in the country, thecomputerization of
Government Accounts and Currency Chest transactions,operationalisation of
Delivery
versus
Payment (D
v
P) for Government securitiestransactions. Two-way inter-city cheque collection
and imaging have beenoperationalised at the four metros. The coverage of
Electronic Clearing Service (Debitand Credit) has been significantly expanded to
encourage non-paper based fundsmovement and develop the provision of a
centralized facility for effecting payments. Thescheme for Electronic Funds
Transfer operated by the Reserve Bank has beensignificantly augmented and is
now available across thirteen major cities. The scheme,which was originally
intended for small value transactions, is processing high value (upto Rs.2 crore)
from October 1, 2001. The Centralized Funds Management System(CFMS), which
would enable banks to obtain consolidated account-wise and centre-wisepositions
of their balances with all 17 offices of the Deposits Accounts Departments of the
Reserve Bank, has begun to be implemented in a phased manner from
November2001.A holistic approach has been adopted towards designing and
development of a modern,robust, efficient, secure and integrated payment and
settlement system taking intoaccount certain aspects relating to potential risks,
legal framework and the impact on the

operational framework of monetary policy. The approach to the modernization of

thepayment and settlement system in India has been three-pronged: (a)
consolidation, (b)development, and (c) integration. The consolidation of the
existing payment systemsrevolves around strengthening Computerized Cheque
clearing, expanding the reach of Electronic Clearing Services and Electronic Funds
Transfer by providing for systemswith the latest levels of technology. The critical
elements in the developmental strategyare the opening of new clearing houses,
interconnection of clearing houses through theINFINET; optimizing the
deployment of resources by banks through Real Time GrossSettlement System,
Centralized Funds Management System (CFMS); Nego tiatedDealing System
(NDS) and the Structured Financial Messaging Solution (SFMS). Whileintegration
of the various payment products with the systems of individual banks is thethrust
area, it requires a high degree of standardization within a bank and
seamlessinterfaces across banks.The setting up of the apex-level National
Payments Council in May 1999 and theoperationalisation of the INFINET by the
Institute for Development and Research inBanking Technology (IDRBT),
Hyderabad have been some important developments inthe direction of providing a
communication network for the exclusive use of banks andfinancial institutions.
Membership in the INFINET has been opened up to all banks inaddition to those in
the public sector. At the base of all inter-bank message transfers usingthe INFINET
is the Structured Financial Messaging System (SFMS). It would serve as asecure
communication carrier with templates for intra- and inter-bank messages in
fixedmessage formats that will facilitate straight through processing. All interbank transactions would be stored and switched at the central hub at Hyderabad
while intra-bank messages will be switched and stored by the bank gateway.
Security features of theSFMS would match international standards.In order to
maximize the benefits of such efforts, banks have to take pro-active measuresto:

further strengthen their infrastructure in respect of standardization, high levelsof

security and communication and networking;

achieve inter-branch connectivity early;

popularize the usage of the scheme of electronic funds transfer (EFT); and

Institute arrangements for an RTGS environment online with a view tointegrating

into a secure and consolidated payment system.Information technology has
immense untapped potential in banking. Strengthening of information technology
in banks could improve the effectiveness of asset-liabilitymanagement in banks.
Building up of a related data-base on a real time basis wouldenhance the
forecasting of liquidity greatly even at the branch level. This could contributeto
enhancing the risk management capabilities of banks.

REGULATIONS AND COMPLIANCE

----------------------------Progressive strengthening, deepening and refinement of the
regulatory andsupervisory system for the financial sector have been important
elements of financialsector reforms. In the long run, it is the supervision and
regulation function that is criticalin safeguarding financial stability. There is also
some evidence that proactive andeffective supervision contributes to the efficiency
of financial intermediation. Financialsector supervision is expected to become
increasingly risk-based and concerned withvalidating systems rather than setting
them. This will entail procedures for sound internalevaluation of risk for banks. As
mentioned earlier, bank managements will have todevelop internal capital
assessment processes in accordance with their risk profile andcontrol environment.
These internal processes would then be subjected to review andsupervisory
intervention if necessary. The emphasis will be on evaluating the quality of risk
management and the adequacy of risk containment. In such an
environment,credibility assigned by markets to risk disclosures will hold only if
they are validated bysupervisors. Thus effective and appropriate supervision is
critical for the effectiveness of capital requirements and market discipline.In
certain areas, as for instance, in the urban cooperative banking segment,
theregulatory requirements leave considerable scope for regulatory arbitrage and
evencircumvention. The problem is rendered more complex by the existence of
regulatoryoverlap between the Central Government, the State Governments and the
Reserve Bank.Regulatory overlap has impeded the speed of regulatory response to
emerging problems.The need for removing multiple regulatory jurisdictions over
the cooperative bankingsector has been reiterated on several occasions. In this
regard, the Reserve Bank has
proposed the setting up of an apex supervisory body for urban cooperative banks
underthe control of a high-level supervisory board consisting of representatives of
the Centralgovernments, the State governments, the Reserve Bank and experts. The
apex body isexpected to ensure compliance with prudential requirements and also
supervise on-siteinspections and off-site surveillance.Recent developments in
certain segments of the financial sector have also brought to thefore issues relating

to corporate governance in banks. As part of on-going reforms, boardshave been

given greater autonomy to prescribe internal control guidelines, risk management
and procedures for market discipline and accountability. It is extremelyimportant
that greater vigilance over adherence to these norms goes hand-in-hand withgreater
autonomy. Recent evidence of transgression of prudential guidelines by a fewbanks
has raised the issue of the audit and supervisory functions of boards. As we
movetowards a more deregulated financial regime, these functions have to be
transferred fromeither the Government or the Reserve Bank to bank boards. This
imposes a greaterresponsibility and accountability on the bank management. It is in
this context that aconsultative group of directors of select banks and other experts
has been set up torecommend measures to strengthen the internal supervisory role
of boards. The objectiveis to obtain a feedback on how boards function
vis--vis
compliance with prudentialnorms, transparency and disclosure, functioning of the
audit committee,
etc
., and todevise effective mechanisms for ensuring management discipline.Several
other initiatives in improving the supervisory function have beenundertaken,
including a prudential supervisory reporting system for financial
institutions,improvements in procedures for financial inspection, sensitizing the
general public forbetter regulation of the activities of NBFCs and enactment of
appropriate legislation toprotect depositor interests in some States. Major legal
reforms have been initiated in areassuch as security laws, the Negotiable
Instruments Act, bank frauds and the regulatoryframework of banking. The
Reserve Bank has also accepted the principle of transfer of ownership to the
Government in respect of some financial institutions in view of theconflict of
interest that may arise in the conduct of its supervisory function. It is expectedthat
these initiatives will pave the way for an efficient, and risk-based
supervisoryenvironment in India.The largest set of consolidated regulations that
mandate integrity of data in Indiaare the IT Act and SEBI's clause 49 for listed
companies. These regulations do not
currently enforce the kind of security standards that are common in Europe and the
US.In a global economy, however, no company is an island and India Inc is
adopting US andEuropean compliance procedures and certifications such as
Sarbanes Oxley, SafeHarbour, BS, and ISO.Compliance, regulatory or otherwise,
does not directly concern the IT department.In manufacturing for instance,
compliance controls don't really involve system security,and a large part of the
quality control required by authorities cannot be imposed orenforced using IT.
Companies that deal with sensitive information, financial services andBPOs,
banks, MNC subsidiaries or those with plans to expand beyond Indian shores areall

affected. These will continue to make strides towards compliance. For the mediumscale segment (Rs 100-300 crore turnover), security and audits are not a priority.
Thissegment is comfortable with public mail servers, and exchanging information
over notvery secure connections.

CORPORATE GOVERNANCE - CODE OF CONDUCT

--------1.
Need and objective of the Code
Clause 49 of the Listing agreement entered into with the Stock
Exchanges,requires, as part of Corporate Governance the listed entities to lay down
a Code of Conduct for Directors on the Board of an entity and its Senior
Management. Theterm "Senior Management" shall mean personnel of the company
who aremembers of its core management team excluding the Board of Directors.
Thiswould also include all members of management, one level below the
ExecutiveDirectors including all functional heads.
2.
Bank's Belief System
This Code of Conduct attempts to set forth the guiding principles on which
theBank shall operate and conduct its daily business with its
multitudinousstakeholders, government and regulatory agencies, media and anyone
else withwhom it is connected. It recognizes that the Bank is a trustee and
custodian of public money and in order to fulfill fiduciary obligations and
responsibilities, ithas to maintain and continue to enjoy the trust and confidence of
public at large.
The Bank acknowledges the need to uphold the integrity of every transaction
itenters into and believes that honesty and integrity in its internal conduct would
be judged by its external behavior. The bank shall be committed in all its actions
tothe interest of the countries in which it operates. The Bank is conscious of
thereputation it carries amongst its customers and public at large and shall
endeavorto do all it can to sustain and improve upon the same in its discharge
of obligations. The Bank shall continue to initiate policies, which are
customercentric and which promote financial prudence.
3.
Philosophy of the Code

The code envisages and expects

a.
Adherence to the highest standards of honest and ethical conduct,including proper
and ethical procedures in dealing with actual or apparentconflicts of interest
between personal and professional relationships.
b.
Full, fair, accurate, sensible, timely and meaningful disclosures in theperiodic
reports required to be filed by the Bank with government andregulatory agencies.
c.
Compliance with applicable laws, rules and regulations.
d.
To address misuse or misapplication of the Bank's assets and resources.
e.
The highest level of confidentiality and fair dealing within and outside theBank.
A. General Standards of conduct
The Bank expects all Directors and members of the Core Management to
exercisegood judgment, to ensure the interests, safety and welfare of customers,
employeesand other stakeholders and to maintain a cooperative, efficient, positive,
harmoniousand productive work environment and business organization. The
Directors andmembers of the Core Management while discharging duties of their
office must acthonestly and with due diligence. They are expected to act with that
amount of utmostcare and prudence, which an ordinary person is expected to take
in his/ her ownbusiness. These standards need to be applied while working in the
premises of theBank, at offsite locations where business is being conducted
whether in India orabroad, at Bank-sponsored business and social events, or at any
other place wherethey act as representatives of the Bank.
B. Conflict of Interest
A "conflict of interest" occurs when personal interest of any member of the Board
of Directors and of the Core management interferes or appears to interfere in any
waywith the interests of the Bank. Every member of the Board of Directors and
CoreManagement has a responsibility to the Bank, its stakeholders and to each
other.Although this duty does not prevent them from engaging in personal
transactions andinvestments, it does demand that they avoid situations where a

conflict of interestmight occur or appear to occur. They are expected to perform

their duties in a waythat they do not conflict with the Bank's interest such as :

Employment /Outside Employment The members of the Core Managementare expected to devote their total attention
to the business interests of the Bank.They are prohibited from engaging in any
activity that interferes with theirperformance or responsibilities to the Bank or
otherwise is in conflict with orprejudicial to the Bank.

Business Interests If any member of the Board of Directors and CoreManagement considers
investment in securities issued by the Bank's customer,supplier or competitor, they
should ensure that these investments do notcompromise their responsibilities to the
Bank. Many factors including the size andnature of the investment; their ability to
influence the Bank's decisions, theiraccess to confidential information of the Bank,
or of the other entity, and thenature of the relationship between the Bank and the
customer, supplier orcompetitor should be considered in determining whether a
conflict exists.Additionally, they should disclose to the Bank any interest that they
have whichmay conflict with the business of the Bank.

Related Parties As a general rule, the Directors and members of the CoreManagement should
avoid conducting Bank' s business with a relative or anyother person or any firm,
Company, association in which the relative or otherperson is associated in any
significant role. Relatives shall include :
o
Father
o
Mother (including step mother)
o
Son's Wife
o
Daughter (including step daughter)

o
Father's father
o
Father's mother
o
Mother's mother
o
Mother's father
o
Son's son
o
Son's son's wife
o
Son's daughter
o
Son's daughter's husband
o
Daughter's husband
o
Daughter's son
o
Daughter's son's wife
o
Daughter's daughter
o
Daughter's daughter's husband
o

Brother (including step brother)

o
Brother's wife
o
Sister (including step sister)
o
Sister's husbandIf such a related party Transaction is unavoidable, they must fully
disclose the natureof the related party transaction to the appropriate authority. Any
dealings with arelated party must be conducted in such a way that no preferential
treatment is givento that party.In the case of any other transaction or situation
giving rise to conflicts of interests, theappropriate authority should after due
deliberations decide on its impact.
C. Applicable Laws
The Directors of the Bank and Core Management must comply with applicable
laws,regulations, rules and regulatory orders. They should report any inadvertent
non -compliance, if detected subsequently, to the concerned authorities.
D. Disclosure Standards
The Bank shall make full, fair, accurate, timely and meaningful disclosures in
theperiodic reports required to be filed with Government and Regulatory agencies.
Themembers of Core Management of the bank shall initiate all actions deemed
necessaryfor proper dissemination of relevant information to the Board of
Directors, Auditors
and other Statutory Agencies, as may be required by applicable laws, rules
andregulations.
E. Use of Bank's Assets and Resources
Each member of the Board of Directors and the Core Management has a duty to
theBank to advance its legitimate interests while dealing with the Bank's assets
andresources. Members of the Board of Directors and Core Management are
prohibitedfrom:

Using Corporate property, information or position for personal gain,

Soliciting, demanding, accepting or agreeing to accept anything of valuefrom any

person while dealing with the Bank's assets and resources,


Acting on behalf of the Bank in any transaction in which they or any of their
relative(s) have a significant direct or indirect interest.
F. Confidentiality and Fair Dealings
(i) Bank's confidential Information

The Bank's confidential information is a valuable asset. It includes all trade

relatedinformation, trade secrets, confidential and privileged information,
customerinformation, employee related information, strategies, administration,
research inconnection with the Bank and commercial, legal, scientific, technical
data that areeither provided to or made available each member of the Board of
Directors and thecore Management by the Bank either in paper form or electronic
media to facilitatetheir work or that they are able to know or obtain access by
virtue of their positionwith the Bank. All confidential information must be used for
Bank's businesspurposes only.

This information includes the safeguarding, securing and proper disposal

of confidential information in accordance with the Bank's policy on maintaining
andmanaging records. The obligation extends to confidential of third parties, which
theBank has rightfully received under non-disclosure agreements.

To further the Bank's business, confidential information may have to be disclosed

topotential business partners. Such disclosures should be made after considering
itspotential benefits and risks. Care should be taken to divulge the most
sensitiveinformation, only after the said potential business partner has signed
aconfidentiality agreement with the Bank.

Any publication or publicly made statement that might be perceived or construed

asattributable to the Bank, made outside the scope of any appropriate authority in
theBank, should include a disclaimer that the publication or statement represents
theviews of the specific author and not the Bank.
(ii) Other Confidential Information

The bank has many kinds of business relationships with many companies
andindividuals. Sometimes, they will volunteer confidential information about
theirproducts or business plans to induce the Bank to enter into a business
relationship.At other times, the Bank may request that a third party provide
confidentialinformation to permit the Bank to evaluate a potential business
relationship withthe party. Therefore, special care must be taken by the Board of
Directors andmembers of the Core Management to handle the confidential
information of others responsibly. Such confidential information should be handled
inaccordance with the agreements with such third parties.

The Bank requires that every Director and the member of Core
Management,General Managers should be fully compliant with the laws, statutes,
rules andregulations that have the objective of preventing unlawful gains of any
naturewhatsoever.

Directors and members of Core Management shall not accept any offer,
payment,promise to pay or authorization to pay any money, gift or anything of
value fromcustomers, suppliers, shareholders/ stakeholders etc that is perceived as
intended,directly or indirectly, to influence any business decision, any act or failure
to act,any commission of fraud or opportunity for the commission of any fraud.
4.
Good Corporate Governance Practices
Each member of the Board of Directors and Core Management of the Bank should
adhere to the following so as to ensure compliance with good
CorporateGovernance practices.
(a) Dos

Attend Board meetings regularly and participate in the deliberations

anddiscussions effectively.

Study the Board papers thoroughly and enquire about follow-up reports ondefinite
time schedule.

Involve actively in the matter of formulation of general policies.

Be familiar with the broad objectives of the Bank and policies laid downby the
Government and the various laws and legislations.

Ensure confidentiality of the Bank's agenda papers, notes and minutes.

(b) Don'ts

Do not interfere in the day to day functioning of the Bank.

Do not reveal any information relating to any constituent of the Bank toanyone.

Do not display the logo / distinctive design of the Bank on their personalvisiting
cards / letter heads.

Do not sponsor any proposal relating to loans, investments, buildings orsites for
Bank's premises, enlistment or empanelment of contractors,architects, auditors,
doctors, lawyers and other professionals etc.

Do not do anything, which will interfere with and/ or be subversive of maintenance

of discipline, good conduct and integrity of the staff.
5.
Waivers

Any waiver of any provision of this Code of Conduct for a member of theBank's
Board of Directors or a member of the Core Management must beapproved in
writing by the Board of Directors of the Bank.The matters covered in this Code of
Conduct are of the utmost importance to thebank, its stakeholders and its business

partners, and are essential to the Bank's ability toconduct its business in accordance
with its value system.

ENTREPRENEURSHIP
------------------------------------------------------Entrepreneurship
is the practice of starting neworganizations, particularly newbusinessesgenerally in
response to identified opportunities. Entrepreneurship is often adifficult
undertaking, as a majority of new businesses fail. Entrepreneurial activities
aresubstantially different depending on the type of organization that is being
started.Entrepreneurship may involve creating many job opportunities.
Many "high-profile" entrepreneurial ventures seek venture capitalorangel
fundingin order to raisecapitalto build the business. Many kinds of organizations
now exist to support would-be entrepreneurs, including specialized government
agencies,business incubators,science parks, and someNGOs. Our understanding of
entrepreneurship owes a lot to the work of economistJoseph Schumpeterand
theAustrian Schoolof economics. For Schumpeter (1950), an entrepreneur is a
person who is willing and able to convert a new idea orinventioninto
asuccessfulinnovation. Entrepreneurship forces "creative destruction" across
markets and industries, simultaneously creating new products andbusiness
modelsand eliminatingothers. In this way, creative destruction is largely
responsible for the dynamism of industries and long-run economic growth. Despite
Schumpeter's early 20th-centurycontributions, the traditionalmicroeconomictheory
of economicshas had little room for entrepreneurs in their theories

Characteristics of entrepreneurship:
The entrepreneur, who has a vision and the enthusiasm for this vision, is thedriving
force of an entrepreneurship

The vision is usually supported by a set of ideas that have not been awared by
themajority of the market/industry

The overall blueprint to realize the vision is clear, however details may
beincomplete, flexible, and evolving

The entrepreneur promotes the vision with an influential passion

With a persistent and deterministic mindset, the entrepreneur devises a set

of entrepreneurial strategies to thrive for the vision

Conclusion:We began by asserting that individual entrepreneurs get too much credit andblame
for the fate of new ventures. We also emphasized that successful entrepreneurs are

those who can develop the right kinds of relationships with others inside and
outside theirfirm. Our perspective suggests that, in trying to predict which
entrepreneurs will succeedor fail, instead of turning attention to the characteristics
of individual founders and CEOs,researchers and teachers would be wiser to turn
attention to the other people theentrepreneur spends time with and how they
respond. Our perspective also implies thatthe format of the "Entrepreneurs of the
Year" competition described at the outset of thischapter ought to be changed.
Rather than using such events to recognize individual CEOsor founders from
successful start-ups, awards could be presented to recognize theintertwined group
of people who made each start-up a success.

PERFORMANCE AND BENCHMARKING

--------------------
PERFORMANCE MANAGEMENT:-

Performance management is a systematic approach to improving

workerproductivity through a year-round, ongoing process of communicating and
managingperformance expectations. With Performance-based Management,
performanceimprovement becomes the joint responsibility of employees and their
managers.Generally there are two things which determine how successful a
performance appraisalsystem is in place in an organization.1) The contents/design
of the performance appraisal form and2) The manner in which Performance
Appraisal is conducted.While organizations lay great emphasis on the
contents/design part, spendingmuch of time, money and energy on designing most
suitable, objective, comprehensiveformats, it serves no purpose if the appraising
process is not conducted properly.Performance-based Management measures,
evaluates and improves performanceon the job. You can expect employee
productivity to increase because performanceassessments and performance
feedback will always be job-related, even if the duties of aparticular job expand or
change. Furthermore, because this type of performancemanagement focuses on
productivity and not personality and since it involves ongoing,open, two-way
communication between manager and employee, it greatly reduces manyof the
stereotypes, problems and anxieties associated with traditional labor-intensive
annual performance reviews. In other words, the desired outcomes of
performancemanagement can happen more easily and quickly.

LITTLE BASIC OF BENCHMARK:A

benchmark
is a point of reference for a measurement. The term presumablyoriginates from the
practice of making dimensional height measurements of an object ona workbench
using a graduated scale or similar tool, and using the surface of theworkbench as
the origin for the measurements.Insurveying,
benchmarks
are landmarks of reliable, precisely-known altitude,
and are often man-made objects, such as features of permanent structures that
areunlikely to change, or special-purpose "monuments", which are typically small
concreteobelisks, approximately 3 feet tall and 1 foot at the base, set permanently
into the earth.Incomputing, a
benchmark
is the result of running acomputer program, or a set
of programs, in order to assess the relative performance of an object, by running
anumber of standard tests and trials against it. The term is also commonly used

forspecially-designed benchmarking programs themselves. Benchmarking is

usuallyassociated with assessing performance characteristics of computer
hardware, e.g., thefloating point operation performance of aCPU, but there are
circumstances when thetechnique is also applicable to software. Software
benchmarks are, for example, runagainstcompilersordatabase management
systems.
Benchmarks provide a method of comparing the performance of
varioussubsystems across different chip/system architectures.Ascomputer
architectureadvanced, it became more and more difficult to compare
the performance of various computer systems simply by looking at their
specifications.Therefore, tests were developed that could be performed on different
systems, allowingthe results from these tests to be compared across different
architectures. For example,Intel Pentium 4processors have a higher hertz rating
than AMDAthlon XPprocessors for the same computational speed, in other words
a 'slower' AMD processors could be asfast on benchmark tests as a higher hertz
rated Intel processors.Benchmarks are designed to mimic a particular type of
workload on a componentor system. "Synthetic" benchmarks do this by speciallycreated programs that impose theworkload on the component. "Application"
benchmarks, instead, run actual real-world

programs on the system. Whilst application benchmarks usually give a much

bettermeasure of real-world performance on a given system, synthetic benchmarks
still havetheir use for testing out individual components, like ahard disk or
networking device.Computer manufacturers have a long history of trying to set up
their systems to giveunrealistically high performance on benchmark tests that is not
replicated in real usage.For instance, during the 1980s some compilers could detect
a specific mathematicaloperation used in a well-known floating-point benchmark
and replace the operation witha mathematically-equivalent operation that was
much faster. However, such atransformation was rarely useful outside the
benchmark. Manufacturers commonly reportonly those benchmarks (or aspects of
benchmarks) that show their products in the bestlight. They also have been known
to mis-represent the significance of benchmarks, againto show their products in the
best possible light. Taken together, these practices are called
bench-marketing.
Users are recommended to take benchmarks, particularly those provided
bymanufacturers themselves, with ample quantities of salt. If performance is really
critical,the only benchmark that matters is the actual workload that the system is to
be used for. If that is not possible, benchmarks that resemble real workloads as
closely as possibleshould be used, and even then used with skepticism. It is quite
possible for system A tooutperform system B when running program "furble" on
workload X (the workload in thebenchmark), and the order to be reversed with the
same program on your own workload.

BENCHMARKING:Benchmarking (Comparing) is a selective method of finding out how and whysome

companies can perform tasks much better than other companies. There can be
asmuch as a tenfold difference in the quality, speed and cost-performance of an
averagecompany versus a world-class company.
It involves the following seven steps
1)
Determine functions to benchmark.
2)
Identify the key performance variables to measure.
3)
Identify the best-in-class companies.

4)
Measure performance of best-in-class companies
5)
Measures the company's performance.
6)
Specify programs and actions to close the gap
7)
Implement and monitor resultsA company can identify "best practices" companies
by asking employees,customers, suppliers and distributors what they rate as doing
the best. Major ConsultingFirms can also be contacted for this purpose. To keep
costs under control, a companyshould focus primarily on benchmarking those

critical tasks that deeply affect customersatisfaction and Cost Management and
where substantially better performance is knownto exist.

What is benchmarking? What is it valuable?

Benchmarking is finding and implementing best practices with a view toimproving
organizations Competitive position. Benchmarking is valuable as it providesinsight
into superior management practices, sets achievable Standards and targets
beforethe work-groups, and instill a spirit of competition.

BENCHMARKING
:The purpose of benchmarking is to improve the organizations competitiveposition
and its learning Abilities. This perspective goes well with the
unauthorizeddefinition.
The practice of being humble enough toAdmit that someone else is better at
something,And wise enough to learn how to match and even surpass...

Operationally defined, benchmarking is:

Finding and implementing best practices

An ongoing process of measuring and improving companys products, servicesand

practices against

Those companies that distinguish themselves in that same category

of performance.

The first step in creating the recognition that changes and improvements
areneeded.

Why is benchmarking valuable?


Benchmarking helps in three ways:

Providing breakthrough insights by examining superior management practices.

Inspiring people by demonstrating: We cant .... but others are ...

Setting objective targets by highlighting the gaps between us and

them.Benchmarking as a quality tool is simple to apply and does not require
advanceand sophisticated techniques. More importantly, this process can provide
an externalstimulus to encourage a reflective environment of continuous learning.
A powerfullearning experience such as benchmarking can be a vehicle for creating
sustainablebusiness solutions. This type of learning parallels Peter Senges
description of a learningorganization as one that is continually expanding its
capacity to create its future.Benchmarking facilitates learning.
Benchmarking
is a process used inmanagementand particularlystrategic
management, in which businesses use industry leaders as a model in developing
their
business practices. This involves determining where you need to improve, finding
anorganization that is exceptional in this area, then studying the company and
applying it'sbest practices in your firm. Benchmarking systematically studies the
absolute best firms,then uses their best practices as the standard of comparison, a
standard to meet or evensurpass.Benchmarking recognizes that no company is
exceptional at everything. That iswhy it is an ongoing process involving firms from
any industry and any country. It is nota one-shot event. There is no room for
complacency. Benchmarking requires that youconstantly search for better
solutions. The rationale is, If you continuously search for bestpractices in the best
firms around the world, you should become an exceptional company.Every
function and task of your business can be benchmarked, from production,
tomarketing, to purchasing, to information technology management, to customer
service.Some authors call benchmarking "best practices benchmarking" or
"processbenchmarking". This is to distinguish it from what they call "competitive
benchmarking".
Competitive benchmarking
is used incompetitor analysis. When researching your

direct competitors you also research the best company in the industry (even if it
serves a

different location ormarket segmentand is therefore not a direct competitor). This

benchmark company is then used as a standard of comparison when assessing your
directcompetition and yourself. A process similar to benchmarking is also used in
technicalproduct testing and in land surveying. See the articlebenchmark for these
applications.

PROCEDURE
:Identify your problem areas
Because benchmarking can be applied to any business process or function, arange
of research techniques may be required. They include: informal conversations

withcustomers, employees, or suppliers;exploratory researchtechniques such

asfocus
groups; or in-depthmarketing research,quantitative
research,surveys,questionnaires,
reengineering analysis, process mapping, quality control variance reports, or
financial
ratio analysis.
Identify organizations that are leaders in these areas
Look for the very best in any industry and in any country. Consult
customers,suppliers, financial analysts, trade associations, and magazines to
determine whichcompanies are worthy of study.
Study their best practices
An initial study can be done at a good university library or online. This will
giveyou an overview; however more detailed information will require an in-person
visit.Phone the CEO and ask if a group of your managers and employees can visit
theiroperations for an hour. Be forthright as to the purpose of the visit. Most CEOs
will beflattered and agree to the request. Make it clear that any information
obtained from thevisit will be shared with them. Determine what subject areas will
be off-limits. Ask if camera or video recorders are acceptable. Prepare two lists
well in advance: a list of yourobjectives, and a list of questions. Choose 2 to 5
visitors, people that are closest to theissue, that will be responsible for
implementing any recommendations, and cover a broadrange of functional
responsibilities. Occasionally an outside consultant is included in thevisit team so
as to provide an alternative perspective. Meet with your employees toexplain the
purpose of the visit and assign one or two questions to each employee.Explain
what subject areas are off limits. Ask them to think about how the visit
couldbenefit their area, and ask them to device more questions. Stay away from
questions thatcould cause legal problems (eg. price fixing or new product
development). Send a

confirmation letter one week before the visit stating the date, time, and location of
thevisit, the number of visitors and their positions, your objectives, and a list of
possiblequestions. Visits are typically 1 to 3 hours long. When at the site, provide a
token gift toshow that you appreciate the opportunity, keep focused on your
objectives, give praisewhere it is due, and do not criticize. Look for anything
remarkable or unexpected. Assoon as you get back to your office (or hotel), have
an immediate debriefing. Discusswhat you have learnt and how you can apply it.
Make sure that every visitor has an actionplan detailing how they will be
implementing the new information in their job. Someformal analysis (such as
process mapping) of the benchmarked process may be necessary.After several
weeks, phone back the CEO to express your appreciation and give
concreteexamples of how the knowledge gained from the visit will be used in your
company.Send them a copy of any written reports about the visit before they are
distributed. Thisallows them to correct inaccuracies and modify sensitive or
proprietary information.
Implement the best practices
Delegate responsibility for actions to individuals orcross-functional teams.
Setmeasurable goals that are to be accomplished within a specified time frame.
Monitor theresults. Get key personnel to give you a brief (one page) summary of
how theimplementation is proceeding. Spread the information through out the
entire organization.
Repeat
Benchmarking is an ongoing process. Best practices can always be made better.

BENCHMARKING THE INDIAN BANKING SYSTEM BYINTERNATIONAL

STANDARDS:The impetus given to the strengthening of domestic financial systems and
theinternational financial architecture by the Asian crisis has gathered momentum
in recentyears. An important development In this regard has been the move to set
up universallyacceptable standards and codes for benchmarking domestic financial
systems. Moreover,multilateral assessments of country performance are
increasingly focusing on observanceof standards. The IMFs Article IV
consultations, its Financial Sector StabilityAssessment and the Reports on
Observance of Standards and Codes of the IMF and theWorld Bank are indicative
of the fact that a countrys adherence to benchmark standardsand codes is being
considered integral to the preservation of international monetary and

financial stability. While the process has begun with the predominant involvement
of governments and regulators, the search for standards and codes is
progressivelyencompassing the private sector with consideration of issues relating
to market discipline,corporate governance, insolvency procedures and credit rights.
It is important torecognize that new standards and codes are not being regarded as
final goals but asinstruments or enabling conditions for enhancing efficiency in
financial intermediationwhile ensuring financial stability. There are three levels at
which action is necessary,
viz.
,legal, policy and procedures, and market practices by participants. In several
areas,fundamental changes in the legal and institutional infrastructure are prerequisites. Sincethese changes can impinge upon the socio-cultural as well as
politico-economic ethos,appropriate adoption and some prioritization in

implementation are unavoidable.We have made some noteworthy progress in

generating a constructive debate onthe applicability of international standards and
codes to the Indian financial system.Participative consultation has been supported
by internal self-assessments as well asexternal assessment. In several areas, the
issues are of a technical nature. Accordingly,the Standing Committee on
International Standards and Codes, set up in December 1999,constituted ten
Advisory Groups comprising eminent experts, generally nonofficial, tobring
objectivity and experience into studying the applicability of relevant
internationalcodes and standards to each area of competence.The Advisory Groups
have submitted their reports. They have set out a roadmapfor implementation of
appropriate standard and codes in the light of existing levels of compliance, the
cross-country experience, and the existing legal and institutionalinfrastructure. The
Advisory Group on Banking Supervision has assessed the Indianbanking system
vis--vis
the principles of the Basel Committee on Banking Supervision.It has found the
level of compliance to be generally of a high order. The Advisory Groupon
Bankruptcy Laws has,
inter alias,
recommended a comprehensive bankruptcy codeincorporating various aspects
including cross-border insolvency and the repeal of theSick Industrial Companies
Act. The Advisory Group on Corporate Governance has maderecommendations
relating to rules and responsibilities of boards and has advisedamendments to the
Companies Act. The Advisory Group on Data Dissemination hasfound that Indias
data dissemination compares favorably with many other countries andhas proposed
the compilation of forward-looking indicators. The Advisory Group onFiscal
Transparency is of the view that current fiscal practices meet the IMFs Code of
Good Practices on Fiscal Transparency. It has recommended amplifying the scope
of fiscal responsibility legislation in order to include the essential elements of a
budget law.The Advisory Group on Insurance regulation has recommended flexible
minimum capitalrequirements depending on the class of business. With regard to
actuarial and solvencyissues, the Group has found the Indian standards to be at par
with international norms.The Advisory Group on International Accounting and
Auditing Standards has set out anagenda for the future for convergence in auditing
and accounting practices. It hasrecommended a single standard setting authority
and the need for convergence of corporate and tax laws. The Advisory Group on
Transparency in Monetary and FinancialPolicies has recommended inflation as the
single mandated objective for the central bank and necessary autonomy to fulfill
the mandate. It has also made recommendations on theoperating procedures of
monetary policy. The Advisory Group on Payments andSettlement has
recommended legal reforms to empower the Reserve Bank to supervisethe

payment and settlement system, application of the Lamfalussy standards to

deferrednet settlement (DNS) and introduction of Real Time Gross Settlement
(RTGS). It has alsorecommended the setting up of the Clearing Corporation and a
separate guarantee fundfor foreign exchange clearing. The Advisory Group on
Securities Market Regulation hascompared India against the International
Organization of Securities Commissions(IOSCO) principles and emphasized the
need to strengthen inter-regulator cooperation.Thus, in India, we have made
considerable progress in the identification of international standards and codes in
relevant areas, expert assessment regarding theirapplicability, including comparator
country evaluation and building up possible course of action for the future. The
next step is to sensitize all concerned policy makers,regulators and market
participants to the issues involved and to seek the widest possibledebate on issues
as well as expert assessments with a view to generating a broadconsensus on
implementation of a universally recognized set of codes and standards.
Benchmark PLR
Sr.No Banks1
Public Sector Banks
2
Associate Banks of SBI
3
Private Sector Banks
4
Foreign Banks
5
Co-operative BanksAbove all banks prime lending rate benchmark is as follows:

Benchmark Prime Lending Rates (New): Public Sector Bank

Sr.No Name of the Bank W.E.F.NewBPLROldPLRDifference inBasis Points1
Allahabad Bank 1/1/2004 11 11.5 502 Andhra Bank 2/5/2006 11 10.5 503 Bank
of Baroda 1/5/2006 11 10.75 254 Bank of India 1/5/2006 11.25 10.75 505 Bank
of Maharashtra 18/11 / 2004 11.25 11 256 Canara Bank 5/5/2006 11.25 10.75
507 Central Bank of India 15/5 / 2006 11.5 11 508 Corporation Bank 1/5/2006
11.25 11.5 259 Dena Bank 1/6/2006 11.5 11 5010 Indian Bank 1/6/2006 11.5 11

5011 Indian Overseas Bank 1/5/2006 11.5 11 5012Oriental Bank

of Commerce15/5 / 2006 11.5 11 5013 Punjab & Sind Bank 1/5/2006 11.5 0 014
Punjab National Bank 1/5/2006 11.25 11 2515 Syndicate Bank 16/5 / 2006
11.25 11 2516 UCO Bank 2/5/2006 11.5 11 5017 Union Bank of India 1/5/2006
11.25 11 2518 United Bank of India 1/5/2006 11.25 10.75 5019 Vijaya Bank
10/5/2006 11.25 11 2520Industrial DevelopmentBank of India (IDBI)22/5 /
2006 11 10.5 5021 State Bank of India 1/5/2006 10.75 10.25 50
Benchmark Prime Lending Rates (New): Associate Bank of SBI
Sr.No Name of the Bank W.E.F.NewBPLROldPLRDifference inBasis
Points1State Bank of Bikaner &Jaipur8/5/2006 11.25 10.75 502 State Bank of
Hyderabad 1/5/2006 11.5 11 503 State Bank of Mysore 22/5 / 2006 11.5 11 504
State Bank of Patiala 1/5/2006 11 10.5 505 State Bank of Saurashtra 8/5/2006
11.5 11 506 State Bank of Travancore 1/1/2004 11 11.5 50
Benchmark Prime Lending Rates (New): Private Banks of India
Sr.No Name of the Bank W.E.F.NewBPLROldPLRDifference inBasis Points

1Bharat Overseas BankLtd.1/6/2006 11.75 11 752Centurion Bank of

PunjabLimited1/3/2004 11.53 City Union Bank Ltd. 1/1/2004 12 12.5
504Development Credit BankLtd.15/6 / 2006 14.25 14 255 ICICI Bank
Limited 1/1/2004 10.5 10.5 06 Lord Krishna Bank Ltd. 1/4/2006 12.5 12.5
07SBI Commercial andInternational Bank Ltd.1/1/2004 11.58Tamilnad
MercantileBank Ltd.1/1/2004 12 12.25 259The Bank of
RajasthanLimited1/5/2006 12.5 11.75 7510The Dhanalakshmi
BankLimited.1/5/2006 13 0 011 The Federal Bank Ltd. 1/5/2006 12 0 012The
Ganesh Bank of Kurundwad Ltd.1/10/2004 10.5 0 013 The HDFC Bank Ltd.
14/6 / 2006 11.5 12 5014The Jammu & KashmirBank Ltd.1/1/2004 1115
Karnataka Bank Ltd. 1/1/2004 12 0 016The Karur Vysya BankLtd.1/1/2004
12.5 12.5 017The Lakshmi Vilas BankLtd.1/1/2004 12.5 12.5 018 The Nainital
Bank Ltd. 1/4/2006 11.5 0 019 The Sangli Bank Ltd. 1/5/2006 12 0 020The
South Indian BankLtd.1/5/2006 13.5 0 021The United Western
BankLtd.1/5/2006 12.5 11.5 10022 ING Vysya Bank Ltd. 15/1 / 2004 11.25 11.5
2523 UTI Bank Ltd. 14/3 / 2006 13 12 10024 The Ratnakar Bank Ltd. 1/1/2004
11.525Kotak Mahindra BankLimited1/4/2006 14.5 13 150

Benchmark Prime Lending Rates (New): Foreign Banks

Sr.No Name of the Bank W.E.F.NewBPLROldPLRDifference inBasis Points1
ABN AMRO Bank N.V. 15/3 / 2004 12.75 16 3252American Express
BankLtd.1/5/2006 12.5 0 03Arab Bangladesh BankLimited15/9 / 2003 11 12
1004Bank InternationalIndonesia1/5/2006 11 0 05 Bank of America N.A.
1/1/2004 13.56Bank of Bahrain &Kuwait BSC1/1/2004 12.57 BNP PARIBAS
1/5/2006 12 0 08 Citibank N.A. 1/5/2006 12.75 0 09Oman International BankS
A O G1/8/2003 11.5 13.5 20010 Societe Generale 1/3/2004 11 12 10011
Standard Chartered Bank 1/5/2006 12 0 012 The Bank of Nova Scotia 1/2/2004
14 14 013The Hong Kong &Shanghai BankingCorporation Ltd.1/5/2006 13 0
014Mizuho Corporate BankLtd.1/1/2004 11 13.5 15015Krung Thai Bank
PublicCompany Limited1/5/2006 10 0 0
Benchmark Prime Lending Rates (New): Co-operative Banks
Sr.No Name of the Bank W.E.F.NewBPLROldPLRDifference inBasis
Points1Bombay Mercantile Co-op. Bank Ltd.1/5/2006 11 0 02Rajkot Nagarik
SahakariBank Ltd.1/6/2006 12 12.75 753 Rupee Co-op. Bank Ltd. 1/5/2006 11
0 04The Karad Urban Co-op.Bank Ltd.1/5/2006 10.5 0 0

5The Shamrao Vithal Co-op. Bank Ltd.1/5/2006 11.5 0 06The Zoroastrian Cooperative Bank Limited1/5/2006 11 0 0


INTRODUCTION
-------------------------------------------------------------- In my inaugural address last year, I had
indicated a vision for Indian banking inthe new millennium that of a vibrant,
internationally active banking system, drawingupon its innate strengths and
comparative advantages to make India a major bankingcentre of the world. I had
pointed out then that, while it may take up to 10 or even 15years to achieve this
vision, the time to begin was now. Recent developments have onlyserved to bring
forward the urgency attached to embarking upon this quest. Even as wedo so, it is
necessary to recognize that, in view of recent global developments and
theeconomic slowdown, the progress towards this goal would call for even greater
effort anddetermination. In this context, the theme chosen for this years
Conference
i.e.
, "IndianBanking: Paradigm Shift" is most timely as it provides an opportunity to
deliberate on thenew challenges ahead, and the action that we must take to manage
them. I am happy to bea part of these deliberate ions and to deliver the inaugural
address to the 23rd Conferenceof Bank Economists here today.As you are aware,
global economic prospects turned sharply adverse sinceSeptember 2001 following
the terrorist attacks on the US. The possibilities of a recoveryin the global economy
have become highly uncertain, belying the initial expectations of aV-shaped
recovery as well as the subsequent hopes of a U-shaped recovery. As of now,the
consensus of forecasts settles around 2.4 per cent for world GDP growth for
2001.World trade volume growth could slow down to around 1.3 per cent and net
capitaloutflows from developing countries may now be larger than anticipated
earlier. Althoughthe sharp spurt in international oil prices has abated, their future
behavior remainsunclear. Macroeconomic weaknesses have also been associated
with an erosion of business confidence. Insurance, airlines, tourism and hotel
industries have been hit hardand the exposure of financial institutions to these
industries can be a potential source of vulnerability.Despite the relatively inwardlooking nature of the Indian economy, it cannotremain insulated from these
international developments. The direct effects of theseexternal developments on
our banking system are expected to be limited. Indirect effects,especially through
exports and subdued industrial activity could, however, impact upon
the asset quality of our banking system and other segments of the financial system.
Theneed to constantly monitor international developments and take appropriate
and often,preemptive action add an entirely new dimension to the progress of our
banking systemtowards its longer-term vision.We have made considerable progress
in implementing banking and financialsector reforms. There is also some

improvement in the financial performance of thebanking system in terms of

various indicators of operating efficiency. Nevertheless, thereare several areas
regarding the efficiency of our banking system rather than its stability that raise
concerns, especially during a period of generalized uncertainty. The level of nonperforming assets (NPAs) continues be high by international standards,
preemptingfunds for provisioning and eating into the performance and profitability
of financialintermediaries. The response to the debt recovery and asset
restructuring initiativesundertaken as part of financial sector reforms has also been
slow.In the period ahead, our financial system will also have to prepare for a
tighteningof the prudential norms as the new Basel Accord becomes effective and a
fuller responseto the current financial environment emerges. Our financial
institutions continue to besusceptible to financial market turbulence, especially in
the equity market. Upgradingtechnical skills, technology, research and human
capital, developing effective front-office strategies and fortifying internal rules of
governance and responsibility assumes arenewed priority in the fast changing
scenario.The face of banking, as we have known it, is also changing rapidly. India
isapproaching an era of financial conglomorisation and bundling in the provision
of financial services. Besides infusing heightened competition, there are
implications for theregulatory and supervisory regime. Banks and financial
institutions have to prepare forchanges in the regulatory framework towards a more
focused, comprehensive andefficient environment that eschews regulatory
forbearance. Legal reforms accordinglywill have to ascend the hierarchy of
priorities in the reform process.Against this background, in this talk, I propose to
focus on the main challengesfacing Indian banking, such as, the role of financial
intermediation in different phases of the business cycle, the emerging compulsions
of the new prudential norms, andbenchmarking the Indian financial system against
international standards and bestpractices. I will also say a few words about the
changing context of regulation andsupervision of the financial system in India, the
need for introducing new technology in
the banking and financial system, and the importance of strengthening skills
andintellectual capital formation in the banking industry.

RECENT MACROECONOMIC DEVELOPMENTS AND THEBANKING

SYSTEM
-----------------------------------------------------------------------------For a greater part of the
twentieth century, the role of the financial system wasperceived as mobilizing the
massive resource requirements for growth. Since the 1970sand 1980s, development
economics underwent a paradigm shift. The financial system isno longer viewed as
a passive mobiliser of funds. Efficiency in financial intermediation

i.e.
, the ability of financial institutions to intermediate between savers and investors,
toset economic prices for capital and to allocate resources among competing
demands isnow emphasized. Developments in endogenous growth theory since the
late 1980sindicate that efficiency in financial intermediation is a source of
technical progress to beexploited for generating increasing returns and sustaining
high growth. These changeshave provided the rationale for many developing
countries to undertake wide-rangingreforms of their financial systems so as to
prepare them for their true resource allocationfunction. As important financial
intermediaries, banks have a special role to play in thisnew dispensation.The sharp
downturn in global macroeconomic prospects and the continuingsluggishness in
domestic industrial activity have necessitated a revision in the forecast forIndias
real GDP growth in 2001-02 from 6.0-6.5 per cent expected at the time of theApril
2001 Monetary and Credit Policy Statement to 5.0-6.0 per cent in the midtermreview of the policy. The downward revision is primarily predicated on the
outlook forthe industrial sector which grew by barely 2.2 per cent in April-October
2001 as against5.9 per cent in the corresponding period of last year, mainly on
account of the slowdownin manufacturing and mining and quarrying. Capital
goods production declined by asmuch as 6.6 per cent and several sectors recorded
a slow down in growth rate or anabsolute decline. On the other hand, agriculture
sector, supported by reasonablemonsoon, recorded a rebound in growth. The
kharif
output is expected to cross a newpeak of 105.6 million tonnes and prospects for the
Rabi
crop are also good. On theexternal front, merchandise exports increased marginally
by 0.5 per cent in the first eight
months of 2001-02. While oil imports fell by 13.4 per cent, the non-oil imports
showedan increase of 8.4 per cent. Despite a moderate widening of the trade
deficit, continuingbuoyancy in net invisible receipts has kept the current account
deficit very low.According to available data, net capital flows are also likely to be
of a higher order thanin the preceding year. Foreign exchange reserves rose to US $
48.0 billion as onDecember 28, 2001 recording an accretion of the order of the US
$ 5.8 billion over theend-March 2001 level.In the context of the recent deceleration
in the economy the intermediation roleassumes even greater relevance. Banks and
financial institutions should endeavor to playa supply-leading rather than
demand-following role in initiating the upturn byenergizing the financial
intermediation process. By virtue of a birds eye view of theeconomy and their
superior credit assessment of the investment proposals and theefficiency of capital,
banks should endeavor to economies on search costs in identifyingand nurturing
growth impulses in the commodity and service producing sectors of theeconomy.In

the recent period, monetary policy in India has also moved into a counter-cyclical
stance signaled by cuts in key interest rates and cash reserve requirements. At
thesame time, market operations have ensured adequate liquidity to support the
revival of aggregate demand with a clear preference for softening of interest rates
within the overallinstitutional constraints on the interest rate regime. Inflation has
been steadily falling andthis has had a positive impact on inflation expectations,
along with the underlyingresilience of the macroeconomic fundamentals of the
Indian economy. The 50 basis pointreduction in the Bank Rate and the 200 basis
point reduction in the CRR, announcedrecently, are expected to significantly
enhance the lend able resources of the bankingsystem.The current situation of
comfortable liquidity provides an opportunity for banks totransform idle liquidity
into investigable resources for growth. The easy interest rateenvironment would
make it possible for banks to price in projects which would haveearlier remained
unfunded due to inherently lower returns to capital or due to lack of access to
prime lending rates. This will, however, require reassessment of portfolios
andinternal liquidity constraints, even adjustments in risk profiles and risk
management. Thedeceleration in the industrial growth scenario, of course, opens
up the moral hazard of adverse selection and the possibilities of large-scale
contamination of portfolios. In a
situation of generalized slowdown, unviable projects can look potentially bankable
giventhe scarcity of investment avenues.Nevertheless, the possibilities for financial
intermediation in the current situationare too varied and challenging to ignore.
There is no systematic evidence that financialsector reforms by themselves and
without supportive policies in other areas, cancontribute to a revival of the
economy; yet this is a time when the responsibility on thefinancial system to
contribute to the process of economic revival is greater than before.Periods of
downturn in economic activity also provide opportunities for banks toundertake
consolidation and strengthening. There is a strong complementarily
betweenfinancial stability and macroeconomic stability. The interests of both are
served by astable and resilient financial system.In recent years, various measures
have been taken to improve the functioning of different segments of the financial
markets and thereby, to improve the operationaleffectiveness of monetary policy.
The Liquidity Adjustment Facility (LAF), which wasintroduced in June 2000, has
emerged as an effective and flexible instrument formanaging liquidity on a day-today basis. In the second stage of the LAF, whichcommenced from May 2001,
variable rate repo auctions replaced the collateralizedlending facility and Level I
support to primary dealers. Standing facilities wererationalized and a back-stop
facility was introduced at variable market-related rates.Concurrently, LAF
operating procedures were recast to improve operational flexibilityand
complementary measures were undertaken to improve the functioning of money

andgovernment securities market segments and to facilitate their orderly

integration.In order to enable the call money market to evolve into a pure interbank market,lending by non-banks was reduced to 85 per cent of their average
daily call lending in2000-01 from May 2001. The minimum maturity for wholesale
term deposits of Rs.15lakh and above has been reduced to 7 days from the earlier
minimum maturity of 15 days.The maintenance of daily minimum cash reserve
requirements has been lowered to 50 percent from 65 per cent for the first seven
days of the reporting fortnight. Interest paid oneligible balances under CRR has
been raised to the level of the Bank Rate fromNovember 3, 2001. The market has
responded positively with an appreciable rise inturnover and a decline in
volatility.Several measures have also been taken to improve the functioning of
thegovernment securities market. 14-day and 182-day Treasury Bills were
withdrawn and
the notified amount of 91-day Treasury Bills has been simultaneously increased.
ANegotiated Dealing System (NDS) is being introduced to facilitate electronic
bidding andto disseminate information on trades on a real-time basis. For this
purpose, the ReserveBank has begun the automation of its public debt offices. An
important step is the settingup of the Clearing Corporation of India Ltd. (CCIL) to
act as counterparty in all tradesinvolving government securities, Treasury Bills,
repos and foreign exchange. The entiresystem will operate in a networked
environment and Indian Financial Network (INFINET) will provide the backbone
for communication.

PRUDENTIAL NORMS
--------------------------------------------------------A
strong and resilient financial system and the orderly evolution of financialmarkets
are key prerequisites for financial stability and economic progress. In keepingwith
the vision of an internationally competitive and sound banking system,
deepeningand broadening of prudential norms to the best internationally
recognized standards havebeen the core of our approach to financial sector
reforms. This has been supportedconcurrently by heightened market discipline,
pro-active and comprehensive supervisionof the financial system and the orderly
development of financial market segments. Thecalibration of the convergence with
international standards is conditioned by the specificrealities of our situation;
however, the New Capital Accord of the Basel Committee onBanking Supervision
which was released in January 2001 adds urgency to the process of convergence. It
is against the backdrop of these exigencies that prudential norms arebeing
constantly monitored and refined. In the recent period, banks are being

encouragedto build risk-weighted components of their subsidiaries into their own

balance sheets andto assign additional capital. Risk weights are being constantly
refined to take intorecognition additional sources of risk. The concept of past due
in the identification of NPAs has been dispensed with. Banks and financial
institutions are being urged toprepare to move to the international practice of the
90 day norm in the classification of assets as non-performing by 2003-04.The
new Basel Accord, as contained in the second Consultative Paper on
CapitalAdequacy of the Basel Committee on Banking Supervision released in
January 2001 is inresponse to the perceived rigidities in the 1988 Accords capital
requirements, the scope
for capital arbitrage and the increased sophistication in the measurement
andmanagement of risk. The new Accord rests on three mutually reinforcing pillars
i.e.
,minimum capital requirements, processes of supervisory review and market
discipline.Under the first pillar, the current definition of capital and the minimum
requirement of 8per cent of capital to risk weighted assets is retained. Capital
requirements would beextended on a consolidated basis to holding companies of
banking groups.The primary emphasis of the new Accord is on improving the
measurement of risk. The process of measurement of market risk is maintained.
Three alternatives forcalculating credit risk capital requirements are proposed to be
made available to banks,depending on the complexity of their business and the
quality of their risk managementoperations. The standardized approach which can
be employed by less complex banksremains conceptually the same as in the 1988
norms; however, it expands the scale of risk weights and uses external credit
ratings to categories credits. Banks with more advancedrisk management
capabilities can employ an internal ratings based (IRB) approach foundation and
advanced variants are proposed on a progression scale in whichbanks may
categories exposures into multiple credit ratings of their approved internalrating
systems. The internally estimated probability of default, the maturity of
exposureand the credit type
i.e.
, corporate or retail, will determine risk weights. There is a newexplicit capital
charge proposed on operational risk.The processes of supervisory review contained
in the second pillar emphasize theneed for banks to develop sound internal
procedures to assess the adequacy of capitalbased on a thorough evaluation of its
risk profile and control environment, and to setcommensurate targets for capital.
The internal processes would be subject to supervisoryevaluation, review and
intervention, when appropriate. The third pillar aims at bolsteringmarket discipline
through enhanced disclosure by banks. Disclosure requirements are setout in
several areas under the new Accord, including the way in which banks

calculatetheir capital adequacy and their risk assessment methods.The Basel

Committee on Banking Supervision has received more than 250comments on the
January 2001 proposals. The Committee is expected to release a fullyspecified
proposal, based on these comments, in early 2002 and to finalize the Accordduring
2002. An implementation date of 2005 is envisaged. The Reserve Bank
forwardedits comments to the Basel committee in May 2001. It has supported
flexibility, discretionto national supervisors and a phased approach in
implementing the Accord. The Accord
could initially apply to internationally active banks with over 15 per cent of
theirbusiness in cross-border transactions, as proposed by the Reserve Bank and
significantbanks whose domestic market share exceeds 1 per cent with a
simplified standardizedapproach to be evolved for other banks. Material limits on
cross-holdings of capital andeschewing of direct responsibility on external credit
rating agencies in the assessment of bank assets have also been proposed by the
Reserve Bank. It has also expressed itspreference for external credit rating
agencies that publicly disclose risk scores, ratingprocesses and methodologies.The
new accord, when implemented, is likely to have significant implications forthe
banking system as a whole. Besides requiring increased capital, it attaches urgency
tothe development of efficient and comprehensive internal systems for assessment
andmanagement of risks, setting up and adhering to adequate internal exposure
limits andimproving internal control generally. The guidelines for risk management
and assetliability management provided by the Reserve Bank serve as a useful
foundation forbuilding more sophisticated control systems. The feedback received
from few banksindicates the need for substantial up gradation of existing
management informationsystems, risk management practices and technical skills.
Capital allocation is alsoexpected to be more risk sensitive and, therefore, banks
and financial institutions willhave to plan in advance so that there are no
disruptions in the capital structure. Furthersophistication in risk management and
control mechanisms will have to evolve asexperience with preferential riskweighting and sensitivity to external ratings isaccumulated.A key requirement
when the new Accord, after further modification, becomesoperational is that of
high quality human resources to cope with and adapt to the newenvironment.
Enhancing technical skills and abilities to handle new technologies and newrisks,
exploiting information flows to price them in, and developing foresight
inanticipating changing risk-return relationships will become essential.

MARKET DISCIPLINE

------------------------------------------------------ Processes of transparency and market

disclosure of critical information describingthe risk profile, capital structure and
capital adequacy are assuming increasing
importance in the emerging environment. Besides making banks more accountable
andresponsive to better-informed investors, these processes enable banks to strike
the rightbalance between risks and rewards and to improve the access to markets.
Improvementsin market discipline also call for greater coordination between banks
and regulators.India has been a participant in the international initiatives to ensure
improvedprocesses of market discipline that are being worked out in several fora,
such as, themultilateral organizations, the BIS, the Financial Stability Forum, and
the Core PrinciplesLiaison Group. Concurrent efforts are underway to refine and
upgrade financialinformation monitoring and flow, data dissemination and data
warehousing. Banks arecurrently required to disclose in their balance sheets
information on maturity profiles of assets and liabilities, lending to sensitive
sectors, movements in NPAs, besides providinginformation on capital, provisions,
shareholdings of the government, value of investmentsin India and abroad, and
other operating and profitability indicators. Financial institutionsare also required
to meet these disclosure norms. Banks also have to disclose their totalinvestments
made in equity shares, units of mutual funds, bonds and debentures, andaggregate
advances against shares in their notes to balance sheets.From this year onwards,
notes to banks balance sheets will disclose themovement of provisions against
NPAs as well as those held towards depreciation oninvestments. Guidelines
relating to non-SLR investments through the private placementroute mandate the
disclosure of information on issuer composition and non-performinginvestments in
a similar manner. Efforts have been made to identify and monitor earlywarning
indicators of financial crises. The overall approach is to combine the use of microprudential indicators with macro-economic indicators in order to develop a set
of aggregate macro-prudential indicators. This brings about a mix between bottomup andtop-down assessment. As the methodology gets refined and the indicators
are stress-tested for predictive power, financial stability surveillance will be
significantly improved.This process will involve greater transparency and
objectivity in the disclosure practicesof banks.Efforts have also been made to set
up a Credit Information Bureau to collect andshare information on borrowers and
improve the credit appraisal of banks and financialinstitutions within the ambit of
the existing legislation. The Bureau has been incorporatedby the State Bank of
India in collaboration with Housing Development FinanceCorporation (HDFC)
and foreign technology partners. Collection and sharing of some
items of information have already been initiated. Efforts are also going into the
collectionand sharing of information on private placement of debt under the
Bureau so that there isgreater transparency in such trades. The possibility of

collecting and disseminatinginformation on suit-filed accounts by the Bureau (in

place of the Reserve Bank) is beingexplored by a Working Group constituted for
this purpose with representation fromacross the financial system. The Group will
also examine the prospects of on-line supplyof information and the processing of
queries. A draft legislation covering various aspectsof information sharing,
including issues relating to rights, responsibilities, and privacyhas been prepared,
which would considerably strengthen the functioning of the Bureauwhen it is
enacted.

UNIVERSAL BANKING
---------------------------------------------------- Since the early 1990s, banking systems
worldwide have been going through arapid transformation. Mergers,
amalgamations and acquisitions have been undertaken ona large scale in order to
gain size and to focus more sharply on competitive strengths.This consolidation
has produced financial conglomerates that are expected to maximizeeconomies of
scale and scope by bundling the production of financial services. Thegeneral
trend has been towards downstream universal banking where banks
haveundertaken traditionally non-banking activities such as investment banking,
insurance,mortgage financing, securitization, and particularly, insurance. Upstream
linkages, wherenon-banks undertake banking business, are also on the increase.
The global experiencecan be segregated into broadly three models. There is the
Swedish or Hong Kong typemodel in which the banking corporate engages in inhouse activities associated withbanking. In Germany and the UK, certain types of
activities are required to be carried outby separate subsidiaries. In the US type
model, there is a holding company structure andseparately capitalized
subsidiariesIn India, the first impulses for a more diversified financial
intermediation werewitnessed in the 1980s and 1990s when banks were allowed to
undertake leasing,investment banking, mutual funds, factoring, hire-purchase
activities through separatesubsidiaries. By the mid-1990s, all restrictions on project
financing were removed andbanks were allowed to undertake several activities inhouse. In the recent period, the
focus is on Development Financial Institutions (DFIs), which have been allowed to
set upbanking subsidiaries and to enter the insurance business along with banks.
DFIs were alsoallowed to undertake working capital financing and to raise shortterm funds withinlimits. It was the Narasimham Committee II Report (1998) which
suggested that the DFIsshould convert themselves into banks or non-bank financial
companies, and thisconversion was endorsed by the Khan Working Group (1998).
The Reserve BanksDiscussion Paper (1999) and the feedback thereon indicated
the desirability of universalbanking from the point of view of efficiency of

resource use, but it also emphasized theneed to take into account factors such as
the status of reforms, the state of preparednessof the institutions, and a viable
transition path while moving in the desired direction.Accordingly, the mid-term
review of monetary and credit policy, October 1999and the annual policy
statements of April 2000 and April 2001 enunciated the broadapproach to universal
banking and the Reserve Banks circular of April 2001 set out theoperational and
regulatory aspects of conversion of DFIs into universal banks. The needto proceed
with planning and foresight is necessary for several reasons. The movetowards
universal banking would not provide a panacea for the endemic weaknesses of
aDFI or its liquidity and solvency problems and/or operational difficulties arising
fromundercapitalization, non-performing assets, and asset liability mismatches,
etc
. Theoverriding consideration should be the objectives and strategic interests of the
financialinstitution concerned in the context of meeting the varied needs of
customers, subject tonormal prudential norms applicable to banks. From the point
of view of the regulatoryframework, the movement towards universal banking
should entrench stability of thefinancial system, preserve the safety of public
deposits, improve efficiency in financialintermediation, ensure healthy
competition, and impart transparent and equitableregulation.

HUMAN RESOURCE DEVELOPMENT IN BANKING

-- A recurring theme in the annual BECON Conference has been the need to
focuson developing human resources to cope with the rapidly changing scenario.
The corefunction of HRD in the banking industry is to facilitate performance
improvement,measured not only in terms of financial indicators of operational
efficiency but also in
terms of the quality of financial services provided. Factors such as skills, attitudes
andknowledge of personnel play a critical role in determining the competitiveness
of thefinancial sector. The quality of human resources indicates the ability of banks
to delivervalue to customers. Capital and technology are replicable, but not human
capital whichneeds to be viewed as a valuable resource for the achievement of
competitive advantage.The primary emphasis needs to be on integrating human
resource management (HRM)strategies with the business strategy. HRM strategies
include managing change, creatingcommitment, achieving flexibility and
improving teamwork. These processes underlie thecomplementary processes that
represent the overt aspects of HRM, such as recruitment,placement, performance
management, reward management, and employee relations. Aforward looking
approach would involve moving towards self-assessment of competencyand

developmental needs as a part of a continuous learning cycle.The Indian banking

industry has been an important driving force behind thenations economic
development. The emerging environment poses both opportunities andthreats, in
particular, to the public sector banks. How well these are met will mainlydepend on
the extent to which the banks leverage their primary assets
i.e.
, humanresources in the context of the changing economic and business
environment. It isobvious that the public sector banks hierarchical structure, which
gives preference toseniority over performance, is not the best environment for
attracting the best talent fromamong the young in a competitive environment. A
radical transformation of the existingpersonnel structure in public sector banks is
unlikely to be practical, at least in theforeseeable future. However, certain
improvements can be made in the recruitmentpractices as well as in on-the-job
training and redeployment of those who are alreadyemployed. There are several
institutions in the country which cater exclusively to theneeds of human resource
development in the banking industry. It is worthwhile toconsider broad-basing the
courses conducted in these institutions among other higher-level educational
institutions so that specialization in the area of banking and financialservices
becomes an option in higher education curriculums. In the area of
informationtechnology, Indian professionals are world leaders and building
synergies between the ITand banking industries will sharpen the competitive edge
of our banks.
Conclusion
How close are we to the vision of a sound and well-functioning banking systemthat
I outlined. It is fair to say that despite a turbulent year and many challenges, we
havemade some progress towards this goal. There has been progressive
intensification of financial sector reforms, and the financial sector as a whole is
more sensitized than beforeto the need for internal strength and effective
management as well as to the overallconcerns for financial stability. At the same
time, in view of greater disclosure andtougher prudential norms, the weaknesses in
our financial system are more apparent thanbefore.There is greater awareness now
of the need to prepare the banking system for thetechnical and capital requirements
of the emerging prudential regime and a greater focuson core strengths and niche
strategies. We have also made some progress in assessing ourfinancial system
against international best practices and in benchmarking the futuredirections of
progress. Several contemplated changes in the surrounding legal andinstitutional
environment have been proposed for legislation.

The NPA levels remain too large by international standards and concerns relatingto
management and supervision within the ambit of corporate governance are being
testedduring the period of downturn of economic activity. The structure of the
financial systemis changing and supervisory and regulatory regimes are
experiencing the strains of accommodating these changes. Certain weak links in
the decentralized banking and non-bank financial sectors have also come to notice.
In a fundamental sense, regulators andsupervisors are under the greatest pressures
of change and bear the larger responsibilityfor the future. For both the regulators
and the regulated, eternal vigilance is the price of growth with financial
stability.We should strive to move towards realizing our vision of an efficient and
soundbanking system of international standards with redoubled vigor. Our greatest
asset in thisendeavor is the fund of technical and scientific human capital
formation available in thecountry. The themes which are being covered in this
Conference under structural,operational and governance issues should help in
defining the road map for the future.

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THE FINANCIAL EXPRESS

BANKING ANNUAL-BUSINESS STANDARD


PROFESSIONAL BANKER-THE ICFAI UNIVERSITY PRESS

BOOK NAME

BANKING AND PRACTICE-P.N.VARSHNEW

BUSINESS MANAGEMENT-CAIIB EXAMINATION

MONEY, BANKING, INTERNATIONAL TRADE AND PUBLIC FINANCE--D.M.MITHANI

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