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`PROJECT ON

EVOLUTION OF BANKING

BACHELOR OF COMMERCE

(BANKING & INSURANCE)

SEMESTER-V

YEAR 2017-2018

UNIVERSITY OF MUMBAI

In partial fulfillment of requirement

For the Award of Degree of Bachelor of Commerce

(Banking & Insurance)

SUBMITTED BY:

AASHISH RUPREJA

T.Y.B.C.B.I.

UNDER THE GUIDANCE OF

PROF. RESHMA KUKREJA

SMT. CHANDIBAI HIMATHMAL

MANSUKHANI COLLEGE

ULHASNAGAR-421003
SMT.CHANDIBAI HIMATHMAL
MANSUKHANI COLLEGE
ULHASNAGAR – 421 003
CERTIFICATE

This to certify that MR AASHISH BHAGWANDAS


RUPREJA , Roll No-54 of B. Com. Banking & Insurance
Semester V (2017-2018) has successfully completed the project
on ‘EVOLUTION OF BANKING’ under the guidance of
Prof. RESHMA KUKREJA.

PROF. RESHMA KUKREJA DR. MANJU PATHAK


(I/C HOD) (I/C PRINCIPAL)

PROF. RESHMA KUKREJA

(PROJECT GUIDE)

INTERNAL EXAMINER EXTERNAL EXAMINER


DECLARATION

I am AASHISH RUPREJA, student of


SMT.CHANDIBAI HIMATHMAL MANSUKHANI
COLLEGE studying in Third Year of Bachelor of Commerce
Banking & Insurance (T.Y.B.C.B.I.) hereby declare that I have
completed the project on “EVOLUTION OF BANKING” in
the academic year 2016-2017.

The information submitted is true and original to the best


of my knowledge.

SIGNATURE

AASHISH RUPREJA

ROLL NO. 54

T.Y.B.C.B.I.
Date -

To whomsoever it may concern

This refers to the discussion I had with Mr AASHISH


RUPREJA Roll no 54, TYBCBI, SMT. CHANDABHAI
HIMATMAL MANSUKHANI COLLEGE, and ULHASAGAR
3 in connection with the topic on “EVOLUTION OF
BANKING” The information on this related topic was based on
my knowledge and experience with him.

The required information has been provided to her with brief


explanation for it.

FOR BANK

Branch Manager
ACKNOWLEDGEMENT

It is my pleasure to be indebted to various people, who


directly or indirectly contributed in the development of this
project and who influenced my thinking, behavior and acts
during the course of study.

I express my sincere gratitude to the UNIVERSITY OF


MUMBAI and my college for giving me this opportunity for
taking this project, which has enhanced my knowledge about
“EVOLUTION OF BANKING”.

It is with my deep gratitude, I would like to thank PROF.


RESHMA KUKREJA, under the guidance of whom I was able
to complete my project successfully. I wish to thank her for all
useful discussions and timely suggestions of the related topic
and invaluable help during preceding the project.

I also extend my sincere appreciation to all the people who


helped me to complete this project by their suggestions and
valuable information.
Executive Summary
Banking is as old as the authentic history and the origins of modern
commercial banking are traceable to ancient times. In ancient Greece
around 2000 BC, the famous temples of Ephesus, Delphi and Olympia
were used as depositories for people’s surplus funds and these temples
were the centers of money lending transactions. The word “Bank” is said
to be of Germanic origin, cognate with the French word “Banque” and
the Italian word “Banca” both meaning “Bench”.

It is referred to a bench for keeping, lending and exchanging of


money or coins in the market place by money lenders and money
changers. The Bank of Venice, founded in 1157 was the first public
banking institutions. Following its establishment, were established the
Bank of Barcelona in 1401 and Bank of Genoa in 1407 respectively. The
Bank of Venice and the Bank of Genoa continued to operate successfully
until the end of the 18th century. But the modern banking began with the
English goldsmiths only after 1640. The Bank of England started its
business in 1694 with a view to finance the government, to carry on its

war with the neighbouring countries.


1. To know about how banking came into

existence.

2. To get information about history of banking

3. To know how banks used to function in

old times.

4. What were the roles and objectives of banks

banks in past

5. What services banks provieded to their customers

in past
Research Methodology

1. The primary data for the project will be collected from


banking professionals

2. The secondary data for the project will be collected from


various, books, presentations by other
people, some from news and the internet.
Index
Sr .no Topic name Pg. no
1 Introduction
2 Literature Review
3 Field study
4 Finding and analysis
5 conclusion
6 Finding & Analysis
6 Annexure
7 Bibliography & Webliography
Chapter 1
Introduction
Introduction
A bank is a financial institution that accepts deposits from the
public and creates credit lending activities can be performed either
directly or indirectly through capital markets. Due to their importance in
the financial stability of a country, banks are highly regulated in most
countries. Most nations have institutionalized a system known
as fractional reserve banking under which banks hold liquid assets equal
to only a portion of their current liabilities. In addition to other
regulations intended to ensure liquidity, banks are generally subject
to minimum capital requirements based on an international set of capital
standards, known as the Basel Accords.

Banking in its modern sense evolved in the 14th century in the


prosperous cities of Renaissance Italy but in many ways was a
continuation of ideas and concepts of credit and lending that had their
roots in the ancient world. In the history of banking, a number of banking
dynasties – notably, the Medicis, the Fuggers, the Welsers,
the Berenbergs and the Rothschilds – have played a central role over
many centuries. The oldest existing retail bank is Banca Monte dei Paschi
di Siena, while the oldest existing merchant bank is Berenberg Bank.

Definition
As per Section 5(b) of the Banking Regulation Act, 1949,
"banking" 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 or otherwise
Basic Concepts Used In Banking:

Banking

Banking has been defined as "Accepting for the purpose of lending and
investment, of deposits of money from public, repayable on demand,
order or otherwise and withdrawable by cheque, draft or otherwise."

Banker

Banker is a person who accepts deposits, money on current accounts,


issue and pay cheques and collects cheques for his customer.

Customer

A customer is a person who has an account with the bank,


performs, at least a transaction of a banking activity nature.

Banking Company

Banking Company means any company, which transacts the business


of banking in India. Section 7, of the Banking Regulation Act, provides
that "No company other than a banking company shall use as part of its
name any of the words 'Bank', 'Banker', or 'Banking', and no company
shall carry on the business of banking in India unless it uses as a part of
its name at least one of such words". It further provides that no firm,
individual or group of individuals shall, for the purpose of carrying on
any business, use as parts of its name, any of the words, bank, banking or
banking company.
Need For Banks
Before the establishment of banks, the financial activities were
handled by money lenders and individuals. At that time the interest rates
were very high. Again there were no security of public savings and no
uniformity regarding loans. So as to overcome such problems the
organized banking sector was established, which was fully regulated by
the government. The organized banking sector works within the financial
system to provide loans, accept deposits and provide other services to
their customers. The following functions of the bank explain the need of
the bank and its importance:

• To provide the security to the savings of customers.

• To control the supply of money and credit

• To encourage public confidence in the working of the financial system,


increase savings speedily and efficiently.

• To avoid focus of financial powers in the hands of a few individuals and


institutions.

• To set equal norms and conditions (i.e. rate of interest, period of lending
etc. to all types of customers.
History of Indian Banking System

The first bank in India, called The General Bank of India was
established in the year 1786. The East India Company established The
Bank of Bengal/Calcutta (1809), Bank of Bombay (1840) and Bank of
Madras (1843). The next bank was Bank of Hindustan which was
established in 1870. These three individual units (Bank of Calcutta, Bank
of Bombay, and Bank of Madras) were called as Presidency Banks.
Allahabad Bank which was established in 1865, was for the first time
completely run by Indians. Punjab National Bank Ltd. was set up in 1894
with head quarters at Lahore. Between 1906 and 1913, Bank of India,
Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and
Bank of Mysore were set up. In 1921, all presidency banks were
amalgamated to form the Imperial Bank of India which was run by
European Shareholders. After that the Reserve Bank of India was
established in April 1935.

At the time of first phase the growth of banking sector was very
slow. Between 1913 and 1948 there were approximately 1100 small
banks in India. To streamline the functioning and activities of commercial
banks, the Government of India came up with the Banking Companies
Act, 1949 which was later changed to Banking Regulation 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 a Central Banking Authority. After independence, Government has
taken most important steps in regard of Indian Banking Sector reforms. In
1955, the Imperial Bank of India was nationalized and was given the
name "State Bank of India", to act as the principal agent of RBI and to
handle banking transactions all over the country. It was established under
State Bank of India Act, 1955. Seven banks forming subsidiary of State
Bank of India was nationalized in 1960. On 19th July, 1969, major
process of nationalization was carried out. At the same time 14 major
Indian commercial banks of the country were nationalized. In 1980,
another six banks were nationalized, and thus raising the number of
nationalized banks to 20. Seven more banks were nationalized with
deposits over 200 Crores. Till the year 1980 approximately 80% of the
banking segment in India was under government’s ownership. On the
suggestions of Narsimhan Committee, the Banking Regulation Act was
amended in 1993 and thus the gates for the new private sector banks were
opened.

The following are the major steps taken by the Government of India to
Regulate Banking institutions in the country:-

1949 : Enactment of Banking Regulation Act.

1955 : Nationalisation of State Bank of India.

1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalisation of 14 major Banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalisation of seven banks with deposits over 200 Crores.


Historical Context of Indian Banking Sector

Banking existed in India in one form or the other from times


immemorial. The ancient Hindu scriptures refer the money lending
activities in the Vedic period. During the Ramayana and Mahabharatha
eras, banking need became a full-fledged business activity and during the
Smriti period which followed the Vedic period and epic age the business
of banking was carried on by the members of the Vaish community.
Manu, the great law-giver of the time, speaks of the earning of interest as
“the business of Vysyas”.

The banker in the Smriti period performed most of those functions


which banks perform in modern times, such as; accepting of deposits,
granting secured and unsecured loans, acting as their customers baille,
granting loan to kings in times of grave crisis, acting as the treasurer and
banker to the state and issuing and managing the currency of the country.

During the Moghul period, ‘metallic’ money was issued and the
indigenous bankers played a very important role in lending money and
financing trade and commerce. Modern banking started in India only
from the beginning of 19th century. The earliest commercial banks were
started in India by the employees of the East India Company. These
banks were known as ‘Agency Houses’. They were mainly trading
concerns which combined banking business with other activities, such as;
trading & speculation.

The first joint stock bank to be setup in India was Bank of


Hindustan in the year 1770. The others which followed were Bank of
Bengal established in 1806, Bank of Bombay in 1840 and the Bank of
Madras in 1843. These banks were established with the financial
participation of the government. So, they were called ‘the Presidency
Banks’. They continued till 1921 when they were amalgamated and
converted into the Imperial Bank of India.

The first purely Indian Joint Stock Bank to be established in the


country was ‘The Oudh Commercial Bank’, established in the year 1889.
Later it was followed by the establishment of Punjab National Bank in
1894 and People’s Bank in 1901. The Indian banking system had to pass
through a series of crisis and its growth was very slow during the first
half of the 20th century. It is only after the independence, the Indian
banking system has made rapid progress and today the Indian banking
system is one of the well developed banking systems in the world.

Banking in Independent India

The Banking Regulations Act was passed in the year 1949, which
provided a frame work for regulation and supervision of commercial
banking activity. This regulation brought RBI, an Apex Bank under
Government control. Under this act, RBI got wide ranging powers for
supervision and control of banks. The act also vested licensing powers
and the authority to conduct inspections.

The first step towards the nationalization of commercial banks was


the result of a report in the year 1951 by the committee of direction of All
India Rural Credit Survey, which recommended setting-up a strong
integrated state owned commercial banking institution to stimulate
banking development, in general and rural credit in particular. Thus, the
Imperial Bank of India was taken over by the Government of India and
renamed as State Bank of India (SBI) in the year 1955 with the RBI
acquiring majority of the shares. A number of erstwhile banks owned by
princely states were made subsidiaries of SBI in the year 1959. In the
year 1960, RBI was empowered to force compulsory merger of weak
banks with the strong ones and the total number of banks was thus
reduced from 566 in 1951 to 85 in 1969.

Nationalization of Banks

The Indian banking system made a considerable progress in 1950’s


and 1960’s, it established close links between commercial banks and
industrial houses, resulting in cornering of bank credit to other sectors
such as; agriculture and small scale industries. Functionally the banks
catered only to the needs of organized industrial and trading sectors and
neglected the primary sector such as; agriculture, forestry and fishing,
which formed more than 50% of GDP and had to depend largely on own
financing and on sources outside the commercial banks. It is against this
53 backdrop that the process of financial development was given impetus
with the adoption of the policy of social control over banks in 1967.

The GOI, in the year 1969, nationalized 14 banks having an


aggregate deposit of Rs.50 crores or more and subsequently in the year
1980 the government took over 6 more scheduled commercial banks with
deposits of Rs.200 crore and above. The sole objective was “to serve
better the needs of development of the economy, in conformity with
National Priorities and objectives”.

Structure of the Indian Banking System

The Indian banking structure comprises a heterogeneous mass


covering a wide spectrum ranging from the unorganized indigenous
bankers at the one end to the foreign banks at the other. The Indian
banking structure has at the apex the RBI entrusted with the responsibility
for the formulation and implementation of the monitory policies of the
country, regulating the banking sector, issuing and managing currency,
purchasing and selling of government securities, and managing the
foreign exchange position of the country.

The Reserve Bank derives its powers from the RBI Act of 1935
and the Banking Regulation Act, 1949. It performs the same functions as
central banks do all over the world. But the RBI has taken developmental
function also. Under this, it is responsible for institutionalizing of the vast
savings of the country, through spread of banking habits and banking
infrastructure. RBI is also supposed to help in a rapid industrialization
through developmental organization set up for the purpose like the IDBI,
IFCI, so on. It also overseas the agricultural development is not stifled for
want of credit and has, for the purpose, set up National Agricultural
Board for Rural Development (NABARD).

Scheduled Banks

The Scheduled Banks are those which are included in the second
schedule of RBI Act, 1935, others are non-scheduled banks. The state co-
operative banks also come under the category of scheduled banks. To be
included in the second schedule a bank (a) must have a paid up capital
and reserves of not less than Rs.5 lakhs, (b) it must also satisfy the RBI
that its affairs are not conducted in a manner detrimental to the interests
of its depositors. Scheduled banks are required to maintain a certain
amount of results with the RBI. They enjoy the facility of financial
accommodation and remittance facilities at a concessional rates from the
RBI.

Non Scheduled Banks

The Non-Scheduled banks are those joint stock banks that are not
listed in the second schedule to the RBI Act, in 1939, i.e., when the RBI
Act had been around for four years, there were about 1500 joint stock
banks in the country of which as many as about 1400 were unscheduled.
However, now the number has come down and the volume of their
business is negligible small. The other unscheduled banks have since
Reserve Bank of India Scheduled Banks Non-Scheduled Bank State Co-
op Banks Commercial Banks Central Coop. Banks & Primary Credit
Commercial Banks Indian Banks Foreign Banks Public Sector Banks
Private Sector Banks State Bank of India & its Subsidiaries Nationalized
Banks Regional Rural Banks 55 either closed down or merged with other
scheduled banks, or converted themselves into non-banking companies.
Public Sector Banks

The Public Sector Banks (PSB) comprises of;

1) The State Bank Group

2) Nationalized Banks and

3) Regional Rural Banks.

The State Bank Group

The State Bank Group comprises of State Bank of India and its
seven associates, viz.;

1. State Bank of Bikaner and Jaipur.

2. State Bank of Hyderabad

3. State Bank of Indore

4. State Bank of Mysore

5. State Bank of Patiala

6. State Bank of Saurashtra

7. State Bank of Travancore


The State Bank of India is unique among the public sector banks
on two accounts;

1) The bank was mandated by the governing act to extend banking


facilities on a large scale and more particularly to rural and semi-urban
areas.

2) The bank has traditionally conducted the treasury operations on


behalf of the central and state governments and has, therefore, had a close
relationship with the government departments and undertakings.

The Nationalized Banks Group originally comprised 20 banks of


which 14 were nationalized in 1969 and 6 in 1980 and one of them – the
New Bank of India, was later merged with Punjab National Bank. Thus
27 banks constitute public sector in Indian Commercial Banking. With
these two rounds of nationalization and State Bank of India, being already
in the ownership of the RBI to the extent of its equity, the organized
banking sector has come in the government control. The nationalization
of banks was done with a view to serving better the developmental needs
of all sectors of the economy in consonance with the national policies and
priorities. The broad aim 56 got translated into spreading of banking
areas, increased mobilization of savings, removal of regional disparities
and channelizing credit into the weaker sections of the society.

Regional Rural Banks

Regional Rural Banks are an institution unique to our country.


They came into existence on 2nd October, 1976. The need for these banks
was felt because despite the existence of co-operative banks over last
several decades and the progress recorded by the commercial banks since
their nationalization, there still exists, a vast gap in supply of credit to the
rural areas. RRBs were established to operate exclusively in rural areas to
provide credit to small farmers, agricultural labourers, artisans, and small
entrepreneurs. These banks are governed by the RRB Act, 1976. Each of
them was formed with an authorized capital of Rs.1 Crore and an initial
paid up capital of Rs.25 Lakhs contributed by the sponsor bank of each
RRB, the state government, and the central government. These rural
banks are supposed to have one or two districts as their area of operation
and are expected to have branches upto a number of 100 although many
RRBs have long since cross that number by a wide margin.

Private Sector Commercial Banks

The Private Sector Commercial Banks comprise the unscheduled


joint stock banks as well as some of the schedule banks. However, with
two rounds of nationalization and several rounds of mergers and closures
there number has come down significantly. Even in terms of importance
by way of spread of network and magnitude of business, this group has
since been marginalized.

After the nationalization of banks, new banks in the private sector


could not be setup in India, though there was no legal bar to that effect.
The Narasimham Committee on financial sector recommended the
establishment of such banks in India. The RBI therefore issued guidelines
for setting-up of new private sector banks in India in January, 1993.
These guidelines aimed at ensuring that the new banks are financially
viable and technologically upto date from the start. They are expected to
start functioning in a professional manner so as to improve the image of
commercial banking system and to win the confidence of the depositing
public.

The new banks shall be governed by the provisions of RBI Act,


Banking Regulation Act, and other relevant statutes and shall follow all
the directions, instructions, guidelines and advises given by the Reserve
Bank. The private sector banks that have been established so far are;
IDBI, ICICI, Axis Bank, to name a few.

Local Area Banks

In 1996, government decided to allow new local area banks with


the twin objectives of;

a) providing an institutional mechanism for promoting rural and


semiurban savings

b) for providing credit for viable economic activities in the local


areas.

These banks will be established as public limited companies in the


private sector and will be promoted by the individuals, companies, trusts,
and societies. The minimum paid up capital of such banks to be Rs.5
crores with promoters contribution of atleast Rs.2 crore. They are
expected to be setup in district towns and the area of their operation
would be a maximum of three geographically contiguous districts where
they can open their branches. A few local area banks have already been
allowed to be setup.

Co-operative Banks

The Co-operative credit structure in India for short and medium


term loans is a three tier federal structure. At the apex in each state is a
State Co-operative Bank (SCB), at the district levels are the District
Central Co-Operative Banks (DCC), and at the base are the primary credit
societies, agricultural credit societies in village and urban co-operative
banks and credit societies of the structure only the state cooperative banks
figure in the second schedule of the RBI Act and hence have the status of
scheduled banks. The co-operative banks at the state level and at the
district level perform the usual banking functions although the credit
societies are only what their nomenclature suggests.

Foreign Banks

The Foreign Banks include the branches in India of those banks


which are incorporated abroad. Opening of branches in India of these
foreign banks is largely by lateral matter with that country although the
RBI remains the licensing authority. 58 These foreign banks operate in
India mainly from the Metropolitan cities and maintain a strong profile in
banking business related to foreign trade. Of late, however, many of these
foreign banks have also started making forays into the retail personal
banking segment in the country.

Development Banks

The Development Banks do not perform the banking business as


per the legal definition of the word, but as far as the meeting of credit
requirements of the large and medium industrial sector in the country is
concerned, they have a pivotal role. Some of the more important
development banks in the country are; Industrial Development Bank of
India (IDBI), Industrial Finance Corporation of India (IFCI), Industrial
Credit and Investment Corporation of India (ICICI), the various State
Financial Corporation (SFCs), the Industrial Investment Bank of India
(IIBI), and so on. Of this, only the ICICI is in the private sector. All these
development banks are expected to meet the long and medium term credit
needs for fixed capital of the large and medium sector industries.
However, IDBI also supports the small scale sectors indirectly by way of
its refinance and bills rediscounting schemes, and acts as an apex
development bank.

Reformation of Indian Banking System


The banking sector plays a crucial role in the economic
development of a nation. A sound, efficient, effective, vibrant and
innovative banking system stimulates economic growth by mobilizing
savings on a massive scale and efficiently allocating resources for
productive as well as consumption purposes.

Indian banking witnessed a remarkable transformation consequent


to the implementation of banking sector reforms since early 90s. The
banking sector reforms included progressive reduction of statutory
liquidity ratio (SLR) and cash reserve ratio (CRR); prescription of
uniform accounting norms with regard to classification of assets,
enactment of a statute providing for setting-up of tribunals for expeditious
adjudication and recovery of bank loans; establishment of separate board
for financial supervision of banks; permission for the entry of new private
banks to inject competition; rationalization and deregulation of interest
rates; implementation of capital adequacy norms; recapitalization of
banks; permission to banks to access 59 capital market for mobilizing
additional equity; liberalized new branch licensing and new bank
licensing policy.

Worldwide financial systems have undergone structural changes.


The global factors driving these changes have been advancements in
technology and computing, external financial liberalization and
organizational changes in corporate world. Banking and finance in
emerging economies has been no exception. But the structural shifts in
these economies have been motivated by their country’s specific factors
also including macro economic pressures, disintermediation pressures and
banking crisis of 1990’s. These developments have been instrumental in
formation of a ‘Global Village’ making the dividing line between
financial products, type of financial institutions and their geographical
location as irrelevant.

Globalization of banking operations and expansion of financial


activities as a result of technology advancements, in an increasingly
market driven environment have redefined the business models and
changed the way the banks use to do the banking business. The banking
industry has virtually seen a shift from brick and mortar banking to
banking virtually across time zones, geographical reach and alternatively
delivery channels.

Classification of Reforms The banking sector reforms can be


classified into 6 categories; viz.,

a) measures meant for promotion of competition,

b) measures meant for strengthening the role of the market,

c) prudential measures

d) legal measures,

e) measures meant for strengthening supervision or supervisory


controls and f) measures relating to technology. Some of these measures
meant for strengthening competition included grant of limited operational
autonomy to public sector banks (PSB); dilution of government stake in
the equity of PSBs permitting them to mobilize capital from the open
market; adoption of transparent licensing policy enabling the entry of
private sector, foreign and joint venture banks; permitting foreign direct
investment (FDI) in the financial sector as well as permitting portfolio
investment; issue of guidelines on ownership and governance in private
sector banks. Measures initiated to strengthen the role of market forces
included progressive reduction in SLR and CRR, market determined
pricing of government securities, deregulation of interest rates. Prudential
measures which have been implemented covered fulfillment of capital
adequacy 60 norms; and new accounting, income recognition, provision
and exposure norms. Measures initiated to strengthen risk management
included assignment of risk weights to different categories of assets,
norms on connected lending, credit concentration norms, application of
marked – to – market principle for investment portfolio and fixation of
limits for deployment of funds in sensitive factors and activities.

In addition, know your customer (KYC) guidelines, anti-money


laundering (AML) standards, introduction of capital charge for market
risk, high graded provisioning for non-performing assets (NPA), were
adopted for implementation. Institutional and legal measures introduced
for improving banks performance in the area of recovery and for asset
quality up gradation included setting-up Lok Adalats, Debt Recovery
Tribunals (DRT), Asset Reconstruction Companies (ARC), Settlement
Advisory Committees (SAC), Corporate Debt Restructuring Mechanism.
Enactment of securitization and reconstruction of financial assets and
enforcement of security interest act (Sarfaesi Act) was another important
mile stone in reforms. Setting-up Credit Information Bureau (India) Ltd.,
(CIBL) for sharing credit information and establishment of the Clearing
Corporation of India Ltd, (CCIL) to act as central counter party for
facilitating payments and settlement systems relating to fixed income
securities and money market instruments extended support to banks.

Certain supervisory measures such as establishment of a separate


board for financial supervision in RBI, recasting the role of statutory
auditors and increased internal control through strengthening of internal
audit, strengthening of corporate governance may also initiated. The
technology related measures included setting-up of INdian FInancial NET
work (INFINET) as the communication backbone for the financial sector,
introduction of negotiated delink system for screen based trading in the
government securities and implementation of real time gross settlement
(RTGS) system.

The Indian economy has recently been exhibiting signs of staying


ahead of global activity. Some signs cyclical recovery are currently
evident, further, rapid globalization an increased competitiveness have
forced a significant impact on banking innovations and their functioning
in a diversified ways.

Innovation in Banking

Innovation means the introduction or application of something new


– either new goods and services or new ways of reducing them.
Innovation differs from invention in essential respect. An invention is the
discovery of something new, whereas an innovation is the actual
introduction or application of something new. Entrepreneurs and
producers must innovate and adopt new methods and ideas to increase
their productive capacity and improve working conditions, thereby
raising productions and consequently the national income. Innovation is,
therefore, an important factor responsible for a countries economic
development.

Innovations in banking have become the order of the day and the
concept of the bank a mere manager of liquidity belongs to the past. New
services, both credit and non-credit one’s have been introduced and
existing services developed by banks throughout the world as they meet
increasing competition for business from within the banking industry and
from without, fill-up in their range of services to steal a march over their
competitors by endeavoring to satisfy the needs of their present and
potential customers demanding more flexible, advantageously priced and
comprehensive facilities. Apart from selective introduction of modern
technology to speed up, banking operations require an increasing degree
of sophistication, there will be changes in the composition of banking
business reflecting the changes is occurring in trade and industry. The
banks, the world over, are becoming financial supermarkets in which a
wide variety of services can be purchased and often conduct business that
do not always resemble banking.

Many significant changes are taking place in our country in


response to changes in national and international economic environment.
These changes have also affected the financial sector and are forcing it to
move towards a deregulated and more competitive environment. A
marked future of the financial system in the decade of 1980’s has been
changes which have occurred in the institutional frame work and financial
instruments. When viewed in historical context, such has been the pace of
change which has occurred in the financial systems of developed
countries and more particularly in the United Kingdom (UK)and United
States of America (USA) in the last two decades and particularly in the
recent years that it frequently referred to as constituting a “Revolution of
Financial Services”. Whether this description is an 62 appropriate one is a
matter on which opinions differ, but nevertheless, observers of the
financial system have identified a number of major interlocking trends
which have changed and are changing the institutions characteristics of
the financial system.

Simultaneously, the trends towards the diversification by banks


abroad, particularly by those banks which have branches in India and are
trying to introduce innovations in their business activities in India so as to
enable them to have a higher market share, in evitable had its impact on
Indian banks. The demand for diversified financial services and banking
innovations was also created by the structural changes that have taken
place in the Indian economic over the last decade as shown below;

1. The share of primary and secondary vectors in national income


declined and the share of service sector increased;

2. The salaried middle class has risen fast and they are in need of
financial assets with higher income growth potential than usual
commercial bank deposits;

3. The strategy of accelerating the pace of development has been


undertaken by giving an impetus to increased consumption of industrial
products through tax concessions and other means; and

4. The industrial growth appears to be largely anchored to the


consumption needs of urban middle class, which has emerged with much
potential demand for variety of financial services.

The process of disintermediation is part of the process of meeting


the financial asset needs of the customers coming from the urban middle
class. Many of the financial services offered by banks are oriented
towards this class of customers. Diversification in this direction will be
largely successful because here banks with their urban orientation in their
home ground. Moreover, following the example of international banks,
many Indian banks have tried to shift from traditional business to fee
producing business as a step towards their efforts to innovate, adopt new
market strategies and diversify.

Chapter 2
Literature Review
This chapter reviews the various literature reviews available on the
Subject of externalities relevant reference from literature and Research
studies were collected from books ,research, articles, research paper and
various Internet websites Were also used on the basis of identified issued
objectives where drawn to prosecute a fresh study in the study region. A
large volume of literature thus available on the different aspect of small
scale industries have been studied at length .A brief review of such
important studies is made here.

General Review

Remarkable and rapid transformation has taken place in financial


and banking sector in the liberalized and post reform period. As outcome
of these, significant studies were undertaken and significant body of
literature has evolved on the subject. It explores the performance of
financial institutions. The main motive of studies, in general, is to analyze
the efficiency and productivity of banking systems. Such studies and
analysis are important from the policy standpoint.

Success or Failure of policy initiatives are identified by


policymakers, researchers and academicians. Framing and Formulating
appropriate policies enables banks to function in a better way and which
may be reflected in safety and soundness of the financing system. Banks
play an important role in the financial markets of developing economy
and it is very important to evaluate whether banks operate efficiently or
not. Banking developments greatly contributed to economic development
of the country. A positive relationship between financial sector
development and economic growth was established by economists in
various empirical studies. (Goldsmith 1969, King and Levine 1993,
Levine 1999, Khan and Senhadji, 2000). In pre-reform period, the
commercial banks and other financial institutions were operating in stable
environment with little or absence of competition. But in the reform
period remarkable changes took place in banking industry. During
liberalised era, banking industry entered new phase and became globally
competitive. It has to fulfill both social and national objectives. In wake
of these changes it is necessary to study the performance of the banks.
State Bank of India, being the oldest and largest commercial bank of the
country, contributed remarkably to the development of Indian banking
industry. Therefore it is essential to study the performance of State Bank
of India and its associates in the changed and competitive environment.
As per the topic of the research “An Analysis of Performance of SBI and
its associate banks” an attempt has been made to study the different
studies in this field to assess the performance of banks in India..

Review by different economist;-

In this section, an attempt has been made to review the previous


studies carried out in relation to the small scale industrial units.

Birla Institute of Scientific Research (1981)

attempts to make comparative analysis of performance of the


public banks and the major private banks since nationalisation.
Comparisons are made in terms of ratios and growth rates. The study
brings out that the profitability ratios have been higher for selected group
of the private sector banks than for the nationalised banks. Though public
sector banks has vast network of branches and wide coverage, yet the
credit of taking banking services to large mass of population goes to
private sector banks.

Malhotra R N (1986)
has highlighted the fact that nationalisation of Indian commercial
banks has brought dramatic changes in the profile of Indian banking.
Banking has emerged as an effective catalytic agent of socioeconomic
change. It has acquired a broad base and has also emerged as an agent of
development in the rural sector. The new phase of banking will be
characterised by increasing sophistication. Increased sophistication will
be reflected in introduction of modern technology and changes in the
composition of bank business. Policies and specific measures are being
framed to bring about all round improvement in banking operations.

Robert M (1991)

The study attempts to analyze the trends in profitability, assess the


operational efficiency of Public sector banks, estimated the behavioural
function of profit effecting profit for individual banks and for the banking
industry as a whole. The study covers 14 banks nationalised in 1969.
These were classified as large scale banks, medium scale banks and small
scale banks in order to make inter-bank comparisons. The study covers a
period of 15 years from 1973 to 1987. Herfindhal’s index of
concentration is used to study the performance of each unit of the system
with reference to the system as a whole. Bank-wise trend in profitability
showed that out of 14 banks, 12 showed decline in profitability during
this period. Operational efficiency based on manpower expenses and
other expenses to total staff revealed that CBI, UCB and DB were the
highest cost effective banks among large, medium and small banks.

Singh Jagwant (1993)

in his book is concerned with trends and changes in productivity


with particular emphasis on employee and branch productivity in the
Indian banking industry. It determines the level of productivity and its
growth during the period 1969-85. The 22 public sector banks i.e. banks
of the SBI group and 14 nationalised in 1969 have been taken up for the
study. The study attempts to make cross-sectional and intertemporal
analysis on the basis of 17 indicators. The indicators have been divided
into 3 categories which measure labour productivity, branch productivity
and financial productivity. T-scores have been used for giving ranking to
the banks. The ranking of the banks reveal that most significant
improvement in the ranking was achieved by Indian Bank and Indian
Overseas Bank. United Commercial Bank recorded maximum
deterioration. From the SBI group the performance of State Bank of India
was better.

Agarwal R N (1993)

in his paper analysed the profits of Public Sector Banks since their
nationalisation and discuss the determinants of profitability. The study
covers State Bank Group and Nationalized Bank Group. Time series data
for the period 1970-1987 has been used. The profit equation is estimated
by ordinary least square method. Empirical results indicate that
profitability of public sector banks has been adversely affected by
increasing statutory reserve ratios, lending to priority sectors at lower
rates of interest, expansion of bank branches in the rural and semi-urban
regions and rising wages of employees. Declining labour productivity has
also adversely affected profitability. Time deposits are found important to
encourage profitability. The two banking groups are found significantly
different in their financial performance. Zacharias Thomas (1997)6 This
study is undertaken to review and analyze the performance effectiveness
of Syndicate Bank and other Nationalized banks in India using an
Economic Managerial- Efficiency Evaluation Model (EMEE Model)
developed by researcher. A period of ten years from 1984 to 1993-94 is
taken for the study. Thomas in this study found that Syndicate Bank got
5th position in capital adequacy and quality of assets, 15th in
profitability, 14th position in social banking, 8th in growth, 7th in
productivity and 15th position in customer service among the
nationalized banks. Further, he found that five nationalized banks showed
low health performance, seven low priority performance and eleven low
efficiency performance in comparison with Syndicate Bank.
Chapter 3
The primary data has been collected through
visiting a bank name union bank situated at Ulhasnagar
03 interacting with us very politely and efficiently

I visited the union bank for my project on


“Evolution of banking”. I collect the information
regarding the services, schemes, opportunities and threat
to the face competition, interest offered by bank to their
customer .I got the information also needed and
important functions offered by the bank for financing to
small scale industries

I had discussed about the various schemes interest


rates eligible organisation and so on so I achieved good
response regarding my topic and they provide me best of
the knowledge
Questionnaire

1) When SIDBI was established?

Ans: SIDBI was established on April 2, 1990 through an


act of parliament

2) What are the schemes provided by your bank to small


scale industries?

Ans: the major scheme of SIDBI is

1) Technology Development & Modernisation Fund


2) National Equity Fund
3) Single Window Scheme
4) Composite Loan Scheme
5) Mahila Udyam Nidhi (MUN) Scheme
3) What are interest rate charges?

Ans. it depend on the company background ,their


financials , our internal rating & other aspect

4) Who regulate SIDBI?

Ans. SIDBI is regulated by Government of india & Reserve


bank of India

5) Are you required to maintain any reserve like SLR or


CRR with RBI?

Ans. No
6) Are there any loan schemes available for large scale
industries?

Ans. It depend mostly we deal with small scale industries

7) Do you face problem in loan recovery?

Ans. Yes

8) What are the necessary measure to overcome those


problem?

Ans. Suitable recovery option are taken such as legal notice

9) What differentiates SIDBI from other banks in the


country?

Ans. Being the apex institution for MSMEs (micro, small and
medium enterprises), SIDBI's role has been that to solving
the sector's problems and meeting its needs. We, at SIDBI,
have re-oriented our business strategy to cater to the specific
needs of Indian MSMEs that are not fulfilled through
traditional sources.

10) Are there any opportunities for employment for


recently graduated students?

Ans. There has been a recent Recruitment 15 Vacancies for


both fresher’s and experienced candidates. There is being usual
update regarding vacancies on the website.
11) What are your future plans?

Ans. SIDBI aims to have more than 100 branches in the next
2-3 years. It aids small and medium enterprises (SMEs).
Chapter 3
Finding and analysis
MAIN SCHEMES OF SIDBI

A brief summary of the Schemes available with SIDBI.

National Equity Fund Scheme

Under National Equity Fund Scheme equity support is available to


entrepreneurs for setting up new projects in tiny/small scale sector, for
undertaking expansion, modernisation, technology upgradation and
diversification by existing tiny, SSI and service enterprises and for
rehabilitation of viable sick units in the SSI sector which fulfill the
specified eligibility criteria.
Technology Development & Modernisation Fund Scheme

SIDBI has set up Technology Development & Modernisation Fund


(TDMF) scheme for direct assistance of small sale industries to
encourage existing industrial units in the sector, to modernise their
production facilities and adopt improved and updated technology so as to
strengthen their export capabilities. Assistance under the scheme is
available for meeting the expenditure on purchase of capital equipment
acquisition of technical know-how, upgradation of process technology
and products with thrust on quality improvement, improvement in
packaging and cost of TQM and acquisition of ISO-9000 series
certification.
SIDBI in July 1996 had permitted SFCs and promotional banks to
grant loans for modernisation projects costing upto Rs. 50 lakhs. The
Coverage of the TDMF scheme has been enlarged w.e.f. 1.9.1997. Non-
exporting units and units which are graduating out of SSI sector are now
eligible to avail assistance under this scheme.
Single Window Scheme

To provide both term loan for fixed assets and loan for working
capital through the same agency. The total working capital requirement of
such units inclusive of all fund based facilities may be taken into account
for determining the working capital facility eligible for refinance

Composite Loan Scheme

The Scheme envisages


sanction and disbursement of
working capital and
term loan together from a single
agency. The limit forcomposite
loans has been enhanced to Rs. 25
lakhs in the Comprehensive Policy
Package. The Scheme is operated
both by banks and financial
institutions.
Mahila Udyam Nidhi (MUN) Scheme

SIDBI Mahila Udyam Nidhi is designed to help meet gap in equity


in startups by women entrepreneurs. SIDBI or Small Industries
Development Bank of India is the principal financial institution for the
promotion, financing and development of industry in the small scale
sector. The purpose of Mahila Udyam Nidhi is to help women
entrepreneurs meeting equity funds requirement will setting up a new
business

Scheme for financing activities

Being an apex financial institution, SIDBI provides support to the


MSME sector through its various schemes. The indirect assistance is
provided by way of refinance, equity assistance, resource support to
Primary Lending Institutions (PLIs) or Non-Banking Finance Companies
(NBFCs) and Micro Finance Institutions (MFIs).
Equipment Finance Scheme

Equipment Finance Scheme for acquisition of


machinery/equipment including Diesel Generator Sets which are not
related to any specific project.

Venture Capital Scheme

Venture Capital is emerging as an important source of finance for


small and medium-sized firms, especially for starting the business and
business expansion. An entrepreneur usually starts the business with his
own funds, and those borrowed from banks. It is during expansion that
they find it difficult to raise funds. SMEs have traditionally been
dependent on Bank finance for expansion and working capital
requirements.
ISO 9000 Scheme

ISO 9000 Scheme Facility is for acquiring testing/calibrating


equipment, and to meet the expenditure on account of consultancy,
documentation, audit, certification fee etc.to meet the expenses on
consultancy, documentation, audit, certification fee, equipment and
calibrating instruments required for obtaining ISO 9000 certification.

Micro Credit Scheme

to meet the requirement of well managed Voluntary Agencies that


are in existence for at least 5 years; have a good track record and have
established network and experience in small savings-cum-credit
programmes with Self Help Groups (SHGs) individuals.
Functions of SIDBI
1. Refinance:
It refinances loans and advances provided by the existing lending
institutions to the small scale units.
2. Discounting Bills :
It discounts and re-discounts bills arising from sale of machinery to
and manufactured by small scale industrial units.
3. Seed Capital / Soft Loan :
It extends seed capital / soft loan assistance under National Equity
Fund, Mahila Udyam Nidhi and Mahila Vikas Nidhi and seed capital
schemes.
4. Refinance for Exports:
It grants direct assistance and refinance loans extended by primary
lending institutions for financing exports of products manufactured by
small scale units.
5. Factoring Services :
It provide services like factoring, leasing, etc, to small units.
6. Financial Support to SSICs :
It extends financial support to State Small Industries Corporation
for providing scare raw materials to and marketing the products of the
small scale units.
7. Assistance to NSIC :
It provides financial support to National Small Industries
Corporation for providing; leasing, hire-purchase and marketing help to
the small scale units.
8. Co-promotes State Level Venture Funds:
SIDBI Co-Promotes state level venture funds in association with
respective state government.
Chapter 5

In the changing scenario, the SSI sector will have greater


opportunities for playing a more active and diversified role-Govt. of India
in its ongoing process of economic reforms has attached a-great deal of
importance for the development of modern SSI sector in the country. The
RBI has also initiated certain follow-up measures based on the
recommendations of the Nayak Committee Report such as setting up of
specialised bank branches to operate the Single Window Scheme to assist
the SSI units. These measures are expected to go a long way in improving
the health of SSI sector in general and in ensuring availability of
adequate' and timely working capital to SSIs in particular. No doubt,
SIDBI will continue to share greater responsibilities, provide more and
more innovative schemes and services and extend all the required help as
in the past to help the SSI sector. However, the SSIs themselves with
their inherent strengths should also gear up to meet the new challenges.
Chapter 6
Annexure
Questions
1. When SIDBI was established?

Ans.

2. What are the schemes provided by your bank to small scale


industries?

Ans

3. What are interest rate charges?

Ans

4. Who regulate SIDBI?

Ans

5. Are you required to maintain any reserve like SLR or CRR


with RBI?

Ans

6. Are there any loan schemes available for large scale


industries?

Ans

7. Do you face problem in loan recovery?

Ans
8. What are the necessary measure to overcome those
problem?

Ans

9. What differentiates SIDBI from other banks in the


country?

Ans

10. Are there any opportunities for employment for recently


graduated students?

Ans

11. What are your future plans?

Ans
Article
16/08/2017 01:40pm

RDSO will work with


SIDBI and FISME to lay
faster track for MSME
suppliers
RDSO will work with SIDBI and FISME to
lay faster track for MSME suppliers

New Delhi, Aug 16


(KNN) Research, Development
and Standards Organisation
(RDSO) the premier R&D organisation of Indian Railways is working
with SIDBI to facilitate supplies by MSMEs to Railways.
FISME, the lead federation of Indian MSMEs, will provide the back end
support for the programme.
The programme will be launched at the New Auditorium of RDSO at
Manak Bagh, Lucknow by the senior officers of RDSO and SIDBI.
The concept for the fast track for MSME suppliers of Railways was laid
by the Railways Minister, Suresh Prabhu at a meeting conducted recently.
In the meeting organised to develop a road map for enhanced supply by
MSMEs to Railways, the Minister asked for a time bound action plan.
RDSO has already taken a number of initiatives to encourage
participation of MSMEs in Railways procurements.
The most significant are reservation of 20% of all orders for new entrants
and earmarking of development orders to MSMEs.
SIDBI on its end are offering financial package to MSMEs developing
innovative solutions.
Towards ‘Ease of Doing Business’ for MSMEs RDSO has already
launched a single portal for all information and minimised the number of
documents from 22 to 6.
Railways has also reduced the registration charges for micro and small
enterprises from Rs. 25,000 to Rs. 15,000 and extended the period of re-
audits to 5 years.
FISME is at the fore front for cutting a respectable share for MSMEs in
the pie of the Government order of about Rs. 2 trillion rupees, annually.
For this while on the one hand the FISME leadership is working with
large buyers like Railways, it is also working at the policy level to ease
the procurements under compulsory ‘make in India’ accessible to
MSMEs.
For the Railways, FISME will facilitate SIDBI in organising MSME
suppliers’ meet with railways, at the all India level, to iron out the last
mile bottlenecks. (KNN/ DB)
.
bibliography

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https://accountlearning.com

http://etheses.saurashtrauniversity.edu/60/

http://www.papertyari.com/

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