BANKING AND FINANCE IN INDIA

The Indian money market is classified in to : the organized sector(comprising private,

public and foreign owned commercial banks and cooperative banks, together known as
scheduled banks); and the unorganized sector(comprising individual or family owned
indigenous bankers or money lenders and non banking financial companies (NBFCs)).
The unorganized sector and micro credit and still preferred over traditional banks in rural
and sub-urban areas, especially for non-productive purposes, like ceremonies and short
duration loans.

Early History

Banking in India originated in the first decade of 18th century. The first banks were The
General Bank of India, which started in 1786, and Bank of Hindustan, both of which are
now defunct. The oldest bank in existence in India is the State Bank of India, which
originated in the "The Bank of Bengal" in Calcutta in June 1806. This was one of the
three presidency banks, the other two being the Bank of Bombay and the Bank of
Madras. The presidency banks were established under charters from the British East India
Company. They merged in 1925 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India. For many years the Presidency banks
acted as quasi-central banks, as did their successors. The Reserve Bank of India formally
took on the responsibility of regulating the Indian banking sector from 1935. After India's
independence in 1947, the Reserve Bank was nationalized and given broader powers.

Post-independence

The partition of India in 1947 adversely impacted the economies of Punjab and West
Bengal, paralyzing 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:
In 1948, the Reserve Bank of India, India's central banking authority, was nationalized,
and it became an institution owned by the Government of India.
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of
India (RBI) "to regulate, control, and inspect the banks in India."
The Banking Regulation Act also provided that no new bank or branch of an existing
bank may be opened without a license from the RBI, and no two banks could have
common directors.
However, despite these provisions, control and regulations, banks in India except the
State Bank of India, continued to be owned and operated by private persons. This
changed with the nationalization of major banks in India on 19th July, 1969.

Nationalization

By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large
employer, and a debate has ensued about the possibility to nationalize the banking
industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the
GOI in the annual conference of the All India Congress Meeting in a paper entitled
"Stray thoughts on Bank Nationalization." The paper was received with positive
enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance
and nationalized the 14 largest commercial banks with effect from the midnight of July
19, 1969. 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 9th August, 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The
stated reason for the nationalization was to give the government more control of credit
delivery. With the second dose of nationalization, the GOI controlled around 91% of the
banking business of India.
After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to
the average growth rate of the Indian economy.
Liberalisation
In the early 1990s the then Narsimha Rao government embarked on a policy of
liberalisation and gave licenses to a small number of private banks, which came to be
known as New Generation tech-savvy banks, which included banks such as Global Trust
Bank (the first of such new generation banks to be set up) which later amalgamated with
Oriental Bank of Commerce, UTI Bank (now re-named as Axis Bank), ICICI Bank and
HDFC Bank. This move, along with the rapid growth in the economy of India, kick –
started the banking sector in India, which has seen rapid growth with strong contribution
from all the three sectors of banks, namely, government banks, private banks and foreign
banks.
The next stage for the Indian banking has been setup 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 49%
with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 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 not just demanded more
from their banks but also received more.
Current situation
Currently (2007), banking in India is 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. The stated policy of the Bank on the
Indian Rupee is to manage volatility but without any fixed exchange rate-and this has
mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong. One may also
expect 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.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks
(that is with the Government of India holding a stake), 29 private banks (these do not
have government stake; they may be publicly listed and traded on stock exchanges) and
31 foreign banks. They have a combined network of over 53,000 branches and 17,000
ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks
hold over 75 percent of total assets of the banking industry, with the private and foreign
banks holding 18.2% and 6.5% respectively.
Since liberalization, the government has approved significant banking reforms. While
some of these relate to nationalized banks (like encouraging mergers, reducing
government interference and increasing profitability and competitiveness) other reforms
have opened up the banking and insurance sectors to private and foreign players.

Central bank Reserve Bank of India

Allahabad Bank · Andhra Bank · Bank of Baroda · Bank of
India · Bank of Maharashtra · Canara Bank · Central Bank of
India · Corporation Bank · Dena Bank · Indian Bank · Indian
Nationalized banks Overseas Bank · Oriental Bank of Commerce · Punjab & Sind
Bank · Punjab National Bank · Syndicate Bank · Union Bank
of India · United Bank of India · UCO Bank · Vijaya Bank ·
IDBI Bank
 State Bank of India · State Bank of Bikaner & Jaipur · State
Bank of Hyderabad · State Bank of Indore · State Bank of
State Bank Group
Mysore · State Bank of Patiala · State Bank of Saurashtra ·
State Bank of Travancore
Axis Bank · Bank of Rajasthan · Bharat Overseas Bank ·
Catholic Syrian Bank · Centurion Bank of Punjab · City Union
Bank · Development Credit Bank · Dhanalakshmi Bank ·
Federal Bank · Ganesh Bank of Kurundwad · HDFC Bank ·
Private banks ICICI Bank · IndusInd Bank · ING Vysya Bank · Jammu &
Kashmir Bank · Karnataka Bank Limited · Karur Vysya Bank ·
Kotak Mahindra Bank · Lakshmi Vilas Bank · Nainital Bank ·
Ratnakar Bank · SBI Commercial and International Bank ·
South Indian Bank · Amazing Mercantile Bank · YES Bank
ABN Amro Bank · Barclays Bank · Citibank · HSBC ·
Foreign banks
Standard Chartered · Deutsche Bank
South Malabar Gramin Bank · North Malabar Gramin Bank ·
Regional Rural banks
Pragathi Gramin Bank · Shreyas Gramin Bank
Real Time Gross Settlement(RTGS) · National Electronic Fund
Transfer (NEFT) · Structured Financial Messaging System
Financial Services
(SFMS) · CashTree · Cashnet · Automated Teller Machine
(ATM)

Structure / Constituents of Indian Finance System

The India Finance System is composed of different institutions and will see
subsequent address to certain roles and have accordingly brought out a variety of
instrumentation and helped create a healthy money market, which is fundamental
requisite of good finance system.
 Commercial Banks

Public Sector Private Sector

State Bank of India

Foreign Banks in India

Associate Banks Other Banks in India

Nationalized Banks Non-Scheduled Banks

14 major banks nationalized on 6 Banks nationalized on 15th

19th July 2, 1969 April 1980

Regional Rural Banks

Categories of Bank:

Banking in India falls mainly under two categories, viz. Commercial banks and Co-
operative banks, while commercial banks cater to the needs of industry and trade largely;
the cooperative banks play a major role in financing agriculture and allied activities in
rural areas, and trade and services in urban areas.
The commercial banks may be classified into four group in terms of ownership: 1) Public
Sector Banks 2) Regional Rural 3) Indian Private Sector Banks and 4) Banks
incorporated outside India.
The commercial banks can be further classified into Scheduled banks and Non Scheduled
Banks. Scheduled Banks are those listed in the second schedule to the Reserve Bank of
India Act 1934
These banks satisfy the criteria laid down under section 42 (6) of the RBI Act that they
should have capital and reserve of Rs. 5 lakhs and their activities should not be
detrimental to the interests of depositors. The scheduled banks are required to maintain
cash reserves equal to 5 % of DTL which can go up to 15 % under section 42 (1). Those,
which are not included in the 2nd schedule, are called the non-scheduled banks. The
number of take- oven/liquidation as also in some cases up gradation into scheduled banks
category.

Introduction to finance :

Finance is the handmaiden of economic growth Institutions like banks, which command
huge financial resources, can play a crucial role in shaping the economy of a country by
judiciously deploying their funds over such important activities as would lead to an
overall economic growth. A bank’s offer compared to a dam and the money lying
scattered with individuals and institutions in society to the water running its own course
without any direction. Money is collected by banks by way of deposits, and from this
fund money is turned back to the community in the form of loans. Thus, banks act as a
vital link between the savers and the needy.

India is striving to transform herself into an industrially developed country based on a

rural and agricultural economy which should not only be able to feed the millions of her
populations but also to produce raw material for her mills. This can be done by bringing
about the necessary change from an agrarian economy to a diversified one. Banks have
crucial role to play not only in the achievement of this objective but more significantly in
determining how speedily and efficiently it is achieved. Since the nationalization of the
fourteen major banks, the banking industry has developed adequately enough to meet the
changing needs, both corporate and personal. Banks now offer a wide range of financial
services in an extensively varied environment. The complex task of managing these
changes and their consequences requires that banker should be more professional than
ever before.

The Business of Banking

Banking has been understood differently at different times and indifferent countries. In
India, the earliest legislation that dealt with the business of banking was the Indian
Companies Act 1913. The Banking Regulations Act came in 1936. Under this Act all
companies having their principal business, accepting deposits from the public were
classified as banks. Hence between 1936 and 1942 even trading and industrial concerns
accepting deposits were classified as banks, if accepting such deposits was their principal
business. The Government of India passed a compressive Banking Regulation Act in
1949. Accordingly a banking company was defined as a company which carries on the
business of banking that is to say accepting for the purpose of lending or investing
deposits of money from the public, repayable on demand of otherwise, and withdrawal
cheque, draft, order of otherwise. The study group reviewing legislation affecting
banking is of the opinion that “banking should be abroad based.” The definition given by
the Banking Regulation Act 1949 is certainly not exhaustive, and it needs certain
alterations for the sake of simplification. The purpose of accepting deposits is strictly not
relevant for the definition of banking, through it is basic for banking regulation. There is
no need to distinguish between “loans” deposits” in the context of banking regulation.
The definition of banking should cover all forms of deposits from the public, and banking
regulation should take into its ambit all the different types of banking.

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 countries regulate
this sector rather stringently. In India, the regulation traditionally has been very strict 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, which started in 1991,
has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of
policy and regulations that a Bank has to work with makes its operations even more
complicated, sometimes bordering on illogical. This section, which is also intended for
banking professional, attempts to give an overview of the functions in as simple 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 the public, repayable on demand or
otherwise and withdrawal by cheques, draft, order or otherwise."

Deriving from this definition and viewed solely from the point of view of the customers,
Banks essentially perform the following functions:
 1. Accepting Deposits from public/others (Deposits)
2. Lending Money to public (Loans)
3. Transferring money from one place to another.
4. Acting as trustees.
5. Keeping valuables in safe custody.
6. Government business.

But do these functions constitute banking? The answer must be a no. There are so many
intricacies involved in the activities that a bank performs today, that the above list must
sound very simple to a seasoned banker. Please click on the activity to see what a Bank
has to do to give the above services to its customers. These activities can also be
described as back office banking. Banks are organized in a linear structure to perform
these activities at the base of which lies a Branch. The corporate office of a bank is
normally called Head Office

FORMS OF ADVANCES:

Advances by commercial banks are made in different forms such as loans, cash credit,
overdrafts, bills purchased, bills discounted etc. These are generally short- term advances.
Commercial banks do not sanction advances on a long-term basis beyond a small
proportion of their demand and time liabilities. They cannot afford to lock up their funds
for long period. Hence a considerable percentage of their advances is repayable on
demand.
Advances may be granted against tangible security or in special deserving cases on an
unsecured/clean basis.
1. Loans
1. Overdrafts
2. Cash credits
3. Temporary Overdrafts
4. Clean advances
5. Term loans
 6. Bridge loan
7. Participation loan
8. Loans to small borrowers
10. Hire purchase and leasing finance
11. Bills purchased
12. Bills discounted

LOANS:

Bank loans are called indirect agents of production. For achieving a sustained rate of
economic growth over a long period, greater efforts have to be made to increase
agricultural and industrial production, and in this increased production, bank credit plays
a significant role. But banks in India are not free to employ their funds n an arbitrary
manner, while lending, they will have to keep in mind factors like a desirable balance
among liquidity, safely and profitability, legal and statutory requirements, socio-
economic conditions of the country, priorities set by economic planners, and so on. Banks
try to achieve this objective through maintaining a particular relationship between their
assets and deposits. As such, between advances and deposits in the form of advances
among as many different types of securities and over as wide an areas as possible, and
they avoid granting too large a proportion of their advances to one party or to a single
industry. While the se factors limit banks capability to lend, they are, nevertheless
expected to grant credit according to the changing economic scene conditioned by the
programs and priorities of different Five Year Plans.

In a loan account the entire amount is paid to the debtor at one time, either in cash or by
transfer to his current account. No subsequent debit ordinarily allowed except by way of
interest, incidental charges, insurance premiums, expenses incurred is provided for by
installment without allowing the demand character of the loan to be affected in any way.
There is usually a stipulation that in the event of installment remaining unpaid, the entire
amount of the loan will become due. Interest is charged on the debit balance, usually with
quarterly rests unless there is an arrangement to the contrary. No cheque book is issued.
The security may be personal or in the form of shares, debentures. Government paper,
immovable property, fixed deposit receipts, life insurance policies, goods etc.
Industry introduction

The Indian Banking industry, which is governed by the Banking Regulation Act of India,

1949 can be broadly classified into two major categories, non-scheduled banks and

scheduled banks. Scheduled banks comprise commercial banks and the co-operative

banks. In terms of ownership, commercial banks can be further grouped into

nationalized banks, the State Bank of India and its group banks, regional rural banks

and private sector banks (the old/ new domestic and foreign). These banks have over

67,000 branches spread across the country in every city and villages of all nook and

corners of the land.

The first phase of financial reforms resulted in the nationalization of 14 major banks in

1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted

in a significant growth in the geographical coverage of banks. Every bank had to

earmark a minimum percentage of their loan portfolio to sectors identified as “priority

sectors”. The manufacturing sector also grew during the 1970s in protected environs

and the banking sector was a critical source. The next wave of reforms saw the

nationalization of 6 more commercial banks in 1980. Since then the number of

scheduled commercial banks increased four-fold and the number of bank branches

increased eight-fold. And that was not the limit of growth.

After the second phase of financial sector reforms and liberalization of the sector in the

early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete

with the new private sector banks and the foreign banks. The new private sector banks

first made their appearance after the guidelines permitting them were issued in January

1993. Eight new private sector banks are presently in operation. These banks due to

their late start have access to state-of-the-art technology, which in turn helps them to

save on manpower costs.

During the year 2000, the State Bank Of India (SBI) and its 7 associates accounted for

a 25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized

banks accounted for 53.2 percent of the deposits and 47.5 percent of credit during the

same period. The share of foreign banks (numbering 42), regional rural banks and other

scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent

respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively

in credit during the year 2000.about the detail of the current scenario we will go

through the trends in modern economy of the country.

Current Scenario:

The industry is currently in a transition phase. On the one hand, the PSBs, which are

the mainstay of the Indian Banking system are in the process of shedding their flab in

terms of excessive manpower, excessive non Performing Assets (Npas) and excessive

governmental equity, while on the other hand the private sector banks are consolidating

themselves through mergers and acquisitions.

PSBs, which currently account for more than 78 percent of total banking industry

assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues

from traditional sources, lack of modern technology and a massive workforce while the

new private sector banks are forging ahead and rewriting the traditional banking

business model by way of their

sheer innovation and service. The PSBs are of course currently working out challenging

strategies even as 20 percent of their massive employee strength has dwindled in the

wake of the successful Voluntary Retirement Schemes (VRS) schemes.

The private players however cannot match the PSB’s great reach, great size and access

to low cost deposits. Therefore one of the means for them to combat the PSBs has been

through the merger and acquisition (M& A) route. Over the last two years, the industry

has witnessed several such instances. For instance, HDFC Bank’s merger with Times

Bank Icici Bank’s acquisition of ITC Classic, Anagram Finance and Bank of Madurai.

Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the

lookout. The UTI bank- Global Trust Bank merger however opened a pandora’s box and

brought about the realization that all was not well in the functioning of many of the

private sector banks.

Private sector Banks have pioneered internet banking, phone banking, anywhere

banking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined

various other services and integrated them into the mainstream banking arena, while

the PSBs are still grappling with disgruntled employees in the aftermath of successful

VRS schemes. Also, following India’s commitment to the W To agreement in respect of

the services sector, foreign banks, including both new and the existing ones, have been

permitted to open up to 12 branches a year with effect from 1998-99 as against the

earlier stipulation of 8 branches.

Tasks of government diluting their equity from 51 percent to 33 percent in November

2000 has also opened up a new opportunity for the takeover of even the PSBs. The FDI

rules being more

rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route

to acquire willing Indian partners.

Meanwhile the economic and corporate sector slowdown has led to an increasing

number of banks focusing on the retail segment. Many of them are also entering the

new vistas of Insurance. Banks with their phenomenal reach and a regular interface

with the retail investor are the best placed to enter into the insurance sector. Banks in
India have been allowed to provide fee-based insurance services without risk

participation, invest in an insurance company for providing infrastructure and services

support and set up of a separate joint-venture insurance company with risk

participation.

Aggregate Performance of the Banking Industry

Aggregate deposits of scheduled commercial banks increased at a compounded annual

average growth rate (Cagr) of 17.8 percent during 1969-99, while bank credit expanded

at a Cagr of 16.3 percent per annum. Banks’ investments in government and other

approved securities recorded a Cagr of 18.8 percent per annum during the same period.

In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP) growth of

only 6.0 percent as against the previous year’s 6.4 percent. The WPI Index (a measure of

inflation) increased by 7.1 percent as against 3.3 percent in FY00. Similarly, money

supply (M3) grew by around 16.2 percent as against 14.6 percent a year ago.

The growth in aggregate deposits of the scheduled commercial banks at 15.4 percent in

FY01 percent was lower than that of 19.3 percent in the previous year, while the growth

in credit by

SCBs slowed down to 15.6 percent in FY01 against 23 percent a year ago.

The industrial slowdown also affected the earnings of listed banks. The net profits of 20

listed banks dropped by 34.43 percent in the quarter ended March 2001. Net profits

grew by 40.75 percent in the first quarter of 2000-2001, but dropped to 4.56 percent in

the fourth quarter of 2000-2001.

On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the

norms, it was a feat achieved with its own share of difficulties. The CAR, which at

present is 9.0 percent, is likely to be hiked to 12.0 percent by the year 2004 based on
the Basle Committee recommendations. Any bank that wishes to grow its assets needs

to also shore up its capital at the same time so that its capital as a percentage of the

risk-weighted assets is maintained at the stipulated rate. While the IPO route was a

much-fancied one in the early ‘90s, the current scenario doesn’t look too attractive for

bank majors.

Consequently, banks have been forced to explore other avenues to shore up their

capital base. While some are wooing foreign partners to add to the capital others are

employing the M& A route. Many are also going in for right issues at prices considerably

lower than the market prices to woo the investors.

Interest Rate Scene

The two years, post the East Asian crises in 1997-98 saw a climb in the global interest

rates. It was only in the later half of FY01 that the US Fed cut interest rates. India has

however

remained more or less insulated. The past 2 years in our country was characterized by

a mounting intention of the Reserve Bank Of India (RBI) to steadily reduce interest rates

resulting in a narrowing differential between global and domestic rates.

The RBI has been affecting bank rate and CRR cuts at regular intervals to improve

liquidity and reduce rates. The only exception was in July 2000 when the RBI increased

the Cash Reserve Ratio (CRR) to stem the fall in the rupee against the dollar. The steady

fall in the interest rates resulted in squeezed margins for the banks in general.

Governmental Policy:
After the first phase and second phase of financial reforms, in the 1980s commercial

banks began to function in a highly regulated environment, with administered interest

rate structure, quantitative restrictions on credit flows, high reserve requirements and

reservation of a significant proportion of lendable resources for the priority and the

government sectors. The restrictive regulatory norms led to the credit rationing for the

private sector and the interest rate controls led to the unproductive use of credit and

low levels of investment and growth. The resultant ‘financial repression’ led to decline in

productivity and efficiency and erosion of profitability of the banking sector in general.

This was when the need to develop a sound commercial banking system was felt. This

was worked out mainly with the help of the recommendations of the Committee on the

Financial

System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector reforms

called for interest rate flexibility for banks, reduction in reserve requirements, and a

number of structural measures. Interest rates have thus been steadily deregulated in

the past few years with banks being free to fix their Prime Lending Rates(PLRs) and

deposit rates for most banking products. Credit market reforms included introduction

of new instruments of credit, changes in the credit delivery system and integration of

functional roles of diverse players, such as, banks, financial institutions and non-

banking financial companies (Nbfcs). Domestic Private Sector Banks were allowed to be

set up, PSBs were allowed to access the markets to shore up their Cars.

Implications Of Some Recent Policy Measures:

The allowing of PSBs to shed manpower and dilution of equity are moves that will lend

greater autonomy to the industry. In order to lend more depth to the capital markets

the RBI had in November 2000 also changed the capital market exposure norms from 5

percent of bank’s incremental deposits of the previous year to 5 percent of the bank’s
total domestic credit in the previous year. But this move did not have the desired effect,

as in, while most banks kept away almost completely from the capital markets, a few

private sector banks went overboard and exceeded limits and indulged in dubious stock

market deals. The chances of seeing banks making a comeback to the stock markets

are therefore quite unlikely in the near future.

The move to increase Foreign Direct Investment FDI limits to 49 percent from 20

percent

during the first quarter of this fiscal came as a welcome announcement to foreign

players wanting to get a foot hold in the Indian Markets by investing in willing Indian

partners who are starved of net worth to meet CAR norms. Ceiling for FII investment in

companies was also increased from 24.0 percent to 49.0 percent and have been

included within the ambit of FDI investment.

INTRODUCTION OF INDUSTRY
5
ORIGIN OF BANKING

Banks are among the main participants of the financial system in India. Banking offers several
facilities and opportunities.

Banks in India were started on the British pattern in the beginning of the 19th century. The first
half of the 19th century, The East India Company established 3 banks The Bank of Bengal, The
Bank of Bombay and The Bank of Madras6.

These three banks were known as Presidency Banks. In 1920 these three banks were
amalgamated and The Imperial Bank of India was formed. In those days, all the banks were joint
stock banks and a large number of them were small and weak. At the time of the 2nd world war
about 1500 joint stock banks were operating in India out of which 1400 were non- scheduled
banks. Bad and dishonest management managed quiet a quiet a few of them and there were a
number of bank failures. Hence the government had to step in and the Banking Company’s Act
(subsequently named as the Banking Regulation Act) was enacted which led to the elimination of
the weak banks that were not in a position to fulfil the various requirements of the Act. In order to
strengthen their weak units and review public confidence in the banking system, a new section 45
was enacted in the Banking Regulation Act in the year 1960, empowering the Government of
India to compulsory amalgamate weak units with the stronger ones on the recommendation of the
RBI.
 BUSINESS OF BANKING
Banking, in a traditional sense is the business of accepting deposits of money from public for the
purpose of lending and investment. These deposits can have a distinct feature of being withdraw able
by cheques, which no other financial institution can offer.

In addition to this banks also offer various other financial services also which include:-
 Issuing Demand Drafts & Travelers Cheques
 Collection of Cheques, Bills of exchange
 Safe Deposit Lockers
 Issuing Letters of Credit & Letters of Guarantee
 Sale and Purchase of Foreign Exchange
 Custodial Services
 Investment services

The business of banking is highly regulated since banks deal with money offered to them by the
public and ensuring the safety of this public money is one of the prime responsibilities of any bank.
That is why banks are expected to be prudent in their lending and investment activities. The major
regulations and acts that govern the banking business are:-

 Banking Regulations Act

 Reserve Bank of India Act
 Foreign Exchange Regulation (Amendment) Act, 1993
 Indian Contract Act
 Negotiable Instruments Act

Banks lend money either for productive purposes to individuals, firms, corporate etc. or for buying
house property, cars and other consumer durable and for investment purposes to individuals and
others. However, banks do not finance any speculative activity. Lending is risk taking. The risk should
be covered by having prudent norms for lending. The depositors of banks are also assured of safety
of their money by deploying some percentage of deposits in statutory reserves like SLR & CRR.
NEW GENERATION BANKING

The liberalize policy of Government of India permitted entry to private sector in the banking, the
industry has witnessed the entry of nine new generation private banks. The major differentiating
parameter that distinguishes these banks from all the other banks in the Indian banking is the level of
service that is offered to the customer. Verify the focus has always been centered on the customer –
understanding his needs, preempting him and consequently delighting him with various
configurations of benefits and a wide portfolio of products and services. These banks have generally
been established by promoters of repute or by ‘high value’ domestic financial institutions. The
popularity of these banks can be gauged by the fact that in a short span of time, these banks have
gained considerable customer confidence and consequently have shown impressive growth rates.
Today, the private banks corner almost four per cent share of the total share of deposits. Most of the
banks in this category are concentrated in the high-growth urban areas in metros (that account for
approximately 70% of the total banking business). With efficiency being the major focus, these banks
have leveraged on their strengths and competencies viz. Management, operational efficiency and
flexibility, superior product positioning and higher employee productivity skills.

The private banks with their focused business and service portfolio have a reputation of being niche
players in the industry. A strategy that has allowed these banks to concentrate on few reliable high
net worth companies and individuals rather than cater to the mass market. These well-chalked out
integrates strategy plans have allowed most of these banks to deliver superlative levels of
personalized services. With the Reserve Bank of India allowing these banks to operate 70% of their
businesses in urban areas, this statutory requirement has translated into lower deposit mobilization
costs and higher margins relative to public sector banks.