1.0 Absract: Project On Banking Sector 1

1.
0 ABSRACT
Banks play an important role in development of Indian

economy. After liberalization, the banking industry under went major
changes. The economic reforms totally have charged the banking
sector. RBI permitted new banks to be started in the private sector as
per the recommendation of Narasimham committee. The Indian
Banking Industry was dominated by public sector banks. But now the
situations have changed. New generation banks with used of
technology and professional management has gained a reasonable
position in the banking industry. In this paper, we look the type of
banks, their role and function, Establishment and role of India’s
banks, Central Bank of India (RBI) and the recent banking reforms.
1.1 INTRODUCTION
Banks over the years have become a significant aspect of an economy

with the ongoing financial depression, the position of banks have
become all the more importance in the course of working of the
money market and hence the economy of a nation. The banking sector
forming a portion of the financial sector primarily works as a
financial intermediary generating money supply. Form the different
economic models bank has been found to be a part of the supply side
of the economy. However, over time banks have transformed from
merely money generating organization to a multi tasking entity. In
this paper, we shall deal with role of banks in the context of the world
economy as well as the Indian economy.
Project on Banking Sector 1

1.2 HISTORY
 1870- Bank of Hindustan- First Bank
 Presidency Banks- Bank of Calcutta, Bank of Bombay and

Bank of Madras.
 1921- All 3 amalgamated and became imperial Bank of India
 1934- RBI was constituted
 1949- RBI came under Government control
 1955- Imperial Bank became State Bank Of India (SBI)
1.3 FACTS & FIGURES
 The First Bank in India to be given an 150 certification.

-Canara Bank
 The First Indian Bank to have been started solely with Indian
Capital. -Punjab National Bank
 The First among the private sector banks in kerala to become a
scheduled bank in 1946 under the RBI Act.
-South Indian Bank
 India’s oldest, largest and most successful commercial Bank,
offering the widest possible range of domestic, international and
NRI products and services, through its vast network in India and
overseas. – State Bank OF India
 India’s Second largest private sector bank and is now the largest
scheduled commercial bank in India.

-The federal Bank Limited
 Bank which started as private shareholders bank, mostly
Europeans shareholders
-Imperial Bank of India
 The First Indian Bank to open a branch outside India in London
in 1946 and the first to open a branch in continental Europe at
Paris in 1974.
-Bank of India, founded in 1906 in Mumbai
 The oldest public sector Bank in India having branches all over
India and serving the customers for the last 132 years.
- Allahabad Bank
 The First Indian commercial Bank, which was wholly owned
and managed by Indians.
-Central Banks of India

1.4 MOTIVATION
The recession in the US market and the global meltdown termed as

Global recession have engulfed complete world economy with a
varying degree of recession impact. World over the impact has
diversified and its impact can be observed from the very fact of
falling stock market, recession in job availability and companies
following downsizing in the existing available staff and cutting down
of the perks and salary correction.
Various steps taken by RBI to curb the present recession in the

economy and counter act the prevailing situation. The sudden drying-
up of capital inflows from the FDI which were invested in Indian
stock market for greater returns visualizing the potential higher return
flying back is continuing to challenge liquidity management. At the
heart of the current liquidity, tightening is the balance of payment
deficit, and his NRI deposit move should help in some small way.
To curb the liquidity crises the RBI will continue to initiate liquidity
measures as long as the current unusually tight domestic liquidity
environment prevails. The current step to curb these being lowering
of interest rates and reducing the PLR. The BOP balance of payment
deficit-at a time when domestic credit demand is very high- is
resulting in vicious loop of reduced access to liquidity, showing
growth, and increased risk adversion in the financial system.
In present situation down fall in one sector one day leads to a

negative impact on the other sector thus all together everyone feel the
impact of the financial crises with the result of the current recession
which started in US and slowly and gradually due to linked global
world have impacted everyone.

Solution for the problem still remain at the mind of every one, still
everyone facing the impact of recession but now long is the major
question which is of great importance.
1.5 HYPOTHESIS
In this research. I am trying to given on overview of the whole

banking sector in India and kind of financial function they perfume
which help in the growth of the economic growth and progress of the
country.

2.0 WHAT IS THE BANK?
While the question may seen elementary, the answer can be quite
complex, understanding what banking is all about will help the paper
to illustrate the role of banks better.
A Bank is a financial institution where the accepting, for the purpose

of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, where an individual can deposit
money and withdrawable by cheque, draft, order or otherwise. The
funds raised by the bank through deposits or by way of borrowings
from the money market are at a cost which is payable in terms of
interest. Banks provide the many services they offer saves an
incredible amount of time, and ensures that the funds of micro as well
as macroeconomics agents “pass hand” in a legal and structured
manner. There are also other types of financial institutions that
operate just like banks. Banking Regulation Act, 1949 requires all
banks to maintain cash reserves in the range of three to twenty per
cent of demand and time liabilities (DTL) and liquid assets in the
form of investment in Government and other approved securities to
the tune a minimum of 25% of the DTL. On an average about 30-40%
of the bank’s funds are locked up or invested to meet the statutory
liquidity requirements leaving the balance of about 60-70% for
lending. Broadly, banks are required to follow the norm of credit-
deposit (CD) ratio of 60-70% of the deposits could be utilized for
lending. This is generally expressed to say that banks are required to
maintain a CD ratio of 60-70%. Obviously, for any bank to survive,
the return on funds lent or invested has to be higher than the cost of
funds.

Apart from the CD ration of 60-70%, the bank has to manage its
advances portfolio to be in tune with the credit policy announced by
the RBI from time to time. Bank credit is an integral part of the total
money supply.
2.1 TYPES OF BANK
 Central Bank: A central Bank, Reserve Bank or monetary

authority is the entity responsible for the monetary policy of a
country or of a group of member states. Its primary
responsibility is to maintain the stability of the national currency
and money supply, but more active duties include controlling
subsidized loan interest rate, and acting as a lender of last resort
of the banking sector during times of financial crisis (private
banks often being integral to the national financial system). It
may also have supervisory powers, to ensure that banks and
other financial institution do not behave recklessly or
fraudulently.
 Commercial Banks: A commercial Bank performs all kinds of

banking function such as accepting deposits, advancing loans,
credit creation & agency function. They generally advance
short-term loans to their customers, in some cases they may give
medium terms loans also.
 Industrial Bank: Ordinarily, the Industrial banks perform

three main functions.

Firstly, acceptance of long-term deposits: since the industrial
bank gives long-term loans, they cannot accept short-term
deposits from the public.
Secondly: meeting the credit requirement of companies. Firstly
the industrial requirement to purchase land to erect building and
purchase heavy machinery, secondly the industries require short
term loans to buy raw materials & to make payment of wages to
workers, thirdly it does some other functions- The industrial
banks tender advice to big industrial firms regarding the sale &
purchase of shares & debentures.
 Agricultural Banks: As the commercial the industrial banks

are not in a position to meet the credit requirements of
agriculture, there arises the need for setting up special types of
banks to finance agriculture, there arises the need for setting up
special types of banks to finance agriculture. Firstly, the farmers
require short term loans to buy seeds, fertilizers, ploughs and
other inputs. Secondly, the farmers require long term loans to
purchase land, to effect permanent improvement on the land to
buy equipment & to provide for irrigation works.
 Foreign Exchange Banks : Their main functions is to make

international payments through the purchase & sale of exchange
bills. As is well known, the exporters of a country prefer to
receive the payment for their exports in their own currency.
Hence their arises the problem of converting the currency of
another. The foreign exchange banks try to solve this problem.
These banks specialize in financing foreign trade.
 Indigenous Banks: According to the Indian enquiry

committee, “Indigenous banker is a person or a firm which

accepts deposits, transacts business in hundies and advance
loans etc.”
2.2 FUNCTION OF BANK
Function of a Bank is among the most complicated of corporate

operation. Since Banking involves dealing directly with money
government in most countries regulated 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 regulation
that a bank has to work with makes it operations even more
complicated, sometimes bordering an illogical. This section 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 withdrawable 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:
o Accepting Deposits from public/ other (deposits)

o Lending money to public (Loans)
o Transferring money from one place to another(Remittances)
o Credit creation
o Acting as trustees
o Keeping valuables in safe custody
o Investment decisions and analysis
o Government business
o Other types of lending and transactions.

Other services offered by Banks
o Credit cards
o Personal Loans
o Home and car loans
o Mutual fund
o Business Loans
o Safe deposit boxes
o Debit cards
o Trust services
o Signature Guarantees.
…...and many other investment services.
2.3 ROLE OF BANK
A proper financial sector is of special importance for the economic

growth of developing and underdeveloped countries. The commercial
banking sector should be well organized and efficient for the growth
dynamic of a growing economy. No underdeveloped country can
progress without first setting up a sound system of commercial
banking. The importance of sound system of commercial banking for
a developing country may be depicted as follows:

• Capital formation: The rate of saving is generally low in an
underdeveloped economy due to the existence of deep rooted
poverty among the people. Even the potential savings of the
country cannot be realized due to lack of adequate banking
facilities in the country. To mobilize doormat savings and to
make them available to the entrepreneurs for productive
purpose, the development of a sound system of commercial
banking is essential for a developing economy.
• Monetization: An underdeveloped economy is characterized

by the existence of a large non-monetized sector, particularly, in
the backward and inaccessible areas of the country. The
existence of this non-monetized sector is a hindrance in the
economic development of the country. The banks, backward
areas, can promote the process of monetization in the economy.
• Innovation: Innovation is an essential prerequisite for

economic progress. These innovations are mostly financed by
bank credit in the developed countries. But the entrepreneurs in
underdeveloped countries cannot bring about these innovation
for lack of bank should, there fore, pay special attention to the
financing of business innovation by providing adequate and
cheap credit to entrepreneurs.
• Finance for priority sectors : The commercial banks in

underdeveloped countries generally hesitate in extending
financial accommodation to such sectors as agriculture and
small scale industries, on account of the risks involved therein.
They mostly extend credit to trade and commerce where the risk
involved is for less. But for the development of these countries
it is essential that the banks take risk in extending credit

facilities to the priority sectors, such as agriculture and small
scale industries.
• Provision for medium and long term finance : The

commercial banks in underdeveloped countries invariable given
loans and advances for a short period of time. They generally
hesitate to extend medium and long-term loans to
businessperson. As is well known, the new business need
medium and long-term loans for their proper establishment. The
commercial banks should, therefore, change their policies in
favor therefore, change their policies in favor of granting
medium and long term accommodation to businessman and
industry.
• Cheap money policy: The commercial bank in an

underdeveloped economy should follow cheap money policy to
estimate economic activity or to meet the threat of business
recession. In fact, cheap money policy is the only policy, which
can help promote the economic growth of an underdeveloped
country. It is hearting to note that recently the commercial banks
have reduced their lending interest rates considerably.
• Need for a sound Banking system : A sound system of

commercial banking is an essential prerequisite for the
economic development of a backward country.

2.4 INNOVATION IN BANKING DUE TO
TECHNOLOGY.
The recent years witnessed the Indian banking on a technological

upswing. Some of the innovation that are made possible on account of
infusion of technology are as follows:
1. Total Branch Automation
Total Branch Automation (TBA) enables customers to transact all the

banking needs through a single counter instead of going to different
counters in the premises. TBA helps significantly in improving the
efficiency of operations.
2. Automated Teller Machines
ATMs are capable of performing the function of a bank teller or a

cashier viz., dispensing cash, answering account related enquiries,
ordering a new cheque book, providing statements of account etc.
3. Electronic funds Transfer
Banks through the technique of networking are able to transmit

messages at the push of a button. Now the mail transfers and
telegraphic transfers are effected within a matter of seconds.

4. Automated Cash Dispensers
These machines dispense a fixed amount of cash as soon as

preprinted voucher in inserted in the machine.
5. Anywhere Banking
Due to the networking of computerized branches, customers can

choose to operate their account through any branch of the once they
become the account holders of a branch.
6. Anytime Banking
The ATM facilities enable customers to transact with the bank any
time all through the 24 hours of the day.
7. Home Banking
Due to the latest technology, a customer can route most of the

transactions through his/her personal computer, which will be up-
linked with the main frame computer of the bank.
8. Mobile Banking
With Mobile Banking facilities, one can bank from anywhere, at

anytime and in any condition or anyhow. The system is either through
SMS or through WAP.
SEVICES OFFERED ON MOBILE:

 Bill Payments
 Fund transfers
 Check balances
 Any many more which is also available in SMS banking.
9. SMS Banking
 Balance enquiry
 Last three transactions
 Cheque payment status
 Cheque book request
 Statement request
 Demat- free balance holdings
 Demat- last two transactions
 Bill payment
SMS banking is also very much safe. First, one authenticates the
mobile number with the authentications key. Second, the customer
uses secret mobile personal Identification Number (MPIN)
10. Telebanking
Telebanking facility enables the customer to use Automatic voice

recorder for simpler queries like balance in the account, request for a
cheque book, standing instruction, information about bank schemes,
issue of drafts etc. The customers can do many of their non-cash
related transaction over phone. A personnel identification number
would be given to each customer for identification and secrecy..

11. Plastic Cards
Credit cards as a method of payment without the use of cash or

cheque is gradually giving way to improved version such as debit
cards, smart cards, co branded cards etc.
12. Internet Card
This card is similar to the commonly used plastic card, but can be
used for online transaction. SBI has applied for RBI’s approval to
start issuance of internet card.
13. Biometric Card
Biometric ATMs authorize transaction by scanning the customer’s

thumbprints instead of a PIN code. Biometric ATMs have multiple
language capabilities and voice enables navigation. The colour coded
buttons (Yellow for deposit, green for withdrawal) guide customers
through the transaction-balance enquiry, deposits and withdrawals.
14. Electronic Clearing Service-ECS
Electronic Clearing service is available at various centers.

Ahmedabad, Bangalore, Bhuneshwar, Kolkata, Chandigarh, Chennai,

Delhi, Guwahati, Hyderabad, Jaipur, Kanpur, Mumbai, Nagpur,
Patna, Pune, Trivandrum and other centers.
The customers willing to use this facility are required to fill in the
mandate form from the corporate/any-utility service institution for
ECS mode of credit and debit. The customers need to prepare the
payment date and submit it to the “sponsor bank” and after that every
thing happens electronically.
3.0 BANKING SECTOR IN INDIA
 Central Bank:
Reserve Bank of India the central bank that is fully owned by the
Government. It is governed by a central board (head by a
Governor) appointed by the central Government. It issues
guidelines for the functioning of all banks operating within the
country.
Public sectors banks:
a) State bank of India its associate banks called state Bank

Group
b) 20 nationalized banks
c) Regional rural banks mainly sponsored by public sector
banks
Private Banks:
a) Old generation private Banks

b) New generation private Banks
c) Foreign banks operating in India

d) Scheduled co-operating banks
e) Non-scheduled banks
Co-operative sector:
The co-operative sector is very much useful for rural people. The
co-operative banking sector is divided into the followings
categories.
a) State co-operative banks

b) Central co-operative banks
c) Primary Agriculture credit societies.
Development Banks/ Financial Institutions:
o IFCI, IDBI, ICICI Bank, RBI

o SCICI Ltd.
o NABARD
o Export-Import bank of India
o National Housing Development Bank of India
o North Eastern Development finance corporation.

3.1 BANKING NETWORK IN INDIA
 Currently India has:

 88 scheduled commercial bank (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)
 31 foreign banks
They have 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 per cent of total assets of the
banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively.

3.2 ROLE OF BANKS IN INDIAN ECONOMY.
In India, as in many developing countries, the commercial banking

sector has been the dominant element in the country’s financial
system. The sector has performed the key function of providing
liquidity and payment services to the real sector and has accounted for
the bulk of the financial intermediation process. Bedsides
institutionalizing savings, the banking sector has contributed to the
process of economic development by serving as a major source of
credit to households, government, business and to weaker sectors of
the economy like village and small scale industries in the form of
bank deposits and around 60% of the assets of all financial institution
accounted for by commercial banks.
An important landmark in the development of banking sector in

recent year has been the initiation if reforms following the
recommendations of the first Narasimham Committee financial
system. In reviewing the strength and weakness of these banks, the
committee suggested several measures to transform the Indian
banking sector from a highly regulated to a more market oriented
system and to enable it to compete effectively in an increasingly
globalised environment. Many of the recommendation of the

committee especially those pertaining to interest rate, an institution of
prudential regulation and transparent accounting norms were in line
with banking policy reforms implemented by a host of developing
countries since 1970’s.
3.3 EVALUATION OF INDIAN BANKING
Prior to 1969, all bank, except state Bank of India and its seven
associate banks were privately owned/. However there was a
perception among policy makers that under private ownership, too
many rural and semi urban-area remained unserved by banks,
whereas the banking industry has to be developed to “touch the lives
of millions”. Further as India became an increasing planned economy,
policy makers felt that it would be difficult t undertake credit
planning unless the link control of industry and banks in the same
(private) banks is snapped by the nationalization Act of 1969 which
caused 14 largest privately owned domestic banks to be nationalized
in 1980 under the same Act, the Government of India acquire
ownership of 6 more private banks, bringing the total number of
nationalized banks to 20.
Not withstanding the positive role played by the banking sector since
nationalization in institutionalization savings and becoming a source
of credit to the small borrower, the cumulative effect of excessive
focus on quantitative achievement and social obligations took a tall
on profitability and efficiency Rates of Return became low by
international standards, the capital base was eroded, NPS’s were on
the rise, and customer service was below exception. These conditions
led to gradually liberalization of banking sector reforms of 1992 with

the acceptance of key recommendations of the Narasimham
Committee.
3.4 TOP 20’S BANKS IN INDIA
• Abn Amro Bank in India

• Allahabad Bank in India
• American express Bank in India
• Andhra Bank in India
• Axis Bank
• Bank of India
• Canara Bank
• Central Bank of India
• CITI Bank
• Corporation Bank of India
• HDFC Bank
• HSBC Bank
• ICICI Bank
• IDBI Bank
• Indian Overseas Bank
• Oriental Bank of Commerce
• Punjab National Bank
• State Bank of India
• Standard charted Bank
• United Bank of India

3.5 LAW RELATED TO BANKING
o Bankers Book Evidence Act, 1891

o The Hire-purchase Act,1972
o The Industrial Disputes (Banking and insurance
companies)Act, 1949
o The Industrial Dispute (Banking companies) decision
Act,1955
o Introduction to Law of negotiable instruments.
o Negotiable instrument by Avtal Singh.
o Banking, public financial institution & negotiable
instrument laws (Amend) Act, 1988 by EBC.
o Company secretaries Act, 1980 by EBC.
o National Housing Bank Act, 1987 by EBC.
o Negotiable instruments Act, 1881 by EBC.
o Regional Rural Banks Act, 1976 by EBC.
o Recovery of debts due to banks and financial institutions
Act, 1993 with debts recovery tribunal (procedure) rules,
1993 by EBC.
o Small industries development bank of India Act, 1989 by
EBC
o Industrial development bank of India Act, 1964 by EBC

o Export import bank of India Act, 1981 by EBC
o Banking public financial institutions & negotiable
instruments laws (Amend). Act, 1988 by EBC
o Reserve bank of India Act, 1934 by EBC.
4.0 BANKING SECTOR REFORMS IN INDIA
INTRODUCTION
Just a few decades ago, one would not have imagined about
the dramatic transformation that has taken/are taking place in the
banking industry. Perhaps no, where in the world de we have a record
of such a massive growth and wide ranging changes that have taken
place during the past two decades.
In the early 1950s, there were only a few banks operating in

the country and their branches were largely located at port towns,
important trade, and commercial centers like Mumbai, Kolkata,
Delhi, Chennai etc.
The banking culture then prevailing was essentially

different. There remained and aura around the branches and the
banks. The customer would consider it a unique distinction if he

could get an account opened with any one of the branches of any
bank.
The Rules governing the deposits, advances, withdrawals,

opening and closing of accounts, business timings and holidays were
all well spelt out and were religiously followed. No relaxation thereto
was permitted; either with intent to attract further deposits or to
improve their budgetary position nor any laxity was allowed to
facilitate any customer or to attract any business.
The total number of Branches of all banks in the country

was less than 1000. Advances were largely on pledge basis and
security oriented. They consisted or rice, paddy, cotton, sugar etc.
industrial products were not common. Agricultural lending and
lending to other priority sectors was practically nil, and was not heard
of by many.
The above scenario is just five decades back and would be

disbelieved to have existed in the present situation and context.
Sea change
Banking industry underwent dramatic changes in style,

functioning, operation and system to such an extent that one would
have extreme difficulty in believing that there existed and era of such
a state of banking as described in the previous paragraphs.
As of now, we have commercial banks in public and private

sector, foreign banks primary (Urban) co-operative banks and
specialized rural banks namely RRBs, state co-operative banks and
District central co-operative Banks.

OVER VIEW OF BANKING SECTOR REFORMS
In the context of industrial Trade & Exchange Rate Policy

Reforms initiated by the Government of India as a part of the macro
economic adjustments, the question of financial sector reforms, which
is also an essential adjunct to economic reforms came up for
consideration during 1991. The government of India therefore
constituted a high level committee to review the financial system and
to pave the way for the liberalization of banking practices under the
chairmanship of Shri M. Narasimham (former RBI Governor).
4.1 NARASIMHAM COMMITTEE BANKING

REFORMS
IMPORTANT RECOMMENDATION OF THE NARASHIMHAM

COMMITTEE –
PHASE-I
After identifying the weaknesses, the Narasimham

Committee has made fareaching recommendations to improve the
financial health of the banking system.
Some of the important recommendations are as under:
a) It is necessary that the financial system should operate on the

basis of operational flexibility and functional authority in order
to enhance efficiency, productivity and profitability.
b) The high level of statutory Liquidity Ratio stipulated for the
banks should be brought down in a phased manner in order to
release bank funds for deployment in profitable avenues.

c) The cash Reserve Ratio should also be progressively reduced
from its present high level. RBI should use CRR more flexibly
for monetary policy objectives and occasions for using it to
control secondary expansion of credit should be less.
d) Administered interest rate structure is very complex. Interest
rates should be deregulated so as to reflect emerging market
conditions. Bank Rate should be used as an anchor to signal
RBI Monetary policy. Prime lending rates should also provided
for, to indicate the floor lending rates of banks. Confessional
interest rates should be phased out.
e) Interest rates on CRR & SLR amounts over and above the base
level may be increased to be in tune with market related rates.
The interest should also ensure coverage of the average cost of
deposits raised by the banks.
f) All the banks 8% as a ratio in relation to risk weighted assests
should achieve capital adequacy norm within 3 years and latest
by March 1996.
g) Banks with good market reputation and having profitability
operation may be permitted to approach the capital market for
enhancement of the capital.
h) Before arriving at the capital adequacy ratio the assests of banks
should be evaluated on the basis of their realizable values by
adopting uniform accounting practices in regard to income
recognition and provisioning for bad and doubtful debts.
i) No income should be recognized on a non-performing asset.
Further provisioning should be done for doubtful and bad debts,
after classifying the assets into four categories viz. standard,
sub-standard, doubtful and loss assests.
j) The balance sheet of banks should be made more transparent by
full disclosure as per the international accounting standard
committee recommendations.
k) For speedy recovery of the bank’s dues special tribunals may be
set up to facilitate quick decisions because the ordinary courts
take a long time for awarding decrees.

l) An Asset Reconstruction Fund (ARF) may be established to
take over par of the bad and doubtful debts of banks for final
disposal by way of recovery/write-off by a special treatment.
This method is suggested as a part of the exercise for cleaning
the balance sheets of banks.
m) The entire commercial Banking System may be restructured to
constitute a four-tier banking system comprising of international
Banks, National Level Banks, Local Banks and Rural Banks.
To summaries, the major policy thrust therefore has been improving

the operation and ensuring efficiency of the banking sector by
focusing on the following objectives:
1. correcting and improving macro-economic policy setting, within

which banks operates by rationalizing interest rates and bringing
down levels of resource pre-emptions in the form of CRR &
SLR.
2. Improving the financial health and conditions of bans, by:
a) Recapitalizing banks;
b) Restructuring weaker ones;
c) Improving incentives.
3. Building financial institution and infrastructure relating to
supervision, audit technology and legal framework.
4. Improving the level of managerial competence and the quality
of human resources by reviewing the policies related to
recruitment, training and placement.
5. Injecting greater element of competition in the financial system.
Further, portfolio-clean up and recapitalization should go hand in

hand with the necessary institutional and management changes.
NARASIMHAM COMMITTEE RECOMMENDATIONS-
PHASE-II

 Mergers and closures of Banks
1. Strong Banks are to be merged with other strong banks for

creation of Global Banks.
2. Allow closure of chronically weak banks.
3. Introduce narrow banking concept, where weak banks
specialize in selected areas of banking operation say deposit
mobilization and depend on other banks for advance.
 Three-Tier banking structure:
1. Create 2 or 3 internationally oriented Banks.

2. 8 to 10 National Banks to cater to domestic credit needs of
the Indian corporate sector (Large and medium sized
Industries).
3. Small Local banks need to confine to state or cluster of
districts.
 Revamp Bank Functioning:
1. Professionals need to be inducted into Bank Boards.

2. Bank Chief Executive Officer Posts need to be de-
politicised.
3. State Bank subsidiaries should be reconstituted to have
chairman and Managing Director (CMD) and two whole-
time Directors.
4. To review recruitment procedures, training and
remuneration policies of public sector Banks.
5. Wage settlement should be made Bank wise. Right sizing
and re-deployment of surplus staff either by retaining or
voluntary Retirement Scheme (VRM) with appropriate
incentives.
6. Give more thrust to technology up-gradation.

7. Reduction in priority sector lending targets.
 Strengthening Bank Balance Sheets:
1. Capital Adequacy Ratio (CAR) should be increased to 9%

by 2000 AD and to 10% by 2001 AD by all banks.
Accrual of interest for income recognition should be
reduced to 90 days from 180 days.
 BANKING SECTOR REFOMS DURING 2001-2002
Emphasis during the year 2001-2002 was on:
-Building the health of banks and financial institutions.

-Improving the asset quality,
-Strengthening prudential norms, and
-Supervision and monitoring development with a view to
securing soundness and stability of the Indian banking
system comparable to international standards.
4.2 ROLE OF CENTRAL BANK (RBI)
INTRODCUTION:

It is necessary to know that Reserve Bank of India was
constituted under the RBI Act, 1934 was commenced on
April 1, 1935 and was nationalized in the year 1949. RBI to
regulate the issue of bank notes and the keeping of reserves
with a view to securing the monetary stability in India and
generally to operate the currency and credit system of the
country to its advantage. The RBI was originally conceived
as central bank of the country to perform the traditional
central banking functions, which are generally the same both
in developed and developing countries. The main objective
for the establishment of the central bank were as follows:
o To issue Currency Notes.

o To act as Banker to the Government.
o To act as Banker to the other Banks.
o To control and manage foreign exchange.
o To control and supervise other banks.
o To control money and credit in the country.
o To manage the monetary and credit system of the
country.
o To stabilizing internal and external value of Rupee.
o For the balanced and systematic development of
banking in the country.
o For the development of organized in the money market
in the country.
o For the proper arrangement of industrial finance.
o To establish monetary relation with other countries of
the world & international finance institutions.
o For the proper management of public debts.
o For centralization of cash reserves of commercial
banks.
o To maintains balance between the demand and supply
of currency.

4.3 RBI- ORGANISATIONAL STRUCTURE
The affairs of the Reserve Bank of India are managed by

Central Board of Directors, which consists of:
1. The Governor and not more than 4 Deputy Governors

appointed by the Central Government.
2. Four Directors nominated by the Central Government

one from each of the Four Local Boards.
3. Ten Directors and one Government Official nominated

by the Government of India.

The Reserve Bank of India has four Local Boards at Mumbai,
Kolkata, Chennai and New Delhi, with Head quarters at Mumbai. The
Local Boards consist of five members and these members are also
appointed by central Government to represent territorial and
economic interests.
The chairman of the Central Board of Directors is the Chief Executive

authority of the bank who is known as the Governor. The Governor
has the powers of general superintendence and direction on the affairs
and business of the bank.
4.4 FUNTION OF THE RESERVE BANK OF INDIA
The main functions of the Reserve Bank of India are:
1. Issue of Notes
The RBI is the sole authority for issuing bank notes in the
country, which constitutes a significant part of the money
supply. The notes are issued in suitable denominations,
which constitute the legal tender. Similarly, the RBI destroys
currency and coins not fir for circulation.
2. Banker to The Government
The RBI acts as Banker to both the Central Government as

also the state Governments. Apart from handling the day to day

transactions of the Government, the Reserve Bank of India also
manages the public debt of the Government raised through loans,
bonds etc.
3. Banker’s Bank
The RBI does not deal with the public directly as the
Commercial Banks do. It is necessary to understand the difference
between the Commercial Banks and the Central Bank of the
country. The commercial bank act as a link between the public and
the Central bank and operate with the main motive of profits.
However, the Central Bank’s main objective is the economic
welfare of the country. The Reserve Bank of India is the monetary
authority of the country. It may be noted that monetary policy is
that part of the economic policy, which regulated the level of
money supply in the economy in such a way to achieve the policy
objective of price stability, economic growth and equilibrium in
balance of payments position. Since the banks are the custodian of
the money supply, RBI operates the monetary policy by are the
custodian of the money supply, RBI operates the monetary policy
by controlling the Commercial Banks through various instruments
like Bank Rate, Open Market Operations etc. RBI also acts as the
lender of last resort t the other banks.
4. Foreign Exchange Management
Foreign Exchange Management and control involves

maintaining the external value of the currency, management of
foreign exchange reserves and exchange control. The RBI
performs these functions in consultation with the Government of
India under the provisions of Foreign exchange Management Act.
It facilitates external trade and payment and promoter’s orderly

development and maintenance of foreign exchange market in
India.
5. Credit Control
India being a predominantly agrarian economy, the RBI manages

the credit control on the basis of busy and slack season credit
policy generally coinciding with the sowing and harvesting seasons
of the country. Meetings are help with the bankers twice a year
during which the credit policy for the season is announced and
implementation is monitored. Credit control is such a unique and
importance function that through it all other functions are made to
serve the common purpose of the monetary policy objective of
economic growth with price stability. In order to regulate the
supply of credit RBI uses quantitative and qualitative instruments
or techniques of credit control. The qualitative techniques include
Bank Rate, Open Market Operation, Cash Reserve and Statutory
Liquidity Ratio requirements.
4.5 RBI AND ITS CONTROL ON COMMERCIAL BANKS
a) Bank Rate:
Section 49 of the RBI Act stipulated that the RBI shall make
public from time to time the standard rate at which it is prepared to
buy or discount bill of exchange or other commercial paper eligible
for purchase under this Act. In a developed money market
condition the Bank Rate acts as a pointer to general interest rate
structure in the economy and serves the purpose of regulatory
norm to which the money market as a whole should adjust. Thus

the Bank Rate is a very powerful instrument of credit control
indicative of dear money or cheap money policy followed by the
Central Bank of the country. The efficacy of Bank Rate depends
upon the extent to which commercial banks resort to financial
accommodation from the Central Bank. In the Indian conditions,
the RBI has not been using Bank Rate as a main instrument of
credit control because until recently we had a system of
administered interest rates for all types of commercial lending, and
deposits.
Under the planned economic development, public sector

investments have a major role. Government of India directly the
major investments according to its policy. In such an environment,
the efficacy of Bank Rate as powerful instrument of credit control
in India is not comparable to what it is in some of the developed
countries with a free economy. The Bank Rate merely indicates the
changes in the direction of credit policy of the RBI.
b) Open Market Operations
This instrument of credit control is a technique by which the

RBI is able to change the liquidity position of Banks through
buying and selling of securities directly in the market. In the Indian
conditions, open market operations are generally confined to
buying and selling of Government securities. The Government
security market is narrow because a sizeable portion of
Government securities are held by the leading financial institution.
On account of not having a very well developed bill market. Open
market operations of RBI are confined to Government Bonds.
Hence this instrument is not able to produce the required efficient
result in India, as it might do in the developed countries. It has a
very limited role, more particularly, in the context of a system of
RBI indicating the extent of its support to Government borrowing
programme as a part of the overall budgetary exercise and the
ways and means advance system to replace adhoc treasury bills.

c) Cash Reserve Ration (CRR)
The RBI regulates the liquidity of the banking system and

through it the credit creating capacity of the banks by means of two
complementary methods viz. Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR). CRR is the amount of cash reserve
that is required to be maintained by every bank in India, (other than a
scheduled bank) way of cash reserve bank either with itself or in
current account a sum equivalent to a prescribed % of its total
demand and time liabilities. This is a statutory requirement stipulated
under section 18 of the Banking Regulation Act, 1949. The minimum
requirement of cash reserve required to be kept is 3 percent of
demand and time liabilities (DTL) of Bank of India computed for the
period from Saturday to second Friday, of each fortnight. The items
of DTL which are to be include/excluded for the purpose of
computation of CRR have been given in section 18 of the banking
Regulation Act.
If RBI wants to put a check on credit expansion, it raises the

CRR, conversely when credit expansion is to be induced, the CRR is
lowered. The main purpose of the CRR is to safeguard the liquidity
position of the banks in the interest of depositors. However, this
technique is used by the RBI as a monetary instrument to control the
money supply in the economy. High CRR is resulting in impounding
the cash resources of the banks and their ability to expand credit.
d) Statutory Liquidity Ration (SLR)
This is a statutory requirement stipulated under section 24 of

the Banking Regulation Act, 1949. The RBI is empowered to vary the
SLR between 25 to 40% of he Demand and Time Liabilities. The
SLR is required to be maintained in the form of cash, gold (valued at
market price) and other approved securities. The details of the items

of Demand and Time Liabilities to be included/excluded for
computing the SLR are given in section 24 of the Banking Regulation
Act.
The SLR is exclusive of the CRR, and banks are required to

maintain CRR and SLR both separately. SLR to be maintenance on a
daily basis computed on the basis of net Demand and Time Liabilities
as on the last Friday of the second preceding fortnight. A return has
been prescribed to monitor compliance. Any default attracts penalty.
The main purpose of SLR like that of CRR is to safeguard

the liquidity position of the bank by investing in approved securities
which can be readily marketed and could be converted into cash to
meet the obligations of / claims of depositors. RBI has been the
purpose of SLR mainly comprise of the Government securities and
bonds. Over a period, the SLR has come to play the role of financing
the Government of India though SLR ration at 25% of Demand and
Time Liabilities.
4.6 GLOBAL GDP GROWTH
(Percentage)
Country/ Region 2009 2010
 US (-) 2.7 1.5
 UK (-) 4.4 0.9

 Euro Area (-) 4.2 0.3
 Japan (-) 5.4 1.7
 China 8.5 9.0
 India 5.4 6.4
 Advanced Economic (-) 3.4 1.3
 Emerging and Developing 1.7 5.1

Economies
 World (-) 1.1 3.1
5.07 P’S OF BANKS
PRODCUT
PROMOTION
PRICING
PHYSICAL EVIDENCE
PALCE

PEOPLE
PROCESS
5.1 SWOT ANALYSIS OF BANKING

INDUSTRIES

Strength Weakness
 Supports from the  Too many small Banks

Government
 Financial assistance  Regulatory Environment
Opportunity Threat
 Electronic forms of  Investment of foreign

Business banks
 Technology  Unorganized money
 Untapped market lending market
 Young India & rising  Threat of nationalization.
standard of living
 Globalization
5.2 THE CHALLENGES AHEAD
Let me now turn to the major challenges facing the Banking system in
the country, particularly in the wake of the global financial crisis.
• The first challenge: Maintaining the credit now. If it is

indicative of slowing economic activity, it would be a major
challenge for the banks to ensure healthy flow of credit to the

productive sectors of the economy. As you know, economic
growth, even in normal times requires of efficient financial
intermediation. An economic downturn, therefore, requires even
more efficient financial intermediation and this is a major
challenge that the banking community has to address.
• The second challenge: How to reform financial sector

Regulation: several issues have come to the fore. I will mention
just, few. How can complex derivatives products, which
transmitted risks across the system, be made more transparent?
a. What are the financial stability implication of structured
products like credit derivatives?
b. Are exchange trade derivatives better than over the
counter (OTC) derivatives?
c. How do we eliminate the drawbacks of the “originate to
distribute” model?
d. Is universal banking the model that the United States has
now turned to appropriate?
e. Can we apply the some regulatory regime for both
wholesale and retail banks?
• The Third challenge: Effective implementation of Basel II

framework.
Having regard to the state of preparedness of the system, we

have for the present, adopted only the simpler approaches available
under the framework. One RBI is yet to announced the timeframe
for adoption of the advanced approaches in the Indian banking
system but the migration to these approaches is the eventual goal.
For which the banking system will need to start its preparations in
all earnestness.

5.3 CONCLUSION:
Going forward developments in the real economy, financial

markets and global commodity prices point to a period of
moderation in growth with declining inflation. What is heartening
though is that the fundamentals of our economy continue to be
strong. Once calm and confidence are restored in the global
markets economic activity in India will recover sharply. But a
period of painful adjustment is inevitable. It is our collective
challenge for you the bankers and for us at the RBI to respond to
this extraordinary situation effectively and return India to its path
of growth and poverty reduction.
5.4 BIBLIOGRAPHY
Reference: To obtain more information regarding present study

and to subordinate it with theoretical proof following reference
were made.
Book reference:
Banking and Insurance Law and Practice

ICSI
Trend and progress of Banking in India

Internet:
http://finanance.indiamart.com/investment
in India/easy banking.html
www.rbi.org.in
www.wikipodia.org
www.imf.org.in
www.google.com
Newspapers:
Economic Times.

*≈ Thank you ≈*

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1.

Banks play an important role in development of Indian

Banks over the years have become a significant aspect of an economy

Project on Banking Sector 1

 1870- Bank of Hindustan- First Bank

 Presidency Banks- Bank of Calcutta, Bank of Bombay and

 1921- All 3 amalgamated and became imperial Bank of India

 1934- RBI was constituted

 1949- RBI came under Government control

 1955- Imperial Bank became State Bank Of India (SBI)

1.3 FACTS & FIGURES

 The First Bank in India to be given an 150 certification.

Project on Banking Sector 2

Project on Banking Sector 3

The recession in the US market and the global meltdown termed as

Various steps taken by RBI to curb the present recession in the

In present situation down fall in one sector one day leads to a

Project on Banking Sector 4

In this research. I am trying to given on overview of the whole

Project on Banking Sector 5

A Bank is a financial institution where the accepting, for the purpose

Project on Banking Sector 6

2.1 TYPES OF BANK

 Central Bank: A central Bank, Reserve Bank or monetary

 Commercial Banks: A commercial Bank performs all kinds of

 Industrial Bank: Ordinarily, the Industrial banks perform

Project on Banking Sector 7

 Agricultural Banks: As the commercial the industrial banks

 Foreign Exchange Banks : Their main functions is to make

 Indigenous Banks: According to the Indian enquiry

Project on Banking Sector 8

2.2 FUNCTION OF BANK

Function of a Bank is among the most complicated of corporate

Banking regulation Act of India, 1949 defines Banking as “accepting,

o Accepting Deposits from public/ other (deposits)

Project on Banking Sector 9

2.3 ROLE OF BANK

A proper financial sector is of special importance for the economic

Project on Banking Sector 10

• Monetization: An underdeveloped economy is characterized

• Innovation: Innovation is an essential prerequisite for

• Finance for priority sectors : The commercial banks in

Project on Banking Sector 11

• Provision for medium and long term finance : The

• Cheap money policy: The commercial bank in an

• Need for a sound Banking system : A sound system of

Project on Banking Sector 12

The recent years witnessed the Indian banking on a technological

1. Total Branch Automation

Total Branch Automation (TBA) enables customers to transact all the

2. Automated Teller Machines

ATMs are capable of performing the function of a bank teller or a

3. Electronic funds Transfer

Banks through the technique of networking are able to transmit

Project on Banking Sector 13

These machines dispense a fixed amount of cash as soon as

Due to the networking of computerized branches, customers can

Due to the latest technology, a customer can route most of the

With Mobile Banking facilities, one can bank from anywhere, at

SEVICES OFFERED ON MOBILE:

Project on Banking Sector 14

Telebanking facility enables the customer to use Automatic voice