chapter - iii an overview of banking sector in india...
TRANSCRIPT
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CHAPTER - III
AN OVERVIEW OF BANKING SECTOR IN INDIA AND
REGULATORY FRAMEWORK OF REGIONAL RURAL
BANKS
3.1 INTRODUCTION
Today banks have become a part and parcel of our life. There was a time
when the dwellers of city alone could enjoy their services. Now banks offer access
to even a common man and their activities extend to areas hitherto untouched. Apart
from their traditional business oriented functions, they have now come out to fulfill
national responsibilities through catering to the needs of agriculturists, industrialists,
traders and to all the other section of the society. Thus they accelerate the economic
growth of a country and steer the wheels of the economy towards its goal of self
reliance in all fields. It arouses our interest in knowing more about the bank and
various men and activities connected with it.1
Bank is a financial institution that provides banking and other financial
services to their customers. A bank is generally understood as an institution which
provides fundamental banking services such as accepting deposits and providing
loans. There are also nonbanking institutions that provide certain banking services
without meeting the legal definition of a bank. Hence, banks are subset of the
financial services industry.
In the recent years India’s banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact India banking
system has reached even to the remote corner of the country.
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A banking system also referred as a system provided by the bank which
offers cash management services for customers, reporting the transactions of their
accounts and portfolios, throughout the day.
The development of banking is evolutionary in nature. There is no single to
answer to the question of what is banking. Because, a bank performs a multitude of
functions and services which cannot be comprehended into a single definition. For a
common man, a bank means a storehouse of money, for a businessman it is an
institution of finance and for a worker it may be a depository for his savings.
It may be explained in brief as “banking is what a bank does”. But it is not
clear enough to understand the subject in full. The meaning of the bank can be
understood only by its functions just as a tree is known by its fruits2.
Evolution of Banking
It is interesting to trace the origin of the word ‘bank’ in the modern sense, to
the German word “Banck” which means, heap or mound or joint stock fund. From
this, the Italian word ‘Banco’ meaning heap of money was coined.
Some people have the opinion that the word “bank” is derived from the
French words “bancus” or “banque” which means a ‘bench’. Initially, the bankers,
the Jews in Lomardy, transacted their business on benches in the market place and
the bench resembled the banking counter. If a banker failed, his ‘banque’ (bench)
was broken up by the people, hence the word “bankrupt” has come. In simple term,
bankrupt means a person who has lost all his money, wealth or financial resources.
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Thus, the origin of the word bank can be traced
↓↓↓↓ Banck - German (Joint stock fund)
↓↓↓↓ Banco - Italian (Heap of money)
↓↓↓↓ Bancus / Banque - French (Bench/ chest a place where valuables are kept)
↓↓↓↓ Bank - English (common meaning prevalent today, i.e., as an institution accepting
money as deposit for lending)
Banking as 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. Any institution other than a banking company to
accept deposit money from public withdrawal by cheque. In other words, the
combination of the functions of acceptance of public deposits and withdrawal of the
money by cheques by an institution cannot be performed without the approval of
Reserve Bank.3
The origin of modern banks is traced to three important sources. They are:-
1. The Gold smiths.
2. The Money Lenders and
3. The Merchant Bankers.
The Gold Smiths: The gold smith by virtue of dealing in Gold, which is a very
valuable item. Its facilities for the safe keeping of valuables. He accepted for safe
custody the money, another important valuable item. Belonging to his customers.
The gold smith began to lend the money knowing that all the depositors do not
withdraw their savings at a time.
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The Money Lenders: The money lenders lent his surplus funds to the needy and
earned the income by way of interest.
The Merchant Bankers: The merchant bankers were primarily trader and had to
oblige his customers by accepting their money for safe custody. He was doing the
banking business as a side occupation. Modern banks retain all the characteristics of
these three types of institutions or functions.
Development of Banking in India
Banking in India is indeed as old as Himalayas. But, the banking functions
became effective force only after the first decade of 20th century. To understand the
history of modern banking in India, one has to refer to the “English Agency Houses”
established by the East India Company. These agency Houses, were basically
trading firms and carry on banking business as part of their main business. But they
failed and vanished from the scene during the third decade of 18th century.
The East India Company laid the foundation for modern banking in the first-
half of the 19th century with the establishment of the three banks:
i. Bank of Bengal in 1809
ii. Bank of Bombay in 1840
iii. Bank of Madras in 1843
These banks are also known as “Presidency Banks” and they functioned well
as independent units.
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In 1920 the all presidency banks were amalgamated to form the Imperial
Bank of India which was run by European Shareholders. On the basis of the
recommendation of the Banking Enquiry Committee, the Reserve Bank of India Act
was passed in 1934. Accordingly the Reserve Bank of India was established in 1935.
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. 1960s, the Indian banking industry has become an important tool to facilitate
the development of the Indian economy. The nationalisation took place in the
country in 1969 fourteen major Indian commercial banks were nationalised and also
in 1980 six more banks were nationalised.
In the year 1991 under the chairmanship of M Narasimham, a committee was
set up by him nave which worked for the liberalisation of banking practices. In this
year introduced many more products and facilities in the banking sector in its
reforms measures.
The banking industry has undergone rapid changes, followed by a series of
fundamental developments. Most significant among them is the advancement in
information technology as well as communication system. This has changed
technology as well as communication system. This has changed the very concept of
traditional banking activities and has been instrumental behind broadening the
dissemination of financial information along with lowering the costs of many
financial activities. Information Technology and the Communication Networking
Systems have revolutionized the functioning of the banks.4
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Meaning and Definition of Banking:
A bank is an institution which deals in money and credit. Thus, bank is an
intermediary which handles other people’s money both for their advantage and to its
own profit. But, bank is not merely a trader in money but also an important
manufacturer of money. In other words, a bank is a factory of credit.
Crowther defines a bank as, “ one that collects money from those who have it to
spare or who are saving it out of their income and lends the money so collected to
those who required it”.
Dr. L. Hart , says that the bankers are “one who in the ordinary course of business
honours cheques drawn upon him by persons from and for whom he receives money
on current accounts”.
Sir Kinley , “A bank is an establishment which makes to individuals such advances
money as may be required and to which individual entrust money when not required
by them for use”.5
Features of Banking:
• Dealing in Money: The banks accept deposits from the public and
advancing them as loans to the needy people. The deposits may be of
different types-current, fixed, savings etc. accounts. The deposits are
accepted on various terms and conditions.
• Deposits Must be Withdrawable: The deposits (other than fixed deposits)
made by the public can be withdrawable by cheque, draft or otherwise, i.e.,
the bank issue and pay cheques. The deposits are usually withdrawable on
demand.
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• Dealing with Credit: The banks are the institutions that can create credit
i.e., creation of additional money for lending. Thus, “creation of credit” is
the unique feature of banking.
• Commercial in Nature: Since all the banking functions are carried on with
the aim of making profit, it is regarded as a commercial institution.
• Nature of Agent: Besides the basic functions of accepting deposits and
lending money as loans, banks possess the character of an agent because of
its various agency services.
3.2 CLASSIFICATION OF BANKS
Today is the age of specialization and we can find specialization in all fields
including banking. The banks have specialized in a particular line of finance. Banks
are generally classified on the basis of the functions performed by them. The
following are the various types of banks:
Central Banks: Central Bank is the bank of a country a nation. It controls the entire
banking system of a country. Its main function is to issue currency known as ‘Bank
Notes’. This bank acts as the leader of the banking system and money market of the
country by regulating money and credit. Its act as the central monetary authority.
These banks are the bankers to the government, they bankers banks and the ultimate
custodian of a nations foreign exchange reserves. The aim of the Central Bank is
not to earn profit, but to maintain price stability and to strive for economic
development with all round growth of the country. The Central Bank of different
countries is known by different names like Reserve Bank in India, Bank of England
in U.K., Federal Reserve System in U.S.A., etc.
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Commercial Banks: A bank, which undertakes all kinds of ordinary banking
business is called a commercial bank. It provides money and credit for commercial
and trade activities. They receive short and medium term deposits form the public
and grant short-term loans, and advances. They supply working capital to industries
and enable them to carry on production and manufacturing activities. They grant
loans and advances on the stocks of agricultural commodities, industrial goods, etc.
They discount internal and foreign bills and thereby finance the International trade.
They also perform certain agency services such as collection of cheques, dividends,
interest on investments, issue of drafts, letter of credit, travelers cheques, investment
advisory services etc.
Industrial Banks (Financial Institutions) : An Industrial Banks is one which
specializes by providing loans and fixed capital to industrial concerns by subscribing
to share and debenture issued by public companies. They play an important role in
the establishment and growth of industries. The block capital required for the
acquisition of fixed assets, etc., is supplied by investment banks. They provide long-
term loans and credits for period varying between 5 and 15 years for industries to
acquired fixed assets. They may serve as catalytic agents in mobilization of capital
in other forms of assistance such as, underwriting, guarantee, etc., these banks are
now a day’s grouped as ‘Development Financial Institutions’. These banks are very
popular in Germany and Japan. In India, we have several Industrial Finance
Corporations in addition to the “Industrial Development Bank of India’. Both,
Development Financial institutions and Commercial banks, now a day’s, financial
infrastructural development activities, which include construction of transport
facilities, building of power-supply stations, etc.
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Exchange Banks: These types of banks are primarily engaged in transactions
involving foreign exchange. They deal in foreign bills of exchange import and
export of bullion and otherwise participate in the financing of foreign trade. They
do a number of incidental services such as opening of letters of credit, issue of
Foreign Currency Draft and Travelers Cheques and supply of information about
foreign customers. They provide credit and loans in foreign currency and also accept
deposits in Foreign Currency. They require huge capital and trained staff as it is a
risky business. They maintain branches in foreign countries at important trade
centres. In the past foreign banks operating in India would deal in foreign exchange
and were known as exchange banks nowadays, many Indian banks deal in foreign
exchange with special authorization from Reserve Bank of India and known as
Authorized Dealers in Foreign Exchange. As per Foreign Exchange Regulation Act
banks dealing in Foreign Exchange related activities require the permission of
Reserve Bank of India. This is applicable to both India and Foreign Banks.
Co-operative Banks: They are organized on co-operative principles of mutual help
and assistance. They grant short-term loans to the agriculturists for purchase of
seeds, harvesting and for other cultivation expenses. They accept money on deposit
from and make loans to their members at a low rate of interest.
Land-Mortgage Banks: Presently known as agriculture and rural development
banks, they are agriculture development banks. The land-mortgage banks supply
long-term loans for a period up to 15 years for development of land to improve
agricultural yields. They grant loan for permanent improvements in agricultural
lands. They create negotiable bonds out of real estate like land, buildings, etc., they
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raise funds by floating debentures and by borrowing from the government. The
Agriculture Finance Corporation was the first Indian Institution to set up finance for
development of agriculture. The National Bank for Agriculture and Rural
Development (NABARD) was constituted by the government to promote rural
development.
Indigenous Banks: The Central Banking Enquiry Commission defined an
indigenous banker as an individual or firm accepting deposits and dealing in
indigenous lending of money to the needy. They form unorganized part of the
banking structure, i.e., these are unrecognized operators in receiving deposits and
lending money. In India the Marwaris, the Multanis, The Jains, The sowcars, the
Nattukottai chttiars are some of the leading indigenous bankers who charge high
rates of interest on their lendings. In rural areas, they still provide substantial
finance to agriculturists and small traders.
Savings Banks: These are institutions which collect the periodical savings of the
general public. Their main object is to promote thrift and saving habits among the
middle and lower income sections of the society. They have certain restrictions on
number of withdrawals in a year to discourage spending. In almost all countries,
postal authorities also run saving bank accounts and their working is regulated by
the government. The first saving bank was started in Mamburg in 1765. In India, we
have postal savings accounts. These days separate savings banks as such are very
rare. In India, all commercial banks are having savings accounts.
Supranational Banks: Special Banks have been created to deal with certain
international financial matters. World Bank is otherwise known as International
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Bank for Reconstruction and Development (IBRD) which gives long-term loans to
developing countries for their economic and agricultural development. Asian
Development Bank (ADB) is another Supranational Bank which provides finance
for the economic development of poor Asian countries. They generally provide
finance at concessional interest rates and for long-term needs.
International Banks: International Banks are those which are operating in different
countries. While, the registered office or head office is situated in one country, they
operate through their branches in other countries. They specialize in Banking
business pertaining to foreign trade like opening of letters of credit, providing short-
term finance in foreign currency, issue of performance guarantee, arranging foreign
currency credits, etc., they are the main traders in International currencies like US.
Dollars, Japanese yen, the new born European currency, Euro, etc. They also
perform Currency Risk Management functions for clients. These banks are also
known as Multinational Banks since, they operate from many countries. These
banks make possible the flow of money/credit from one country to another country.
They help grow international trade.6
3.3 BANKING SYSTEM
Indian Banking system developed enormously after independence.
Particularly after nationalization of banks there has been a multidimensional
development. Nationalization of banks provided in impetus to the banking
development and the banks stated functioning with social responsibility.
The structure of banking differs from country to country depending upon
their economic conditions, political structure and financial system. Banks can be
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classified on the basis of volume of operations, business pattern and areas of
operations.7 They are termed as systems of banking. The commonly identified
systems.
I) Unit Banking : It is originated and developed in U.S.A. in this system, small
independent banks are functioning in a limited area or in a single town i.e.,
the business of each bank is confined to a single office, which has no branch
at all. It has its own governing body or board of directors and stockholders.
It functions independently and is not controlled by any other individual, firm
or body corporate. It also does not control any other banks. Such banks can
become member of the clearing house and also of the Banker’s Association.
The main reason for the development of unit banking in America is said to
be the fear of monopoly in banking. It is also called as “Localized Banking”.
According to Solomon and Whilt, a unit bank is, “a corporation that
operates one office and that is not related to other banks through either
ownership or control.”
Advantages of Unit Banking
Following are the main advantages of unit banking:
� Efficient Management: One of the most important advantages of unit
banking system is that it can be managed efficiently because of its size and
work. Co-ordination and control becomes effective. There is no
communication gap between the persons making decisions and those
executing such decisions.
� Better Service: Unit banks can render efficient service to their customers.
Their area of operation being limited, they can concentrate well on that
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limited area and provide best possible service. Moreover, they can take care
of all banking requirements of a particular area.
� Close Customer-banker Relations: Since the area of operation is limited
the customers can have direct contact. Their grievances can be redressed then
and there.
� No Evil Effects Due to Strikes or Closure: In case there is a strike or
closure of a unit, it does not have much impact on the trade and industry
because of its small size. It does not affect the entire banking system also.
� No Monopolistic Practices: Since the size of the bank and area of its
operation are limited, it is difficult for the bank to adopt monopolistic
practices. Moreover, there is free competition. It will not be possible for the
bank to indulge in monopolistic practices.
� No Risks of Fraud: Due to small size of the bank, there is stricter and closer
control of management. Therefore, the employees will not be able to commit
fraud.
� Closure of Inefficient Banks: Inefficient banks will be automatically closed
as they would not be able to satisfy their customers by providing efficient
service.
� Local Development: Unit banking is localised banking. The unit bank has
the specialised knowledge of the local problems and serves the requirement
of the local people in a better manner than branch banking. The funds of the
locality are utilized for the local development and are not transferred to other
areas.
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� Promotes Regional Balance: Under unit banking system, there is no
transfer of resources from rural and backward areas to the big industrial and
commercial centers. This tends to reduce regional imbalance.
Disadvantages of Unit Banking
� No Economies of Large Scale: Since the size of a unit bank is small, it
cannot reap the advantages of large scale viz., division of labour and
specialisation.
� Lack of Uniformity in Interest Rates: In unit banking system there will be
large number of banks in operation. There will be lack of control and
therefore their rates of interest would differ widely from place to place.
Moreover, transfer of funds will be difficult and costly.
� Lack of Control: Since the number of unit banks is very large, their co-
ordination and control would become very difficult.
� Risks of Bank’s Failure: Unit banks are more exposed to closure risks.
Bigger unit can compensate their losses at some branches against profits at
the others. This is not possible in case of smaller banks. Hence, they have to
face closure sooner or later.
� Limited Resources: Under unit banking system the size of bank is small.
Consequently its resources are also limited. Hence, they cannot meet the
requirements of large scale industries.
� Unhealthy Competition: A number of unit banks come into existence at an
important business centre. In order to attract customers they indulge in
unhealthy competition.
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� Wastage of National Resources: Unit banks concentrate in big metropolitan
cities whereas they do not have their places of work in rural areas.
Consequently there is uneven and unbalanced growth of banking facilities.
� No Banking Development in Backward Areas: Unit banks, because of
their limited resources, cannot afford to open uneconomic branches in
smaller towns and rural areas. As such, these areas remain unbanked.
� Local Pressure: Since unit banks are highly localised in their business, local
pressures and interferences generally disrupt their normal functioning.
II) Branch Banking : A system of banking in which a bank carries on banking
business through a large network of branches spread all over the country is
known as ‘branch banking system’. It simply reflects existence of small
number of big banks with branches all over the country. Branch banking
system is popular in the U.K., Canada, Australia and India. The availability
of huge financial resources enables a bank to carry on its activities on a large
scale basis all over the country. The specialty of branch banking system is
that the operations are large-scale in nature characterized by the presence of
a number of branches. Most of the Indian Banks are falling under this
category. They are having large number of branches. All the Public Sector
banks, i.e., Nationalised Banks and State Bank of India and its subsidiary
banks. Banks in India require a license from Reserve Bank of India under
Banking Regulation Act to open a branch as well as to start a bank itself.
Thus, branch banking consists of a few big banks with numerous branches
spread over wide geographical areas. These branch banks operate under
their head offices. Branch banking is also known as “delocalized banking”.
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Advantages of Branch Banking:
� Better Banking Services: Such banks, because of their large size can enjoy
the economies of large scale viz., division of work and specialization. These
banks can also afford to have the specialized services of bank personnel
which the unit banks can hardly afford.
� Extensive Service: Branch banking can provide extensive service to cover
large area. They can open their branches throughout the country and even in
foreign countries.
� Decentralization of Risks: In branch banking system branches are not
concentrated at one place or in one industry. These are decentralized at
different places and in different industries. Hence the risks are also
distributed.
� Uniform Rates of Interest: There is better control and coordination of the
central bank. Consequently interest rates can be uniform.
� Better Cash Management: In branch banking there can be better cash
management as cash easily transferred from one branch to another.
Therefore, there will be lesser need to keep the cash idle for meeting
contingencies.
� Better Training Facilities to Employees: Under branch banking the size of
the bank is quite large. Therefore, such banks can afford to provide better
training facilities to their employees. Almost every nationalized bank in
India has its separate training college.
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� Easy and Economical Transfer of Funds: A bank has a widespread of
branches. Therefore, it is easier and economical to transfer funds from one
branch to the other.
� Better Investment of Funds: Such bank can afford the services of
specialized and expert staff. Therefore they invest their funds in such
industries where they get the highest return and appreciation without
sacrificing the safety and liquidity of funds.
� Effective Central Bank Control: Under branch banking, the central bank
has to deal only with a few big banks controlling a large number of branches.
It is always easier and more convenient to the central bank to regulate and
control the credit policies of a few big banks, than to regulate and control the
activities of a large number of small unit banks. This ensures better
implementation of monetary policy.
� Contacts with the Whole Country: The bank maintains continual contacts
with all parts of the country. This helps it to acquire correct and reliable
knowledge about economic conditions in various parts of the country. This
knowledge enables the bank to make a proper and profitable investment of
its surplus funds.
� Greater Public Confidence: A bank, with huge financial resources and
number of branches spread throughout the country, can command greater
public confidence than a small unit bank with limited resources and one or a
few branches.
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Disadvantages of Branch Banking
Even though, the branch bank has many advantages, it is not free from
criticisms. The following are the disadvantages of branch banking:
� Difficulties of Management, Supervision and Control: Since there are
hundreds of branches of a bank under this system, management, supervision
and control became more inconvenient and difficult. There are possibilities
of mismanagement in branches. Branch managers may misuse their position
and misappropriate funds. There is great scope for fraud. Thus there are
possibilities of fraud and irregularities in the financial management of the
bank.
� Lack of Initiative : The branches of the bank under this system suffer from a
complete lack of initiative on important banking problems confronting them.
No branch of the bank can take decision on important problems without
consulting the head office. Consequently, the branches of the bank find
themselves unable to carry on banking activities in accordance with the
requirements of the local situation. This makes the banking system rigid and
inelastic in its functioning. This also leads to “red-tapism” which means
“official delay.”
� Monopolistic Tendencies: Branch banking encourages monopolistic
tendencies in the banking system. A few big banks dominate and control the
whole banking system of the country through their branches. This can lead to
the concentration of resources in the hands of a small number of men. Such a
monopoly power is a source of danger to the community, whose goal is a
socialistic pattern of society.
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� Regional Imbalances: Under the branch banking system, the financial
resources collected in the smaller and backward regions are transferred to the
bigger industrial centers. This encourages regional imbalances in the
country.
� Continuance of Non-profitable Branches: Under branch banking, the weak
and unprofitable branches continue to operate under the protection cover of
the stronger and profitable branches.
� Unnecessary Competition: Branch banking is delocalized banking, under
branch banking system, the branches of different banks get concentrated at
certain places, particularly in big towns and cities. This gives rise to
unnecessary and unhealthy competition among them. The branches of the
competing banks try to tempt customers by offering extra inducements and
facilities to them. This naturally increases the banking expenditure.
� Expensiveness: Branch banking system is much more expensive than the
unit banking system. When a bank opens a number of branches at different
places, then there arises the problem of coordinating their activities with
others. This necessitates the employment of expensive staff by the bank.
� Losses by Some Branches Affect Others: When some branches suffer
losses due to certain reasons, this has its repercussions on other branches of
the bank. Thus branch banking system as well as unit banking system suffers
from defects and drawbacks. But the branch banking system is, on the whole,
better than the unit banking system. In fact, the branch banking system has
proved more suitable for backward and developing countries like India.
Branch banking is very popular and successful in India. A comparison
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between unit banking and branch banking is essentially a comparison
between small-scale and large-scale operations. 8
III) Correspondent Banking System: It is developed to remove the difficulties
in unit banking system. It is the system under which unit banks are linked
with bigger banks. The big correspondent banks are linked with still bigger
banks in the financial centers. The smaller banks deposit their cash reserve
with bigger banks. The bigger banks with whom such deposits are so made
are called correspondent banks. Therefore, correspondent banks are
intermediaries through which all unit banks are linked with bigger banks in
financial centers. Through correspondent banking, a bank can carry-out
business transactions in another place where it does not have a branch. This
system is very common in international banking transactions.
IV) Group Banking: It is the system in which two or more independently
incorporated banks are brought under the control of a holding company.
Under group banking, the individual banks may be unit banks or banks
operating branches or a combination of the two. Participating banks retain
their own boards of directors which are responsible to the supervising and
regulatory authority and depositors for the proper operation of the bank.
That is, each bank in the group has got a separate entity. This system has
developed in United States in 1900. It was popularly extensively developed
in 1920’s.
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Advantages of Group Banking:
The following are the advantages of the Group Banking System:
o Centralized Administration: Under group banking system the participating
banks can enjoy the benefits of centralized administration.
o Enhancement of Operational Efficiency: Because of Group Banking
System, the operational efficiency of participant banks is enhanced through
shared knowledge and experience.
o Broader Market: Group Banking offers broader market to the small banks
for their excess resources. Thus, their earning capacity and network
improved.
o Large Scale Operation: Group banking paves the way for large scale
operation. The member banks can get the economies of large scale operation.
o Mobility and Transfer of Resources: In the case of crisis, the funds are
transferred among participating banks. This helps them to face the financial
crisis if any, more effectively.
Disadvantages of Group Banking:
� Lack of Effective Management and Control: Under Group banking
system the control and management is not effective because the control is
indirect and more flexible. It cannot offer specialized management.
� Inefficiency of Member Banks Protected: The inefficiency one
participating bank affects the other participating banks.
� Fewer Facilities: This system cannot provide all the facilities offered by
branch banking.
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� Cannot Mobilize Funds: Group banking does not have the capacity to
mobilize funds as in the case with branch banking.
V) Chain Banking: The system of banking in which two or more banks are
owned and controlled by one person or a group of persons in known as
‘chain banking system’. The chain banking system was first developed in the
USA and mostly used in United States of America. In this system where the
same individual or group of individuals controls two or more, as against
controlled by a holding bank under group banking. This is done by stock
ownership in two or more banks stockholders directly or through their
nominees exercise control on competing banks.
Advantages of Chain Banking:
• Effective utilization financial resources
• Better managerial services
• Higher profits
• Diversification of risks
• Economy in operational costs
• Centralized administrative control.
Disadvantages of Chain Banking:
• Lack of efficient management and supervision
• Lack of flexibility
• Undertaking speculative activities by banks
• Chance of corruption.
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VI) Pure Banking System: Under this banking system where the commercial
banks confine themselves to the financing of the short term requirements of
industry and commerce is referred to as ‘pure banking system’. Under this
system, commercial banks provide loans and advances to industry and trade
only for short-term purposes. Where, financial facility is granted for a period
not exceeding six months. This is for meeting the working capital
requirements of the trade and industry. This type of banking is popular in
U.K. In U.K. special institutions like investment houses, finance corporations
where established for providing long term finance. Hence, it is argued that
commercial banks should provide only short term loans. It is stressed on the
lines of safety and liquidity. The Indian banking system is one of pure
banking types. The Indian commercial banks provide mainly short-term
loans to commerce and industry.
VII) Mixed Banking System: Mixed banking is that system of banking under
which the commercial banks perform the dual function of commercial
banking and investment banking, i.e., it combines deposit and lending
activity with investment banking. This system of banking is popular in
Germany. The German banking system is the best example of mixed
banking where banks are permitted besides, lending activity, investment
functioning also. In India, Banks are permitted to undertake limited
investment activity. In USA commercial or credit banks are not permitted to
undertake investment activity. Banks in Switzerland, Denmark, and Japan
also provide long term loans. The mixed banking system is one which the
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commercial banks provide advance both short-term as well as long-term
loans to commerce and industry.
Advantages of Mixed Banking System:
� Credit requirements are fully satisfied
� Banking resources are utilized for industrial development
� Industries can mobilize greater finance resources through these banks
� Direct contract with industries
� Investment guidance to general public.
Disadvantages of Mixed Banking System:
� Liquidity of banks may be affected, if the securities are not traded in the
market
� Possibility of engaging in speculative business
� Scope for over lending
� Threat to stability of Banks - The stability of the banks may be affected if the
prices of securities in which banks have invested depreciate.
VII) Relationship Banking: it is necessary for every bank to retain its big and
good customers. These customers will be a source of regular income for the
banks as they will be prompt and regular repayment of loans advances. In
many cases they may be customers having large deposits with the banks. A
bank’s profit to a large extent depends upon retaining such honest borrowers
and large depositors. Relationship banking refers to the efforts of a bank to
promote personal contacts and to keep continuous touch with customers who
are very valuable to the bank. In order to retain such profitable accounts with
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the bank or to attract new accounts, it is necessary for the bank to serve their
needs by maintaining a close relationship with such customers. This type of
banking activities gains momentum in a highly competitive banking world.
IX) Narrow Banking: A bank engaged in multifarious activities like providing
working capital, term loans, doing investment business, consumer loans,
housing loans, agricultural loans, advisory services, etc., require maintaining
group of knowledgeable persons and experts in each field activity. For lack
of proper appraisal of loans documents, verification of important information
due to inadequate knowledge, staff or expertise the bank may slip into losing
business. Similarly, having a large number of customers may also result into
many defaults in payments and consequently of more bad debts. In order to
obviate such pitfalls, a bank may be concentrating only on collection of
deposits and lend or invest the money within particular region or certain
chosen activity like investing the funds only in Government Securities. This
type of restricted minimum banking activity is referred to ‘Narrow Banking’.
X) Universal Banking: The concept of ‘Universal Banking’ is of recent origin in
India. At the global level, its origin in Germany. It refers to broad- based and
comprehensive banking activities. Under this type of banking, a bank will
deal with working capital requirements as well as term loans for
developmental activities. They will be dealing with individual customers as
well as big corporate customers. They will have expanded lines of business
activity combining the functions of traditional deposit taking, modern
financial services, selling long-term saving products, insurance cover,
investment banking etc. examples of universal bankers are city group
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(formerly city bank), Hong Kong and Shanghai Banking Corporation
(HSBC). In Europe universal banks are known as “Banc assurance”. In India
commercial banks like State Bank of India, Indian Overseas Bank and other
banks generally provide loans and advances for short-term to meet working
capital requirements of borrowing companies. Likewise Developmental
Financial Institutions like IDBI, ICICI provide only long term finance for
expansion and diversification of business activity.
XI) Regional Banking: Small traders, Village artisans, agricultural labourers, etc.
in rural and semi-urban areas do not get adequate credit facilities from
commercial banks since these banks are generally looking for large borrowers
engaged in commercial/business activities. This type of banking leaves the
rural areas undeveloped economically. In order to provide adequate and
timely credits to small borrowers in rural and semi-urban areas. Central
Government set up Regional Banks, known as Regional Rural Banks (RRBs)
all over India jointly with State Governments and some Commercial Banks.
As they are permitted to operate in particular region, it may help develop the
regional economy.
XII) Local Area Banks: In some cases, the regional banks set up by the
governments are not being run profitably for various reasons. Secondly,
these banks are not meeting fully the credit requirements of regional
borrowers of regional banks, Government has permitted establishment of a
new type of regional banks in rural and semi-urban centers under private
sector known as ‘Local Area Banks’. These banks require a low capital base
of Rs. 5 crore only. The entire share capital has to be mobilized from private
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sector. They will be permitted to operate only within a region of 2 or 3
districts. Local Area Banks are yet to become operational in India as of June
1999.
XIII) Retail Banking: It is a major form of commercial banking but mainly
targeted to consumers rather than corporate clients. It is the method of banks
approach to the customers for sale of their products. The products are
consumer-oriented like offering a car loan, home loan facility, financial
assistance for purchase of consumer durables, etc. Retail banking therefore
has large customer base and hence, large number of transactions with small
values. It may therefore be cost ineffective in a highly competitive
environment. Most of the rural and semi-urban branches of banks, in fact, do
retail banking. In the present day situation when lending to corporate clients
lead to credit risk and market risk, retail banking may eliminate market risk.
XIV) Wholesale Banking: Wholesale or corporate banking refers to dealing with
limited large-sized customers. Instead of maintaining thousands of small
accounts and incurring huge transaction costs, under wholesale banking, the
banks deal with large customers and keep only large accounts. These are
mainly corporate customers. This results into few transactions with large
amount thus, resulting into cost reduction and higher fees. Foreign banks in
India are mostly concentrating in wholesale banking which is aided by fully
computerized banking operations. Growth in this type of banking was aided
by increased merchant banking and investment banking activities.
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XV) Private Banking: Private or personal banking with people-rich individuals
instead of banking with corporate clients. Private or personal banking
attends to the need of individual customers, their preferences and the
products or services needed by them. This may include all round personal
services like maintaining accounts, loans, foreign currency requirements,
investment guidance, etc. This type of banking is investment and asset
management oriented towards individuals and not addressing to the needs of
industry and trade. 9
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3.4 RECENT TRENDS IN INDIAN BANKING
The Banking sector has been immensely benefited from the implementation
of superior technology during the recent past, almost in every nation in the world.
Productivity enhancement, innovative products, speedy transactions seamless
transfer of funds, real time information system and efficient risk management are
some of the advantage derived through the technology. Information technology has
also improved the efficiency and robustness of business processes across banking
sector. India's banking sector has made rapid strides in reforming itself to the new
competitive business environment. Indian banking industry is the midst of an IT
revolution. Technological infrastructure has become an indispensable part of the
reforms process in the banking system, with the gradual development of
sophisticated instruments and innovations in market practices.
IT in Banking
Indian banking industry, today is in the midst of an IT revolution. A
combination of regulatory and competitive reasons has led to increasing importance
of total banking automation in the Indian banking industry. The bank which used the
right technology to supply timely information will see productivity increase and
thereby gain a competitive edge. To compete in an economy which is opening up, it
is imperative for the Indian banks to observe the latest technology and modify it to
suit their environment. Information technology offers a chance for banks to build
new systems that address a wide range of customer needs including many that may
not be imaginable today. 10
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Following are the innovative services offered by the banks in the recent past:
A) Types of Financing
1. Take-out Financing: Banks usually lend for short term. It is because their
source of funds for financing comes form deposits which are usually for a
maximum period of 3 to 5 years. However, presently banks are encouraged
to provide finance for long-term projects like infrastructure industry. Hence,
when a bank lend for 10 years against a 4 years deposit, there is a problem of
continuing the loan after 4 years. It is possible that the bank will continue to
get deposits every year. Yet, the fact today is a 10 year loan has been made
based on a 4 year deposit which is a risky affair. In such a situation, few
banks will came together and under an agreement each one of them will take
up the loan portfolio in turn, for a foxed period of time till the loan matures.
2. Revolving Credit Facility: Under a Revolving Credit Facility a bank fixes
up a credit limit to a borrower for certain period, say Rs. 10 crore for 3 years
period. The borrower will get a maximum credit facility to Rs. 10 crore at
any point of time once the loan is repaid. The borrower’s facility
automatically gets renewed up to Rs. 10 crore during the 3 year period any
number of times. In other words, the credit facility revolves around with a
maximum of Rs. 10 crore outstanding at any point of time over a 3 year
period. In principle, under a Revolving Facility there is no format repayment
period. The borrower is allowed to draw, repay and again draw throughout
the loan period.
3. Ever-greening of Loan: Sometimes a bank provides a second finance
facility to a borrower to help him to pay back the original loan. Why should
a bank do it when the bank’s exposure to the customer remains same? It is
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because when a borrower defaults on payment of interest/principal to the
bank as per prudential norms, the loan account will become an NPA and the
bank has to make provisions. To avoid such an unpleasant situation and to
show a rosy picture of bank’s loan portfolio, sometimes banks do resort to
ever greening. RBI does not permit this type of replacement credit.
4. Syndicated Loan: It is loan facility provided to a single borrower by a group
of banks. As the loan is extended by a group of lenders, the size of
syndicated loan is normally large and a single lender/banker may not have
been in a position to extend such a facility. It could also be that a single
lender may not like to have such a large exposure (credit risk) to a single
borrower. Syndicated loans are arranged to finance projects needing large
sums of money where the credit risk is also high. These loans are for
financing medium to long term requirements.
5. Consortium Finance: Under this finance a large credit facility may be
jointly arranged by a combinat6ion of several banks. Usually, one of the
banks in the group will act as the leader for the credit. The consortium
leader will extend a larger share of the credit as compared to other banks in
the consortium. The word consortium refers to ‘a combination of many
banks who have agreed to extend the credit facility’.
6. Preferred Financing: In the highly competitive world of banking today,
banks are reaching out to customers, particularly high net worth or wealthy
customers. One are of lucrative finance for bankers is consumer finance,
more particularly car finance. A preferred financier is a lender or a bank;
which provides large consumer loans like car loan under an arrangement
with the car manufacturer. Because of the tie-up, the manufacturer agrees to
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provide some concession in the car price and some additional facilities in the
car. Thus, the manufacturer makes available for two reasons. None,
purchase price is assured and second it gives some push for the demand of
that car. Preferred financier also benefits.
7. Bridge Loan: Bridge loan is a short-term temporary loan extended by
financial institutions to help the borrower to meet the immediate expenditure
pending disposal of requests for long-term funds or regular loans.
8. Guarantee Services/Non-fund Based Business: Non-fund based business is
not a credit facility or a financial assistance. However, the banks make
sizeable income out of non-fund based business mainly from guarantee
services. This has been explained Banks offer ‘Guarantee Services’ to
valued customers. Guarantee Service refers to a legal undertaking by the
banks to pay a certain sum of money to a third-party or a creditor in the event
of the bank’s party or a creditor in the event of the bank’s client/customer
fails to fulfil his part of obligation. The obligation may be to pay some
money or to perform certain duties like a contract job. The guarantee from
bank enhances the certainty of performance or payment. Usually, banks
issue guarantees on behalf of their customers in favour of government
departments like customs authority saying if the customer does not perform
under a contract or does not pay the required sum, the bank will pay the
money or damages. This function of issuing a guarantee is done for certain
amount of fees. Hence, it is called – fee based services of banks. You will
understand and a guarantee a bank does not provide any credit facility to the
customer.
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B) Repayment Method
1. Bullet Payment System: Under this method of borrowing and lending, the
borrower will not be required to pay back the loan and interest payments
periodically like every 6 months or so. The full loan amount together with
interest payments will be made at a single time on maturity of loan. This
system of lending is rare in India as there are no regular cash flows for the
bank. This method of payment is adopted in term loans.
2. Balloon Payment System: In this system, the repayment of a term-loan
facility will be so arranged that the installment value will be smaller in the
beginning and as the repayment progresses towards maturity value of
installments will be larger and larger. In other words, under Balloon Payment
System, the borrower’s repayments are higher at end and smaller in the
beginning. This type of arrangement will be helpful to borrower who
expects smaller returns in the beginning and higher returns later out of his
investments. You will notice that bullet and Balloon payments system refer
to repayment of term loans. These methods are not common in Indian
Banking.
C) Venture Capital: A ‘venture’ is a new risky business. ‘Venture Capital’
refers to providing start-up capital to new and risky business operations. The
venture capitalist (one who provides finance for venture capital business)
takes a bigger risk in financing the production of a new product by persons
who have not proven their business so far. It can be said that venture capital
is the equity investment in young private companies. The venture capitalist
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may be financial institutions, banks, investment companies or even wealthy
individuals.
D) Factoring Services: Factoring services originated from the
recommendations of Kalyanasundaram Committee. SBI was the first to start
factoring services and Canara Bank has floated Canara Bank Factors Ltd.
Which was incorporation on 10th May 1991. Factoring is a portfolio of
complementary financial services relating to receivable of a company. The
basic components of factoring services are finance up to 80% of the invoice
value, sales ledger administration, debt collection services and credit
insurance.
E) Banknet: the collecting, processing and distribution of information is vital
to business growth of banks. Computerization takes care of only the
processing. The gathering and distribution on use of telephone, mail,
telegraph and telex which leads to delay and high cost due to handling at
several stages. Hence a common communications network called ‘Banknet’
operated by banks and financial institutions on a co-operative basis within
the country is being set up. The Banknet can be put to several uses those are:
� Transfer of funds from one place to another distant place or bank.
� Exchange of statistical information among banks.
� Foreign exchange business operations.
� Inter-Bank applications, like settlement of funds between banks.
� Others.
The transfer of funds includes that customer can draw cash against their
deposit at any branch of the bank as envisaged under ‘on-line banking’ and can also
79
deposit cash at any branch for credit to an account at some other branch. Advance
can be allowed at one branch against deposit at some other branch. This concept is
known as ‘Banking Any-where’.
F) Automated Teller Machines (ATM): The evolutionary trend from cash
economy to cheque economy and onward to plastic card economy is
witnessed in the introduction of ATMs. ATM outwardly appears like a
human weighting machine kept in Railway Platforms. The days, ATMs are
securely placed inside the walls of banks premises. While a weighing
machine measures the weight of a person in kilograms, the ATM’s measures
the bank balance of a person in rupees. In the weighing machine you insert a
coin and you get a card telling your weight and fortune. In ATM you insert a
plastic card and you get brand new currency notes and your bank balance.
� Automatic Teller Machine is the most popular devise in India, which enables
t draw cash round the clock (for 24 hours a day) and no employee interface is
required.
� ATM provides customer not having credit facilities an alternative for
obtaining cash when required.
� It elements the need for the customer to travel to the branch at which is
account are maintained if the machines are conveniently located and
networked.
� Automatic and instantaneous accounting is possible.
� When labour cost is high the technology provides a cost effective solution.
� Customer can deposits cash/instruments and leave instruction for the
requirements of the statement of accounts, transfer, etc.
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� As transactions are handled through software, without cash or instruments
scope for frauds, robberies and misappropriation is reduced.
The customers to withdraw their money 24 hours a day 7 days a week. It is a
devise that allows customer who has an ATM card to perform routine banking
transactions without interacting with a human teller. In addition to cash withdrawal,
ATMs can be used for payment of utility bills, funds transfer between accounts,
deposit of cheques and cash into accounts, balance enquiry etc.
G) Phone Banking: Phone Banking is yet another banking service offered by
banks. Under this system, like in ATM card, a secret code number is
provided to each account holder. A customer wanting to know his bank
balance or any other information relating to his bank account should dial up
a particular phone number indicated by the bank. When the number is
dialled, a recorded voice will ask you to identify yourself with your account
number and code number. If the numbers are tallied, you will get all the
information you want to know about your account. You cannot draw cash or
deposit cash through phone banking. It is basically an information service.
Tele Banking facilitates the customer to do entire non-cash related banking
on telephone. Under this devise Automatic Voice Recorder is used for
simpler queries and transactions. For complicated queries and transactions,
manned phone terminals are used.
H) Net Banking or Internet Banking: We are now aware of the nature of the
banking business. Banking is a practically a service oriented activity. One of
the methods providing service through the medium of computer network.
Net or Internet banking refers to extension of banking service through the
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network of computers. ‘Internet’ is a world wide network of computers
connected with telephone lines. Under the internet facility, millions of
computers located at banks, offices, hospitals, educational institutions,
commercial establishments at different countries are connected through one
another. If you have a Personal Computer (PC), telephone connection and an
instrument called ‘modem’ with the internet facility you can have access to
various colleges and universities and offices and obtain important
information, send and receive messages, etc. similarly, banking messages
can be exchanged between the bank and its customers through the net
banking system. Hence in the internet in the internet banking a customer can
ask for his/her bank balance, give other instructions pertaining to his
account, call for his/her statement of account, transfer money from his/her
account, pay college fees, call for cheque book and a number of similar
functions through net banking without visiting the bank. This system of
conducting banking business is known as net or internet banking.
I) Deposit Insurance Scheme: To protect the interests of the depositors, the
Deposit Insurance Corporation of India was established by an act of
parliament in 1962. It provides insurance cover on deposits held with the
commercial and co-operative banks and the scheme of deposit insurance was
introduced effect from 1st January 1962. In 1978, the Credit Guarantee
Corporation of India was merged with the Deposit Insurance Corporation
and the corporation has been renamed as ‘Deposit Insurance and Credit
Guarantee Corporation’ with effect from 15th July 1978. The corporation
provides protection to small depositors by insurance and provides guarantee
to the banks for loans extended to small borrowers.
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J) Gold Deposit Scheme: The Government of India has proposed a new Gold
Deposit Scheme in its Budget for 1999-2000. The purpose of the scheme
was to mobilize idle gold lying with people/institutions like temple in India
and utilize the same for productive purpose through the banking system. As
per the scheme announced in September/October 1999 selected commercial
banks are permitted to accept gold deposits form individuals, trusts and
companies in the form of gold coin, jewellery, ornaments, gold bars, etc.
K) Electronic Payment Services E-Cheques: Nowadays we are hearing about
e-governance, e-mail, e-commerce, e-tail etc. In the same manner, a new
technology is being developed in US for introduction of e-cheque, which will
eventually replace the conventional paper cheque. India, as harbinger to the
introduction of e-cheque, the Negotiable Instruments Act has already been
amended to include; Truncated cheque and E-cheque instruments.
L) Real Time Gross Settlement (RTGS): It is introduced in India since March
2004, in this system through which electronics instructions can be given by
banks to transfer funds from their account to the account of another bank.
The RTGS system is maintained and operated by the RBI and provides a
means of efficient and faster funds transfer among banks facilitating their
financial operations. As the name suggests, funds transfer between banks
takes place on a 'Real Time' basis. Therefore, money can reach the
beneficiary instantaneously and the beneficiary's bank has the responsibility
to credit the beneficiary's account within two hours.
M) Electronic Funds Transfer (EFT): This system whereby anyone who wants
to make payment to another person/company etc. can approach his bank and
make cash payment or give instructions/authorization to transfer funds
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directly from his own account to the bank account of the
receiver/beneficiary. Complete details such as the receiver's name, bank
account number, account type (savings or current account), bank name, city,
branch name etc. should be furnished to the bank at the time of requesting
for such transfers so that the amount reaches the beneficiaries' account
correctly and faster. RBI is the service provider of EFT.
N) Electronic Clearing Service (ECS): It is a retail payment system that can be
used to make bulk payments/receipts of a similar nature especially where
each individual payment is of a repetitive nature and of relatively smaller
amount. This facility is meant for companies and government departments to
make/receive large volumes of payments rather than for funds transfers by
individuals.
O) Electronic Data Interchange (EDI): Electronic Data Interchange is the
electronic exchange of business documents like purchase order, invoices,
shipping notices, receiving advices etc. in a standard, computer processed,
universally accepted format between trading partners. EDI can also be used
to transmit financial information and payments in electronic form.11
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3.5 STRUCTURE OF BANKING SECTOR IN INDIA
CHART 2: STRUCTURE OF BANKING SECTOR IN INDIA
RBI : It is India's central bank. The Reserve Bank of India was established on April
1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
RBI acts as a banker to the government and banks. The Central Bank maintains
record of government revenue and expenditure under various heads. It maintains
deposit accounts of all other banks and advances money to other banks, when
needed. Another important function of the Central Bank is the issuance of currency
notes, regulating their circulation in the country by different methods. Banks in the
country are broadly classified as scheduled banks and non- scheduled banks.
Scheduled Banks: All banks which are included in the Second Schedule to the
Reserve Bank of India Act, 1934 are scheduled banks. These banks comprise
Scheduled Commercial Banks and Scheduled Cooperative Banks. These banks are
eligible for certain facilities such as financial accommodation from RBI and are
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required to fulfil certain statutory obligation. The RBI is empowered to exclude any
bank from the schedule whose:
1) Aggregate value of paid up capital and reserves fall below Rs 5 lakhs.
2) Affairs are conducted in a manner detrimental to the interests of depositors
3) Goes into liquidation and ceases to transact banking business
Commercial Banks: The banks may be defined as, any banking organization that
deals with the deposits and loans of business organizations. Commercial banks issue
bank checks and drafts, as well as accept money on term deposits. Commercial
banks also act as moneylenders, by way of installment loans and overdrafts.
Commercial banks also allow for a variety of deposit accounts, such as checking,
savings, and time deposit. These institutions are run to make a profit and owned by a
group of individuals.
Public Sector Banks: These are banks where majority stake is held by the
Government of India. Examples of public sector banks are: SBI, Bank of India,
Canara Bank, etc. Public sector Banks have a dominant position in terms of
business.
Foreign Banks: These banks are registered and have their headquarters in a foreign
country but operate their branches in our country. Examples of foreign banks in
India are: HSBC, Citibank, Standard Chartered Bank, etc. In India, foreign banks
practices have been held in suspicion. The unfair competition with Indian banks,
their practice of drawing funds from London Money Market for financing India’s
foreign trade and their gross irregularities in securities scam have been a cause of
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concern. With growing strength of Indian banks have improved their practices and
have stopped discriminatory policies.
Private Sector Banks: These are banks majority of share capital of the bank is held
by private individuals. These banks are registered as companies with limited
liability. Examples of private sector banks are: ICICI Bank, Axis bank, HDFC, etc.
Regional Rural Banks: These banks were established under the provisions of an
Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an
objective to ensure sufficient institutional credit for agriculture and other rural
sectors. The area of operation of RRBs is limited to the area as notified by Govt. of
India covering one or more districts in the State. RRBs are jointly owned by Govt.
of India, the concerned State Government and Sponsor Banks (27 scheduled
commercial banks and one State Cooperative Bank); the issued capital of a RRB is
shared by the owners in the proportion of 50%, 15% and 35% respectively.
Prathama bank is the first Regional Rural Bank in India located in the city
Moradabad in Uttar Pradesh.
Co-operative Banks: It is a financial entity which belongs to its members, who are
at the same time the owners and the customers of their bank. Co-operative banks are
often created by persons belonging to the same local or professional community or
sharing a common interest. Co-operative banks generally provide their members
with a wide range of banking and financial services (loans, deposits, banking
accounts, etc). They provide limited banking products and are specialists in
agriculture-related products.
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Co-operative banks are the primary financiers of agricultural activities, some
small-scale industries and self-employed workers. Co-operative banks function on
the basis of "no-profit no-loss". Anyonya Co-operative Bank Limited (ACBL) is the
first co-operative bank in India located in the city of Vadodara in Gujarat.
The Co-operative Credit system consists of
a) Short-term agricultural credit institutions
b) Long-term agricultural credit institutions
c) Non-agricultural credit institutions
The short-term agricultural credit institutions are in three categories:
� Primary Agricultural Credit Societies at the Village level Guidelines
� Central Co-operative Banks at the District level
� State Co-operative Banks at the State level
The Long-term agricultural credit institutions are as under:
1. Primary Land Development Banks [at the base]
2. Central Land Development Banks [at the apex]
Thus, the apex of the co-operative organization in a state is the State Bank to
which Central Banks are affiliated. The Primary societies are mostly affiliated to the
Central Banks. Some of them are grouped into local unions for the purposes of
supervision. All of them are forbidden to lend to non-members except with the
sanction of the Registrar of Co-operative societies. 12
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3.6 BANKING SECTOR REFORMS IN INDIA
There have been a number of measures for enhancing the transparency and
disclosures standards. All cases of penalty imposed by the RBI on the banks as also
directions issued on specific matters, including those arising out of inspection, are to
be placed in the public domain to increase transparency in the banking sector.
The major banking sector reforms comprises of modifying the policy
framework for improving the financial soundness and credibility of banks; creating a
competitive environment and strengthening of the institutional framework. The
improvements in the policy framework are aimed at removing and reducing the
external constraints bearing on the profitability and functioning of commercial
banks.
The Reserve Bank of India, twice, appointed a Committee under the
Chairmanship of Shri M. Narasimham to suggest measures to revamp the Indian
Financial Sector. The First Financial Sector Reforms were introduced in the year
1992-93 followed by the Second Committee’s Recommendations in 1998. Both the
Committees, under the Chairmanship of same person, recommended introduction of
various prudential measures, strict accounting standards, full disclosure norms,
capital adequacy for banks in India.13
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First Phase of Banking Sector Reforms
To promote healthy development of financial sector, the Narasimham
committee made recommendations.
I) Recommendations of Narasimham Committee:
1. Establishment of 4 tier hierarchy for banking structure with 3 to 4 large
banks (including SBI) at top and at bottom rural banks engaged in
agricultural activities.
2. The supervisory functions over banks and financial institutions can be
assigned to a quasi-autonomous body sponsored by RBI.
3. Phased reduction in statutory liquidity ratio.
4. Phased achievement of 8% capital adequacy ratio.
5. Abolition of branch licensing policy.
6. Proper classification of assets and full disclosure of accounts of banks and
financial institutions.
7. Deregulation of Interest rates.
8. Delegation of direct lending activity of IDBI to a separate corporate body.
9. Competition among financial institutions on participating approach.
10. Setting up asset reconstruction fund to take over a portion of loan portfolio
of banks whose recovery has become difficult.
II) Banking Reform Measures of Government:
On the recommendations of Narasimham Committee, following measures
were undertaken by government since 1991.
1. Lowering SLR and CRR: The high SLR and CRR reduced the profits of
the banks. The SLR has been reduced from 38.5% in 1991 to 25% in 1997.
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This has left more funds with banks for allocation to agriculture, industry,
trade etc. The Cash Reserve Ratio (CRR) is the cash ratio of banks total
deposits to be maintained with RBI. The CRR has been brought down from
15% in 1991 to 4.1% in June 2003. The purpose is to release the funds
locked up with RBI.
2. Prudential Norms: Norms have been started by RBI in order to impart
professionalism in commercial banks. The purpose of prudential norms
include proper disclosure of income, classification of assets and provision for
bad debts so as to ensure hat the books of commercial banks reflect the
accurate and correct picture of financial position.
Prudential norms required banks to make 100% provision for all Non-
performing Assets (NPAs). Funding for this purpose was placed at Rs.
10,000 crores phased over 2 years.
3. Capital Adequacy Norms (CAN): This ratio is the ratio of minimum capital
to risk asset ratio. In April 1992 RBI fixed CAN at 8%. By March 1996, all
public sector banks had attained the ratio of 8%. It was also attained by
foreign banks.
4. Deregulation of Interest Rates: The Narasimham committee advocated that
interest rates should be allowed to be determined by market forces. Since
1992, interest rates have become much simpler and freer.
a) Scheduled Commercial banks have now the freedom to set interest rates on
their deposits subject to minimum floor rates and maximum ceiling rates.
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b) Interest rate on domestic term deposits has been decontrolled.
c) The prime lending rate of SBI and other banks on general advances of over
Rs. 2 lakhs has been reduced.
d) Rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled.
e) The interest rates on deposits and advances of all co-operative banks have
been deregulated subject to a minimum lending rate of 13%.
5. Recovery of Debts: The Government of India passed the “Recovery of
debts due to banks and Financial Institutions Act 1993” in order to facilitate
and speed up the recovery of debts due to banks and financial institutions.
Six Special Recovery Tribunals have been set up. An Appellate Tribunal has
also been set up in Mumbai.
6. Competition from New Private Sector Banks: Now banking is open to
private sector. New private sector banks have already started functioning.
These new private sector banks are allowed to raise capital contribution from
foreign institutional investors up to 20% and from NRIs up to 40%. This has
led to increased competition.
7. Phasing out of Directed Credit: The committee suggested phasing out of
the directed credit programme. It suggested that credit target for priority
sector should be reduced to 10% from 40%. It would not be easy for
government as farmers, small industrialists and transporters have powerful
lobbies.
8. Access to Capital Market: The Banking Companies (Acquisition and
Transfer of Undertakings) Act was amended to enable the banks to raise
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capital through public issues. This is subject to provision that the holding of
Central Government would not fall below 51% of paid-up-capital. SBI has
already raised substantial amount of funds through equity and bonds.
9. Freedom of Operation: Scheduled Commercial Banks are given freedom to
open new branches and upgrade extension counters, after attaining capital
adequacy ratio and prudential accounting norms. The banks are also
permitted to close non-viable branches other than in rural areas.
10. Local Area Banks (LABs): In 1996, RBI issued guidelines for setting up of
Local Area Banks and it gave its approval for setting up of 7 LABs in private
sector. LABs will help in mobilizing rural savings and in channeling them in
to investment in local areas.
11. Supervision of Commercial Banks: The RBI has set up a Board of financial
supervision with an advisory council to strengthen the supervision of banks
and financial institutions. In 1993, RBI established a new department known
as Department of Supervision as an independent unit for supervision of
commercial banks.
93
Second Phase of Reforms of Banking Sector (1998)
To make banking sector stronger the government appointed committee on
banking sector Reforms under the chairmanship of M. Narasimham. It submitted its
report in April 1998. The committee placed greater importance on structural
measures and improvement in standards of disclosure and levels of transparency.
Following are the recommendations of Narasimham committee.
1) Committee suggested a strong banking system especially in the context of
Capital Account Convertibility (CAC). The committee cautioned the merger
of strong banks with weak ones as this may have negative effect on stronger
banks.
2) It suggested that 2 or 3 large banks should be given international orientation
and global character.
3) There should be 8 to10 national banks and large number of local banks.
4) It suggested new and higher norms for capital adequacy.
5) To take over the bad debts of banks committee suggested setting up of Asset
Reconstruction Fund.
6) A Board for Financial Regulation and Supervision (BFRS) can be set up to
supervise the activities of banks and financial institutions.
7) There is urgent need to review and amend the provisions of RBI Act,
Banking Regulation Act, etc. to bring them in line with current needs of
industry.
8) Net Non-performing Assets for all banks was to be brought down to 3% by 2002.
9) Rationalization of bank branches and staff was emphasized. Licensing policy
for new private banks can be continued.
10) Foreign banks may be allowed to set up subsidiaries and joint ventures.
94
The Recommendations of Committee Following Reforms have been taken:
1) New Areas: New areas for bank financing have been opened up, such as
insurance, credit cards, asset management, leasing, gold banking, investment
banking etc.
2) New Instruments: For greater flexibility and better risk management new
instruments have been introduced such as interest rate swaps, cross currency
forward contracts, forward rate agreements, liquidity adjustment facility for
meeting day-to-day liquidity mismatch.
3) Risk Management: Banks have started specialized committees to measure and
monitor various risks. They are regularly upgrading their skills and systems.
4) Strengthening Technology: For payment and settlement system technology
infrastructure has been strengthened with electronic funds transfer,
centralized fund management system, etc.
5) Increase Inflow of Credit: Measures are taken to increase the flow of credit
to priority sector through focus on Micro Credit and Self Help Groups.
6) Increase in FDI Limit: In private banks the limit for FDI has been increased
from 49% to 74%.
7) Universal Banking: It refers to combination of commercial banking and
investment banking. For evolution of Universal Banking guidelines have
been given.
8) Adoption of Global Standards: RBI has introduced Risk Based Supervision of
banks. Best international practices in accounting systems, corporate governance,
payment and settlement systems etc. are being adopted.
95
9) Information Technology: Banks have introduced online banking, E-
banking, internet banking, telephone banking etc. Measures have been taken
facilitate delivery of banking services through electronic channels.
10) Management of NPAs: RBI and central government have taken measures
for management of Non-Performing Assets (NPAs), such as Corporate Debt
Restructuring (CDR), Debt Recovery Tribunals (DRTs) and Lok Adalats.
11) Mergers and Amalgamation: In May 2005, RBI has issued guidelines for
merger and amalgamation of private sector banks.
12) Guidelines for Anti-Money Laundering: In recent times, prevention of
money laundering has been given importance in international financial
relationships. In 2004, RBI revised the guidelines on Know Your Customer
(KYC) principles.
13) Managerial Autonomy: In February. 2005, the Government of India has
issued a managerial autonomy package for public sector banks to provide
them a level playing field with private sector banks in India.
14) Customer Service: In recent years to improve customer service RBI has
taken many steps such as credit card facilities, banking ombudsman,
settlement off claims of deceased depositors etc.
15) Base Rate System of Interest Rates: In 2003 the system of Benchmark
Prime Lending Rate (BPLR) was introduced to serve as a benchmark rate for
banks pricing of their loan products so as to ensure that it truly reflected the
actual cost. However the BPLR system tells short of its objective. RBI
introduced the system of Base Rate since 1st July, 2010. The base rate is the
minimum rate for all loans.
96
Credit Risk Management:
The risk philosophy of the any bank is guided by the twin objective of
shareholder value creation and optimum allocation of capital. Credit risk is a
measure risk representing the possibility of borrower or counterpart failing to meet
its re-payments obligations in accordance with the agreed terms. Credit risk
management, both at the transaction level as well as at the portfolio level, aims at
building up sound assets quality and long term profitability of the institution and
encompasses activities like risk identification, risk measurement, risk mitigation and
risk based pricing.
Performing Assets of the Bank
A bank’s asset portfolio is basically classified into performing and non-
performing asset. Performing asset is one which generates periodical income and
repayments, as and when due or within the minimum lag of two quarters. As assets
are to be treated as performing assets if interest is serviced promptly and there is no
irregularity/over due in the account.
Non-Performing Assets (NPA) of the Bank
Non-performing Assets is one which ceases to generate income from the
bank. The guiding principal is that the income on NPA should not be recognized on
accrual basis and should be treated as income only when actually received.
The development process of a country is usually non nourished by its
banking system and the process of sustained development depend on the emergence
of a dynamic banking system operated on soundings. The contribution of the
banking industry to the Indian economy as a whole is quite significant. The lending
97
operation of banking system in the post nationalization era have been relying less on
security approach and more on purpose oriented approach in order to cater to the
needs of vast clientele in business, industry, agriculture and service sectors.
The technological development, rising costs and disintermediation are all
putting margins of public sector bank under pressure. The public sector banks are
therefore, finding themselves placed in a vulnerable position. The struggle presently
is of consolidation and showing improved profitability. The fittest only will survive
is the order of the day. Hence, as a measure to keep one self best fit. The public
sector banks should aim at bringing down the level of Non-Performing Asset (NPA)
to a considerable low level.
Since the public sector banks were rated on the parameters of profitability in
the recent past. There has been mounting pressures on the profitability of these
banks. Profitability has been considered as on index of financial health and hence
much attention is being focused on profitability of the public sector banks. It
measurers the overall efficiency of banking finance and administrations. Indeed, it is
essential on the part of the banks to earn sufficient revenue to meet the rising cost of
funds and staffs. Earning adequate revenue is a pre-requisite for survival and
growth.
Accumulated revenue enables the bankers either to expand or diversify their
present activities. As NPA’s or intricately affecting the profitability of the banks.
Any further escalation in their quantum will drain away the profits and erode capital
these banks causing anxiety. 14
98
3.7 REGULATORY FRAMEWORK OF REGIONAL RURAL
BANKS
Agricultural and rural development is an integral part of economic
development of the country as Gandhiji said “Real India lies in villages” and village
economy is the back bone of Indian economy. In our country 60% of total
population lives in rural area, they composed of agricultural producers, tenant
cultivators, landless laborers, village artisans, socio economic backward,
unemployment and under employment and most of the rural population depend upon
agriculture for the livelihood. Significantly they are poor they are unable to meet
their day to day requirement from their own source of income so they require credit.
Credit plays a pivotal role in this rural area.
In spite of the rapid expansion programmes undertaken by the commercial
banks in recent years, a large segment of the rural economy was still beyond the
reach of the organized commercial banks. To fill this gap it was thought necessary to
create a new agency which could combine the advantages of having adequate
resources but operating relatively with a lower cost at the village level.
After the declaration of emergency, the Prime Minister, Smt. Indira Gandhi,
announced on July 1, 1975 the 20 point economic programme of the Government of
India. One of the points of this programme was the liquidation of rural indebtedness
by stages and provides institutional credit to farmers and artisans in rural areas. The
Government of India promulgated on September 26, 1975, the Regional Rural Bank
ordinance, to set up regional rural banks throughout the country; the ordinance was
replaced by the Regional Rural Banks Act, 1976. The main objective of the regional
rural banks is to provide credit and other facilities particularly to the small and
99
marginal farmers, agricultural labourers, artisans and small entrepreneurs so as to
develop agriculture, trade, commerce, industry and other productive activities in
rural areas. 15
Objectives of Regional Rural Banks:
� To provide credit and other facilities particularly to the small and marginal
farmers, agricultural labourers, artisans, small entrepreneurs and other
weaker sections.
� To develop agriculture, trade, commerce, industry and other productive
activities in the rural areas.
� To provide easy, cheap and sufficient, credit to the rural poor and backward
classes and save them from the clutches of money lenders.
� To encourage entrepreneurship.
� To increase employment opportunities.
� To reconcile rural business aims and social responsibilities.
Capital Structure:
At present, the authorized capital of regional rural banks is Rs. 5 crores and
the issued capital is Rs. 1 crore, 50% of the issued capital is to be subscribed by the
Central Government, 15% by the concerned State Government and 35% by the
Sponsoring Commercial Banks. The shares of regional rural banks are to be treated
as approved “Securities”.
100
Features of Regional Rural Banks:
The following are the features of the Regional Rural Banks
♦ The regional rural bank like a commercial bank is a scheduled bank.
♦ The RRB is a sponsored bank. It is sponsored by a scheduled commercial
bank.
♦ It is deemed to be co-operative society for the purpose of income tax act,
1961.
♦ The RRB charges interest rates as adopted by the co-operative societies in
the state.
♦ The area of operations of the RRBs is limited to a specified region relating to
one or more districts in the concerned state.
♦ The interest paid by the RRBs on its term deposits may be 1% or 2% more
than that is paid by the commercial banks.
Functions of Regional Rural Banks:
1. Granting of loans and advances to small and marginal farmers and
agriculture laborers either individually or in groups.
2. Granting of loans and advances to co-operative societies, agricultural
processing societies and co-operative farming societies primarily for
agricultural purpose or for agricultural operations and other related purpose.
3. Granting of loans and advances to artisans, small entrepreneurs and persons
of small means engaged in trade, commerce and industry or other productive
activities within a specified region.
4. Accepting various types of deposits.
101
The credit policy of regional rural banks is more liberal than co-operative banks.
It is not necessary for the borrower to mortgage property or deposit title deeds. It is not
necessary to produce “not encumbrance certificate” or get legal opinion.
Management of RRBs:
The Board of Directors constituted by Government of India will be guiding
and reviewing authority on all policy matters relating to bank’s working. The board
of directors is represented by following agencies.
Chairman →→→→ Appointed by Government of India (on the
recommendation of sponsor bank).
Two Nominee Directors →→→→ Appointed from Government of India.
One Nominee Directors →→→→ Appointed from Reserve Bank of India.
One Nominee Directors →→→→ From NABARD.
Two Nominee Directors →→→→ From State Government
Two Nominee Directors →→→→ From Sponsor Bank. 16
Restructuring Process in RRB’s:
The RBI in 2001 constituted a Committee under the Chairmanship of Dr V S
Vyas on “Flow of Credit to Agriculture and Related Activities from the Banking
System” which examined relevance of RRBs in the rural credit system and the
alternatives for making it viable. The committee was of the view that the sponsor
bank should ensure necessary autonomy for RRBs in their credit and other portfolio
management system. Subsequently, another committee under the Chairmanship of
Chalapathy Rao in 2003 (Chalapathy Rao Committee) recommended that the entire
system of RRBs may be consolidated while retaining the advantages of regional
character of these institutions. As part of the process, some sponsor banks may be
eased out. The sponsoring institutions may include other approved financial
institutions as well, in addition to commercial banks. The Group of CMDs of select
102
Public Sector Banks, 2004 (Purwar committee) recommended the amalgamation of
RRBs on regional basis into six commercial banks - one each for the Northern,
Southern, Eastern, Western, Central and North-Eastern Regions. Thus one finds that
a host of options have been suggested starting with vertical merger (with sponsor
banks), horizontal merger (amongst RRBs operating in a particular region) to
liquidation by different committees that have gone into the issue of financial
viability and restructuring strategies for the RRBs.17
More recently, a committee under the Chairmanship of A.V Sardesai
revisited the issue of restructuring the RRBs (Sardesai Committee, 2005). The
Sardesai committee held that ‘to improve the operational viability of RRBs and take
advantage of the economies of scale, the route of merger/amalgamation of RRBs
may be considered taking into account the views of the various stakeholders’. The
amalgamation process to improve the competitiveness, work culture, management
and efficiency of the concerned RRBs’ and also help in improving the performance
of RRBs. The first phase of amalgamation was initiated sponsor bank-wise within a
state in 2005 and the second phase was across the sponsor banks within a state in
2012. The process was initiated with a view to provide better customer service by
having better infrastructure, computerization, experienced work force, common
publicity and marketing efforts etc. The amalgamated RRBs also benefit from larger
area of operation, enhanced credit exposure limits for high value and diverse
banking activities. As a result of amalgamation, number of the RRBs has been
reduced from 196 to 82 as on 31 March 2012. The number of branches of RRBs
increased to 16,909 as on 31 March 2012 covering 635 districts throughout the
country.18
103
TABLE: 3.1
STATE WISE DISTRIBUTION OF REGIONAL RURAL BANKS
Sl. No. STATE
No. of RRB.s
1 Andhra Pradesh 05
2 Arunachal Pradesh 01
3 Assam 02
4 Bihar 04
5 Chattisgarh 03
6 Gujarat 03
7 Haryan 02
8 Himachal Pradesh 02
9 Jammu and Kashmir 02
10 Jharkhand 02
11 Karnataka 06
12 Kerala 02
13 Madhya Pradesh 08
14 Maharashtra 03
15 Manipur 01
16 Meghalaya 01
17 Mizoram 01
18 Nagaland 01
19 Orissa 05
20 Punjab 03
21 Puducherry 01
22 Rajasthan 06
23 Tamil Nadu 02
24 Tripura 01
25 Uttar Pradesh 10
26 Uttarakhand 02
28 West Bengal 03
TOTAL 82 Source: RBI trends and progress report 2012
104
TABLE: 3.2
PERFORMANCE OF REGIONAL RURAL BANKS IN INDIA
(Rs. Crore)
PARTICULARS YEARS
2008 2009 2010 2011 2012
No. of RRBs 91 86 82 82 82
Branch Network 14,761 15,181 15,480 15,938 16,909
Share Capital 197.00 197.00 197.00 197.00 197
Share Capital Deposit 2,832.53 3,959.30 3,984.90 4076.34 5002.01
Reserves 5,703.06 6,753.99 8,065.26 9,678.90 11262.99
Borrowings 11,494.00 12,734.65 18,770.06 27,216.59 30288.84
Deposits 99,093.46 120,189.90 145,034.95 174,041.94 186336.07
Investments 48,559.54 65,909.92 79,379.16 95,245.99 95,974..93
Loans and Advances (Credit) 58,984.27 67,802.10 82,819.10 101,039.30 116384.97
Amount of Net Profit 1,383.69 1,787.64 2,509.18 3,464.82 1886.15
Net Worth 6,107.37 8,610.31 10,472.10 12,566.52 15129.41
Recovery (%) 80.81 77.85 80.09 80.03 81.60
NPA (%) 6.05 4.14 3.72 3.5 5.03
C-D Ratio (%) 59.52 56.41 57.10 58.05 62.46
Return on Investment (%) 2.85 2.71 3.16 3.64 1.97
Return on Net Worth (%) 22.66 20.76 23.96 27.57 0.12
Deposit Per Branch 6.71 7.92 9.37 10.92 11.02
Credit Per Branch 4.00 4.47 5.35 6.34 6.88
Business Per Brach 10.71 12.38 14.72 17.26 17.90
Source: Data compiled from the Annual Reports of NABARD during the period 2008 to 2012.
105
3.8 PROFILE OF THE KARNATAKA STATE
Karnataka is a state in South West India. It was created on 1 November 1956,
with the passage of the States Re-organization Act. Originally known as the State of
Mysore, it was renamed Karnataka in 1973. The capital and largest city is
Bangalore. Karnataka is bordered by the Arabian Sea and the Laccadive Sea to the
west, Goa to the North West, Maharashtra to the North, Andhra Pradesh to the east,
Tamil Nadu to the South East, and Kerala to the South West. The state covers an
area of 191,976 square kilometres (74,122 sq mi), or 5.83 per cent of the total
geographical area of India. It is the eighth largest Indian state by area. With
61,130,704 inhabitants at the 2011 census, Karnataka is the ninth largest state by
population, comprising 30 districts. Kannada is the most widely spoken and official
language of the state.
The two main river systems of the state are the Krishna and its tributaries, the
Bhima, Ghataprabha, Vedavathi, Malaprabha, and Tungabhadra, in the north, and
the Kaveri and its tributaries, the Hemavati, Shimsha, Arkavati, Lakshmana Thirtha
and Kabini, in the south. Both these rivers flow out of Karnataka eastward into the
Bay of Bengal.
Though several etymologies have been suggested for the name Karnataka,
the generally accepted one is that Karnataka is derived from the Kannada words
karu and nādu, meaning "elevated land". Karu nadu may also be read as karu,
meaning "black", and nadu, meaning "region", as a reference to the black cotton soil
found in the Bayalu Seeme region of the state. The British used the word Carnatic,
sometimes Karnatak, to describe both sides of peninsular India, south of the
Krishna.
106
With an antiquity that dates to the Paleolithic, Karnataka has been home to
some of the most powerful empires of ancient and medieval India. The philosophers
and musical bards patronized by these empires launched socioreligious and literary
movements which have endured to the present day. Karnataka has contributed
significantly to both forms of Indian classical music, the Carnatic and Hindustani
traditions. Writers in the Kannada language have received the most number of
Jnanpith awards in India.
The State has 30 districts and 176 taluks. Karnataka has varied topography.
Based on physiographic features, the state is divided into 4 regions, viz. Coastal
Region, Malnad (Hilly) Region, Northern Plateau Region and Southern Plateau
Region, falling within ten agro-climatic zones. Karnataka has been a middle-
ranking state among 15 major states of India on a variety of development indicators.
During the 1th five year plan period, the state's economy has grown by 8.0 percent
while the country's economy as per CAGR was 7.9 percent. GDP of the state during
2011-12 was Rs.2,97,964 crores at constant prices. The services sector recorded 10.6
percent growth rate.19
107
MAP 3.1: KARNATAKA STATE
108
Agriculture Profile of the State
The State has 66% rural population (72% at all India level) and 55.5%
workers are classified as Cultivators/Agricultural Labourers (compared to all India
level at 58.4%). Net irrigated area is 31.32 lakh ha. Major sources of irrigation were
wells/tubewells/ borewells : 15.13 lakh ha. Land use pattern in the state (2007-08) -
Net Sown Area (NSA) of the state constituted 54.7% followed by forest (16.1%),
land put to non agricultural use (7.2%), barren & cultivable waste (6.3%), permanent
pasture & trees and groves (6.4%) and fallow (9.3)% of the total geographical area.
Distribution of operational holdings depicts a skewed pattern in the state. The
average size of operational holding is 1.63 ha. in Karnataka, larger than the all India
level at 1.33 ha. The average size of a holding by small and marginal farmers at 0.82
ha., restricts the scope of individual financing.
Two thirds of the geographical area of Karnataka is under arid and semi-arid
conditions. Karnataka ranks second, after Rajasthan, in terms of drought prone area.
18 out of 30 districts are drought prone. 62% of cereals and almost entire pulses are
produced in these dry land areas.
Major Crops Grown in the State are:
� Food Crops - Paddy, Jowar, Ragi, Maize, Groundnut, Sunflower, Bengal
gram, Sugarcane.
� Fruits - Mango, Banana, Grapes, Guava, Sapota, Pineapple, Pomegranate,
Lime.
� Vegetables - Tomato, Brinjal, Gourds, Lady Finger, Beans, Gherkin, onion,
Chillies, etc.
109
� Plantation - Coconut, Turmeric, Ginger, Arecanut, Coffee, Cardamom,
Pepper, Vanilla.
� The State ranks second in cooperative milk procurement and third in sheep
population, in the country.
� The State ranks second in plantation crops, fourth in production of flowers.
� Production of vegetable crops, eighth in production of fruits and leading
producer of spices, medicinal and aromatic crops.
� Karnataka is one of the five traditional mulberry-silk producing states,
providing employment to more than 18.50 lakh people.
� AEZs have been set up for Gherkins, Rose-onion, Floriculture and the
proposal for creation of AEZ for Vanilla has been cleared and notified by
Government of India.20
110
TABLE: 3.3
KARNATAKA STATE POPULATION AND LITERACY RATE
SL. NO. DISTRICT
POPULATION (in millions) No. of Illiterate
2001 2011 2001 2011
1 Belgaum 42.15 47.78 12.85 10.88
2 Bagalkot 16.52 18.91 5.92 4.98
3 Bijapur 18.07 21.75 6.54 6.14
4 Bidar 15.02 17 4.93 4.3
5 Raichur 16.7 19.25 7.1 6.53
6 Koppal 11.96 13.91 4.53 3.92
7 Gadag 9.72 10.65 2.83 2.33
8 Dharwad 16.04 18.47 3.94 3.22
9 Uttara Kannada 13.54 14.37 2.76 2.06
10 Haveri 14.39 15.99 3.98 3.16
11 Bellary 20.27 25.32 7.28 7.04
12 Chitradurga 15.18 16.6 4.66 3.88
13 Davanagere 17.91 19.47 5.05 4.12
14 Shimoga 16.43 17.56 3.66 3.08
15 Udupi 11.12 11.78 1.87 1.48
16 Chikmagalur 11.41 11.38 2.79 2.15
17 Tumkur 25.85 26.81 7.52 6.24
18 Bangalore 65.37 95.89 9.8 9.9
19 Mandya 17.64 18.09 6.08 4.92
20 Hassan 17.22 17.76 4.78 3.91
21 Dakshina Kannada 18.98 20.84 2.77 2.14
22 Kodagu 5.49 5.55 1.05 0.88
23 Mysore 26.41 29.95 8.46 7.43
24 Chamarajanagar 9.65 10.21 4.17 3.6
25 Gulbarga 21.75 25.65 12.98 7.6
26 Yadgir 9.56 11.73 0 4.7
27 Kolar 13.87 15.4 8.18 3.54
28 Chikkaballapura 11.49 12.54 0 3.38
29 Bangalore Rural 8.51 9.87 5.84 1.92
30 Ramanagara 10.31 10.83 0 3.02
Total Population 528.51 611.31 152.33 132.46
Source: Census of Karnataka State
111
Table: 3.4
PROGRESS OF REGIONAL RURAL BANKS IN KARNATAKA (Pre- Amalgamation)
Indicator Unit 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Total Regional Rural Banks
No. 13 13 13 13 13 13 13 13 13 7
Districts Covered by RRBs
No. 20 20 27 27 27 27 27 27 27 27
Total Branches No. 1074 1073 1075 1085 1096 1096 1095 1103 1113 1112
Total Deposits Rs.
Crore 964.40 1118.00 1325.30 1592.20 1989.90 2432.40 2719.60 3078.60 3486.80 4091.30
Deposit Per branch
Rs. Lakh 89.80 104.19 123.29 146.75 181.56 221.93 248.36 279.11 313.09 367.92
Total Advances Rs.
Crore 892.13 1051.70 1210.10 1364.50 1639.40 1978.60 2256.30 2548.40 2900.90 3751.30
Advances per Branch
Rs. Lakh 83.07 98.01 112.57 125.76 151.4 180.53 206.05 231.04 260.63 337.35
Credit Deposit Ratio
Percent 93.00 94.10 91.30 85.70 81.17 81.25 82.96 82.78 83.20 91.69
Total Business Rs.
Crores 1856.53 2169.70 2535.40 2956.70 3629.30 4411.00 4975.90 5627.00 6387.70 7842.60
Business per Branch
Rs. Lakhs
172.86 202.21 235.85 272.51 331.14 402.46 454.42 510.15 573.92 705.27
Source: www.karnatakastat.com
112
Table: 3.5
PROGRESS OF REGIONAL RURAL BANKS IN KARNATAKA (Post -Amalgamation)
Indicator Unit 2006 2007 2008 2009 2010 2011 2012
Total Regional Rural Banks No 6 6 6 6 6 6 6
Districts Covered by RRBs No 27 27 29 29 29 29 30
Total Branches No 1127 1128 1153 1179 1212 1229 1302
Total Deposits Rs. Crores 5004.00 6025.00 7618.00 9500.00 11622.00 13833.00 14757.00
Deposit Per branch Rs. Lakhs 4.44 5.34 6.61 8.06 9.59 11.26 11.33
Total Advances Rs. Crores 4705.00 5893.00 7082.00 8018.00 9557.00 11501.00 13037.00
Advances per Branch Rs.. Lakhs 4.17 5.22 6.14 6.80 7.89 9.36 10.01
Credit Deposit Ratio percentage 94.02 97.81 92.96 84.40 82.23 83.14 88.34
Total Business Rs. Crores 9709.00 11918.00 14700.00 17518.00 21179.00 25334.00 27794.00
Business per Branch Rs. Lakhs 8.61 10.57 12.75 14.86 17.47 20.61 21.35
Source: www.karatakastat.com
113
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114
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