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TENTS

Pages No.

Need of the project 01

Objective of the project 02

Role of economist in banking 03

Chapter 1 : History of Banking Sector 05-19

Chapter 2 : General banking 20-28

Chapter 3 : Management of banking 29-86

Conclusion 87

Bibliography 90


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Need of the project:

Usually all persons want money for personal and commercial purposes. Banks arethe oldest lending institutions in Indian scenario. They are providing all facilities to all

citizens for their own purposes by their terms. To survive in this modern market every bank

implements so many new innovative ideas, strategies, and advanced technologies. For that

they give each and every minute detail about their institution and projects to Public.

They are providing ample facilities to satisfy their customers i.e. Net Banking,

Mobile Banking, Door to Door facility, Instant facility, Investment facility, De mat facility,

Credit Card facility, Loans and Advances, Account facility etc. And such banks get success to

create their own image in public and corporate world. These banks always accepts innovative

notions in Indian banking scenario like Credit Cards, ATM machines, Risk Management etc.

So, as a student business economics I take keen interest in Indian economy and for that

banks are the main source of development.

So this must be the first choice for me to select this topic. At this stage every person

must know about new innovation, technology of procedure new schemes and new ventures.


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Objective of the project:

Because of the following reasons, I prefer this project work to get the knowledge of thebanking system.

Banking is an essential industry.

It is where we often wind up when we are

seeking a problem in financial crisis and

money related query.

Banking is one of the most regulated

businesses in the world.

Banks remain important source for career

opportunities for people.

It is vital system for developing economyfor the nation.

Banks can play a dynamic role in delivery

and purchase of consumer durables.


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The role of economist in banks:

The crucial role of bank economists in transforming the banking system in India.Economists have to be more mainstreamed within the operational structure of commercial

banks. Apart from the traditional functioning of macro-scanning, the inter- linkages between

treasuries, dealing rooms and trading rooms of banks need to be viewed not only with the

day-to-day needs of operational necessity, but also with analytical content and policy

foresight.

Today, operational aspects of the functioning of banks are attracting intensive

research by professional economists. In particular, measuring and modeling different kinds

of risks faced by banks, the behavior of risk-return relationships associated with different

portfolio mixes and the impact of fluctuations in financial markets on the financial

performance of banks are areas which lend themselves to analytical and empirical appraisal

by economists and econometricians. They, in turn, are discovering the degrees of freedom

and room for analytical maneuver in high frequency information generated by the day-to-

day functioning of banks. It is vital that we develop an environment where these synergies

are nurtured so as to serve the longer-term strategic interests of banks. Even in real timetrading and portfolio decisions, the fundamental analysis of economists provides an

independent assessment of market behavior, reinforcing technical analysis.

A serious limitation of the applicability of standard economic analysis to banking

relates to the inadequacies of the data-base. Absence of long time series data storage in the

banking industry often poses serious problems to the quest for the formal analytical

relationships between variables. Even if such data exist, the presence of structural breaks

may blur meaningful analysis based on traditional formulation. Economists need to thinkinnovatively to overcome this problem. Use of panel regression, non-parametric methods and

multivariate analyses could go a long way in understanding and validating behavioral

relationships in banking.


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Another important challenge for the economics profession is to develop proper models for

measurement of various risks in Indian conditions. This is a necessity in view of the move

towards risk-based supervision. Quantification of operational risks and calibration of Value

at Risk (VaR) models pose major computational challenge to bankers and policy makers

alike, particularly in India. A major difficulty lies in identifying the right statistical model

that determines the underlying distribution suited to the particular category of operational

loss, and building the necessary database for deriving operationally meaningful conclusions.


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History ofbanking

Chapter -1

HISTORY OF BANKING IN INDIA-----


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Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it should be able to

meet new challenges posed by the technology and any other external and internal factors.

For the past three decades 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, Indian banking system has reached

even to the remote corners of the country. This is one of the main reasons of India's growth

process. The government's regular policy for Indian bank since 1969 has paid rich dividends

with the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting

a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the

most efficient bank transferred money from one branch to other in two days. Now it is simple

as instant messaging or dial a pizza. Money has become the order of the day. The first bank

in India, though conservative, was established in 1786. From 1786 till today, the journey of

Indian Banking System can be segregated into three distinct phases. They are as mentioned

below:

Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial &

Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and

Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan

and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of

Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency


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Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was

established which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab

National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913,

Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and

Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures

between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline

the functioning and activities of commercial banks, the Government of India came up with

The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949

as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with

extensive powers for the supervision of banking in India as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath deposit

mobilization was slow. Abreast of it the savings bank facility provided by the Postal

department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalized Imperial Bank of India with extensive banking

facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of

India to act as the principal agent of RBI and to handle banking transactions of the Union

and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on

19th July, 1969, major process of nationalization was carried out. It was the effort of the then

Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country

were nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in

1980 with seven more banks. This step brought 80% of the banking segment in India under


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Government ownership. The following are the steps taken by the Government of India to

Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act.

1955 : Nationalization of State Bank of India.

1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalization of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose

to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in

the sunshine of Government ownership gave the public implicit faith and immense

confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in

its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was

set up by his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being

put to give a satisfactory service to customers. Phone banking and net banking is introduced.

The entire system became more convenient and swift. Time is given more importance than

money. The financial system of India has shown a great deal of resilience. It is sheltered from

any crisis triggered by any external macroeconomics shock as other East Asian Countries

suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the

capital account is not yet fully convertible, and banks and their customers have limited

foreign exchange exposure.


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Banks in India:

In India banks are segregated in different groups. Each group has their own benefits and

limitations in operating in India. Each has their own dedicated target market. Few of them

work on only rural market but others work both on rural as well as urban market. Many

even are only catering only in cities. Some of them are Indian origin and some of them are


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foreign players. And the details are discussed here. The banks with their relation with their

customers, the mode of operation,the names of the banks under different groups and such

other useful information are talked about.

One more important section has been note of these upcoming foreign banks in India. RBI

has shown certain interest in the inclusion of foreign banks than the existing one. These step

has paved away more foreign banks to do their banks in India.

Major banks in India :

ABN AMRO Bank

Abu Dhabi commercial Bank

American Express Bank

Andhra Bank

Bank of Baroda

Bank of Maharashtra

Bank of India

Bank of Punjab

Bank of Rajasthan

Bank of Ceylon

BNP Paribus Bank

Canara Bank

Catholic Syrian Bank

Central bank of India

Indian Overseas bank

Indusland Bank

ING Vysya Bank

Jammu and Kashmir Bank

JP Morgan Chase Bank

Karnataka Bank


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Oriental Bank of Commerce

Punjab National Bank

Punjab Sind Bank

South Indian Bank Standard Chartered Bank

State Bank of India

State Bank of bikener and jaipur

China trust commercial Bank

City Bank

City union Bank

Corporation Bank Dena bank

Deutsche Bank

Dhanlakshmi Bank

Federal Bank

HDFC Bank

ICICI Bank

IDBI Bank

Indian Bank

State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Saurastra

State Bank of Travancore

Syndicate Bank

Taib Bank

UCO Bank

Union Bank of India

United Bank of India


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United Western Bank

UTI Bank

Vijaya Bank

Banking services in India:

With years, banks are also adding services to their customers. The Indian banking industry

is passing through a phase of customers market. The customers have more choices in

choosing their banks. A competition has been established within the banks operating in

India.

With stiff competition and advancement of technology, the service provided by

banks has become more easy and convenient. The past days are witness to an hour wait

before withdrawing cash from accounts or cheque from north of the country being cleared in

one month in south.

This section of banking deals with the latest discovery in banking instruments

along with the polished version of their old systems.

Reserve Bank of India:

The central bank of the country is the Reserve Bank of India (RBI). It was

established in April 1935 with a share capital of Rs. 5 crores on the basis of the

recommendations of the Hilton Young Commission. The share capital was divided into

shares of Rs. 100 each fully paid which was entirely owned by private shareholders in thebeginning. The Government held shares of nominal value of Rs. 2, 20,000.

Reserve Bank of India was nationalized in the year 1949. The general

superintendence and direction of the Bank is entrusted to Central Board of Directors of 20

members, the Governor and four Deputy Governors, one Government official from the


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Ministry of Finance, ten nominated Directors by the Government to give representation to

important elements in the economic life of the country, and four nominated Directors by the

Central Government to represent the four local Boards with the headquarters at Mumbai,

Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central

Government appointed for a term of four years to represent territorial and economic

interests and the interests of co-operative and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act,

1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

To regulate the issue of banknotes

To maintain reserves with a view to securing monetary stability and

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

Functions of resrve bank of India:

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

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank

notes of all denominations. The distribution of one rupee notes and coins and small coins all

over the country is undertaken by the Reserve Bank as agent of the as the agent of the

Government. The Reserve Bank has a separate Issue Department which is entrusted with the

issue of currency notes. The assets and liabilities of the Issue Department are kept separate

from those of the Banking Department. Originally, the assets of the Issue Department were

to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided


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the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the

assets might be held in rupee coins, Government of India rupee securities, eligible bills of

exchange and promissory notes payable in India. Due to the exigencies of the Second World

War and the post-was period, these provisions were considerably modified. Since 1957, the

Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200

crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is

known as the minimum reserve system.

Banker to Government

The second important function of the Reserve Bank of India is to act as Government

banker, agent and adviser. The Reserve Bank is agent of Central Government and of allState Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has

the obligation to transact Government business, via. to keep the cash balances as deposits

free of interest, to receive and to make payments on behalf of the Government and to carry

out their exchange remittances and other banking operations. The Reserve Bank of India

helps the Government - both the Union and the States to float new loans and to manage

public debt. The Bank makes ways and means advances to the Governments for 90 days. It

makes loans and advances to the States and local authorities. It acts as adviser to the

Government on all monetary and banking matters.

Bankers' Bank and Lender of the Last Resort:

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the

Banking Companies Act of 1949, every scheduled bank was required to maintain with the

Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its

time liabilities in India. By an amendment of 1962, the distinction between demand and time

liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent

of their aggregate deposit liabilities. The minimum cash requirements can be changed by the

Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank of India on the basis of

eligible securities or get financial accommodation in times of need or stringency by


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rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank

of India to come to their help in times of banking crisis the Reserve Bank becomes not only

the banker's bank but also the lender of the last resort.

Controller of Credit:

The Reserve Bank of India is the controller of credit i.e. it has the power to influence

the volume of credit created by banks in India. It can do so through changing the Bank rate

or through open market operations. According to the Banking Regulation Act of 1949, the

Reserve Bank of India can ask any particular bank or the whole banking system not to lend

to particular groups or persons on the basis of certain types of securities. Since 1956,

selective controls of credit are increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian

money market. Every bank has to get a license from the Reserve Bank of India to do banking

business within India, the license can be cancelled by the Reserve Bank of certain stipulated

conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank

before it can open a new branch. Each scheduled bank must send a weekly return to the

Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for

information is also intended to give it effective control of the credit system. The Reserve

Bank has also the power to inspect the accounts of any commercial bank. As supreme

banking authority in the country, the Reserve Bank of India, therefore, has the following

powers:

(a)It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative andqualitative controls.

(c)It controls the banking system through the system of licensing, inspectionand calling for

information.

(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled

banks.


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Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the official rate of

exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy

and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of

exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange

rate fixed at lsh.6d. Though there were periods of extreme pressure in favor of or against the

rupee. After India became a member of the International Monetary Fund in 1946, the

Reserve Bank has the responsibility of maintaining fixed exchange rates with all other

member countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as

the custodian of India's reserve of international currencies. The vast sterling balances were

acquired and managed by the Bank. Further, the RBI has the responsibility of administering

the exchange controls of the country.

Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has certain

non-monetary functions of the nature of supervision of banks and promotion of sound

banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have

given the RBI wide powers of supervision and control over commercial and co-operative

banks, relating to licensing and establishments, branch expansion, liquidity of their assets,

management and methods of working, amalgamation, reconstruction, and liquidation. The

RBI is authorized to carry out periodical inspections of the banks and to call for returns and

necessary information from them. The nationalization of 14 major Indian scheduled banks in

July 1969 has imposed new responsibilities on the RBI for directing the growth of bankingand credit policies towards more rapid development of the economy and realization of

certain desired social objectives. The supervisory functions of the RBI have helped a great

deal in improving the standard of banking in India to develop on sound lines and to improve

the methods of their operation.


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Promotional functions

With economic growth assuming a new urgency since Independence, the range of the

Reserve Bank's functions has steadily widened. The Bank now performs variety of

developmental and promotional functions, which, at one time, were regarded as outside the

normal scope of central banking. The Reserve Bank was asked to promote banking habit,

extend banking facilities to rural and semi-urban areas, and establish and promote new

specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of

the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of

India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural

Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of

India in 1972. These institutions were set up directly or indirectly by the Reserve Bank topromote saving habit and to mobilize savings, and to provide industrial finance as well as

agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural

Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this

field has become extremely important. The Bank has developed the co-operative credit

movement to encourage saving, to eliminate moneylenders from the villages and to route its

short term credit to agriculture. The RBI has set up the Agricultural Refinance and

Development Corporation to provide long-term finance to farmers.

Classification of RBIs functions

The monetary functions also known as the central banking functions of the RBI are

related to control and regulation of money and credit, i.e., issue of currency, control of bank

credit, control of foreign exchange operations, banker to the Government and to the money

market. Monetary functions of the RBI are significant as they control and regulate the

volume of money and credit in the country.


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Equally important, however, are the non-monetary functions of the RBI in the context of

India's economic backwardness. The supervisory function of the RBI may be regarded as a

non-monetary function (though many consider this a monetary function). The promotion of

sound banking in India is an important goal of the RBI, the RBI has been given wide and

drastic powers, under the Banking Regulation Act of 1949 - these powers relate to licensing

of banks, branch expansion, liquidity of their assets, management and methods of working,

inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and

inspection, the working of banks has greatly improved. Commercial banks have developed

into financially and operationally sound and viable units. The RBI's powers of supervision

have now been extended to non- banking financial intermediaries. Since independence,

particularly after its nationalization 1949, the RBI has followed the promotional functions

vigorously and has been responsible for strong financial support to industrial andagricultural development in the country.


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General

Banking

Chapter -2

NATURE OF BANKING IN INDIA--- ---

A banking company in India has been defined in the banking companies

act,1949.as one which transacts the business of banking which means the accepting, for the

purpose of lending or investment of deposits of money from the public, repayable on demand

or otherwise and withdraw able by cheque, draft, order or otherwise.

Most of the activities a Bank performs are derived from the above definition. In

addition, Banks are allowed to perform certain activities which are ancillary to this business

of accepting deposits and lending. A bank's relationship with the public, therefore, revolves

around accepting deposits and lending money. Another activity which is assuming increasing

importance is transfer of money - both domestic and foreign - from one place to another.

This activity is generally known as "remittance business" in banking parlance. The so called

forex (foreign exchange) business is largely a part of remittance albeit it involves buying and

selling of foreign currencies.


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FUNCTIONING OF A BANK:-

Functioning of a Bank is among the more complicated of corporate operations. Since

Banking involves dealing directly with money, governments in most countries regulate this

sector rather stringently. In India, the regulation traditionally has been very strict and in the

opinion of certain quarters, responsible for the present condition of banks, where NPAs are

of a very high order. The process of financial reforms, which started in 1991, has cleared the

cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations

that a Bank has to work with makes its operations even more complicated, sometimes

bordering on illogical. This section, which is also intended for banking professional, attempts

to give an overview of the functions in as simple manner as possible. Banking Regulation Act

of India, 1949 defines Banking as "accepting, for the purpose of lending or investment ofdeposits of money from the public, repayable on demand or otherwise and withdraw able by

cheques, draft, and order or otherwise."

KINDS OF BANKS---

Financial requirements in a modern economy are of a diverse nature, distinctive

variety and large magnitude. Hence, different types of banks have been instituted to cater to

the varying needs of the community.

Banks in the organized sector may, however, be classified in to the following

major forms:

1.Commercial banks

2.Co-operative banks

3.Specialized banks

4.Central bank

-: COMMERCIAL BANKS:-


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Commercial banks are joint stock companies dealing in money and credit. In India,

however there is a mixed banking system, prior to July 1969, all the commercial banks-73

scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-

were under the control of private sector. On July 19, 1969, however,

14mejor commercial banks with deposits of over 50 Corers were nationalized. In April

1980, another six commercial banks of high standing were taken over by the government.

At present, there are20 nationalized banks plus the state bank of India and its 7

subsidiaries constituting public sector banking which controls over 90 per cent of the

banking business in the country.

-:CO-OPERATIVE BANKS:-

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

the Co-operative societies Act of the states.

The main objective of co-operative banks is to provide cheap credits to their members. They

are based on the principle of self-reliance and mutual co-operation. Co-operative banking

system in India has the shape of a pyramid a three tier structure, constituted by:

Primary credit

societies(APEX)

Centralcooperativebanks(district)

State cooperativebank(village ,towns ,cities)


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-: SPECIALIZED BANKS:-

There are specialized forms of banks catering to some special needs with this

unique nature of activities. There are thus,

1.Foreign exchange banks,

2.Industrial banks,

3.Development banks,

4.Land development banks,

5.Exim bank.

-: CENTRAL BANK:-

A central bank is the apex financial institution in the banking and financial system of

a country. It is regarded as the highest monetary authority in the country. It acts as the

leader of the money market. It supervises, control and regulates the activities of the

commercial banks. It is a service oriented financial institution.

Indias central bank is the reserve bank of India established in 1935.a central

bank is usually state owned but it may also be a private organization. For instance, the

reserve bank of India (RBI), was started as a shareholders organization in 1935, however, it

was nationalized after independence, in 1949.it is free from parliamentary control.

ROLE OF BANKS IN A DEVELOPING ECONOMY-----

Banks play a very useful and dynamic role in the economic life of every modern state.

A study of the economic history of western country shows that without the evolution ofcommercial banks in the 18th and 19th centuries, the industrial revolution would not have

taken place in Europe. The economic importance of commercial banks to the developing

countries may be viewed thus:


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Banks are in a position to influence economic activity in a country by their influence

on the rate interest. They can influence the rate of interest in the money market through its

supply of funds. Banks may follow a cheap money policy with low interest rates which will

tend to stimulate economic activity.

FACILITATOR OF MONETARY POLICY:-

Thus monetary policy of a country should be conductive to economic development.

But a well-developed banking system is on essential pre-condition to the effective

implementation of monetary policy. Under-developed countries cannot afford to ignore this

fact.

A fine, an efficient and comprehensive banking system is a crucial factor of the

developmental process.

PRINCIPLES OF BANK LENDING POLICIES---------------

The main business of banking company is to grant loans and advances to traders as

well as commercial and industrial institutes. The most important use of banks money is

lending. Yet, there are risks in lending. So the banks follow certain principles to minimize the

risk:

1.Safet y

2.Liquidit y

3.Profitabilit y

4.Purpose of loan

5.Principle of diversification of risks

SAFETY: -

Normally the banker uses the money of depositors in granting loans and advances. So first of

all initially the banker while granting loans should think first of the safety of depositors

money. The purpose behind the safety is to see the financial position of the borrower whether

he can pay the debt as well as interest easily.

LIQUIDITY: -


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It is a legal duty of a banker to pay on demand the total deposited money to the

depositor. So the banker has to keep certain percent cash of the total deposits on hand.

Moreover the bank grants loan. It is also for the addition of short term or productive capital.

Such type of lending is recovered on demand.

P ROF ITABILITY: -

Commercial banking is profit earning institutes. Nationalized banks are also not an

exception. They should have planning of deposits in a profitability way pay more interest to

the depositors and more salary to the employees. Moreover the banker can also incur

business cost and can give more benefits to customer.

PURPOSE OF LOAN:-

Banks never lend or advance for any type of purpose. The banks grant loans and

advances for the safety of its wealth, and certainty of recovery of loan and the bank lends

only for productive purposes. For example, the bank gives such loan for the requirement for

unproductive purposes.

PRINCIPLE IOF DIVERSIFICATION OF RISKS:-

While lending loans or advances the banks normally keep such securities and assets

as a supports so that lending may be safe and secured. Suppose, any particular state is hit by

disasters but the bank shall get benefits from the lending to another states units. Thus, he

effect on the entire business of banking is reduced. There are proverbs that do not keep all

the eggs in one basket.

-a principle of considerations of sound lending is: 1.Safety

2.Liquidity3.Shiftability

4.Profitability.


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Management of banking

Chapter-3

BRANCH SETUP AND STRUCTURE-------

Ever since major commercial banks were nationalized in two phases in 1969 and 1980, there

has been a sea change in their functions, outlook and perception.

One of the main objectives of nationalization of banks has been to help achieve

balanced, regional, sectoral and sectional development of the economy by way of making the

banks reach out to the small man and to the remote areas of the country.

RATIONAL OF A BANK STRUCTURE:-

An organization consists of people who carry out differentiated tasks which are

coordinated so as to contribute and achieves planned goals. Organizations are created mainly

for producing goods and services to the society for which they have to incorporate a formal

structure.

Indian banking is now operating in a more competitive setting with the induction of

new banks. Both Indian and foreign, who will be bringing in new work technology and

specialist expertise and a variety of new financing instruments.

Branch is the primary unit of the banks business, particularly for serving the weaker

sections of the society. Branches have to develop close relationship they profess to serve. This

leads to opening up or specialized branches, like industrial finance, small scale industries,

and Hi-tech agriculture, overseas and non-resident Indian, according to market


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segmentation. This new vision entails a new chain of command, a new technology and specific

delegation of authority.

This calls for the branch manger to concentrate on his/her styles, skills and

subordinates, goals, to shape the branch in the competitive environment to become a profit

centre and to render better customer service. This implies that the branch manager should

have adequate supporting staff to relieve him from the routine table work to developmental

activities.

In order to serve the customer it is necessary that one should understand and accept role and

relationship with other so as to make sure that none of the supporting staff would be deemed

to be independent of the branch manger. So the structure of branch organization must, from

time to time, conform to the demands and peculiarities of the

locality in which the branch is functioning.

Before looking in to the branch structure of bank, it will be worthwhile examining

how a formal organizational structure of a bank appears. After nationalization, generally

banks have a 4-tier structure represented as under:


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During the mid-80s, banks started diversifying in to various areas like merchant

banking, mutual funds, leasing, hire purchase, etc., to improve their profitability and to cater

to the needs of the customers. These activities are performed by the banks either by separate

departments or as subsidiaries. After liberalization and globalization of the economy, with a

view to meeting the customers needs and to avoid delays, a revised organizational structure

of banks was convened by removing one tier. Now banks are going in for a 3-tier structure as

under:

The regional offices are given more powers and jurisdiction so as to enable them to act

quickly.

ORGANISATIONAL STRUCTURE OF A BANK BRANCH--

Now let discuss the structure of a branch. The branch is the focal point of all activities. The

structure of the branch may be as under:


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This is the typical structure of a branch bank. In very large branches, these structure will undergo

slight changes as stated below:

BANK ORGANIZATION SYSTEM IN INDIA:-

The large volume of work passing through the banking system every day in the form

of cash, cheque, and other credit instruments, together with the complexity of the manyservices rendered, calls not only for a high degree of skill, accuracy and knowledge on the

part of the officials, but also up-to-date and efficient methods of organization, accountancy

and control.

Share holder and directors General Managers Head office AdministratorsThe Branch Manager Branch Administrators Foreign Departments

The chief clerks The security clerk The cashierThe Remittance or waste

clerk

The ledger keeper The day book or contrl

clerkThe junior clerk The shorthand typist Rotation of duties


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RETAIL BANKING-THE NEW FLAVOR---

The Concept of Retail Banking:-

The retail banking encompasses deposit and assets linked products as well as other

financial services offered to individual for personal consumption. Generally, the pure retail

banking is conceived to be the provision of mass banking products and services to private

individuals as opposed to wholesale banking which focuses on corporate clients. Over the

years, the concept of retail banking has been expanded to include in many cases the servicesprovided to small and medium sized businesses. Some banks in Europe even include their

private banking business i.e. services to high net worth net worth individuals in their retail

Banking portfolio.

The concept of Retail banking is not new to banks. it is only now that it is being

viewed as an attractive market segment, which offers opportunities for growth with profits.

The diversified portfolio characteristic of retail banking gives better comfort and spreads the

essence of retail banking lies in individual customers. Though the term Retail Banking and

retail lending are often used synonymously, yet the later is lust one side of Retail Banking. In

retail banking, all the banking needs of individual customers are taken care of in an

integrated manner.

Retail Lending Products:-

Major retail lending products offered by banks are the following:

I.Housing Loans

II.Loan for Consumer goods

III.Personal Loans for marriage, honeymoon, medical treatment and holding etc.

IV.Education Loans


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V.Auto Loans

VI.Gold Loans

VII.Event Loans

VIII.Festival Loans

IX.Insurance Products

X.Loan against Rent receivables

XI.Loan against Pension receivables to senior citizens

XII.Debit and Credit Cards

XIII.Global and International Cards

XIV.Loan to Doctors to set up their own Clinics or for purchase of medical equipments

XV.Loan for Woman Empowerment for the Setting up of boutiques Setting up of beauty parlours

Setting up of creches

Setting up of flower shops

For making jaipuri quilts etc.

Preparation and supply of Food Tiffins

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

Retail Banking Products for Depositors:-

Retail banking products for depositors in various segments of customers like;

children, salaried persons. Senior citizens, professionals, technocrats business men, retail

traders and farmers etc. include:

a.Flexi deposit Accounts

b.Savings Bank Accounts

c.Recurring Deposit Accounts

d.Short Term Deposits

e.Deferred pension Linked Deposit Schemes


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Today pure deposit type products are giving way to multi-benefit, multi-access genres of

banking products. Most of the innovation is taking place in saving bank accounts to make the

meager return of 3.5% p.a. that they earn, more attractive. Most of the banks now offer

Sweep in and sweep out account, called 2-in-1 accounts or value added savings bank

accounts. This account is a combination of savings bank and term deposit accounts and

offers twin benefit of liquidity of a savings bank account and higher interest earning of term

deposit accounts.

Add-ons and Freebies:-

To make their products and services more service more attractive so as to woo

maximum number of customers, the banks are vying with each other with whole lot off rills,

goodies, freebies are as under:

1.Free collection of specified number of outstation instruments

2.Instant credit of outstanding cheques up to Rs.15000/-

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

exchange .

4.Issuance of free personalized cheques books.

5.Free issuance of ATM, Debit, Credit and add-on Cards.

6.Free investment advisory services.

7.Grant of redeemable reward points on use of credit cards.

8.Free internet banking, phone banking and any where banking facilities.

9.Issuance of discount coupons for purchase of various products like computeraccessories,

music CDs, cassettes, books, toys, garments etc.etc. 10.Last but not the least, issuance of free

PVR, Trade Fair tickets etc. etc.11.Concession in rate of interest on Group advances

12.Exemption in upfront fees

These concessions, freebies and add-ons are based on the True Relationship Value of

customers and is calculated by the return on various products and services of the banks


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availed by them. These concessions and freebies are usually offered for purchase of consumer

goods but now they have become an integral part of retail Banking products and services

also.

Other Retail Banking Services:-

Offer of several frills and goodies is not the end of the game. Banks also offer following

Retail Banking services free of charges to customers:

1.Payment of utility bills like water, electricity, telephone and mobile phone bills

2.Payment of insurance premiums on due dates

3.Payment of monthly/quarterly education fee of children to their respective schools

4.Remittance of funds from one account to another

5.Demating of shares, bonds, debentures, and mutual funds

6.Payment of credit card bills on due dates

7.Last but not the least, the filing of income tax returns and payment of income tax

Retail Lending at Point of Sale:-

More and more banks have since entered into tie up arrangement with leading

automobile, electronic and consumer goods dealers, builders and real estate agents,

universities and colleges etc. for promoting and selling their Retail Banking products

including housing and educational loans to customer at the very point of sale.

New delivery channels for Retail Banking Products and Services:-

The advent of new delivery channels viz. ATM, Interest and Telebanking haverevolutionalised the retail banking activities. These channels enable Banks to deliver retail

Banking products and services in an efficient and cost effective manner. Now-a- days the

banks are under great pressure to attract new and retain old customers, as margins are

turning wafer thin. In these circumstances reducing administrative a transaction cost has


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become crucial. Banks are making special offerings to customers through these channels.

Retail banking has been immensely benefited with the revolution in IT. and communication

technology. The automation of the Banking processes is facilitating extension of their reach

and rationalization of their costs as well. They are the engine for growth of retail banking

business of Banks. The networking of branches has extended the scope of banking to

anywhere and anytime 24 * 7 days week banking. It has enabled customer to be the customer

of a bank rather then the customers of a particular branch only. Customers can transact

retail Banking transactions at any of the networked branches without any extra cost. As a

matter of fact the Retail Banking per se has taken off because of the advent of multiple

banking channels. These channels have enabled banks to go on a massive customer

acquisition mode since transaction volumes spread over multiple channels lessen the load on

the brick and mortar bank branches.

The impact of Retail Banking:-

The major impact of Retail Banking is that, the customers have become the emperors the

fulcrum of all banking activities, both on the asset side and the liabilities front. The hitherto

sellers market has transformed into buyers market. The customers have multiple of choices

before them now for cherry picking products and services, which suit their life styles and

tastes and financial requirements as well. Banks now go to their customers more often than

the customers go to their banks.

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

business due to high risk and high returns thereon have been dislodged from their profit

munching citadel.

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

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

Banks can foster lasting business relationship with customers and retain the

existing customers and attract new ones. There is a rise in their service levels aswell.

Banks can cut costs and achieve economies of scale and improve their revenues

and profits by robust growth in retail business. Reduction in costs offers a win

win situation both for banks and the customers.


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It has affected the interface of banking system through different delivery

mechanism.

It is not that banks are sharing the same pie of retail business. The pie itself is

growing exponentially; retail banking has fueled a considerable quantum of

purchasing power through a slew of retail products.

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

NPAs.

Re-engineering of business with sophisticated technology based products will

lead to business creation, reduction in transaction cost and enhancement in

efficiency of operations.

Draw-backs of Retail Banking :-

Despite the numerous advantage of Retail Banking there are some drew-Backs in thisbusiness. These are as under

a. Management of large number of clients may become a problem if IT systems arenot

robust.

b. Rapid evolution of products can lead to IT complications.

c. The cost of maintaining large number of small value transactions in branch

networks will be relatively high, unless the customers use alternate delivery channels likeATMs, internet and phone banking etc. for carrying out banking transactions.

The Future of Retail Banking :-

Though at present Retail Banking appears to be the best bet for banks to improve their top

and bottom line, yet the future of Retail banking in general, may not be all roses as it appears

to be. There are signs of slowdown in customer growth in some countries, which will

inevitably have an impact on Retail Banking business growth. Secondly the possibility of

deterioration in asset quality cannot be ruled out. With the boom in housing loan market, the

sign of overheating has also started surfacing with potential problem for banks that have not

exercised sufficient caution. Further the pressure on margins is mounting partly because of

fierce competition and partly as a result of falling interest rates environment which has

diminished to some extent the endowment effect of substantial deposit bases from which most


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retail banks have been deriving benefits. But banks, which have built a significant retail

banking portfolio may fare relatively well in the current fiscal. Those banks which have a

dynamic retail strategy and are well diversified in products, services and distribution

channels and have at the same time managed to achieve a good level of cost efficiency are the

ones that are most likely to succeed in the longer term.

STRATEGIC ISSUES IN BANKING SERVICES----

Strategic Planning: is the process of analyzing the organizational external and internal

environments; developing the appropriate mission, vision, and overall goals; identifying the

general strategies to be pursued; and allocated resources.

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

Vision is an organization's fundamental aspirations and purpose that usually appeals to its

member's hearts and minds.

Goals are what an organization is committed to achieving.

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

Resource Allocation is the earmarking of money, through budgets, for various purposes.

Downsizing Strategy signals an organization's intent to rely on fewer resources- primarily

human-to accomplish its goals.Tactical Planning: is the process of making detailed decisions about what to do, which

will do it, and how to do it-with a normal time and horizon of one year or less. The process

generally includes:

Choosing specific goals and the means of implementing the

organization's strategic plan,

Deciding on courses of action for improving current operations, and

Developing budgets for each department, division and project.Strategic issues in banks services are known as or define by these ways, which are known as


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NON-PERFORMING ASSETS OF THE BANKING SECTOR:-

There was a significant decline in the non-performing assets (NPAs) of SCBs in 2003-

04, despite adoption of 90 day delinquency norm from March 31, 2004. The Gross NPAs of

SCBs declined from 4.0 per cent of total assets in 2002-03 to 3.3 percent in 2003-04. The

corresponding decline in net NPAs was from 1.9 per cent to 1.2 per cent. Both gross NPAs

and net NPAs declined in absolute terms. While the gross NPAs declined from Rs. 68,717

crore in 2002-03 to Rs. 64,787 crore in 2003-04, net NPAs declined from Rs. 32,670 crore to

Rs. 24,617 crore in the same period. There was also a significant decline in the proportion of

net NPAs to net advances from 4.4 per cent in 2002-03 to 2.9 per cent in 2003-04. The

significant decline in the net NPAs by 24.7 per cent in 2003-04 as compared to 8.1 per cent in

2002-03 was mainly on account of higher provisions (up to 40.0 per cent) for NPAs made bySCBs.

The decline in NPAs in 2003-04 was witnessed across all bank groups. The decline in

net NPAs as a proportion of total assets was quite significant in the case of new private sector

banks, followed by PSBs. The ratio of net NPAs to net advances of SCBs declined from 4.4

per cent in 2002-03 to 2.9 per cent in 2003-04. Among the bank groups, old private sector

banks had the highest ratio of net NPAs to net advances at 3.8 per cent followed by PSBs (3.0

per cent) new private sector banks (2.4 per cent) and foreign banks (1.5 per cent)

An analysis of NPAs by sectors reveals that in 2003-04, advances to non-priority sectors

accounted for bulk of the outstanding NPAs in the case of PSBs (51.24 per cent of total) and

for private sector banks (75.30 per cent of total). While the share of NPAs in Agriculture


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sector and SSIs of PSBs declined in 2003-04, the share of other priority sectors increased.

The share of loans to other priority sectors in priority sector lending also increased.

Measures taken to reduce NPAs include re schedulement, restructuring at the bank level,

corporate debt restructuring, and recovery through Lok Adalats, Civil Courts, and debt

recovery tribunals and compromise settlements. The recovery management received a major

fillip with the enactment of the Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest (SARFAESI) Act, 2002 enabling banks to realize their dues

without intervention of courts and tribunals. The Supreme Court in its judgment dated April

8, 2004, while upholding the constitutional validity of the Act, struck down section 17 (2) of

the Act as unconstitutional and contrary to Article 14 of the Constitution of India. The

Government amended the relevant provisions of the Act to address the concerns expressed

by the Supreme Court regarding a fair deal to borrowers through an ordinance datedNovember 11, 2004. It is expected that the momentum in the recovery of NPAs will be

resumed with the amendments to the Act.

The revised guidelines for compromise settlement of chronic NPAs of PSBs were

Issued in January 2003 and were extended from time to time till July 31, 2004. The cases

filed by SCBs in Lok Adalats for recovery of NPAs stood at 5.20 lakh involving anamount of

Rs. 2,674 crore (prov.). The recoveries effected in 1.69 lakh cases amounted to Rs.352 crore

(prov.) as on September 30, 2004.The number of cases filed in debt


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recovery tribunals stood at 64, 941 as on June 30, 2004, involving an amount of Rs. 91,901

crore. Out of these, 29, 525 cases involving an amount of Rs. 27,869 crore have been

adjudicated. The amount recovered was to Rs. 8,593 crore. Under the scheme of corporate

debt restructuring introduced in 2001, the number of cases and value of assets restructured

stood at 121 and Rs. 69,575 crore, respectively, as on December 31, 2004. Iron and steel,

refinery, fertilizers and telecommunication sectors were the major beneficiaries of the

scheme. These sectors accounted for more than two-third of the values of assets restructured.

As credit information is crucial for the development of the financial system and for

addressing the problems of NPAs, dissemination of credit information on suit-filed defaulters

is being undertaken by the Credit Information Bureau of India Ltd. (CIBIL) from March

2003. In its annual policy statement for 2004-05, the RBI advised banks and financial

institutions to review the measures taken for furnishing credit information in respect of all

borrowers to CIBIL. In its mid-term review, the RBI again urged the banks to make

persistent efforts in obtaining consent from all the borrowers, in order to establish an

efficient credit information system, which would help in enhancing the quality of credit

decisions, improve the asset quality, and facilitate faster credit delivery.

CAPITAL ADEQUACY RATIO:-


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The concept of minimum capital to risk weighted assets ratio (CRAR) has been

developed to ensure that banks can absorb a reasonable level of losses. Application of

minimum CRAR protects the interest of depositors and promotes stability and efficiency of

the financial system. At the end of March 31, 2004, CRAR of PSBs stood at 13.2 per cent, an

improvement of 0.6 per centage point from the previous year. There was also an

improvement in the CRAR of old private sector banks from 12.8 per cent in 2002-03 to 13.7

per cent in 2003-04. The CRAR of new private sector banks and foreign banks registered a

decline in 2003-04. For the SCBs as a whole the CRAR improved from 12.7 per cent in 2002-

03 to 12.9 per cent in 2003-04. All the bank groups had CRAR above the minimum 9 per cent

stipulated by the RBI.

During the current year, there was further improvement in the CRAR of SCBs. The ratio inthe first half of 2004-05 improved to 13.4 per cent as compared to 12.9 per cent at the end of

2003-04. Among the bank groups, a substantial improvement was witnessed in the case of

new private sector banks from 10.2 per cent as at the end of 2003-04 to 13.5 per cent in the

first half of 2004-05. While PSBs and old private banks maintained the CRAR at almost the

same level as in the previous year, the CRAR of foreign banks declined to 14.0 per cent in the

first half of 2004-05 as compared to 15.0 per cent as at the end of 2003-04

TOTAL QUALITY MANAGEMENT:-

While Total Quality Management has proven to be an effective process for improving

organizational functioning, its value can only be assured through a comprehensive and well

thought out implementation process. The purpose of this chapter is to outline key aspects of

implementation of large scale organizational change which may enable a practitioner to more

thoughtfully and successfully implement TQM. First, the context will be set. TQM is, in fact,

a large scale systems change, and guiding principles and considerations regarding this scale

of change will be presented. Without attention to contextual factors, well intended changes

may not be adequately designed. As another aspect of context, the expectations and

perceptions of employees (workers and managers) will be assessed, so that the

implementation plan can address them. Specifically, sources of resistance to change and ways

of dealing with them will be discussed. This is important to allow a change agent to anticipate

resistances and design for them, so that the process does not bog down or stall. Next, a model


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of implementation will be presented, including a discussion of key principles. Visionary

leadership will be offered as an overriding perspective for someone instituting TQM. In

recent years the literature on change management and leadership has grown steadily, and

applications based on research findings will be more likely to succeed. Use of tested

principles will also enable the change agent to avoid reinventing the proverbial wheel.

Implementation principles will be followed by a review of steps in managing the transition to

the new system and ways of helping institutionalize the process as part of the organization's

culture. This section, too, will be informed by current writing in transition management and

institutionalization of change. Finally, some miscellaneous do's and dont will be

offered.Members of any organization have stories to tell of the introduction of new programs,

techniques, systems, or even, in current terminology, paradigms. Usually the employee, who

can be anywhere from the line worker to the executive level, describes such an incident witha combination of cynicism and disappointment: some manager went to a conference or in

some other way got a "great idea" (or did it based on threat or desperation such as an urgent

need to cut costs) and came back to work to enthusiastically present it, usually mandating its

implementation. The "program" probably raised people's expectations that this time things

would improve, that management would listen to their ideas. Such a program usually is

introduced with fanfare, plans are made, and things slowly return to normal. The manager

blames unresponsive employees, line workers blame executives interested only in looking

good, and all complain about the resistant middle managers. Unfortunately, the program

itself is usually seen as worthless: "we tried team building (or organization development or

quality circles or what have you) and it didn't work; neither will TQM". Planned change

processes often work, if conceptualized and implemented properly; but, unfortunately, every

organization is different, and the processes are often adopted "off the shelf" "the 'appliance

model of organizational change': buy a complete program, like a 'quality circle package,'

from a dealer, plug it in, and hope that it runs by itself" (Kanter, 1983, 249). Alternatively,

especially in the under funded public and not for profit sectors, partial applications are tried,

and in spite of management and employee commitment do not bear fruit. This chapter will

focus on ways of preventing some of these disappointments.


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In summary, the purpose here is to review principles of effective planned change

implementation and suggest specific TQM applications. Several assumptions are proposed:

1. TQM is a viable and effective planned change method, when properly installed

2. Not all organizations are appropriate or ready for TQM

3. Preconditions (appropriateness, readiness) for successful TQM can sometimes be

created

4. Leadership commitment to a large scale, long term, and cultural change is necessary.

While problems in adapting TQM in government and social service organizations have been

identified, TQM can be useful in such organizations if properly modified.

For survival, banks have to make efforts to improve their quality and

competitiveness by planning and taking innovative in fall areas:

Increase emphasis on customer focused activities

Intro a total quality program

Developing differential value added services

Educating employees through involvement programs

Increase quality through management and system Increase effectiveness of product development

Developing product with lower uses costs

TQM principles

Customer satisfaction

Plan-do-check-act (PDCA) cycle Management by 'fact' -- 5Ws (what, why, who, when, and where) + 1H

(how) approach

Respect for people

TQM elements


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Total employee involvement (TEI)

Total waste elimination (TWE)

Total quality control (TQC)

TQM focus areas

Customer satisfaction

Product quality

Plant reliability

Waste elimination

Benefits achieved through TQM

Increased focus on the customer

Mindset of 'continuous improvement'

Better product quality

Better systems and procedures

Better cross-functional teamwork

Increased plant reliability

Waste elimination in offices and factories

INNOVATION IN BANK-----


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Innovation drives organizations to grow, prosper and transform in sync with the

changes in the environment, both internal and external. Banking is no exception to this. In

fact, this sector has witnessed radical transformation of late, based on many innovations in

products, processes, services, systems, business models, technology, governance and

regulation. A liberalized and globalize financial infrastructure has provided an additional

impetus to this gigantic effort.

The pervasive influence of in formation technology has revolutionalized banking.

Transaction costs have crumbled and handling of astronomical number of transactions in no

time has become a reality. Internationally, the number brick and mortar structure has been

rapidly yielding ground to click and order electronic banking with a plethora of new

products. Banking has become boundary less and virtual with a 24 * 7 model. Banks whostrongly rely on the merits of relationship banking as a time tested way of targeting and

serving clients, have readily embraced Customer Relationship Management (CRM), with

sharp focus on customer centricity, facilitated by the availability of superior technology.

CRM has, therefore, become the new mantra in customer service management, which is both

relationship based and information intensive.

Risk management is no longer a mere regulatory issue.basel-2 has accorded a

primacy of place to this fascinating exercise by repositioning it as the core of banking. Wenow see the evolution of many novel deferral products like credit derivatives, especially the

Credit Risk Transfer (CRT) mechanism, as a consequence. CRT, characterized by significant

product innovation, is a very useful credit risk management tool that enhances liquidity and

market efficiency. Securitization is yet another example in this regard, whose strategic use

has been rapidly rising globally. So is outsourcing.

SOME RECENT INNOVATIONS IN INDIAN BANKING:-

Tandon can, however, usefully cast an eye at one way of shopping without revealing his

credit card number. HDFC Banks Net Safe card is a one-time use card with a limit thats

specified, taken from Tendons credit or debit card. Even if Tandon fails to utilize the full

amount within 24 hours of creating the card, the card simply dies and the unspent amount in

the temporary card reverts to his original credit or debit card.


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Welcome to one of the myriad ways in which bankers have been trying to innovate. Theyre

bringing ATMs, cash and even foreign exchange to their customers doorsteps. Indeed,

innovation has become the hottest banking game in town.

Want to buy a house but dont want to go through the hassles of haggling with

brokers and the mounds of paperwork? Not to worry. Your bank will tackle all this. Its

ready to come every step of the way for you to buy a house. Standard Chartered, for

instance, has property advisors to guide a customer through the entire process of selecting

and buying a house. They also lend a hand with the cumbersome documentation formalities

and the registration.

Dont fret if youve already bought your house or car you can do other things with

both. You can leverage your new house or car these days with banks like ICICI Bank and

Stanchart ready to extend loans against either, till its about five years old. Loans are

available to all car owners for almost all brands of cars manufactured in India that are up to

five years old.

Still, innovation is more evident in retail banking. True, all banks offer pretty much

the same suite of asset and liability products. But its the small tweaking here and there that

makes all the difference. Take, for example, the once staid deposits. Some bank accountscombine a savings deposit account with a fixed deposit. A sweep-in account, as it is called,

works like this: the account will have a cut-off, say, Rs 25,000; any amount over and above

that gets automatically transferred to a fixed deposit which will earn the customer a clean 2

per cent more than the returns that a savings account gives.

Last month, Kotak Mahindra Bank introduced a variant of the sweep-in account. If

the balance tops Rs 1.5 lakh, the excess runs into Kotaks liquid mutual fund. Even if the

money is there only for the weekend, a liquid fund can earn you a clean 4.5 per cent perannum, points out Shashi Arora, vice president, marketing, Kotak Mahindra Bank. Thats

not a small gain considering that your current account does not pay you any interest. And if,

meanwhile, you want to buy a big-ticket home theatre system, the minute you swipe your

card the invested sum will return to your account.


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Stanchart, ABN Amro and HDFC Bank. HDFC Bank brings even foreign exchange, whether

travellers cheques or cash, to your doorstep courtesy its tie-up with Travelex India. All one

has to do is call up the branch or HDFC Banks phone banking number. The banks country

head, retail, Neeraj Swaroop, believes that continuous innovation will always make a

difference, with customer needs changing day by day. Innovation will never become less

important for us, he says. HDFC Bank has pioneered other innovations. Take point of sale

(POS) terminals, a prerequisite in any store or restaurant worth its name in the country.

Earlier this year, it tied up with Reliance Infocomm to offer mobile POS terminals. Although

this might sound a tad too fancy today, there could soon be a day when you can swipe your

card to pay your cabby, the pizza home delivery boy and even for the groceries from the local

kirana store.

But internet banking and shopping have been slow starters, given the low computer

penetration in the country but banks are going all out to get the customer online. Not only is

electronic fund transfer between banks across cities possible through internet banking today

but banks also offer other features that benefit the customer. HDFC Bank, for instance, has

an option called One View on its internet banking site which provides customers a

comprehensive view of their investments and fund movements. Customers can look at their

accounts in six different banks on one screen. These include HDFC Bank accounts and demat

accounts, ICICI Bank, Citibank, HSBC and Standard Chartered Bank accounts, apart from

details of Citibank credit card dues and so on.

Banks are also innovating on the company and treasury operations fronts. In

corporate loans, plain loans are passe. Mumbai inter-bank offered rate (MIBOR)-linked and

commercial paper-linked interest rates on loans are common. MIBOR is a reference rate

arrived at every day at 4 pm by Reuters. It is the weighted average rate of call money

business transacted by 22 institutions, including banks, primary dealers and financial

institutions.

The State Bank of India was the first to usher in MIBOR-linked loans for top

companies. Soon enough, other banks followed. ICICI Bank carried out the worlds first ever

securitization of a micro finance portfolio last year. The bank securitized Rs 4.2 crore for


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Bharatiya Samruddhi Finance Ltd for crop production. Banks, of course, realize that

innovation gives them only a first mover advantage until their rivals catch up. But then, they

can console themselves. Isnt imitation the best form of flattery?

TECHNOLOGY IN BANKING---

Nobel Laureate Robert Solow had once remarked that computers are seen

everywhere excepting in productivity statistics. More recent developments have shown how

far this state of affairs has changed. Innovation in technology and worldwide revolution in

information and communication technology (ICT) have emerged as dynamic sources of

productivity growth. The relationship between IT and banking is fundamentally symbiotic.

In the banking sector, IT can reduce costs, increase volumes, and facilitate customized

products; similarly, IT requires banking and financial services to facilitate its growth. As far

as the banking system is concerned, the payment system is perhaps the most important

mechanism through which such interactive dynamics gets manifested.

Recognizing the importance of payments and settlement systems in the economy, we

have embarked on technology based solutions for the improvement of the payment and

settlement system infrastructure, coupled with the introduction of new payment productssuch as the computerized settlement of clearing transactions, use of Magnetic Ink Character

Recognition (MICR) technology for cheque clearing which currently accounts for 65 per cent

of the value of cheques processed in the country, the computerization of Government

Accounts and Currency Chest transactions, operationalisation of Deliveryversus Payment

(DvP) for Government securities transactions. Two-way inter-city cheque collection and

imaging have been operationalised at the four metros. The coverage of Electronic Clearing

Service (Debit and Credit) has been significantly expanded to encourage non-paper based

funds movement and develop the provision of a centralized facility for effecting payments.

The scheme for Electronic Funds Transfer operated by the Reserve Bank has been

significantly augmented and is now available across thirteen major cities. The scheme, which

was originally intended for small value transactions, is processing high value (up to Rs.2

crore) from October 1, 2001. The Centralized Funds Management System (CFMS), which


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would enable banks to obtain consolidated account-wise and centre-wise positions of their

balances with all 17 offices of the Deposits Accounts Departments of the Reserve Bank, has

begun to be implemented in a phased manner from November 2001.

A holistic approach has been adopted towards designing and development of a modern,

robust, efficient, secure and integrated payment and settlement system taking into account

certain aspects relating to potential risks, legal framework and the impact on the operational

framework of monetary policy. The approach to the modernization of the payment and

settlement system in India has been three-pronged: (a) consolidation, (b) development, and

(c) integration. The consolidation of the existing payment systems revolves around

strengthening Computerized Cheque clearing, expanding the reach of Electronic Clearing

Services and Electronic Funds Transfer by providing for systems with the latest levels oftechnology. The critical elements in the developmental strategy are the opening of new

clearing houses, interconnection of clearing houses through the INFINET; optimizing the

deployment of resources by banks through Real Time Gross Settlement System, Centralized

Funds Management System (CFMS); Nego tiated Dealing System (NDS) and the Structured

Financial Messaging Solution (SFMS). While integration of the various payment products

with the systems of individual banks is the thrust area, it requires a high degree of

standardization within a bank and seamless interfaces across banks.

The setting up of the apex-level National Payments Council in May 1999 and the

operationalisation of the INFINET by the Institute for Development and Research in

Banking Technology (IDRBT), Hyderabad have been some important developments in the

direction of providing a communication network for the exclusive use of banks and financial

institutions. Membership in the INFINET has been opened up to all banks in addition to

those in the public sector. At the base of all inter-bank message transfers using the INFINET

is the Structured Financial Messaging System (SFMS). It would serve as a secure

communication carrier with templates for intra- and inter-bank messages in fixed message

formats that will facilitate straight through processing. All inter-bank transactions would

be stored and switched at the central hub at Hyderabad while intra- bank messages will be

switched and stored by the bank gateway. Security features of the SFMS would match

international standards.


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In order to maximize the benefits of such efforts, banks have to take pro-active measures

to:

further strengthen their infrastructure in respect of standardization, high levels

of security and communication and networking;

achieve inter-branch connectivity early;

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

Institute arrangements for an RTGS environment online with a view to integrating

into a secure and consolidated payment system.

Information technology has immense untapped potential in banking. Strengthening of

information technology in banks could improve the effectiveness of asset-liability

management in banks. Building up of a related data-base on a real time basis would enhance

the forecasting of liquidity greatly even at the branch level. This could contribute toenhancing the risk management capabilities of banks.

BANKING SECTOR REFORMS

As the real sector reforms began in 1992, the need was felt to restructure

the Indian banking industry. The reform measures necessitated the

deregulation of the financial sector, particularly the banking sector. The

initiation of the financial sector reforms brought about a paradigm shift in

the banking industry. In 1991, the RBI had proposed to from the

committee chaired by M. Narasimham, former RBI Governor in order to

review the Financial System viz. aspects relating to the Structure,

Organisations and Functioning of the financial system. The Narasimham

Committee report, submitted to the then finance minister, Manmohan

Singh, on the banking sector reforms highlighted the weaknesses in theIndian banking system and suggested reform measures based on the

Basle norms. The guidelines that were issued subsequently laid the

foundation for the reformation of Indian banking sector.

The main recommendations of the Committee were: -


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i. Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a

period of five years

ii. Progressive reduction in Cash Reserve Ratio (CRR)

iii. Phasing out of directed credit programmes and redefinition of the

priority sector

iv. Deregulation of interest rates so as to reflect emerging market

conditions

v. Stipulation of minimum capital adequacy ratio of 4 per cent to risk

weighted assets by March 1993, 8 per cent by March 1996, and 8

per cent by those banks having international operations by March

1994

61.1 Introduction

vi. Adoption of uniform accounting practices in regard to income

recognition, asset classification and provisioning against bad and

doubtful debts

vii. Imparting transparency to bank balance sheets and making more

disclosures

viii. Setting up of special tribunals to speed up the process of recovery

of loans

ix. Setting up of Asset Reconstruction Funds (ARFs) to take over from

banks a portion of their bad and doubtful advances at a discount

x. Restructuring of the banking system, so as to have 3 or 4 large

banks, which could become international in character, 8 to 10

national banks and local banks confined to specific regions. Rural

banks, including RRBs, confined to rural areas

xi. Abolition of branch licensing

xii. Liberalising the policy with regard to allowing foreign banks to open

offices in India

xiii. Rationalisation of foreign operations of Indian banks

xiv. Giving freedom to individual banks to recruit officers


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xv. Inspection by supervisory authorities based essentially on the

internal audit and inspection reports

xvi. Ending duality of control over banking system by Banking Division

and RBI

xvii. A separate authority for supervision of banks and financial

institutions which would be a semi-autonomous body under RBI

xviii. Revised procedure for selection of Chief Executives and Directors

of Boards of public sector banks

xix. Obtaining resources from the market on competitive terms by DFIs

xx. Speedy liberalisation of capital market

7

xxi. Supervision of merchant banks, mutual funds, leasing companiesetc., by a separate agency to be set up by RBI and enactment of a

separate legislation providing appropriate legal framework for

mutual funds and laying down prudential norms for such

institutions, etc.

Several recommendations have been accepted and are being

implemented in a phased manner. Among these are the reductions in

SLR/CRR, adoption of prudential norms for asset classification and

provisions, introduction of capital adequacy norms, and deregulation of

most of the interest rates, allowing entry to new entrants in private sector

banking sector, etc.

Keeping in view the need of further liberalisation the Narasimham

Committee II on Banking Sector reform was set up in 1997. This

committees terms of reference included review of progress in reforms in

the banking sector over the past six years, charting of a programme of

banking sector reforms required to make the Indian banking system more

robust and internationally competitive and framing of detailed

recommendations in regard to make the Indian banking system more

robust and internationally competitive.

This committee constituted submitted its report in April 1998. The major


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recommendations are :

i. Capital adequacy requirements should take into account market

risks also

ii. In the next three years, entire portfolio of Govt. securities should be

marked to market

iii.Risk weight for a Govt. guaranteed account must be 100 percent

8

iv. CAR to be raised to 10% from the present 8%; 9% by 2000 and 10%

by 2002

v. An asset should be classified as doubtful if it is in the sub-standard

category for 18 months instead of the present 24 months

vi.Banks should avoid ever greening of their advancesvii.There should be no further re-capitalization by the Govt.

viii.NPA level should be brought down to 5% by 2000 and 3% by 2002.

ix.Banks having high NPA should transfer their doubtful and loss

categories to ARCs which would issue Govt. bonds representing the

realisable value of the assets.

x. International practice of income recognition by introduction of the

90-day norm instead of the present 180 days.

xi. A provision of 1% on standard assets is required.

xii.Govt. guaranteed accounts must also be categorized as NPAs under

the usual norms

xiii.There is need to institute an independent loan review mechanism

especially for large borrowal accounts to identify potential NPAs.

xiv.Recruitment of skilled manpower directly from the market be given

urgent consideration

xv.To rationalize staff strengths, an appropriate VRS must be

introduced.

xvi.A weak bank should be one whose accumulated losses and net

NPAs exceed its net worth or one whose operating profits less its

income on recap bonds is negative for 3 consecutive years.


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To start with, it has assigned a 2.5 per cent risk-weightage on gilts by

March 31, 2000 and laid down rules for provisioning; shortened the life of

sub-standard assets from 24 months to 18 months (by March 31, 2001);

called for 0.25 per cent provisioning on standard assets (from fiscal 2000);

9

100 per cent risk weightage on foreign exchange (March 31, 1999) and a

minimum capital adequacy ratio of 9 per cent as on March 31, 2000.

Only a few of these mainly constitute to the reforms in the banking sector

REDUCTION IN CRR AND SLR

The South East Asian countries introduced banking reforms wherein bank

CRR and SLR was reduced, this increased the lending capacity of banks.

The markets fell precipitously because banks and corporates did not

accurately measure the risk spread that should have been reflected in

their lending activities. Nor did they manage such risks or provide for

them in their balance sheets. And followed the South East Asian Crisis.

The monetary policy perspective essentially looks at SLR and CRR

requirements (especially CRR) in the light of several other roles they play

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