BANKING STRUCTURE

PROJECT REPORT BY MS. PRATIBHA KUMARI T.Y.B.B.I (SEMESTER V)

PROJECT GUIDE PROF. dr s.s.SHETE

THE DEPARTMENT OF BANKING & INSURANCE SYDENHAM COLLEGE OF COMMERCE & ECONOMICS B- ROAD, CHURCHGATE, MUMBAI-400020 2011-2012

DECLARATION

I, Pratibha kumari studying in T.Y.B.B.I hereby declare that I have done a project on Banking structure . As required by the university rules, I state that the work presented in this project is original in nature and to the best my knowledge, has not been submitted so far to any other university. Whenever references have been made to the work of others, it is clearly indicated in the sources of information in references.

Place: Mumbai

Pratibha kumari

Date:

PREFACE

The project has been prepared not only because it involves marks and is the requirement of the university but I understand the underlying intention of the board which definitely imparts priceless knowledge and I believe that practical exposure is equally important for every student.

I firmly decided to prepare my project on banking structure as I eager to know the meaning both theoretical as well as practical. I have chosen this topic because to be honest I love doing projects related to the technology. There is nothing more that excites me than good execution done through an electronic medium and hence I choose this topic.

I have put my sincere efforts in the project and hope I have done a decent job to portray that technology has proven to be a boon to banking

Place: Mumbai Date:

Pratibha kumara

ACKNOWLEDGEMENT

I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals and organizations. I would like to extend my sincere thanks to all of them. I am highly indebted to PROF. DR S.S.SHETE for their guidance and constant supervision as well as for providing necessary information regarding the project & also for their support in completing the project. I would like to express my gratitude towards my parents & faculty of B.B.I Dept. for their kind co-operation and encouragement which help me in completion of this project. I would like to express my special gratitude and thanks to industry persons for giving me such attention and time. My thanks and appreciations also go to my colleague in developing the project and people who have willingly helped me out with their abilities.

Place: Mumbai

Pratibha kumari

INTRODUCTION

India has a well developed Banking system. The banking industry originated in India in the 18th century and since then it has undergone significant number of changes. The commercial banking industry in India over the past few decades has been revolutionized by a number of factors such as independence, nationalization, deregulation, rise of the Internet, etc. The commercial banking structure in India consists of Scheduled Banks and Unscheduled Banks. In the past the banks did not find any attraction in the Indian economy because of the low level of economic activities and little business prospects. Today we find positive changes in the National business development policy. Earlier, the money lenders had a strong hold over the rural population which resulted in exploitation of small and marginal savers. The private sector banks failed in serving the society. This resulted in the nationalization of 14 commercial banks in 1969. Nationalization of commercial banks paved ways for the development of Indian economy and channelized financial resources for the upliftment of weaker sections of the society. The passage of financial modernization legislation by Congress in 1999 removed barriers, allowing banks to expand product offerings, while the potential of the Internet as a sales, marketing and delivery tool, widened the avenues to sell and deliver these products. The main products of the commercial banking industryinsurance, securities, mortgages, mutual funds and consumer credit-have all benefited from these changes. This report will examine the extent to which increased product sales have influenced overall bank assets and how

commercial banks' increased market share in each of these products areas over the next five years will raise overall bank income and assets. Currently (2009), banking industry in India is generally fairly mature in terms of supply, product range and reach-even though reaches in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect mergers and acquisitions, takeovers, and asset sales.

REVIEW OF LITERATURE Indian banking system, over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private banks may not extend the kind of cooperation in providing credit support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, State-sponsored, State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59 the associate banks came into the fold of public sector banking. Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal, more particularly to the unorganised sector. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed in organised sectors of industry and trade, while the farmers, small entrepreneurs, transporters , professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control

was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilisation of resources. The scheme however, did not provide any remedy. Though a no. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors. On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs.28.50cr, deposits of Rs.2629cr, loans of Rs.1813cr and with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI introduced the Lead Bank Scheme on the

recommendations of FK Narsimhan Committee. Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance cover to the depositors. In the post-nationalization period, there was substantial increase in the no. of branches opened in rural/semi-urban centers bringing down the population per bank branch to 12000 appx. During 1976, RRBs were established (on the recommendations of M. Narasimham Committee report). The Service Area Approach was introduced during 1989.While the 1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s and more particularly during early 90s, with the submission of

report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. In these five decades since independence, banking in India has evolved through four distinct phases:

Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organization and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 majar private banks during 1969. Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population, which had no access to banking hitherto. Most importantly, credit flows were guided towards the priority sectors. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at low ebb. Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service,

credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market.

Reforms phase: The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc.

OBJECTIVES OF THE STUDY

The objectives of project are as follows:

1. To find out the earlier banking structure that prevailed in India. 2. To assess the various factors that lead to the change in the Indian banking structure 3. To assess the impact of all these factors on the banking structure. 4. To assess the change in the performance and efficiency of the banks in India. 5. To draw a contrast between the old and the new Indian banking structure. 6. To determine the various services offered by banks earlier and currently 7. To determine the future of Indian Banking Markets 8. To assess the impact of information technology on the banking sector. 9. To study how new distribution channels such as Internet Banking, ATM facility, Phone Banking have changed the face of the Banking industry. 10. To draw conclusions of the impact of the changes in banking sector.

RESEARCH METHODOLOGY

Secondary data is the data which is collected for some other purpose. The data used for preparing the project report was secondary data. It was collected from various websites, newspapers and books.

BANKING SECTOR IN THE PAST Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865.By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. At the beginning of the 20th century, Indian economy was passing through a relative period of stability. Around five decades have elapsed since the India's First war of Independence, and the social, industrial and other infrastructure have developed. At that time there were very small banks operated by Indians. The banking in India was controlled and dominated by the presidency banks, namely, the Bank of Bombay, the Bank of Bengal, and the Bank of Madras which later on merged to form the Imperial Bank of India, and Imperial Bank of India.

BANKING STRUCTURE IN INDIA

Reserve Bank of India

Commercial banks

Cooperative Banks

State Co-operative Banks Public Sector Banks Regional Rural Banks Central Co-operative Banks Private Sector Banks Primary Credit Societies

Indian

foreign

RESERVE BANK OF INDIA The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 under the RBI Act, 1934 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 5,00,000 shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. The Government held shares of nominal value of Rs. 2,20,000. Reserve Bank of India was nationalised 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 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 RBI Act, 1934 provides the statutory basis of the functioning of the Bank. It is so called as it maintains cash reserves of all the commercial banks in India with itself. It is also referred to as Central Bank.

Objectives of constituting the Reserve Bank of India:

y y y

To regulate the issue of bank notes. To maintain reserves with a view to securing monetary stability. To operate the credit and currency system of the country to its advantage.

y y y

To act as a regulator and supervisor of the financial system Management of foreign exchange control Banker to the Government because it performs merchant banking function for the central and the state governments; also acts as their banker.

y y

Development of banks. Supervision and licensing of banks.

Role of the Reserve Bank of India The Reserve Bank of India performs an important role in monitoring and development of Indian economy. The same can be demonstrated with the

1. Bank of Issue: The Reserve Bank of India enjoys the monopoly of note issue. The Reserve Bank is authorized to issue currency notes of Rs. 2, 5, 10, 20, 50, 100, 500 and 1000. The one rupee note is issued by the Government of India. RBI has the issue department which is entirely responsible for the issue of coins and notes. The RBI required to follows certain principles in order to prevent misuse of issuing of notes. Against the issue of notes the RBI is required to maintain gold and foreign exchange reserve of Rs. 200 Crores, Rs. 115 Crores gold and the remaining Rs. 85 Crores in foreign securities. Monopoly power of note issue with the Reverse Bank of India has a number of advantage which are as follows: (a) Uniformity: As all notes in India are issued by the RBI, there is uniformity in note issue, widely accepted and the people of the country have full faith in the currency. (b) Effective Control: The RBI has on effective control on commercial banks that create deposits in the process of advancing loans to its customers. (c) Supervision of Control: The RBI maintains a proper supervision and control over the supply of money in the economy. 2. Bankers Bank and Lender of the Last Resort: As the bankers bank, the RBI performs the same functions as performed by commercial bank for their customers. On behalf of the Government the RBI receives the cheques, draft and deposit of cash etc. For the payment of salaries and wages it provide cash to the government. It also buys and sells foreign currencies.

Every scheduled bank, according to the RBI, Act, 1934, was required to maintain with the Reserve Bank a Cash balance equivalent to 5 percent of its demand liabilities and 2 percent of its time liabilities in India. The demand and time liabilities was abolished by an amendment of 1962, and now the bank require cash reserves equal to 3 percent of their aggregate deposit liabilities with the RBI. The RBI at any time can change the minimum cash reserve. As the word say lender of the last resort it simply means that the RBI provides all financial assistance whether directly or indirectly to commercial bank at the time of financial crises through loans, advances and discounting of approved securities. 3. Fiscal Agent and Advisor to the Government: On behalf of the Government the RBI issues new loans, receives subscriptions and pays interest on them and at last repay these loans. As the financial advisor, the RBI advises the government on all monetary and banking matter like floating of loans, on industrial and agricultural finance, control of inflation or deflation, budgetary policy, financial aspects of planning, etc. 4. Controller of Credit: RBI is the controller of credit. For the smooth functioning of the economy, the supply of credit must be regulated and controlled, the RBI can do so through changing, the bank rate or through open market operations. According to the Banking Regulation act of 1949, the RBI can ask any particulars bank or the whole banking system not to lend to particular groups of persons or on the basis of certain type of securities.

5. Custodian of Nations Foreign Exchange Reserve: The custodian of nation s foreign exchange reserve is one of the most important functions of the RBI. The RBI controls both the receipts and payment of foreign exchange, and in the regard it tries to maintain stability of the exchange rate. This can be possible only when it buys or sell foreign currencies in the market. After India became a member of the international monetary fund, the RBI has the responsibility of maintaining fixed exchange rates with all other member countries of the IMF. 6. Clearing house for Transfer and Settlement: Reserve Bank provides clearing house facilities to the member banks. The customers of various bank issue cheques drawn on their bank. So the need arises regarding the settlement claims of the commercial bank on each other. It is very easy to settle claims between them by making transfer entries in their account because the commercial bank keeps their cash reserve with the RBI. So it is simple, economical and time saving device for settling the claims of commercial bank on each other. 7. Promotional Functions: With economic growth assuming a new urgency since independence, The Reverse Bank of India not only performs the traditional function explained in point 1 to 6 above, but it also performs various development and promotional functions with were considered as outside the scope of RBI at one time. For developing and promoting a strong banking system the responsibility is on the hand of RBI, and in this regard it provides cheap and liberal rediscounting facilities and also gives various types of concessions to commercial banks from time to time.

The Reserve bank has helped in the setting up of the IFCI and the SFC to provide various funds for the development of agriculture, industry and service sector of the economy. 8. Supervisory Functions: Now the supervision is in the hand of the RBI, to see whether the commercial banks are performing better or not for the development of the economy. The Banking Regulation Act 1949, have given wide power to RBI regarding proper control and supervision over commercial banks regarding licensing and establishment, expansion of branch, liquidity of their assets, management and method of working of commercial banks.

Commercial Banks in India

Commercial Banks in India are broadly categorized into Scheduled Commercial Banks and Unscheduled Commercial Banks. The Scheduled Commercial Banks have been listed under the Second Schedule of the Reserve Bank of India Act, 1934. The selection measure for listing a bank under the Second Schedule was provided in section 42 (60 of the Reserve Bank of India Act, 1934. Commercial bank is the term used for a normal bank to distinguish it from an investment bank or retail bank. It can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking).

Activities of Commercial Banks The modern Commercial Banks in India cater to the financial needs of different sectors. The main functions of the commercial banks comprise: y transfer of funds y acceptance of deposits y offering those deposits as loans for the establishment of industries purchase of houses, equipments, capital investment purposes etc. The banks are allowed to act as trustees. On account of the knowledge of the financial market of India the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture. The Indian Government presently hires the

commercial banks for various purposes like tax collection and refunds, payment of pensions etc. Functions of Commercial Banks The functions of a commercial banks are divided into two categories: i) Primary functions, and ii) Secondary functions including agency functions.

i) Primary functions: The primary functions of a commercial bank include: a) Accepting deposits; and b) Granting loans and advances;

i i ) Secondary function Be sides the primary functions of a accepting deposits and lending money, banks perform a number of other function which are called secondary functions. These are as followsy Issuing letter of credit, traveller cheques, circular notes etc. y Undertaking safe custody of valuables, important documents and securities by providing safe deposite locker. y Providing customers with facilities of foreign exchange. y Transferring money from one place to another; and from one branch to another branch of the bank. y Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc y Collecting and supplying business information;

y Providing reports on the credit worthiness of customers. List of Commercial Banks in India SBI & Associates: 1. State Bank of India 2. State Bank of Bikaner & Jaipur 3. State Bank of Hyderabad 4. State Bank of Indore 5. State Bank of Mysore 6. State Bank of Patiala

Public Sector Banks Among the Public Sector Banks in India, United Bank of India is one of the 14 major banks which were nationalised on July 19, 1969. Its predecessor, in the Public Sector Banks, the United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly Bank Ltd. (1932). Oriental Bank of Commerce (OBC), a Government of India Undertaking offers Domestic, NRI and Commercial banking services. OBC is implementing a GRAMEEN PROJECT in Dehradun District (UP) and Hanumangarh District (Rajasthan) disbursing small loans. This Public Sector Bank India has implemented 14 point action plan for strengthening of credit delivery to

women and has designated 5 branches as specialized branches for women entrepreneurs. The following are the list of Public Sector Banks in India
1. 2. 3. 4. 5. 6. 7. 8. 9.

Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Corporation Bank Dena Bank Indian Bank Punjab National Bank Private sector banks in India

Private banking in India was practiced since the beginning of banking system in India. The first Private bank in India to be set up in Private Sector Banks in India was Induslnd Bank. It is one of the fastest growing Private Sector Banks in India. IDBI ranks the tength largest Development bank in the world as Private Banks in India and has promoted a world class institutions in India. The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in India as part of the RBI's liberalisation of the Indian Banking Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and

commenced operations as Scheduled Commercial Bank in January 1995. ING Vysya, yet another Private Bank of India was incorporated in the year 1930. Bangalore has a pride of place for having the first branch inception in the year 1934. With successive years of patronage and constantly setting new standards in banking, ING Vysya Bank has many credits to its account.List of Private Banks in India  Bank of Punjab  Bank of Rajasthan  Centurion Bank  HDFC Bank  ICICI Bank  Jammu & Kashmir Bank  Karnataka Bank  UTI Bank Mini-Case HDFC Bank Ltd.: A Leader in Making HDFC Bank was incorporated in the year of 1994 by Housing Development Finance Corporation Limited (HDFC), India s premier housing finance company. It was among the first companies to receive an in principle approval from the Reserve Bank of India (RBI) to set up a bank in the private sector. The Bank commenced its operations as a Scheduled Commercial Bank in January 1995 with the help of RBI s liberalization policies. In a milestone transaction in the Indian banking industry, Times Bank Limited (promoted by Bennett, Coleman & Co./Times Group) was merged with HDFC

Bank Ltd., in 2000. This was the first merger of two private banks in India. As per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank. In 2008 HDFC Bank acquired Centurian Bank and its total branches became more than 1,000. The amalgamated bank emerged with a strong deposit base of around Rs. 1,22,000 crore and net advances of around Rs. 89,000 crore. The amalgamation added significant value to HDFC Bank in terms of increased branch network, geographic reach, and customer base, and a bigger pool of skilled manpower. Business Focus HDFC Bank deals with three key business segments Wholesale Banking

Services, Retail Banking Services and Treasury. It has entered the banking consortia of over 50 corporate for providing working capital finance, trade services, corporate finance and merchant banking. It is also providing sophisticated product structures in areas of foreign exchange and derivatives, money markets and debt trading and equity research. Wholesale Banking Services The Bank s target markets are large, blue-chip manufacturing companies, small & mid-sized companies and agro-based businesses. For these customers, the Bank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. The bank is also a leading provider of

structured solutions, which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers. HDFC Bank has made significant inroads into the banking consortia of a number of leading Indian corporate including multinationals, companies from the domestic business houses and prime public sector companies. It is recognized as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks. Retail Banking Services The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a onestop window for all his/her banking requirements. The products are backed by world-class services and delivered to customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile Banking. HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Master card and Maestro debit card as well. It launched its credit card business in late 2001. By March 2009, the bank had a total card base (debit and credit cards) of over 13 million. It is also one of the leading players in the merchant acquiring business with over 70,000 Point-of-sale (POS) terminals for debit/credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc.

Treasury Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. These services are provided through the bank s Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio. Distribution Network HDFC Bank is headquartered in Mumbai. The Bank has a network of 1,725 branches spread in 771 cities across India. All branches are linked on an online real-time basis. Customers in over 500 locations are also serviced through Telephone Banking. The Bank has a presence in all major industrial and commercial centers across the country. Being a clearing/settlement bank to various leading stock exchanges, the Bank has branches in the centers where the NSE/BSE has a strong and active member base. The Bank also has 3,898 networked ATMs across these cities. Moreover, HDFC Bank s ATM network can be accessed by all domestic and international Visa/MasterCard, Visa Electron/ Maestro, Plus/Cirrus and American Express Credit/Charge cardholders.

Foreign Banks Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative. New rules announced by the Reserve Bank of India for the foreign banks in India in this budget have put up great hopes among foreign banks which allow them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that foreign banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its terms)

and their Indian subsidiaries will not be able to open branches freely. Please see the list of foreign banks in India till date. List of Foreign Banks in India
y y y y y y y y y

ABN-AMRO Bank Abu Dhabi Commercial Bank Bank of Ceylon BNP Paribas Bank Citi Bank Deutsche Bank HSBC Sonali Bank JPMorgan Chase Bank

Regional Rural Banks Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country. There are 197 RRB s in India. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in

rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas. Apart from SBI, there are other few banks which functions for the development of the rural areas in India. Few of them are as follows:

y Haryana State Cooperative Apex Bank Limited y National Bank for Agriculture and Rural Development (NABARD) y Sindhanur Urban Souharda Co-operative Bank y United Bank of India y Syndicate Bank

Co-Operative Banks The Co operative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co operative, the expectations the co operative is supposed to fulfill, their number, and the number of offices the cooperative bank operate. Though the co operative movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India play an important role even today in rural financing. The businesses of cooperative bank in the urban areas also have increased phenomenally in recent years due to the

sharp

increase

in

the

number

of

primary

co-operative

banks.

Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. Features of Cooperative Banks: Co-operative Banks are organised and managed on the principal of cooperation, self-help, and mutual help. They function with the rule of "one member, one vote". Function on "no profit, no loss" basis. Co- operative banks, as a principle, do not pursue the goal of profit maximisation. Co-operative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also. UCBs provide working capital loans and term loan as well. The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally extend housing loans upto Rs 1 lakh to an individual. The scheduled UCBs, however, can lend upto Rs 3 lakh for housing purposes. The UCBs can provide advances against shares and debentures also. Co-operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan areas also. The urban and nonagricultural business of these banks has grown over the years. The cooperative banks demonstrate a shift from rural to urban, while the commercial banks, from urban to rural. Co-operative banks are perhaps the

first government sponsored, government-supported, and governmentsubsidised financial agency in India. They get financial and other help from the Reserve Bank of India NABARD, central government and state governments. They constitute the "most favoured" banking sector with risk of nationalisation. For commercial banks, the Reserve Bank of India is lender of last resort, but co-operative banks it is the lender of first resort which provides financial resources in the form of contribution to the initial capital (through state government), working capital, refinance. Co-operative Banks belong to the money market as well as to the capital market. Primary agricultural credit societies provide short term and medium term loans. Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short term and term loans. Co-operative banks are financial intermediaries only partially. The sources of their funds (resources) are y central and state government, y the Reserve Bank of India and NABARD, y other co-operative institutions, y ownership funds and, y deposits or debenture issues. It is interesting to note that intra- sectoral flows of funds are much greater in co-operative banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a significant part of assets and liabilities of cooperative banks. This means that intra-sectoral competition is absent and intra-sectoral integration is high for co- operative bank. Some co-operative bank is scheduled banks, while others are non-scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other cooperative banks are non-scheduled banks. At present, 28 SCBs and 11 UCBs

with Demand and Time Liabilities over Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act. Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and nonscheduled banks are. However, their requirements are less than commercial banks. Since 1966 the lending and deposit rate of commercial banks have been directly regulated by the Reserve Bank of India. Although the Reserve Bank of India had power to regulate the rate co-operative bank but this have been exercised only after 1979 in respect of non-agricultural advances they were free to charge any rates at their discretion. Although the main aim of the cooperative bank is to provide cheaper credit to their members and not to maximize profits, they may access the money market to improve their income so as to remain viable. Cooperative banks in India finance rural areas under:
y y y y y

Farming Cattle Milk Hatchery Personal finance

Cooperative banks in India finance urban areas under:

y y y y

Self-employment Industries Small scale units Home finance

Consumer finance

i.

State Co-operative Banks:

State Co-operative Banks are the apex of the three-tier Co-operative structure dispensing mainly short/medium term credit. It is the principal society in a State which is registered or deemed to be registered under the Government Societies Act, 1912, or any other law for the time being in force in India relating to co-operative societies and the primary object of which is the financing of the other societies in the State which are registered or deemed to be registered. The State Co-operative Banks receive current and fixed deposits from its constituent banks as well as savings, current and fixed deposits from the general public and from local boards, other local authorities, etc. Further, they receive loans from the RBI and NABARD. NABARD is the supervisory authority for State Co-operative Banks. The state government contributes the certain portion of their working capital. The principal function of State Co-operative Banks is to assist the Central Co-operative Banks and to balance excesses and deficiencies in the resources of Central Co-operative Banks. It also act as the balancing centre for Central Co-operative Banks in the sense that surplus fund of some of these banks are made available to other needy banks. It also serves the link between RBI and the Central Co-operative Banks and Primary Agriculture Credit Societies. But the connection between the State Co-operative Banks and Primary Co-

operative Societies is not direct. The Central Co-operative Banks are acting as intermediaries between the State Co-operative Banks and Primary societies.

Central Co-operative Banks:

Central Co-operative Banks form the middle tier of Cooperative credit institutions. These are the independent units in as much as the State Co-operative Banks have control to control or supervise their affairs. They are of two kinds i.e. pure and mixed . Those banks are the membership of which is confined to co-operative organizations only are included in pure type, while those banks the membership of which is open to co-operative organizations as well as to the individuals are included in mixed type. The pure type of Central Banks can be seen in Kerala, Bombay, Orissa, etc., while the mixed type can be seen in Andhra Pradesh, Assam, Tamil Nadu, etc. The pure type of banks is based on strict co-operative principles. However, the mixed type has an advantage over the pure type in so far as they can draw their funds from the non-agricultural sector too.

The Central Co-operative Banks draw their funds from share capital, deposits, loans from the State C-operative Banks and where State Banks do not exist from the RBI, NABARD and commercial banks. NABARD is the supervisory

authority for Central Co-operative Banks. Deposits constitute the major component of sources of funds, followed by borrowings. The main function of Central Co-operative Banks is to finance the primary credit societies. In addition they carry on Commercial banking activities like acceptance of deposits, granting of loans and advances on the security of first class guilt-edged securities, fixed deposit receipts, gold, bullion, goods and documents of title to goods, collection of bills, cheques, etc., safe custody of valuables and agency services. They are expected to attract deposits from the general public. They also act as balancing centres , making available access funds of one primary to another which is in need of them. The central co-operative banks are located at the district headquarters or some prominent town of the district. These banks have a few private individuals also who provide both finance and management. The central co-operative banks have three sources of funds,
y y y y

Their own share capital and reserves Deposits from the public and Loans from the state co-operative banks Primary Agriculture Credit Societies:

Primary Agricultural Credit Societies is the foundation of the co-operative credit system on which the superstructure of the short-term co-operative credit system rests. It deals directly with individual farmers, provide short and medium term credit, supply agricultural inputs, distribute consume

articles and also arrange for the marketing of products of its members through a c-operative marketing societies. These societies form the basic unit of cooperative credit system in India. These voluntary societies based on principle of one man one vote has posed challenge to exploitative practices of the village moneylenders. The farmers and other small-time borrowers come in direct contact with these societies. The success of the co-operative credit movement depend largely on the strength of these village level societies.

The major objective of Primary agricultural Credit Societies is to serve the need of weaker sections of these society. For this purpose, the people with limited means, particularly with schedules castes and scheduled tribes, are encouraged to become members of these societies. So, they must function effectively as well-managed and multi-purpose institutions mobilizing the savings of the rural people and providing the package of services including credit, supply of agricultural inputs and implements, consumer goods, marketing services and technical guidance with focus on weaker sections. Government has promoted multi-purpose societies in tribal areas for the benefit of people living there.

INDIAN BANKING SCENARIO 2010

Towards a High-performing Sector The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI),

Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favorably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. However, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. India s banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. Opportunities And Challenges For Players The bar for what it means to be a successful player in the sector has been raised. Four challenges must be addressed before success can be achieved. First, the market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. Second, banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks. Third, with increased interest in India, competition from foreign banks will only intensify. Fourth, given the demographic shifts resulting

from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. FUTURE OF INDIAN BANKING MARKET The Indian banking market is growing at an astonishing rate, with assets expected to reach US$1 trillion by 2010. An expanding economy, middle class, and technological innovations are all contributing to this growth. A new Celent report, Overview of Indian Banking Market, examines the impressive growth of this industry, largely due to an expanding economy and growing consumer middle class in need of financial services. India's economy is growing at a rate of 8%, with banking assets increasing at a CAGR of 24% from 2001 to 2008, from US$374.4 billion in 2003 to US$616.15 billion in 2008. While public sector banks still dominate Indias banking industry, the private sector is growing, with global players now actively competing with domestic banks.

CHANGES IN BANKING STRUCTURE

The opening up of the Indian banking sector to private players acted as 'the tipping point' for this transformation. The deregulatory efforts

prompted many financial institutions (like HDFC and ICICI) and non-financial institutions enter the banking arena. With the entry of private players into retail banking and with multi-nationals focusing on the individual consumer in a big way, the banking system underwent a phenomenal change. Multi-channel banking gained prominence. For the first time consumers got the choice of conducting transactions either the traditional way (through the bank branch), through ATMs, the telephone or through the Net. Technology played a key role in providing this multi-service platform. The entry of private players combined with new RBI guidelines forced

nationalized banks to redefine their core banking strategy. And technology was central to this change. Today banks have to look much beyond just providing a multi-channel service platform for its customers. There are other pressing issues that banks need to address in order to chalk-out aroadmap for the future. Here are the top three concerns in the mind of every bank's CEO.

Customer retention: Customer retention is one of the main priorities for banks today. With the entry of new players and multiple channels, customers have become more discerning and less 'loyal' to banks. Given the various options, it is now possible to open a new account within minutes. Or for that matter shift accounts within a couple of hours. This makes it imperative that banks provide best levels of service to ensure customer satisfaction.

Cost pressures:

Cost pressures come into play when banks are not able to afford the cost of a certain service or initiative although they want to or need to have it in place. This is primarily because the cost structure at the backend is not efficient enough to offer that kind of service to the marketplace.

Increased competition: The entry of new players into the banking space is leading to increased competition. A recent example would be of Kotak Mahindra Finance Limited (KMFL) a financial services company focused on investment morphing into Kotak Bank.

consulting, auto finance, insurance, etc

Many other such players are waiting on the sidelines. Technology makes it easier for any company with the right channel infrastructure and money r es er v es t o g et i nt o b a n k i ng . Th i s h as b ee n o ne o f t h e m ajo r r ea s o ns b e h i n d t h i s ki n d o f competition from players who do not have a banking background. Kotak Bank overcame the initial costs of setting up its own ATM network by getting into a sharing agreement with UTI bank. New entrants with strategies such as these make the banking game tough

IMPACT OF CHANGE IN BANKING STRUCTURE ON ECONOMY

Financial and Banking reforms

The last decade witnessed the maturity of India's financial markets. Since 1991, every governments India took major steps in reforming the financial sector of the country. The important achievements the following fields are discussed under separate heads:

Financial Markets In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial banking and asset management business. With the openings in the insurance sector for these institutions, they started making debt in the market. Competition among financial intermediaries gradually helped the interest rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high price while depositors had incentives to save. It was something between the nominal rate of interest and the expected rate of inflation.

Regulators The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more independent. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators.

Development Finance Institutions Financial institution's access to SLR funds reduced. Now they have to approach the capital market for debt and equity funds. Convertibility clause no longer obligatory for assistance to corporate sanctioned by term-lending institutions. Capital adequacy norms extended to financial institutions. DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking, asset management and insurance through separate ventures. The move to universal banking has started.

Non-banking finance companies In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net owned funds, has been raised to Rs.2 crores. Until recently, the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. The secondary market was underdeveloped and lacked liquidity. Several measures have been initiated and include new money market instruments, strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI).T h e R BI c o nd u c t s i t s s al e s o f d at e d s ec u r i t i e s an d t r e as u r y b i l l s t h r o u g h i t s o p en m ar k et operations (OMO) window. Primary dealers bid for these securities and also trade in them. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is

injected through reverse repo auctions and liquidity is sucked out through repo auctions. On account of the substantial issue of government debt, the gilt- edged market occupies an important position in the financial set- up. The Securities Trading Corporation of India (STCI), w h i c h s t ar t e d o p er at i o ns i n J u ne 1 9 9 4 , h as a m a nd at e t o d e v el o p t h e s ec o n d ar y m ar k et i n government securities. Long-term debt market. After bringing some order to the equity market, the SEBI has now decided to concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of dematerialization of debt instruments in order to encourage paperless trading.

The Capital Market The number of shareholders in India is estimated at 25 million. However, only an estimated two lakh persons actively trade in stocks. There has been a dramatic improvement in the country's stock market trading infrastructure during the last few years. Expectations are that India will bean attractive emerging market with tremendous potential. Unfortunately, during recent times the stock markets have been constrained by some unsavory developments, which have led to retail investors deserting the stock markets.

Mutual Funds The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players. The Unit Trust of India remains

easily

the

biggest

mutual

fund

controlling

corpus

of

nearlyRs.70,000 crores, but its share is going down. The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the US 64schemes. With the growth in the securities markets and tax advantages granted for i n mutual funds units, mutual funds started

b e c o m i n g p o p u l a r . The foreign owned AMCs are the ones which are now setting the pace for the industry. They are introducing new products, setting new standards of customer service, improving disclosure standards and experimenting with new types of distribution. The insurance industry is the latest to be thrown open to competition from the private sector i nc l u d i ng f o r e i g n p l ay e r s . F o r ei g n c o mp a ni es c a n o nl y e nt e r jo i nt v e nt u r es with I nd i a n companies, with

participation restricted to 26 per cent of equity. It is too early to conclude w h et h e r t h e er s t w h i l e pu b l i c s ec t o r m o n o po l i es w i l l s u c c e s s f u l l y b e ab l e t o f ac e u p t o t h e competition posed by the new players, but it can be expected that the customer will gain from improved service. The new players will need to bring in innovative products as well as fresh ideas on marketing and distribution, in order to improve the low per capita insurance coverage. Good regulation will, of course, be essential.

Deregulation of Banking System

Prudential norms were introduced for income recognition, asset classification, provisioning for delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy norms, substantial capital were provided by the Government to PSBs. Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated. N ew pr i v at e

s ec t o r b an k s al l o w ed p r o mo t i ng a nd e nc o u r ag i ng c o m p et i t i o n . P S B s w e r e encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate quicker recovery of loan arrears. B a n k l e n d i n g n o r m s l i b e r a l i z e d a n d a loan system to ensure better control over credit

introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk management systems in banks encompassing credit, market and operational risks. A credit information bureau being established to identify bad risks. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced.

Capital Market Developments The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital Issues was abolished and the initial share pricing were decontrolled. SEBI, the capital market regulator was established in 1992. Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after registration with the SEBI. Indian companies were permitted to access international capital markets through euro issues. The National

Stock Exchange (NSE), with nationwide stock trading and electronic display, clearing and settlement facilities was established. Several local stock exchanges changed over from floor based trading to screen based trading.

Private Mutual Funds Permitted The Depositories Act had given a legal framework for the establishment of depositories to record ownership deals in book entry form. Dematerialization of stocks encouraged paperless trading. Companies were required to disclose all material facts and specific risk factors associated with their projects while making public issues. To reduce the cost of issue, underwriting by the issuer were made optional, subject to conditions. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued by SEBI. SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy norms for brokers, and made rules for making client or broker relationship more transparent which included separation of client and broker accounts.

Buy Back Of Shares Allowed Th e S E BI s t a r t e d i n s i s t i ng o n g r e at e r c o r po r at e d i s c l o s u r es . S t e ps w er e t a k en t o i m pr o v e c o r p o r a t e based on the report of a governance SEBI issued

committee.

detailed employee stock option scheme and employee stock purchase scheme

for listed companies. Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies given the freedom to issue dematerialized shares in any denomination. Derivatives trading starts with index options and futures. A system of rolling settlements introduced. SEBI empowered to register and regulate venture capital funds. The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India.

CONCLUSIONS AND SUGGESTIONS 1. The Indian banking can be broadly categorized into nationalized (government owned), private banks and specialized banking institutions. The Reserve Bank of India is the apex institution in the Indian banking system & acts a regulator and a centralized body for monitoring any discrepancies and shortcoming in the system. 2. Before Nationalisation, banks in the beginning faced severs financial crisis. During and after World War I, 87 banks were liquidated. Development of banks in India was characterized by bank failures. After Independence, the Indian banking underwent a thorough and moral change. The government of

India announced Banking Regulations Act in 1949 to consolidate and regulate the banking growth in India 3. After Nationalisation, however, growth of banking during the first 3 plan periods resembles that of capitalist growth. There was need for stimulating the savings and investment to meet the growing demand for bank credit for economic development. Therefore government focused on social banking than capitalistic banking. Hence, in February 1961, announcement of 14 banks was made for the purpose of nationalisation. Since then, the performance of banking has been remarkable in the many aspects such as branch expansion, expansion of business, priority sector advances, development and spread of banking. 4. Currently, banking system has entered into the third phase of development which is characterized by innovation & diversification in order to meet new challenges. New services have been started such as merchant banking, investment banking, housing finance, investment banking, internet banking, telebanking, branch banking, electronic money transfers, SMS banking, mobile banking, proxy banking, plastic money such as credit cards, ATM cards, debit cards, smart cards, etc. 5. Banks have indulged in activities such as service area approach, mutual funds, housing finance, factoring services, commercial papers, certificate of deposit, stock invest and other money and capital market instruments. 6. The unleashing of products and services through the net has galvanized players at all levels of the banking and financial institutions market grid to look anew at their existing portfolio offering. Banks have been benefited a lot

with the internet and information technology. As a result banks have become more efficient and cost-effective. Indian nationalized banks continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization. However there is a need to create more awareness regarding social development. There is need for taking decisive actions . 7. Industry estimates indicate that out of 274 commercial banks operating in India, 223 banks are in the public sector & 51 are in the private sector. The private sector bank grid also includes 24 foreign banks. 8. Indian banking market is growing at an astonishing rate, with assets expected to reach US$1 trillion by 2010. The Indian banking industry is in the middle of an IT revolution, focusing on the expansion of retail and rural banking. Players are becoming increasingly customer-centric in their approach, which has resulted in innovative methods of offering new banking products & services. Banks are now realizing the importance of being a big player & are beginning to focus their attention on mergers & acquisitions to take advantage of economies of scale.