Description
banking, banking acts
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Executive Summary
The last decade has seen many positive developments in the Indian banking system. The
policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related
government and financial system regulatory entities, have made several notable efforts to
improve regulation in the system. The system now compares favourably with banking systems 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 system 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. While the onus for this change lies mainly with bank
managements, an enabling policy and regulatory framework will also be critical to their success.
The failure to respond to changing market realities has stunted the development of the financial
system in many developing countries. A weak banking structure has been unable to fuel
continued growth, which has harmed the long-term health of their economies. In this ?white
paper?, we emphasise the need to act both decisively and quickly to build an enabling, rather
than a limiting, banking system in India.
Technology has become a part of all walks of life and across all business systems, and
even more so in banking. There has been massive use of technology across many areas of
banking business in India, both from the asset and the liability side of a bank’s balancesheet.
Delivery channels have immensely increased the choices offered to the customer to conduct
transactions with ease and convenience. Various wholesale and retail payment and settlement
systems have enabled faster means of moving the money to settle funds among banks and
customers, facilitating improved turnover of commercial and financial transactions. Banks have
been taking up new projects like data warehousing, customer relationship management and
financial inclusion initiatives to further innovate and strategise for the future and to widen the
reach of banking. The dependence on technology is such that the banking business cannot be
thought of in isolation without technology, such has been the spread of technology footprints
across the Indian commercial banking landscape. Developments in IT have also brought along a
whole set of challenges to deal with. The dependence on technology has led to various challenge
and issues like frequent changes or obsolescence, multiplicity and complexity of systems,
different types of controls for different types of technologies/systems, proper alignment with
business objectives and legal/regulatory requirements, dependence on vendors due to
outsourcing of IT services, vendor related concentration risk, segregation of duties, external
threats leading to cyber frauds/crime, higher impact due to intentional or unintentional acts of
internal employees, new social engineering techniques employed to acquire confidential
credentials, need for governance processes to adequately manage technology and information
security, need for appreciation of cyber laws and their impact and to ensure continuity of
business processes in the event of major exigencies.
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Objective Of Study
? To assess various aspects of services provided by the public sector, private sector and
foreign banks.
? To study the various development banks operating in India.
? To give a glance at the working of development banks.
? To find out role of development banks in Indian financial system.
? To determine and compare the extent of customer’s satisfaction with quality of banking
services on the basis of different constituent factors.
? To check the contribution of development of banks in economic growth.
? To assess the extent of use of services especially the IT enabled services in these banks.
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Introduction To Banking System In India
The banking system in India is significantly different from that of other Asian nations
because of the country’s unique geographic, social, and economic characteristics. India has a
large population and land size, a diverse culture, and extreme disparities in income, which are
marked among its regions. There are high levels of illiteracy among a large percentage of its
population but, at the same time, the country has a large reservoir of managerial and
technologically advanced talents. Between about 30 and 35 percent of the population resides in
metro and urban cities and the rest is spread in several semi-urban and rural centers. The
country’s economic policy framework combines socialistic and capitalistic features with a heavy
bias towards public system investment. India has followed the path of growth-led exports rather
than the ?exported growth? of other Asian economies, with emphasis on self-reliance through
import substitution.
These features are reflected in the structure, size, and diversity of the country’s
banking and financial system. The banking system has had to serve the goals of economic
policies enunciated in successive five year development plans, particularly concerning equitable
income distribution, balanced regional economic growth, and the reduction and elimination of
private system monopolies in trade and industry. In order for the banking industry to serve as an
instrument of state policy, it was subjected to various nationalization schemes in different phases
(1955, 1969, and 1980). As a result, banking remained internationally isolated (few Indian banks
had presence abroad in international financial centers) because of preoccupations with domestic
priorities, especially massive branch expansion and attracting more people to the system.
Moreover, the system has been assigned the role of providing support to other economic systems
such as agriculture, small-scale industries, exports, and banking activities in the developed
commercial centers (i.e., metro, urban, and a limited number of semi-urban centers). The
banking system’s international isolation was also due to strict branch licensing controls on
foreign banks already operating in the country as well as entry restrictions facing new foreign
banks. A criterion of reciprocity is required for any Indian bank to open an office abroad. These
features have left the Indian banking system with weaknesses and strengths. A big challenge
facing Indian banks is how, under the current ownership structure, to attain operational
efficiency suitable for modern financial intermediation. On the other hand, it has been relatively
easy for the public system banks to recapitalize, given the increases in nonperforming assets
(NPAs), as their Government dominated ownership structure has reduced the conflicts of interest
that private banks would face.
The banking system, which forms the core of the financial architecture of the economy,
you have an inimitable opportunity to influence the economic lives of the nation’s populace. We
all know that banking plays a silent, yet crucial part in our day-to-day lives. The banks perform
financial intermediation by pooling savings and channelizing them into investments through
maturity and risk transformations, thereby keeping the economy’s growth engine revving.
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What Is Banking System?
Meaning of Banking
You know people earn money to meet their day to day expenses on food, clothing,
education of children, having etc. They also need money to meet future expenses on marriage,
higher education of children housing building and social functions. These are heavy expenses,
which can be met if some money is saved out of the present income. With this practice, savings
were available for use whenever needed, but it also involved the risk of loss by theft, robbery and
other accidents.
Thus, people were in need of a place where money could be saved safely and would be
available when required. Banks are such places where people can deposit their savings with the
assurance that they will be able to with draw money from the deposits whenever required. Bank
is a lawful organization which accepts deposits that can be withdrawn on demand. It also tends
money to individuals and business houses that need it.
Definitions of Banking
In India, the definition of the business of banking has been given in the Banking
Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is
a company which transacts the business of banking in India.' Further, Section 5(b) of the BR Act
defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order or
otherwise.' This definition points to the three primary activities of a commercial bank which
distinguish it from the other financial institutions. These are:
(i) maintaining deposit accounts including current accounts,
(ii) issue and pay cheques, and
(iii) collect cheques for the bank's customers.
1. Indian Banking Companies Act - ?Banking Company is one which transacts the business
ofbanking which means the accepting for the purpose of lending or investment of deposits
money from the public repayable on demand or otherwise and withdrawable by cheque, draft,
order or otherwise?.
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2. Dictionary Meaning of the Word ‘Bank’ -The oxford dictionary defines a bank as ?an
establishment for custody of money received from or on behalf of its customers. It’s essential
duty is to pay their drafts on it. It’s profits arises from the use of the money left employed by
them?.
3. The Webster’s Dictionary Defines a bank as ?an institution which trades in money,
establishment for the deposit, custody and issue of money, as also for making loans and
discounts and facilitating the transmission of remittances from one place to another?.
4. According to Prof. Kinley, ?A bank is an establishment which makes to individuals such
advances of money as may be required and safely made, and to which individuals entrust money
when it required by them for use?.
Needs of the Banking system
Before the establishment of banks, the financial activities were handled by money lenders
and individuals. At that time the interest rates were very high. Again there were no security of
public savings and no uniformity regarding loans. So as to overcome such problems the
organized banking sector was established, which was fully regulated by the government. The
organized banking sector works within the financial system to provide loans, accept deposits and
provide other services to their customers. The following functions of the bank explain the need
of the bank and its importance:
? To provide the security to the savings of customers.
? To control the supply of money and credit
? To encourage public confidence in the working of the financial system, increase
? savings speedily and efficiently.
? To avoid focus of financial powers in the hands of a few individuals and
? institutions.
? To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all
? types of customers
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History Of Banking System
The first bank in India, called The General Bank of India was established in the year
1786. The East India Company established The Bank of Bengal/Calcutta (1809), Bank of
Bombay (1840) and Bank of Madras (1843). The next bank was Bank of Hindustan which was
established in 1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank
of Madras) were called as Presidency Banks. Allahabad Bank which was established in 1865,
was for the first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894
with head quarters 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. In 1921, all
presidency banks were amalgamated to 22 form the Imperial Bank of India which was run by
European Shareholders. After that the Reserve Bank of India was established in April 1935. At
the time of first phase the growth of banking sector was very slow. Between 1913 and 1948 there
were approximately 1100 small banks in India. 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 a Central Banking Authority. After independence, Government has taken most
important steps in regard of Indian Banking Sector reforms. In 1955, the Imperial Bank of India
was nationalized and was given the name "State Bank of India", to act as the principal agent of
RBI and to handle banking transactions all over the country. It was established under State Bank
of India Act, 1955. Seven banks forming subsidiary of State Bank of India was nationalized in
1960. On 19th July, 1969, major process of nationalization was carried out. At the same time 14
major Indian commercial banks of the country were nationalized. In 1980, another six banks
were nationalized, and thus raising the number of nationalized banks to 20. Seven more banks
were nationalized with deposits over 200 Crores. Till the year 1980 approximately 80% of the
banking segment in India was under government’s ownership. On the suggestions of Narsimhan
Committee, the Banking Regulation Act was amended in 1993 and thus the gates for the new
private sector banks were opened.
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Nationalisation Period
By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer, and a
debate has ensured about the possibility to nationalise the banking industry. Indira Gandhi, the-
then Prime Minister of India expressed the intention of the Government of India (GOI) in the
annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalisation". The paper was received with positive enthusiasm. Thereafter, her move was
swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial
banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of
India, described the step as a "Masterstroke of political sagacity" Within two weeks of the issue
of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of
Undertaking) Bill, and it received the presidential approval on 9 August, 1969. A second step of
nationalisation of 6 more commercial banks followed in 1980. The stated reason for the
nationalisation was to give the government more control of credit delivery. With the second step
of nationalisation, the GOI controlled around 91% of the banking business in India. Later on, in
the year 1993, the government merged New Bank of India with Punjab National Bank. It was the
only merger between nationalised banks and resulted in the reduction of the number of
nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a
pace of around 4%, closer to the average growth rate of the Indian economy. The nationalized
banks were credited by some; including Home minister P. Chidambaram, to have helped the
Indian economy withstand the global financial crisis of 2007-2009.
Liberalisation period
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalisation,
licensing a small number of private banks. These came to be known as New Generation tech-
savvy banks, and included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of 24 Commerce, Axis Bank(earlier as UTI
Bank), ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of
India revolutionized the banking sector in India which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation
in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given
voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with
some restrictions. The new policy shook the banking sector in India completely. Bankers, till this
time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning.
The new wave ushered in a modern outlook and tech-savvy methods of working for the
traditional banks. All this led to the retail boom in India. People not just demanded more
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from their banks but also received more. Currently (2007), banking in India is generally fairly
mature in terms of supply, product range and reach-even though reach in rural India still remains
a challenge for the private sector and foreign banks. In terms of quality of assets and capital
adequacy, Indian banks are considered to have clean, strong and transparent balance sheets as
compared 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. In March 2006, the Reserve Bank
of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector
bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a
private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the
private sector banks would need to be voted by them. In recent years critics have charged that the
non-government owned banks are too aggressive in their loan recovery efforts in connection with
housing, vehicle and 25 personal loans. There are press reports that the banks' loan recovery
efforts have driven defaulting borrowers to suicide.
Current scenario of banking system
The global economy after a sustained period of expansion is no entering in to a phase of
downturn on account of the global financial crises. The Global GDP rose on an average by5
percent per annum during 2004 to2007,which isthehighestsustainedratesince1970s. On the other
hand international financial market witnessed a turbulencebeginningJune2007, triggered by the
US sub-prime mortgage market, which then spread in subsequent months. Losses were recorded
worldwide by financial institutions, which consequently undertook huge write offs, with some
largest international banks recording considerable decline in profit. The global turmoil has
accentuated significantly during 2008sofar and its adverse impact on the real sector is clearly in
evidence. Many advanced economies are experiencing recessionary conditions. The financial
crises seems to have entered a new turbulent phase since September 2008, which has severely
impaired confidence in global financial institutions and markets.
As per the RBI report, The Indian economy continued to record strong growth during
2007-08, albeit with some moderation. With adverse effect of global recessions on Indian
industry and service sector, the Real GDP growth rate of India, has declinedfrom9.6%in 2006-07
to9%in 2007-08. But the overall growth of real GDP rate of the India economy during 2007-
08was noteworthy in the global context. Indian Financial System and Financial Institutions:
Indian financial system is standing on the four pillars namely financial institutions, financial
markets, financial instruments and regulatory bodies. Banking and Insurance are the important
constituents of Indian Financial System. Both plays very important role in the socio economic
development of the country. As far as the present scenarios concerned the banking industry is in
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a transition phase. On the other hand the Private Sector Banks in India are witnessing immense
progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. On the
other hand the Public Sector Banks are still facing the problem of unhappy employees. There has
been a decrease of20 percent in the employee strength of the private sector in the wake of the
Voluntary Retirement Schemes (VRS).As far as foreign banks are concerned they are likely to
succeed in India. Indusland Bank was the first private bank to be set up in India. IDBI, ING
Vyasa Bank, SBI Commercial and International Bank Ltd,Dhanalakshmi Bank Ltd, Karur Vysya
Bank Ltd, Bank of Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public
Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank,
Andhra Bank etc. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd,
Citibank etc are some foreign banks operating in India. Banking Institutions Banks are the most
significant players in the India financial market. They are the biggest purveyors of credit, and
they also attract most of the savings from the population. Dominated by the public sector, the
banking industry has so far acted as an efficient partner in the growth and development of the
country. Driven by the socialist ideologies and the welfare state concept, public sector banks
have long been the supporters of agriculture and other priority sectors. They act as crucial
channels of the governments in its efforts to ensure equitable economic development.
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Structure Of Banking System In India
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? The Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) is India's central banking institution, which controls
the monetary policy of the Indian rupee. It was established on 1 April 1935 during the British Raj
in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was
divided into shares of 100 each fully paid, which was entirely owned by private shareholders in
the beginning. Following India's independence in 1947, the RBI was nationalised in the year
1949.
The RBI plays an important part in the development strategy of the Government of India. It
is a member bank of the Asian Clearing Union. The general superintendence and direction of the
RBI is entrusted with the 21-member-strong Central Board of Directors—the Governor
(currently Raghuram Rajan), four Deputy Governors, two Finance Ministry representative, ten
government-nominated directors to represent important elements from India's economy, and four
directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi.
Each of these local boards consists of five members who represent regional interests, as well as
the interests of co-operative and indigenous banks.
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Functions of Reserve Bank of India
1. Monopoly of Note Issue
In terms of Section 22 of the Reserve Bank of India Act, the RBI has been given the
statutory function of note issue on a monopoly basis. The note issue in India was originally based
upon "Proportional Reserve System". When it became difficult to maintain the re-serve
proportionately, it was replaced by "Minimum Reserve System ". According to the RBI
Amendment Act of 1957, the bank should now maintain a minimum reserve of Rs.200 crore
worth of gold coins, gold bullion and foreign securities of which the value of gold coin and
bullion should be not less than Rs.115 crore. The Government of India issues rupee coins in the
denomination of Rs.1, 2, and 5 topublic. These coins are required to be circulated to public only
through Reserve Bank un-der Section 38 of the RBI Act. The RBI presently issues notes of
denominations Rs.10 and above. RBI manages circulation of money through currency chests.
Originally RBI issued currency notes of Rs.2 and above. However, due to higher cost of printing
small denomina-tion notes these denominations are now coincides and issued by Government.
The value of currency with public as on June 1991 was only to the extent of Rs.53048 crore.
However, this value went up to Rs.145182 crore in June 1998 and further to Rs.169382 crore in
March, 1999. Currency Chests Currency Chests are receptacles in which stocks of issuable and
new notes are stored along with rupee coins. Currency Chests are repositories run by RBI, SBI,
subsidiaries of SBI, public sector banks, Government Treasuries and Sub treasuries.
2. Banker To The Government
The RBI acts as banker to the Government under Section 20 of RBI Act. Section 21
provides that Government should entrust its money remittance, exchange and banking
transactions in India to RBI. Under Section 21A RBI has to conduct similar transactions for State
Governments also. RBI earns no income by conducting those functions but earns com-missions
for managing the government's public debt. Where RBI has no branch, SBI or its subsidiaries are
appointed as agents and sub-agents under Section 45 of the RBI Act. Agency Banks receive
commission on all transactions conducted on turnover basis.
3. Agent and Adviser Of The Government
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The RBI acts, as the financial agent and adviser to the Government. It renders the following
functions:
a) As an agent to the Government, it accepts loans and manages public debts on behalf of the
Government.
b) It issues Government bonds, treasury bills, etc.
c) Acts as the financial adviser to the Government in all important economic and financial
matters.
4. Banker to the Banks
The RBI acts as banker to all scheduled banks. Commercial banks including foreign
banks, co-operative banks and RRBs are eligible to be included in the second schedule of RBI
Act subject to fulfilling conditions laid down under Section 42 (6) of RBI Act.
RBI has powers to delete a bank from the second schedule if the bank concerned fails to fulfill
the laid down conditions such as erosion in paid up capital below the prescribed limits and the
banks' activities became detrimental to the interest of depositors, etc.
All banks in India, should keep certain percentage of their demand and time liabilities as
reserves with the RBI. This is known as Cash Reserve Ratio or CRR. At end November 1999, it
is 3 per cent for RRBs and co-operative banks; 9 per cent for commercial banks.
They also maintain Current Account with RBI for various banking transactions. This centralization
of reserves and accounts enables the RBI to achieve the following:
(a) Regulation of money supply credit.
(b) Acts as custodian of cash reserves of commercial banks.
(c) Strengthen the banking system of the country
(d) Exercises effective control over banks in Liquidity Management.
(e) Ensures timely financial assistance to the Banks in difficulties.
(f) Gives directions to the Banks in their lending policies in the public interest.
(g) Ensures elasticity in the credit structure of the country.
(h) Quick transfer of funds between member banks.
5. Acts as National Clearing House
In India RBI acts as the clearing house for settlement of banking transactions. This
function of clearing house enables the other banks to settle their interbank claims easily. Further
it facilitates the settlement economically. Where the RBI has no offices of its own, the function
of clearing house is carried out in the premises of the State Bank of India. The entire clearing
house operations carried on by RBI are computerized. The inter-bank cheque clearing settlement
is done twice a day. There is a separate route for clearing high value cheques of Rs.1.00 lakh and
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above. Cheques drawn on banks in metropolitan cities are cleared on the same day. The RBI
carries out this function through a cell known as National Clearing Cell. In 1998, there were in
all 860 clearing houses in operation of which 14 were run by RBI, 578 by SBI and others by
public sector banks. The RBI acts as a lender of last resort or emergency fund provider to the
other member banks. As such, if the commercial banks are not able to get financial assistance
from any other sources, then as a last resort, they can approach the RBI for the necessary
financial assistance.
6. Custodian of Foreign Exchange Reserves
The RBI acts as the custodian of foreign exchange reserves. Adequate reserves may help
maintain foreign exchange rates. In order to minimize the undue fluctuations in the rates it may
buy and sell foreign currencies depending upon the situations.
Its purchase and sale of foreign currencies from the market is done like commercial banks.
However, the objective of the RBI will not be profit booking. It may buy the foreign currency to
build up adequate reserves or to arrest unwarranted rise in the value of rupee which may be due
to sudden inflow of foreign currencies into India. It may also buy and sell foreign currencies in
international market to switch the portfolio of investments denominated in different international
currencies depending upon circumstances and needs
7. Exchange Control
When a country faces Balance of Payment of problems usually when its foreign exchange
payments exceed foreign exchange receipts it controls the whole gamut of fore (foreign
exchange) transactions and regulates payment system for its advantage. Trade side imports, i.e.,
merchandise imports are regulated by Director General Foreign Trade in the Ministry of
Commerce. Payment for invisible transactions like tourism, foreign visit, dividend/interest
payment, etc. is regulated by RBI.
Similarly, all forex received or earned by residents in India, like exporters and relatives of
NRIs [Non-resident Indian] should be surrendered to banks having license from RBI to deal in
forex. However, since 1992, the receivers of forex are permitted to retain certain part of this
forex in a separate foreign currency account if they so desire. Such account is known as
Exchange Earners' Foreign Currency Account or EEFC Account.
8.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 a 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 specialised
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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 to promote saving habit and to mobilise
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.
? Objective of Reserve Bank of India
The Reserve Bank of India Act, 1934 sets out the objectives of the Reserve Bank:
To regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to its
advantage.
The formulation, framework and institutional architecture of monetary policy in India have
evolved around these objectives – maintaining price stability, ensuring adequate flow of credit to
sustain the growth momentum, and securing financial stability.
The responsibility for ensuring financial stability has entailed the vesting of extensive powers in
and operational objectives for the Reserve Bank for regulation and supervision of the financial
system and its constituents, the money, debt and foreign exchange segments of the financial
markets in India and the payment and settlement system.
The endeavour of the Reserve Bank has been to develop a robust, efficient and diversified
financial system so as to anchor financial stability and to facilitate effective transmission of
monetary policy.
In addition, the Reserve Bank pursues operational objectives in the context of its core function of
issuance of bank notes and currency management as well as its agency functions such as banker
to Government (Centre and States) and management of public debt; banker to the banking
system including regulation of bank reserves and the lender of the last resort.
The specific features of the Indian economy, including its socio-economic characteristics, make
it necessary for the Reserve Bank to operate with multiple objectives. Regulation, supervision
and development of the financial system remain within the legitimate ambit of monetary policy
broadly interpreted in India.
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The role of communication policy, therefore, lies in articulating the hierarchy of objectives in a
given context in a transparent manner, emphasising a consultative approach as well as autonomy
in policy operations and harmony with other elements of macroeconomic policies.
? Compliance with RBI guidelines
The credit policy of a bank should be conformant with RBI guidelines; some of the
important guidelines of the RBI relating to bank credit are discussed below.
Directed credit stipulations
The RBI lays down guidelines regarding minimum advances to be made for priority
sector advances, export credit finance, etc.27 These guidelines need to be kept in mind while
formulating credit policies for the Bank.
Capital adequacy
If a bank creates assets-loans or investment-they are required to be backed up by bank
capital; the amount of capital they have to be backed up by depends on the risk of individual
assets that the bank acquires. The riskier the asset, the larger would be the capital it has to be
backed up by. This is so, because bank capital provides a cushion against unexpected losses of
banks and riskier assets would require larger amounts of capital to act as cushion. The Basel
Committee for Bank Supervision (BCBS) has prescribed a set of norms for the capital
requirement for the banks for all countries to follow. These norms ensure that capital should be
adequate to absorb unexpected losses.28 In addition, all countries, including India, establish their
own guidelines for risk based capital framework known as Capital Adequacy Norms. These
norms have to be at least as stringent as the norms set by the Basel committee. A key norm of the
Basel committee is the Capital Adequacy Ratio (CAR), also known as Capital Risk Weighted
Assets Ratio, is a simple measure of the soundness of a bank. The ratio is the capital with the
bank as a percentage of its risk-weighted assets. Given the level of capital available with an
individual bank, this ratio determines the maximum extent to which the bank can lend.
The Basel committee specifies a CAR of at least 8% for banks. This means that the capital
funds of a bank must be at least 8 percent of the bank's risk weighted assets. In India, the RBI
has specified a minimum of 9%, which is more stringent than the international norm. In fact, the
actual ratio of all scheduled commercial banks (SCBs) in India stood at 13.2% in March 2009.
The RBI also provides guidelines about how much risk weights banks should assign to different
classes of assets (such as loans). The riskier the asset class, the higher would be the risk weight.
Thus, the real estate assets, for example, are given very high risk weights. This regulatory
requirement that each individual bank has to maintain a minimum level of capital, which is
commensurate with the risk profile of the bank's assets, plays a critical role in the safety and
soundness of individual banks and the banking system.
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Credit Exposure Limits
As a prudential measure aimed at better risk management and avoidance of concentration
of credit risks, the Reserve Bank has fixed limits on bank exposure to the capital market as well
as to individual and group borrowers with reference to a bank's capital. Limits on inter-bank
exposures have also been placed. Banks are further encouraged to place internal caps on their
sectoral exposures, their exposure to commercial real estate and to unsecured exposures. These
exposures are closely monitored by the Reserve Bank. Prudential norms on banks
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? Co-operative Banks
A Co-operative bank, as its name indicates is an institution consisting of a number of
individuals who join together to pool their surplus savings for the purpose of eliminating the
profits of the bankers or money lenders with a view to distributing the same amongst the
depositors and borrowers Co-operative bank, in a nutshell, provides financial assistance to the
people with small means to protect them from the debt trap of the moneylenders. It is a part of
vast and powerful structure of co-operative institutions which are engaged in tasks of
production, processing, marketing, distribution, servicing and banking in India. A co-operative
bank is a financial entity which belongs to its members, who are at the same time the owners
and the customers of their bank. Co-operative banks are often created by persons belonging to
the same local or professional community or sharing a common interest. These banks generally
provide their member with a wide range of banking and financial services (loans, deposits,
banking accounts…). Co-operative banks differ from stockholder banks by their organization,
their goals, their Values and their governance.
Role of Co-operative Banking in India
Co-operative Banks are much more important in India than anywhere else in the world.
The distinctive character of this bank is service at a lower cost and service without
exploitation. It has gained its importance by the role assigned to them, the expectations they are
supposed to fulfill, their number and the number of offices they operate. Co-operative banks
role in rural financing continues to be important day by day, and their business in the urban
areas also has increased phenomenally in recent years mainly due to the sharp increase in the
number of primary co-operative banks. In rural areas, as far as the agricultural and related
activities are concerned, the supply of credit was inadequate, and money lenders would exploit
the poor people in rural areas providing them loans at higher rates. So, Co-operative banks
mobilize deposits and purvey agricultural and rural credit with a wider outreach and provide
institutional credit to the farmers. Co-operative bank have also been an important instrument
for various development schemes, particularly subsidy-based programmes for poor. The
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exponential growth of Co-operative banks is attributed mainly to their much better contacts
with the local people, personal interaction with customers, and their ability to catch the nerve
of the local clientele. The total deposits and lendings of Co-operative banks are much more
than the Old Private Sector Banks and the New Private Sector Banks.
Importance of Co-operative Banking
Co-operative bank forms an integral part of banking system in India. This bank operates
mainly for the benefit of rural area, particularly the agricultural sector. Co-operative bank
mobilize deposits and supply agricultural and rural credit with the wider outreach. They are the
main source for the institutional credit to farmers. They are chiefly responsible for breaking the
monopoly of moneylenders in providing credit to agriculturists. Co-operative bank has also been
an important instrument for various development schemes, particularly subsidy-based
programmes for the poor. Co-operative banks operate for non-agricultural sector also but their
role is small. Though much smaller as compared to scheduled commercial banks, co-operative
banks constitute an important segment of the Indian banking system. They have extensive branch
network and reach out to people in remote areas. They have traditionally played an important
role in creating banking habits among the lower and middle income groups and in strengthening
the rural credit delivery system.
Features of Co-operative Banking
? Co-operative Banks are organized 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 maximization.
? 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.
? Co-operative banks are perhaps the first government sponsored, government-supported,
and government-subsidised 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
20
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.
? Co-operative banks are financial intermediaries only partially. The sources of their
funds (resources) are: Central and state government, The Reserve Bank of India and
NABARD, Other co-operative institutions, Ownership funds and, Deposits or debenture
issues.
? Some co-operative bank are scheduled banks, while others are nonscheduled banks. Co-
operative Banks are subject to CRR and liquidity requirements as other scheduled and
non-scheduled banks are. However, their requirements are less than commercial banks.
? As said earlier, co-operative banks accept current, saving, and fixed or time deposits
from individuals and institutions including banks.
? In the recent past, the RBI has introduced changes in interest rates of cooperative banks
also, along with changes in interest rates of commercial banks. The interest rates structure
of co-operative banks is quite complex. The rates charged by them depend upon the type
of bank, the type of loans, and vary from state to state.
? 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.
? Co-operative banks (COBs), in short, have played a pivotal role in the development of
short-term and long-term rural credit structure in India over the years. The co-operative
credit effort is said to be the first ever attempt at micro-credit dispensation in India.
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Classifications of Co-operative Banking
The Co-operative banking structure in India comprises of:
1. Urban Co-operative Banks
2. Rural Co-operatives
1.Urban Co-operative Banks:
Urban Co-operative Banks is also referred as Primary Co-operative banks by the Reserve
Bank of India. Among the non-agricultural credit societies urban co-operative banks occupy an
important place. This bank is started in India with the object of catering to the banking and credit
requirements of the urban middle classes.
The RBI defines Urban Co-operative banks as ?small sized cooperatively organized
banking units which operate in metropolitan, urban and semi-urban centers to cater mainly to the
needs of small borrowers, viz. owners of small scale industrial units, retail traders, professional
and salaries classes.?
Urban Co-operative banks mobilize savings from the middle and lower income groups and
purvey credit to small borrowers, including weaker sections of the society. These banks organize
on a limited liability basis, generally extend their area of operation over a town. The main
functions of these banks are to promote thrift by attracting deposits from members and non-
members and to advance loans to the members. It is registered under Co-operatives Societies Act
22
of the respective state Governments. Prior to 1966, Urban Co-operative banks were exclusively
under the purview of State Government. From March 1, 1966 certain provisions of Banking
Regulation Act have been made applicable to these banks. Consequently, the RBI became the
regulatory an supervisory authority of Urban Co-operative Banks for their related operations.
Managerial aspects of such banks continue to remain with State Governments under the
respective Cooperative Societies Act. These banks with multi-presence are regulated by the
Central Governments and registered under Multi-State Co-operative Societies Act. The RBI
extends refinance to Urban Co-operative Banks at bank ate against their advances to tiny and
cottage industrial units. These banks grants sizeable loans and advances under priority sector for
lending to small business enterprises, retail trade, road and water transport operators and
professional and self-employed persons. Urban Co-operative banks are mostly located in towns
and cities and cater to the credit requirement of the urban clientele.
The objectives and functions of the Urban Co-operative banks:
? Primarily, to raise funds for lending money to its members.
? To attract deposits from members as well as non-members.
? To encourage thrift, self-help ad mutual aid among members.
? To draw, make, accept, discount, buy, sell, collect and deal in bills of exchange, drafts,
certificates and other securities.
? To provide safe-deposit vaults.
Area of Operation :
The area of operation of these banks are usually restricted by its byelaws to a municipal
area or a town. In some occasions it exceeds this limit. The study group on Credit Co-
operatives in Non-Agricultural Sectors has recommended that normally, it would be
advisable for an urban cooperative bank to restrict its area of operation to the municipality or
the taluka town where it operates.
2. Rural Co-operatives:
Rural Cooperative Banking plays an important role in meeting the growing credit needs
of rural population of India. It provides institutional credit to the agricultural and rural sector.
The inadequacy of rural credit engaged the attention of RBI and Government throughout the
1950s and 1960s. One important feature of providing agriculture credit in India has been the
existence of a widespread network of rural financial institutions. The rural credit structure
consists of many types of financial institutions as large scale branch expansion was undertaken
to create a strong institution based in rural area. It has served as an important instrument of
credit delivery in rural and agricultural areas. The separate structure of rural Cooperative sector
for long-term and short-term loans has enabled thes institutions to develop a specialized
institution for rural credit delivery. The volume of credit flowing through these institution has
increased. The Rural Co-operative structure has traditionally been bifurcated into two parallel
wings, i.e.
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? Commercial banks
The commercial banking industry in India started in 1786 with the establishment of the
Bank of Bengal in Calcutta. The Indian Government at the time established three Presidency
banks, viz., the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840)
and the Bank of Madras (established in 1843). In 1921, the three Presidency banks were
amalgamated to form the Imperial Bank of India, which took up the role of a commercial bank, a
bankers' bank and a banker to the Government. The Imperial Bank of India was established with
mainly European shareholders. It was only with the establishment of Reserve Bank of India
(RBI) as the central bank of the country in 1935, that the quasi-central banking role of the
Imperial Bank of India came to an end.
In 1860, the concept of limited liability was introduced in Indian banking, resulting in the
establishment of joint-stock banks. In 1865, the Allahabad Bank was established with purely
Indian shareholders. Punjab National Bank came into being in 1895. Between 1906 and 1913,
other banks like Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up.
After independence, the Government of India started taking steps to encourage the spread of
banking in India. In order to serve the economy in general and the rural sector in particular, the
All India Rural Credit Survey Committee recommended the creation of a state-partnered and
state-sponsored bank taking over the Imperial Bank of India and integrating with it, the former
state-owned and state-associate banks. Accordingly, State Bank of India (SBI) was constituted in
1955. Subsequently in 1959, the State Bank of India (subsidiary bank) Act was passed, enabling
the SBI to take over eight former state-associate banks as its subsidiaries.
To better align the banking system to the needs of planning and economic policy, it was
considered necessary to have social control over banks. In 1969, 14 of the major private sector
banks were nationalized. This was an important milestone in the history of Indian banking. This
was followed by the nationalisation of another six private banks in 1980. With the
nationalization of these banks, the major segment of the banking sector came under the control of
the Government. The nationalisation of banks imparted major impetus to branch expansion in
un-banked rural and semi-urban areas, which in turn resulted in huge deposit mobilization,
thereby giving boost to the overall savings rate of the economy. It also resulted in scaling up of
lending to agriculture and its allied sectors. However, this arrangement also
24
saw some we knesses like reduced bank profitability, weak capital bases, and banks getting
burdened with large non-performing assets. To create a strong and competitive banking system, a
number of reform measures were initiated
In early 1990s. The thrust of the reforms was on increasing operational efficiency,
strengthening supervision over banks, creating competitive conditions and developing
technological and institutional infrastructure. These measures led to the improvement in the
financial health, soundness and efficiency of the banking system
Functions of Commercial Banks
The main functions of a commercial bank can be segregated into three main areas:
(i)Payment System
(ii) Financial Intermediation
(iii)Financial Services.
(i) Payment System
Banks are at the core of the payments system in an economy. A payment refers to the
means by which financial transactions are settled. A fundamental method by which banks help
in settling the financial transaction process is by issuing and paying cheques issued on behalf of
customers. Further, in modern banking, the payments system also involves electronic banking,
wire transfers, settlement of credit card transactions, etc. In all such transactions, banks play a
critical role.
(ii) Financial Intermediation
The second principal function of a bank is to take different types of deposits from
customers and then lend these funds to borrowers, in other words, financial intermediation. In
financial terms, bank deposits represent the banks' liabilities, while loans disbursed, and
investments made by banks are their assets. Bank deposits serve the useful purpose of
addressing the needs of depositors, who want to ensure liquidity, safety as well as returns in the
form of interest. On the other hand, bank loans and investments made by banks play an
important function in channelling funds into profitable as well as socially productive uses.
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(iii) Financial Services
In addition to acting as financial intermediaries, banks today are increasingly involved
with offering customers a wide variety of financial services including investment banking,
insurance-related services, government-related business, foreign exchange businesses, wealth
management services, etc. Income from providing such services improves a bank's profitability.
Other Functions of Commercial Banks
Accepting Deposits:
Accepting deposits is one of major function of commercial bank. It is the business of bank to
accept deposits so that he can lend it to other and earn interest. Basically, the money is accepted
as deposit for safe keeping. Banks also pay interest on these deposits. To attract depositors banks
maintain different types of accounts. These are as following.
a) Fixed Deposit Accounts: The account which is opened for fixed period by depositing
amount is known as fixed deposit account. The money deposited in this account cannot
be withdrawn before expiry of period. A high rate of interest is paid on fixed deposits.
b) Current Deposit Account: Current deposit accounts are mostly opened by
businessmen and traders who withdraw money number of times a day. Banks dose not
pay interest on these types of account. The bank collects certain charges from depositors
for services rendered by it.
c) Saving Account: Saving account is most suited for those people who want to save
money for future needs. This types of account can be opened with a minimum initial
deposit. A minimum balance has to be maintained in account as prescribed by bank.
Some restrictions are imposed on depositor regarding number of deposit withdrawal and
amount to be withdrawn in given period.
d) Recurring Deposit Account: The purpose of these accounts is to encourage public for
regular saving, particularly by fixed income group. Fixed amount is deposit is deposited
at regular intervals for a fixed term and repaid on maturity.
2. Grant of Loans and Advances
Besides accepting deposit, the second most important function of commercial bank is advancing
of loan to the public. After keeping certain part of deposits received by bank as reserve and the
26
rest of balance give as loan. The different types of loan and advances are given by bank as
follow.
a) Call Money : There are generally short term credit that range from one day to fort night.
There are even one nigh call money advances made available to bank with the help of this
market. The rate of interest depends upon the conditions prevailing in money market.
b) Overdraft : In over draft, a customer can withdraw money from his current account and
available balance below zero. When the amount withdrawn is within the authorized limit
then rate of interest charged at agreed rate. Overdraft is allowed normally against the
security of negotiable Instrument and credit worthy customers without security.
c) Cash Credit: In cash credit, Bank advance loan against the customer current asset or
personal guarantee. The borrower has option to withdraw the funds as and when required
to extent of his needs but he cannot exceed the credit limit allowed to him. The cash
credit limit depends on the debtor’s need and as agreed with the bank. The bank charges
interest only on money withdrawn from by them.
d) Discounting of Bills: Under this type of lending, Bank pay amount before due date of
bill after deducting certain rate of discount or commission. The holder of bill get money
immediately without waiting for the date of maturity. If bill of exchange dishonored on
due date the bank can recover the amount from the customer.
e) Direct Loan: A loans granted for a fixed maturity period more then one year. Loans are
usually secured against some collateral security. The borrower can withdraw entire
money through cheques. The interest is charged on entire amount of loan. Repayment of
loan either in installments or in lumpsum
3. Credit Creation
Credit creation is also an important function of commercial Bank. The process of credit creation
automatically performed when bank accept deposits and provide loans Prof Sayers says, ?Banks
are not merely supply of money but in an important sense, they are manufacturers of money?. In
this process, customers deposit their money in bank. Bank keeps certain amount of deposit as
cash reserve and rest of balance given as loan and advances. Banks not required to keep the
entire deposits in cash. The amount of loan does not give directly to borrower. The borrower
open a account and then bank deposit money in that account. Here, bank’s lends money and
process of credit creation starts. The current cash reserve ratio is 6% in 2011.
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Classification of Commercial Banks
The commercial banks re further divided in to 4 categories:
1. Public Sector Banks
Public sector banks are those in which the majority stake is held by the Government of
India (GoI). Public sector banks together make up the largest category in the Indian banking
system. There are currently 27 public sector banks in India. They include the SBI and its 6
associate banks (such as State Bank of Indore, State Bank of Bikaner and Jaipur etc), 19
nationalized banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd.
Public sector banks have taken the lead role in branch expansion, particularly in the rural
areas.
2.Regional Rural Banks
Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop
the rural economy. Each RRB is owned jointly by the Central Government, concerned State
Government and a sponsoring public sector commercial bank. RRBs provide credit to small
farmers, artisans, small entrepreneurs and agricultural labourers. Over the years, the
Government has introduced a number of measures of improve viability and profitability of
RRBs, one of them being the amalgamation of the RRBs of the same sponsored bank within a
State. This process of consolidation has resulted in a steep decline in the total number of RRBs
to 86 as on March 31, 2009, as compared to 196 at the end of March 2005.
3.Private Sector Banks
In this type of banks, the majority of share capital is held by private individuals and
corporates. Not all private sector banks were nationalized in in 1969, and 1980. The private
banks which were not nationalized are collectively known as the old private sector banks and
28
include banks such as The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc.5 Entry
of private sector banks was however prohibited during the post-nationalisation period. In July
1993, as part of the banking reform process and as a measure to induce competition in the
banking sector, RBI permitted the private sector to enter into the banking system. This resulted
in the creation of a new set of private sector banks, which are collectively known as the new
private sector banks. As at end March, 2009 there were 7 new private sector banks and 15 old
private sector banks operating in India.
4.Foreign Banks
Foreign banks have their registered and head offices in a foreign country but operate their
branches in India. The RBI permits these banks to operate either through branches; or through
wholly-owned subsidiaries.7 The primary activity of most foreign banks in India has been in
the corporate segment. However, some of the larger foreign banks have also made
consumerfinancing a significant part of their portfolios. These banks offer products such as
automobile finance, home loans, credit cards, household consumer finance etc. Foreign banks in
India are required to adhere to all banking regulations, including priority-sector lending norms
as
applicable to domestic banks.8 In addition to the entry of the new private banks in the mid-
90s, the increased presence of foreign banks in India has also contributed to boosting
competition in the banking sector.
29
The Banking Regulation Act
The Banking Act 1949 was a special legislation, applicable exclusively to the banking
companies. This Act was later renamed as the Banking Regulation Act from March 1966. The
Act vested in the Reserve Bank of India the responsibility relating to licensing of banks, branch
expansion, and liquidity of their assets, management and methods of working, amalgamation,
reconstruction and liquidation. Thus giving RBI authority along with responsibility & igniting
the first part of banking transformation in India. The second path braking & transformation effort
took place in 1955 with the establishment of the Indian Banking Sector' State Bank of India.
Formation of "The State Bank of India" In 1951, when the First Five Year Plan was launched,
the development of rural India was given the highest priority. The commercial banks of the
country including 88 Pacific Business Review International the Imperial Bank of India had till
then confined their operations to the urban sector and were not equipped to respond to the
emergent needs of economic regeneration of the rural areas. In order, therefore, to serve the
economy in general and the rural sector in particular, the All India Rural Credit Survey
Committee recommended the creation of a state-partnered and state-sponsored bank by taking
over the Imperial Bank of India, and integrating with it, the former state-owned or state-associate
banks. An act was accordingly passed in Parliament in May 1955 and the State Bank of India
was constituted on 1 July 1955. However it was soon realized that State Bank alone is not
sufficient for the development of the economy & more government sponsored banks are required
& accordingly the plan for nationalization was passed in1968. Thus forming the third turning
point in the history of Indian Banking in India. The need for nationalization was felt because
government believed that private commercial banks were lacking in fulfilling the social &
developmental goals of banking. This was evident from the fact that the industries' share in loans
almost doubled between 1951 and 1968, from 34% to 68%. On the other hand, agriculture which
was a major occupation (and still is) received less than 2% of total credit Thus with a view to
serve the mass Government of India Nationalized 4 banks (refer table 1) in 1969 bringing the
30
total number of branches under government control to 84 percent .Once again in April of 1980,
the Government of India undertook a second round of nationalization, placing under government
control the six private banks whose nationwide deposits were above Rs. 2 billion, leaving
approximately 10 percent of bank branches in private hands.
31
E- banking
What Is E-banking?
In simple words, e-banking implies provision of banking products and services through
electronic delivery channels. Electronic banking has been around for quite some time in the form
of automatic teller machines (ATMs) and telephone transactions. In more recent times, it has
been transformed by the the internet – a new delivery channel that has facilitated banking
transactions for both customers and banks. For customers, the internet offers faster access, is
more convenient and available around the clock irrespective of the customer’s location. For
banks, it is a much more efficient and cost- saving channel (see Table 1 which gives cost
comparisons for various delivery channels within US and India).
Why E-banking?
There are not many inventions that have changed the business of banking as quickly as the e-
banking revolution. World over banks are reorienting their business strategies towards new
opportunities offered by e-banking. E-banking has enabled banks to scale borders, change
strategic behaviour and thus bring about new possibilities. E-banking has moved real banking
behaviour closer to neoclassical economic theories of market functioning. Due to the absolute
transparency of the market, clients (both business as well as retail) can compare the services of
various banks more easily. For instance, on the internet, competitors are only one click away. If
clients are not happy with the products, prices or services offered by a particular bank, they are
able to change their banking partner much more easily than in the physical or real bank-client
relationship. From the banks’ point of view, use of the internet has significantly reduced the
physical costs of banking operations. As discussed by Turner (2001), progress in information
technology has slashed the costs of processing information, while the internet has facilitated its
transmission, thus facilitating change in the very essence of the banking business. Around the
world, electronic banking services, whether delivered online or through other mechanisms, have
32
spread quickly in recent years. It must be noted that the impact of e-banking is not limited to
industrial and advanced emerging economies. Even in countries with underdeveloped banking
systems, E-banking has offered many new business opportunities.
State Bank Of India (SBI)
State bank of India is the nations largest and oldest bank. Tracing its roots back some 200
years to the British East India Company (and initially established as the Bank of Calcutta in
1806), the bank operates more than 15,000 branches within India, where it also owns majority
stakes in six associate banks. State Bank of India (SBI) has more than 80 offices in nearly 35
other countries, including multiple locations in the US, Canada, and Nigeria. The bank has other
units devoted to capital markets, fund management, factoring and commercial services, credit
cards, and brokerage services. The Reserve Bank of India owns about 60% of State bank of
India.
33
SERVICES PROVIDED BY SBI INTERNET BANKING
? ONLINE SBI (WWW.ONLINESBI.COM):
State Bank of India is India?s largest bank with a branch network of over 11000 branches and
6 associate banks located even in the remotest parts of India. State Bank of India (SBI) offers a wide
range of banking products and services to corporate and retail customers. „Online SBI? is the
Internet banking portal for State Bank of India. The portal provides anywhere, anytime, online access
to accounts for State Bank?s Retail and Corporate customers. The application is developed using the
latest cutting edge technology and tools. The infrastructure supports unified, secure access to banking
services for accounts in over 11,000 branches across India.
? RETAIL BANKING:
The Retail banking application is an integration of several functional areas, and enables
customers to:
? Transfer funds to own and third party accounts
? Credit beneficiary accounts using the VISA Money Transfer, RTGS/NEFT feature
? Generate account statements
? Setup Standing Instructions
? Configure profile settings
? Use e-Tax for online tax payment
? Use e-Pay for automatic bill payments
? Interface with merchants for railway and airline reservations
? vail DEMAT and IPO services
? CORPORATE BANKING:
The Online SBI corporate banking application provides features to administer and manage
corporate accounts online. The corporate module provides roles such as Regulator, Admin, Up
34
loader, Transaction Maker, Authorizer, and Auditor. These roles have access to the following
functions:
? Manage users, define rights and transaction rules on corporate accounts
? Access accounts in several branches with a single sign-on mechanism
? Upload files to make bulk transactions to third parties, supplier, vendor and tax collection
authorities.
? Use online transactional features such as fund transfer to own accounts, third party
payments, and draft issues
? Make bill payments over the Internet.
? Authorize, modify, reschedule and cancel transactions, based on rights assigned to the
user
? Generate account statement
? Enquire on transaction details or current balance
? PRODUCTS & SERVICES
? E-TICKETING:
You can book your railway, air and bus tickets online through Online SBI. To book
your train ticket, just log on to irctc.co.in and create an ID there at if you do not have one.
Submit your travel plan and book the ticket(s)-eithercan be printed any time. For an e-ticket, the
details of photo identity card will required to be filled in) and select State Bank of India in the
payment options. You will be redirected to Internet Banking site of SBI (www.onlinesbi.com).
After submitting the respective ID and password, you can select your account. After a successful
debit, Railways will generate the ticket. E-ticket can be printed by you whereas the i-ticket will
be dispatched by IRCTC at the given address. Service charges @ Rs.10/- per transaction shall be
levied in addition to the cost of the ticket. Cancellation of E-ticket can be done by logging on to
IRCTC's site; refund amount will be credited to your account directly within 2-3 days. For
cancellation of i-ticket, you shall be required to submit your ticket at a computerized counter of
Railways and on cancellation; the amount shall be credited back to your account.
35
You can also book your Air ticket through the e-ticketing feature. Logon to Indian
Airlines website to make a payment for an e-ticket through State Bank of India, you need to
select SBI as the payment option. The payment request will be redirected to Internet Banking
site. The request may be processed based on values sent from the airlines website. Once a
transaction is processed, an appropriate response will be sent to airlines site to update the status
of the transaction. You can print the E-ticket immediately
To book bus tickets to destinations in Karnataka, log on to the KSRTC website. Provide
details about the start and end points of your journey, date of journey and number of tickets.
Verify availability of seats on the selected date and confirm the transaction. Select „Online SBI?
to make the payment. Provide your credentials and select the SBI account that will be debited for
the payment. You are provided a KSRTC reference number for your e-Ticket.
? SBI E-TAX
You can pay your taxes online through SBI E-Tax. This facility enables you to pay TDS,
Income tax, Indirect tax, Corporation tax, Wealth tax, Estate Duty and Fringe Benefits tax. Click
the e-Tax link in the home page. You are displayed a page with two links Direct Tax and Indirect
Tax. Click the Direct Tax link. You will be redirected to the NSDL site where you can select an
online challan based on the tax you wish to pay. Provide the PAN, name and address, assessment
year, nature of payment and bank name. On selecting the bank name as SBI and submitting the
form, you will be redirected to the Internet Banking site. After submitting the respective ID and
password, you can select your account for making payment of taxes. After payment is successful
you can print the E-Receipt for the payment. The E-receipt can be printed at a later date also and
the same can be retrieved from: Enquiries > Find Transactions > Status Enquiries > Click on the
respective transaction to print the tax receipt.
The Indirect Tax link is used to make Central Excise and Service Tax payments to Central Board
of Excise and Customs. The online payment feature facilitates anytime, anywhere payment and
an instant E-Receipt is generated once the transaction is complete. The Indirect Tax payment
36
facility is available to Registered Central Excise/Service Tax Assesses who possesses the 15
digit PAN based Assesses Code. You can make CBEC payments using the Indirect Taxes link
available in the Payments/Transfers tab. You need to provide your assesses code as registered
with CBEC and select the minor heads towards which you intend to pay tax. Select the
appropriate tax type and enter the tax amount. Select an account for debiting the total tax
amount. You can use any of your transaction accounts to make the payment. If a payment is
successful, CBEC provides a link to generate an E-Receipt for the payment. Internet banking
customers can pay tax through site to site integration. For government agencies, which are not
Internet-enabled, „Online SBI? offers the Government Tax Payment facility. This facility is
available as a post login feature in the retail and corporate banking sites of the Online SBI portal.
? BILL PAYMENT
A simple and convenient service for viewing and paying your bills online. No more late
payments No more queues No more hassles of depositing cheques Using the bill payment you
can view and pay various bills online, directly from your SBI account. You can pay telephone,
electricity, insurance, credit cards and other bills from the comfort of your house or office, 24
hours a day, 365 days a year. Simply logon tohttp://www.onlinesbi.com/ with your credentials
and register the biller to which you want to pay, with all the bill details. Once the bill is uploaded
by the biller, you can make payment online. You can see 'how do i' to learn the steps for using
the facility. You can also set up Auto Pay instructions with an upper limit to ensure that your
bills are paid automatically whenever they are due. The upper limit ensures that only bills within
the specified limit are paid automatically, thereby providing you complete control over these
payments. The e-PAY service is available in various cities across the country and you can now
make payments to several billers in your region.
? RTGS/NEFT
You can transfer money from your State Bank account to accounts in other banks using the
RTGS/NEFT service. The RTGS system facilitates transfer of funds from accounts in one bank
to another on a "real time" and on "gross settlement" basis. This system is the fastest possible
interbank money transfer facility available through secure banking channels in India. RTGS
transaction requests will be sent to RBI immediately during working hours post working hours
37
requests are registered and sent to RBI on next working day. You can also schedule a transaction
for a future date. You can transfer an amount of Rs.1 lac and above using RTGS system.
National Electronic Funds Transfer (NEFT) facilitates transfer of funds to the credit
account with the other participating bank. RBI acts as the service provider and transfers the
credit to the other bank's account.
NEFT transactions are settled in batches based on the following timings
? settlements on weekdays - at 09:00, 11:00, 12:00, 13:00, 15:00 and 17:00 hrs.
? settlements on Saturdays - at 09:00, 11:00 and 12:00 hrs.
please note that all the above timings are based on Indian Standard Time (IST) only.
In order to transfer the funds to an account with other bank, kindly ensure that the bank
branch of the beneficiary is covered under the RGTS/NEFT payment system. It is recommended
that you choose the Bank/ Branch from the drop down option provided under the link "Add
Interbank beneficiary" and exercise care to provide the correct account number and name of the
beneficiary.
? E-PAYMENT
You can pay your insurance premium, mobile phone bills and also you can purchase
mutual fund units by coming from the biller?s website and selecting state bank of India in the
payment option. LIC PREMIUM: For paying premium of LIC policy logon to www.licindia.com
and register your policy details. When the premium is due select State Bank of India in the make
payment option. SBI Mutual FUND: You can invest in the SBI Mutual Fund schemes online.
Logon to www.sbimf.com and select the scheme in which you want to make investment in the
payment option select State Bank of India. CC Avenue: Enjoy shopping at the CC Avenue
Shopping Mall and purchase from a wide variety of products and services through CC Avenue
Certified Vendors. Make payments for your purchases using your Internet enabled SBI accounts.
? FUND TRANSFER
The Funds Transfer facility enables you to transfer funds within your accounts in the same
branch or other branches. You can transfer aggregating Rs.1 lakh per day to own accounts in the
38
same branch and other branches. To make a funds transfer, you should be an active Internet
Banking user with transaction rights. Funds transfer to PPF account is restricted to the same
branch.
Just log on to retail section of the Internet Banking site with your credentials and select the
Funds Transfer link under Payments/Transfers tab. You can see all your online debit and credit
accounts. Select the debit account from which you wish to transfer funds and the credit account
into which the amount is to be credited. Enter the amount and remarks. The remarks will be
displayed in your accounts statement for this transaction. You will be displayed the last five
funds transfer operations on your accounts. On confirming the transaction, you will be displayed
a confirmation page with the details of the transaction and the option to submit or cancel the
funds transfer request. A reference number will be generated for your record.
? THIRD PARTY TRANSFER
You can transfer funds to your trusted third parties by adding them as third party
accounts. The beneficiary account should be any branch SBI. Transfer is instant. You can do any
number of Transactions in a day for amount aggregating Rs.1lakh. To transfer funds to third
party having account in SBI, you need to add and approve a third party, you need to register your
mobile number in personal details link under profile section. You will receive a One Time SMS
password on your mobile phone to approve a third party. If you do not have a mobile number,
third party approval will be handled by your branch. Only after approval of third party, you will
be able to transfer funds to the third party. You can set limits for third party transactions made
from your accounts or even set limits for individual third parties.
? DEMAND DRAFT
The Internet Banking application enables you to register demand drafts requests online.
You can get a demand draft from any of your Accounts (Savings Bank, Current Account, Cash
Credit or Overdraft). You can set limits for demand drafts issued from your accounts or use the
bank specified limit for demand drafts. You can opt to collect the draft in person at your branch,
quoting a reference to the transaction. A printed advice can also be obtained from the site for
39
your record. Alternatively, you may request the branch to courier it to your registered address,
and the courier charges will be recovered from you.
? CHEQUE BOOK REQUEST
You can request for a cheque book online. Cheque book can be requested for any of your
Savings, Current, Cash Credit, and Over Draft accounts. You can opt for cheque books with 25,
50 or 100 cheque leaves. You can either collect it from branch or request your branch to send it
by post or courier. You can opt to get the cheque book delivered at your registered address or
you can provide an alternate address. Cheque books will be dispatched within 3 working days
from the date of request. Just log on to retail section of the Internet Banking site with your
credentials and select the Cheque Book link under Requests tab. You can view all your
transaction accounts. Select the account for which you require a cheque book; enter the number
of cheque leaves required and the mode of delivery. Then, submit the same.
? ACCOUNT OPENING REQUEST „
Online SBI? enables you to open a new account online. You can apply for a new account
only in branches where you already have accounts. You should have an INB-enabled account
with transaction right in the branch. Funds in an existing account are used to open the new
account. You can open Savings, Current, Term Deposit and Recurring Deposit accounts of
Residents, NRO and NRE types. Just log on to retail section of the Internet Banking site with
your credentials and select the New Account link under Requests tab. You can see all types of
accounts. Select the account and account type you wish to open and submit the same. Then, you
need to select the branch and enter the initial amount to open the account. You can select any of
your accounts for debiting the initial amount. Then, submit the transaction. Your new account
opening request will be processed by the branch.
? ACCOUNT STATEMENT
The Internet Banking application can generate an online, downloadable account statement
for any of your accounts for any date range and for any account mapped to your username. The
statement includes the transaction details, opening, closing and accumulated balance in the
account. You can generate the online account statement for any date range or for any month and
40
year. The account statement can be viewed online, printed or downloaded as an Excel or PDF
file. You also have the option to select the number of records displayed in each page of the
statement. The options are 25, 50, 75, 100 and ALL.
? TRANSACTION ENQUIRY
„Online SBI? provides features to enquire status of online transactions. You can view and verify
transaction details and the current status of transactions. Your VISA transactions can also be
viewed separately. Just log on to retail section of the Internet Banking site with your credentials
and select the Status Enquiry link under the Enquiries tab. You will be displayed all online
transactions you have performed. To view details of individual transactions, you need to click the
Transaction Reference number link. You are displayed the debit and credit account details,
transaction amount, narration and transaction status.
? DEMAT ACCOUNT STATEMENT „
Online SBI? enables you to view Demat account statement and maintain such accounts. The bank
acts as your depository participant. In the third party site, you can mark a lien on your Demat
accounts and use the funds to trade on stock using funds in your SBI savings account. You can view
Demat account details, and generate the following statements: statement of holding, statement of
transactions, statement of billing.
? DONATION
You can make donation to religious and charitable institution by using Internet Banking of SBI.
Simply log on tohttp://www.onlinesbi.com/ with your credentials and go to Payment and
transfer and click on make donation link. After selecting the debit account select the
religious/charitable institution that you want to offer donation. After successful payment you can
print an E-receipt for the donation made.
41
Suggestions
(i) The banking practices need to be upgraded.
(ii) Encouraging them to avail of certain facilities from the banking system, including the RBI.
(iii) These banks should be linked with commercial banks on the basis of certain understanding
in the respect of interest charged from the borrowers, the verification of the same by the
commercial banks and the passing of the concessions to the priority sectors etc.
(iv)These banks should be encouraged to become corporate bodies rather than continuing as
family based enterprises.
42
Bibliography
? www.managementparadise.com
? www.scribd.com
? www.casestudy.co.in
? www.slideshare.com
? www.ncfm.com
43
References
? Banking and financials sector in the new millennium –by raj
kapila and uma kapila.
? Indian banking in transition :issues and challenges –by T. Ravi
Kumar
? An overview of banking sector in india –by C.A Rajkumar
Adukai
44
Appendix
Date :November 9, 2012 (Economics Times Of India)
SBI now has the largest overseas presence among Indian banks
State Bank of India has taken the leadership position in overseas presence with 52 offices as on
March 2012, ahead of Bank of Baroda's 47. India's largest bank opened seven offices in 2011-12
while BoB's tally remained the same amid global economic turbulence. State-run Bank of India
ranked third with 24 offices. The largest private lender ICICI Bank has 9 offices, according to
the latest Reserve Bank of India statistics.
They are opening more branches overseas as more local companies are going outside the country
to expand fortune. Indian banks collectively have 165 offices overseas, 10 more than last year, in
countries with large non resident population. They have opened as many as 40 offices in the last
five years after 2008's global economic recession as they withstood the crisis better than many
foreign banks. SBI opened about 20 during this period to strengthen its overseas presence.
Date : December 9, 2012 (Business Today)
The Indian banking sector has seen unprecedented growth along with remarkable improvement
in its quality of assets and efficiency since economic liberalisation began in the early 1990s.
From providing plain vanilla banking services, banks have gradually transformed themselves
into universal banks. ATMs, Internet banking, mobile banking and social banking have made
"anytime anywhere banking" the norm now.
In 2011/12, non-cash payments comprised 91 per cent of total transactions in terms of value and
48 per cent in terms of volume. Within noncash payments, too, the share of payments through
cheques has come down from 85 per cent to nine per cent in value, and 83 per cent to 52 per cent
in volume between 2005/06 and 2011/12. Banks have taken other measures to improve their
functioning, too. As a result, there were 20 Indian banks in the UK-based Brand Finance's annual
international ranking of top 500 in 2010, as compared to only six in 2007, according to a report
in a leading financial daily.
The growth is not restricted to the metropolitan or urban areas. Financial inclusion has been at
the forefront of regulators and policy makers in India, a country where approximately half of the
population still does not have access to banking services. There have been occasions when banks
have acted beyond their role of finance providers.
45
For example, a financial daily reported that Aryavart Gramin Bank, a regional rural bank
sponsored by Bank of India, tied up with Tata BP Solar to finance "Solar Home Lighting
System" for village homes in Uttar Pradesh. It extended finance of around Rs 10,000 with Rs
3,000 as margin money to be contributed by the beneficiary.
The equated monthly installment towards the repayment of the loan amount was less than the
amount the villagers had to spend on kerosene requirements per month. The bank's initiative
resulted in 20,000 houses getting solar power. It also meant an annual saving of about 192 tanker
loads of kerosene.
doc_416152760.docx
banking, banking acts
1
Executive Summary
The last decade has seen many positive developments in the Indian banking system. The
policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related
government and financial system regulatory entities, have made several notable efforts to
improve regulation in the system. The system now compares favourably with banking systems 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 system 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. While the onus for this change lies mainly with bank
managements, an enabling policy and regulatory framework will also be critical to their success.
The failure to respond to changing market realities has stunted the development of the financial
system in many developing countries. A weak banking structure has been unable to fuel
continued growth, which has harmed the long-term health of their economies. In this ?white
paper?, we emphasise the need to act both decisively and quickly to build an enabling, rather
than a limiting, banking system in India.
Technology has become a part of all walks of life and across all business systems, and
even more so in banking. There has been massive use of technology across many areas of
banking business in India, both from the asset and the liability side of a bank’s balancesheet.
Delivery channels have immensely increased the choices offered to the customer to conduct
transactions with ease and convenience. Various wholesale and retail payment and settlement
systems have enabled faster means of moving the money to settle funds among banks and
customers, facilitating improved turnover of commercial and financial transactions. Banks have
been taking up new projects like data warehousing, customer relationship management and
financial inclusion initiatives to further innovate and strategise for the future and to widen the
reach of banking. The dependence on technology is such that the banking business cannot be
thought of in isolation without technology, such has been the spread of technology footprints
across the Indian commercial banking landscape. Developments in IT have also brought along a
whole set of challenges to deal with. The dependence on technology has led to various challenge
and issues like frequent changes or obsolescence, multiplicity and complexity of systems,
different types of controls for different types of technologies/systems, proper alignment with
business objectives and legal/regulatory requirements, dependence on vendors due to
outsourcing of IT services, vendor related concentration risk, segregation of duties, external
threats leading to cyber frauds/crime, higher impact due to intentional or unintentional acts of
internal employees, new social engineering techniques employed to acquire confidential
credentials, need for governance processes to adequately manage technology and information
security, need for appreciation of cyber laws and their impact and to ensure continuity of
business processes in the event of major exigencies.
2
Objective Of Study
? To assess various aspects of services provided by the public sector, private sector and
foreign banks.
? To study the various development banks operating in India.
? To give a glance at the working of development banks.
? To find out role of development banks in Indian financial system.
? To determine and compare the extent of customer’s satisfaction with quality of banking
services on the basis of different constituent factors.
? To check the contribution of development of banks in economic growth.
? To assess the extent of use of services especially the IT enabled services in these banks.
3
Introduction To Banking System In India
The banking system in India is significantly different from that of other Asian nations
because of the country’s unique geographic, social, and economic characteristics. India has a
large population and land size, a diverse culture, and extreme disparities in income, which are
marked among its regions. There are high levels of illiteracy among a large percentage of its
population but, at the same time, the country has a large reservoir of managerial and
technologically advanced talents. Between about 30 and 35 percent of the population resides in
metro and urban cities and the rest is spread in several semi-urban and rural centers. The
country’s economic policy framework combines socialistic and capitalistic features with a heavy
bias towards public system investment. India has followed the path of growth-led exports rather
than the ?exported growth? of other Asian economies, with emphasis on self-reliance through
import substitution.
These features are reflected in the structure, size, and diversity of the country’s
banking and financial system. The banking system has had to serve the goals of economic
policies enunciated in successive five year development plans, particularly concerning equitable
income distribution, balanced regional economic growth, and the reduction and elimination of
private system monopolies in trade and industry. In order for the banking industry to serve as an
instrument of state policy, it was subjected to various nationalization schemes in different phases
(1955, 1969, and 1980). As a result, banking remained internationally isolated (few Indian banks
had presence abroad in international financial centers) because of preoccupations with domestic
priorities, especially massive branch expansion and attracting more people to the system.
Moreover, the system has been assigned the role of providing support to other economic systems
such as agriculture, small-scale industries, exports, and banking activities in the developed
commercial centers (i.e., metro, urban, and a limited number of semi-urban centers). The
banking system’s international isolation was also due to strict branch licensing controls on
foreign banks already operating in the country as well as entry restrictions facing new foreign
banks. A criterion of reciprocity is required for any Indian bank to open an office abroad. These
features have left the Indian banking system with weaknesses and strengths. A big challenge
facing Indian banks is how, under the current ownership structure, to attain operational
efficiency suitable for modern financial intermediation. On the other hand, it has been relatively
easy for the public system banks to recapitalize, given the increases in nonperforming assets
(NPAs), as their Government dominated ownership structure has reduced the conflicts of interest
that private banks would face.
The banking system, which forms the core of the financial architecture of the economy,
you have an inimitable opportunity to influence the economic lives of the nation’s populace. We
all know that banking plays a silent, yet crucial part in our day-to-day lives. The banks perform
financial intermediation by pooling savings and channelizing them into investments through
maturity and risk transformations, thereby keeping the economy’s growth engine revving.
4
What Is Banking System?
Meaning of Banking
You know people earn money to meet their day to day expenses on food, clothing,
education of children, having etc. They also need money to meet future expenses on marriage,
higher education of children housing building and social functions. These are heavy expenses,
which can be met if some money is saved out of the present income. With this practice, savings
were available for use whenever needed, but it also involved the risk of loss by theft, robbery and
other accidents.
Thus, people were in need of a place where money could be saved safely and would be
available when required. Banks are such places where people can deposit their savings with the
assurance that they will be able to with draw money from the deposits whenever required. Bank
is a lawful organization which accepts deposits that can be withdrawn on demand. It also tends
money to individuals and business houses that need it.
Definitions of Banking
In India, the definition of the business of banking has been given in the Banking
Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is
a company which transacts the business of banking in India.' Further, Section 5(b) of the BR Act
defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order or
otherwise.' This definition points to the three primary activities of a commercial bank which
distinguish it from the other financial institutions. These are:
(i) maintaining deposit accounts including current accounts,
(ii) issue and pay cheques, and
(iii) collect cheques for the bank's customers.
1. Indian Banking Companies Act - ?Banking Company is one which transacts the business
ofbanking which means the accepting for the purpose of lending or investment of deposits
money from the public repayable on demand or otherwise and withdrawable by cheque, draft,
order or otherwise?.
5
2. Dictionary Meaning of the Word ‘Bank’ -The oxford dictionary defines a bank as ?an
establishment for custody of money received from or on behalf of its customers. It’s essential
duty is to pay their drafts on it. It’s profits arises from the use of the money left employed by
them?.
3. The Webster’s Dictionary Defines a bank as ?an institution which trades in money,
establishment for the deposit, custody and issue of money, as also for making loans and
discounts and facilitating the transmission of remittances from one place to another?.
4. According to Prof. Kinley, ?A bank is an establishment which makes to individuals such
advances of money as may be required and safely made, and to which individuals entrust money
when it required by them for use?.
Needs of the Banking system
Before the establishment of banks, the financial activities were handled by money lenders
and individuals. At that time the interest rates were very high. Again there were no security of
public savings and no uniformity regarding loans. So as to overcome such problems the
organized banking sector was established, which was fully regulated by the government. The
organized banking sector works within the financial system to provide loans, accept deposits and
provide other services to their customers. The following functions of the bank explain the need
of the bank and its importance:
? To provide the security to the savings of customers.
? To control the supply of money and credit
? To encourage public confidence in the working of the financial system, increase
? savings speedily and efficiently.
? To avoid focus of financial powers in the hands of a few individuals and
? institutions.
? To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all
? types of customers
6
History Of Banking System
The first bank in India, called The General Bank of India was established in the year
1786. The East India Company established The Bank of Bengal/Calcutta (1809), Bank of
Bombay (1840) and Bank of Madras (1843). The next bank was Bank of Hindustan which was
established in 1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank
of Madras) were called as Presidency Banks. Allahabad Bank which was established in 1865,
was for the first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894
with head quarters 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. In 1921, all
presidency banks were amalgamated to 22 form the Imperial Bank of India which was run by
European Shareholders. After that the Reserve Bank of India was established in April 1935. At
the time of first phase the growth of banking sector was very slow. Between 1913 and 1948 there
were approximately 1100 small banks in India. 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 a Central Banking Authority. After independence, Government has taken most
important steps in regard of Indian Banking Sector reforms. In 1955, the Imperial Bank of India
was nationalized and was given the name "State Bank of India", to act as the principal agent of
RBI and to handle banking transactions all over the country. It was established under State Bank
of India Act, 1955. Seven banks forming subsidiary of State Bank of India was nationalized in
1960. On 19th July, 1969, major process of nationalization was carried out. At the same time 14
major Indian commercial banks of the country were nationalized. In 1980, another six banks
were nationalized, and thus raising the number of nationalized banks to 20. Seven more banks
were nationalized with deposits over 200 Crores. Till the year 1980 approximately 80% of the
banking segment in India was under government’s ownership. On the suggestions of Narsimhan
Committee, the Banking Regulation Act was amended in 1993 and thus the gates for the new
private sector banks were opened.
7
Nationalisation Period
By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer, and a
debate has ensured about the possibility to nationalise the banking industry. Indira Gandhi, the-
then Prime Minister of India expressed the intention of the Government of India (GOI) in the
annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalisation". The paper was received with positive enthusiasm. Thereafter, her move was
swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial
banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of
India, described the step as a "Masterstroke of political sagacity" Within two weeks of the issue
of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of
Undertaking) Bill, and it received the presidential approval on 9 August, 1969. A second step of
nationalisation of 6 more commercial banks followed in 1980. The stated reason for the
nationalisation was to give the government more control of credit delivery. With the second step
of nationalisation, the GOI controlled around 91% of the banking business in India. Later on, in
the year 1993, the government merged New Bank of India with Punjab National Bank. It was the
only merger between nationalised banks and resulted in the reduction of the number of
nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a
pace of around 4%, closer to the average growth rate of the Indian economy. The nationalized
banks were credited by some; including Home minister P. Chidambaram, to have helped the
Indian economy withstand the global financial crisis of 2007-2009.
Liberalisation period
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalisation,
licensing a small number of private banks. These came to be known as New Generation tech-
savvy banks, and included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of 24 Commerce, Axis Bank(earlier as UTI
Bank), ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of
India revolutionized the banking sector in India which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation
in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given
voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with
some restrictions. The new policy shook the banking sector in India completely. Bankers, till this
time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning.
The new wave ushered in a modern outlook and tech-savvy methods of working for the
traditional banks. All this led to the retail boom in India. People not just demanded more
8
from their banks but also received more. Currently (2007), banking in India is generally fairly
mature in terms of supply, product range and reach-even though reach in rural India still remains
a challenge for the private sector and foreign banks. In terms of quality of assets and capital
adequacy, Indian banks are considered to have clean, strong and transparent balance sheets as
compared 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. In March 2006, the Reserve Bank
of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector
bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a
private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the
private sector banks would need to be voted by them. In recent years critics have charged that the
non-government owned banks are too aggressive in their loan recovery efforts in connection with
housing, vehicle and 25 personal loans. There are press reports that the banks' loan recovery
efforts have driven defaulting borrowers to suicide.
Current scenario of banking system
The global economy after a sustained period of expansion is no entering in to a phase of
downturn on account of the global financial crises. The Global GDP rose on an average by5
percent per annum during 2004 to2007,which isthehighestsustainedratesince1970s. On the other
hand international financial market witnessed a turbulencebeginningJune2007, triggered by the
US sub-prime mortgage market, which then spread in subsequent months. Losses were recorded
worldwide by financial institutions, which consequently undertook huge write offs, with some
largest international banks recording considerable decline in profit. The global turmoil has
accentuated significantly during 2008sofar and its adverse impact on the real sector is clearly in
evidence. Many advanced economies are experiencing recessionary conditions. The financial
crises seems to have entered a new turbulent phase since September 2008, which has severely
impaired confidence in global financial institutions and markets.
As per the RBI report, The Indian economy continued to record strong growth during
2007-08, albeit with some moderation. With adverse effect of global recessions on Indian
industry and service sector, the Real GDP growth rate of India, has declinedfrom9.6%in 2006-07
to9%in 2007-08. But the overall growth of real GDP rate of the India economy during 2007-
08was noteworthy in the global context. Indian Financial System and Financial Institutions:
Indian financial system is standing on the four pillars namely financial institutions, financial
markets, financial instruments and regulatory bodies. Banking and Insurance are the important
constituents of Indian Financial System. Both plays very important role in the socio economic
development of the country. As far as the present scenarios concerned the banking industry is in
9
a transition phase. On the other hand the Private Sector Banks in India are witnessing immense
progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. On the
other hand the Public Sector Banks are still facing the problem of unhappy employees. There has
been a decrease of20 percent in the employee strength of the private sector in the wake of the
Voluntary Retirement Schemes (VRS).As far as foreign banks are concerned they are likely to
succeed in India. Indusland Bank was the first private bank to be set up in India. IDBI, ING
Vyasa Bank, SBI Commercial and International Bank Ltd,Dhanalakshmi Bank Ltd, Karur Vysya
Bank Ltd, Bank of Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public
Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank,
Andhra Bank etc. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd,
Citibank etc are some foreign banks operating in India. Banking Institutions Banks are the most
significant players in the India financial market. They are the biggest purveyors of credit, and
they also attract most of the savings from the population. Dominated by the public sector, the
banking industry has so far acted as an efficient partner in the growth and development of the
country. Driven by the socialist ideologies and the welfare state concept, public sector banks
have long been the supporters of agriculture and other priority sectors. They act as crucial
channels of the governments in its efforts to ensure equitable economic development.
10
Structure Of Banking System In India
11
? The Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) is India's central banking institution, which controls
the monetary policy of the Indian rupee. It was established on 1 April 1935 during the British Raj
in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was
divided into shares of 100 each fully paid, which was entirely owned by private shareholders in
the beginning. Following India's independence in 1947, the RBI was nationalised in the year
1949.
The RBI plays an important part in the development strategy of the Government of India. It
is a member bank of the Asian Clearing Union. The general superintendence and direction of the
RBI is entrusted with the 21-member-strong Central Board of Directors—the Governor
(currently Raghuram Rajan), four Deputy Governors, two Finance Ministry representative, ten
government-nominated directors to represent important elements from India's economy, and four
directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi.
Each of these local boards consists of five members who represent regional interests, as well as
the interests of co-operative and indigenous banks.
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Functions of Reserve Bank of India
1. Monopoly of Note Issue
In terms of Section 22 of the Reserve Bank of India Act, the RBI has been given the
statutory function of note issue on a monopoly basis. The note issue in India was originally based
upon "Proportional Reserve System". When it became difficult to maintain the re-serve
proportionately, it was replaced by "Minimum Reserve System ". According to the RBI
Amendment Act of 1957, the bank should now maintain a minimum reserve of Rs.200 crore
worth of gold coins, gold bullion and foreign securities of which the value of gold coin and
bullion should be not less than Rs.115 crore. The Government of India issues rupee coins in the
denomination of Rs.1, 2, and 5 topublic. These coins are required to be circulated to public only
through Reserve Bank un-der Section 38 of the RBI Act. The RBI presently issues notes of
denominations Rs.10 and above. RBI manages circulation of money through currency chests.
Originally RBI issued currency notes of Rs.2 and above. However, due to higher cost of printing
small denomina-tion notes these denominations are now coincides and issued by Government.
The value of currency with public as on June 1991 was only to the extent of Rs.53048 crore.
However, this value went up to Rs.145182 crore in June 1998 and further to Rs.169382 crore in
March, 1999. Currency Chests Currency Chests are receptacles in which stocks of issuable and
new notes are stored along with rupee coins. Currency Chests are repositories run by RBI, SBI,
subsidiaries of SBI, public sector banks, Government Treasuries and Sub treasuries.
2. Banker To The Government
The RBI acts as banker to the Government under Section 20 of RBI Act. Section 21
provides that Government should entrust its money remittance, exchange and banking
transactions in India to RBI. Under Section 21A RBI has to conduct similar transactions for State
Governments also. RBI earns no income by conducting those functions but earns com-missions
for managing the government's public debt. Where RBI has no branch, SBI or its subsidiaries are
appointed as agents and sub-agents under Section 45 of the RBI Act. Agency Banks receive
commission on all transactions conducted on turnover basis.
3. Agent and Adviser Of The Government
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The RBI acts, as the financial agent and adviser to the Government. It renders the following
functions:
a) As an agent to the Government, it accepts loans and manages public debts on behalf of the
Government.
b) It issues Government bonds, treasury bills, etc.
c) Acts as the financial adviser to the Government in all important economic and financial
matters.
4. Banker to the Banks
The RBI acts as banker to all scheduled banks. Commercial banks including foreign
banks, co-operative banks and RRBs are eligible to be included in the second schedule of RBI
Act subject to fulfilling conditions laid down under Section 42 (6) of RBI Act.
RBI has powers to delete a bank from the second schedule if the bank concerned fails to fulfill
the laid down conditions such as erosion in paid up capital below the prescribed limits and the
banks' activities became detrimental to the interest of depositors, etc.
All banks in India, should keep certain percentage of their demand and time liabilities as
reserves with the RBI. This is known as Cash Reserve Ratio or CRR. At end November 1999, it
is 3 per cent for RRBs and co-operative banks; 9 per cent for commercial banks.
They also maintain Current Account with RBI for various banking transactions. This centralization
of reserves and accounts enables the RBI to achieve the following:
(a) Regulation of money supply credit.
(b) Acts as custodian of cash reserves of commercial banks.
(c) Strengthen the banking system of the country
(d) Exercises effective control over banks in Liquidity Management.
(e) Ensures timely financial assistance to the Banks in difficulties.
(f) Gives directions to the Banks in their lending policies in the public interest.
(g) Ensures elasticity in the credit structure of the country.
(h) Quick transfer of funds between member banks.
5. Acts as National Clearing House
In India RBI acts as the clearing house for settlement of banking transactions. This
function of clearing house enables the other banks to settle their interbank claims easily. Further
it facilitates the settlement economically. Where the RBI has no offices of its own, the function
of clearing house is carried out in the premises of the State Bank of India. The entire clearing
house operations carried on by RBI are computerized. The inter-bank cheque clearing settlement
is done twice a day. There is a separate route for clearing high value cheques of Rs.1.00 lakh and
14
above. Cheques drawn on banks in metropolitan cities are cleared on the same day. The RBI
carries out this function through a cell known as National Clearing Cell. In 1998, there were in
all 860 clearing houses in operation of which 14 were run by RBI, 578 by SBI and others by
public sector banks. The RBI acts as a lender of last resort or emergency fund provider to the
other member banks. As such, if the commercial banks are not able to get financial assistance
from any other sources, then as a last resort, they can approach the RBI for the necessary
financial assistance.
6. Custodian of Foreign Exchange Reserves
The RBI acts as the custodian of foreign exchange reserves. Adequate reserves may help
maintain foreign exchange rates. In order to minimize the undue fluctuations in the rates it may
buy and sell foreign currencies depending upon the situations.
Its purchase and sale of foreign currencies from the market is done like commercial banks.
However, the objective of the RBI will not be profit booking. It may buy the foreign currency to
build up adequate reserves or to arrest unwarranted rise in the value of rupee which may be due
to sudden inflow of foreign currencies into India. It may also buy and sell foreign currencies in
international market to switch the portfolio of investments denominated in different international
currencies depending upon circumstances and needs
7. Exchange Control
When a country faces Balance of Payment of problems usually when its foreign exchange
payments exceed foreign exchange receipts it controls the whole gamut of fore (foreign
exchange) transactions and regulates payment system for its advantage. Trade side imports, i.e.,
merchandise imports are regulated by Director General Foreign Trade in the Ministry of
Commerce. Payment for invisible transactions like tourism, foreign visit, dividend/interest
payment, etc. is regulated by RBI.
Similarly, all forex received or earned by residents in India, like exporters and relatives of
NRIs [Non-resident Indian] should be surrendered to banks having license from RBI to deal in
forex. However, since 1992, the receivers of forex are permitted to retain certain part of this
forex in a separate foreign currency account if they so desire. Such account is known as
Exchange Earners' Foreign Currency Account or EEFC Account.
8.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 a 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 specialised
15
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 to promote saving habit and to mobilise
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.
? Objective of Reserve Bank of India
The Reserve Bank of India Act, 1934 sets out the objectives of the Reserve Bank:
To regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to its
advantage.
The formulation, framework and institutional architecture of monetary policy in India have
evolved around these objectives – maintaining price stability, ensuring adequate flow of credit to
sustain the growth momentum, and securing financial stability.
The responsibility for ensuring financial stability has entailed the vesting of extensive powers in
and operational objectives for the Reserve Bank for regulation and supervision of the financial
system and its constituents, the money, debt and foreign exchange segments of the financial
markets in India and the payment and settlement system.
The endeavour of the Reserve Bank has been to develop a robust, efficient and diversified
financial system so as to anchor financial stability and to facilitate effective transmission of
monetary policy.
In addition, the Reserve Bank pursues operational objectives in the context of its core function of
issuance of bank notes and currency management as well as its agency functions such as banker
to Government (Centre and States) and management of public debt; banker to the banking
system including regulation of bank reserves and the lender of the last resort.
The specific features of the Indian economy, including its socio-economic characteristics, make
it necessary for the Reserve Bank to operate with multiple objectives. Regulation, supervision
and development of the financial system remain within the legitimate ambit of monetary policy
broadly interpreted in India.
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The role of communication policy, therefore, lies in articulating the hierarchy of objectives in a
given context in a transparent manner, emphasising a consultative approach as well as autonomy
in policy operations and harmony with other elements of macroeconomic policies.
? Compliance with RBI guidelines
The credit policy of a bank should be conformant with RBI guidelines; some of the
important guidelines of the RBI relating to bank credit are discussed below.
Directed credit stipulations
The RBI lays down guidelines regarding minimum advances to be made for priority
sector advances, export credit finance, etc.27 These guidelines need to be kept in mind while
formulating credit policies for the Bank.
Capital adequacy
If a bank creates assets-loans or investment-they are required to be backed up by bank
capital; the amount of capital they have to be backed up by depends on the risk of individual
assets that the bank acquires. The riskier the asset, the larger would be the capital it has to be
backed up by. This is so, because bank capital provides a cushion against unexpected losses of
banks and riskier assets would require larger amounts of capital to act as cushion. The Basel
Committee for Bank Supervision (BCBS) has prescribed a set of norms for the capital
requirement for the banks for all countries to follow. These norms ensure that capital should be
adequate to absorb unexpected losses.28 In addition, all countries, including India, establish their
own guidelines for risk based capital framework known as Capital Adequacy Norms. These
norms have to be at least as stringent as the norms set by the Basel committee. A key norm of the
Basel committee is the Capital Adequacy Ratio (CAR), also known as Capital Risk Weighted
Assets Ratio, is a simple measure of the soundness of a bank. The ratio is the capital with the
bank as a percentage of its risk-weighted assets. Given the level of capital available with an
individual bank, this ratio determines the maximum extent to which the bank can lend.
The Basel committee specifies a CAR of at least 8% for banks. This means that the capital
funds of a bank must be at least 8 percent of the bank's risk weighted assets. In India, the RBI
has specified a minimum of 9%, which is more stringent than the international norm. In fact, the
actual ratio of all scheduled commercial banks (SCBs) in India stood at 13.2% in March 2009.
The RBI also provides guidelines about how much risk weights banks should assign to different
classes of assets (such as loans). The riskier the asset class, the higher would be the risk weight.
Thus, the real estate assets, for example, are given very high risk weights. This regulatory
requirement that each individual bank has to maintain a minimum level of capital, which is
commensurate with the risk profile of the bank's assets, plays a critical role in the safety and
soundness of individual banks and the banking system.
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Credit Exposure Limits
As a prudential measure aimed at better risk management and avoidance of concentration
of credit risks, the Reserve Bank has fixed limits on bank exposure to the capital market as well
as to individual and group borrowers with reference to a bank's capital. Limits on inter-bank
exposures have also been placed. Banks are further encouraged to place internal caps on their
sectoral exposures, their exposure to commercial real estate and to unsecured exposures. These
exposures are closely monitored by the Reserve Bank. Prudential norms on banks
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? Co-operative Banks
A Co-operative bank, as its name indicates is an institution consisting of a number of
individuals who join together to pool their surplus savings for the purpose of eliminating the
profits of the bankers or money lenders with a view to distributing the same amongst the
depositors and borrowers Co-operative bank, in a nutshell, provides financial assistance to the
people with small means to protect them from the debt trap of the moneylenders. It is a part of
vast and powerful structure of co-operative institutions which are engaged in tasks of
production, processing, marketing, distribution, servicing and banking in India. A co-operative
bank is a financial entity which belongs to its members, who are at the same time the owners
and the customers of their bank. Co-operative banks are often created by persons belonging to
the same local or professional community or sharing a common interest. These banks generally
provide their member with a wide range of banking and financial services (loans, deposits,
banking accounts…). Co-operative banks differ from stockholder banks by their organization,
their goals, their Values and their governance.
Role of Co-operative Banking in India
Co-operative Banks are much more important in India than anywhere else in the world.
The distinctive character of this bank is service at a lower cost and service without
exploitation. It has gained its importance by the role assigned to them, the expectations they are
supposed to fulfill, their number and the number of offices they operate. Co-operative banks
role in rural financing continues to be important day by day, and their business in the urban
areas also has increased phenomenally in recent years mainly due to the sharp increase in the
number of primary co-operative banks. In rural areas, as far as the agricultural and related
activities are concerned, the supply of credit was inadequate, and money lenders would exploit
the poor people in rural areas providing them loans at higher rates. So, Co-operative banks
mobilize deposits and purvey agricultural and rural credit with a wider outreach and provide
institutional credit to the farmers. Co-operative bank have also been an important instrument
for various development schemes, particularly subsidy-based programmes for poor. The
19
exponential growth of Co-operative banks is attributed mainly to their much better contacts
with the local people, personal interaction with customers, and their ability to catch the nerve
of the local clientele. The total deposits and lendings of Co-operative banks are much more
than the Old Private Sector Banks and the New Private Sector Banks.
Importance of Co-operative Banking
Co-operative bank forms an integral part of banking system in India. This bank operates
mainly for the benefit of rural area, particularly the agricultural sector. Co-operative bank
mobilize deposits and supply agricultural and rural credit with the wider outreach. They are the
main source for the institutional credit to farmers. They are chiefly responsible for breaking the
monopoly of moneylenders in providing credit to agriculturists. Co-operative bank has also been
an important instrument for various development schemes, particularly subsidy-based
programmes for the poor. Co-operative banks operate for non-agricultural sector also but their
role is small. Though much smaller as compared to scheduled commercial banks, co-operative
banks constitute an important segment of the Indian banking system. They have extensive branch
network and reach out to people in remote areas. They have traditionally played an important
role in creating banking habits among the lower and middle income groups and in strengthening
the rural credit delivery system.
Features of Co-operative Banking
? Co-operative Banks are organized 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 maximization.
? 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.
? Co-operative banks are perhaps the first government sponsored, government-supported,
and government-subsidised 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
20
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.
? Co-operative banks are financial intermediaries only partially. The sources of their
funds (resources) are: Central and state government, The Reserve Bank of India and
NABARD, Other co-operative institutions, Ownership funds and, Deposits or debenture
issues.
? Some co-operative bank are scheduled banks, while others are nonscheduled banks. Co-
operative Banks are subject to CRR and liquidity requirements as other scheduled and
non-scheduled banks are. However, their requirements are less than commercial banks.
? As said earlier, co-operative banks accept current, saving, and fixed or time deposits
from individuals and institutions including banks.
? In the recent past, the RBI has introduced changes in interest rates of cooperative banks
also, along with changes in interest rates of commercial banks. The interest rates structure
of co-operative banks is quite complex. The rates charged by them depend upon the type
of bank, the type of loans, and vary from state to state.
? 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.
? Co-operative banks (COBs), in short, have played a pivotal role in the development of
short-term and long-term rural credit structure in India over the years. The co-operative
credit effort is said to be the first ever attempt at micro-credit dispensation in India.
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Classifications of Co-operative Banking
The Co-operative banking structure in India comprises of:
1. Urban Co-operative Banks
2. Rural Co-operatives
1.Urban Co-operative Banks:
Urban Co-operative Banks is also referred as Primary Co-operative banks by the Reserve
Bank of India. Among the non-agricultural credit societies urban co-operative banks occupy an
important place. This bank is started in India with the object of catering to the banking and credit
requirements of the urban middle classes.
The RBI defines Urban Co-operative banks as ?small sized cooperatively organized
banking units which operate in metropolitan, urban and semi-urban centers to cater mainly to the
needs of small borrowers, viz. owners of small scale industrial units, retail traders, professional
and salaries classes.?
Urban Co-operative banks mobilize savings from the middle and lower income groups and
purvey credit to small borrowers, including weaker sections of the society. These banks organize
on a limited liability basis, generally extend their area of operation over a town. The main
functions of these banks are to promote thrift by attracting deposits from members and non-
members and to advance loans to the members. It is registered under Co-operatives Societies Act
22
of the respective state Governments. Prior to 1966, Urban Co-operative banks were exclusively
under the purview of State Government. From March 1, 1966 certain provisions of Banking
Regulation Act have been made applicable to these banks. Consequently, the RBI became the
regulatory an supervisory authority of Urban Co-operative Banks for their related operations.
Managerial aspects of such banks continue to remain with State Governments under the
respective Cooperative Societies Act. These banks with multi-presence are regulated by the
Central Governments and registered under Multi-State Co-operative Societies Act. The RBI
extends refinance to Urban Co-operative Banks at bank ate against their advances to tiny and
cottage industrial units. These banks grants sizeable loans and advances under priority sector for
lending to small business enterprises, retail trade, road and water transport operators and
professional and self-employed persons. Urban Co-operative banks are mostly located in towns
and cities and cater to the credit requirement of the urban clientele.
The objectives and functions of the Urban Co-operative banks:
? Primarily, to raise funds for lending money to its members.
? To attract deposits from members as well as non-members.
? To encourage thrift, self-help ad mutual aid among members.
? To draw, make, accept, discount, buy, sell, collect and deal in bills of exchange, drafts,
certificates and other securities.
? To provide safe-deposit vaults.
Area of Operation :
The area of operation of these banks are usually restricted by its byelaws to a municipal
area or a town. In some occasions it exceeds this limit. The study group on Credit Co-
operatives in Non-Agricultural Sectors has recommended that normally, it would be
advisable for an urban cooperative bank to restrict its area of operation to the municipality or
the taluka town where it operates.
2. Rural Co-operatives:
Rural Cooperative Banking plays an important role in meeting the growing credit needs
of rural population of India. It provides institutional credit to the agricultural and rural sector.
The inadequacy of rural credit engaged the attention of RBI and Government throughout the
1950s and 1960s. One important feature of providing agriculture credit in India has been the
existence of a widespread network of rural financial institutions. The rural credit structure
consists of many types of financial institutions as large scale branch expansion was undertaken
to create a strong institution based in rural area. It has served as an important instrument of
credit delivery in rural and agricultural areas. The separate structure of rural Cooperative sector
for long-term and short-term loans has enabled thes institutions to develop a specialized
institution for rural credit delivery. The volume of credit flowing through these institution has
increased. The Rural Co-operative structure has traditionally been bifurcated into two parallel
wings, i.e.
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? Commercial banks
The commercial banking industry in India started in 1786 with the establishment of the
Bank of Bengal in Calcutta. The Indian Government at the time established three Presidency
banks, viz., the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840)
and the Bank of Madras (established in 1843). In 1921, the three Presidency banks were
amalgamated to form the Imperial Bank of India, which took up the role of a commercial bank, a
bankers' bank and a banker to the Government. The Imperial Bank of India was established with
mainly European shareholders. It was only with the establishment of Reserve Bank of India
(RBI) as the central bank of the country in 1935, that the quasi-central banking role of the
Imperial Bank of India came to an end.
In 1860, the concept of limited liability was introduced in Indian banking, resulting in the
establishment of joint-stock banks. In 1865, the Allahabad Bank was established with purely
Indian shareholders. Punjab National Bank came into being in 1895. Between 1906 and 1913,
other banks like Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up.
After independence, the Government of India started taking steps to encourage the spread of
banking in India. In order to serve the economy in general and the rural sector in particular, the
All India Rural Credit Survey Committee recommended the creation of a state-partnered and
state-sponsored bank taking over the Imperial Bank of India and integrating with it, the former
state-owned and state-associate banks. Accordingly, State Bank of India (SBI) was constituted in
1955. Subsequently in 1959, the State Bank of India (subsidiary bank) Act was passed, enabling
the SBI to take over eight former state-associate banks as its subsidiaries.
To better align the banking system to the needs of planning and economic policy, it was
considered necessary to have social control over banks. In 1969, 14 of the major private sector
banks were nationalized. This was an important milestone in the history of Indian banking. This
was followed by the nationalisation of another six private banks in 1980. With the
nationalization of these banks, the major segment of the banking sector came under the control of
the Government. The nationalisation of banks imparted major impetus to branch expansion in
un-banked rural and semi-urban areas, which in turn resulted in huge deposit mobilization,
thereby giving boost to the overall savings rate of the economy. It also resulted in scaling up of
lending to agriculture and its allied sectors. However, this arrangement also
24
saw some we knesses like reduced bank profitability, weak capital bases, and banks getting
burdened with large non-performing assets. To create a strong and competitive banking system, a
number of reform measures were initiated
In early 1990s. The thrust of the reforms was on increasing operational efficiency,
strengthening supervision over banks, creating competitive conditions and developing
technological and institutional infrastructure. These measures led to the improvement in the
financial health, soundness and efficiency of the banking system
Functions of Commercial Banks
The main functions of a commercial bank can be segregated into three main areas:
(i)Payment System
(ii) Financial Intermediation
(iii)Financial Services.
(i) Payment System
Banks are at the core of the payments system in an economy. A payment refers to the
means by which financial transactions are settled. A fundamental method by which banks help
in settling the financial transaction process is by issuing and paying cheques issued on behalf of
customers. Further, in modern banking, the payments system also involves electronic banking,
wire transfers, settlement of credit card transactions, etc. In all such transactions, banks play a
critical role.
(ii) Financial Intermediation
The second principal function of a bank is to take different types of deposits from
customers and then lend these funds to borrowers, in other words, financial intermediation. In
financial terms, bank deposits represent the banks' liabilities, while loans disbursed, and
investments made by banks are their assets. Bank deposits serve the useful purpose of
addressing the needs of depositors, who want to ensure liquidity, safety as well as returns in the
form of interest. On the other hand, bank loans and investments made by banks play an
important function in channelling funds into profitable as well as socially productive uses.
25
(iii) Financial Services
In addition to acting as financial intermediaries, banks today are increasingly involved
with offering customers a wide variety of financial services including investment banking,
insurance-related services, government-related business, foreign exchange businesses, wealth
management services, etc. Income from providing such services improves a bank's profitability.
Other Functions of Commercial Banks
Accepting Deposits:
Accepting deposits is one of major function of commercial bank. It is the business of bank to
accept deposits so that he can lend it to other and earn interest. Basically, the money is accepted
as deposit for safe keeping. Banks also pay interest on these deposits. To attract depositors banks
maintain different types of accounts. These are as following.
a) Fixed Deposit Accounts: The account which is opened for fixed period by depositing
amount is known as fixed deposit account. The money deposited in this account cannot
be withdrawn before expiry of period. A high rate of interest is paid on fixed deposits.
b) Current Deposit Account: Current deposit accounts are mostly opened by
businessmen and traders who withdraw money number of times a day. Banks dose not
pay interest on these types of account. The bank collects certain charges from depositors
for services rendered by it.
c) Saving Account: Saving account is most suited for those people who want to save
money for future needs. This types of account can be opened with a minimum initial
deposit. A minimum balance has to be maintained in account as prescribed by bank.
Some restrictions are imposed on depositor regarding number of deposit withdrawal and
amount to be withdrawn in given period.
d) Recurring Deposit Account: The purpose of these accounts is to encourage public for
regular saving, particularly by fixed income group. Fixed amount is deposit is deposited
at regular intervals for a fixed term and repaid on maturity.
2. Grant of Loans and Advances
Besides accepting deposit, the second most important function of commercial bank is advancing
of loan to the public. After keeping certain part of deposits received by bank as reserve and the
26
rest of balance give as loan. The different types of loan and advances are given by bank as
follow.
a) Call Money : There are generally short term credit that range from one day to fort night.
There are even one nigh call money advances made available to bank with the help of this
market. The rate of interest depends upon the conditions prevailing in money market.
b) Overdraft : In over draft, a customer can withdraw money from his current account and
available balance below zero. When the amount withdrawn is within the authorized limit
then rate of interest charged at agreed rate. Overdraft is allowed normally against the
security of negotiable Instrument and credit worthy customers without security.
c) Cash Credit: In cash credit, Bank advance loan against the customer current asset or
personal guarantee. The borrower has option to withdraw the funds as and when required
to extent of his needs but he cannot exceed the credit limit allowed to him. The cash
credit limit depends on the debtor’s need and as agreed with the bank. The bank charges
interest only on money withdrawn from by them.
d) Discounting of Bills: Under this type of lending, Bank pay amount before due date of
bill after deducting certain rate of discount or commission. The holder of bill get money
immediately without waiting for the date of maturity. If bill of exchange dishonored on
due date the bank can recover the amount from the customer.
e) Direct Loan: A loans granted for a fixed maturity period more then one year. Loans are
usually secured against some collateral security. The borrower can withdraw entire
money through cheques. The interest is charged on entire amount of loan. Repayment of
loan either in installments or in lumpsum
3. Credit Creation
Credit creation is also an important function of commercial Bank. The process of credit creation
automatically performed when bank accept deposits and provide loans Prof Sayers says, ?Banks
are not merely supply of money but in an important sense, they are manufacturers of money?. In
this process, customers deposit their money in bank. Bank keeps certain amount of deposit as
cash reserve and rest of balance given as loan and advances. Banks not required to keep the
entire deposits in cash. The amount of loan does not give directly to borrower. The borrower
open a account and then bank deposit money in that account. Here, bank’s lends money and
process of credit creation starts. The current cash reserve ratio is 6% in 2011.
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Classification of Commercial Banks
The commercial banks re further divided in to 4 categories:
1. Public Sector Banks
Public sector banks are those in which the majority stake is held by the Government of
India (GoI). Public sector banks together make up the largest category in the Indian banking
system. There are currently 27 public sector banks in India. They include the SBI and its 6
associate banks (such as State Bank of Indore, State Bank of Bikaner and Jaipur etc), 19
nationalized banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd.
Public sector banks have taken the lead role in branch expansion, particularly in the rural
areas.
2.Regional Rural Banks
Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop
the rural economy. Each RRB is owned jointly by the Central Government, concerned State
Government and a sponsoring public sector commercial bank. RRBs provide credit to small
farmers, artisans, small entrepreneurs and agricultural labourers. Over the years, the
Government has introduced a number of measures of improve viability and profitability of
RRBs, one of them being the amalgamation of the RRBs of the same sponsored bank within a
State. This process of consolidation has resulted in a steep decline in the total number of RRBs
to 86 as on March 31, 2009, as compared to 196 at the end of March 2005.
3.Private Sector Banks
In this type of banks, the majority of share capital is held by private individuals and
corporates. Not all private sector banks were nationalized in in 1969, and 1980. The private
banks which were not nationalized are collectively known as the old private sector banks and
28
include banks such as The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc.5 Entry
of private sector banks was however prohibited during the post-nationalisation period. In July
1993, as part of the banking reform process and as a measure to induce competition in the
banking sector, RBI permitted the private sector to enter into the banking system. This resulted
in the creation of a new set of private sector banks, which are collectively known as the new
private sector banks. As at end March, 2009 there were 7 new private sector banks and 15 old
private sector banks operating in India.
4.Foreign Banks
Foreign banks have their registered and head offices in a foreign country but operate their
branches in India. The RBI permits these banks to operate either through branches; or through
wholly-owned subsidiaries.7 The primary activity of most foreign banks in India has been in
the corporate segment. However, some of the larger foreign banks have also made
consumerfinancing a significant part of their portfolios. These banks offer products such as
automobile finance, home loans, credit cards, household consumer finance etc. Foreign banks in
India are required to adhere to all banking regulations, including priority-sector lending norms
as
applicable to domestic banks.8 In addition to the entry of the new private banks in the mid-
90s, the increased presence of foreign banks in India has also contributed to boosting
competition in the banking sector.
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The Banking Regulation Act
The Banking Act 1949 was a special legislation, applicable exclusively to the banking
companies. This Act was later renamed as the Banking Regulation Act from March 1966. The
Act vested in the Reserve Bank of India the responsibility relating to licensing of banks, branch
expansion, and liquidity of their assets, management and methods of working, amalgamation,
reconstruction and liquidation. Thus giving RBI authority along with responsibility & igniting
the first part of banking transformation in India. The second path braking & transformation effort
took place in 1955 with the establishment of the Indian Banking Sector' State Bank of India.
Formation of "The State Bank of India" In 1951, when the First Five Year Plan was launched,
the development of rural India was given the highest priority. The commercial banks of the
country including 88 Pacific Business Review International the Imperial Bank of India had till
then confined their operations to the urban sector and were not equipped to respond to the
emergent needs of economic regeneration of the rural areas. In order, therefore, to serve the
economy in general and the rural sector in particular, the All India Rural Credit Survey
Committee recommended the creation of a state-partnered and state-sponsored bank by taking
over the Imperial Bank of India, and integrating with it, the former state-owned or state-associate
banks. An act was accordingly passed in Parliament in May 1955 and the State Bank of India
was constituted on 1 July 1955. However it was soon realized that State Bank alone is not
sufficient for the development of the economy & more government sponsored banks are required
& accordingly the plan for nationalization was passed in1968. Thus forming the third turning
point in the history of Indian Banking in India. The need for nationalization was felt because
government believed that private commercial banks were lacking in fulfilling the social &
developmental goals of banking. This was evident from the fact that the industries' share in loans
almost doubled between 1951 and 1968, from 34% to 68%. On the other hand, agriculture which
was a major occupation (and still is) received less than 2% of total credit Thus with a view to
serve the mass Government of India Nationalized 4 banks (refer table 1) in 1969 bringing the
30
total number of branches under government control to 84 percent .Once again in April of 1980,
the Government of India undertook a second round of nationalization, placing under government
control the six private banks whose nationwide deposits were above Rs. 2 billion, leaving
approximately 10 percent of bank branches in private hands.
31
E- banking
What Is E-banking?
In simple words, e-banking implies provision of banking products and services through
electronic delivery channels. Electronic banking has been around for quite some time in the form
of automatic teller machines (ATMs) and telephone transactions. In more recent times, it has
been transformed by the the internet – a new delivery channel that has facilitated banking
transactions for both customers and banks. For customers, the internet offers faster access, is
more convenient and available around the clock irrespective of the customer’s location. For
banks, it is a much more efficient and cost- saving channel (see Table 1 which gives cost
comparisons for various delivery channels within US and India).
Why E-banking?
There are not many inventions that have changed the business of banking as quickly as the e-
banking revolution. World over banks are reorienting their business strategies towards new
opportunities offered by e-banking. E-banking has enabled banks to scale borders, change
strategic behaviour and thus bring about new possibilities. E-banking has moved real banking
behaviour closer to neoclassical economic theories of market functioning. Due to the absolute
transparency of the market, clients (both business as well as retail) can compare the services of
various banks more easily. For instance, on the internet, competitors are only one click away. If
clients are not happy with the products, prices or services offered by a particular bank, they are
able to change their banking partner much more easily than in the physical or real bank-client
relationship. From the banks’ point of view, use of the internet has significantly reduced the
physical costs of banking operations. As discussed by Turner (2001), progress in information
technology has slashed the costs of processing information, while the internet has facilitated its
transmission, thus facilitating change in the very essence of the banking business. Around the
world, electronic banking services, whether delivered online or through other mechanisms, have
32
spread quickly in recent years. It must be noted that the impact of e-banking is not limited to
industrial and advanced emerging economies. Even in countries with underdeveloped banking
systems, E-banking has offered many new business opportunities.
State Bank Of India (SBI)
State bank of India is the nations largest and oldest bank. Tracing its roots back some 200
years to the British East India Company (and initially established as the Bank of Calcutta in
1806), the bank operates more than 15,000 branches within India, where it also owns majority
stakes in six associate banks. State Bank of India (SBI) has more than 80 offices in nearly 35
other countries, including multiple locations in the US, Canada, and Nigeria. The bank has other
units devoted to capital markets, fund management, factoring and commercial services, credit
cards, and brokerage services. The Reserve Bank of India owns about 60% of State bank of
India.
33
SERVICES PROVIDED BY SBI INTERNET BANKING
? ONLINE SBI (WWW.ONLINESBI.COM):
State Bank of India is India?s largest bank with a branch network of over 11000 branches and
6 associate banks located even in the remotest parts of India. State Bank of India (SBI) offers a wide
range of banking products and services to corporate and retail customers. „Online SBI? is the
Internet banking portal for State Bank of India. The portal provides anywhere, anytime, online access
to accounts for State Bank?s Retail and Corporate customers. The application is developed using the
latest cutting edge technology and tools. The infrastructure supports unified, secure access to banking
services for accounts in over 11,000 branches across India.
? RETAIL BANKING:
The Retail banking application is an integration of several functional areas, and enables
customers to:
? Transfer funds to own and third party accounts
? Credit beneficiary accounts using the VISA Money Transfer, RTGS/NEFT feature
? Generate account statements
? Setup Standing Instructions
? Configure profile settings
? Use e-Tax for online tax payment
? Use e-Pay for automatic bill payments
? Interface with merchants for railway and airline reservations
? vail DEMAT and IPO services
? CORPORATE BANKING:
The Online SBI corporate banking application provides features to administer and manage
corporate accounts online. The corporate module provides roles such as Regulator, Admin, Up
34
loader, Transaction Maker, Authorizer, and Auditor. These roles have access to the following
functions:
? Manage users, define rights and transaction rules on corporate accounts
? Access accounts in several branches with a single sign-on mechanism
? Upload files to make bulk transactions to third parties, supplier, vendor and tax collection
authorities.
? Use online transactional features such as fund transfer to own accounts, third party
payments, and draft issues
? Make bill payments over the Internet.
? Authorize, modify, reschedule and cancel transactions, based on rights assigned to the
user
? Generate account statement
? Enquire on transaction details or current balance
? PRODUCTS & SERVICES
? E-TICKETING:
You can book your railway, air and bus tickets online through Online SBI. To book
your train ticket, just log on to irctc.co.in and create an ID there at if you do not have one.
Submit your travel plan and book the ticket(s)-eithercan be printed any time. For an e-ticket, the
details of photo identity card will required to be filled in) and select State Bank of India in the
payment options. You will be redirected to Internet Banking site of SBI (www.onlinesbi.com).
After submitting the respective ID and password, you can select your account. After a successful
debit, Railways will generate the ticket. E-ticket can be printed by you whereas the i-ticket will
be dispatched by IRCTC at the given address. Service charges @ Rs.10/- per transaction shall be
levied in addition to the cost of the ticket. Cancellation of E-ticket can be done by logging on to
IRCTC's site; refund amount will be credited to your account directly within 2-3 days. For
cancellation of i-ticket, you shall be required to submit your ticket at a computerized counter of
Railways and on cancellation; the amount shall be credited back to your account.
35
You can also book your Air ticket through the e-ticketing feature. Logon to Indian
Airlines website to make a payment for an e-ticket through State Bank of India, you need to
select SBI as the payment option. The payment request will be redirected to Internet Banking
site. The request may be processed based on values sent from the airlines website. Once a
transaction is processed, an appropriate response will be sent to airlines site to update the status
of the transaction. You can print the E-ticket immediately
To book bus tickets to destinations in Karnataka, log on to the KSRTC website. Provide
details about the start and end points of your journey, date of journey and number of tickets.
Verify availability of seats on the selected date and confirm the transaction. Select „Online SBI?
to make the payment. Provide your credentials and select the SBI account that will be debited for
the payment. You are provided a KSRTC reference number for your e-Ticket.
? SBI E-TAX
You can pay your taxes online through SBI E-Tax. This facility enables you to pay TDS,
Income tax, Indirect tax, Corporation tax, Wealth tax, Estate Duty and Fringe Benefits tax. Click
the e-Tax link in the home page. You are displayed a page with two links Direct Tax and Indirect
Tax. Click the Direct Tax link. You will be redirected to the NSDL site where you can select an
online challan based on the tax you wish to pay. Provide the PAN, name and address, assessment
year, nature of payment and bank name. On selecting the bank name as SBI and submitting the
form, you will be redirected to the Internet Banking site. After submitting the respective ID and
password, you can select your account for making payment of taxes. After payment is successful
you can print the E-Receipt for the payment. The E-receipt can be printed at a later date also and
the same can be retrieved from: Enquiries > Find Transactions > Status Enquiries > Click on the
respective transaction to print the tax receipt.
The Indirect Tax link is used to make Central Excise and Service Tax payments to Central Board
of Excise and Customs. The online payment feature facilitates anytime, anywhere payment and
an instant E-Receipt is generated once the transaction is complete. The Indirect Tax payment
36
facility is available to Registered Central Excise/Service Tax Assesses who possesses the 15
digit PAN based Assesses Code. You can make CBEC payments using the Indirect Taxes link
available in the Payments/Transfers tab. You need to provide your assesses code as registered
with CBEC and select the minor heads towards which you intend to pay tax. Select the
appropriate tax type and enter the tax amount. Select an account for debiting the total tax
amount. You can use any of your transaction accounts to make the payment. If a payment is
successful, CBEC provides a link to generate an E-Receipt for the payment. Internet banking
customers can pay tax through site to site integration. For government agencies, which are not
Internet-enabled, „Online SBI? offers the Government Tax Payment facility. This facility is
available as a post login feature in the retail and corporate banking sites of the Online SBI portal.
? BILL PAYMENT
A simple and convenient service for viewing and paying your bills online. No more late
payments No more queues No more hassles of depositing cheques Using the bill payment you
can view and pay various bills online, directly from your SBI account. You can pay telephone,
electricity, insurance, credit cards and other bills from the comfort of your house or office, 24
hours a day, 365 days a year. Simply logon tohttp://www.onlinesbi.com/ with your credentials
and register the biller to which you want to pay, with all the bill details. Once the bill is uploaded
by the biller, you can make payment online. You can see 'how do i' to learn the steps for using
the facility. You can also set up Auto Pay instructions with an upper limit to ensure that your
bills are paid automatically whenever they are due. The upper limit ensures that only bills within
the specified limit are paid automatically, thereby providing you complete control over these
payments. The e-PAY service is available in various cities across the country and you can now
make payments to several billers in your region.
? RTGS/NEFT
You can transfer money from your State Bank account to accounts in other banks using the
RTGS/NEFT service. The RTGS system facilitates transfer of funds from accounts in one bank
to another on a "real time" and on "gross settlement" basis. This system is the fastest possible
interbank money transfer facility available through secure banking channels in India. RTGS
transaction requests will be sent to RBI immediately during working hours post working hours
37
requests are registered and sent to RBI on next working day. You can also schedule a transaction
for a future date. You can transfer an amount of Rs.1 lac and above using RTGS system.
National Electronic Funds Transfer (NEFT) facilitates transfer of funds to the credit
account with the other participating bank. RBI acts as the service provider and transfers the
credit to the other bank's account.
NEFT transactions are settled in batches based on the following timings
? settlements on weekdays - at 09:00, 11:00, 12:00, 13:00, 15:00 and 17:00 hrs.
? settlements on Saturdays - at 09:00, 11:00 and 12:00 hrs.
please note that all the above timings are based on Indian Standard Time (IST) only.
In order to transfer the funds to an account with other bank, kindly ensure that the bank
branch of the beneficiary is covered under the RGTS/NEFT payment system. It is recommended
that you choose the Bank/ Branch from the drop down option provided under the link "Add
Interbank beneficiary" and exercise care to provide the correct account number and name of the
beneficiary.
? E-PAYMENT
You can pay your insurance premium, mobile phone bills and also you can purchase
mutual fund units by coming from the biller?s website and selecting state bank of India in the
payment option. LIC PREMIUM: For paying premium of LIC policy logon to www.licindia.com
and register your policy details. When the premium is due select State Bank of India in the make
payment option. SBI Mutual FUND: You can invest in the SBI Mutual Fund schemes online.
Logon to www.sbimf.com and select the scheme in which you want to make investment in the
payment option select State Bank of India. CC Avenue: Enjoy shopping at the CC Avenue
Shopping Mall and purchase from a wide variety of products and services through CC Avenue
Certified Vendors. Make payments for your purchases using your Internet enabled SBI accounts.
? FUND TRANSFER
The Funds Transfer facility enables you to transfer funds within your accounts in the same
branch or other branches. You can transfer aggregating Rs.1 lakh per day to own accounts in the
38
same branch and other branches. To make a funds transfer, you should be an active Internet
Banking user with transaction rights. Funds transfer to PPF account is restricted to the same
branch.
Just log on to retail section of the Internet Banking site with your credentials and select the
Funds Transfer link under Payments/Transfers tab. You can see all your online debit and credit
accounts. Select the debit account from which you wish to transfer funds and the credit account
into which the amount is to be credited. Enter the amount and remarks. The remarks will be
displayed in your accounts statement for this transaction. You will be displayed the last five
funds transfer operations on your accounts. On confirming the transaction, you will be displayed
a confirmation page with the details of the transaction and the option to submit or cancel the
funds transfer request. A reference number will be generated for your record.
? THIRD PARTY TRANSFER
You can transfer funds to your trusted third parties by adding them as third party
accounts. The beneficiary account should be any branch SBI. Transfer is instant. You can do any
number of Transactions in a day for amount aggregating Rs.1lakh. To transfer funds to third
party having account in SBI, you need to add and approve a third party, you need to register your
mobile number in personal details link under profile section. You will receive a One Time SMS
password on your mobile phone to approve a third party. If you do not have a mobile number,
third party approval will be handled by your branch. Only after approval of third party, you will
be able to transfer funds to the third party. You can set limits for third party transactions made
from your accounts or even set limits for individual third parties.
? DEMAND DRAFT
The Internet Banking application enables you to register demand drafts requests online.
You can get a demand draft from any of your Accounts (Savings Bank, Current Account, Cash
Credit or Overdraft). You can set limits for demand drafts issued from your accounts or use the
bank specified limit for demand drafts. You can opt to collect the draft in person at your branch,
quoting a reference to the transaction. A printed advice can also be obtained from the site for
39
your record. Alternatively, you may request the branch to courier it to your registered address,
and the courier charges will be recovered from you.
? CHEQUE BOOK REQUEST
You can request for a cheque book online. Cheque book can be requested for any of your
Savings, Current, Cash Credit, and Over Draft accounts. You can opt for cheque books with 25,
50 or 100 cheque leaves. You can either collect it from branch or request your branch to send it
by post or courier. You can opt to get the cheque book delivered at your registered address or
you can provide an alternate address. Cheque books will be dispatched within 3 working days
from the date of request. Just log on to retail section of the Internet Banking site with your
credentials and select the Cheque Book link under Requests tab. You can view all your
transaction accounts. Select the account for which you require a cheque book; enter the number
of cheque leaves required and the mode of delivery. Then, submit the same.
? ACCOUNT OPENING REQUEST „
Online SBI? enables you to open a new account online. You can apply for a new account
only in branches where you already have accounts. You should have an INB-enabled account
with transaction right in the branch. Funds in an existing account are used to open the new
account. You can open Savings, Current, Term Deposit and Recurring Deposit accounts of
Residents, NRO and NRE types. Just log on to retail section of the Internet Banking site with
your credentials and select the New Account link under Requests tab. You can see all types of
accounts. Select the account and account type you wish to open and submit the same. Then, you
need to select the branch and enter the initial amount to open the account. You can select any of
your accounts for debiting the initial amount. Then, submit the transaction. Your new account
opening request will be processed by the branch.
? ACCOUNT STATEMENT
The Internet Banking application can generate an online, downloadable account statement
for any of your accounts for any date range and for any account mapped to your username. The
statement includes the transaction details, opening, closing and accumulated balance in the
account. You can generate the online account statement for any date range or for any month and
40
year. The account statement can be viewed online, printed or downloaded as an Excel or PDF
file. You also have the option to select the number of records displayed in each page of the
statement. The options are 25, 50, 75, 100 and ALL.
? TRANSACTION ENQUIRY
„Online SBI? provides features to enquire status of online transactions. You can view and verify
transaction details and the current status of transactions. Your VISA transactions can also be
viewed separately. Just log on to retail section of the Internet Banking site with your credentials
and select the Status Enquiry link under the Enquiries tab. You will be displayed all online
transactions you have performed. To view details of individual transactions, you need to click the
Transaction Reference number link. You are displayed the debit and credit account details,
transaction amount, narration and transaction status.
? DEMAT ACCOUNT STATEMENT „
Online SBI? enables you to view Demat account statement and maintain such accounts. The bank
acts as your depository participant. In the third party site, you can mark a lien on your Demat
accounts and use the funds to trade on stock using funds in your SBI savings account. You can view
Demat account details, and generate the following statements: statement of holding, statement of
transactions, statement of billing.
? DONATION
You can make donation to religious and charitable institution by using Internet Banking of SBI.
Simply log on tohttp://www.onlinesbi.com/ with your credentials and go to Payment and
transfer and click on make donation link. After selecting the debit account select the
religious/charitable institution that you want to offer donation. After successful payment you can
print an E-receipt for the donation made.
41
Suggestions
(i) The banking practices need to be upgraded.
(ii) Encouraging them to avail of certain facilities from the banking system, including the RBI.
(iii) These banks should be linked with commercial banks on the basis of certain understanding
in the respect of interest charged from the borrowers, the verification of the same by the
commercial banks and the passing of the concessions to the priority sectors etc.
(iv)These banks should be encouraged to become corporate bodies rather than continuing as
family based enterprises.
42
Bibliography
? www.managementparadise.com
? www.scribd.com
? www.casestudy.co.in
? www.slideshare.com
? www.ncfm.com
43
References
? Banking and financials sector in the new millennium –by raj
kapila and uma kapila.
? Indian banking in transition :issues and challenges –by T. Ravi
Kumar
? An overview of banking sector in india –by C.A Rajkumar
Adukai
44
Appendix
Date :November 9, 2012 (Economics Times Of India)
SBI now has the largest overseas presence among Indian banks
State Bank of India has taken the leadership position in overseas presence with 52 offices as on
March 2012, ahead of Bank of Baroda's 47. India's largest bank opened seven offices in 2011-12
while BoB's tally remained the same amid global economic turbulence. State-run Bank of India
ranked third with 24 offices. The largest private lender ICICI Bank has 9 offices, according to
the latest Reserve Bank of India statistics.
They are opening more branches overseas as more local companies are going outside the country
to expand fortune. Indian banks collectively have 165 offices overseas, 10 more than last year, in
countries with large non resident population. They have opened as many as 40 offices in the last
five years after 2008's global economic recession as they withstood the crisis better than many
foreign banks. SBI opened about 20 during this period to strengthen its overseas presence.
Date : December 9, 2012 (Business Today)
The Indian banking sector has seen unprecedented growth along with remarkable improvement
in its quality of assets and efficiency since economic liberalisation began in the early 1990s.
From providing plain vanilla banking services, banks have gradually transformed themselves
into universal banks. ATMs, Internet banking, mobile banking and social banking have made
"anytime anywhere banking" the norm now.
In 2011/12, non-cash payments comprised 91 per cent of total transactions in terms of value and
48 per cent in terms of volume. Within noncash payments, too, the share of payments through
cheques has come down from 85 per cent to nine per cent in value, and 83 per cent to 52 per cent
in volume between 2005/06 and 2011/12. Banks have taken other measures to improve their
functioning, too. As a result, there were 20 Indian banks in the UK-based Brand Finance's annual
international ranking of top 500 in 2010, as compared to only six in 2007, according to a report
in a leading financial daily.
The growth is not restricted to the metropolitan or urban areas. Financial inclusion has been at
the forefront of regulators and policy makers in India, a country where approximately half of the
population still does not have access to banking services. There have been occasions when banks
have acted beyond their role of finance providers.
45
For example, a financial daily reported that Aryavart Gramin Bank, a regional rural bank
sponsored by Bank of India, tied up with Tata BP Solar to finance "Solar Home Lighting
System" for village homes in Uttar Pradesh. It extended finance of around Rs 10,000 with Rs
3,000 as margin money to be contributed by the beneficiary.
The equated monthly installment towards the repayment of the loan amount was less than the
amount the villagers had to spend on kerosene requirements per month. The bank's initiative
resulted in 20,000 houses getting solar power. It also meant an annual saving of about 192 tanker
loads of kerosene.
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