current scenario of indian banking sector

Description
its related to banking project

Current scenario of Indian Banking Sector

PROJECT REPORT ON (NAME OF YOUR PROJECT)

BACHELOR OF COMMERCE BANKING AND INSURANCE SEMESTER V (2011-2012)

SUBMITTED BY (NAME) ROLL NO: SEAT NO:

GURU NANAK COLLEGE OF ARTS, SCIENCE AND COMMERCE GURU TEGH BAHADUR NAGAR, MUMBAI-400037

Page 1

Guru Nanak College

Current scenario of Indian Banking Sector PROJECT REPORT ON (CURRENT SCENARIO OF INDIAN BANKING SECTOR) BACHELOR OF COMMERCE BANKING AND INSURANCE SEMESTER V (2011-2012) SUBMITTED In Partial Fulfillment of the requirements For the award of the degree of Bachelor of management SUBMITTED BY (MANDEEP KAUR SAINI) ROLL NO:18 SEAT NO GURU NANAK COLLEGE OF ARTS, SCIENCE AND COMMERCE GURU TEGH BAHADUR NAGAR, MUMBAI-400037

Page 2

Guru Nanak College

Current scenario of Indian Banking Sector

DECLARATION I MANDEEP KAUR SAINI THE STUDENT OF B.COM BANKING AND INSURANCE SEMESTER V (2011-2012) HEREBY DECLARE THAT I HAVE COMPLETED THE PROJECT ON CURRENT SCENARIO OF INDIAN BANKING SECTOR.

THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL TO THE BEST OF MY KNOWLEDGE.

SIGNATURE OF STUDENT (MANDEEP KAUR SAINI) ROLL NO:18 SEAT NO: GURU NANAK COLLEGE OF ARTS, SCIENCE & COMMERCE GURU TEGH BAHADUR NAGAR, MUMBAI – 400037

Page 3

Guru Nanak College

Current scenario of Indian Banking Sector C E R T F I C A T E THIS IS TO CERTIFY THAT MISS MANDEEP KAUR SAINI OF B.COM BANKING AND INSURANCE SEMESTER V (2011-2012) HAS SUCCESSFULLY COMPLETED THE PROJECT ON CURRENT SCENARIO OF INDIAN BANKING SECTOR. UNDER THE GUIDENCE OF Prof. LATA LOKHANDE PRINCIPAL DR.BINA PUNJABI

COURSE CO-ORDINATOR KETAN VIRA

PROJECT GUIDE / INTERNAL EXAMINE LATA LOKHANDE

EXTERNAL EXAMINER

Page 4

Guru Nanak College

Current scenario of Indian Banking Sector ACKNOWLEDEMENT:

This is to express my earnest gratitude and extreme joy at being bestowed with an opportunity to get an interesting and informative project on “CURRENT SCENARIO OF INDIAN BANKING SECTOR” I would like to thank all the people who have helped me in completion of project, I would avail this opportunity to express my profound gratitude and in debtness to all those people.

I would like to specially thank Prof. LATA LOKHANDE , for introducing me to such a wonderful and challenging topic and for being me guide in the true sence of the word and for guiding , correcting and motivating me at each and every moment during my project . Lastly without fail I would thank all my faculties for providing all explicit and implicit support to me during the course of my project.

Page 5

Guru Nanak College

Current scenario of Indian Banking Sector

S.NO

TOPIC

PAGE NO.

1.

CHAPTER 1 1.1 1.2 1.3 Introduction. History. Reserve bank of India.

CHAPTER 2 2.1 Indian banking sector. 2.2 The financial system. CHAPTER 3 3.1 Major reforms initiative. 3.2 Information technology usage. 3.3 Services provided. 3.4 Main competitor for banking sector. CHAPTER4 4.1 Economic development of India. 4.2 Growth of Indian banking.

Page 6

Guru Nanak College

Current scenario of Indian Banking Sector 4.3 Major development.

CHAPTER 5 5.1 Reforms in banking sector. 5.2 Revival of week bankers. 5.3 Narasimham committee report-1991. CHAPTER 6 6.1 Recession in banking sector. 6.2 Present banking. 6.3 Future trends. CHAPTER 7 7.1 Conclusion. 7.2 Bibliography.

INTRODUCTION OF INDIAN BANKING SECTOR
Page 7

Guru Nanak College

Current scenario of Indian Banking Sector
Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained

Page 8

Guru Nanak College

Current scenario of Indian Banking Sector
the exclusive domain of Europeans for next several decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks
Page 9

Guru Nanak College

Current scenario of Indian Banking Sector
were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

HISTORY OF INDIAN BANKING SYSTEM
For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. The first bank in India, though conservative, was established in1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. Those are:a) Early phase from 1786 to 1969 of Indian Banks
Page 10

Guru Nanak College

Current scenario of Indian Banking Sector
b) Nationalizations of Indian Banks and up to 1991 prior to Indian banking sector reforms. c) New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. The steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200crore.

Reserve Bank of India
RBI is the banker to banks—whether commercial, cooperative, or rural. The relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act,1934. Such bank, called a scheduled bank, is entitled to facilities of refinance from RBI, subject to fulfillment of the following conditionslaid down in Section 42 (6) of the Act, as follows: It must have paid-up capital and reserves of an aggregate value of not Less than an amount specified from time to time; and

Page 11

Guru Nanak College

Current scenario of Indian Banking Sector
It must satisfy RBI that its affairs are not being conducted in manner detrimental to the interests of its depositors

Banking in India
Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. During the Mogul period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, it was the turn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency Banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India. The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank
Page 12

Guru Nanak College

Current scenario of Indian Banking Sector
of Baroda Ltd, the Central Bank of India Ltd.

Indian Banking Sector
The Indian Banking Sector is quite different from the banking system in the rest of Asia, because of the distinctive geographic, social and economic characteristics of the country. India is the second most populated nation in the world; it has marked economic disparities and high levels of illiteracy. The country followed a socialist approach for well over 4 decades after independence till the government initiated the economic reforms through the policy of liberalization. The banking structure in India is therefore a reflection of the countries socialistic set up. It had to meet the goals set by the five year plans, especially with regard to equitable distribution of wealth, balanced regional economic growth and removing private sector monopolies in trade and industry. The government nationalized the banks in 2 different phases (1969 and 1980). On July 19, 1969, 14 major banks of the country were nationalized and on 15th April 1980, six more commercial private sector banks were taken over by the government. As a consequence the banking system in India concentrated on the domestic sector; very few banks in India had a presence internationally. The nationalized banks had a social obligation of taking the banking sector to the people by expanding the branches and by getting more people to open an account. It also had to play a supportive role to other sectors of the economy like agriculture, small scale industries and exports.

Page 13

Guru Nanak College

Current scenario of Indian Banking Sector
The Indian Financial system consists of: 1 Commercial Banks
• • • • •

Public Sector Private sector Foreign banks Cooperative Banks Development Banks

Public Sector Banks
• • •

State Bank of India and its associate banks called the State Bank group. 20 nationalized banks. Regional Rural Banks mainly sponsored by Public Sector Banks.

Private sector
• • • • •

Old generation private banks New generation private banks Foreign banks in India Scheduled Co-operative Banks Non-scheduled Banks

Cooperative Banks
• • • •

State Co-operative Banks Central Co-operative Banks Primary Agriculture Credit Societies Land Development Banks
Page 14

Guru Nanak College

Current scenario of Indian Banking Sector
• • • •

Urban Co-operative Banks Primary Agricultural Development Banks Primary Land Development Banks State Land Development Banks

Development Banks
• • • • • • • • •

Industrial Finance Corporation of India (IFCI). Industrial Development Bank of India (IDBI). Industrial Credit and Investment Corporation of India (ICICI). Industrial Investment Bank of India (IIBI). Small Industries Development Bank of India (SIDBI). SCICI Ltd. National Bank for Agriculture and Rural Development (NABARD). Export Import Bank of India. National Housing Bank.

Effect of Global Crisis On Indian Banking System
•

The global economic meltdown has not had a deep impact on the banking

system in India. The banks in India have a strong fundamental structure and are well protected from the economic crisis.
•

The robust economic growth in India, low defaulter ratio, non existence of

complex financial products, constant monitoring by the central bank, efficient monetary policy and the non aggressive close banking culture has shielded the Indian banking sector. Banking Sector Forecast

Page 15

Guru Nanak College

Current scenario of Indian Banking Sector
•

Today in India there are totally 56,640 branches, 893,356 employees and

27,088 ATMs. Public sector banks account for 87.7 per cent of the offices, 82 per cent of staff and 60.3 per cent of ATMs.
•

As of January 2, 2009, bank deposits were 21.2 per cent. Bank credit was 24 The total flow of capital to the commercial sector from the banks as on

per cent against 21.4 per cent on January 4 2008.
•

January 2, 2009 stood at 6.1 per cent. India has a well developed banking system. Most of the banks in India were founded by Indian entrepreneurs and visionaries in the pre-independence era to provide financial assistance to traders, agriculturists and budding Indian industrialists. The origin of banking in India can be traced back to the last decades of the 18th century. The General Bank of India and the Bank of Hindustan, which started in 1786 were the first banks in India. Both the banks are now defunct. The oldest bank in existence in India at the moment is the State Bank of India. The State Bank of India came into existence in 1806. At that time it was known as the Bank of Calcutta. SBI is presently the largest commercial bank in the country. The role of central banking in India is looked by the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India. Reserve Bank was nationalized in 1947 and was given broader powers. In 1969, 14 largest commercial banks were nationalized followed by six next largest in 1980. But with adoption of economic liberalization in 1991, private banking was again allowed. The commercial banking structure in India consists of: Scheduled Commercial Banks and Unscheduled Banks. Scheduled commercial Banks constitute those banks, which have been included in the Second Schedule of
Page 16

Guru Nanak College

Current scenario of Indian Banking Sector
Reserve Bank of India (RBI) Act, 1934. RBI includes only those banks in this schedule, which satisfy the criteria laid down vide section 42 (6) (a) of the Act. Indian banks can be broadly classified into public sector banks (those banks in which the Government of India holds a stake), private banks (government doe not have a stake in these banks; they may be publicly listed and traded on stock exchanges) and foreign banks.
•

Bank Fixed Deposits Bank Fixed Deposits are also known as Term Deposits. In a Fixed

Deposit Account, a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of interest for Bank Fixed Deposits depends on the maturity period. It is higher in case of longer maturity period. There is great flexibility in maturity period and it ranges from 15days to 5 years. • Current Account Current Account is primarily meant for businessmen, firms, companies, public enterprises etc. that have numerous daily banking transactions. Current Accounts are cheque operated accounts meant neither for the purpose of earning interest nor for the purpose of savings but only for convenience of business hence they are non-interest bearing accounts.

• Demat Account Demat refers to a dematerialised account. Demat account is just like a bank account where actual money is replaced by shares. Just as a bank account is
Page 17

Guru Nanak College

Current scenario of Indian Banking Sector
required if we want to save money or make cheque payments, we need to open a demat account in order to buy or sell shares. • Recurring Bank Deposits Under a Recurring Deposit account (RD account), a specific amount is invested in bank on monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which the principal sum as well as the interest earned during that period is returned to the investor. • Reserve Bank of India The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Though initially RBI was privately owned, it was nationalized in 1949. Its central office is in Mumbai where the Governor of RBI sits. • Savings Bank Account Savings Bank Accounts are meant to promote the habit of saving among the citizens while allowing them to use their funds when required. The main advantage of Savings Bank Account is its high liquidity and safety.

• Senior Citizen Saving Scheme 2004 The Senior Citizen Saving Scheme 2004 had been introduced by the Government of India for the benefit of senior citizens who have crossed the age of
Page 18

Guru Nanak College

Current scenario of Indian Banking Sector
60 years. However, under some circumstances the people above 55 years of age are also eligible to enjoy the benefits of this scheme. • Foreign Banks in India Foreign banks have brought latest technology and latest banking practices in India. They have helped made Indian Banking system more competitive and efficient. Government has come up with a road map for expansion of foreign banks in India.
•

Nationalized Banks Nationalised banks dominate the banking system in India. The history

of nationalized banks in India dates back to mid-20th century, when Imperial Bank of India was nationalized (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. • Private Banks in India Initially all the banks in India were private banks, which were founded in the pre-independence era to cater to the banking needs of the people. In 1921, three major banks i.e. Banks of Bengal, Bank of Bombay, and Bank of Madras, merged to form Imperial Bank of India.

MAJOR REFORMS INITIATIVES
•

Some of the major reform initiatives in the last decade that have changed the face of the Indian banking are:Interest Rate Deregulation-Interest rates on deposits and lending have deregulated with banks enjoying greater freedom to determine been

•

their rates.
Page 19

Guru Nanak College

Current scenario of Indian Banking Sector
• Government equity in banks has been reduced and strong banks have been allowed to access the capital market for raising additional capital.
•

New private sector banks have been set up and foreign banks permitted to expand their operations in India including through subsidiaries. New areas have been opened up for bank financing like- insurance, credit cards, infrastructure financing, leasing, gold banking, besides of course investment banking, asset management, factoring, etc.

•

•

Banks have specialized committees to measure and monitor various risks and have been upgrading their risk management skills and systems. Adoption of prudential norms in terms of capital adequacy, asset classification, income recognition, provisioning, exposure limits, investment fluctuation reserve, etc.

•

INFORMATION TECHNOLOGY USAGE BY BANKS
IT usage by banks in India has come of age. The financial sector of the country has become more IT savvy and the Banking sector in particular is one of the largest users of IT and IT enabled services. The Reserve Bank too has enhanced the usage of IT as a tool for better performance and overall systemic efficiency. Information Technology (IT) continues to be the single largest facilitating force behind the successful transformation of transactions and analytical processing of banking business in the country. Developments which have taken place during the last few years all have IT as the pivotal centre-point. Since the publication of the Financial Sector Technology (FST) Vision in July, 2005, there have been significant changes in the banking sector of the country, as far as IT

Page 20

Guru Nanak College

Current scenario of Indian Banking Sector
implementation is concerned. Some of the major developments which have taken place since then are as follows:• Core Banking Systems (CBS) • Internet Banking • Mobile Banking • Mobile Automated Teller Machines (ATMs) • Multifunctional ATMs shared ATM services • Large scale usage of Real Time Gross Settlement (RTGS)

Technological Developments in Banking
In India, banks as well as other financial entities have entered the domain of information technology and computer networking. A satellite-based Wide Area Network (WAN) would provide a reliable communication framework for the financial sector. The Indian Financial Network (INFINET) was inaugurated in June 1999. It is based on satellite communication using VSAT technology and would enable faster connectivity within the financial sector. The INFINET would serve as the communication backbone of the proposed Integrated Payment and Settlement System (IPSS). The Reserve Bank constituted a National Payments Council (Chairman: Shri S. P. Talwar) in 1999-2000 to focus on the policy parameters for developing an IPSS with a real time gross settlement (RTGS) system as the core.

SERVICES PROVIDED BY BANK
• Demat Account • Lockers
Page 21

Guru Nanak College

Current scenario of Indian Banking Sector
• Cash Management • Insurance Product • Mutual Fund Product • Loans • ECS(Electronic clearance system) • Taxes

MAIN COMPETITORS FOR BANKING SECTOR
•
•

Post offices Mutual fund Share market Insurance Money lenders Family and Friends

•
• •

•

CHALLENGES AHEAD
•

Improving profitability Reinforcing technology Risk management
Page 22

•

•

Guru Nanak College

Current scenario of Indian Banking Sector
• • • • Sharpening skills Greater customer orientation Corporate governance International standard

Economic development of India
The economic development of India was dominated by socialistinfluenced policies, state-owned sectors, and red tape & extensive regulations, collectively known as "License Raj". It led the country and its economy isolated from the world economy. However the scenario started changing from the mid1980s, when India began opening up its market slowly through economic liberalization. The policy played a huge impact on the economic development of India. The Indian economic development got a boost through its economic reform in 1991 and again through its renewal in the 2000s. Since then, the face of economic development of India has changed completely. The economic reform of 1991 played a pivotal role in the economic development of India. Reaping its benefit, the growth of the country reached around 7.5% in the late 2000s. It is also expected to double the average income within a decade. According to the analysts, if India can push more fundamental market reforms, it will be able to sustain the rate and can even achieve the government's target of 10% by 2011.

India's Economic Development: Role of States
Page 23

Guru Nanak College

Current scenario of Indian Banking Sector
India is world's 12th largest economy and also the 4th largest in terms of purchasing power parity adjusted exchange rates (PPP). It is the 128th largest in the world on per capita basis and 118th by PPP. However, states have a major role to play in the economic development of India. There are few states which have higher annualized 1999-2008 growth rates comparing to others. The growth rates for the states like Gujarat (8.8%), Haryana (8.7%) and Delhi (7.4%) are considerably higher than other states like Bihar (5.1%), Uttar Pradesh (4.4%) and Madhya Pradesh (3.5%).

Economic Development the Decisive Factors
The economic development of India largely depends upon a few factors, which prove to be decisive. According to the World Bank, for a better economic development, India needs to give due priorities in various issues like infrastructure, public sector reform, agricultural and rural development, reforms in lagging states, removal of labor regulations and HIV/AIDS.

Agriculture
Agriculture, along with other allied sectors like fishing, forestry, and logging play a major role in the economic development in India. In 2005, these sectors accounted for almost 18.6% of the GDP. India holds the second position worldwide in terms of farm output. It also generated works for 60% of the total workforce. Though, currently seeing a steady decline of its share in the GDP, it is still the largest economic sector of the country. In India, a steady growth has been observed in the yields per unit area of all the crops since 1950. And the reason behind this is the fact that, special
Page 24

Guru Nanak College

Current scenario of Indian Banking Sector
emphasis was given on agriculture in the five-year plans. In 1965, the country saw green revolution. Improvements came in the various areas like irrigation, technology, provision of agricultural credit, application of modern agricultural practices and subsidies. India has done considerably well in agriculture and allied sectors. The country is the worlds largest producer of tea, coconut, cashew nuts, black pepper, turmeric, ginger and milk. India also has the largest cattle population in the world. It is worlds second largest producer of sugar, rice, wheat and inland fish. It is in the third position in the list of tobacco producers in the world. India also produces 10% of the overall fruit production in the world, holding the first position in banana and sapota production.

Growth of Indian Banking sector
The Indian banking system is financially stable and resilient to the shocks that may arise due to higher non-performing assets (NPAs) and the global economic crisis, according to a stress test done by the Reserve Bank of India.

Page 25

Guru Nanak College

Current scenario of Indian Banking Sector
Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7 billion towards the purchase of 200 metric tonnes of gold from the International Monetary Fund (IMF) in November 2009. The purchase has increased the country's share of gold holdings in its foreign exchange reserves from approximately 4 per cent to about 6 per cent. In the annual international ranking conducted by UK-based Brand Finance Plc, 20 Indian banks have been included in the Brand Finance® Global Banking 500. In fact, the State Bank of India (SBI) has become the first Indian bank to be ranked among the Top 50 banks in the world, capturing the 36th rank, as per the Brand Finance study. The brand value of SBI increased from US$ 1.5 billion in 2009 to US$ 4.6 billion in 2010. ICICI Bank also made it to the Top 100 list with a brand value of US$ 2.2 billion. The total brand value of the 20 Indian banks featured in the list stood at US$ 13 billion. Meanwhile, loan disbursement from scheduled commercial banks which included regional rural banks as well posted a growth of 16.04 per cent by March 12, 2010, on a year-on-year basis, as per the latest data released by RBI. The RBI had earlier predicted that the credit growth during 2009-10 would be around 16 per cent. Following the financial crisis, new deposits have gravitated towards public sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalised banks, as a group, accounted for 50.5 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per cent.

Page 26

Guru Nanak College

Current scenario of Indian Banking Sector
The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively. With respect to gross bank credit also, nationalised banks hold the highest share of 50.5 per cent in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5 per cent and 2.5 per cent respectively in the total bank credit. The report also found that scheduled commercial banks served 34,709 banked centres. Of these centres, 28,095 were single office centres and 64 centres had 100 or more bank offices. The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI fund inflows increased since April 2009 and touched US$ 47.8 billion on March 2010, as per the RBI's June 2010 bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts. Foreign exchange reserves were up by US$ 1.69 billion to US$ 272.783 billion, for the week ending June 11, on account of revaluation gains. June 21, 2010.

Major Developments
The Monetary Authority of Singapore (MAS) has provided qualified full banking (QFB) privileges to ICICI Bank for its branch operations in Singapore. Currently, only SBI had QFB privileges in country.
Page 27

Guru Nanak College

Current scenario of Indian Banking Sector
The Indian operations of Standard Chartered reported a profit of above US$ 1 billion for the first time. The bank posted a profit before tax (PAT) of US$ 1.06 billion in the calendar year 2009, as compared to US$ 891 million in 2008. Punjab National Bank (PNB) plans to expand its international operations by foraying into Indonesia and South Africa. The bank is also planning to increase its share in the international business operations to 7 per cent in the next three years. The State Bank of India (SBI) has posted a net profit of US$ 1.56 billion for the nine months ended December 2009, up 14.43 per cent from US$ 175.4 million posted in the nine months ended December 2008.

Reforms in banking sector in India
In line with the recommendations of the second Narasimham Committee, the Mid-Term Review of the Monetary and Credit Policy of October 1999 announced a gamut of measures to strengthen the banking system. Important measures on strengthening the health of banks included: (i) assigning of risk weight of 2.5 per cent to cover market risk in respect of investments in securities outside the SLR by March 31, 2001 (over and above the existing 100 per cent risk weight) in addition to a similar prescription for Government and other approved securities by March 31, 2000, and (ii) lowering of the exposure ceiling in respect of an individual borrower from 25 per cent of the bank's capital fund to 20 per cent, effective April 1, 2000.

Capital Adequacy and Recapitalization of Banks

Page 28

Guru Nanak College

Current scenario of Indian Banking Sector
Out of the 27 public sector banks (PSBs), 26 PSBs achieved the minimum capital to risk assets ratio (CRAR) of 9 per cent by March 2000. Of this, 22 PSBs had CRAR exceeding 10 per cent. To enable the PSBs to operate in a more competitive manner, the Government adopted a policy of providing autonomous status to these banks, subject to certain benchmarks. As at end-March 1999, 17 PSBs became eligible for autonomous status.

Prudential Accounting Norms for Banks
The Reserve Bank persevered with the on-going process of strengthening prudential accounting norms with the objective of improving the financial soundness of banks and to bring them at par with international standards. The Reserve Bank advised PSBs to set up Settlement Advisory Committees (SACs) for timely and speedier settlement of NPAs in the small scale sector, viz., small scale industries, small business including trading and personal segment and the agricultural sector. The guidelines on SACs were aimed at reducing the stock of NPAs by encouraging the banks to go in for compromise settlements in a transparent manner. Since the progress in the recovery of NPAs has not been encouraging, a review of the scheme was undertaken and revised guidelines were issued to PSBs in July 2000 to provide a simplified, non-discriminatory and non-discretionary mechanism for the recovery of the stock of NPAs in all sectors. The guidelines will remain operative till March 2001. Recognising that the high level of NPAs in the PSBs can endanger financial system stability, the Union Budget 2000-01 announced the setting up of seven more Debt Recovery Tribunals (DRTs) for speedy recovery of bad loans. An

Page 29

Guru Nanak College

Current scenario of Indian Banking Sector
amendment in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, was effected to expedite the recovery process.

Asset Liability Management (ALM) System
The Reserve Bank advised banks in February 1999 to put in place an ALM system, effective April 1, 1999 and set up internal asset liability management committees (ALCOs) at the top management level to oversee its implementation. Banks were expected to cover at least 60 per cent of their liabilities and assets in the interim and 100 per cent of their business by April 1, 2000. The Reserve Bank also released ALM system guidelines in January 2000 for all-India term-lending and refinancing institutions, effective April 1, 2000. As per the guidelines, banks and such institutions were required to prepare statements on liquidity gaps and interest rate sensitivity at specified periodic intervals. Risk Management Guidelines The Reserve Bank issued detailed guidelines for risk management systems in banks in October 1999, encompassing credit, market and operational risks. Banks would put in place loan policies, approved by their boards of directors, covering the methodologies for measurement, monitoring and control of credit risk. The guidelines also require banks to evaluate their portfolios on an on-going basis, rather than at a time close to the balance sheet date. As regards off-balance sheet exposures, the current and potential credit exposures may be measured on a daily basis. Banks were also asked to fix a definite time-frame for moving over to the Value-at-Risk (VaR) and duration approaches for the measurement of interest rate risk. The
Page 30

Guru Nanak College

Current scenario of Indian Banking Sector
banks were also advised to evolve detailed policy and operative framework for operational risk management. These guidelines together with ALM guidelines would serve as a benchmark for banks which are yet to establish an integrated risk management system. Disclosure Norms As a move towards greater transparency, banks were directed to disclose the following additional information in the 'Notes to Accounts' in the balance sheets from the accounting year ended March 31, 2000: (i) maturity pattern of loans and advances, investment securities, deposits and borrowings, (ii) foreign currency assets and liabilities, (iii) movements in NPAs and (iv) lending to sensitive sectors as defined by the Reserve Bank from time to time.

Page 31

Guru Nanak College

Current scenario of Indian Banking Sector Revival of Weak Banks
The Reserve Bank had set up a Working Group (Chairman: Shri M. S. Verma) to suggest measures for the revival of weak PSBs in February 1999. The Working Group, in its report submitted in October 1999, suggested that an analysis of the performance based on a combination of seven parameters covering three major areas of i) solvency (capital adequacy ratio and coverage ratio), ii) earnings capacity (return on assets and net interest margin) and iii) profitability (operating profit to average working funds, cost to income and staff cost to net interest income plus all other income) could serve as the framework for identifying the weakness of banks. PSBs were, accordingly, classified into three categories depending on whether none, all or some of the seven parameters were met. The Group primarily focussed on restructuring of three banks, viz., Indian Bank, UCO Bank and United Bank of India, identified as weak as they did not satisfy any (or most) of the seven parameters. The Group also suggested a two-stage restructuring process; whereby focus would be on restoring competitive efficiency in stage one, with the options of privatization and/or merger assuming relevance only in stage two. Deposit Insurance Reforms Reforming the deposit insurance system, as observed by the Narasimham Committee (1998), is a crucial component of the present phase of financial sector reforms in India. The Reserve Bank constituted a Working Group (Chairman: Shri Jagdish Capoor) to examine the issue of deposit insurance which submitted its report in October 1999. Some of the major
Page 32

Guru Nanak College

Current scenario of Indian Banking Sector
recommendations of the Group are : (i) fixing the capital of the Deposit Insurance and Credit Guarantee Corporation (DICGC) at Rs.500 crore, contributed fully by the Reserve Bank, (ii) withdrawing the function of credit guarantee on loans from DICGC and (iii) risk-based pricing of the deposit insurance premium in lieu of the present flat rate system. A new law, in supercession of the existing enactment, is required to be passed in order to implement the recommendations. The task of preparing the new draft law has been taken up. The relevant proposals in this respect would be forwarded to the Government for consideration. Also :
1.

Non-Banking

Financial

Companies

(NBFCs)

Reforms

2.

Financial Institutions Reforms.

Narasimham Committee Report
Page 33

Guru Nanak College

Current scenario of Indian Banking Sector

1.

Directed Investment Programme : The committee objected to the system

of maintaining high liquid assets by commercial banks in the form of cash, gold and unencumbered government securities. It is also known as the statutory liquidity Ratio (SLR). In those days, in India, the SLR was as high as 38.5 percent. According to the M. Narasimham's Committee it was one of the reasons for the poor profitability of banks. Similarly, the Cash Reserve Ratio- (CRR) was as high as 15 percent. Taken together, banks needed to maintain 53.5 percent of their resources idle with the RBI. Directed Credit Programme : Since nationalization the government has

2.

encouraged the lending to agriculture and small-scale industries at a confessional rate of interest. It is known as the directed credit programme. The committee opined that these sectors have matured and thus do not need such financial support. This directed credit programme was successful from the government's point of view but it affected commercial banks in a bad manner. Basically it deteriorated the quality of loan, resulted in a shift from the security oriented loan to purpose oriented. Banks were given a huge target of priority sector lending, etc. ultimately leading to profit erosion of banks. Interest Rate Structure : The committee found that the interest rate

3.

structure and rate of interest in India are highly regulated and controlled by the government. They also found that government used bank funds at a cheap rate under the SLR. At the same time the government advocated the philosophy of subsidized lending to certain sectors. The committee felt that there was no need

Page 34

Guru Nanak College

Current scenario of Indian Banking Sector
for interest subsidy. It made banks handicapped in terms of building main strength and expanding credit supply. Additional Suggestions: Committee also suggested that the determination of

4.

interest rate should be on grounds of market forces. It further suggested minimizing the slabs of interest. Along with these major problem areas M. Narasimham's Committee also found various inconsistencies regarding the banking system in India. In order to remove them and make it more vibrant and efficient, it has given the following recommendations.

Narasimham Committee Report - 1991
The Narsimham Committee was set up in order to study the problems of the Indian financial system and to suggest some recommendations for improvement in the efficiency and productivity of the financial institution. The committee has given the following major recommendations:-

1.

Reduction in the SLR and CRR: The committee recommended the

reduction of the higher proportion of the Statutory Liquidity Ratio 'SLR' and the Cash Reserve Ratio 'CRR'. Both of these ratios were very high at that time. The SLR then was 38.5% and CRR was 15%. This high amount of SLR and CRR meant locking the bank resources for government uses. It was hindrance in the productivity of the bank thus the committee recommended their gradual reduction. SLR was recommended to reduce from 38.5% to 25% and CRR from 15% to 3 to 5%.
Page 35

Guru Nanak College

Current scenario of Indian Banking Sector

2.

Phasing out Directed Credit Programme: In India, since nationalization,

directed credit programmes were adopted by the government. The committee recommended phasing out of this programme. This programme compelled banks to earmark then financial resources for the needy and poor sectors at confessional rates of interest. It was reducing the profitability of banks and thus the committee recommended the stopping of this programme. Interest Rate Determination: The committee felt that the interest rates in

3.

India are regulated and controlled by the authorities. The determination of the interest rate should be on the grounds of market forces such as the demand for and the supply of fund. Hence the committee recommended eliminating government controls on interest rate and phasing out the concessional interest rates for the priority sector. Structural Reorganizations of the Banking sector: The committee

4.

recommended that the actual numbers of public sector banks need to be reduced. Three to four big banks including SBI should be developed as international banks. Eight to Ten Banks having nationwide presence should concentrate on the national and universal banking services. Local banks should concentrate on region specific banking. Regarding the RRBs (Regional Rural Banks), it recommended that they should focus on agriculture and rural financing. They recommended that the government should assure that henceforth there won't be any nationalization and private and foreign banks should be allowed liberal entry in India.

Page 36

Guru Nanak College

Current scenario of Indian Banking Sector
5.

Establishment of the ARF Tribunal: The proportion of bad debts and Non-

performing asset (NPA) of the public sector Banks and Development Financial Institute was very alarming in those days. The committee recommended the establishment of an Asset Reconstruction Fund (ARF). This fund will take over the proportion of the bad and doubtful debts from the banks and financial institutes. It would help banks to get rid of bad debts. Removal of Dual control: Those days banks were under the dual control of

6.

the Reserve Bank of India (RBI) and the Banking Division of the Ministry of Finance (Government of India). The committee recommended the stepping of this system. It considered and recommended that the RBI should be the only main agency to regulate banking in India. Banking Autonomy: The committee recommended that the public sector

7.

banks should be free and autonomous. In order to pursue competitiveness and efficiency, banks must enjoy autonomy so that they can reform the work culture and banking technology upgradation will thus be easy. Some of these recommendations were later accepted by the Government of India and became banking reforms.

Page 37

Guru Nanak College

Current scenario of Indian Banking Sector Narasimham Committee Report - 1998
In 1998 the government appointed yet another committee under the chairmanship of Mr. Narsimham. It is better known as the Banking Sector Committee. It was told to review the banking reform progress and design a programme for further strengthening the financial system of India. The committee focused on various areas such as capital adequacy, bank mergers, bank legislation, etc. It submitted its report to the Government in April 1998 with the following recommendations. Strengthening Banks in India: The committee considered the stronger

1.

banking system in the context of the Current Account Convertibility 'CAC'. It thought that Indian banks must be capable of handling problems regarding domestic liquidity and exchange rate management in the light of CAC. Thus, it recommended the merger of strong banks which will have 'multiplier effect' on the industry. Narrow Banking: Those days many public sector banks were facing a

2.

problem of the Non-performing assets (NPAs). Some of them had NPAs were as high as 20 percent of their assets. Thus for successful rehabilitation of these banks it recommended 'Narrow Banking Concept' where weak banks will be allowed to place their funds only in short term and risk free asset.

Page 38

Guru Nanak College

Current scenario of Indian Banking Sector
3.

Capital Adequacy Ratio: In order to improve the inherent strength of the

Indian banking system the committee recommended that the Government should raise the prescribed capital adequacy norms. This will further improve their absorption capacity also. Currently the capital adequacy ration for Indian banks is at 9 percent. Bank ownership: As it had earlier mentioned the freedom for banks in its

4.

working and bank autonomy, it felt that the government control over the banks in the form of management and ownership and bank autonomy does not go hand in hand and thus it recommended a review of functions of boards and enabled them to adopt professional corporate strategy. Review of banking laws: The committee considered that there was an urgent

5.

need for reviewing and amending main laws governing Indian Banking Industry like RBI Act, Banking Regulation Act, State Bank of India Act, Bank Nationalisation Act, etc. This upgradation will bring them in line with the present needs of the banking sector in India. Apart from these major recommendations, the committee has also recommended faster computerization, technology upgradation, training of staff, depoliticizing of banks, professionalism in banking, reviewing bank recruitment, etc.

Page 39

Guru Nanak College

Current scenario of Indian Banking Sector Evaluation of Narsimham Committee Report
The Committee was first set up in 1991 under the chairmanship of Mr. M. Narasimham who was 13th governor of RBI. Only a few of its recommendations became banking reforms of India and others were not at all considered. Because of this a second committee was again set up in 1998. As far as recommendations regarding bank restructuring, management freedom, strengthening the regulation are concerned, the RBI has to play a major role. If the major recommendations of this committee are accepted, it will prove to be fruitful in making Indian banks more profitable and efficient.

Page 40

Guru Nanak College

Current scenario of Indian Banking Sector

Recession in Indian Banking Sector
The Prime Minister, Dr. Manmohan Singh addressed the Platinum Jubilee celebrations of the Reserve Bank of India in Mumbai. Following is the text of the Prime Minister’s address on the occasion: It is indeed a great pleasure to be here in Mumbai for the Platinum Jubilee celebrations of the Reserve Bank of India. For me, this is also a very special moment of nostalgia. I spent some very memorable years in this institution as its Governor. My wife and I cherish the memories of many new enduring friendships that we made during those memorable days. I also recall with deep appreciation the role played by the Reserve Bank in helping the Government of India in the implementation of the agenda for economic reforms when I was the Finance Minister of India at a very difficult time in our country’s economic history. To return as Prime Minister for the Platinum Jubilee of this great institution is indeed an emotionally moving experience for me. When I took over as Finance Minister in 1991, I was convinced that the economic liberalization and reforms could only succeed if complemented by broad based reform in the banking and financial sectors. I turned to my old friend and former RBI Governor Shri M Narasimham to Chair a Committee to make recommendations on this very important issue. The Report of the Narasimham Committee outlined a comprehensive agenda of reform which served as a blue print of what we needed to do in subsequent years. It would have been difficult to implement those reforms had they not received enthusiastic support, as they did, from the Governor of the day, Shri S. Venkitaramanan and Dr. Rangrajan. Subsequently as Venitramanan’s success or Dr C. Rangarajan took the financial reform agenda further forward in many critical
Page 41

Guru Nanak College

Current scenario of Indian Banking Sector
areas,including especially the ending of automatic monetization of the government’s deficit. As with economic reforms in general, financial sector reforms in India were implemented at a gradual pace. We were often criticized for our incremental approach which critics often complained was far too slow. But few would deny that we have accomplished a great deal over the years and Reserve Bank has made important contribution towards this. We have successfully eliminated stifling controls on industry and investment. We have opened the economy to foreign trade, lowered tariffs and switched over to a market determined exchange rate. We have liberalized capital controls enabling the economy to absorb substantial inflows of capital in the form of both FDI and FII flows into the stock market. In recent years, foreign investment has also become a two way flow as many Indian companies have established a presence abroad through investment or acquisition. All of this has been achieved without experiencing a serious macro economic crisis or severe inflation over an extended period. Most importantly, the real economy has clearly prospered. The rate of growth of GDP has increased steadily over the past two decades, culminating in an unprecedented 9 percent growth per year in the four year period just before the global financial crisis. Poverty too, has declined steadily, though this is an area where much more remains to be done. The Reserve Bank of India has played a major role in this transformation. It has been a lead player in banking and financial sector reforms and has acted as a confidential adviser to the Government on many other issues relevant to the complex task of macro economic management in an increasingly

Page 42

Guru Nanak College

Current scenario of Indian Banking Sector
open and liberalized economic environment. Indeed, it is one of our great institutions of which we can all be truly proud. The past two years have been difficult years for governments and central banks all over the world. Excessive credit expansion and asset price inflation both fuelled by so-called “financial innovations” of dubious value, and a lax regulatory environment led to an accumulation of risk that was not adequately understood and ultimately produced a severe crisis. India was relatively insulated from these developments because our financial system was much less integrated with the global system. However, the RBI deserves credit for having been prescient about the dangers posed by property bubbles. The action taken by Governor Reddy, who is present here, well before the crisis to tighten bank credit against real estate, limited bank exposure on this account. When the crisis exploded in September 2008, the RBI rapidly reversed its earlier tightening of credit to meet the new and changed circumstances. The CRR and the repo and reverse repo rates were rapidly lowered in a series of quick steps. Some initiatives were also taken to enhance access to bank credit by Non Banking Finance Companies. Signs of panic withdrawals from some private sector banks in the initial weeks of the crisis were met with strong reassurances by both the Government and the RBI that our banks were sound and would be fully supported. Ensuring that the Indian financial system remained stable in these very difficult times was a major achievement in financial and economic management. I would like to compliment Governor Subbarao and his team at the RBI for the role they played in this period.
Page 43

Guru Nanak College

Current scenario of Indian Banking Sector
With the crisis now nearly over, we need to reflect on the challenges that confront us in the years that lie ahead. The industrialized countries are almost certainly entering a period of slower growth. India on the other hand is emerging stronger, with a good prospect of better performance in future. Our domestic savings rate has increased to around 35 percent and our domestic investment rates are around 37 percent of our GDP. We have a highly entrepreneurial private sector which has demonstrated that it can compete in global markets, not just in software but in areas of traditional manufacturing also. We have a critical mass of human resources with good quality higher education, which definitely places us at an advantage in today’s world. We are geographically located in a continent which is gaining in economic importance and looks like being a major driver of the world economy in the years that lie ahead. We must build on these strengths and return as quickly as possible to a high growth path. I believe we can get back to 9 percent growth path by the end of the Eleventh Plan and do even better thereafter. I have therefore asked the Planning Commission to explore the feasibility of achieving 10 percent inclusive growths in the Twelfth Five Year Plan. Achieving this outcome will require many policy changes. Let me comment briefly on those that concern the Reserve Bank. As we pursue our objective of achieving rapid and inclusive growth, our monetary and financial policies must be guided by three important objectives. First, they must ensure that inflation is kept under control since it hurts the common man the most and also distorts economic signals. Second, they must ensure stability of the banking and financial system since otherwise we run the risk of experiencing
Page 44

Guru Nanak College

Current scenario of Indian Banking Sector
financial crises which always impose high costs on the real economy as well. Third, they must meet the financial intermediation needs of rapid and inclusive growth. Monetary and financial policies can achieve these objectives efficiently only if the macro economic environment is sound. The size of the fiscal deficit is a key parameter in this context. We allowed a large increase in the fiscal deficit in the past two years as we responded to the global economic crisis. I compliment my colleague and friend Pranab Mukherjee for this. This must now be reversed. We are therefore, firmly committed to bring the economy back to a fiscally sustainable path. This involves a reduction in the fiscal deficit from 6.8 percent of GDP in 2009-10 to 5.5 percent in 2010-11 with a further reduction in the next two years reaching 4.1 percent in 2012-13. It will be much easier for monetary policy to control inflation if the fiscal targets are met. This is not to say that monetary policy has no role to play in the face of fiscal imbalance. However, its role in that situation is essentially defensive, of avoiding monetary expansion to accommodate the deficit since such accommodation will only stoke inflation. The problem is that monetary discipline in such a situation may help contain inflation but it will not offset the negative impact of large fiscal deficits on the availability of resources for private investment, or on the long term interest rate, both of which are critical for growth. In fact, in an economy open to capital flows, monetary discipline in the face of fiscal imbalances can lead to a rise in interest rates triggering excessive capital inflows, which in turn put pressure on the exchange rate, making the task of macro-management that much more difficult. This is the well known problem of the impossible trinity or trilemma. In an economy with capital mobility you cannot simultaneously have exchange rate stability and an independent monetary policy.
Page 45

Guru Nanak College

Current scenario of Indian Banking Sector
The responsibility for handling this delicate balancing act falls on the Reserve Bank of India. Its task is made easier by the fact that the capital account is not entirely open and there are restrictions on inflows of debt, especially short term debt. Caution in the pace of opening the capital account has been a conscious feature of our policy, and there are good reasons to continue with this approach. The second objective I mentioned is the need to ensure financial stability. There are important lessons to be learnt from the recent crisis in this respect. Financial regulation must be designed to avoid excessive risk taking keeping in mind that banks must protect their balance sheets from cyclical variations. We must be particularly watchful of regulatory loopholes which can create systemic risk. Micro prudential regulation which focuses on the stability of individual institutions has to be supplemented by macro prudential considerations, which relate to the stability of the system as a whole. All these issues are being examined in the Financial Stability Board which is the key multilateral forum for evolving an agreed architecture of financial regulation. As members of the G20, we are now full members of this Board and are represented in that body by the Reserve Bank of India. The Bank must ensure that our concerns, reflecting our constraints and special circumstances, are fully reflected in the new international consensus that emerges out of the deliberations of the Financial Stability Board. This brings me to the third objective of ensuring that the financial system meets the intermediation requirement of rapid and inclusive growth. This is in some ways the most challenging task before us. Our financial system has proved to be stable, but that does not mean that it does not need further development and refinement. I sometimes hear it said that our insulation has served us well and we
Page 46

Guru Nanak College

Current scenario of Indian Banking Sector
should therefore avoid experimentation and further liberalization in this sector. This I fear would be the wrong lesson to learn from the crisis. We must not draw the conclusion that financial innovation is not important in our situation. Our banking and financial system is still relatively small compared to the size of the economy and there are many dimensions in which it must develop to enable it to support the higher rates of economic growth we are now aiming at. These higher rates of growth will occur in an economic environment in which India will remain open to the world and Indian companies will operate globally. Management of foreign currency risk will be an increasingly important concern in future and the financial system must provide our companies with the instruments they need to manage these risks at reasonable cost. Similarly, rapid growth requires massive investments in infrastructure and much of this will have to be funded through long term debt. Banks are not ideally suited to provide long term debt and this underscores the need to develop a domestic corporate debt market. This too requires a conscious plan of action. Finally, for growth to be truly inclusive, banking must reach out to many more people than it reaches now. Technological changes in the form of Information Technology and mobile banking greatly expand the potential reach of the banking system. The Reserve Bank has already shown commendable flexibility in allowing the system of banking agents to develop. It must remain committed to further expansion of banking services so that banks can touch the lives of more and more of our ordinary people. Our banking system must never lose sight of credit needs of our farmers, the small and medium industry and other priority sectors. We have a long way to go before the benefits of financial inclusion reach the worthier common man.
Page 47

Guru Nanak College

Current scenario of Indian Banking Sector
The Reserve Bank has served our country with great distinction in its seventy five years of existence. I conclude with the prayer that the best is yet to come and that its next seventy five years will be still more productive and still be more creative for our great country. I wish the Reserve Bank of India and its staff all the very best for the future.” In the age of globalization, no country can remains isolated from the fluctuations of world economy. Heavy losses suffered by major International Banks is going to affect all countries of the world as these financial institutes have their investment interest in almost all countries. As of now India is facing heat on three grounds: (1) Our Share Markets are falling everyday, (2) Rupee is weakening against dollars and (3) Our banks are facing severe crash crunch resulting in shortage of liquidity in the market. Actually all the above three problems are interconnected and have their roots in the above-mentioned global crisis. For the last two years, our stock market was touching new heights thanks to heavy investments by Foreign Institutional Investors (FIIs). However, when the parent companies of these investors (based mainly in US and Europe) found themselves in a severe credit crunch as a result of sub-prime mess, the only option left with these investors was to withdraw their money from Indian Stock Markets to meet liabilities at home. FIIs were the main buyers of Indian Stocks and their exit from the market is certain to wreak havoc in the market. FIIs that were on a buying spree last year, are now in the mood of selling their stocks in India. As a result our Share Markets are touching new lows everyday.
Page 48

Guru Nanak College

Current scenario of Indian Banking Sector
Since, the money, which FIIs get after selling their stocks, needs to be converted into dollars before they can sent it home, the demands for dollars has suddenly increased. As more and more FIIs are buying dollars, the rupee is loosing its strength against dollar. As long as demands for dollars remain high, the rupee will keep loosing its strength against dollar. The current financial crisis has also started directly affecting Indian Industries. For the past few years, the two most preferred method of raising money by the companies were Stock Markets and external borrowings on low interest rates. Stock Markets are bleeding everyday and it is not possible to raise money there. Regarding external borrowing from world markets, this option has also become difficult. In the last fiscal year alone, India borrowed $29 billion from foreign lenders and got $34 billion of foreign direct investment. A global recession has hurt external demand. International lenders who have become extremely risk aversive can limit access to international capital. If that happens, both India’s financial markets and the real economy will be hurt in the process. Suddenly, the 9% growth target does not seem that ‘doable’ any more; we should be happy to clock 7% this fiscal year and the next. However, one positive point in favor of India is the fact that Indian Banks are more or less secured from the ill-effects of sub-prime mess. A glance at Indian banks’ balance sheets would show that their exposure to complex instruments like CDOs is almost nil. In India, still the major banking operations are in the hands of Public Sector Banks who exercise extreme cautions in disbursing loans to needy people/companies. As a result, we are not likely to see a repeat of
Page 49

Guru Nanak College

Current scenario of Indian Banking Sector
sub-prime crisis in India. Though there have been a presence of big US/European Banks in India and even some Indian banks (like ICICI) have some foreign subsidiary with stake in the sub-prime losses, there presence is miniscule as compare to the overall size of Indian banking industry. So at least on this major front we need not worry much. However, a global depression is likely to result in a fall in demand of all types of consumer goods. In 2007-08, India sold 13.5% of its goods to foreign buyers. A fall in demand is likely to affect the growth rate this year. Our export may get affected badly. A negative atmosphere, shortage of cash, fall in demands, reducing growth rate and uncertainties in the market are some of the most visible aspects of an economic depression. What started as a small matter of sub-prime loan defaulters has now become a subject of global discussion and has engulfed the global economy scenario.

Indian present banking still conversation
In India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sect oral needs and also providing longPage 50

Guru Nanak College

Current scenario of Indian Banking Sector
term resources at concessional terms, while the commercial banks in general, by and large, confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry, trade and agriculture. Consequent to the liberalisation and deregulation of financial sector, there has been blurring of distinction between the commercial banking and investment banking. Reserve Bank of India constituted on December 8, 1997, a Working Group under the Chairmanship of Shri S.H. Khan to bring about greater clarity in the respective roles of banks and financial institutions for greater harmonization of facilities and obligations. Also report of the Committee on Banking Sector Reforms or Narasimham Committee (NC) has major bearing on the issues considered by the Khan Working Group. The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into a universal bank. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance, its proposed policy for universal banking, including a case-by-case approach towards allowing domestic financial institutions to become universal banks. Now RBI has asked FIs, which are interested to convert itself into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions. FIs need to formulate a road map for the transition path and strategy for smooth conversion into a universal bank over a specified time frame. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period.

Page 51

Guru Nanak College

Current scenario of Indian Banking Sector
SALIENT OPERATIONAL AND REGULATORY ISSUES OF RBI TO BE ADDRESSED BY THE FIs FOR CONVERSION INTO A UNIVERSAL BANK a) Reserve requirements. Compliance with the cash reserve ratio and statutory liquidity ratio requirements (under Section 42 of RBI Act, 1934, and Section 24 of the Banking Regulation Act, 1949, respectively) would be mandatory for an FI after its conversion into a universal bank. b) Permissible activities. Any activity of an FI currently undertaken but not permissible for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested after its conversion into a universal bank.. c) Disposal of non-banking assets. Any immovable property, howsoever acquired by an FI, would, after its conversion into a universal bank, be required to be disposed of within the maximum period of 7 years from the date of acquisition, in terms of Section 9 of the B. R. Act. d) Composition of the Board. Changing the composition of the Board of Directors might become necessary for some of the FIs after their conversion into a universal bank, to ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires at least 51% of the total number of directors to have special knowledge and experience. e) Prohibition on floating charge of assets. The floating charge, if created by an FI, over its assets, would require, after its conversion into a universal bank, ratification by the Reserve Bank of India under Section 14(A) of the B. R. Act, since a banking company is not allowed to create a floating charge on the

Page 52

Guru Nanak College

Current scenario of Indian Banking Sector
undertaking or any property of the company unless duly certified by RBI as required under the Section. f) Nature of subsidiaries. If any of the existing subsidiaries of an FI is engaged in an activity not permitted under Section 6(1) of the B R Act, then on conversion of the FI into a universal bank, delinking of such subsidiary / activity from the operations of the universal bank would become necessary since Section 19 of the Act permits a bank to have subsidiaries only for one or more of the activities permitted under Section 6(1) of B. R. Act. g) Restriction on investments. An FI with equity investment in companies in excess of 30 per cent of the paid up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less, on its conversion into a universal bank, would need to divest such excess holdings to secure compliance with the provisions of Section 19(2) of the B. R. Act, which prohibits a bank from holding shares in a company in excess of these limits. h) Connected lending . Section 20 of the B. R. Act prohibits grant of loans and advances by a bank on security of its own shares or grant of loans or advances on behalf of any of its directors or to any firm in which its director/manager or employee or guarantor is interested. The compliance with these provisions would be mandatory after conversion of an FI to a universal bank. i) Licensing. An FI converting into a universal bank would be required to obtain a banking licence from RBI under Section 22 of the B. R. Act, for carrying on banking business in India, after complying with the applicable conditions. j) Branch network An FI, after its conversion into a bank, would also be required to comply with extant branch licensing policy of RBI under which the new banks
Page 53

Guru Nanak College

Current scenario of Indian Banking Sector
are required to allot at least 25 per cent of their total number of branches in semiurban and rural areas. k) Assets in India. An FI after its conversion into a universal bank, will be required to ensure that at the close of business on the last Friday of every quarter, its total assets held in India are not less than 75 per cent of its total demand and time liabilities in India, as required of a bank under Section 25 of the B R Act. l) Format of annual reports. After converting into a universal bank, an FI will be required to publish its annual balance sheet and profit and loss account in the forms set out in the Third Schedule to the B R Act, as prescribed for a banking company under Section 29 and Section 30 of the B. R. Act. m) Managerial remuneration of the Chief Executive Officers. On conversion into a universal bank, the appointment and remuneration of the existing Chief Executive Officers may have to be reviewed with the approval of RBI in terms of the provisions of Section 35 B of the B. R. Act. The Section stipulates fixation of remuneration of the Chairman and Managing Director of a bank by Reserve Bank of India taking into account the profitability, net NPAs and other financial parameters. Under the Section, prior approval of RBI would also be required for appointment of Chairman and Managing Director. n) Deposit insurance . An FI, on conversion into a universal bank, would also be required to comply with the requirement of compulsory deposit insurance from DICGC up to a maximum of Rs.1 lakh per account, as applicable to the banks. o) Authorized Dealer's License. Some of the FIs at present hold restricted AD licence from RBI, Exchange Control Department to enable them to undertake transactions necessary for or incidental to their prescribed functions. Guru Nanak College On

Page 54

Current scenario of Indian Banking Sector
conversion into a universal bank, the new bank would normally be eligible for fullfledged authorized dealer licence and would also attract the full rigour of the Exchange Control Regulations applicable to the banks at present, including prohibition on raising resources through external commercial borrowings. p) Priority sector lending. On conversion of an FI to a universal bank, the obligation for lending to "priority sector" up to a prescribed percentage of their 'net bank credit' would also become applicable to it. q) Prudential norms. After conversion of an FI in to a bank, the extant prudential norms of RBI for the all-India financial institutions would no longer be applicable but the norms as applicable to banks would be attracted and will need to be fully complied with.

Page 55

Guru Nanak College

Current scenario of Indian Banking Sector

THE FUTURE TREND OF UNIVERSAL BANKING IN DIFFERENT COUNTRIES
Universal banks have long played a leading role in Germany, Switzerland, and other Continental European countries. The principal financial institutions in these countries typically are universal banks offering the entire array of banking services. Continental European banks are engaged in deposit, real estate and other forms of lending, foreign exchange trading, as well as underwriting, securities trading, and portfolio management. In the Anglo-Saxon countries and in Japan, by contrast, commercial and investment banking tend to be separated. In recent years, though, most of these countries have lowered the barriers between commercial and investment banking, but they have refrained from adopting the Continental European system of universal banking. In the United States, in particular, the resistance to softening the separation of banking activities, as enshrined in the Glass-Steagall Act, continues to be stiff. In Germany and Switzerland the importance of universal banking has grown since the end of World War II. Will this trend continue so that universal banks could completely overwhelm the specialized institutions in the future? Are the specialized banks doomed to disappear? This question cannot be answered with a simple "yes" or "no". The German and Swiss experiences suggest that three factors will determine future growth of universal banking. First, universal banks no doubt will continue to play an important role. They possess a number of advantages over specialized institutions. In particular, they are able to exploit economies of scale and scope in banking. These economies are especially important for banks operating on a global scale and catering to
Page 56

Guru Nanak College

Current scenario of Indian Banking Sector
customers with a need for highly sophisticated financial services. As we saw in the preceding section, universal banks may also suffer from various shortcomings. However, in an increasingly competitive environment, these defects will likely carry far less weight than in the past. Second, although universal banks have expanded their sphere of influence, the smaller specialized institutions have not disappeared. In both Germany and Switzerland, they are successfully coexisting and competing with the big banks. In Switzerland, for example, the specialized institutions are firmly entrenched in such areas as real estate lending, securities trading, and portfolio management. The continued strong performance of many specialized institutions suggests that universal banks do not enjoy a comparative advantage in all areas of banking. Third, universality of banking may be achieved in various ways. No single type of universal banking system exists. The German and Swiss universal banking systems differ substantially in this regard. In Germany, universality has been strengthened without significantly increasing the market shares of the big banks. Instead, the smaller institutions have acquired universality through cooperation. It remains to be seen whether the cooperative approach will survive in an environment of highly competitive and globalized banking.

Page 57

Guru Nanak College

Current scenario of Indian Banking Sector

Conclusion
The face of banking is changing rapidly. Competition is going to be tough and with financial liberalization under the WTO, banks in India will have to benchmark themselves against the best in the world. For a strong and resilient banking and financial system, therefore, banks need to go beyond peripheral issues and tackle significant issues like improvements in profitability, efficiency and technology, while achieving economies of scale through consolidation and exploring available cost-effective solutions. These are some of the issues that need to be addressed if banks are to succeed, not just survive, in the changing milieu. 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. The country’s economic policy framework combines socialistic and capitalistic features with a heavy bias towards public sector investment. India has followed the path of growthled exports rather than the “exported growth” of other Asian economies, with emphasis on self-reliance through import substitution.

Page 58

Guru Nanak College

Current scenario of Indian Banking Sector

Bibliography
Book Reffered • Banking Reforms & Productivity in India By P.Tapiawala • Financial Services By P.K.Jain M.Y.Khan Web Sites www.google.com www.yahoo.com www.rbi.org.com www.wikipedia.com

Page 59

Guru Nanak College

Current scenario of Indian Banking Sector

Page 60

Guru Nanak College



doc_973140785.doc