Bank Project 2

7/29/2019 Bank Project 2

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NEEDS FOR THE PROJECT

Usually all persons want money for personal and commercial

purposes. Banks are the oldest lending institutions in Indianscenario. They are providing all facilities to all citizens for their own

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

implements so many new innovative ideas, strategies, and advanced

technologies. For that they give each and every minute detail about

their institution and projects to Public.

They are providing ample facilities to satisfy their customers

i.e. Net Banking, Mobile Banking, Door to Door facility, Instant facility,

Investment facility, Demat facility, Credit Card facility, Loans and

Advances, Account facility etc. And such banks get success to create

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

accepts innovative notions in Indian banking scenario like Credit

Cards, ATM machines, Risk Management etc.

So, as a student business economics I take keen interest in

Indian economy and for that banks are the main source of

development. So this must be the first choice for me to select this

topic. At this stage every person must know about new innovation,

technology of procedure new schemes and new ventures.

Objective of Project on Banking view in India Because of the

following reasons, I prefer this project work to get the knowledge of

the banking system.

Banking is an essential industry.

financial crisis and money related query.

Banking is one of the most regulated businesses in the world.


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consumer durables


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THE ROLE OF ECONOMISTS IN BANKS

The crucial role of bank economists in transforming the banking

system in India. Economists have to be more mainstreamed within the

operational structure of commercial banks. Apart from the traditional

functioning of macro-scanning, the inter linkages between treasuries,

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

the day-to-day needs of operational necessity, but also with analytical

content and policy foresight. Today, operational aspects of the functioning

of banks are attracting intensive research by professional economists. In

particular, measuring and modeling different kinds of risks faced by banks,

the behavior of risk-return relationships associated with different portfolio

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

performance of banks are areas which lend themselves to analytical and

empirical appraisal by economists and econometricians. They, in turn, are

discovering the degrees of freedom and room for analytical maneuver in

high frequency information generated by the day-to-day functioning of

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

are nurtured so as to serve the longer-term strategic interests of banks.

Even in real time trading and portfolio decisions, the fundamental analysis

of economists provides an independent assessment of market behavior,

reinforcing technical analysis.

A serious limitation of the applicability of standard economic analysis

to banking relates to the inadequacies of the data-base. Absence of long

time series data storage in the banking industry often poses serious

problems to the quest for the formal analytical relationships between

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

blur meaningful analysis based on traditional formulation. Economists need


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to think innovatively to overcome this problem. Use of panel regression,

non-parametric methods and multivariate analyses could go a long way in

understanding and validating behavioral relationships in banking.

Another important challenge for the economics profession is todevelop proper models for measurement of various risks in Indian

conditions. This is a necessity in view of the move towards risk-based

supervision. Quantification of operational risks and calibration of Value at

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

policy makers alike, particularly in India. A major difficulty lies in identifying

the right statistical model that determines the underlying distribution suited

to the particular category of operational loss, and building the necessary

database for deriving operationally meaningful conclusions.

In my inaugural address last year, I had also emphasized the need for

bank economists to come out of their narrow specialization and address

operational issues relating to banking and finance. In order to make a

meaningful contribution to banking, economists must have the experience

of working in operational areas of banks. For this purpose, economists

need to soil their hands in dealing rooms, treasuries and investment units,

credit authorization and loan recovery, strategic management groups and

management information systems of the banks to understand the ground

realities. There are also economies to be gained from field-level credit

appraisal, asset recovery, debt restructuring, market and consumer

behaviors in which banks are involved. Thus, the profession needs to

amalgamate the objectivity and theoretical soundness of economics with

the functional dimensions of banking and finance. It is this combination of

specialist training with operational experience, which is going to make the

economics profession relevant to the changing face of banking in India.


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History of Banking in India

Banks in India

Banking services in India

Reserve Bank of India (RBI)

General Banking

Nature of Banking

Kinds of Banks

Role of Banks in Developing Economy Principles of Bank Lending Policies

Management of Banking

Branch setup and structure Organization and structure of a Bank Branch

Explain bank organization system in India Retail Banking-The New Flavor

Strategic issues in Banking Services Knowledge Management Innovation

in Banking Technology in Banking Regulations and Compliance Customer

Centric Organization Ethics and Corporate Governance Entrepreneurship

Performance and Benchmarking

Managing New Challenges

Introduction Recent Macroeconomic Development s and the Banking

System Prudential Norms Market Discipline Universal Banking Human

Resource Development in Banking


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HISTORY OF BANKING IN INDIA

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

a healthy economy. The banking system of India should not only be hassle

free but it should be able to meet new challenges posed by the technologyand any other external and internal factors.

For the past three decades India's banking system has several

outstanding achievements to its credit. The most striking is its extensive

reach. It is no longer confined to only metropolitans or cosmopolitans in

India. In fact, Indian banking system has reached even to the remote

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

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

paid rich dividends with the nationalization of 14 major private banks of

India.

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

for getting a draft or for withdrawing his own money. Today, he has a

choice. Gone are days when the most efficient bank transferred money

from one branch to other in two days.

Now it is simple as instant messaging or dial a pizza. Money has

become the order of the day. The first bank in India, though conservative,

was established in 1786. From 1786 till today, the journey of Indian

Banking System can be segregated into three distinct phases.


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In the evolution of this strategic industry spanning over two centuries,immense developments have been made in terms of the regulations

governing it, the ownership structure, products and services offered andthe technology deployed. The entire evolution can be classified into fourdistinct phases.

Phase I- Pre-Nationalization Phase (prior to 1955) Phase II- Era of Nationalization and Consolidation (1955-1990) Phase III- Introduction of Indian Financial & Banking Sector Reforms

and Partial Liberalization (1990-2004) Phase IV- Period of Increased Liberalization (2004 onwards)

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

Bank of Hindustan and Bengal Bank. The East India Company established

Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras

(1843) as independent units and called it Presidency Banks. These three

banks were amalgamated in 1920 and Imperial Bank of India was

established which started as private shareholders banks, mostly

Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by

Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters

at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India,

Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set

up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also

experienced periodic failures between 1913 and 1948. There wereapproximately 1100 banks, mostly small. To streamline the functioning and

activities of commercial banks, the Government of India came up with The

Banking Companies Act, 1949 which was later changed to Banking

Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).


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Reserve Bank of India was vested with extensive powers for the

supervision of banking in India as the Central Banking Authority. During

those days public has lesser confidence in the banks.

As an aftermath deposit mobilization was slow. Abreast of it thesavings bank facility provided by the Postal department was comparatively

safer. Moreover, funds were largely given to traders.

BANKS IN INDIA

In India the banks are being segregated in different groups. Each

group has their own benefits and limitations in operating in India. Each has

their own dedicated target market. Few of them only work in rural sector

while others in both rural as well as urban.

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

some are foreign players. All these details and many more are discussed

over here. The banks and its relation with the customers, their mode of

operation, the names of banks under different groups and other such

useful information are talked about. One more section has been taken note

of is the upcoming foreign banks in India.

The RBI has shown certain interest to involve more of foreign banks

than the existing one recently. This step has paved a way for few more

foreign banks to start business in India.


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Major Banks in India

RBS Bank

Punjab National Bank Standard Chartered Bank

State Bank of India (SBI)

State Bank of Bikaner & jaipur

Citi Bank

Deutsche Bank

Federal Bank

HDFC Bank

HSBC

ICICI Bank

IDBI Bank

Syndicate Bank

United Western Bank

UTI Bank Vijaya Bank

American Express Bank

Allahabad Bank

Bank of Baroda

Bank of India

Bank of Maharashtra

Bank of Punjab

BNP Paribas Bank

Canara Bank

Central Bank of India

Indian Overseas Bank


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ING Vysya Bank

JPMorgan Chase Bank

First Rand Bank


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BANKING SERVICES IN INDIA

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

Indian banking industry is passing through a phase of customers market.

The customers have more choices in choosing their banks. A competitionhas been established within the banks operating in India.

With stiff competition and advancement of technology, the service

provided by banks has become more easy and convenient. The past days

are witness to an hour wait before withdrawing cash from accounts or a

cheque from north of the country being cleared in one month in the south.

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

instruments along with the polished version of their old systems.

RESERVE BANK OF INDIA (RBI)

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

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

basis of the recommendations of the Hilton Young Commission. The share

capital was divided into shares of Rs. 100 each fully paid which was

entirely owned by private shareholders in the beginning. The Government

held shares of nominal value of Rs. 2, 20,000.

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

general superintendence and direction of the Bank is entrusted to Central

Board of Directors of 20 members, the Governor and four Deputy

Governors, one Government official from the Ministry of Finance, ten

nominated Directors by the Government to give representation to important

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

by the Central Government to represent the four local Boards with the

headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards

consist of five members each Central Government appointed for a term of


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four years to represent territorial and economic interests and the interests

of co-operative and indigenous banks.

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

1935. The Act, 1934 (II of 1934) provides the statutory basis of thefunctioning of the Bank.

The Bank was constituted for the need of following:

o

o

o To operate the credit and currency system of the country to its

advantage.


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Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important

functions of a central bank the Reserve Bank of India.

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the

sole right to issue bank notes of all denominations. The distribution of one

rupee notes and coins and small coins all over the country is undertaken

by the Reserve Bank as agent of the Government. The Reserve Bank has

a separate Issue Department which is entrusted with the issue of currency

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

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

Department were to consist of not less than two-fifths of gold coin, gold

bulli0on or sterling securities provided the amount of gold was not less

than Rs. 40 crores in value.

The remaining three-fifths of the assets might be held in rupee coins,

Government of India rupee securities, eligible bills of exchange and

promissory notes payable in India.

Due to the exigencies of the Second World War and the post-was

period, these provisions were considerably modified. Since 1957, the

Reserve Bank of India is required to maintain gold and foreign exchange

reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in

gold. The system as it exists today is known as the minimum reserve

system.


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Banker to Government

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

as Government banker, agent and adviser. The Reserve Bank is agent of

central Government and of all State Governments in India excepting that ofJammu and Kashmir.

The Reserve Bank has the obligation to transact Government

business, via. to keep the cash balances as deposits free of interest, to

receive and to make payments on behalf of the Government and to carry

out their exchange remittances and other banking operations. The Reserve

Bank of India helps the Government - both the Union and the States to

float new loans and to manage public debt. The Bank makes ways and

means advances to the Governments for 90 days. It makes loans and

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

Government on all monetary and banking matters.

Bankers' Bank and Lender of the Last Resort

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

the provisions of the Banking Companies Act of 1949, every scheduled

bank was required to maintain with the Reserve Bank a cash balance

equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities

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

time liabilities was abolished and banks have been asked to keep cash

reserves equal to 3 per cent of their aggregate deposit liabilities. The

minimum cash requirements can be changed by the Reserve Bank of

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

the basis of eligible securities or get financial accommodation in times of

need or stringency by rediscounting bills of exchange. Since commercial

banks can always expect the Reserve Bank of India to come to their help


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in times of banking crisis the Reserve Bank becomes not only the banker's

bank but also the lender of the last resort.

Controller of CreditThe Reserve Bank of India is the controller of credit i.e. it has the

power to influence the volume of credit created by banks in India. It can do

so through changing the Bank rate or through open market operations.

According to the Banking Regulation Act of 1949, the Reserve Bank of

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

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

Since 1956, selective controls of credit are increasingly being used by the

Reserve Bank.

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

control the Indian money market. Every bank has to get a license from the

Reserve Bank of India to do banking business within India, the license can

be cancelled by the Reserve Bank of certain stipulated conditions are not

fulfilled. Every bank will have to get the permission of the Reserve Bank

before it can open a new branch. Each scheduled bank must send a

weekly return to the Reserve Bank showing, in detail, its assets and

liabilities. This power of the Bank to call for information is also intended to

give it effective control of the credit system. The Reserve Bank has also

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

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

the following powers:

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

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

qualitative controls.

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

inspection and calling for information.


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

to scheduled banks.

Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the

official rate of exchange. According to the Reserve Bank of India Act of

1934, the Bank was required to buy and sell at fixed rates any amount of

sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was

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

rate fixed at lsh.6d. Though there were periods of extreme pressure in

favor of or against the rupee. After India became a member of the

International Monetary Fund in 1946, the Reserve Bank has the

responsibility of maintaining fixed exchange rates with all other member

countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the Reserve

Bank has to act as the custodian of India's reserve of international

currencies. The vast sterling balances were acquired and managed by the

Bank. Further, the RBI has the responsibility of administering the exchange

controls of the country.

Supervisory functions

In addition to its traditional central banking functions, the Reserve

bank has certain non-monetary functions of the nature of supervision of

banks and promotion of sound banking in India. The Reserve Bank Act,

1934, and the Banking Regulation Act, 1949 have given the RBI wide

powers of supervision and control over commercial and co-operative

banks, relating to licensing and establishments, branch expansion, liquidity


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of their assets, management and methods of working, amalgamation,

reconstruction, and liquidation. The RBI is authorized to carry out

periodical inspections of the banks and to call for returns and necessary

information from them. The nationalization of 14 major Indian scheduledbanks in July 1969 has imposed new responsibilities on the RBI for

directing the growth of banking and credit policies towards more rapid

development of the economy and realization of certain desired social

objectives. The supervisory functions of the RBI have helped a great deal

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

to improve the methods of their operation.

Promotional functions

With economic growth assuming a new urgency since

Independence, the range of the Reserve Bank's functions has steadily

widened. The Bank now performs variety of developmental and

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

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

banking habit, extend banking facilities to rural and semi-urban areas, and

establish and promote new specialized financing agencies. Accordingly,

the Reserve Bank has helped in the setting up of the IFCI and the SFC; it

set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in

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

Agricultural Refinance Corporation of India in 1963 and the Industrial

Reconstruction Corporation of India in 1972. These institutions were set up

directly or indirectly by the Reserve Bank to promote saving habit and to

mobilize savings, and to provide industrial finance as well as agricultural

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

Agricultural Credit Department to provide agricultural credit. But only since

1951 the Bank's role in this field has become extremely important. The


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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.


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Classification of RBIs functions

The monetary functions also known as the central banking functionsof the RBI are related to control and regulation of money and credit, i.e.,

issue of currency, control of bank credit, control of foreign exchange

operations, banker to the Government and to the money market. Monetary

functions of the RBI are significant as they control and regulate the volume

of money and credit in the country.

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

the context of India's economic backwardness. The supervisory function of

the RBI may be regarded as a non-monetary function (though many

consider this a monetary function).

The promotion of sound banking in India is an important goal of the

RBI, the RBI has been given wide and drastic powers, under the Banking

Regulation Act of 1949 these powers relate to licensing of banks, branch

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

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

supervision and inspection, the working of banks has greatly improved.

Commercial banks have developed into financially and operationally sound

and viable units. The RBI's powers of supervision have now been

extended to nonbanking financial intermediaries. Since independence,

particularly after its nationalization 1949, the RBI has followed the

promotional functions vigorously and has been responsible for strong

financial support to industrial and agricultural development in the country.


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NATURE OF BANKING IN INDIA

A banking company in India has been defined in the bankingcompanies act,1949.as one which transacts the business of banking

which means the accepting, for the purpose of lending or investment

of deposits of money from the public, repayable on demand or

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

Most of the activities a Bank performs are derived from the above

definition. In addition, Banks are allowed to perform certain activities which

are ancillary to this business of accepting deposits and lending. A bank's

relationship with the public, therefore, revolves around accepting deposits

and lending money. Another activity which is assuming increasing

importance is transfer of money - both domestic and foreign - from one

place to another. This activity is generally known as "remittance business"

in banking parlance. The so called forex (foreign exchange) business is

largely a part of remittance albeit it involves buying and selling of foreign

currencies.

FUNCTIONING OF A BANK

Functioning of a Bank is among the more complicated of corporate

operations. Since Banking involves dealing directly with money,

governments in most countries regulate this sector rather stringently. In

India, the regulation traditionally has been very strict and in the opinion of

certain quarters, responsible for the present condition of banks, where

NPAs are of a very high order. The process of financial reforms, which

started in 1991, has cleared the cobwebs somewhat but a lot remains to

be done. The multiplicity of policy and regulations that a Bank has to work

with makes its operations even more complicated, sometimes bordering on


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

attempts to give an overview of the functions in as simple manner as

possible. Banking Regulation Act of India, 1949 defines Banking as

"accepting, for the purpose of lending or investment of deposits of moneyfrom the public, repayable on demand or otherwise and withdraw able by

cheques, draft, and order or otherwise."


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KINDS OF BANKS

Financial requirements in a modern economy are of a diverse

nature, distinctive variety and large magnitude. Hence, different types ofbanks have been instituted to cater to the varying needs of the community.

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

following major forms:

1. Commercial banks

2. Co-operative banks

3. Specialized banks

4. Central bank

COMMERCIAL BANKS

Commercial banks are joint stock companies dealing in money and

credit. In India, however there is a mixed banking system, prior to July

1969, all the commercial banks-73 scheduled and 26 non-scheduled

banks, except the state bank of India and its subsidiaries-were under the

control of private sector. On July 19, 1969, however, 14mejor commercial

banks with deposits of over 50 Corers were nationalized. In April 1980,

another six commercial banks of high standing were taken over by the

government.

At present, there are 20 nationalized banks plus the state bank of India

and its 7 subsidiaries constituting public sector banking which controls over

90 per cent of the banking business in the country.


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CO-OPERATIVE BANKS

Co-operative banks are a group of financial institutions organized

under the provisions of the Co-operative societies Act of the states. The

main objective of co-operative banks is to provide cheap credits to theirmembers. They are based on the principle of self-reliance and mutual co-

operation. Co-operative banking system in India has the shape of a

pyramid a three tier structure, constituted by: Primary credit societies

[APEX]

Central co-operative banks [District level]

State co-operative banks [Villages, Towns, Cities]

CENTRAL BANK

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

financial system of a country. It is regarded as the highest monetary

authority in the country. It acts as the leader of the money market. It

supervises, control and regulates the activities of the commercial banks. It

is a service oriented financial institution.

Indias central bank is the reserve bank of India established in

1935.a central bank is usually state owned but it may also be a private

organization. For instance, the reserve bank of India (RBI), was started as

a shareholders organization in 1935, however, it was nationalized after

independence, in 1949.it is free from parliamentary control.

ROLE OF BANKS IN A DEVELOPING ECONOMY

Banks play a very useful and dynamic role in the economic life of

every modern state. A study of the economic history of western country

shows that without the evolution of commercial banks in the 18th and 19th

centuries, the industrial revolution would not have taken place in Europe.


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The economic importance of commercial banks to the developing countries

may be viewed thus:

1. Promoting capital formation

2. Encouraging innovation3. Monetsation

4. Influence economic activity

5. Facilitator of monetary policy

PROMOTING CAPITAL FORMATION

A developing economy needs a high rate of capital formation to

accelerate the tempo of economic development, but the rate of capital

formation depends upon the rate of saving. Unfortunately, in

underdeveloped countries, saving is very low. Banks afford facilities for

saving and, thus encourage the habits of thrift and industry in the

community. They mobilize the ideal and dormant capital of the country and

make it available for productive purposes.

ENCOURAGING INNOVATION

Innovation is another factor responsible for economic development.

The entrepreneur in innovation is largely dependent on the manner in

which bank credit is allocated and utilized in the process of economic

growth. Bank credit enables entrepreneurs to innovate and invest, and

thus uplift economic activity and progress.

INFLUENCE ECONOMIC ACTIVITY

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

their influence on the rate interest. They can influence the rate of interest in

the money market through its supply of funds. Banks may follow a cheap


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money policy with low interest rates which will tend to stimulate economic

activity.

FACILITATOR OF MONETARY POLICY

Thus monetary policy of a country should be conductive to economic

development. But a well-developed banking system is on essential pre-

condition to the effective implementation of monetary policy. Under-

developed countries cannot afford to ignore this fact. A fine, an efficient

and comprehensive banking system is a crucial factor of the

developmental process.

PRINCIPLES OF BANK LENDING POLICIES

The main business of banking company is to grant loans and

advances to traders as well as commercial and industrial institutes. The

most important use of banks money is lending. Yet, there are risks in

lending. So the banks follow certain principles to minimize the risk:

1. Safety

2. Liquidity

3. Profitability

4. Purpose of loan

5. Principle of diversification of risks

SAFETY

Normally the banker uses the money of depositors in granting loans

and advances. So first of all initially the banker while granting loans should

think first of the safety of depositors money. The purpose behind the


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safety is to see the financial position of the borrower whether he can pay

the debt as well as interest easily.

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

money to the depositor. So the banker has to keep certain percent cash of

the total deposits on hand. Moreover the bank grants loan. It is also for the

addition of short term or productive capital. Such type of lending is

recovered on demand.

PROFITABILITY

Commercial banking is profit earning institutes. Nationalized banks

are also not an exception. They should have planning of deposits in a

profitability way pay more interest to the depositors and more salary to the

employees. Moreover the banker can also incur business cost and can

give more benefits to customer.

PURPOSE OF LOAN

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

grant loans and advances for the safety of its wealth, and certainty of

recovery of loan and the bank lends only for productive purposes. For

example, the bank gives such loan for the requirement for unproductive

purposes.

PRINCIPLE OF DIVERSIFICATION OF RISKS

While lending loans or advances the banks normally keep such

securities and assets as a supports so that lending may be safe and

secured. Suppose, any particular state is hit by disasters but the bank shall


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get benefits from the lending to another states units. Thus, he effect on the

entire business of banking is reduced. There are proverbs that do not

keep all the eggs in one basket. a principle of considerations of sound

lending is:1. Safety

2. Liquidity

3. Shift ability

4. Profitability.

BRANCH SETUP AND STRUCTURE

Ever since major commercial banks were nationalized in two phases

in 1969 and 1980, there has been a sea change in their functions, outlook

and perception. One of the main objectives of nationalization of banks has

been to help achieve balanced, regional, sectoral and sectional

development of the economy by way of making the banks reach out to the

small man and to the remote areas of the country.

ORGANISATIONAL STRUCTURE OF A BANK BRANCH

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

point of all activities. The structure of the branch may be as under:

Small/Medium Branch

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

the structure will undergo slight changes as stated below:


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Very Large Branch

From the structure we can see how the functional relationship works

in a branch. He structure also explains the reporting authority for each

cadre of the employees. It indicates the communication flow in the branchwith well-defined accountability on the part of the employees roles.

TYPES OF BRANCHES

According to locations, there are four types bank branches. They

are rural, semiurban, urban and metropolitan branches. The B.M. has

special role and functions in managing different types of branches.

BANK ORGANIZATION SYSTEM IN INDIA

The large volume of work passing through the banking system every

day in the form of cash, cheque, and other credit instruments, together with

the complexity of the many services rendered, calls not only for a high

degree of skill, accuracy and knowledge on the part of the officials, but

also up-to-date and efficient methods of organization, accountancy and

control. Shareholders and directors

General Managers

Head office

Administration

Branch

Administration Foreign

Departments

The Branch Manager

The day-book or

Control Clerk

The Security Clerk

The cashier


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The Chief Clerk

Modern Banking Methods

The Remittance or

Waste ClerkThe Shorthand Typist

Rotation of Duties

The junior Clerk

The Ledger-Keeper

The Shorthand Typist

The Ledger-Keeper

RETAIL BANKING-THE NEW FLAVOR

-

The retail banking encompasses deposit and assets linked products

as well as other financial services offered to individual for personal

consumption. Generally, the pure retail banking is conceived to be the

provision of mass banking products and services to private individuals as

opposed to wholesale banking which focuses on corporate clients. Over

the years, the concept of retail banking has been expanded to include in

many cases the services provided to small and medium sized businesses.

Some banks in Europe even include their private banking business i.e.

services to high net worth net worth individuals in their retail Banking

portfolio.

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

being viewed as an attractive market segment, which offers opportunities

for growth with profits. The diversified portfolio characteristic of retail

banking gives better comfort and spreads the essence of retail banking lies


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in individual customers. Though the term Retail Banking and retail lending

are often used synonymously, yet the later is lust one side of Retail

Banking. In retail banking, all the banking needs of individual customers

are taken care of in an integrated manner.

Retail Lending Products

Major retail lending products offered by banks are the following:

1. Housing Loans

2 Loan for Consumer goods

3. Personal Loans for marriage, honeymoon, medical treatment and

holding etc.

4. Education Loans

5.Auto Loans

6. Gold Loans

7. Loan against Rent receivables

8. Loan against Pension receivables to senior citizens

9. Debit and Credit Cards10. Global and International Cards

Other Retail Banking Services

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

also offer following Retail Banking services free of charges to customers:

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

bills

2. Payment of insurance premiums on due dates

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

respective schools

4. Remittance of funds from one account to another


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

6. Payment of credit card bills on due dates

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

income tax

The impact of Retail Banking

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

the emperors the fulcrum of all banking activities, both on the asset side

and the liabilities front. The hitherto sellers market has transformed into

buyers market.

The customers have multiple of choices before them now for cherry

picking products and services, which suit their life styles and tastes and

financial requirements as well. Banks now go to their customers more

often than the customers go to their banks.

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

retail business due to high risk and high returns thereon have been

dislodged from their profit munching citadel.

Retail banking is transforming banks in to one stop financial super

markets.

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

Banks can foster lasting business relationship with customers and retain

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

levels as well.

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

revenues and profits by robust growth in retail business. Reduction in costs

offers a win win situation both for banks and the customers.

It has affected the interface of banking system through different delivery

mechanism.


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

itself is growing exponentially; retail banking has fueled a considerable

quantum of purchasing power through a slew of retail products.

_ Banks can diversify risks in their credit portfolio and contain the menaceof NPAs.

_ Re-engineering of business with sophisticated technology based

products will lead to business creation, reduction in transaction cost and

enhancement in efficiency of operations.

Draw-backs of Retail Banking

Despite the numerous advantage of Retail Banking there are some

drew-Backs in this business. These are as under:

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

systems are not robust.

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

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

branch networks will be relatively high, unless the customers use alternate

delivery channels like ATMs, internet and phone banking etc. for carrying

out banking transactions.

The Future of Retail Banking

Though at present Retail Banking appears to be the best bet for

banks to improve their top and bottom line, yet the future of Retail banking

in general, may not be all roses as it appears to be. There are signs of

slowdown in customer growth in some countries, which will inevitably have


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

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

loan market, the sign of overheating has also started surfacing with

potential problem for banks that have not exercised sufficient caution.Further the pressure on margins is mounting partly because of fierce

competition and partly as a result of falling interest rates environment

which has diminished to some extent the endowment effect of substantial

deposit bases from which most retail banks have been deriving benefits.

But banks, which have built a significant retail banking portfolio may fare

relatively well in the current fiscal. Those banks which have a dynamic

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

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

cost efficiency are the ones that are most likely to succeed in the longer

term.

STRATEGIC ISSUES IN BANKING SERVICES

Strategic Planning: is the process of analyzing the organizational

external and internal environments; developing the appropriate mission,

vision, and overall goals; identifying the general strategies to be pursued;

and allocated resources.

s an organization's fundamental aspirations and purpose that

usually appeals to its member's hearts and minds.

achieves goals.

various purposes.


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resourcesprimarily human-to accomplish its goals.

Tactical Planning: is the process of making detailed decisions about what

to do, which will do it, and how to do it-with a normal time and horizon ofone year or less. The process generally includes:

organization's strategic plan,

ciding on courses of action for improving current operations, and

NON-PERFORMING ASSETS OF THE BANKING SECTOR

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

of SCBs in 2003-04, despite adoption of 90 day delinquency norm from

March 31, 2004. The Gross NPAs of SCBs declined from 4.0 per cent of

total assets in 2002-03 to 3.3 percent in 2003-04. The corresponding

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

NPAs and net NPAs declined in absolute terms. While the gross NPAs

declined from Rs. 68,717 crore in 2002-03 to Rs. 64,787 crore in 2003-04,

net NPAs declined from Rs. 32,670 crore to Rs. 24,617 crore in the same

period. There was also a significant decline in the proportion of net NPAs

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

The significant decline in the net NPAs by 24.7 per cent in 2003-04 as

compared to 8.1 per cent in 2002-03 was mainly on account of higher

provisions (up to 40.0 per cent) for NPAs made by SCBs.

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

groups. The decline in net NPAs as a proportion of total assets was quite

significant in the case of new


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TOTAL QUALITY MANAGEMENT

While Total Quality Management has proven to be an effectiveprocess for improving organizational functioning, its value can only be

assured through comprehensive and well thought out implementation

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

implementation of large scale organizational change which may enable a

practitioner to more thoughtfully and successfully implement TQM. First,

the context will be set. TQM is, in fact, a large scale systems change, and

guiding principles and considerations regarding this scale of change will be

presented. Without attention to contextual factors, well intended changes

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

expectations and perceptions of employees (workers and managers) will

be assessed, so that the implementation plan can address them.

Specifically, sources of resistance to change and ways of dealing

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

anticipate resistances and design for them, so that the process does not

bog down or stall. Next, a model of implementation will be presented,

including a discussion of key principles. Visionary leadership will be offered

as an overriding perspective for someone instituting TQM. In recent years

the literature on change management and leadership has grown steadily,

and applications based on research findings will be more likely to succeed.

Use of tested principles will also enable the change agent to avoid

reinventing the proverbial wheel.

.

INNOVATION IN BANK

Innovation drives organizations to grow, prosper and transform in

sync with the changes in the environment, both internal and external.


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Banking is no exception to this. In fact, this sector has witnessed radical

transformation of late, based on many innovations in products, processes,

services, systems, business models, technology, governance and

regulation. A liberalized and globalize financial infrastructure has providedan additional impetus to this gigantic effort.

The pervasive influence of information technology has

revolutionalized banking. Transaction costs have crumbled and handling of

astronomical number of transactions in no time has become a reality.

Internationally, the number brick and mortar structure has been rapidly

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

products. Banking has become boundary less and virtual with a 24 * 7

model. Banks who strongly rely on the merits of relationship banking as a

time tested way of targeting and serving clients, have readily embraced

Customer Relationship Management (CRM), with sharp focus on customer

centricity, facilitated by the availability of superior technology.

CRM has, therefore, become the new mantra in customer service

management, which is both relationship based and information intensive.

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

accorded a primacy of place to this fascinating exercise by repositioning it

as the core of banking.

We now see the evolution of many novel deferral products like credit

derivatives, especially the Credit Risk Transfer (CRT) mechanism, as a

consequence. CRT, characterized by significant product innovation, is a

very useful credit risk management tool that enhances liquidity and market

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

strategic use has been rapidly rising globally. So is outsourcing.


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TECHNOLOGY IN BANKING

Nobel Laureate Robert Solow had once remarked that computers

are seen everywhere excepting in productivity statistics. More recent

developments have shown how far this state of affairs has changed.Innovation in technology and worldwide revolution in information and

communication technology (ICT) have emerged as dynamic sources of

productivity growth. The relationship between IT and banking is

fundamentally symbiotic. In the banking sector, IT can reduce costs,

increase volumes, and facilitate customized products; similarly, IT requires

banking and financial services to facilitate its growth. As far as the banking

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

mechanism through which such interactive dynamics gets manifested.

Recognizing the importance of payments and settlement systems in the

economy,

CORPORATE GOVERNANCE - CODE OF CONDUCT

Need and objective of the Code

Clause 49 of the Listing agreement entered into with the Stock

Exchanges, requires, as part of Corporate Governance the listed entities to

lay down a Code of Conduct for Directors on the Board of an entity and its

Senior Management. The term "Senior Management" shall mean

personnel of the company who are members of its core management team

excluding the Board of Directors. This would also include all members of

management, one level below the Executive Directors including all

functional heads.

Bank's Belief System

This Code of Conduct attempts to set forth the guiding principles on

which the Bank shall operate and conduct its daily business with its


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multitudinous stakeholders, government and regulatory agencies, media

and anyone else with whom it is connected. It recognizes that the Bank is

a trustee and custodian of public money and in order to fulfill fiduciary

obligations and responsibilities, it has to maintain and continue to enjoy thetrust and confidence of public at large.

The Bank acknowledges the need to uphold the integrity of every

transaction it enters into and believes that honesty and integrity in its

internal conduct would be judged by its external behavior. The bank shall

be committed in all its actions to the interest of the countries in which it

operates. The Bank is conscious of the reputation it carries amongst its

customers and public at large and shall endeavor to do all it can to sustain

and improve upon the same in its discharge of obligations. The Bank shall

continue to initiate policies, which are customer centric and which promote

financial prudence.

Philosophy of the Code

Adherence to the highest standards of honest and ethical conduct,

including proper and ethical procedures in dealing with actual or apparent

conflicts of interest between personal and professional relationships. Full,

fair, accurate, sensible, timely and meaningful disclosures in the periodic

reports required to be filed by the Bank with government and regulatory

agencies. Compliance with applicable laws, rules and regulations. To

address misuse or misapplication of the Bank's assets and resources. The

highest level of confidentiality and fair dealing within and outside the Bank.

General Standards of conduct

The Bank expects all Directors and members of the Core

Management to exercise good judgment, to ensure the interests, safety

and welfare of customers, employees and other stakeholders and to


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maintain a cooperative, efficient, positive, harmonious and productive work

environment and business organization. The Directors and members of the

Core Management while discharging duties of their office must act

honestly and with due diligence. They are expected to act with that amountof utmost care and prudence, which an ordinary person is expected to take

in his/ her own business. These standards need to be applied while

working in the premises of the Bank, at offsite locations where business is

being conducted whether in India or abroad, at Bank-sponsored business

and social events, or at any other place where they act as representatives

of the Bank.

Employment/OutsideEmployment The members of the

Core Management are expected to devote their total attention to the

business interests of the Bank.

They are prohibited from engaging in any activity that interferes with their

performance or responsibilities to the Bank or otherwise is in conflict with

or prejudicial to the Bank.

Business Interests:

If any member of the Board of Directors and Core

Management considers investment in securities issued by the Bank's

customer, supplier or competitor, they should ensure that these

investments do not compromise their responsibilities to the Bank. Many

factors including the size and nature of the investment; their ability to

influence the Bank's decisions, their access to confidential information of

the Bank, or of the other entity, and the nature of the relationship between

the Bank and the customer, supplier or competitor should be considered in

determining whether a conflict exists. Additionally, they should disclose to


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the Bank any interest that they have which may conflict with the business

of the Bank.

. Applicable Laws

The Directors of the Bank and Core Management must comply with

applicable laws, regulations, rules and regulatory orders. They should

report any inadvertent non - compliance, if detected subsequently, to the

concerned authorities.

. Disclosure Standards

The Bank shall make full, fair, accurate, timely and meaningful

disclosures in the periodic reports required to be filed with Government

and Regulatory agencies. The members of Core Management of the bank

shall initiate all actions deemed necessary for proper dissemination of

relevant information to the Board of Directors, Auditors and other Statutory

Agencies, as may be required by applicable laws, rules and regulations.

Good Corporate Governance Practices

Each member of the Board of Directors and Core Management of

the Bank should adhere to the following so as to ensure compliance with

good Corporate Governance practices.

(a) Dos

_ Attend Board meetings regularly and participate in the deliberations and

discussions effectively.

_ Study the Board papers thoroughly and enquire about follow-up reports

on definite time schedule.


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_ Involve actively in the matter of formulation of general policies.

_ Be familiar with the broad objectives of the Bank and policies laid down

by the Government and the various laws and legislations.

_ Ensure confidentiality of the Bank's agenda papers, notes and minutes.(b) Don'ts

_ Do not interfere in the day to day functioning of the Bank.

_ Do not reveal any information relating to any constituent of the Bank to

anyone.

_ Do not display the logo / distinctive design of the Bank on their personal

visiting cards / letter heads.

_ Do not sponsor any proposal relating to loans, investments, buildings or

sites for Bank's premises, enlistment or empanelment of contractors,

architects, auditors, doctors, lawyers and other professionals etc.

_ Do not do anything, which will interfere with and/ or be subversive of

maintenance of discipline, good conduct and integrity of the staff.

Waivers

Any waiver of any provision of this Code of Conduct for a member of

the Bank's Board of Directors or a member of the Core Management must

be approved in writing by the Board of Directors of the Bank.

The matters covered in this Code of Conduct are of the utmost importance

to the bank, its stakeholders and its business partners, and are essential to

the Bank's ability to conduct its business in accordance with its value

system.


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ENTREPRENEURSHIP

Entrepreneurship is the practice of starting new organizations,

particularly new businesses generally in response to identified

opportunities. Entrepreneurship is often a difficult undertaking, as amajority of new businesses fail. Entrepreneurial activities are substantially

different depending on the type of organization that is being started.

Entrepreneurship may involve creating many job opportunities.

Many "high-profile" entrepreneurial ventures seek venture capital or

angel funding in order to raise capital to build the business. Many kinds of

organizations now exist to support would-be entrepreneurs, including

specialized government agencies, business incubators, science parks, and

some NGOs.

Our understanding of entrepreneurship owes a lot to the work of

economist Joseph Schumpeter and the Austrian School of economics. For

Schumpeter (1950), an entrepreneur is a person who is willing and able to

convert a new idea or invention into a successful innovation.

Entrepreneurship forces "creative destruction" across markets and

industries, simultaneously creating new products and business models and

eliminating others. In this way, creative destruction is largely responsible

for the dynamism of industries and long-run economic growth. Despite

Schumpeter's early 20th-century contributions, the traditional

microeconomic theory of economics has had little room for entrepreneurs

in their theories

Characteristics of entrepreneurship

The entrepreneur, who has a vision and the enthusiasm for this

vision, is the driving force of an entrepreneurship


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We began by asserting that individual entrepreneurs get too much

credit and blame for the fate of new ventures. We also emphasized that

successful entrepreneurs are those who can develop the right kinds of

relationships with others inside and outside their firm. Our perspectivesuggests that, in trying to predict which entrepreneurs will succeed or fail,

instead of turning attention to the characteristics of individual founders and

CEOs, researchers and teachers would be wiser to turn attention to the

other people the entrepreneur spends time with and how they respond.

Our perspective also implies that the format of the "Entrepreneurs of the

Year" competition described at the outset of this chapter ought to be

changed. Rather than using such events to recognize individual CEOs or

founders from successful start-ups, awards could be presented to

recognize the intertwined group of people who made each start-up a

success.

RECENT MACROECONOMIC DEVELOPMENTS AND THE

BANKING SYSTEM

For a greater part of the twentieth century, the role of the financial

system was perceived as mobilizing the massive resource requirements

for growth. Since the 1970s and 1980s, development economics

underwent a paradigm shift. The financial system is no longer viewed as a

passive mobiliser of funds. Efficiency in financial intermediation

i.e., the ability of financial institutions to intermediate between savers and

investors, to set economic prices for capital and to allocate resources

among competing demands is now emphasized. Developments in

endogenous growth theory since the late 1980s indicate that efficiency in

financial intermediation is a source of technical progress to be exploited for

generating increasing returns and sustaining high growth. These changes


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have provided the rationale for many developing countries to undertake

wide-ranging reforms of their financial systems so as to prepare them for

their true resource allocation function. As important financial

intermediaries, banks have a special role to play in this new dispensation.The sharp downturn in global macroeconomic prospects and the

continuing sluggishness in domestic industrial activity have necessitated a

revision in the forecast for Indias real GDP growth in 2001-02 from 6.0-6.5

per cent expected at the time of the April 2001 Monetary and Credit Policy

Statement to 5.0-6.0 per cent in the mid-term review of the policy. The

downward revision is primarily predicated on the outlook for the industrial

sector which grew by barely 2.2 per cent in April-October 2001 as against

5.9 per cent in the corresponding period of last year, mainly on account of

the slowdown

PRUDENTIAL NORMS

A strong and resilient financial system and the orderly evolution of

financial markets are key prerequisites for financial stability and economic

progress. In keeping with the vision of an internationally competitive and

sound banking system, deepening and broadening of prudential norms to

the best internationally recognized standards have been the core of our

approach to financial sector reforms. This has been supported concurrently

by heightened market discipline, pro-active and comprehensive

supervision of the financial system and the orderly development of

financial market segments. The calibration of the convergence with

international standards is conditioned by the specific realities of our

situation; however, the New Capital Accord of the Basel Committee on

Banking Supervision which was released in January 2001 adds urgency to


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the process of convergence. It is against the backdrop of these exigencies

that prudential norms are being constantly monitored and refined. In the

recent period, banks are being encouraged to build risk-weighted

components of their subsidiaries into their own balance sheets and toassign additional capital. Risk weights are being constantly refined to take

into recognition additional sources of risk. The concept of past due in the

identification of NPAs has been dispensed with. Banks and financial

institutions are being urged to prepare to move to the international practice

of the 90 day norm in the classification of assets as non -performing by

2003-04.

MARKET DISCIPLINE

Processes of transparency and market disclosure of critical

information describing the risk profile, capital structure and capital

adequacy are assuming increasing importance in the emerging

environment. Besides making banks more accountable and responsive to

better-informed investors, these processes enable banks to strike the right

balance between risks and rewards and to improve the access to markets.

Improvements in market discipline also call for greater coordination

between banks and regulators.

India has been a participant in the international initiatives to ensure

improved processes of market discipline that are being worked out in

several fora, such as, the multilateral organizations, the BIS, the Financial

Stability Forum, and the Core Principles Liaison Group. Concurrent efforts

are underway to refine and upgrade financial information monitoring and

flow, data dissemination and data warehousing. Banks are currently

required to disclose in their balance sheets information on maturity profiles

of assets and liabilities, lending to sensitive sectors, movements in NPAs,

besides providing information on capital, provisions, shareholdings of the


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government, value of investments in India and abroad, and other operating

and profitability indicators. Financial institutions are also required to meet

these disclosure norms. Banks also have to disclose their total

UNIVERSAL BANKING

Since the early 1990s, banking systems worldwide have been going

through a rapid transformation. Mergers, amalgamations and acquisitions

have been undertaken on a large scale in order to gain size and to focus

more sharply on competitive strengths.

This consolidation has produced financial conglomerates that are

expected to maximize economies of scale and scope by bundling the

production of financial services. The general trend has been towards

downstream universal banking where banks have undertaken traditionally

non-banking activities such as investment banking, insurance, mortgage

financing, securitization, and particularly, insurance. Upstream linkages,

where non-banks undertake banking business, are also on the increase.

The global experience can be segregated into broadly three models. There

is the Swedish or Hong Kong type model in which the banking corporate

engages in in-house activities associated with banking. In Germany and

the UK, certain types of activities are required to be carried out by separate

subsidiaries. In the US type model, there is a holding company structure

and separately capitalized subsidiaries

In India, the first impulses for a more diversified financial

intermediation were witnessed in the 1980s and 1990s when banks were

allowed to undertake leasing, investment banking, mutual funds, factoring,

hire-purchase activities through separate subsidiaries. By the mid-1990s,

all restrictions on project financing were removed and banks were allowed


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to undertake several activities in-house. In the recent period, the focus is

on Development Financial Institutions (DFIs), which have been allowed to

set up banking subsidiaries and to enter the insurance business along with

banks. DFIs were also allowed to undertake working capital financing andto raise short-term funds within limits. It was the Narasimham Committee II

Report (1998) which suggested that the DFIs should convert themselves

into banks or non-bank financial companies, and this conversion was

endorsed by the Khan Working Group (1998). The Reserve Banks

Discussion Paper (1999) and the feedback thereon indicated the

desirability of universal banking from the point of view of efficiency of

resource use, but it also emphasized the need to take into account factors

such as the status of reforms, the state of preparedness of the institutions,

and a viable transition path while moving in the desired direction.

Accordingly, the mid-term review of monetary and credit policy,

October 1999 and the annual policy statements of April 2000 and April

2001 enunciated the broad approach to universal banking and the Reserve

Banks circular of April 2001 set out the operational and regulatory aspects

of conversion of DFIs into universal banks. The need to proceed with

planning and foresight is necessary for several reasons. The move

towards universal banking would not provide a panacea for the endemic

weaknesses of a DFI or its liquidity and solvency problems and/or

operational difficulties arising from undercapitalization, non-performing

assets, and asset liability mismatches, etc. The overriding consideration

should be the objectives and strategic interests of the financial institution

concerned in the context of meeting the varied needs of customers,

subject to normal prudential norms applicable to banks. From the point of

view of the regulatory framework, the movement towards universal banking

should entrench stability of the financial system, preserve the safety of


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public deposits, improve efficiency in financial intermediation, ensure

healthy competition, and impart transparent and equitable regulation.

HUMAN RESOURCE DEVELOPMENT IN BANKING

A recurring theme in the annual BECON Conference has been the

need to focus on developing human resources to cope with the rapidly

changing scenario. The core function of HRD in the banking industry is to

facilitate performance improvement, measured not only in terms of

financial indicators of operational efficiency but also in terms of the quality

of financial services provided. Factors such as skills, attitudes and

knowledge of personnel play a critical role in determining the

competitiveness of the financial sector. The quality of human resources

indicates the ability of banks to deliver value to customers. Capital and

technology are replicable, but not human capital which needs to be viewed

as a valuable resource for the achievement of competitive advantage.

The primary emphasis needs to be on integrating human resource

management (HRM) strategies with the business strategy. HRM strategies

include managing change, creating commitment, achieving flexibility and

improving teamwork. These processes underlie the complementary

processes that represent the overt aspects of HRM, such as recruitment,

placement, performance management, reward management, and

employee relations. A forward looking approach would involve moving

towards self-assessment of competency and developmental needs as a

part of a continuous learning cycle.

The Indian banking industry has been an important driving force

behind the nations economic development. The emerging environment

poses both opportunities and threats, in particular, to the public sector

banks. How well these are met will mainly depend on the extent to which


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the banks leverage their primary assets i.e., human resources in the

context of the changing economic and business environment. It is obvious

that the public sector banks hierarchical structure, which gives preference

to seniority over performance, is not the best environment for attracting thebest talent from among the young in a competitive environment. A radical

transformation of the existing personnel structure in public sector banks is

unlikely to be practical, at least in the foreseeable future. However, certain

improvements can be made in the recruitment practices as well as in on-

the-job training and redeployment of those who are already employed.

There are several institutions in the country which cater exclusively to the

needs of human resource development in the banking industry. It is

worthwhile to consider broad-basing the courses conducted in these

institutions among other higherlevel educational institutions so that

specialization in the area of banking and financial services becomes an

option in higher education curriculums. In the area of information

technology, Indian professionals are world leaders and building synergies

between the IT and banking industries will sharpen the competitive edge of

our banks.


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Role of FICCI and UNDP

1. As you are all aware, financial inclusion is a mammoth task and itcannot be achieved without the active collaboration of all stakeholders. It isin this context that this particular seminar organised by Federation of

Indian Chambers of Commerce and Industry (FICCI), which is an apexindustry association and brings a large number of stakeholders under itsfold, and United Nations Development Programme (UNDP), which is at thecentre of the UNs efforts to reduce global poverty, assumes significance.FICCI has been playing a leading role in policy debates touching social,economic and political issues and I believe that corporates have a greatrole to play in furthering financial inclusion. It is in their interest. UNDP, as Iam aware, has always been a solution-oriented, knowledge-baseddevelopment organization, supporting various countries to reach theirdevelopment objectives and internationally agreed goals. The strength of

UNDP is that it partners with people at all levels of society to help buildnations as also helps build capacities for sustained development and tomeet the emerging developmental needs. It also brings in globalperspective which is much needed. Within the thematic area of povertyreduction, UNDP has also associated itself with state governments tofacilitate the design and implementation of pro-poor and inclusivelivelihood promotion strategies with focus on excluded groups such aswomen, Schedule Castes (SCs), Scheduled Tribes (STs), Minorities,below-poverty line and migrant households and involuntarily displacedpeople. It is indeed an opportune time for FICCI-UNDP to release the

paper on A study on the progress of Financial Inclusion in Indiawhich aims to analyze the role played by banks in creating FinancialInclusion and the future strategy they need to adopt to make furtherprogress.

2. The important objectives under Financial Inclusion were aptlydeliberated by the Committee on Financial Inclusion and the Committee onFinancial Sector Reforms headed by respected Dr. Rangarajan and Dr.Raghuram Rajan. These reports have spelt out the imperative need tomodify the credit and financial services delivery system to achieve greaterinclusion. The full implementation of the recommendations made in theseReports will definitely go a long way to modify particularly the creditdelivery system of the banks and other related institutions to meet thecredit requirements of marginal and sub-marginal farmers in the ruralareas in a fuller measure.


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National focus on inclusive growth

3. Today, there is a national as well as global focus on inclusive growth.The Financial Stability and Development Council (FSDC) headed by theFinance Minister is mandated to focus on financial inclusion and financial

literacy. All financial sector regulators including the Reserve Bank of Indiaare committed to the mission. And, very publicly, so are banks and otherfinancial sector entities. If we are advocating any kind of stability whetherfinancial, economic, political or social and inclusive growth with stability, itis not possible to attain these goals without achieving financial inclusion.Financial inclusion promotes thrift and develops culture of saving,improves access to credit both entrepreneurial and emergency and alsoenables efficient payment mechanism, thus strengthening the resourcebase of the financial institution which benefits the economy as resourcesbecome available for efficient payment mechanism and allocation.

Empirical evidence shows that countries with large proportion of populationexcluded from the formal financial system also show higher poverty ratiosand higher inequality. Thus, financial inclusion is no longer a policy choicetoday but a policy compulsion. And, banking is a key driver for financialinclusion/inclusive growth.

Role of Banks

4. But, it is well recognized that there are supply side and demand sidefactors driving inclusive growth. Banks and other financial services playersare largely expected to mitigate the supply side processes that preventpoor and disadvantaged social groups from gaining access to the financialsystem. Access to financial products is constrained by several factorswhich include lack of awareness about the financial products, unaffordableproducts, high transaction costs and products which are inconvenient,inflexible, not customized and of low quality. However, we must bear inmind that apart from the supply side factors, demand side factors such aslower income and /or asset holdings also have a significant bearing oninclusive growth. Owing to difficulties in accessing formal sources of credit,

poor individuals andsmall and microenterprises usually rely on theirpersonal savings and internal sources or take recourse to informal sourcesto invest in health, education, housing and entrepreneurial activities tomake use of growth opportunities. The mainstream financial institutionslike banks have an important role to play in overcoming this constraint, notas a social obligation, but as pure business proposition.


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Financial Inclusion - A global policy priority

5. The importance of an inclusive financial system is widely recognized inthe policy circles, not only in India, but has become a policy priority inmany countries. Several countries across the globe now look at financial

inclusion as the means of a more comprehensive growth, wherein eachcitizen of the country is able to use their earning as a financial resourcethat they can put to work to improve their future financial status, adding tothe nations progress. In advanced markets, it is mostly a demand sideissue. Initiatives for financial inclusion have come from the financialregulators, the governments and the banking industry. The banking sectorhas taken a lead role in promoting financial inclusion. Legislative measureshave been initiated in some countries. For example, in the United States,the Community Reinvestment Act (1997) requires banks to offer creditthroughout their entire area of operation and prohibits them from targeting

only the rich neighborhood. In France, the law on exclusion (1998)emphasizes an individuals right to have a bank account. The GermanBankers Association introduced a voluntary code in 1996 providing for aneveryman current banking account that facilitates basic bankingtransactions. In South Africa, a low cost bank account called Mzansi waslaunched for financially excluded people in 2004 by the South AfricanBanking Association. In the United Kingdom, a Financial Inclusion TaskForce was constituted by the government in 2005 in order to monitor thedevelopment of financial inclusion. The Principles for Innovative FinancialInclusion serve as a guide for policy and regulatory approaches with the

objectives of fostering safe and sound adoption of innovative, adequate,low-cost financial delivery models, helping provide conditions for faircompetition and a framework of incentives for the various bank, insurance,and non-bank actors involved and delivery of the full range of affordableand quality financial services.

Definition of Financial Inclusion

6. What is our definition of Financial Inclusion? Financial Inclusion is theprocess of ensuring access to appropriate financial products and servicesneeded by all sections of the society in general and vulnerable groups

such as weaker sections and low income groups in particular, at anaffordable cost in a fair and transparent manner by regulated mainstreaminstitutional players.It is in this context that I would like to point thatMFIs/NBFCs/NGOs on their own would not be able to bring about financialinclusion as the range of financial products and services which weconsider as the bare minimum to qualify as availability of banking servicescannot be offered by MFIs/NBFCs/NGOs. But, yes, they have an immense


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and extremely important role to play in furthering financial inclusion in thesense that they bring people and communities into the fold of the formalfinancial system.

What it means to us? Objective

7.Our broad objective is to take banking to all excluded sections of thesociety, rural and urban.Our attention wasspecifically attracted to providebanking services to all the 6 lakh villages and meet their financial needsthrough basic financial products like savings, credit and remittance forobvious reasons. Though, the focus initially was to cover villages withpopulation above 2000 by March 2012, banks have since drawn up theirBoard approved Financial Inclusion Plans to put in place a roadmap forextending banking services in all villages in an integrated manner over aperiod of next 3 to 5 years.

Is it the first time?

8. It is not that efforts have not been made in the past to promote financialinclusion. The Nationalization of banks, Lead Bank Scheme, incorporationof Regional Rural Banks, Service Area Approach and formation of Self-Help Groups- all these were initiatives to take banking services to themasses. The brick and mortar infrastructure expanded; the number of bankbranches multiplied ten-fold - from 8,000+ in 1969 when the first set ofbanks were nationalized to 80,000+ today. Despite this wide network ofbank branches spread across the length and breadth of the country,banking has still not reached a large section of the population. A number ofrural households are still not covered by banks. They are deprived of basicbanking services like a savings account or minimal credit facilities. Theproportion of rural residents who lack access to bank accounts is nearly 40per cent, and this rises to over three-fifths in the eastern and north-easternregions of India. The major barriers cited to expand appropriate services topoor by financial service providers are the lack of reach, higher cost oftransactions and time taken in providing those services. The existingbusiness model does not pass the test of convenience, reliability, flexibilityand continuity.

So, what has changed now?

9. It is not correct to surmise that banks were uninterested in increasingpenetration. They were constrained by their capacity/ability as, till a fewyears ago, appropriate banking technology was not available. But, now,with the availability of suitable banking technology, the time has come


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when the Indian banking system can make and deliver on that promise.Quite clearly, the task to cover 1.2 billion population with banking servicesis gigantic and, hence, banks have now realized that technology is thedriving force for achieving this. Harnessing this power of technology formaking the banking system more efficient for achieving the goals set under

financial inclusion is going to be a big opportunity as well as a biggerchallenge for the banking system. We should also understand that poorpeople are bankable and there is tremendous potential for business growthby providing banking services to them. What we need is an appropriatebusiness and delivery model.

Is Financial Inclusion a viable Business Model today?

10. Contrary to common perception, financial inclusion is a potentiallyviable business proposition because of the huge untapped market that it

seeks to bring into the fold of banking services. Financial inclusion,primafacie, needs to be viewed as money at the bottom of the pyramid andbusiness models should be so designed to be at least self-supporting inthe initial phase and profit-making in the long run. It is important to keep inmind that service provided should be at an affordable cost. It is alsopertinent to note that providing subsidy does not necessarily lead to abetter delivery mechanism.

What RBI has done? Removed all regulatory roadblocks

11.It has been RBIs endeavour to remove all hurdles in the way ofitsregulated entities in achieving financial inclusion objectives.While I wouldmention a couple of enabling policy measures undertaken by RBI a littlelater, I would first like to highlight certain special characteristics of Indiasfinancial inclusion model.

RBI has adopted a bank-led model as its main plank for achievingthe goals under financial inclusion.

Due to the constraints involved in going for a full-fledged brick &mortar branch model, RBI has adopted the ICT based agent bankmodel through Business Correspondents for ensuring door step

delivery of financial products and services. The approach adopted has been technology and delivery model

neutral, whether through handheld devices, mobiles, mini ATMs,etc. We have endeavoured to deliver a minimum of four basic products

and services, viz. a savings account with overdraft facility, aremittance product, a pure savings product, preferably, variablerecurring deposit, and an entrepreneurial credit product such as


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Kisan Credit Card (KCC) or General purpose Credit Card (GCC).Naturally, the front end devices must be able to transact all thesefour products and services.

RBI has undertaken a series of policy measures to make our unique model

a success. Some of the important ones are:

i. Relaxation on KYC norms: Know Your Customer (KYC)requirements for opening bank accounts were earlier relaxed forsmall accounts in August 2005, simplifying procedure by stipulatingthat introduction by an account holder who has been subjected to fullKYC drill would suffice for opening such accounts or the bank cantake any evidence as to the identity and addres

Bank Project 2

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Transcript of Bank Project 2