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    1.AN INTRODUCTION TO THE BANKING SECTOR IN

    INDIA

    Banks are the most significant players in the Indian financial market. They are the

    biggest purveyors of credit, and they also attract most of the savings from the

    population. Dominated by public sector, the banking industry has so far acted as an

    efficient partner in the growth and the development of the country. Driven by the

    socialist ideologies and the welfare state concept, public sector banks have long

    been the supporters of agriculture and other priority sectors. They act as crucial

    channels of the government in its efforts to ensure equitable economic

    development.

    The Indian banking can be broadly categorized into nationalized (government

    owned), private banks and specialized banking institutions. The Reserve Bank of

    India acts a centralized body monitoring any discrepancies and shortcoming in the

    system. Since the nationalization of banks in 1969, the public sector banks or the

    nationalized banks have acquired a place of prominence and has since then seen

    tremendous progress. The need to become highly customer focused has forced the

    slow-moving public sector banks to adopt a fast track approach. The unleashing

    of products and services through the net has galvanized players at all levels of the

    banking and financial institutions market grid to look anew at their existing

    portfolio offering. Conservative banking practices allowed Indian banks to be

    insulated partially from the Asian currency crisis. Indian banks are now quoting al

    higher valuation when compared to banks in other Asian countries (viz. Hong

    Kong, Singapore, Philippines etc.) that have major problems linked to huge Non

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    Performing Assets (NPAs) and payment defaults. Co-operative banks are nimble

    footed in approach and armed with efficient branch networks focus primarily on

    the high revenue niche retail segments.

    The Indian banking has finally worked up to the competitive dynamics of the

    new Indian market and is addressing the relevant issues to take on the

    multifarious challenges of globalization. Banks that employ IT solutions are

    perceived to be futuristic and proactive players capable of meeting the

    multifarious requirements of the large customers base. Private Banks have been

    fast on the uptake and are reorienting their strategies using the internet as a

    medium The Internet has emerged as the new and challenging frontier of

    marketing with the conventional physical world tenets being just as applicable

    like in any other marketing medium.

    The Indian banking has come from a long way from being a sleepy business

    institution to a highly proactive and dynamic entity. This transformation has been

    largely brought about by the large dose of liberalization and economic reforms

    that allowed banks to explore new business opportunities rather than generating

    revenues from conventional streams (i.e. borrowing and lending). The banking in

    India is highly fragmented with 30 banking units contributing to almost 50% of

    deposits and 60% of advances. Indian nationalized banks (banks owned by the

    government) continue to be the major lenders in the economy due to their sheer

    size and penetrative networks which assures them high deposit mobilization. The

    Indian banking can be broadly categorized into nationalized, private banks and

    specialized banking institutions.

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    The Reserve Bank of India acts as a centralized body monitoring any

    discrepancies and shortcoming in the system. It is the foremost monitoring body

    in the Indian financial sector. The nationalized banks (i.e. government-owned

    banks) continue to dominate the Indian banking arena. Industry estimates

    indicate that out of 274 commercial banks operating in India, 223 banks are in the

    public sector and 51 are in the private sector. The private sector bank grid also

    includes 24 foreign banks that have started their operations here.

    The liberalize policy of Government of India permitted entry to private sector in

    the banking, the industry has witnessed the entry of nine new generation private

    banks. The major differentiating parameter that distinguishes these banks from all

    the other banks in the Indian banking is the level of service that is offered to the

    customer. Their focus has always centered around the customer understanding

    his needs, preempting him and consequently delighting him with various

    configurations of benefits and a wide portfolio of products and services. These

    banks have generally been established by promoters of repute or by high value

    domestic financial institutions.

    The popularity of these banks can be gauged by the fact that in a short span of

    time, these banks have gained considerable customer confidence and

    consequently have shown impressive growth rates. Today, the private banks

    corner almost four per cent share of the total share of deposits. Most of the banks

    in this category are concentrated in the high-growth urban areas in metros (that

    account for approximately 70% of the total banking business). With efficiency

    being the major focus, these banks have leveraged on their strengths and

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    competencies viz. Management, operational efficiency and flexibility, superior

    product positioning and higher employee productivity skills.

    The private banks with their focused business and service portfolio have a

    reputation of being niche players in the industry. A strategy that has allowed

    these banks to concentrate on few reliable high net worth companies and

    individuals rather than cater to the mass market. These well-chalked out

    integrates strategy plans have allowed most of these banks to deliver superlative

    levels of personalized services. With the Reserve Bank of India allowing these

    banks to operate 70% of their businesses in urban areas, this statutory

    requirement has translated into lower deposit mobilization costs and higher

    margins relative to public sector banks.

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    2. Meaning of Bank

    People earn money to meet their day-to-day expenses on food, clothing, education

    of children, housing, etc. They also need money to meet future expenses on

    marriage, higher education of children, house building and other social functions.

    These are heavy expenses, which can be met if some money is saved out of the

    present income. Saving of money is also necessary for old age and ill health when

    it may not be possible for people to work and earn their living.

    The necessity of saving money was felt by people even in olden days. They used tokeep money in their homes. With this practice, savings were available for use

    whenever needed, but it also involved the risk of loss by theft, robbery and other

    accidents. Thus, people were in need of a place where money could be saved safely

    and would be available when required. Banks are such places where people can

    deposit their savings with the assurance that they will be able to withdraw money

    from the deposits whenever required. People who wish to borrow money for

    business and other purposes can also get loans from the banks at reasonable rate of

    interest.

    Banks also render many other useful services like collection of bills, payment of

    foreign bills, Safe-keeping of jewellery and other valuable items, certifying the

    credit-worthiness of business, and so on. Banks accept deposits from the general

    public as well as from the business community. Anyone who saves money for

    future can deposit his savings in a bank. Businessmen have income from sales out

    of which they have to make payment for expenses. They can keep their earnings

    from sales safely deposited in banks to meet their expenses from time to time.

    Banks give two assurances to the depositors

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    a. Safety of deposit, and

    b. Withdrawal of deposit, whenever needed

    On deposits, banks give interest, which adds to the original amount of deposit. It is

    a great incentive to the depositor. It promotes saving habits among the public. On

    the basis of deposits banks also grant loans and advances to farmers, traders and

    businessmen for productive purposes.

    Thereby banks contribute to the economic development of the country and well

    being of the people in general. Banks also charge interest on loans. The rate of

    interest is generally higher than the rate of interest allowed on deposits. Banks also

    charge fees for the various other services, which they render to the business

    community and public in general. Interest received on loans and fees charged for

    services which exceed the interest allowed on deposits are the main sources of

    income for banks from which they meet their administrative expenses.

    The activities carried on by banks are called banking activity. Banking as an

    activity involves acceptance of deposits and lending or investment of money. It

    facilitates business activities by providing money and certain services that help in

    exchange of goods and services. Therefore, banking is an important auxiliary to

    trade. It not only provides money for the production of goods and services but also

    facilitates their exchange between the buyer and seller.

    We may be aware that there are laws which regulate the banking activities in our

    country.

    Depositing money in banks and borrowing from banks are legal transactions.

    Banks are also under the control of government. Hence they enjoy the trust and

    confidence of people. Also banks depend a great deal on public confidence.

    Without public confidence banks cannot survive.

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    Bank definition:

    A financial institution that is licensed to deal with money and its substitutes by

    accepting time and demand deposits, making loans, and investing in securities. The

    bank generates profits from the difference in

    the interest rates charged and paid.

    Bank is a lawful organization, which accepts

    deposits that can be withdrawn on demand. It

    also lends money to individuals and business

    houses that need it.

    A bank is a financial intermediary that accepts deposits and channels those

    deposits into lending activities, either directly or through capital markets. A bank

    connects customers with capital deficits to customers with capital surpluses.

    http://en.wikipedia.org/wiki/Financial_intermediaryhttp://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Deposit_accounthttp://en.wikipedia.org/wiki/Financial_intermediary
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    3. History of Banking Sector in India

    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 the exclusive

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    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 Pondicherry, 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 Bank of Bengal, which later merged with the Bank of Bombay and the Bankof Madras to form the Imperial Bank of India in 1921.

    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 stockbanks. All these banks operated

    in different segments of the economy. The exchange banks, mostly owned by

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    Europeans, concentrated on financing foreign trade. Indian joint stock banks were

    generally undercapitalized 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 Bankand Central Bank

    of India.

    The favor of Swadeshi movement lead to establishing of many private banks in

    Dakshina Kannada and Udupi district which were unified earlier and known by the

    name South Canara ( South Kanara ) district. Four nationalised banks started in

    this district and also a leading private sector bank. Hence undivided Dakshina

    Kannada district is known as "Cradle of Indian Banking".

    During the First World War (1914-1918) through the end of the Second World

    War (1939-1945), and two years thereafter until the independence of India were

    challenging for Indian banking. The years of the First World War were turbulent,

    and it took its toll with banks simply collapsing despite the Indian economygaining indirect boost due to war-related economic activities. At least 94 banks in

    India failed between 1913 and 1918.

    http://en.wikipedia.org/wiki/Swadeshihttp://en.wikipedia.org/wiki/Bank_of_Indiahttp://en.wikipedia.org/wiki/Corporation_Bankhttp://en.wikipedia.org/wiki/Indian_Bankhttp://en.wikipedia.org/wiki/Bank_of_Barodahttp://en.wikipedia.org/wiki/Canara_Bankhttp://en.wikipedia.org/wiki/Central_Bank_of_Indiahttp://en.wikipedia.org/wiki/Central_Bank_of_Indiahttp://en.wikipedia.org/wiki/Dakshina_Kannadahttp://en.wikipedia.org/wiki/Udupi_districthttp://en.wikipedia.org/wiki/First_World_Warhttp://en.wikipedia.org/wiki/Second_World_Warhttp://en.wikipedia.org/wiki/Second_World_Warhttp://en.wikipedia.org/wiki/Indian_independence_movementhttp://en.wikipedia.org/wiki/Economy_of_Indiahttp://en.wikipedia.org/wiki/Economy_of_Indiahttp://en.wikipedia.org/wiki/Indian_independence_movementhttp://en.wikipedia.org/wiki/Second_World_Warhttp://en.wikipedia.org/wiki/Second_World_Warhttp://en.wikipedia.org/wiki/First_World_Warhttp://en.wikipedia.org/wiki/Udupi_districthttp://en.wikipedia.org/wiki/Dakshina_Kannadahttp://en.wikipedia.org/wiki/Central_Bank_of_Indiahttp://en.wikipedia.org/wiki/Central_Bank_of_Indiahttp://en.wikipedia.org/wiki/Canara_Bankhttp://en.wikipedia.org/wiki/Bank_of_Barodahttp://en.wikipedia.org/wiki/Indian_Bankhttp://en.wikipedia.org/wiki/Corporation_Bankhttp://en.wikipedia.org/wiki/Bank_of_Indiahttp://en.wikipedia.org/wiki/Swadeshi
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    Post-independence

    The partition of India in 1947 adversely impacted the economies of Punjab and

    West Bengal, paralyzing banking activities for months. India's independence

    marked the end of a regime of the Laissez-faire for the Indian banking. The

    Government of India initiated measures to play an active role in the economic life

    of the nation, and the Industrial Policy Resolution adopted by the government in

    1948 envisaged a mixed economy. This resulted into greater involvement of the

    state in different segments of the economy including banking and finance. The

    major steps to regulate banking included:

    In 1948, the Reserve Bank of India, India's central banking authority, wasnationalized, and it became an institution owned by the Government of

    India.

    In 1949, the Banking Regulation Act was enacted which empowered theReserve Bank of India (RBI) "to regulate, control, and inspect the banks in

    India."

    The Banking Regulation Act also provided that no new bank or branch of anexisting bank could be opened without a license from the RBI, and no two

    banks could have common directors.

    However, despite these provisions, control and regulations, banks in India except

    the State Bank of India, continued to be owned and operated by private persons.

    This changed with the nationalization of major banks in India on 19 July 1969.

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    Liberalization

    In the early 1990s, the then Narsimha Rao government embarked on a policy of

    liberalization, licensing a small number of private banks. These came to be known

    as New Generation tech-savvy banks, and included Global Trust Bank (the first of

    such new generation banks to be set up), which later amalgamated with Oriental

    Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC

    Bank. This move, along with the rapid growth in the economy of India, revitalized

    the banking sector in India, which has seen rapid growth with strong contribution

    from all the three sectors of banks, namely, government banks, private banks and

    foreign banks.

    The next stage for the Indian banking has been set up with the proposed relaxation

    in the norms for Foreign Direct Investment, where all Foreign Investors in banks

    may be given voting rights which could exceed the present cap of 10%,at present it

    has gone up to 74% with some restrictions.

    The new policy shook the Banking sector in India completely. Bankers, till this

    time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of

    functioning. The new wave ushered in a modern outlook and tech-savvy methods

    of working for traditional banks. All this led to the retail boom in India. People not

    just demanded more from their banks but also received more.

    Currently (2007), banking in India is generally fairly mature in terms of supply,

    product range and reach-even though reach in rural India still remains a challenge

    for the private sector and foreign banks. In terms of quality of assets and capital

    adequacy, Indian banks are considered to have clean, strong and transparent

    balance sheets relative to other banks in comparable economies in its region.

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    Reserve Bank of India is an autonomous body, with minimal pressure from the

    government. The stated policy of the Bank on the Indian Rupee is to manage

    volatility but without any fixed exchange rate-and this has mostly been true.

    With the growth in the Indian economy expected to be strong for quite some time-

    especially in its services sector-the demand for banking services, especially retail

    banking, mortgages and investment services are expected to be strong. One may

    also expect M&As, takeovers, and asset sales.

    In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its

    stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first timean investor has been allowed to hold more than 5% in a private sector bank since

    the RBI announced norms in 2005 that any stake exceeding 5% in the private

    sector banks would need to be vetted by them.

    In recent years critics have charged that the non-government owned banks are too

    aggressive in their loan recovery efforts in connection with housing, vehicle and

    personal loans. There are press reports that the banks' loan recovery efforts have

    driven defaulting borrowers to suicide

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    4. Nationalization of Banks

    The RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of

    India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).

    By the 1960s, the Indian banking industry had become an important tool to

    facilitate the development of the Indian economy. At the same time, it had emerged

    as a large employer, and a debate had ensued about the possibility to nationalise

    the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the

    intention of the GOI in the annual conference of the All India Congress Meeting in

    a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received

    with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI

    issued an ordinance and nationalised the 14 largest commercial banks with effect

    from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of

    India, described the step as a "masterstroke of political sagacity." Within two

    weeks of the issue of the ordinance, the Parliament passed the Banking Companies

    (Acquisition and Transfer of Undertaking) Bill, and it received the presidential

    approval on 9 August 1969. A second dose of nationalization of 6 more

    commercial banks followed in 1980. The stated reason for the nationalization was

    to give the government more control of credit delivery. With the second dose of

    nationalization, the GOI controlled around 91% of the banking business of India.

    Later on, in the year 1993, the government merged New Bank of India with Punjab

    National Bank. It was the only merger between nationalized banks and resulted in

    the reduction of the number of nationalised banks from 20 to 19. After this, until

    the 1990s, the nationalised banks grew at a pace of around 4%, closer to the

    average growth rate of the Indian economy.

    http://en.wikipedia.org/wiki/Indian_economyhttp://en.wikipedia.org/wiki/Indira_Gandhihttp://en.wikipedia.org/wiki/Prime_Minister_of_Indiahttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Nationalisationhttp://en.wikipedia.org/wiki/Jayaprakash_Narayanhttp://en.wikipedia.org/wiki/Parliament_of_Indiahttp://en.wikipedia.org/wiki/President_of_Indiahttp://en.wikipedia.org/w/index.php?title=New_Bank_of_India&action=edit&redlink=1http://en.wikipedia.org/wiki/Punjab_National_Bankhttp://en.wikipedia.org/wiki/Punjab_National_Bankhttp://en.wikipedia.org/wiki/Punjab_National_Bankhttp://en.wikipedia.org/wiki/Punjab_National_Bankhttp://en.wikipedia.org/w/index.php?title=New_Bank_of_India&action=edit&redlink=1http://en.wikipedia.org/wiki/President_of_Indiahttp://en.wikipedia.org/wiki/Parliament_of_Indiahttp://en.wikipedia.org/wiki/Jayaprakash_Narayanhttp://en.wikipedia.org/wiki/Nationalisationhttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Prime_Minister_of_Indiahttp://en.wikipedia.org/wiki/Indira_Gandhihttp://en.wikipedia.org/wiki/Indian_economy
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    The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the

    then prime minister. It nationalised 14 banks then. These banks were mostly owned

    by businessmen and even managed by them.

    Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank United Bank of India UCO Bank Bank of India

    Before the steps of nationalization of Indian banks, only State Bank of India (SBI)

    was nationalised. It took place in July 1955 under the SBI Act of 1955.

    Nationalization of Seven State Banks of India (formed subsidiary) took place

    on 19th July, 1960.The State Bank of India is India's largest commercial bank and is ranked one of the

    top five banks worldwide. It serves 90 million customers through a network of

    9,000 branches and it offers -- either directly or through subsidiaries -- a wide

    range of banking services.

    http://finance.indiamart.com/investment_in_india/central_bank_india.htmlhttp://finance.indiamart.com/investment_in_india/punjab_national_bank.htmlhttp://finance.indiamart.com/investment_in_india/canara_bank.htmlhttp://finance.indiamart.com/investment_in_india/united_bank_india.htmlhttp://finance.indiamart.com/investment_in_india/bank_of_india.htmlhttp://finance.indiamart.com/investment_in_india/bank_of_india.htmlhttp://finance.indiamart.com/investment_in_india/united_bank_india.htmlhttp://finance.indiamart.com/investment_in_india/canara_bank.htmlhttp://finance.indiamart.com/investment_in_india/punjab_national_bank.htmlhttp://finance.indiamart.com/investment_in_india/central_bank_india.html
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    The second phase of nationalization of Indian banks took place in the year 1980.

    Seven more banks were nationalised with deposits over 200 crores. Till this year,

    approximately 80% of the banking segment in India was under Government

    ownership.

    After the nationalization of banks in India, the branches of the public sector banks

    rose to approximately 800% in deposits and advances took a huge jump by

    11,000%.

    1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1969: Nationalization of 14 major banks. 1980: Nationalization of seven banks with deposits over 200 corers.

    Indian Overseas Bank Bank of Baroda Union Bank Allahabad Bank

    http://finance.indiamart.com/investment_in_india/indian_overseas_bank.htmlhttp://finance.indiamart.com/investment_in_india/allahabad_bank.htmlhttp://finance.indiamart.com/investment_in_india/allahabad_bank.htmlhttp://finance.indiamart.com/investment_in_india/indian_overseas_bank.html
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    Distinction between banks and moneylenders

    The following table shows the distinction between a bank and moneylender

    Basis Banks Moneylenders

    1. Entity Banks are organized

    institutions.Moneylenders are individuals

    2. Activity Banking activities include

    acceptance of deposits as well

    as lending of money.

    Activities of moneylender may not

    include acceptance of deposits.

    3. Clients Banks meet the needs of

    people in general and the

    business community in

    particular.

    Moneylenders meet the needs of

    agriculturists and poor people.

    4.Security Banks accept tangible and

    personal security against

    loans.

    Moneylenders generally accept

    gold, jewellery or land as security

    for giving loan.

    5. Process of

    recovery of loans.

    The process of recovery is

    flexible.

    The process of

    recovery is stiff and strict.

    6.Interest Rate Interest charged by banks on

    loan is governed by RBI.

    Rate of Interest is decided by the

    moneylender and is normally very

    high.

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    5. Current scenario

    Banks have come a long way since their origin of having started out with the basicact of lending and borrowing money. The word Bank was derived from the Italian

    word banco, which means bench over which transactions happened during the

    earliest days when banking as a concept came into existence. A bank needs an

    approval from the government to set up its

    business. This approval or license is

    applied differently in different countries.

    The set of regulations vary according to

    the government policies and other norms

    established by the government of that

    country.

    Towards the last few decades of the 18th

    century the concept of banking was

    introduced in India. The oldest bank in

    India is the State Bank of India, a PSU that was initially set up in June 1806 and is

    currently the largest commercial bank. Central banking for which the Reserve

    Bank of India (RBI) is responsible took over these duties from the then Imperial

    Bank of India. After Indias independence in 1947, RBI was nationalized and

    given a wider scope to exercise its powers and judgment. A nationalization spree

    occurred in 1969, when 14 of the largest commercial banks was provided this

    status following another nationalization process of the next six largest banks in

    1980.

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    According to a recent count, India has 88 scheduled commercial banks (SCBs). Of

    this there are 27 public sector banks (with the Government of India holding a

    stake), 31 private banks (these do not have government stake; they may be publicly

    listed and traded on stock exchanges) and 38 foreign banks. They have a combined

    network of over 53,000 branches and 17,000 ATMs.

    According to a report by ICRA Limited, a rating agency, the public sector banks

    hold over 75 percent of total assets of the banking industry, with the private and

    foreign banks holding 18.2% and 6.5% respectively.

    Here is a partial list of the most popular banks in the country.

    HDFC bank

    HDFC - Housing

    Development Finance

    Corporation

    ICICI bank

    SBI

    Axis bank

    Allahabad bank

    Bank of Rajasthan

    City Union bank

    Karnataka bank Limited

    Kotak Mahindra bankLakshmi Vilas bank

    Limited

    http://www.bankbazaar.com/guide/banks-in-india/hdfc-bank/http://www.bankbazaar.com/guide/banks-in-india/housing-development-finance-corporation-hdfc/http://www.bankbazaar.com/guide/banks-in-india/housing-development-finance-corporation-hdfc/http://www.bankbazaar.com/guide/banks-in-india/housing-development-finance-corporation-hdfc/http://www.bankbazaar.com/guide/banks-in-india/icici-bank/http://www.bankbazaar.com/guide/banks-in-india/sbi/http://www.bankbazaar.com/guide/banks-in-india/axis-bank/http://www.bankbazaar.com/guide/banks-in-india/allahabad-bank/http://www.bankbazaar.com/guide/bank-of-rajasthan-a-history/http://www.bankbazaar.com/guide/banks-in-india/city-union-bank/http://www.bankbazaar.com/guide/banks-in-india/karnataka-bank/http://www.bankbazaar.com/guide/banks-in-india/kotak-mahindra-bank/http://www.bankbazaar.com/guide/banks-in-india/lakshmi-vilas-bank-limited/http://www.bankbazaar.com/guide/banks-in-india/lakshmi-vilas-bank-limited/http://www.bankbazaar.com/guide/banks-in-india/lakshmi-vilas-bank-limited/http://www.bankbazaar.com/guide/banks-in-india/lakshmi-vilas-bank-limited/http://www.bankbazaar.com/guide/banks-in-india/kotak-mahindra-bank/http://www.bankbazaar.com/guide/banks-in-india/karnataka-bank/http://www.bankbazaar.com/guide/banks-in-india/city-union-bank/http://www.bankbazaar.com/guide/bank-of-rajasthan-a-history/http://www.bankbazaar.com/guide/banks-in-india/allahabad-bank/http://www.bankbazaar.com/guide/banks-in-india/axis-bank/http://www.bankbazaar.com/guide/banks-in-india/sbi/http://www.bankbazaar.com/guide/banks-in-india/icici-bank/http://www.bankbazaar.com/guide/banks-in-india/housing-development-finance-corporation-hdfc/http://www.bankbazaar.com/guide/banks-in-india/housing-development-finance-corporation-hdfc/http://www.bankbazaar.com/guide/banks-in-india/housing-development-finance-corporation-hdfc/http://www.bankbazaar.com/guide/banks-in-india/hdfc-bank/
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    Punjab National bank

    Rupee Co-operative bank

    and Jaipur

    State Bank of Hyderabad

    Development Credit Bank

    Federal bank

    Saraswat bank

    South Indian bank - SIB

    Bank of India

    Bank of Baroda

    State Bank of Indore

    State Bank of Mysore

    Syndicate bank

    Union Bank of India

    United Bank of India

    Yes bank

    ABN AMRO bank

    Canara bank

    Indian bank

    Andhra bank

    Bank of Maharashtra

    Central Bank of India

    Corporation bank

    Dena bank

    UCO bank

    Vijaya bank

    http://www.bankbazaar.com/guide/banks-in-india/punjab-national-bank/http://www.bankbazaar.com/guide/banks-in-india/rupee-co-operative-bank/http://www.bankbazaar.com/guide/banks-in-india/state-bank-of-bikaner-and-jaipur/http://www.bankbazaar.com/guide/banks-in-india/a-preview-of-state-bank-of-hyderabad/http://www.bankbazaar.com/guide/banks-in-india/development-credit-bank/http://www.bankbazaar.com/guide/banks-in-india/federal-bank/http://www.bankbazaar.com/guide/banks-in-india/the-saraswat-co-operative-bank/http://www.bankbazaar.com/guide/banks-in-india/south-indian-bank/http://www.bankbazaar.com/guide/banks-in-india/bank-of-india/http://www.bankbazaar.com/guide/banks-in-india/bank-of-baroda/http://www.bankbazaar.com/guide/banks-in-india/state-bank-of-indore/http://www.bankbazaar.com/guide/banks-in-india/state-bank-of-mysore/http://www.bankbazaar.com/guide/banks-in-india/syndicate-bank/http://www.bankbazaar.com/guide/banks-in-india/union-bank-of-india/http://www.bankbazaar.com/guide/banks-in-india/united-bank-of-india/http://www.bankbazaar.com/guide/banks-in-india/yes-bank/http://www.bankbazaar.com/guide/banks-in-india/abn-amro-bank/http://www.bankbazaar.com/guide/banks-in-india/canara-bank/http://www.bankbazaar.com/guide/banks-in-india/indian-bank/http://www.bankbazaar.com/guide/banks-in-india/andhra-bank/http://www.bankbazaar.com/guide/banks-in-india/bank-of-maharashtra/http://www.bankbazaar.com/guide/banks-in-india/central-bank-of-india/http://www.bankbazaar.com/guide/banks-in-india/corporation-bank/http://www.bankbazaar.com/guide/banks-in-india/dena-bank/http://www.bankbazaar.com/guide/banks-in-india/uco-bank/http://www.bankbazaar.com/guide/banks-in-india/vijaya-bank/http://www.bankbazaar.com/guide/banks-in-india/vijaya-bank/http://www.bankbazaar.com/guide/banks-in-india/uco-bank/http://www.bankbazaar.com/guide/banks-in-india/dena-bank/http://www.bankbazaar.com/guide/banks-in-india/corporation-bank/http://www.bankbazaar.com/guide/banks-in-india/central-bank-of-india/http://www.bankbazaar.com/guide/banks-in-india/bank-of-maharashtra/http://www.bankbazaar.com/guide/banks-in-india/andhra-bank/http://www.bankbazaar.com/guide/banks-in-india/indian-bank/http://www.bankbazaar.com/guide/banks-in-india/canara-bank/http://www.bankbazaar.com/guide/banks-in-india/abn-amro-bank/http://www.bankbazaar.com/guide/banks-in-india/yes-bank/http://www.bankbazaar.com/guide/banks-in-india/united-bank-of-india/http://www.bankbazaar.com/guide/banks-in-india/union-bank-of-india/http://www.bankbazaar.com/guide/banks-in-india/syndicate-bank/http://www.bankbazaar.com/guide/banks-in-india/state-bank-of-mysore/http://www.bankbazaar.com/guide/banks-in-india/state-bank-of-indore/http://www.bankbazaar.com/guide/banks-in-india/bank-of-baroda/http://www.bankbazaar.com/guide/banks-in-india/bank-of-india/http://www.bankbazaar.com/guide/banks-in-india/south-indian-bank/http://www.bankbazaar.com/guide/banks-in-india/the-saraswat-co-operative-bank/http://www.bankbazaar.com/guide/banks-in-india/federal-bank/http://www.bankbazaar.com/guide/banks-in-india/development-credit-bank/http://www.bankbazaar.com/guide/banks-in-india/a-preview-of-state-bank-of-hyderabad/http://www.bankbazaar.com/guide/banks-in-india/state-bank-of-bikaner-and-jaipur/http://www.bankbazaar.com/guide/banks-in-india/rupee-co-operative-bank/http://www.bankbazaar.com/guide/banks-in-india/punjab-national-bank/
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    NATURE OF BANKING IN INDIA

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

    accepting,for the purpose of lending or investment of deposits of money from

    the public,repayable on demand or otherwise and withdraw able by cheque,

    draft, order or otherwise.

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

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

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

    therefore, revolves around accepting deposits and lending money. Another activity

    which is assuming increasing importance is transfer of money - both domestic and

    foreign - from one place to another. This activity is generally known as "remittance

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

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

    currencies.

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    FUNCTIONING OF A BANK

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

    Since Banking involves dealing directly with money, governments in most

    countries regulate this sector rather stringently. In India, the regulation traditionally

    has been very strict and in the opinion of certain quarters, responsible for the

    present condition of banks, where NPAs are of a very high order. The process of

    financial reforms, which started in 1991, has cleared the cobwebs somewhat but a

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

    to work with makes its operations even more complicated, sometimes bordering on

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

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

    Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of

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

    or otherwise and withdraw able by cheques, draft, and order or otherwise."

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    6. Types of Banks

    There are various types of banks which operate in our country to meet the financial

    requirements of different categories of people engaged in agriculture, business,

    profession, etc. On the basis of functions, the banking institutions in India may be

    divided into the following types:

    Types of Banks

    Central Bank Development Banks Specialized Banks

    (RBI, in India) (EXIM Bank, IDBI, NABARD)

    Commercial Banks Co-operative Banks

    (i) Public Sector Banks (i) Primary Credit Societies

    (ii) Private Sector Banks (ii) Central Co-operative Banks

    (iii) Foreign Banks (iii) State Co-operative Banks

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    Now let us learn about each of these banks in detail.

    a) Central Bank

    A bank which is entrusted with the functions of guiding and regulating the banking

    system of a country is known as its Central bank. Such a bank does not deal with

    the general public. It acts essentially as Governments banker, maintain deposit

    accounts of all other banks and advances money to other banks, when needed. The

    Central Bank provides guidance to other banks whenever they face any problem. It

    is therefore known as the bankers bank. The Reserve

    Bank of India is the central bank of our country.

    The Central Bank maintains record of Government revenue and expenditure under

    various heads.

    It also advises the Government on monetary and credit policies and decides on the

    interest rates for bank deposits and bank loans. In addition, foreign exchange rates

    are also determined by the central bank.

    Another important function of the Central Bank is the issuance of currency notes,

    regulating their circulation in the country by different methods. No other bank than

    the Central Bank can issue currency.

    b) Commercial Banks

    Commercial Banks are banking institutions that accept deposits and grant short-

    term loans and advances to their customers. In addition to giving short-term loans,

    commercial banks also give medium-term and long-term loan to business

    enterprises. Now-a-days some of the commercial banks are also providing housing

    loan on a long-term basis to individuals. There are also many other functions of

    commercial banks, which are discussed later in this lesson.

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    Types of Commercial banks

    Commercial banks are of three types i.e., Public sector banks, Private sector banks

    and foreign banks.

    (i) Public Sector Banks: These are banks where majority stake is held by the

    Government of India or Reserve Bank of India. Examples of public sector banks

    are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc.

    (ii) Private Sectors Banks: In case of private sector banks majority of share

    capital of the bank is held by private individuals. These banks are registered as

    companies with limited liability. For example: The Jammu and Kashmir Bank Ltd.,

    Bank of Rajasthan Ltd.,

    Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank

    Ltd., Global Trust Bank, Vysya Bank, etc.

    (iii) Foreign Banks: These banks are registered and have their headquarters in a

    foreign country but operate their branches in our country. Some of the foreign

    banks operating in our country are Hong Kong and Shanghai Banking Corporation

    (HSBC), Citibank, American

    Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of

    foreign banks operating in our country has increased since the financial sector

    reforms of 1991.

    c) Development Banks

    Business often requires medium and long-term capital for purchase of machinery

    and equipment, for using latest technology, or for expansion and modernization.

    Such financial assistance is provided by Development Banks. They also undertake

    other development measures like Public Sector Banks comprise 19 nationalised

    banks and State Bank of India and its 7 associate banks. Business Studies

    subscribing to the shares and debentures issued by companies, in case of under

    subscription of the issue by the public. Industrial Finance Corporation of India

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    (IFCI) and State Financial Corporations (SFCs) are examples of development

    banks in India.

    d) Co-operative Banks

    People who come together to jointly serve their common interest often form a co-

    operative society under the Co-operative Societies Act. When a co-operative

    society engages itself in banking business it is called a Co-operative Bank. The

    society has to obtain a license from the Reserve Bank of India before starting

    banking business. Any co-operative bank as a society is to function under the

    overall supervision of the Registrar, Co-operative Societies of the State. As regards

    banking business, the society must follow the guidelines set and issued by the

    Reserve Bank of India.

    Types of Co-operative Banks

    There are three types of co-operative banks operating in our country. They are

    primary credit societies, central co-operative banks and state co-operative banks.

    These banks are organized at three levels, village or town level, district level and

    state level.

    (i) Primary Credit Societies: These are formed at the village or town level with

    borrower and non-borrower members residing in one locality. The operations of

    each society are restricted to a small area so that the members know each other and

    are able to watch over the activities of all members to prevent frauds.

    (ii) Central Co-operative Banks: These banks operate at the district level having

    some of the primary credit societies belonging to the same district as their

    members. These banks provide loans to their members (i.e., primary credit

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    societies) and function as a link between the primary credit societies and state co-

    operative banks.

    (iii) State Co-operative Banks: These are the apex (highest level) co-operative

    banks in all the states of the country. They mobilize funds and help in its proper

    channelization among various sectors. The money reaches the individual borrowers

    from the state co-operative banks through the central co-operative banks and the

    primary credit societies.

    e) Specialized Banks

    There are some banks, which cater to the requirements and provide overall support

    for setting up business in specific areas of activity. EXIM Bank, SIDBI and

    NABARD are examples of such banks. They engage themselves in some specific

    area or activity and thus, are called specialized banks. Let us know about them.

    i. Export Import Bank of India (EXIM Bank): If you want to set up a business

    for exporting products abroad or importing products from foreign countries for sale

    in our country, EXIM bank can provide you the required support and assistance.

    The bank grants loans to exporters and importers and also provides information

    about the international market. It gives guidance about the opportunities for export

    or import, the risks involved in it and the competition to be faced, etc.

    ii. Small Industries Development Bank of India (SIDBI): If you want to

    establish a small-scale business unit or industry, loan on easy terms can be

    available through SIDBI. It also finances modernization of small-scale industrial

    units, use of new technology and market activities. The aim and focus of SIDBI is

    to promote, finance and develop small-scale industries.

    iii. National Bank for Agricultural and Rural Development (NABARD): It is a

    central or apex institution for financing agricultural and rural sectors. If a person is

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    engaged in agriculture or other activities like handloom weaving, fishing, etc.

    NABARD can provide credit, both short-term and long-term, through regional

    rural banks. It provides financial assistance, especially, to co-operative credit, in

    the field of agriculture, small-scale industries, cottage and village industries

    handicrafts and allied economic activities in rural areas.

    Functions of Commercial Banks

    The functions of commercial banks are of

    two types.

    (A) Primary functions; and

    (B) Secondary functions.

    Let us discuss details about these

    functions.

    (i) Primary functions

    The primary functions of a commercial

    bank include:

    a) Accepting deposits; and

    b) Granting loans and advances.

    a) Accepting deposits

    The most important activity of a commercial bank is to mobilise deposits from the

    public. People who have surplus income and savings find it convenient to deposit

    the amounts with banks.

    Depending upon the nature of deposits, funds deposited with bank also earn

    interest. Thus,

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    Types of Advances

    Banks grant short-term financial assistance by way of cash credit, overdraft and

    bill discounting.

    Let us learn about these.

    a) Cash Credit

    Cash credit is an arrangement whereby the bank allows the borrower to draw

    amount up to a specified limit. The amount is credited to the account of the

    customer. The customer can withdraw this amount as and when he requires.

    Interest is charged on the amount actually withdrawn. Cash Credit is granted as per

    terms and conditions agreed with the customers.b) Overdraft

    Overdraft is also a credit facility granted by bank. A customer who has a current

    account with the bank is allowed to withdraw more than the amount of credit

    balance in his account.

    It is a temporary arrangement. Overdraft facility with a specified limit may be

    allowed either on the security of assets, or on personal security, or both.

    c) Discounting of Bills

    Banks provide short-term finance by discounting bills that is, making payment of

    the amount before the due date of the bills after deducting a certain rate of

    discount. The party gets the funds without waiting for the date of maturity of the

    bills. In case any bill is dishonoured on the due date, the bank can recover the

    amount from the customer.

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    ii) Secondary functions

    In addition to the primary functions of accepting deposits and lending money,

    banks perform a number of other functions, which are called secondary functions.

    These are as follows.

    a. Issuing letters of credit, travelers cheque, etc.

    b. Undertaking safe custody of valuables, important document and securities by

    providing safe deposit vaults or lockers.

    c. Providing customers with facilities of foreign exchange dealings.

    d. Transferring money from one account to another; and from one branch to

    another branch of the bank through cheque, pay order, demand draft.

    e. Standing guarantee on behalf of its customers, for making payment for purchase

    of goods, machinery, vehicles etc.

    f. Collecting and supplying business information.

    g. Providing reports on the credit worthiness of customers.

    i. Providing consumer finance for individuals by way of loans on easy terms for

    purchase of consumer durables like televisions, refrigerators, etc.

    j. Educational loans to students at reasonable rate of interest for higher studies,

    especially for professional courses.

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    7. SWOT ANALYSIS OF BANKS

    STRENGTH

    Indian banks have compared favorably on growth, asset quality and profitability

    with other regional banks over the last few years. The banking index has grown at

    a compounded annual rate of over 51 per cent since April 2001 as compared to a

    27 per cent growth in the market index for the same period.

    Policy makers have made some notable changes in policy and regulation to

    help strengthen the sector. These changes include strengthening prudential norms,

    enhancing the payments system and integrating regulations between commercialand co-operative banks.

    Bank lending has been a significant driver of GDP growth and employment.

    Extensive reach: the vast networking & growing number of

    branches & ATMs. Indian banking system has reached even

    to the remote corners of the country.

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

    dividends with the nationalization of 14 major private banks of India.

    In terms of quality of assets and capital adequacy, Indian banks are considered

    to have clean, strong and transparent Balance sheets relative to other banks in

    comparable economies in its region.

    India has 88 scheduled commercial banks (SCBs) - 27 public sector banks

    (that is with the Government of India holding a stake)after merger of New Bank of

    India in Punjab National Bank in 1993, 29 private banks (these do not have

    government stake; they may be publicly listed and traded on stock exchanges) and

    31 foreign banks. They have a combined network of over 53,000 branches and

    17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public

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    sector banks hold over 75 percent of total assets of the banking industry, with the

    private and foreign banks holding 18.2% and 6.5% respectively.

    Foreign banks will have the opportunity to own up to 74 percent of Indian

    private sector banks and 20 per cent of government owned banks.

    With the growth in the Indian economy expected to be strong for quite some

    time-especially in its services sector-the demand for banking services, especially

    retail banking, mortgages and investment services are expected to be strong.

    the Reserve Bank of India (RBI) has approved a proposal from the government

    to amend the Banking Regulation Act to permit banks to trade in commodities and

    commodity derivatives.

    Liberalization of ECB norms: The government also liberalized the ECB norms to

    permit financial sector entities engaged in infrastructure funding to raise ECBs.

    This enabled banks and financial institutions, which were earlier not permitted to

    raise such funds, explore this route for raising cheaper funds in the overseas

    markets.

    Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has

    allowed them to raise perpetual bonds and other hybrid capital securities to shore

    up their capital. If the new instruments find takers, it would help PSU banks, left

    with little headroom for raising equity. Significantly, FII and NRI investment

    limits in these securities have been fixed at 49%, compared to 20% foreign equity

    holding allowed in PSU banks.

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    WEAKNESS

    PSBs need to fundamentally strengthen institutional skill levels especially in

    sales and marketing, service operations, risk management and the overall

    organizational performance ethic & strengthen human capital.

    Old private sector banks also have the need to fundamentally strengthen skill

    levels.

    The cost of intermediation remains high and bank penetration is limited to

    only a few customer segments and geographies.

    Structural weaknesses such as a fragmented industry structure, restrictions on

    capital availability and deployment, lack of institutional support infrastructure,

    restrictive labour laws, weak corporate governance and ineffective regulations

    beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service

    bureaus.

    Refusal to dilute stake in PSU banks: The government has refused to dilute its

    stake in PSU banks below 51% thus choking the headroom available to these banks

    for raining equity capital.

    Impediments in sectoral reforms: Opposition from Left and resultant cautious

    approach from the North Block in terms of approving merger of PSU banks may

    hamper their growth prospects in the medium term.

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    With the growth in the Indian economy expected to be strong for quite some

    time-especially in its services sector-the demand for banking services, especially

    retail banking, mortgages and investment services are expected to be strong.

    the Reserve Bank of India (RBI) has approved a proposal from the government

    to amend the Banking Regulation Act to permit banks to trade in commodities and

    commodity derivatives.

    Liberalization of ECB norms: The government also liberalized the ECB norms

    to permit financial sector entities engaged in infrastructure funding to raise ECBs.

    This enabled banks and financial institutions, which were earlier not permitted to

    raise such funds, explore this route for raising cheaper funds in the overseas

    markets.

    THREATS

    Threat of stability of the system: failure of some weak banks has often

    threatened the stability of the system.

    Rise in inflation figures which would lead to increase in interest rates.

    Increase in the number of foreign players would pose threat to the PSB as well

    as the private players.

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    8. PEST ANALYSIS

    TECHNOLOGICAL ENVIRONMENT

    Technology plays a very important role in banks internal control mechanisms as

    well as services offered by them. It has in fact given new dimensions to the banks

    as well as services that they cater to and the banks are enthusiastically adopting

    new technological innovations for devising new products and services.

    The latest developments in terms of technology in computer and

    telecommunication have encouraged the bankers to change the concept of branch

    banking to anywhere banking. The use of ATM and Internet banking has allowed

    anytime, anywhere banking facilities. Automatic voice recorders now answer

    simple queries, currency accounting machines makes the job easier and self-service

    counters are now encouraged. Credit card facility has encouraged an era of

    cashless society. Today MasterCard and Visa card are the two most popular cards

    used world over. The banks have now started issuing smartcards or debit cards to

    be used for making payments. These are also called as electronic purse. Some of

    the banks have also started home banking through telecommunication facilities and

    computer technology by using terminals installed at customers home and they can

    make the balance inquiry, get the statement of accounts, give instructions for fund

    transfers, etc. Through ECS we can receive the dividends and interest directly to

    our account avoiding the delay or chance of losing the post.

    Today banks are also using SMS and Internet as major tool of promotions and

    giving great utility to its customers. For example SMS functions through simple

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    text messages sent from your mobile. The messages are then recognized by the

    bank to provide you with the required information.

    All these technological changes have forced the bankers to adopt customer-based

    approach instead of product-based approach.

    ECONOMICAL ENVIRONMENT

    Banking is as old as authentic history and the modern commercial banking are

    traceable to ancient times. In India, banking has existed in one form or the other

    from time to time. The present era in banking may be taken to have commenced

    with establishment of bank of Bengal in 1809 under the government charter and

    with government participation in share capital. Allahabad bank was started in the

    year 1865 and Punjab national bank in 1895, and thus, others followed

    Every year RBI declares its 6 monthly policy and accordingly the various measures

    and rates are implemented which has an impact on the banking sector. Also the

    Union budget affects the banking sector to boost the economy by giving certain

    concessions or facilities. If in the Budget savings are encouraged, then more

    deposits will be attracted towards the banks and in turn they can lend more money

    to the agricultural sector and industrial sector, therefore, booming the economy. If

    the FDI limits are relaxed, then more FDI are brought in India through banking

    channels.

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    POLITICAL/ LEGAL ENVIRONMENT

    Government and RBI policies affect the banking sector. Sometimes looking into

    the political advantage of a particular party, the Government declares some

    measures to their benefits like waiver of short-term agricultural loans, to attract the

    farmers votes. By doing so the profits of the bank get affected. Various banks in

    the cooperative sector are open and run by the politicians. They exploit these banks

    for their benefits. Sometimes the government appoints various chairmen of the

    banks.

    Various policies are framed by the RBI looking at the present situation of thecountry for better control over the banks.

    SOCIAL ENVIRONMENT

    Before nationalization of the banks, their control was in the hands of the private

    parties and only big business houses and the effluent sections of the society were

    getting benefits of banking in India. In 1969 government nationalized 14 banks. To

    adopt the social development in the banking sector it was necessary for speedy

    economic progress, consistent with social justice, in democratic political system,

    which is free from domination of law, and in which opportunities are open to all.

    Accordingly, keeping in mind both the national and social objectives, bankers were

    given direction to help economically weaker section of the society and also provide

    need-based finance to all the sectors of the economy with flexible and liberal

    attitude. Now the banks provide various types of loans to farmers, working women,

    professionals, and traders. They also provide education loan to the students and

    housing loans, consumer loans, etc.

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    9. 7 Ps of BANKING

    PRODUCT MIX

    PROMOTIONAL MIX

    PRICE MIX

    THE PEOPLE

    THE PEOPLE

    THE PHYSICAL EVIDENCE

    PLACE MIX

    1. PRODUCT MIX

    The banks primarily deal in services and therefore, the formulation of product mix

    is required to be in the face of changing business environment conditions. Of

    course the public sector commercial banks have launched a number of policies and

    programs for the development of backward regions and welfare of the weaker

    sections of the society but at the same time it is also right to mention that their

    development-oriented welfare programs are not optimal to the national socio-

    economic requirements. A proportional contraction in the number of customers is

    found affecting the business of public sector commercial banks. The changing

    psychology, the increasing expectation, the rising income, the changing lifestyles,

    the increasing domination of foreign banks and the changing needs and

    requirements of the customers at large make it essential that they innovate their

    service mix and make them of worked class. The development of new generic

    product, especially when the business environment is regulated is found a difficult

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    task. However, it is pertinent that banks formulate a package in tune with the

    changing business conditions. Against this background, we find it significant that

    the banking organizations minify, magnify, combine and modify their service mix.

    In the formulation of service mix, the banks can follow two guidelines, first is

    related to the processing of product to market needs and the second is concerned

    with the processing of market needs to product. In the first process, the needs to the

    target market are anticipated and visualized and therefore, we expect the prices

    likely to be productive. In the second process, the banks react to the expressed

    needs and therefore we consider it reactive. It is essential that every product is

    measured up to the accepted technical standards. This is because no consumer

    would buy a product, which contains technical faults. Technical perfection in

    service is meant prompt delivery, quick disposal, and presentation of right data,

    right filing, proper documentation or so. If computers start disobeying, the

    command and the customers get wrong facts, the use of technology would be a

    minus point, and you dont have any excuse for your faults.

    Marketing aims not only offering but also at creating\innovating the

    services\schemes found new to the competitors vis-a vis- to the customers. The

    enhanced customer support would be a reward to the bank. The additional

    attractions, the product attractiveness would be a plus point of your mix, which

    would help you in many ways. This makes it essential that the banking

    organizations are sincere to the innovations process and try to enrich their

    peripheral services much earlier than the competitors. We also find the productportfolio of the banks. While formulating the services mix, it is also pertinent that

    the bank professionals make possible affair synchronization of core and peripheral

    services. To be more specific, the peripheral services need an intensive care since

    the core services are found by and large the same. Innovating the peripheral

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    services thus appears to be an important functional responsibility of marketing

    professionals. We cant deny the fact that if the foreign banks have been getting a

    positive response; the credibility goes to their innovative peripheral services.

    Thus, the formulation of product mix is found to be a difficult task that requires

    world-class professionalism.

    2. PROMOTIONAL MIX:

    Promotion mix includes advertising, publicity, sales promotion, wordofmouth

    promotion, personal selling and telemarketing. Each of these services needs to be

    applied in different degree. These components can be useful in the banking

    business in the following ways:

    Advertising

    Advertising is paid form of communication. Banking organizations use thiscomponent of the promotion mix with motto of informing, sensing and persuading

    the customers. While advertising it is essential to be aware of key decision making

    areas so that instrumentally helps banks at micro and macro levels.

    Finalizing the budget:

    This is related to the formulation of the budget for advertisement. The bank

    professionals, senior executives and even the policy planners are found to be

    involved in the process. The business of a bank determines the scale of the

    advertisement budget. In addition, the intensity of competition also plays a decisive

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    Instrumentality of branch managers:

    At micro level, a branch manager bears the responsibility of advertising locally so

    that the messages reach the target audience.

    Characters and themes:

    At apex level it is also important that while advertising the senior executives watch

    the process minutely and select events, characters having a regional orientation.

    The popular characters and sensational moments are likely to be impact generating.

    The theme for appeals and messages also needs due attention. Of course, they have

    a legitimate right of advertising but it is not meant that like the goods

    manufacturing organizations, the service generating organizations also start

    making invasion on culture. It is necessary to regulate a bias to gender, profession,

    region or so.

    Public relations:

    In the banking services the effectiveness of public Relations is found in high

    magnitude. It is in this context that difference is found in designing of the mix for

    promoting the banking services.

    Telemarketing:

    The telemarketing is a process of promoting the business with the help of

    sophisticated communication network. Telemarketing is found instrumental in

    advertising the banking services and the banking organizations can use this tool of

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    the promotion mix both for advertising and selling. This minimizes the dependence

    of banking organizations on sales people and just a counter or center as listed in the

    call numbers may service multi- dimensional services.

    Telemarketing is likely to play an incremental role in marketing the banking

    services. The leading foreign banks and even some of the private sector

    commercial banks have been found promoting telemarketing and they have been

    getting positive results for their efforts.

    Word-Of- Mouth:

    Much communication about the banking services actually takes place by word- of-

    mouth information, which is also known as word- of- mouth promotion. The oral

    publicity plays an important role in eliminating the negative comments and

    improving the services. This also helps the banker to know the feedback, which

    may simplify the task of improving the quality of services. This component of

    promotion mix is not to influence budget adversely or generate additional financial

    burden. By improving the quality of services and by offering small gifts to the

    word- of- mouth promoters, bankers can get more business command in their area.

    The above facts make it clear that such kind of promotion is influenced by a

    number of factors. The most dominating factor is the quality of services offered.

    The bank professionals, the frontline staff and the senior executives should realize

    that degeneration in quality would make this tool effective.

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    3. PRICE MIX:

    In the formulation of marketing mix, the pricing decisions occupy a place of

    outstanding significance. The pricing decisions include the decisions related to

    interest and fee or commission charged by banks. Pricing decisions are found

    instrumental in motivating or influencing the target market. The RBI regulates the

    rate of interest and the Indian Banks Association controls other charges. In our

    country, the price mix is more important because the banking organizations are

    also supposed to sub serve the interests of the weaker sections and the backward

    regions. Also in making the pricing decisions, the Government Of India

    instrumentalists or commands everything as a shadow policy maker. This also

    complicates the price mix for banking sector.

    Pricing policy of a bank is considered important for raising the number of

    customers vis--vis the accretion of deposits. Also the quality of service provided

    has direct relationship with the fees charged. Thus while deciding the price mix

    customer services rank the top position. Banks also have to take the value

    satisfaction variable in to consideration. The value and satisfaction cannot be

    quantified in terms of money since it differs from person to person. Keeping in

    view the level of satisfaction of a particular

    segment, the banks have to frame the pricing

    strategies.

    The banking organizations are required to

    frame two- fold strategies. First, the strategy is

    concerned with interest and fee charged and

    the second strategy is related to the interest paid. Since both the strategies throw a

    vice- versa impact, it is important that banks attempt to establish a correlation

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    6. THE PHYSICAL EVIDENCE

    The physical evidences include signage, reports, punch lines, other tangibles,

    employees dress code etc. The companys financial reports are issued to the

    customers to emphasis or credibility. Even some of the banks follow a dress code

    for their internal customers. This helps the customers to feel the ease and comfort

    Signage: each and every bank has its logo by which a person can identify the

    company. Thus such signages are significant for creating visualization and

    corporate identity.

    Tangibles: banks give pens, writing pads to the internal customers. Even the

    passbooks, chequebooks, etc reduce the inherent intangibility of services.

    Punch lines: punch lines or the corporate statement depict the philosophy and

    attitude of the bank. Banks have influential punch lines to attract the customers.

    Banking marketing consists of identifying the most profitable markets now and in

    future, assessing the present and future needs of customers, setting business

    development goals, making plans-all in the context of changing environment.

    7. PLACE MIX

    Place mix is the location analysis for banks branches. There are number a factors

    affecting the determination of the location of the branch of bank. It is very

    necessary a bank to situated at a location where most of its target population is

    located.

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    Some of the important factors affecting the location analysis of a bank

    1. The Trade Area:The trade area is a very important factor determining the place where a bank

    branch should be set up. For e.g. a particular location maybe a huge trading place

    for textiles, diamonds or for that case even the stock market. Such locations are

    ideal for setting up of bank branches.

    2. Population Characteristics:The demography of a place is a very important factor. This includes:

    The income level of the population The average age The average male female population The caste, religion, culture and customs The average spending and saving habit of the people.

    These factors are very important for a bank as the help them decide the kind of

    business the branch will get.

    3. Commercial Structure:The commercial structure refers to the level of commerce i.e. business activities

    taking place at a particular location. The higher the level of business activities

    taking place in a particular location the more preferable it is for setting up a bank

    branch.

    4. Industrial Structure:This is nothing but a combination of the trade area analysis and the commercial

    structure. However the industrial structure focuses more on the kind of industries

    operating in a particular location. For example, an area like SEEPZ is marked with

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    10. Location of Competition:

    The existence of other banks also means competition. If the level of competition

    is very high in a particular location, it is necessary that a bank does a lot of

    market research before opening a branch so as to estimate the kind of business

    it would get.

    11. Visibility:

    The location of a branch should be such that it is visible and easily noticed by

    the customers as well other people.

    12. Access:

    The bank branch should be very easily accessible to the customers. If this is not

    the case, the customer might switch to some other bank, which is more convenient

    to him and very easily accessible. The location should be such that it is very

    convenient for the customer to reach.

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    10. Recent banking developments in India

    The Indian banking sector has witnessed wide ranging changes under the influence

    of the financial sector reforms initiated during the early 1990s. The approach to

    such reforms in India has been one of gradual and non-disruptive progress through

    a consultative process. The emphasis has been on deregulation and opening up the

    banking sector to market forces. The Reserve Bank has been consistently working

    towards the establishment of an enabling regulatory framework with prompt and

    effective supervision as well as the development of technological and institutional

    infrastructure.

    Persistent efforts have been made towards adoption of international benchmarks as

    appropriate to Indian conditions. While certain changes in the legal infrastructure

    are yet to be effected, the developments so far have brought the Indian financial

    system closer to global standards.

    Statutory Pre-emptions

    In the pre-reforms phase, the Indian banking system operated with a high level of

    statutory preemptions, in the form of both the Cash Reserve Ratio (CRR) and the

    Statutory Liquidity Ratio (SLR), reflecting the high level of the countrys fiscal

    deficit and its high degree of monetization. Efforts in the recent period have been

    focused on lowering both the CRR and SLR. The statutory minimum of

    25 per cent for the SLR was reached as early as 1997, and while the Reserve Bank

    continues to pursue its medium-term objective of reducing the CRR to the statutory

    minimum level of 3.0 per cent, the CRR of the Scheduled Commercial Banks

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    BPLR and spreads of banks. The BPLRs of public sector banks declined to 10.25-

    11.25 per cent in March 2005 from 10.25-11.50 per cent in March 2004.With a

    view to granting operational autonomy to public sector banks, public ownership in

    these banks was reduced by allowing them to raise capital from the equity market

    of up to 49 per cent of paid-up capital. Competition is being fostered by permitting

    new private sector banks, and more liberal entry of branches of foreign banks,

    joint-venture banks and insurance companies.

    Recently, a roadmap for the presence of foreign banks in India was released which

    sets out the process of the gradual opening-up of the banking sector in a

    transparent manner. Foreign investments in the financial sector in the form 238

    BIS Papers No 28 of Foreign Direct Investment (FDI) as well as portfolio

    investment have been permitted. Furthermore, banks have been allowed to

    diversify product portfolio and business activities. The share of public sector banks

    in the banking business is going down, particularly in metropolitan areas. Some

    diversification of ownership in select public sector banks has helped further the

    move towards autonomy and thus provided some response to competitive

    pressures. Transparency and disclosure standards have been enhanced to meet

    international standards in an ongoing manner.

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    Board for Financial Supervision (BFS)

    An independent Board for Financial Supervision (BFS) under the aegis of the

    Reserve Bank has been established as the apex supervisory authority for

    commercial banks, financial institutions, urban banks and NBFCs. Consistent with

    international practice, the Boards focu