Banking Sector Reforms

TO

PROF. AKSHA MEMON

FROM TYBMS

Name Insha ghaswala

Roll no 13

INDEX

Sr no Topics

1 Banking

2 Introduction

3 Highlights of Narasimham Committee Recommendations on Banking Reforms in India

4 Performance of commercial bank in India

5 The new technologies that are been use in banks

6Bibliography

What is banking ????

Banking in India in the modern sense originated in the last decades of the 18th century.

Among the first banks were the Bank of Hindustan, which was established in 1770 and

liquidated in 1829-32; and the General Bank of India, established 1786 but failed in 1791

The largest bank, and the oldest still in existence, is the State Bank of India. It originated as

the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was

one of the three banks funded by a presidency government, the other two were the Bank of

Bombay and the Bank of Madras. The three banks were merged in 1921 to form the Imperial

Bank of India, which upon India's independence, became the State Bank of India in 1955. For

many years the presidency banks had acted as quasi-central banks, as did their successors,

until the Reserve Bank of India was established in 1935, under the Reserve Bank of India

Act, 1934.

In 1960, the State Banks of India was given control of eight state-associated banks under the

State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate

banks. In 1969 the Indian government nationalised 14 major private banks. In 1980, 6 more

private banks were nationalized. These nationalized banks are the majority of lenders in

the Indian economy. They dominate the banking sector because of their large size and

widespread networks.

The Indian banking sector is broadly classified into scheduled banks and non-scheduled

banks. The scheduled banks are those which are included under the 2nd Schedule of the

Reserve Bank of India Act, 1934. The scheduled banks are further classified into:

nationalised banks; State Bank of India and its associates; Regional Rural Banks (RRBs);

foreign banks; and other Indian private sector banks.[6] The term commercial banks refers to

both scheduled and non-scheduled commercial banks which are regulated under the Banking

Regulation Act, 1949.[9]

Generally banking in India was fairly mature in terms of supply, product range and reach-

even though reach in rural India and to the poor still remains a challenge. The government

has developed initiatives to address this through the State Bank of India expanding its branch

network and through the National Bank for Agriculture and Rural Development with things

likemicrofinance.

INTRODUCTION

The financial development was given impetus with the adoption of social control over banks in 1967 and subsequently nationalsation of 14 major scheduled banks in July 1969. Since then the banking system has formed the core of the Indian financial system. In the three decades following the first round of nationalization (the second round consisted of 6 commercial banks in April, 1980), aggregate deposits of scheduled commercial banks have increased at a compound annual average growth rate of 17.8 per cent during this period (1969 to1999), while bank credit expanded at the rate of 16.3 per cent per annum. With branches of more than 67,000 of which 48.7 percent being rural, touching the lives of millions of people everyday, the Indian banking sector constitutes the most significant segment of the financial system of India. Despite this commendable progress serious problems have emerged due to the reasons beyond the control of banking sector. While nationalization achieved the widening of the banking industry in India, the task of deepening their services was still left unattended. By the beginning of 1990, the social banking goals set for the banking industry made most of the public sector banks unprofitable. The resultant „financial repression‟ led to the decline in productivity and efficiency and erosion of profitability of the banking sector in general. It is against the background of these circumstances, that the development of a sound banking system was considered essential for the future growth of the financial system. Financial sector reforms were initiated in the country in 1992 with a view to improving the efficiency in the process of financial intermediation, enhancing the effectiveness in the conduct of monetary policy and creating conducive environment for the integration of domestic financial sector with the global system. International Research Journal of Commerce Arts and Science http:www.casirj.com Page 274 The financial sector reforms started in 1991 had provided the necessary platform for the banking sector to operate based on operational flexibility and functional autonomy enhancing productivity, efficiency and profitability (Talwar, 2005). While several committees have gone in to the problems of commercial banking in India, the two most important of them are:

Narasimham Committee I (1991)

Narasimham Committee II (1998)

These committees proposed various reforms in order to improve the profitability and efficiency of the banking system.

Highlights of Narasimham Committee Recommendations on Banking Reforms in India!

The main recommendations of Narasimham Committee (1991) on the Financial (Banking)

System are as follows;

(i) Statutory Liquidity Ratio (SLR) is brought down in a phased manner to 25 percent (the

minimum prescribed under the law) over a period of about five years to give banks more

funds to carry business and to curtail easy and captive finance.

(ii) The RBI should reduce Cash Reserve Ratio (CRR) from its present high level.

(iii) Directed Credit Programme i.e., credit allocation under government direction, not by

commercial judgement of banks under a free market competitive system, should be phased

out. The priority sector should be scaled down from present high level of 40 percent of

aggregate credit to 10 percent. Also the priority sector should be redefined.

(iv) Interest rates to be deregulated to reflect emerging market conditions.

(v) Banks whose operations have been profitable is given permission to raise fresh capital

from the public through the capital market.

(vi) Balance sheets of banks and financial institutions are made more transparent.

(vii) Set up special tribunals to help banks recover their debt speedily.

(viii) Changes be introduced in the bank structure 3-4 large banks with international

character, 8- 10 national banks with branches throughout the country, local banks confined to

specific region of the country, rural banks confined to rural areas.

(ix) Greater emphasis is laid on internal audit and internal inspection in the banks.

(x) Government should indicate that there would be no further nationalisation of banks, the

new banks in the private sector should be welcome subject to normal requirements of the

RBI, branch licensing should be abolished and policy towards foreign banks should be more

liberal.

(xi) Quality of control over the banking system by the RBI and the Banking Division or the

Ministry of Finance should be ended and the RBI should be made primary agency for

regulation of banking system.

(xii) A new financial institution called the Assets Reconstruction Fund (ARF). Should be

established which would take over from banks and financial institutions a portion of their bad

and doubtful debts at a discount (based on realisable value of assets), and subsequently

follow up on the recovery of the dues owed to them from the primary borrowers.

Follow-up Action:

(i) Statutory Liquidity Ratio (SLR) on incremental Net Domestic and Time Liabilities

(NDTL) reduced from 38.5 percent in 1991-92 to 28 percent by December 1996.

(ii) Effective Cash Reserve Ratio (CRR) on the NDTL reduced from 14 percent to 10 percent

in January 1997.

(iii) In April, 1992 the RBI introduced a risk assets ratio system for banks (including foreign

banks) in India as a capital adequacy measure. Under this banks will have to achieve a

Capital to Risk Weighted Asset ratio (CRAR) of 8 percent. By March, 1996 out of 27 public

sector banks 19 banks (including SBI and all its subsidiaries) have attained 8 percent CRAR

norm. In case of foreign banks, all of them have already attained these norms.

(iv) New prudential norms for income recognition, classification of assets and provisioning of

bad debts introduced in 1992.

(v) In regard to regulated interest ratio structure: (i) considerable rationalisation has been

effected in banks lending rates with the number of concessive slabs reduced and some of the

ratio have been raised thereby reducing the element of subsidy; (ii) regulated deposit late has

been replaced by single prescription of not exceeding 13 (revised to 11 percent) per annum

for all deposit maturities of 46 days and above.

(vi) The SBI and some other nationalised banks have been allowed to seek capital market

access.

(vii) Less strong nationalised banks are being recapitalised by government through budget

provisions of Rs. 15000 crore till 1994-95.

(viii) Existing private sector banks given signal for expansion, more private sector banks

allowed to set up branches provided they confirms to the RBI guidelines.

(ix) Supervision system of the RBI is being strengthened with establishment of new board for

Financial Bank Supervision within the RBI.

(x) Banks given freedom to open new branches and upgrade extension counters on attaining

capital adequacy norms and prudential accounting standards. They are permitted to close

non-viable branches other than in rural areas.

(xi) Rapid computerization of banks being undertaken.

(xii) Agreement signed between the public sector bank and RBI to improve their managerial

and quality of performance.

(xiii) Recovery of debts due to banks and the Financial Institution Act 1993 recently passed

to facilitate quicker recovery of loans and arrears. Accordingly 6 special Debt Recovery

Tribunals were set up along with an Appellate Tribunal at Mumbai to expedite the recovery

of bank loan arrears.

(xiv) Under the Banking Ombudsmen Scheme 1995. Eleven Ombudsmen already functioning

out of a total of 15 to expedite inexpensive resolution of customers’ complaints.

(xv) Ten new private banks have started functioning out of the thirteen “in principle”

approvals given for setting up new banks in private sector.

Performance of commercial Banks in India

Against the backdrop of a slowdown in the domestic economy and tepid global recovery, the growth of the Indian banking sector slowed down for the second consecutive year in 2012-13. There was also a decline in the growth of profits of scheduled commercial banks (SCBs) as credit off-take slowed down and interest rates softened. The asset quality also deteriorated, more perceptibly for public sector banks. On the positive side, capital positions of Indian banks, including public sector banks, remained strong and above the stipulated minimum to face any unforeseen losses. There was also a significant expansion in the outreach of banking in unbanked rural centres, as financial inclusion plans completed three years. In the short-term, the Indian banking sector needs to lend support to productive sectors facilitating economic recovery, while remaining vigilant about asset quality. In the medium to long-term, sustained improvements in efficiency and inclusiveness remain key areas of concern.

1. Introduction

4.1 The Indian financial landscape is dominated by the banking sector with banking flows accounting for over half of the total financial flows in the economy1. Banks play a major role in not just purveying credit to the productive sectors of the economy but also as facilitators of financial inclusion. Although the Indian banking sector exhibited considerable resilience in the immediate aftermath of the global financial crisis, it has been impacted by the global and domestic economic slowdown over the last two years. The year 2011-12, against the backdrop of a muted domestic growth, witnessed a slowdown in the overall growth of the banking sector coupled with a deterioration in asset quality and lower profitability2. The performance of the banking sector in 2012-13 too was conditioned by a further slowdown of

the domestic economy, although there was some respite from inflationary pressures leading to an environment of lower interest rates.

4.2 Against this backdrop, this chapter discusses developments in the Indian banking sector

in 2012-13 in a comparative perspective with the earlier year/s to bring out trends in balance

sheets, profitability, and financial soundness of the sector taking data on 89 scheduled

commercial banks (SCBs). The chapter also spells out key issues relating to other aspects of

operations of SCBs, viz., sectoral distribution of credit, financial inclusion, customer

services, technological developments, and their overseas operations apart from separately

analysis the trends in two segments closely related to the SCB sector, namely regional rural

banks (RRBs) and local area banks (LABs).

The New technologies that are being used in banks are

National Electronic Funds Transfer (NEFT)

National Electronic Funds Transfer (NEFT) is an Indian system of electronic transfer of

money from one bank or bank branch to another.

The banks or their branches that support such transactions have to participate in the NEFT

network. An updated list of banks and branches that are NEFT-enabled can be found on

theReserve Bank of India (RBI) website.

The transfer of money from the customer remitting it to the beneficiary account usually takes

place on the same day. Settlement or clearance of funds takes place in batches as specified by

the guidelines by the RBI. Any amount of money can be transferred using NEFT, making it

usually the best method for retail remittances. Customers with Internet banking accounts can

use the NEFT facility to transfer funds nationwide on their own. Funds can also be

transferred via NEFT by customers by walking into any bank branch (which is NEFT-

enabled) and leaving relevant instructions for such transfer - either from their bank accounts

or by payment of cash. Transfer of funds to Nepal using NEFT, is also allowed subject to

limits.

In order to make a remittance via NEFT, the customer initiating the transfer needs to have the

IFSC (Indian Financial System Code) of the bank branch where the beneficiary account is

located. IFSC is an alphanumeric 11-digit code that functions as a unique address for a

particular branch. Customers will also need to input the beneficiary account number and

name as well as the name of the bank being transferred to.

Credit Card 

A credit card is a payment card issued to users as a system of payment. It allows the

cardholder to pay for goods and services based on the holder's promise to pay for them. The

issuer of the card creates a revolving account and grants a line of credit to the cardholder,

from which the user can borrow money for payment to a merchant or as a cash advance.

A credit card is different from a charge card: a charge card requires the balance to be paid in

full each month. In contrast, credit cards allow the consumers a continuing balance of debt,

subject to interest being charged. A credit card also differs from a cash card, which can be

used like currency by the owner of the card. A credit card differs from a charge card also in

that a credit card typically involves a third-party entity that pays the seller and is reimbursed

by the buyer, whereas a charge card simply defers payment by the buyer until a later date.

The size of most credit cards is 3 3⁄8 × 2 1⁄8 in (85.60 × 53.98 mm),  conforming to

the ISO/IEC 7810 ID-1 standard. Credit cards have a printed[4] or embossed bank card

number complying with the ISO/IEC 7812 numbering standard. Both of these standards are

maintained and further developed by ISO/IEC JTC 1/SC 17/WG 1. Before magnetic stripe

readers came into widespread use, plastic credit cards issued by many department stores were

produced on stock ("Princess" or "CR-50") slightly longer and narrower than 7810. Some

modern credit cards have a computer chip embedded in them for security reasons.

Debit card 

A debit card (also known as a bank card or check card) is a plastic payment card that

provides the cardholder electronic access to their bank account(s) at a financial institution.

Some cards may bear a stored value with which a payment is made, while most relay a

message to the cardholder's bank to withdraw funds from a payer's designated bank account.

The card, where accepted, can be used instead of cash when making purchases. In some

cases, the primary account number is assigned exclusively for use on the Internet and there is

no physical card.

In many countries, the use of debit cards has become so widespread that their volume has

overtaken or entirely replaced chequesand, in some instances, cash transactions. The

development of debit cards, unlike credit cards and charge cards, has generally been country

specific resulting in a number of different systems around the world, which were often

incompatible. Since the mid-2000s, a number of initiatives have allowed debit cards issued in

one country to be used in other countries and allowed their use for internet and phone

purchases.

Unlike credit and charge cards, payments using a debit card are immediately transferred from

the cardholder's designated bank account, instead of them paying the money back at a later

date.

Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for

withdrawing cash. Merchants may also offercashback facilities to customers, where a

customer can withdraw cash along with their purchase

Telephone banking 

Telephone banking is a service provided by a bank or other financial institution, that

enables customers to perform a range of financial transactions over the telephone, without the

need to visit a bank branch or automated teller machine. Telephone banking times are usually

longer than branch opening times, and some financial institutions offer the service on a 24-

hour basis.

From the bank's point of view, telephone banking minimises the cost of handling transactions

by reducing the need for customers to visit a bank branch for non-cash withdrawal and

deposit transactions.

Internet Banking

Online banking (OLB) is an electronic payment system that enables customers of a financial

institution to conduct financial transactions on a website operated by the institution, such as a

retail bank, virtual bank, credit union or building society. Online banking is also referred

as Internet banking, e-banking, virtual banking and by other terms.

To access a financial institution's online banking facility, a customer with Internet access

would need to register with the institution for the service, and set up some password (under

various names) for customer verification. The password for online banking is normally not

the same as for telephone banking. Financial institutions now routinely allocate customers

numbers (also under various names), whether or not customers have indicated an intention to

access their online banking facility. Customers' numbers are normally not the same as

account numbers, because a number of customer accounts can be linked to the one customer

number. The customer can link to the customer number any account which the customer

controls, which may be cheque, savings, loan, credit card and other accounts. Customer

numbers will also not be the same as any debit or credit card issued by the financial

institution to the customer.

To access online banking, a customer would go to the financial institution's secured website,

and enter the online banking facility using the customer number and password previously

setup. Some financial institutions have set up additional security steps for access to online

banking, but there is no consistency to the approach adopted.

Mobile banking 

Mobile banking is a term used to refer to systems that allow customers of a financial

institution to conduct a number of financial transactions through a mobile device such as

a mobile phone or tablet.

Mobile banking differs from mobile payments, which involve the use of a mobile device to

pay for goods or services either at thepoint of sale or remotely,[1] analogously to the use of a

debit or credit card to effect an EFTPOS payment.

The earliest mobile banking services were offered over SMS, a service known as SMS

banking. With the introduction of smart phones with WAP support enabling the use of

the mobile web in 1999, the first European banks started to offer mobile banking on this

platform to their customers.

Mobile banking has until recently (2010) most often been performed via SMS or the mobile

web. Apple's initial success with iPhoneand the rapid growth of phones based

on Google's Android (operating system) have led to increasing use of special client programs,

called apps, downloaded to the mobile device. With that said, advancements in web

technologies such as HTML5, CSS3 andJavaScript have seen more banks launching mobile

web based services to complement native applications. A recent study (May 2012) by Mapa

Research suggests that over a third of banks have mobile device detection upon visiting the

banks' main website. A number of things can happen on mobile detection such as redirecting

to an app store, redirection to a mobile banking specific website or providing a menu of

mobile banking options for the user to choose from.

Doorstep Banking

Salient Features of Doorstep Banking Services (safe & secure)

: Bank is offering the DSBS to its customers (Individual /Non Individual/Corporate) who are interested to avail the said services, for pick up of cash and delivery of cash from the door step of customer: The services are to be offered only to those customers in whose case proper KYC procedures have been followed. The service should be offered either at the residence or at the office of the customer.

Point Of Sale (POS)

The point of sale (POS) is the time and place where a retail transaction is completed. It is the

point at which a customer makes a payment to the merchant in exchange for goods or after

provision of a service. At the point of sale, the merchant would prepare an invoice for the

customer (which may be a cash register printout) or otherwise calculate the amount owed by

the customer and provide options for the customer to make payment. After receiving

payment, the merchant will also normally issue a receipt for the transaction. Usually the

receipt is printed, but it is increasingly being dispensed electronically.[1][2][3]

The POS in various retail situations would use customized hardware and software tailored to

their particular requirements. Retailers may utilize weighing scales, scanners, electronic and

manual cash registers, EFTPOS terminals, touch screens and a variety of other hardware and

software available. For example, a grocery or candy store may use a scale at the point of sale,

while a bar and restaurant may use software to customize the item or service sold when a

customer has a meal or drink request.

The point of sale is often referred to as the point of service because it is not just a point of

sale but also a point of return or customer order. Additionally, today POS software may

include additional features to cater for different functionality, such as inventory management,

CRM, financials, warehousing, etc.

AUTOMATED TELLER MACHINE - ATM

An electronic banking outlet, which allows customers to complete basic transactions without the aid of a branch representative or teller. 

There are two primary types of automated teller machines, or ATMs. The basic units allow the customer to only withdraw cash and receive a report of the account's balance. The more complex machines will accept deposits, facilitate credit card payments and report account

information. To access the advanced features of the complex units, you will usually need to be a member of the bank that operates the machine.

Virtual Banking

A direct bank is a bank without any branch

network that offers its services remotely via online banking and telephone

banking and may also provides access via ATMs (often through interbank

network alliances), mail and mobile. By eliminating the costs associated with bank branches

, directbanks can make significant savings which they may pass on to clients via higher intere

st rates or lowerservice charges.

The concept of a direct bank gained prominence with the advent of online banking technolog

y in the early1990s which led to a number of direct banks being created, although many were 

owned by traditionalbanks. A number of direct banks offer only online savings

account and these banks typically offerhigher interest rates that their traditional competitors a

s these banks can be very cost efficient tooperate. Since mid-2000s online and telephone bank

ing has become a mainstay of retail

banking andmost banks have incorporated these into their core services and transforming or r

educing their branchnetwork to mirror the advantages that direct banks have.

Electronic Clearing Services (ECS)

Payments are an indispensable part of our daily transactions, be it a consumer to a business, a

business to a consumer or a business to a business. Payments raise the GDP of a country thus

it is mandatory that the payment systems of the country are “safe, secure, sound, efficient,

accessible and authorize,” as stated by the mission statement of the Reserve Bank of India’s

publication on Payment Systems in India (2009–12). The Reserve Bank of India continually

strives towards ensuring the smooth progress of the payments system. In India it is the BPSS

(Board for Regulation of Payment and Settlement Systems) which is in charge of regulating

these systems.

India has multiple payments and settlement systems. RBI Still continues to evolve new

payment methods and slowly revamping the payments and settlement capability in India.

India supports a variety of electronic payments and settlement system, both Gross as well as

Net settlement systems

BIBLIOGRAPHY

http://www.yourarticlelibrary.com/banking/highlights-of-narasimham-committee-recommendations-on-banking-reforms-in-india/23497/

http://searchcio.techtarget.in/definition/National-Electronic-Funds-Transfer-NEFT

https://en.wikipedia.org/wiki/Credit_card

https://en.wikipedia.org/wiki/Debit_card

https://en.wikipedia.org/wiki/Telephone_banking

https://en.wikipedia.org/wiki/Online_banking

https://en.wikipedia.org/wiki/Mobile_banking

https://en.wikipedia.org/wiki/Point_of_sale

http://www.investopedia.com/terms/a/atm.asp

http://encyclopedia.thefreedictionary.com/Virtual+Bank

https://en.wikipedia.org/wiki/Payment_and_settlement_systems_in_India