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SUB: Financial Market
S.Y.B.Com (B&I)
Pre & Post Era of Banking Sector in India
Name of Group members:
1. Introduction
V.E.S Colle e of Arts, Science andCommerce
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INDEX
2. History of Banking Sector
3. Impact of liberalisation on finance &banking
4. Challenges after nationalization
5. Banking sector reform in 1992
6. Current banking structure
7. Increasing risk in banking sector
8. Information Technology in banking
sector
9. Internet banking
10. Challenges in e-banking
11. Bank Transformation
12. Opportunities in banking sector
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IntroductionIndian banking industry, the backbone of the countrys
economy, has always played a key role in prevention the
economic catastrophe from reaching terrible volume in thecountry. It has achieved enormous appreciation for its
strength, particularly in the wake of the worldwide economic
disasters, which pressed its worldwide counterparts to the
edge of fall down. If we compare the business of top three
banks in total assets and in terms of return on assets, the
overall development has been lucrative with enhancement in
banking industry efficiency and productivity. It should beunderlined here is financial turmoil which hit the western
economies in 2008 and the distress effect widened to the
majority of the other countries but Indian banking system
survived with the distress and showed the stable
performance. Indian banks have remained flexible even
throughout the height of the sub-prime catastrophe and the
subsequent financial turmoil.
The Indian banking industry is measured as a flourishing and
the secure in the banking world. The countrys economy
growth rate by over 9 percent since last several years and
that has made it regarded as the next economic power in the
World. Our banking industry is a mixture of public, private
and foreign ownerships.
The major dominance of commercial banks can be easily
found in Indian banking, although the co-operative and
regional rural banks have little business segment.
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remained the exclusive domain of Europeans for next several decades
until the beginning of the20th century.
Pre Nationalization Phase (1935 to 1969)
Organized banking in India is more than two centuries old. Until 1935all, the banks were in private sector and were set up by individuals
and/or industrial houses, which collected deposits from individuals
and used them for their own purposes. In the absence of any
regulatory framework, these private owners of banks were at liberty to
use the funds in any manner, they deemed appropriate and resultantly,
the bank failures were frequent. For many years the Presidency banks
acted as quasi-central banks,
EXAMPLE-Reserve Bank of India.
The Reserve Bank of India was set up on the recommendations Royal
Commission on Indian Currency and Finance also known as the
Hilton-Young Commission. The commission submitted its report in
the year 1926, though the bank was not set up for nine years. Reserve
Bank of India (RBI) was created with the central task of maintaining
monetary stability in India. The Government on December 20, 1934issued a notification and on January 14, 1935, the RBI came into
existence, though it was formally inaugurated only on April 1, 1935.
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Post Nationalization Phase (1969 to 1990)
I think nationalization of banks in India was an important
phenomenon. On July 19, 1969 the erstwhile government of India
nationalized 14 major private banks. Nationalization of bank in
India was not new or happening first time. From 1955 to 1960, State
Bank of India and other seven subsidiaries were nationalized under
the SBI Act of 1955.
It was not a step taken at random or because of the whims of the
leadership of the time, but reflected a process of struggle and political
change which had made this an important demand of the people.
Nationalisation took place in two phases, with a first round in 1969
covering 14 banks followed by another in 1980 covering seven banks.
Currently there are 27 nationalized commercial banks
Reasons for Nationalization1. The need for the nationalization was felt mainly because private
commercial banks were not fulfilling the social and developmental
goals of banking, which are so essential for any industrializing
country. Despite the enactment of the Banking Regulation Act in
1949 and the nationalization of the largest bank, the State Bank ofIndia, in 1955, the expansion of commercial banking had largely
excluded rural areas and small-scale borrowers.
2. The developmental goals of financial intermediation were not being
achieved other than for some favoured large industries and established
business houses. Whereas industrys share in credit disbursed by
commercial banks almost doubled between 1951 and 1968, from 34
percent to 68 per cent, agriculture received less than 2 per cent of total
credit.
3. The stated purpose of bank nationalization was to ensure that credit
allocation occur in accordance with plan priorities.
4. Reduce the hold of moneylenders and make more funds available
for agricultural development. Nationalization of bank was to actively
involve in poverty alleviation and employment generation programs.
Motives for nationalization are political as well as economic.
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Modern Phase from 1991 till dateThis is the phase of New Generation tech-savvy banks. This phase
can be called as The ReformsPhase. Starting of the modern and
current phase of Indian Banking is marked by important events.
Narasimhan Committee-The Committee on Banking Sector ReformsCommittee headed by Mr. M. Narasimhan, it is also known as
Narasimhan Committee The Committee, headed by former Reserve
Bank of India governor M Narasimhan, was appointed by the United
Front government to review the progress in banking sector reforms.
The committee submitted its recommendations to union Finance
Minister Yashwant Sinha in November of 1991.The Committee was
required to review the progress in the reforms in the banking sector
over the past six years with and to chart a programme on FinancialSector Reforms necessary to strengthen the India's financial system
and make it internationally competitive taking into account the vast
changes in the international and financial markets, technological
advances. Some of the recommendations Offered by the committee
are:
1. A reduction, phased over five years in the Statutory Liquidity
Ratio (SLR) to 25 percent, synchronized with the planned
contraction in Fiscal Deficit.2. A progressive reduction in the Cash Reserve Ratio (CRR).
3. Gradual deregulation of interest rates.
4. All banks to attain Capital Adequacy 8% in a phased manner.
5. Banks to make substantial provisions for bad and doubtful
debts.
6. Profitable and reputed banks are permitted to raise capital from
the public.
7. Instituting an Assets Reconstruction Fund to which the bad anddoubtful debts of banks and Financial Institutions could be
transferred at a discount.
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Impact of Economic Liberalization on Finance &
BankingPost nationalization now Indian banking sector was unshackled, and
along with the government banks a thick layer of private and foreign
banks was taking shape. The first of such new generation banks to be
set up was Global Trust Bank, which later amalgamated with Oriental
Bank of Commerce, ICICI Bank, HDFC Bank and Axis Bank. This
move, along with the rapid growth in the economy of India,
revitalized the banking sector in India. The next stage for the Indian
banking has been setup with the proposed relaxation in the norms for
Foreign Direct Investment, where all Foreign Investors in banks may
be given voting rights, which could exceed the present cap of 10%, at
present it has gone up to 49% with some restrictions. The new waveushered 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.
Challenges after Nationalisation and
liberalisationAfter nationalisation of banks increasing use of technology continuous mergers
and growth of the Indian banking system by the early 90s the near monopoly of
public sector banks faced competition from more customer focused private
sector entrants. This competition demanded the older and nationalised banks torevitalize their operations.
The year 1992 proved to the Indian banking system owing to
the scam-tainted stock market. Large proportion of household saving moved
into the banking system which recorded an annual growth of 20 percent indeposits.
But along with the continuous growth and modernisation,
several challenges still confront the banking sector. The main challenges are the
deployment of fund in quality assets and the management of revenues and costs
the problem of NPA (Non performing asset) and the overall credit recovery
system exist too.
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Banking Sector Reforms since 1992The first type of reforms mainly based on Narasimhan Committee
recommendations and the principals of new liberalized Indian
economy.
Out of the 27 public sector banks (PSBs), 26 PSBs achieved the
minimum capital to risk assets ratio (CRAR) of 9 per cent by March
2000. To enable the PSBs to operate in a more competitive manner,
the Government adopted a policy of providing autonomous status to
these banks, subject to certain benchmarks. The Reserve Bank
advised banks in February 1999 to put in place an ALM system,
effective April 1, 1999 and set up internal asset liability management
committees (ALCOs) at the top management level to oversee itsimplementation. Banks were expected to cover at least 60 percent of
their liabilities and assets in the interim and 100
per cent of their business by April 1, 2000.
Interest rate deregulation has been an important
component of the reform process. The interest
rates in the banking system have been largely
deregulated except for certain specific classes;these are savings deposit accounts, non-resident
Indian (NRI) deposits, and small loans up to
Rs.2 lakh and export credit.
In 1994, a Board for Financial Supervision (BFS) was constituted
comprising select members of the RBI Board with a variety of
professional expertise to exercise 'undivided attention to supervision'.
The BFS, which generally meets once a month, provides direction on
a continuing basis on regulatory policies including governance issues
and supervisory practices. It also provides direction on supervisory
actions in specific cases.
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The share of the public sector banks in the aggregate assets of the
banking sector has come down from 90 per cent in 1991 to around 75
per cent in 2004. The share of wholly Government-owned public
sector banks has declined from about 90 per cent to 10 per cent
of aggregate assets of all scheduled commercial banks during the
same period. Diversification of ownership has led to greater market
accountability and improved efficiency. Current market value of the
share capital of the Government in public sector banks has increased
manifold and as such, what was perceived to be a bailout of public
sector banks by Government seems to be turning out to be a profitable
investment for the Government.
A Board for Regulation and Supervision of Payment and Settlement
Systems (BPSS) has also been recently constituted to prescribe
policies relating to the regulation and supervision of alltypes of
payment and settlement systems, set standards for existing and future
systems, authorize the payment and settlement systems and determine
criteria for membership to these systems. Both the Houses of the
Parliament have passed the Credit Information Companies
(Regulation) Bill, 2004.
Consolidation in the banking sector has been another feature of the
reform process. This also encompassed the Development Financial
Institutions (DFIs), which have been providers of long-term finance.
Since 1993, twelve new private sector banks have been set up. As
already mentioned, an element of private shareholding in public
sector banks has been injected by enabling a reduction in the
Government shareholding in public sector banks to 51 per cent. As a
major step towards enhancing competition in the banking sector,foreign direct investment in the private sector banks is now allowed
up to 74 per cent, subject to conformity with the guidelines issued
from time to time. Currently, 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.
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Current Banking StructureBanks in India can be categorized into Scheduled and Non-scheduled
Banks
Scheduled Banks
Scheduled Banks in India constitute those banks, which have been
included in the Second Schedule of Reserve Bank of India(RBI) Act,
1934. RBI in turn includes only those banks in this schedule which
satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on
30 the June 1999, there were 300 scheduled banks in India having a
total network of 64,918 branches. The scheduled commercial banks in
India comprise of State bank of India and its associates(8),
nationalized banks (19), foreign banks (45), private sector banks (32),co-operative banks and regional rural banks
Non-Schedule Banks
Non-scheduled bank in India" means a banking company as defined in
clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949),
which is not a scheduled bank". Banks in India can also be classified in a
different way.
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Credit riskRisk that arises due to the possibility of a default in the
repayment obligation by borrowers of funds
Contingency Risk- Risk that arises due to the presence of off balance sheet
items such as grantees, letter of credit, underwriting commitments, etc.
The second banking sector reforms gave much
importance to the modernization and technology up gradation.
The IT Act, 1999 started the speedy process of e-banking.
Delivery of banks services to a customer at his office or
home by using electronic technology can be termed as e-banking.The quality, range and price of these e-services decide a banks
competitive position in the industry. The virtual financial services can
be largely categorized as follows:
Automated Teller Machines:- Cash withdrawals
- Details of most recent balance of account- Mini-statement
- Statement ordering facility
- Deposit facility
- Payments to third parties
EFTP:
-EFTPS card used to initiate transactions:
- Authorization and transaction capture processes take place
electronically.- Transaction confirmed manually.
- Funds not debited electronically.
Remote Banking Services:- Balance enquiry
- Statement ordering
- Funds transfer (payment) to third parties
- Funds transfer between customers different accounts
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- Order travellers cheques and other financial instruments.
Services Not Available Through Remote Banking:- Cash withdrawal
- Cash/ cherub deposit
- Sale of the more complex types of financial services such as life
insurance mortgages and (pensions).
Smart Cards:(i) Stored value cards
(ii) As a replacement for all types of magnetic
stripes cards like ATM Cards, Debit/Credit
Cards, Charge Cards etc.- One smart card to carry out all these
functions
- One smart card can contain the functionality of several different
types of cards issued by different banks while running different
types of networks.
- Smart card a truly powerful financial token, giving user access
- STM
- Debit facility- Charge facilities
- Credit facilities
- Electronic purse facilities at national and international level.
Internet Banking:The latest wave in IT is Internet banking. It is
becoming more obvious that the Internet has unleashed a
revolution that is affecting every sphere of life. Internet is aninterconnection of computer communication networks spanning
the entire globe, crossing all geographical boundaries. Touching
lifestyles in every sphere the Net has
redefined methods of communication,
work, study, education interaction,
health, trade and commerce. The Net
is changing everything, from the way
we conduct commerce, to the way we
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distribute information. Being an interactive two-way medium, the
Net, through innumerable websites, enables participation by
individual in B2B and B2C commerce, visits to shopping malls,
books-stores, entertainment sides, and so on cyberspace.
Challenges in E-BankingE-banking is based on technology that by its very nature is
designed to expand the virtual geographic reach of banks and customers
without necessarily requiring a similar physical expansion
Banking organisations have been delivering services to
consumers Electronic funds transfer including small payment and
corporate cash management systems as well as publicity accessible
machine for currency withdrawals and retail account management are
global fixture However, delivering financial services over public networksuch as internet is bringing about a fundamentals shift in the financial
services industry
These development present challenges for both banks and bank
supervisors Bank management needs to re-evaluate the traditional risk
management practices in light of new risk posed by r-banking activities
Bank supervisors need to take a balanced approach to the
introduction of new regulation and supervisory policy on E-banking
Bank Transformation1. The term transformation in Indian Banking Industry relates to
intermediately stage when the industry is passing from the earlier
social banking era to the newly conceived technology based
customer - centric and competitive banking. The activities of
banks have grown in multi-directional as well as in multi-
dimensional manners.2. During transformation, all known parameters of the earlier
regime continuously change.
3. The current transformation process in the Indian Banking has
many aspects. They pertain to:
(i) Capital Restructuring
(ii) Financial Re-engineering
(iii) Information Technology
(iv) Human Resource Development
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OpportunitiesIssue of HRM: Training, development and retaining talented andcommitted staff is a major emerging challenge before the public sector
banks. Today, our employee performance review systems are neither
objective nor transparent. They do not differentiate high performers, risktakers and innovators lot from amongst the total staff. Time has come to
measure the value of human capital and take urgent steps to ensure it to its
optimum level.
Lack of Risk Management:Today, instead of banks managing the risk,risk is managing the banks. A clear understanding of the risk-return profile
of each activity of the bank is crucial to ensure the soundness and solvency
of the organization. Skill up gradation and preparing a cadre for the risk
organization is a major challenge for public sector banks particularly in the
wake of high labour turnover.Lack of Actionable Planning:Lack of planning or ineffective planningis very relevant to public sector banks. Though all the banks have
established elaborate performance budgeting system and created MIS, it
does not meet the managements present requirements. Basically, theentire planning process is still deposit and credit oriented that too, without
any cost and yield linkages
Customers Expectations:In the era of e-banking and severecompetition, the expectations of the bank customers have increased. Due to
this banks should offer a broad range of deposits, investment and creditproducts through diverse distribution channels including upgraded
branches, ATMs, telephone and Internet.
Become more customer centric, offering a wide range of products through
multiple delivery channels
Become proficient in managing assets and liabilities according to risk and
return
Pay greater attention to profitability including cost-reduction and
increasing fee-based income.
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Conclusion:
The face of banking is changing rapidly. Competition is going
to be tough and with financial liberalisation under the WTO,banks in India will have to benchmark themselves against the
best in the world. For a strong and resilient banking and financial
system, therefore, banks need to go beyond peripheral issues
and tackle significant issues like improvements in profitability,
efficiency and technology, while achieving economies of scale
through consolidation and exploring available cost-effective
solutions. These are some of the issues that need to be addressed
if banks are to succeed, not just survive, in the changing milieu.
The first and obvious step they should take is see to it that
the basic problem fuelling dissatisfaction have been
addressed
After repairing this basic deficiency, banks must ensure thattheir services is competitive
To prevent online banking from remaining expensive
additional channel that does little to retain footloose
customers, banks must act quickly
To create the policies which are beneficial to thedevelopment of banking sector
To provide a satisfactory services to customer so that the
growth of the sector will be done
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Concept of DeregulationLessons from banking history in India by Prof .K.V. Bhanu
Murthy, Delhi University.
Innovation in banking sector
Principal and Practices of banking & insurance
History of Banking sector