leave and licence agreement

1

COMMERCIAL BANKING IN INDIA

1.INTRODUCTION

Opinions differ as to the origin of the work "Banking". The word "Bank" is

said to be of Germanic origin, cognate with the French word "Banque" and

the Italian word "Banca", both meaning "bench". It is surmised that the word

would have drawn its meaning from the practice of the Jewish money-

changers of Lombardy, a district in North Italy, who in the middle ages used

to do their business sitting on a bench in the market place. Again, the

etymological origin of the word gains further relevance from the derivation of

the word "Bankrupt" from the French word "Banque route" and the Italian

word "Banca-rotta" meaning "Broken bench" due probably to the then

prevalent practice of breaking the bench of the money-changer, when he

failed.

Banking is different from money-lending but two terms have in

practice been taken to convey the same meaning. Banking has two important

functions to perform, one of accepting deposits and other of lending monies

and/or investment of funds. It follows from the above that the rates of interest

allowed on deposits and charged on advances must be known and reasonable.

The money-lender advances money out of his own private wealth, hardly

accepts deposits and usually charges high rates of interest. More often, the

rates of interest relate to the needs of the borrower. Money-lending was

practised in all countries including India, much earlier than the recent type of

Banking came on scene.

In the earlier societies functions of a bank were done by the corresponding

institutions dealing with loans and advances. Britishers brought into India the

modern concept of banking by the start of Bank of England in 1694. In 1708,

the bank of England was given the monopoly for the issue of currency notes

2


by an Act. In nineteenth century various banks started operations, which

primarily were receiving money on deposits, lending money, transferring

money from one place to another and bill discounting.

Commercial banks are the oldest, biggest, and fastest growing intermediaries

in India. they are also the most important depositories of public saving and

the most important disburses of finance. Commercial banking in India is a

unique systems, the like of which exist nowhere in the world. the truth of this

statement becomes clear as one studies the philosophy and approaches that

have contributed to the evolution of the banking policy, programmes and

operation in India.

The banking systems in India works under the constraints that go with social

control and public ownership. the public ownership of banks has been

achieved in three stages:1955,July1969, and April 1980. Not only the private

sector and foreign banks are required to meet targets in respect of sectoral

development of credit, regional distribution of branches, and regional credit-

deposits ratios. the operations of banks have been determined by Lead Bank

Scheme, Differential Rate of Interest Scheme, Credit Authorisation Scheme,

inventory norms and lending systems prescribed by the authorities, the

formulation of the credit plans, and Service Area Approach.

A commercial bank is a type of financial intermediary and a type of bank.

Commercial banking is also known as business banking. It is a bank that

provides checking accounts, savings accounts, and money market accounts

and that accepts time deposits. After the Great Depression, the U.S. Congress

required that banks engage only in banking activities, whereas investment

banks were limited to capital market activities. As the two no longer have to

3


be under separate ownership under U.S. law, some use the term "commercial

bank" to refer to a bank or a division of a bank primarily dealing with

deposits and loans from corporations or large businesses. In some other

jurisdictions, the strict separation of investment and commercial banking

never applied. Commercial banking may also be seen as distinct from retail

banking, which involves the provision of financial services direct to

consumers. Many banks offer both commercial and retail banking services.

A commercialbank is a type of financial intermediary and a type of bank.

Commercialbanking is also known as business banking. It is a bank that

provides checking accounts, savings accounts market activities. As the two no

longer have to be under separate ownership under U.S. law, some use the

term "commercialbank" to refer to a bank or a division of a bank primarily

dealing.

Presently, as a part of deregulation many new generation private sector banks

have been permitted viz. ICICI 1 (IDBI) HDFC and the nationalized banks

are being privatized to the extent of 49%.

4


1.1 DEFINATION AND MEANING

1.1 DEFINITION

Section 5 [B] Of The Act Define, Banking As, "Accepting For The Purpose

Of Lending Or Investment Of Deposits Of Money From The Public

Repayable On Demand Or Otherwise & Withdrawal By Cheques, Drafts,

Order Or Otherwise".

According To Prof. Sayers, "A Bank Is An Institution Whose Debts Are

Widely Accepted In Settlement Of Other People's Debts To Each Other." In

This Definition Sayers Has Emphasized The Transactions From Debts Which

Are Raised By A Financial Institution.

Oxford Dictionary defines a bank as "an establishment for custody of money, which it pays out on customer's order.

MEANING

A commercial bank is a financial intermediary which collects credit from

lenders in the form of deposits and lends in the form of loans. A commercial

bank holds deposits for individuals and businesses in the form of checking

and savings accounts and certificates of deposit of varying maturities while a

commercial bank issues loans in the form of personal and business loans as

well as mortgages. The term commercial bank came about as a way to

5


distinguish it from an "investment bank." The primary difference between a

commercial bank and its counterpart is that a commercial bank earns revenue

by issuing primary loans from its pool of deposits while an investment bank

brings debt and equity offerings to market for a fee. Among its assets,

including loans, a commercial bank holds a portfolio of other securities to

generate proprietary income.

Commercial banking activites are different than those of investment banking,

which include underwriting, acting as an intermediary between an issuer of

securities and the investing public, facilitating mergers and other corporate

reorganizations, and also acting as a broker for institutional clients.

COMMERCIAL BANKS BASIC DEPOSITS, CREDIT, CRR

AND SLR IS COMPULSORY TO KEEP WITH RBI

Deposits Rs. 17,81,580Crore

Credits Rs. 11,27,433Crore

Bank Rate 6% (even in Oct 2005)

Prime Lending Rate (PLR) in between 10.5% -11.50%

CRR 4.50%

SLR 25%

6


1.2 HISTORY AND STRUCTURE OF COMMERCIAL

BANKS IN INDIA

12.1 INTRODUCTION

HISTORY OF BANKING IN INDIA:

Banking in India has a very old origin. It started in the Vedic period where

literature shows the giving of loans to others on interest. The interest rates

ranged from two to five percent per month. The payment of debt was made

pious obligation on the heir of the dead person.

Modern banking in India began with the rise of power of the British. To raise

the resources for the attaining the power the East India Company on 2nd June

1806 promoted the Bank of Calcutta. In the mean while two other banks

Bank of Bombay and Bank of Madras were started on 15th April 1840 and 1st

July, 1843 respectively. In 1862 the right to issue the notes was taken away

from the presidency banks. The government also withdrew the nominee

directors from these banks. The bank of Bombay collapsed in 1867 and was

put under the voluntary liquidation in 1868 and was finally wound up in 1872.

The bank was however able to meet the liability of public in full. A new bank

called new Bank of Bombay was started in 1867.

On 27th January 1921 all the three presidency banks were merged together to

form the Imperial Bank by passing the Imperial Bank of India Act, 1920. The

bank did not have the right to issue the notes but had the permission to

manage the clearing house and hold Government balances. In 1934, Reserve

Bank of India came into being which was made the Central Bank and had

7


power to issue the notes and was also the banker to the Government. The

Imperial Bank was given right to act as the agent of the Reserve Bank of India

and represent the bank where it had no braches.

In 1955 by passing the State Bank of India 1955, the Imperial Bank was taken

over and assets were vested in a new bank, the State Bank of India..

Bank Nationalization:

After the independence the major historical event in banking sector was the

nationalization of 14 major banks on 19th July 1969. The nationalization was

deemed as a major step in achieving the socialistic pattern of society. In 1980

six more banks were nationalized taking the total nationalized banks to

twenty.

8


1.3 TYPES OF COMMERCIAL BANKS

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.

Types of Commercial banks: Commercial banks are of three types i.e.,

1 1 PUBLIC SECTOR BANKS,

2 2 PRIVATE SECTOR BANKS,

3 3 FOREIGN BANKS

1. 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.

9


2. 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 limitedliability. 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.

3. 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, Grindlay’s Bank, etc. The number of foreign banks operating

in our country has increased since the financial sector reforms of 1991.

10


1.4. OBJECTIVES OF COMMERCIAL BANKS

Commercial banks, as the name implies, are designed to facilitate commerce

by lending money to businesses. Commercial banks typically offer checking

accounts and other money services, such as wire and electronic transfer

services.

1 ) Commercial Lending

Commercial banks lend money to business for various purposes, such as

buying inventory, purchasing equipment and facilitating business operations.

When loans are made to a business, the bank first looks at how it is going to

be repaid. All commercial loan applications must identify a source of

repayment, such as the sale of inventory.

2) Commercial Real Estate Lending

Commercial banks also lend money for the purchase or construction of

commercial real estate, such as shopping centers, office buildings and

warehouses. With real estate, the bank is looking for cash flow generated by

the property as the source of repayment for the loan. Commercial banks do

not knowingly make speculative real estate loans.

11


3) Commercial Transactions

Commercial banks facilitate everyday commerce by cashing and processing

checks, processing credit card transactions and providing deposit accounts for

businesses. The banks use the deposit funds they hold to make the previously

described loans to businesses. Since checking account deposits have little or

no interest rate expense, the banks profit from making loans at a higher rate.

This is known as spread income.

4) Fee Income

Commercial banks earn spread income on the difference between their cost of

deposits and the loan income they receive, but they also earn considerable

income from fees. These are fees are charged for maintaining accounts,

overdraft fees, credit and debit card transaction processing fees, deposit fees

and many other miscellaneous fees.

5) Bank Income

Commercial banks earn spread income on loans and investments and

additional income from fees charged to customers for services and penalties.

Bank expenses include losses on bad loans, maintaining facilities and

personnel costs. Most commercial banks operate profitably but are subject to

sudden loan losses when the economy sours.

12


1.5. THE ROLE AND FUNCTIONS OF

COMMERCIALBANKS

A PRIMARY FUNCTIONS

Accepting Deposits : Commercial bank accepts various types of deposits from

public especially from its clients. It includes saving account deposits,

recurring account deposits, fixed deposits, etc. These deposits are payable

after a certain time period.

Making Advances : The commercial banks provide loans and advances of

various forms. It includes an over draft facility, cash credit, bill discounting,

etc. They also give demand and demand and term loans to all types of clients

against proper security.

Credit creation : It is most significant function of the commercial

banks. While sanctioning a loan to a customer, a bank does not provide cash

to the borrower Instead it opens a deposit account from where the borrower

can withdraw. In other words while sanctioning a loan a bank automatically

creates deposits. This is known as a credit creation from commercial bank.

lending money by overdraft, installment loan, or other means

providing documentary and standby letter of credit, guarantees, performance

bonds, securities underwriting commitments and other forms of off balance

sheet exposures

13


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.

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 is allowed either on the security of

assets, or on personal security.

SECONDARY FUNCTIONS OF COMMERCIAL BANKS

Along with the primary functions each commercial bank has to perform

several secondary functions too. It includes many agency functions or general

utility functions. The secondary functions of commercial banks can be

divided into agency functions and utility functions.

Agency Functions : Various agency functions of commercial banks are

To collect and clear cheque, dividends and interest warrant.

To make payment of rent, insurance premium, etc.

To deal in foreign exchange transactions.

To purchase and sell securities.

To act as trusty, attorney, correspondent and executor.

14


To accept tax proceeds and tax returns.

General Utility Functions : The general utility functions of the commercial

banks include

To provide money transfer facility.

To issue traveller'scheque.

To act as referees.

To accept various bills for payment e.g phone bills, gas bills, water bills, etc.

To provide merchant banking facility.

To provide various cards such as credit cards, debit cards, Smart cards, etc.

Besides the primary 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, travellerscheques, circular notes etc.

b) Undertaking safe custody of valuables, important documents, and

securities by providing safe deposit vaults or lockers;

c) Providing customers with facilities of foreign exchange.

d) Transferring money from one place to another; and from one

Branch to another branch of the bank.

e) Standing guarantee on behalf of its customers, for making

15


PAYMENTS for purchase of goods, machinery, vehicles etc.

f) Collecting and supplying business information;

g) Issuing demand drafts and pay orders; and,

h) Providing reports on the credit worthiness of customers.

16


1.6 SPECIAL ROLE OF COMMERCIAL BANKS

As said earlier, commercial banks have a special role in India. In fact, many

financial experts even abroad have, of late, been emphasising the special

place that banks hold in their countries also. The "privileged role" of the

banks is the result of their unique features. For example, the liabilities of

banks are money, and, therefore, they are an important part of the payments

mechanism of any country; they also have access to the discount window of

the RBI, call money market (as both borrowers and lenders), and the deposit

insurance. It would be difficult to eliminate such distinctive features of banks

in the near future. There is also an important question as to whether they

should be wiped out, and, if it is done, whether it would not have adverse

consequences on the financial system.

For a financial system to mobilise and allocate savings of the country

successfully and productively, and to facilitate day-to-day transactions, there

must be a class of financial institutions that the public views as safe and

convenient outlets for its savings. In virtually all countries, the single

dominant class of institutions that has emerged to play this crucial role as both

the repository of a large fraction of the society's liquid savings and the entity

through which payments are made is the commercial banks. The structure and

working of the banking system are integral to a country's financial stability

and economic growth.

17


Bank lending is specially important for companies. The theory of financial

contracting under asymmetric information holds that information-intensive

and information-problematic firms submit to the tight and detailed loan

covenants so as to reduce agency costs. They delegate the tasks of monitoring

and renegotiating debt contracts to financial intermediaries because these

tasks are costly and the intermediaries are in a better position to reduce the

costs. Intermediaries are more efficient in monitoring debt contracts because

they are unlikely to free-ride on information-production by others as they

have a larger stake, and they can renegotiate contracts more cheaply than the

dispersed debenture holders. The public bond covenants tend to set their

conditions on events that are relatively easy to verify, viz., a major change in

capital structure or a downgrading of credit rating. In contrast, the

intermediary loan contracts are conditioned by performance measures such as

working capital and net worth which are less easily controlled by the

managers.

Further, the violation of a financial covenant often triggers financial distress.

When this happens, banks can restructure the terms of contracts, viz., wave

covenants, extend maturity, extend more loans, and require more collateral.

Such a flexibility reduces the cost of financial distress. Information

asymmetries and free-riding by bond-holders, on the other hand, may force

the financially distressed firms into inefficient spending cutbacks, and even

bankruptcy. It has been found in the US that the firms' stock prices rise after

an announcement that they have received bank loans, while they fall in

response to announcement of a public bond offering.

18


Similarly, there are reasons why loans from even other financial institutions

may not be a perfect substitute for bank loans. The economies of scope

between deposit taking and lending give banks an information advantage over

finance companies and other financial institutions. The deposit history of

firms may inform banks about the credit risk involved in lending to these

firms. Information on deposits activity may also make it easier for banks to

monitor working capital covenants. The phenomenon of "compensating

balances" can mostly exist only in the case of banks, and not other

institutions. The lending and deposit-taking activities of banks are

complementary, and, go to build up banking relationship which increases the

availability of funds to the firms, which, in turn, enables them to partially

avoid taking more expensive trade credit. Personal relationships are far less

important in borrowing from other financial institutions than from banks.

Moreover, significant differences in collateral requirements exist between

banks and other financial institutions. All such differences effectively

segment the market for business lending, and make bank loans highly

unsubstitutable.

The Indian banking system has a very wide reach and deep presence in

metropolises, cities, semi-urban areas, and the remotest corners of the rural

areas with its vast number of branches. It is one of the largest banking

systems in the world. It has been rightly claimed in certain circles that the

diversification and development of the Indian economy are in no small

measure due to the active role banks have played in financing economic

activities of different sectors They have been playing an important role in

developing mutual funds, merchant banks, Primary Dealers, asset

19


management companies, and debt markets. They operate as issuers, investors,

underwriters, guarantors in financial-markets. By their participation, banks

influence the growth and liquidity of debt markets.

They would help in securitisation of debt market. They hold about 60 per cent

of debt stock of government securities, and they account for more than 50 per

cent of the issuance of bonds through public issues and private placements.

Because of such considerations, the important position which banks have

historically come to occupy in India should not be unwittingly destroyed or

undermine in the name of promoting equity culture. Otherwise, monetary

authorities would find it more and more difficult to achieve the goal of

stability of the financial system and of the prices. The banking reforms,

therefore, must aim not only at profitable banking but also at a viable, sound,

safe, and social banking.

20


1.7 INVESTMENT OF COMMERCIAL BANKS

A)BANKS HAVE FOUR CATEGORIES OF ASSETS:

Cash in hand and balances with the RBI,

Assets with the banking system,

Investments in government and other approved securities, and

Bank credit.

Among these assets, investment in cash and government securities serves the

liquidity requirements of banks and is influenced by the RBI policy.

Quantitatively, bank credit and investment in government securities are banks'

most important assets. Commercial banks in India invest a negligible part of

their resources in shares and debentures of joint stock companies. In fact, for

a long time they were discouraged from undertaking such investments.

However, since 2/3 years, the policy in this regard has been liberalised and at

present banks are allowed to invest five per cent of their incremental deposits

in corporate shares and convertible debentures.

Commercial banks' investments are of three types:

(a) Government of India securities;

(b) other approved securities, and

(c) non- approved securities.

While the first two types are known as SLR securities, the third one is known

as non-SLR securities.

21


INVESTMENT IN SLR SECURITIES

At present, the banks are statutorily required to invest 25 per cent of their

demand and time liabilities in the first two types of securities. The

investments in the first type of securities is the major part of banks'

investments. The government securities accounted for 95.59 per cent of their

total investment portfolio in 2002-03. Their investments in the second type

are marginal, while those in the third type are emerging as substantial

investments.

The commercial banks' investments in Central government securities were

28.1 per cent and 31. 6 per cent of their total assets in 2001-02 and 2002-03,

respectively. The other approved securities accounted for hardly one-or two

per cent of the assets of commercial banks in the years just mentioned.

The phenomenon of investments in government securities far in excess of

statutory requirements has been due to

(a) High fiscal deficit effect,

(b) Capital adequacy norms effect,

(c) Foreign exchange sterilisation effect, and

(d) Slack credit demand effect.

All these effects are easy to understand. The fiscal deficit has been largely

financed through public borrowings, and the banks have been the major

subscribers to the government borrowing programme. Similarly, due to

unprecedented and heavy increase in foreign exchange accruals, the RBI has

been carrying out an intensive sterilisationProgramme which has resulted in a

22


significant increase in the supply of government securities, which the banks

have been purchasing. Further, all scheduled banks are required to maintain

minimum capital to total risk weighted assets ratio which was nine per cent in

2002-03. Given the very-low-risk (risk less) nature of the government

securities, banks have preferred to buy and hold substantial amount of

government securities for this purpose also. Finally, due to industrial

recession in the recent past, the industrial sector's credit off take has been

slack, and banks, therefore, have invested their surplus liquidity in

government securities.

Thus, the banks' investments in government securities cannot really be

decided in terms of the ideology of public vs. private sector. The large size of

the State and the attendant enormous volume of government expenditure, the

portfolio management considerations of banks, the accrual of resources to the

banks, foreign capital flows, and demand for credit, have always determined

and will continue to determine the level of investment-deposit ratio of banks.

Hence, it is erroneous to argue, as the RBI has done, that a large recourse of

banks to gilts to invest their resources is a dissipation of "banking knowledge

capital" regarding credit appraisal, or a possibility of severing of the link

between liquidity, credit, money, and economic activity.

23


INVESTMENT IN NON-SLR SECURITIES

After 1985, there has been a liberalisation of investment norms for banks

which has enabled them to be active players in financial markets. The ambit

of eligible investments has been enlarged to cover Commercial Paper (CP)"

units of mutual funds, shares and debentures of PSUs, and shares and

debentures of private corporate sector, which are all known as non-SLR

investments. Similarly, the limit on investments in the capital market has been

gradually increased. Now, banks can invest in equities to the extent of five per

cent of their outstanding (and not incremental as earlier) advances. Effective

May 2001, the total exposure of a bank to stock markets with sub-ceilings for

total advances to all stock brokers and merchant bankers has been limited to

five per cent of the total advances (including CPs) as on March 31 of the

previous year.

The Aggregate balance sheet of SCBs expanded at a higher rate of 19.3%

excluding the impact of conversion of a non-banking entity into a banking

entity since October 1, 2004) during 2004-2005 as compared with 16.2

percent in 2003-04. The ratio of assets of SCBs to GDP at factor cost at

current prices increased significantly to 80% from 78.3% in 2003-04

reflecting further deepening of leverage enjoyed by the banking sector. The

degree of leverage enjoyed by the banking system as reflected in the equity

multiplier declined to 15.8-16.9 in the previous year.

24


The behavior of major balance sheet indicators show that a divergent during

2004-05. on the back of robust economic growth and industrial recovery,

loans and advances witnessed strong growth, while investment in rising

interest rate scenario, slowed down significantly. Deposits showed a

lackluster performance in the wake of increased competition from other

saving instruments. Borrowings and net-owned funds however, increased

sharply underscoring the growing importance of non-deposits resources of

SCBs.

Bank group-wise, assets of new private sector banks grew at the highest rate.

(19.4%),followed by public sector banks(15.1%eacluding the conversion

impact),foreign banks (13.6%) and old private sector banks (10.6%).PSBs

continued to accounts for the major share in he total assets, deposits, advances

and investments of SCBs at end-March 2005, followed distantly by new

private sector banks. The share of foreign banks in total assets and advances

was higher than that of old private sector banks.

DEPOSITS

Deposits of SCBs grew at a lower rate 15.4 per cent (excluding the

conversion impact) during 2004-05 as compared with 16.4 per cent in the

previous year on account of slowdown in demand deposits and savings

deposits. Deceleration in demand deposits was due mainly to the base effect

as demand deposits had witnessed an usually high growth last year. The

growth in demand deposits, however was in line with the long-term average.

Savings deposits, which reflect the strength of the retail liability franchise and

are at the core of the banks’ customer acquisition efforts grew at a healthy

25


rate, though the growth was somewhat lower than the high growth of last

year. The higher growth of term deposits was mainly o ac count of NRI

deposits and certificate of deposits (CDs).Excluding these deposits, the

growth rate of term deposits showed a declaration, which was on account of a

possible substitution in favour of postal deposits and other investments

products, which continued to grow at a high rate benefiting from tax

incentives and their attractive rate of return in comparison with time deposits.

FACTORS AFFECTING COMPOSITION OF BANK

DEPOSITS

The following factors appear to be relevant:

(a) Increase in national income.

(b) Expansion of banking facilities in new areas and for new classes of

people.

(c) Increase of banking habit.

(d) Increase in the relative rates of return on deposits.

(e) Increase in deficit financing.

(f) Increase in bank credit.

(g) Inflow of deposits from Non-Resident Indians (NRIs).

(h) Growth of substitutes.

26


1.8 COMMERCIAL BANKS AND NATIONALISE

BANKS

14 banks are nationalised banks in India. There are canarabank,karnataka

bank, state bank of India, Indian bank and many more..

PSU bank-The term public sector banks is used commonly in India. This

refers to banks that have their shares listed in the stock exchanges NSE and

BSE and also the government of India holds majority stake in these

banks.Eg:-State bank of India.

Commercial bank:- An institution which accepts deposits, makes business

loans, and offers related services. Commercial banks also allow for a variety

of deposit accounts, such as checking, savings, and time deposit. These

institutions are run to make a profit and owned by a group of individuals, yet

some may be members of the Federal Reserve System. While commercial

banks offer services to individuals, they are primarily concerned with

receiving deposits and lending to businesses. Commercial Banks in India are

broadly categorized into Scheduled Commercial Banks and Unscheduled

Commercial Banks. The Scheduled Commercial Banks have been listed

under the Second Schedule of the Reserve Bank of India Act, 1934. The

selection measure for listing a bank under the Second Schedule was provided

in section 42 (60 of the Reserve Bank of India Act, 1934. Eg:-HDFC bank,

ICICI Bank, Federal Bank etc.

27


1.9 RBI PENALISES 19 COMMERCIAL BANKS

Srinagar, May 1: The Reserve Bank of India has imposed penalties on 19

commercial banks.

A notification by the central bank, copy of which is available on its site, said

in exercise of the powers vested with it under the provisions of Section

47A(1)

(b) Read with Section 46(4)(i) of the Banking Regulation Act, 1949, the RBI

has imposed penalties on 19 commercial banks.

Some of the banks on whom the penalties have been imposed are ICICI Bank,

HDFC Bank, PNB Paribas, Yes Bank, etc.

“The penalties have been imposed for contravention of various instructions

issued by the Reserve Bank in respect of derivatives, such as, failure to carry

out due diligence in regard to suitability of products, selling derivative

products to users not having risk management policies and not verifying the

underlying/ adequacy of underlying and eligible limits under past

performance route,” it said.

The notification, a copy of which is with Greater Kashmir, reads: “The

Reserve Bank had issued Show Cause Notices to these banks. In response to

this, the banks submitted their written replies. On a careful examination of the

banks’ written replies and the oral submissions made during the personal

hearings, the Reserve Bank found that the violations were established and the

penalties were thus imposed.”

28


1.10.COMMERCIAL BANKS AND MICROFINANCE

Within the spectrum of lower-income population who lack access to financial

services, a distinction can be drawn between the extremely poor and the

economically active poor. The extremely poor are considered to be those

individuals who have insufficient resources to meet defined basic

consumption needs, including people who are not qualified to work (due to

age, health and ethnic origin reasons, among others) or whose income is so

low that they are not able to meet their household basic needs. This group has

prior needs such as food and shelter, and therefore requires tools distinct from

financial services to get out of poverty.

In this regard, Robinson M.S. (2001) asserts: “It is sometimes forgotten —

although generally not by borrowers— that another word for credit is debt.

When loans are provided to the very poor, the borrowers may not be able to

use the loans effectively because they lack opportunities for profitable self-

employment (thus being) unable to repay loan principal and interest.”

INCENTIVES AND DISINCENTIVES FOR COMMERCIAL

BANKS ENTRY INTO MF

Banks and financial institutions have been entering the microfinance market

in increasing numbers over the past years. This phenomenon (known as

downscaling), together with that of upgrading, is resulting in a growing

number of formal regulated institutions partially or totally moving into MF.

It is necessary to analyze what drives a traditional banker to engage in MF in

order to fully understand why downscaling has developed so much

worldwide. There are several factors that motivate the bank to start making

29


microloans. These factors are related both to the bank’s internal organization

and to the market in which this bank operates. However, the main incentive is

basically related to the fact that profits are in line with the risks incurred.

Growing competition in markets traditionally served by banks —e.g., loans to

big companies, small and medium-sized businesses and consumers— along

with the resulting fall in banks’ returns has encouraged the search for new

market niches. In countries with no experience in MF, there exists an

unattended market segment which may be viewed by banks as a potential

source of rapid growth and positive returns.

Entering a new sector enables banks to diversify their loan portfolio, focusing

on a population segment previously unattended by them. By making loans to

thousands of small borrowers, the micro lending portfolio itself achieves

substantial diversification in terms of number of clients served, although the

level of diversification by activity and geographical area is usually low.

Commercial banks can overcome this obstacle thanks to their branch

networks across the major cities in the country. In addition, the performance

of the micro lending portfolio may have low correlations with traditional bank

business lines due to the very different nature of the clients and activities.

Similarly, having a sector specialized in MF may help commercial banks

improve their public image, as caring for the most disadvantaged social

sectors is welcomed by clients and society in general.

30


DRIVERS FOR BANK ENTRY INTO MICROFINANCE

Internal Factor External Factor

Profit Large microenterpise or low-

income market

Risk diversification Competition

Excess liquidity Trend or fad

Image Regulations

Cross-selling opportunities Government or donor initiative

Bank leadership Market pressure on margins

Social responsibility Desertion of traditional clients

Public relations

Compatibility with bank strategy

ACTIVITIES (GENERALLY) AUTHORIZED BY THE BCRA

TO BE PERFORMED BY COMMERCIAL BANKS AND

FINANCE COMPANIES

1. Stock exchange brokers or dealers operating outside the stock exchange.

networks’ exploitation and management.

3. Systems for electronic transmission of transactions with institutions and/or

clients.

4. Pension funds management.

31


5. Mutual fund portfolio management (management company).

6. Issuance of credit/debit and other similar instruments.

7. Closed savings management.

8. Financial assistance through leasing transactions of capital goods, durable

goods and real estate, acquired for such

purpose (“leasing”) or over credits arising from sales (“factoring”).

9. Management of public utilities, loan, etc. collection, payment of salaries,

payments to suppliers and fiscal receipt

collection.

10. Services of data processing and/or transmission of information related to

financial activities.

11. Services of credit information for commercial and financial use (financial

record database)

12. Advice on financial and investment issues, and for mergers and/or

acquisitions of companies, provided that this

13. Mutual guarantee companies, acting as protector partner.

14. Funds management and or trusts administration advice as regards

activities consistent with the institution type.

15. Financial trusts fiduciary.

16. Transportation and or custody of money and securities, including

transport service of mailing and financial

32


documentation of institutions and or their customers. Associated security

service for local financial institutions. In

both cases, as long as it is a complement of the service provided to the owner

institution/s.

17. Service of securities and book-entry mortgage bond registry officer

18. Service of liquidation of securities operations.

19. Clearing houses.

20. Temporary acquisition of interest in companies in order to facilitate their

development, with the aim of selling the

relevant stock holdings in the future. Financial advice on planning and

managing to such companies.

33


1.11. TAX REFORM AFFECT COMMERCIAL

BANKS

Iast year, Congress enacted the Tax Reform Act of 1986, which

fundamentally restructures and sim- plifies the federal income tax system.

Beginning in 1987, individuals and corporations face much simpler federal

income tax rules that contain lower marginal tax rates. There is widespread

speculation about the effects of such sweeping federal income tax reform.

Economists, policymakers, and politicians are debating the extent to which

the new tax rules could adversely affect specific economic sectors or groups,

particularly capital-intensive indumies, certain income classes of individual

taxpayers, real estate, and the banking industry. In the commercial banking

industry, the new tax rules will affect banks at a time when the commercial

banking system is undergoing profound structural changes that are eroding

the industry's ability to consistently generate healthy profits on traditional

banking products and services. During the balance of the 1980s and into the

19!90s, commercial banks will face several critical issues, including risk-

based capital standards, deregulation, broader geographic competition, and

possibly increasing competition fiom nonbank companies like Sears, Roebuck

and Company, and Merrill Lynch & Co., Inc.

Tax-Exempt Securities. Under the old tax rules, commercial banks could

deduct 80 percent of interest expenses that were incurred to carry taxexempt

securities in their asset portfolios. As a consequence, there was a strong

incentive for commercial banks to hold municipal securities to reduce their

federal tax burden.

34


The new tax rules disallow 100 percent of the interest charge for carrying

municipal obligations acquired after August 7 , 1986. There is one

exception: under the new tax rules, a municipality still will be permitted to

sell up to $10 million of bonds to a financial institution per year, and the

financial institution can apply the old interest expense disallowance rule (20

percent) to the bonds.

The old tax law required that a commercial bank determine its bad-debt

reserve deduction for tax purposes by using one of two methods: the

experience method or the percentage method. Under the experience method,

a bank bases its loan-loss deduction on the average loan losses of the previous

six years. Under the percentage method, a bank deducts provisions to a loan-

loss reserve equal to 0.6 percent of eligible loans outstanding.

35


1.12 COMMERCIAL BANKS SERVICES PROVIDED

TO THEIR CUSTOMERS

Different modes of Acceptance of Deposits

Banks receive money from the public by way of deposits. The following

types of deposits are usually received by banks:

i) Current deposit

ii) Saving deposit

iii) Fixed deposit26 :: Business Studies

iv) Recurring deposit

v) Miscellaneous deposits

i) Current Deposit

Also called ‘demand deposit’, current deposit can be withdrawn by the

depositor at any time by cheques. Businessmen generally open current

accounts with banks. Current accounts do not carry any interest as the amount

deposited in these accounts is repayable on demand without any restriction.

The Reserve bank of India prohibits payment of interest on current accounts

or on deposits up to 14 Days or less except where prior sanction has been

obtained. Banks usually charge a small amount known as incidental charges

on current deposit accounts depending on the number of transaction. Savings

deposit/Savings Bank Accounts Savings deposit account is meant for

individuals who wish to deposit small amounts out of their current income.

36


It helps in safe guarding their future and also earning interest on the savings.

A saving account c an be opened with or without cheque book f a c i l i ty.

The r e a r e restrictions on the withdraws from this account. Savings

account holders are also allowed to deposit cheques, drafts, dividend

warrants, etc.drawn in their favour for collection by the bank. To open a

savings account, it is necessary for the depositor to be introduced by a person

having a current or savings account with the same bank.

Fixed deposit

The term ‘Fixed deposit’ means deposit repayable after the expiry of a

specified period. Since it is repayable only after a fixed period of time, which

is to be determined at the time of opening of the account, it is also known as

time deposit. Fixed deposits are most useful for a commercial bank. Since

they are repayable only after a fixed period, the bank may invest these funds

more profitably by lending at higher rates of interest and for relatively longer

periods. The rate of interest on fixed deposits depends upon the period of

deposits. The longer the period, the higher is the rate of interest offered. The

rate of interest toFunctions of

Commercial Banks :

be allowed on fixed deposits is governed by rules laid down by the

Reserve Bank of India.

Recurring Deposits

Recurring Deposits are gaining wide popularity these days. Under this type of

deposit, the depositor is required to deposit a fixed amount of money every

month for a specific period of time. Each installment may vary from Rs.5/- to

37


Rs.500/- or more per month and the period of account may vary from 12

months to 10 years. After the completion of the specified period, the customer

gets back all his deposits along with the cumulative interest accrued on the

deposits.

Miscellaneous Deposits

Banks have introduced several deposit schemes to attract deposits from

different types of people, like Home Construction deposit scheme, Sickness

Benefit deposit scheme, Children Gift plan, Old age pensionscheme, Mini

deposit scheme, etc.

Different methods of Granting Loans by Bank

The basic function of a commercial bank is to make loans and advancesout of

the money which is received from the public by way of deposits. The loans

are particularly granted to businessmen and members of the public against

personal security, gold and silver and other movable and immovable assets.

Commercial bank generally lend money in the

following form:

i) Cash credit

ii) Loans

iii) Bank overdraft, and

iv) Discounting of Bills

i) Cash Credit :

38


A cash credit is an arrangement whereby the bank agrees to lend money to the

borrower upto a certain limit. The bank puts this amount of money to the

credit of the borrower. The borrower draws the money28 :: Business Studies

as and when he needs. Interest is charged only on the amount actually drawn

and not on the amount placed to the credit of borrower’s account. Cash credit

is generally granted on a bond of credit or certain other securities. This a very

popular method of lending in our country.

Loans

A specified amount sanctioned by a bank to the customer is called a ‘loan’. It

is granted for a fixed period, say six months, or a year. The specified amount

is put on the credit of the borrower’s account. He can withdraw this amount in

lump sum or can draw cheques against this sum for any amount. Interest is

charged on the full amount even if theborrower does not utilise it. The rate of

interest is lower on loans in comparison to cash credit. A loan is generally

granted against the security of property or personal security. The loan may be

repaid in lump sum or in installments. Every bank has its own procedure of

granting loans. Hence a bank is at liberty to grant loan depending on its own

resources.

The loan can be granted as:

a) Demand loan, or

b) Term loan

a) Demand loan

Demand loan is repayable on demand. In other words it is repayable at short

notice. The entire amount of demand loan is disbursed at one time and the

39


borrower has to pay interest on it. The borrower can repay the loan either in

lump sum (one time) or as agreed with the bank. Loans are normally granted

by the bank against tangible securities including securities like N.S.C., Kisan

Vikas Patra, Life Insurance policies and U.T.I. certificates.

Term loans

Medium and long term loans are called ‘Term loans’. Term loans are granted

for more than one year and repayment of such loans is spread over a longer

period. The repayment is generally made in suitable instalments of fixed

amount. These loans are repayable over a period of 5 years and maximum up

to 15 years.

Functions of Commercial Banks ::

Term loan is required for the purpose of setting up of new business activity,

renovation, modernisation, expansion/extension of existing units, purchase of

plant and machinery, vehicles, land for setting up a factory, construction of

factory building or purchase of other immovable assets. These loans are

generally secured against the mortgage of land, plant and machinery, building

and other securities. The normal rate of interest charged for such loans is

generally quite high.

Bank Overdraft

Overdraft facility is more or less similar to cash credit facility. Overdraft

facility is the result of an agreement with the bank by which a current account

holder is allowed to withdraw a specified amount over and above the credit

balance in his/her account. It is a short term facility. This facility is made

available to current account holders who operate their account through

40


cheques. The customer is permitted to withdraw the amount as and when

he/she needs it and to repay it through deposits in his account as and when it

is convenient to him/her. Overdraft facility is generally granted by bank on

the basis of a written request by the customer. Some times, banks also insist

on either apromissory note from the borrower or personal security to ensure

safety of funds. Interest is charged on actual amount withdrawn by the

customer. The interest rate on overdraft is higher than that of the rate on loan.

Discounting of Bills

Apart from granting cash credit, loans and overdraft, banks also grant

financial assistance to customers by discounting bills of exchange. Banks

purchase the bills at face value minus interest at current rate of interest for the

period of the bill. This is known as ‘discounting of bills’. Bills of exchange

are negotiable instruments and enable the debtors to discharge their

obligations towards their creditors. Such bills of exchange arise out of

commercial transactions both in internal trade and external trade. By

discounting these bills before they are due for a nominal amount, the banks

help the business community. Of course, the banks recover the full amount of

these bills from the persons liable to make.

41


1.13 COMMERCIAL BANKING VS. INVESTMENT

BANKING

COMMERCIAL BANKING

A commercial bank may legally take deposits for checking and savings accounts

from consumers. The federal government provides insurance guarantees on these

deposits through the Federal Deposit Insurance Corporation (the FDIC), on

amounts up to $100,000. To get FDIC guarantees, commercial banks must follow a

myriad of regulations.

The typical commercial banking process is fairly straightforward. You deposit

money into your bank, and the bank loans that money to consumers and companies

in need of capital (cash). You borrow to buy a house, finance a car, or finance an

addition to your home. Companies borrow to finance the growth of their company

or meet immediate cash needs. Companies that borrow from commercial banks can

range in size from the dry cleaner on the corner to a multinational conglomerate.

The commercial bank generates a profit by paying depositors a lower interest rate

than the bank charges on loans.

42


INVESTMENT BANKING

An investment bank operates differently. An investment bank does not have an

inventory of cash deposits to lend as a commercial bank does. In essence, an

investment bank acts as an intermediary, and matches sellers of stocks and bonds

with buyers of stocks and bonds.

Note, however, that companies use investment banks toward the same end as they

use commercial banks. If a company needs capital, it may get a loan from a bank, or

it may ask an investment bank to sell equity or debt (stocks or bonds). Because

commercial banks already have funds available from their depositors and an

investment bank typically does not, an I-bank must spend considerable time finding

investors in order to obtain capital for its client. (Note that as investment banks are

increasingly seeking to become "one-stop" financing sources, many I-banks have

set aside billions of dollars of their own capital that they can use to loan to clients

directly.)

43


1.14 MAJOR

ADVANTAGES OF COMMERCIAL BANKS

Significance of commercial Banks

The importance of a bank to modern economy, so as to enable them to develop, can

be stated as follow:

(i) The banks collect the savings of those people who can save and allocate them to

those who need it. These savings would have remained idle due to ignorance of the

people and due to the fact that they were in scattered and oddly small quantities. But

banks collect them and divide them in the portions as required by the different

investors.

(ii) Banks preserve the financial resources of the country and it is expected of them

that they allocate them appropriately in the suitable and desirable manner.

(iii) They make available the means for sending funds from one place to another

and do this in cheap, safe and convenient manner.

(iv) Banks arrange for payments by changes, order or bearer, crossed and

uncrossed, which is the easiest and most convenient, Besides they also care for

making such payments as safe as possible.

44


(v) Banks also help their customers, in the task of preserving their precious

possessions intact and safe.

(vi) To advance money, the basis of modern industry and economy and essential for

financing the developmental process, is governed by banks.

(vii) It makes the monetary system elastic. Such elasticity is greatly desired in the

present economy, where the phase of economy goes on changing and with such

changes, demand for money is required. It is quite proper and convenient for the

government and R.B.I. to change its currency and credit policy frequently, This is

done by RBI, by changing the supply of money with the changing the supply of

money with the changing needs of the public.

Although traditionally, the main business of banks is acceptance of deposits and

lending, the banks have now spread their wings far and wide into many allied and

even unrelated activities.

Banking as an Ancestral Service

For the history of modern banking in India, a reference to the English Agency

Houses in the days of East India Company is necessary. Those agency houses, with

no capital of their own and depending entirely on deposits, were in fact trading

firms carrying on banking as a part of their business and vanished form the scene in

the crises of 1829-32. In the first half of the 19th century, the East India company

45


established 3 banks The Bank of Bengal in 1809, the Bank of Bombay in 1840 and

the Bank of Madras in 1843.

The Bank of Bengal was given Charter with a capital of Rs.50 Lakhs. This bank

was given powers in different years as to:

(i) Rate of interest was limited to 12%.

(iii) Power to issue currency notes was given in 1824.

(iii) Power to open new branches given in 1839.

(iv) Power to deal in inland exchange was given in 1839.

46


1. 15 MAJOR

DISADVANTAGES OF COMMERCIAL BANKS

The Disadvanteges are Under:

1. Low performance: When the ownership is in public sector, the employs do not

work for profit and do not there performance and efficiency of the employs remains

poor.

2. Lack of competition: Competition is necessary for development and increasing the

production. Commercial banks has decreased the spirit of competition.

3. Favoritism: The management of commercial bank will provide jobs to there

favored persons because the political leaders have influence upon the state

authorities. Policy of partiality is adopted by the commercial banks.

4. Unbalanced distribution of credit: Agricultural sector is the major sector of the

economy. It should be given top priority in connection with distribution of credit.

After nationalization, balance distribution of credit has not been made.

5. Encourage political monopoly: commercial banks will increase the influence of

politicians over fiscal and monitory structure of country. It will encourage political

monopoly in the country.

6. Increase the burden of the government: Government has to run many sectors of the

economy after commercial banks. There will be an extra burden on the government.

It is in the favor of the nation of that policy of the denationalization should be

adopted.

7. Decrease the process of industrialization: Privatization is necessary for increasing

the process of industrialization. When the banks will be nationalized, they will not

provide credit facility so actively for setting up industrial units in different parts of

the counter.

47


CHP 2. RESEARCH DESIGN

RESEARCH DESIGN

Primary Seconday

Books

Telephonic Interview Working Papers

Mail Survey

Newspaper

Questionnaire Websites

48


A Research design is the specification of the method and procedures for acquiring

the information needed.

DATA COLLECTION

There may be different types of information and data. Some of the information may

be published or unpublished, complete or uncomplete, reliable or unreliable, biased

or unbiased, primary or secondary data.

METHODS OF DATA COLLETION

Primary Method:

Primary data are those which are collected a fresh and for the first time and

thus happens to be original in character.

Methods of Primary Research:

Interview Method

Telephone Interview

Mail Survey

Questionnaire

Personal Interview

49


Personal interview method requires a person known as the interviewer asking

questions generally in a face-to face contact to the other person or persons.

The personal interview of the concerned employee of the bank was conducted

which helped to get a clear idea about the products, pricing, placing,

promotion of different banks. The interview was conducted with the help of

structured questionnaires containing open and close end questions give more

scope for quantitative and qualitative information for better conclusion.

Secondary Method:-

Secondary data means data that are already available i.e. they refer to the data

which have already been collected and analyzed by some else. Published

secondary data was used to get an overall idea about the growth of service

marketing in banking sector after globalization with the help of sources like:

Books

News Paper

Web sites

50


Secondary research or desk is so called because it is usually with the use of

secondary data or information that is already available. This means such data

have already been-collected and analyzed by someone else. Such information

has not been gathered afresh specially for any research project. This

information is inclusive of a wide range of materials-Book, Magazine, and

Web-sites, Company reports, Government statistics. Newspapers and Journal

articles to reports worked out by commercial market research agencies.

Books were used to get more information to know about the concepts of Banking Activities. Magazines were referred to take the case studies on current scenario of Banks & development of Jammu and Kashmir Bank.

51


CHAP.3 CASE STUDY ON COMMERCIAL BANK

COMPANY PROFILE

Established in 1975, The Commercial Bank of Qatar is Qatar-based bank with capital reserves of over QR 3.5 billion and total assets book of QR 35 billion. The Bank offers investment, corporate and retail services through its 23 branches, sales offices/pavilions, many ATMs and deposit machines throughout Qatar.

THE SOLUTION

G-Cube offered the solution in the form of Wizdom Web LMS that had following features:

Integrated LMS with existing portal and LDAP server

Very intuitive interface to upload and manage courses

Commercial Bank of Qatar has a large workforce spread across the country. Training the workforce through extremely user-friendly technology to keep their skills updated was the requirement of the client. To implement effective training anytime, anywhere, the Bank chose to use Wizdom Web Learning Management System. The bank not only required an easy-to-use system, it also had some specific requests -

The LMS had to integrate with the Bank’s existing portal, and had to be

customized to provide seamless experience to users, as well as Administrative

staff

The bank required the Wizdom Web LMS to be integrated with the LDAP

server for single sign-in facility.

52


THE SOLUTION

G-Cube offered the solution in the form of Wizdom Web LMS that had following features:

Integrated LMS with existing portal and LDAP server

Very intuitive interface to upload and manage courses

Single sign-on functionality when logging in from Intranet, and a secure environment to logon from Internet

Comprehensive reports to track learner progress

Completely scalable to meet client’s future growth requirements.

THE BENEFITS

The implementation of the Wizdom LMS was a breakthrough step for The Commercial Bank of Qatar due to its easy and anywhere usability. Wizdom Web LMS gave the following benefits to The Commercial bank of Qatar:

Single sign on for the users, preventing them from the hassle of signing in multiple times

Providing consistent look and feel across the portals

Empowering users to learn from anywhere, anytime – be it the Intranet or Internet

Centralized reporting enabled HR to track learner progress and feedback in real time, and

enhance their courses to make them more effective .

53


CHAP.4. SUMMARY OF COMMERCIAL BANKS IN INDIA

The Indian banking industry started taking shape after India’s independence in 1947. Though the Indian banking industry can be traced as far back as 1806 with the establishment of Bank of Bengal, the industry was in a state of turmoil.

Under the British influence, Calcutta witnessed a surge in trading activities, giving rise to a number of banking establishments during the period. Several banks, set up in order to finance trading, went out of business. For instance, Union bank, formed by Indian merchants, failed due to economic recession during 1848-49 resulting in depositors losing money. Such events resulted in shifting the reigns of the industry into the hands of Europeans till the early twentieth century.

From 1906 to1911, several banks were set up based on the principles of the Swadesi movement. The movement inspired Indian businessmen and politicians to set up banks for the Indian community and many new banks were launched to promote trade and finance in communal groups. Some of the prominent ones among these are Bank of India, Corporation Bank, Bank of Baroda, Indian bank, Canara Bank, and Central bank of India.

Bank of Bengal, along with its sister banks, Bank of Bombay and Bank of Madras, set up by British East India Company, merged in 1921 to give birth to Imperial bank of India, now known as State bank of India.

During 1914-1945, India went through several ups and downs politically and economically and the effects were felt in the banking sector too. The World Wars disrupted banking activities of the nation and almost 94 banks failed during this period. After 1947, however, banking activities flourished.

After the partition of India, the government toook drastic steps to regulate the banking industry. For example, in 1948, additional powers and authority were vested in the Reserve bank of India to monitor the functioning of the entire banking system. The passing the Banking regulation act in 1949, empowered RBI to further regulate, inspect, and control Indian banks.

54


The nationalization and liberalization of banks 1969 and 1991 respectively also boosted the development of the Indian banking sector. Nationalization resulted in 91% of government holding in the banking industry and liberalization paved the path for private players to participate in the industry. As a result, banks like Oriental bank of Commerce, HDFC bank, ICICI bank, and AXIS bank came into being. Foreign banks too were permitted to set up their offices in India. The rationalization of FDI norms in 2002 also allowed foreign players to acquire stakes in Indian banks.

These banks implemented innovative forms of banking like ATMs, mobile banking, phone banking, internet banking, and debit/credit cards. The private players constantly improved services in order to retain customers and win the severe competition which had become a feature of the Indian banking industry.

Currently, private banks are going through a series of mergers and acquisitions and public sector banks are shrinking in the form of manpower, equity, and non-performing assets.

The public sector banks have been grappling with attrition which surfaced after the Voluntary Retirement Scheme was announced. The dilution of equity from 51% to 33% has opened up opportunities for takeovers.

The Indian banking system, however, proved resilient to shocks arising out of the global financial recession. In terms of quality of assets, the Indian banking players have come out clean with strong and transparent balance sheets compared to their counterparts in other nations.

55


Following the financial crisis, new deposits made their way towards public sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalized banks, as a group, accounted for 50.5% of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8%. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8%, 5.6%, and 3%, respectively.

Ever since US declared recovery from the global financial crisis, the confidence of non-resident Indians (NRIs) in the Indian economy has revived again. NRI fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the RBI's February bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin.

The report also found that scheduled commercial banks served 34,709 banked centers. Of these centers, 28,095 were single office centers and 64 centers had 100 or more bank offices.

The expansion plans are self evident from the example of SBI, which is adding 23 new branches abroad, bringing its foreign-branch network number to 160 by March 2010. This will cement its leading position as the bank with the largest global presence among local peers.

Currently, the Indian banking framework is comprised of 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake, they may be publicly listed and traded on stock exchanges)

56


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 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.

In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued on June 25, 2009, said that banks should link more branches to the National Electronic Clearing Service (NECS). NECS was introduced in September 2008 for centralized processing of repetitive and bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled to participate in NECS.

Currently the banking industry looks optimistic in terms of strong inflow of funds. This could be supported by the declaration made by RBI in 2009. According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be to:

Anchor inflation expectations and keep a vigil on inflation trends and respond swiftly through policy adjustments,

Actively manage liquidity to ensure credit demands of productive sectors are met adequately,

Maintain an interest rate environment consistent with financial stability and price stability.

The money supply growth on a year-on-year basis at 18.9% as on October 9, 2009, remained above the indicative projection of 18% set out in the First Quarter Review of July 2009. The main source of the expansion was bank credit to the government, reflecting large market borrowings of the government.

57


CHAP.5 CONCLUSION

a commercial bank is a bank that operates with a profit-earning goal ie a business bank while a non-commercial bank is a financial institution that operates with the aim of alleviating. banking on the development of bank-customer relationships in the value creation process.

Banks are financial institutions that can make or break an economy. Unsupervised

and uncontrolled behavior from banks can spell doom to the economy and for the

customers as well. Hence central banks...

banks are the regular banks that provide basic banking facilities to its customers.

Some of the facilities you can get from a commercial bank are:a. Checking/Current

account. Savings..

commercial banks or universal banks constitute twelve (12) financial institutions,

considered as one-stop commercial banks performing com-banking functions and

non-related banking activities

financial institutions that can make or break an economy. Unsupervised and

uncontrolled behavior from banks can spell doom to the economy and for the

customers as well. Hence central banks.

58


QUESTIONNAIRE

ANNEXURE

Dear sir/Madam,

Name:- .............................................................................................................

..

Address:-.............................................................................................................

..............

.............................................................................................................................

Gender

Male

Female

Household income level

Less than $25000

$25001 - $50000

$50000 - $100000

More than $100000

1) How satisfied are you with the service you received?

59


excellent

very good

neutral

poor

very poor

2) How likely are you to recommend our service to others Banks??

yes

maybe

no

3) Which type of account do you have in commercial bank?

Saving Account

Current Account

Demat Account

4) Which type of services you have ever used ?

NRI Banking

Forex Trade

60


Investment and Insurance

Cards

5) Is the commercial banks are better than co-operative banks?

Yes

6) Is the commercial banks are better than co-operative banks?

Yes

No

7) Would you like any suggestions and improvement in commercial

banking services ?

...............................................................................................................

................................................................................................................

................................................................................................................

BIBILOGRAPHY

BOOKS

Jensen M. C. and Meckling W. H. (1979), Rights and Production Functions: An

Application to Labour Managed Firms and Codetermination, Journal of Business,

52 (4), 469-506.

61


Jondrow J., Lovell C. A. K., Materov I. S. and Schmidt P. (1982), On the

estimation of technical inefficiency in the stochastic frontier production function

model, Journal of Econometrics, 19, 233-238.

Hansmann H. (1988), Ownership of the firm, Journal of Law, Economics and

Organization, 4,267-304.

Hansmann H. (1996), The ownership of enterprise, Cambridge (MA), Harvard

University Press. Holmstrom B. (1999), The firm as a subeconomy, Journal of Law,

Economics and Organization,15 (1), 74-102.

Holmstrom B. and Milgrom P. (1994), The firm as an incentive system, American

Economic Sealey C. W. and Lindley J. T. (1977), Inputs, Outputs and a Theory of

Production and Cost at Depository Financial Institutions, Journal of Finance, 32,

1251-1266.

“Building Inclusive Financial Sector for Development.” The Blue Book.

WEBSITES

www.scribd.com

www.managementparadise.com

www.commercialbankindia.com

http://www.commercialbankindia.com/

http://www.managementparadise.com/

http://www.scribd.com/

leave and licence agreement

Documents

Transcript of leave and licence agreement