Name: Nisha Balkrishna S.College: R.K.T. college (CMC)T.Y.B.C.B.I.Roll No. 36534

BANKING SYSTEM IN INDIA

1.Introduction:

A bank is a financial institution that provides banking and other financial services

to their

customers. A bank is generally understood as an institution which provides

fundamental

banking services such as accepting deposits and providing loans. There are also

nonbanking

institutions that provide certain banking services without meeting the legal

definition of a bank. Banks are a subset of the financial services industry.

A banking system also referred as a system provided by the bank which offers cash

management services for customers, reporting the transactions of their accounts

and

portfolios, through out the day. The banking system in India, should not only be

hassle

free but it should be able to meet the new challenges posed by the technology and

any other external and internal factors. For the past three decades, India’s banking

system has several outstanding achievements to its credit. The Banks are the main

participants of the financial system in India. The Banking sector offers several

facilities and opportunities to

their customers. All the banks safeguards the money and valuables and provide

loans,credit, and payment services, such as checking accounts, money orders, and

cashier’s cheques. The banks also offer investment and insurance products. As a

variety of models for cooperation and integration among finance industries have

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emerged, some of the traditional distinctions between banks, insurance companies,

and securities firms have diminished. In spite of these changes, banks continue to

maintain and perform their primary role—accepting deposits and lending funds

from these deposits.

History of Banking in IndiaThe first bank in India, though conservative, was established in 1786. From 1786

till today, the journey of Indian Banking System can be segregated into three

distinct phases:

Early phase of Indian banks, from 1786 to 1969

Nationalization of banks and the banking sector reforms, from 1969 to 1991

New phase of Indian banking system, with the reforms after 1991

The first bank in India, the General Bank of India, was set up in 1786. Bank of

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

of Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) as

independent units and called them Presidency banks. These three banks were

amalgamated in 1920 and the Imperial Bank of India, a bank of private

shareholders, mostly Europeans, was established. Allahabad Bank was established,

exclusively by Indians, in 1865. Punjab National Bank was set up in 1894 with

headquarters in Lahore. Between 1906 and 1913, Bank of India, Central Bank of

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

up. The Reserve Bank of India came in 1935.

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

periodic failures between 1913 and 1948. There were approximately 1,100 banks,

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mostly small. To streamline the functioning and activities of commercial banks, the

Government of India came up with the Banking Companies Act, 1949, which was

later changed to the Banking Regulation Act, 1949 as per amending Act of 1965

(Act No. 23 of 1965). The Reserve Bank of India (RBI) was vested with extensive

powers for the supervision of banking in India as the Central banking authority.

During those days, the general public had lesser confidence in banks. As an

aftermath, deposit mobilization was slow. Moreover, the savings bank facility

provided by the Postal department was comparatively safer, and funds were largely

given to traders.

The government took major initiatives in banking sector reforms after

Independence. In 1955, it nationalized the Imperial Bank of India and started

offering extensive banking facilities, especially in rural and semi-urban areas. The

government constituted the State Bank of India to act as the principal agent of the

RBI and to handle banking transactions of the Union government and state

governments all over the country. Seven banks owned by the Princely states were

nationalized in 1959 and they became subsidiaries of the State Bank of India. In

1969, 14 commercial banks in the country were nationalized. In the second phase

of banking sector reforms, seven more banks were nationalized in 1980. With this,

80 percent of the banking sector in India came under the government ownership.

This phase has introduced many more products and facilities in the banking sector

as part of the reforms process. In 1991, under the chairmanship of M Narasimham,

a committee was set up, which worked for the liberalization of banking practices.

Now, the country is flooded with foreign banks and their ATM stations. Efforts are

being put to give a satisfactory service to customers. Phone banking and net

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banking are introduced. The entire system became more convenient and swift.

Time is given importance in all money transactions.

The financial system of India has shown a great deal of resilience. It is sheltered

from crises triggered by external macroeconomic shocks, which other East Asian

countries often suffered. This is all due to a flexible exchange rate regime, the high

foreign exchange reserve, the not-yet fully convertible capital account, and the

limited foreign exchange exposure of banks and their customers.

The following are the major steps taken by the Government of India to Regulate

Banking

institutions in the country:-

1949 : Enactment of Banking Regulation Act.

1955 : Nationalisation of State Bank of India.

1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalisation of 14 major Banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalisation of seven banks with deposits over 200 Crores.

Banking in India:

 in the modern sense originated in the last decades of the 18th century. The first

banks were Bank of Hindustan (1770-1829) and The General Bank of India,

established 1786 and since defunct.

The largest bank, and the oldest still in existence, is the State Bank of India, which

originated in the Bank of Calcutta in June 1806, which almost immediately became

the Bank of Bengal. This was one of the three presidency banks, the other two

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being the Bank of Bombayand the Bank of Madras, all three of which were

established under charters from the British East India Company. The three banks

merged in 1921 to form the Imperial Bank of India, which, upon India's

independence, became the State Bank of India in 1955. For many years the

presidency banks acted as quasi-central banks, as did their successors, until

the Reserve Bank of India was established in 1935.

In 1969 the Indian government nationalised all the major banks that it did not

already own and these have remained under government ownership. They are run

under a structure know as 'profit-making public sector undertaking' (PSU) and are

allowed to compete and operate as commercial banks. The Indian banking sector is

made up of four types of banks, as well as the PSUs and the state banks, they have

been joined since 1990s by new private commercial banks and a number of foreign

banks.

Banking in India was generally fairly mature in terms of supply, product range and

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

The government has developed initiatives to address this through the State bank of

India expanding its branch network and through the National Bank for Agriculture

and Rural Development with things like microfinance.

History In ancient India there is evidence of loans from the Vedic

period (beginning 1750 BC). Later during the Maurya dynasty (321 to 185 BC), an

instrument called adesha was in use, which was an order on a banker desiring him

to pay the money of the note to a third person, which corresponds to the definition

of a bill of exchange as we understand it today. During the Buddhist period, there

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was considerable use of these instruments. Merchants in large towns gave letters of

credit to one another.

Colonial era During the period of British rule merchants established the Union

Bank of Calcutta in 1829, first as a private joint stock association, then partnership.

Its proprietors were the owners of the earlier Commercial Bank and the Calcutta

Bank, who by mutual consent created Union Bank to replace these two banks. In

1840 it established an agency at Singapore, and closed the one at Mirzapore that it

had opened in the previous year. Also in 1840 the Bank revealed that it had been

the subject of a fraud by the bank's accountant. Union Bank was incorporated in

1845 but failed in 1848, having been insolvent for some time and having used new

money from depositors to pay its dividends.[4]

The Allahabad Bank, established in 1865 and still functioning today, is the

oldest Joint Stock bank in India, it was not the first though. That honour belongs to

the Bank of Upper India, which was established in 1863, and which survived until

1913, when it failed, with some of its assets and liabilities being transferred to

the Alliance Bank of Simla.

Foreign banks too started to appear, particularly in Calcutta, in the 1860s.

The Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and

another in Bombay in 1862; branches inMadras and Pondicherry, then a French

possession, followed. HSBC established itself in Bengal in 1869. Calcutta was the

most active trading port in India, mainly due to the trade of the British Empire, and

so became a banking centre.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,

established in 1881 in Faizabad. It failed in 1958. The next was the Punjab

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National Bank, established in Lahore in 1895, which has survived to the present

and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a

relative period of stability. Around five decades had elapsed since the Indian

Mutiny, and the social, industrial and other infrastructure had improved. Indians

had established small banks, most of which served particular ethnic and religious

communities.

The presidency banks dominated banking in India but there were also some

exchange banks and a number of Indian joint stock banks. All these banks operated

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

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

generally under capitalised and lacked the experience and maturity to compete with

the presidency and exchange banks. This segmentation let Lord Curzon to

observe, "In respect of banking it seems we are behind the times. We are like some

old fashioned sailing ship, divided by solid wooden bulkheads into separate and

cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by

the Swadeshi movement. The Swadeshi movement inspired local businessmen and

political figures to found banks of and for the Indian community. A number of

banks established then have survived to the present such as Bank of

India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central

Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks

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

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

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

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

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

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

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

and it took its toll with banks simply collapsing despite the Indian

economy gaining indirect boost due to war-related economic activities. At least 94

banks in India failed between 1913 and 1918 as indicated in the following table:

YearsNumber of banks

that failed

Authorised capital

(Rs. Lakhs)

Paid-up Capital

(Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

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The Banking Structure in India:The commercial banking structure in India consists of scheduled commercial banks

and unscheduled banks. Scheduled banks constitute those banks that are included

in the Second Schedule of Reserve Bank of India (RBI) Act, 1934.

As on June 30, 1999, there were 300 scheduled banks in India having a total

network of 64,918 branches. The scheduled commercial banks in India comprise

State Bank of India and its associates (8), nationalised banks (19), foreign banks

(45), private sector banks (32), co-operative banks, and regional rural banks.

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

only nationalized bank, which was nationalized on July 1, 1955, under the SBI Act

of 1955. The nationalization of seven State Bank subsidiaries took place in 1959.

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

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

11,000percent. 

Post-Independence 10

The partition of India in 1947 adversely impacted the economies

of Punjab and West Bengal, paralysing banking activities for months.

India's independence marked the end of a regime of theLaissez-faire for the Indian

banking. The Government of India initiated measures to play an active role in the

economic life of the nation, and the Industrial Policy Resolution adopted by the

government in 1948 envisaged a mixed economy. This resulted into greater

involvement of the state in different segments of the economy including banking

and finance. The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was established in

April 1935, but was nationalised on 1 January 1949 under the terms of the

Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[5]

In 1949, the Banking Regulation Act was enacted which empowered the

Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in

India".

The Banking Regulation Act also provided that no new bank or branch of an

existing bank could be opened without a license from the RBI, and no two

banks could have common directors.

Banks in India

In India, banks are segregated in different groups. Each group has its own benefits

and limitations in operations. Each has its own dedicated target market. A few of

them work in the rural sector only while others in both rural as well as urban.

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

are foreign players.

Banks in India can be classified into:

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Public Sector Banks

Private Sector Banks  

Cooperative Banks

Regional Rural Banks

Foreign Banks

One aspect to be noted is the increasing number of foreign banks in India.

The RBI has shown certain interest to involve more foreign banks. This step

has paved the way for a few more foreign banks to start business in India.

Classification of Banking Industry in India

Indian banking industry has been divided into two parts, organized and

unorganized sectors. The organized sector consists of Reserve Bank of India,

Commercial Banks and Co-operative Banks, and Specialized Financial Institutions

(IDBI, ICICI, IFC etc). The unorganized sector, which is not homogeneous, is

largely made up of money lenders and indigenous bankers.

An outline of the Indian Banking structure may be presented as follows:-

1. Reserve banks of India.

2. Indian Scheduled Commercial Banks.

a) State Bank of India and its associate banks.

b) Twenty nationalized banks.

c) Regional rural banks.

d) Other scheduled commercial banks.

3. Foreign Banks

4. Non-scheduled banks.

5. Co-operative banks.

Indian Scheduled Commercial Banks

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The commercial banking structure in India consists of scheduled commercial

banks, and unscheduled banks.

Scheduled Banks :

Scheduled Banks in India constitute those banks which have been

included in the second schedule of RBI act 1934. RBI in turn includes only those

banks in this schedule which satisfy the criteria laid down vide section 42(6a) of

the Act.

“Scheduled banks in India” means the State Bank of India constituted under the

State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the s

State Bank of India (subsidiary banks) Act, 1959 (38 of 1959), a corresponding

new bank constituted under section 3 of the Banking companies (Acquisition and

Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank

included in the Second Schedule to the Reserve bank of India Act, 1934 (2 of

1934), but does not include a co-operative bank”. For the purpose of assessment of

performance of banks, the Reserve Bank of India categories those banks as public

sector banks, old private sector banks, new private sector banks and foreign banks,

i.e. private sector, public sector, and foreign banks come under the umbrella of

scheduled commercial banks.

Regional Rural Bank :

The government of India set up Regional Rural Banks (RRBs) on

October 2, 1975 [10]. The banks provide credit to the weaker sections of the rural

areas, particularly the small and marginal farmers, agricultural labourers, and small

enterpreneurs. Initially, five RRBs were set up on October 2, 1975 which was

sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United

Commercial Bank and United Bank of India. The total authorized capital was fixed

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at Rs. 1 Crore which has since been raised to Rs. 5 Crores. There are several

concessions enjoyed by the RRBs by Reserve Bank of India such as lower interest

rates and refinancing facilities from NABARD like lower cash ratio, lower

statutory liquidity ratio, lower rate of interest on loans taken from sponsoring

banks, managerial and staff assistance from the sponsoring bank and

reimbursement of the expenses on staff training. The RRBs are under the

control of NABARD. NABARD has the responsibility of laying down the policies

for the RRBs, to oversee their operations, provide refinance facilities, to monitor

their performance and to attend their problems.

Unscheduled Banks :

“Unscheduled 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”.

NABARD

NABARD is an apex development bank with an authorization for facilitating credit

flow for promotion and development of agriculture, small-scale industries, cottage

and village industries, handicrafts and other rural crafts. It also has the mandate to

support all other allied economic activities in rural areas, promote integrated and

sustainable rural development and secure prosperity of rural areas. In discharging

its role as a facilitator for rural prosperity, NABARD is entrusted with:

1. Providing refinance to lending institutions in rural areas

2. Bringing about or promoting institutions development and

3. Evaluating, monitoring and inspecting the client banks

Besides this fundamental role, NABARD also:

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• Act as a coordinator in the operations of rural credit institutions

• To help sectors of the economy that they have special credit needs for eg.

Housing, small business and agricultural loans etc.

Co-operative Banks

Co-operative banks are explained in detail in Section – II of this chapter

Services provided by banking organizations

Banking Regulation Act in India, 1949 defines banking as “Accepting” for the

purpose of lending or investment of deposits of money from the public, repayable

on demand and withdrawable by cheques, drafts, orders etc. as per the above

definition a bank essentially performs the following functions:-

• Accepting Deposits or savings functions from customers or public by providing

bank account, current account, fixed deposit account, recurring accounts etc.

• The payment transactions like lending money to the public. Bank provides an

effective credit delivery system for loanable transactions.

• Provide the facility of transferring of money from one place to another place. For

performing this operation, bank issues demand drafts, banker’s cheques, money

orders etc. for transferring the money. Bank also provides the facility of

Telegraphic transfer or tele- cash orders for quick transfer of money.

• A bank performs a trustworthy business for various purposes.

• A bank also provides the safe custody facility to the money and valuables of the

general public. Bank offers various types of deposit schemes for security of

money. For keeping valuables bank provides locker facility. The lockers are small

compartments with dual locking system built into strong cupboards. These are

stored in the bank’s strong room and are fully secured.

• Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of the15

government disbursements like pension payments and tax refunds also take place

through banks.

There are several types of banks, which differ in the number of services they

provide and the clientele (Customers) they serve. Although some of the differences

between these types of banks have lessened as they have begun to expand the

range of products and services they offer, there are still key distinguishing traits.

These banks are as follows:

Commercial banks, which dominate this industry, offer a full range of services for

individuals, businesses, and governments. These banks come in a wide range of

sizes, from large global banks to regional and community banks.

Global banks are involved in international lending and foreign currency trading, in

addition to the more typical banking services.

Regional banks have numerous branches and automated teller machine (ATM)

locations throughout a multi-state area that provide banking services to individuals.

Banks have become more oriented toward marketing and sales. As a result,

employees need to know about all types of products and services offered by banks.

Community banks are based locally and offer more personal attention, which

many individuals and small businesses prefer. In recent years, online banks—

which provide all services entirely over the Internet—have entered the market,

with some success.

However, many traditional banks have also expanded to offer online banking, and

some formerly Internet-only banks are opting to open branches.

Savings banks and savings and loan associations, sometimes called thrift

institutions, are the second largest group of depository institutions. They were first

established ascommunity-based institutions to finance mortgages for people to buy

homes and still cater mostly to the savings and lending needs of individuals.

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Credit unions are another kind of depository institution. Most credit unions are

formed by people with a common bond, such as those who work for the same

company or belong to the same labour union or church. Members pool their

savings and, when they need

money, they may borrow from the credit union, often at a lower interest rate than

that demanded by other financial institutions.

Federal Reserve banks are Government agencies that perform many financial

services for the Government. Their chief responsibilities are to regulate the

banking industry and to help implement our Nation’s monetary policy so our

economy can run more efficiently

Nationalization in the 1960s

Despite the provisions, control and regulations of Reserve Bank of India, banks in

India except the State Bank of India or SBI, continued to be owned and operated

by private persons. By the 1960s, the Indian banking industry had become an

important tool to facilitate the development of the Indian economy. At the same

time, it had emerged as a large employer, and a debate had ensued about the

nationalization of the banking industry. Indira Gandhi, the then Prime Minister of

India, expressed the intention of the Government of India in the annual conference

of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank

Nationalization."  The meeting received the paper with enthusiasm.

Thereafter, her move was swift and sudden. The Government of India issued an

ordinance ('Banking Companies (Acquisition and Transfer of Undertakings)

17

Ordinance, 1969')) and nationalised the 14 largest commercial banks with effect

from the midnight of 19 July 1969. These banks contained 85 percent of bank

deposits in the country. Jayaprakash Narayan, a national leader of India, described

the step as a "masterstroke of political sagacity." Within two weeks of the issue of

the ordinance, the Parliament passed the Banking Companies (Acquisition and

Transfer of Undertaking) Bill, and it received the presidential approval on 9

August 1969.

A second dose of nationalisation of 6 more commercial banks followed in 1980.

The stated reason for the nationalisation was to give the government more control

of credit delivery. With the second dose of nationalisation, the Government of

India controlled around 91% of the banking business of India. Later on, in the year

1993, the government merged New Bank of India with Punjab National Bank. It

was the only merger between nationalised banks and resulted in the reduction of

the number of nationalised banks from 20 to 19. After this, until the 1990s, the

nationalised banks grew at a pace of around 4%, closer to the average growth rate

of the Indian economy.

Nationalization Process

1955: Nationalization of State Bank of India

1959: Nationalization of SBI subsidiaries

1969: Nationalization of 14 major banks

1980: Nationalization of seven banks with deposits over Rs 200 crore

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Nationalisation

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

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

as a large employer, and a debate has ensured about the possibility to nationalise

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

intention of the Government of India (GOI) in the annual conference of the All

India Congress Meeting in a paper entitled "Stray thoughts on Bank

Nationalisation". The paper was received with positive enthusiasm. Thereafter,

her move was swift and sudden, and the GOI issued an ordinance and nationalised

the 14 largest commercial banks with effect from the midnight of July 19, 1969.

Jayaprakash Narayan, a national leader of India, described the step as a

"Masterstroke of political sagacity" Within two weeks of the issue of the

ordinance, the Parliament passed the Banking Companies (Acquisition and

Transfer of Undertaking) Bill, and it received the presidential approval on 9

August, 1969. A second step of nationalisation of 6 more commercial banks

followed in 1980. The stated reason for the nationalisation was to give the

government more control of credit delivery. With the second step of

nationalisation, the GOI controlled around 91% of the

banking business in India. Later on, in the year 1993, the government merged New

Bank of India with Punjab National Bank. It was the only merger between

nationalised banks and resulted in the reduction of the number of nationalised

banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a

pace of around 4%, closer to the average growth rate of the Indian economy. The

nationalised banks were credited by some; including Home minister P.

Chidambaram, to have helped the Indian economy withstand the global financial

crisis of 2007-2009.

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Liberalization in the 1990s

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

licensing a small number of private banks. These came to be known as New

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

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

of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank andHDFC Bank.

This move, along with the rapid growth in the economy of India, revitalised the

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

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

banks.

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

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

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

has gone up to 74% with some restrictions.

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

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

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

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

just demanded more from their banks but also received more.20

Liberalisation

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

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

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

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

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

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

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

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

banks and foreign banks. The next stage for the Indian banking has been 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 policy shook the banking sector in India completely. Bankers, till this

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

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

of working for the traditional banks. All this led to the retail boom in India. People

not just demanded more from their banks but also received more. Currently (2007),

banking in India is generally fairly mature in terms of supply, product range and

reach-even though reach in rural India still remains a challenge for the private

sector and foreign banks. In terms of quality of assets and capital adequacy, Indian

banks are considered to have clean, strong and transparent balance sheets as

compared to other banks in comparable economies in its region. The Reserve Bank

of India is an autonomous body, with minimal pressure from the government. The

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stated policy of the Bank on the Indian Rupee is to manage volatility but without

any fixed exchange rate-and this has mostly been true. With the growth in the

Indian economy expected to be strong for quite some time-especially in its services

sector-the demand for banking services, especially retail banking, mortgages and

investment services are expected to be strong.

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

stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time

an investor has been allowed to hold more than 5% in a private sector bank since

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

sector banks would need to be voted by them. In recent years critics have charged

that the non-government owned banks are too aggressive in their loan recovery

efforts in connection with housing, vehicle and personal loans. There are press

reports that the banks' loan recovery efforts have driven defaulting borrowers to

suicide.

 Banking Activities

Retail banking, dealing directly with individuals and small businesses

Business banking, providing services to mid-market businesses

Corporate banking, directed at large business entities

Private banking, providing wealth management services to high networth

individuals

Investment banking, activities in the financial markets, such as "underwrite"

(guarantee the sale of) stock and bond issues, trade for their own accounts,

make markets, and advise corporations on capital market activities like

mergers and acquisitions

Merchant banking is the private equity activity of investment banks22

Financial services, global financial institutions that engage in multiple

activities such as banking and insurance

Need of the Banks

Before the establishment of banks, the financial activities were handled by money

lenders and individuals. At that time the interest rates were very high. Again there

were no security of public savings and no uniformity regarding loans. So as to

overcome such problems the organized banking sector was established, which was

fully regulated by the government. The organized banking sector works within the

financial system to provide loans, accept deposits and provide other services to

their customers. The following functions of the bank explain the need of the bank

and its importance:

• To provide the security to the savings of customers.

• To control the supply of money and credit

• To encourage public confidence in the working of the financial system, increase

savings speedily and efficiently.

• To avoid focus of financial powers in the hands of a few individuals and

institutions.

• To set equal norms and conditions (i.e. rate of interest, period of lending etc) to

all types of customers

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Government policy on banking industry

(Source:-The federal Reserve Act 1913 and

The Banking Act 1933)Banks operating in most of the countries must contend with heavy regulations,

rules enforced by Federal and State agencies to govern their operations, service

offerings, and the manner in which they grow and expand their facilities to better

serve the public. A banker works within the financial system to provide loans,

accept deposits, and provide other services to their customers. They must do so

within a climate of extensive regulation, designed primarily to protect the public

interests.

The main reasons why the banks are heavily regulated are as follows:

• To protect the safety of the public’s savings.

• To control the supply of money and credit in order to achieve a nation’s broad

economic goal.

• To ensure equal opportunity and fairness in the public’s access to credit and other

vital financial services.

• To promote public confidence in the financial system, so that savings are made

speedily and efficiently.

• To avoid concentrations of financial power in the hands of a few individuals and

institutions.

• Provide the Government with credit, tax revenues and other services.

• To help sectors of the economy that they have special credit needs for eg.

Housing, small business and agricultural loans etc.

24

Law of banking

Banking law is based on a contractual analysis of the relationship between the

bank and customer—defined as any entity for which the bank agrees to conduct an

account.

The law implies rights and obligations into this relationship as follows:

• The bank account balance is the financial position between the bank and the

customer: when the account is in credit, the bank owes the balance to the customer;

when the account is overdrawn, the customer owes the balance to the bank.

• The bank agrees to pay the customer's cheques up to the amount standing to the

credit of the customer's account, plus any agreed overdraft limit.

• The bank may not pay from the customer's account without a mandate from the

customer, e.g. cheques drawn by the customer.

• The bank agrees to promptly collect the cheques deposited to the customer's

account as the customer's agent, and to credit the proceeds to the customer's

account.

• The bank has a right to combine the customer's accounts, since each account is

just an aspect of the same credit relationship.

• The bank has a lien on cheques deposited to the customer's account, to the extent

that the customer is indebted to the bank.

• The bank must not disclose details of transactions through the customer's

25

account—unless the customer consents, there is a public duty to disclose, the

bank's interests require it, or the law demands it.

• The bank must not close a customer's account without reasonable notice, since

cheques are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between

the customer and the bank. The statutes and regulations in force within a particular

jurisdiction may also modify the above terms and/or create new rights, obligations

or limitations relevant to the bank-customer relationship.

Regulations for Indian banks

Currently in most jurisdictions commercial banks are regulated by government

entities and require a special bank license to operate. Usually the definition of the

business of banking for the purposes of regulation is extended to include

acceptance of deposits, even if they are not repayable to the customer's order—

although money lending, by itself, is generally not included in the definition.

Unlike most other regulated industries, the regulator is typically also a participant

in the market, i.e. a government-owned (central) bank. Central banks also typically

have a monopoly on the business of issuing banknotes. However, in some

countries this is not the case. In UK, for example, the Financial Services Authority

licenses banks, and some commercial banks (such as the Bank of Scotland) issue

their own banknotes in addition to those issued by the Bank of England, the UK

government's central bank.

Some types of financial institutions, such as building societies and credit unions,

may be partly or wholly exempted from bank license requirements, and therefore

regulated under separate rules. The requirements for the issue of a bank license

vary between jurisdictions but typically include:26

• Minimum capital

• Minimum capital ratio

• 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or

senior officers

• Approval of the bank's business plan as being sufficiently prudent and plausible.

Current period

By 2010, banking in India was generally fairly mature in terms of supply, product

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

private sector and foreign banks. In terms of quality of assets and capital adequacy,

Indian banks are considered to have clean, strong and transparent balance sheets

relative to other banks in comparable economies in its region. The Reserve Bank of

India is an autonomous body, with minimal pressure from the government. The

stated policy of the Bank on the Indian Rupee is to manage volatility but without

any fixed exchange rate-and this has mostly been true.

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

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

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

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

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

stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time

27

an investor has been allowed to hold more than 5% in a private sector bank since

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

sector banks would need to be vetted by them.

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

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

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

driven defaulting borrowers to suicide.

Adoption of banking technology

The IT revolution has had a great impact on the Indian banking system. The use of

computers has led to the introduction of online banking in India. The use of

computers in the banking sector in India has increased many fold after the

economic liberalisation of 1991 as the country's banking sector has been exposed

to the world's market. Indian banks were finding it difficult to compete with the

international banks in terms of customer service, without the use of information

technology.

The RBI set up a number of committees to define and co-ordinate banking

technology. These have included:

In 1984 was formed the Committee on Mechanization in the Banking Industry

(1984) whose chairman was Dr. C Rangarajan, Deputy Governor, Reserve

Bank of India. The major recommendations of this committee were

introducing MICR technology in all the banks in the metropolises in India. This

provided for the use of standardized cheque forms and encoders.

In 1988, the RBI set up the Committee on Computerization in Banks (1988)[12] headed by Dr. C Rangarajan. It emphasized that settlement operation must

28

be computerized in the clearing houses of RBI in Bhubaneshwar, Guwahati,

Jaipur, Patna and Thiruvananthapuram. It further stated that there should be

National Clearing of inter-city cheques at Kolkata, Mumbai, Delhi, Chennai

and MICR should be made Operational. It also focused on computerisation of

branches and increasing connectivity among branches through computers. It

also suggested modalities for implementing on-line banking. The committee

submitted its reports in 1989 and computerisation began from 1993 with the

settlement between IBA and bank employees' associations.

In 1994, the Committee on Technology Issues relating to Payment

systems, Cheque Clearing and Securities Settlement in the Banking Industry

(1994) was set up under Chairman W S Saraf. It emphasized Electronic Funds

Transfer (EFT) system, with the BANKNET communications network as its

carrier. It also said that MICR clearing should be set up in all branches of all

those banks with more than 100 branches.

In 1995, the Committee for proposing Legislation on Electronic Funds Transfer

and other Electronic Payments (1995) again emphasized EFT system.

Total numbers of ATMs installed in India by various banks as on end June 2012 is

99,218. The New Private Sector Banks in India are having the largest numbers of

ATMs, which is followed by off-site ATMs belonging to SBI and its subsidiaries

and then by Nationalised banks and Foreign banks. While on site is highest for the

Nationalised banks of India.

29

 

FINANCIAL SERVICES Banking

India cannot have a healthy economy without a sound and effective banking

system. The banking system should be hassle free and able to meet the new

challenges posed by technology and other factors, both internal and external.

In the past three decades, India's banking system has earned several outstanding

achievements to its credit. The most striking is its extensive reach. It is no longer

confined to metropolises or cities in India. In fact, Indian banking system has

reached even to the remote corners of the country. This is one of the main aspects

of India's growth story.

The government's regulation policy for banks has paid rich dividends with the

nationalization of 14 major private banks in 1969. Banking today has become

convenient and instant, with the account holder not having to wait for hours at the

bank counter for getting a draft or for withdrawing money from his account.

.

Reserve Bank of India (RBI):

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

established in April 1935 with a share capital of Rs 5 crore on the basis of the

30

recommendations of the Hilton Young Commission. The share capital was divided

into fully paid shares of Rs 100 each, which was entirely owned by private

shareholders in the beginning. The government held shares of nominal value of Rs

220,000.

The RBI commenced operation on April 1, 1935, under the Reserve Bank of India

Act, 1934. The Act (II of 1934) provides the statutory basis of the functioning of

the Bank. The Bank was constituted to meet the following requirements:

Regulate the issue of currency notes

Maintain reserves with a view to securing monetary stability

Operate the credit and currency system of the country to its advantage

Functions of RBI:

The Reserve Bank of India Act of 1934 entrusts all the important functions of a

central bank with the Reserve Bank of India.

Bank of Issue:

 Under Section 22 of the Act, the Bank has the sole right to issue currency notes of

all denominations. The distribution of one-rupee notes and coins and small coins

all over the country is undertaken by the Reserve Bank as an agent of the

government.

Banker to the Government: 

The second important function of the RBI is to act as the government’s banker,

agent, and adviser.

Bankers' Bank and Lender of the Last Resort:

 The RBI acts as the bankers' bank.  Since commercial banks can always expect the

RBI to come to their help in times of banking crisis, the RBI becomes not only the

banker's bank but also the lender of the last resort.31

Controller of Credit:

 The RBI is the controller of credit, i.e., it has the power to influence the volume of

credit created by banks in India. It can do so through changing the Bank rate or

through open market operations.

Custodian of Foreign Reserves: 

The RBI has the responsibility to maintain the official rate of exchange. Besides

maintaining the rate of exchange of the rupee, the RBI has to act as the custodian

of India's reserve of international currencies.

Supervisory Functions:

 In addition to its traditional central banking functions, the RBI has certain non-

monetary functions of the nature of supervision of banks and promotion of sound

banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act,

1949, have given the RBI wide powers of supervision and control over commercial

and co-operative banks, relating to licensing and establishments, branch expansion,

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

reconstruction, and liquidation.

The Indian Banks’ Association (IBA) was formed on September 26, 1946,

with 22 members. Today, IBA has more than 156 members, such as public sector

banks, private sector banks, foreign banks having offices in India, urban co-

operative banks, developmental financial institutions, federations, merchant banks,

mutual funds, housing finance corporations, etc.

The IBA has the following functions:

Promote sound and progressive banking principles and practices.

Render assistance and to provide common services to members.

32

Organize co-ordination and co-operation on procedural, legal, technical,

administrative, and professional matters.

Collect, classify, and circulate statistical and other information.

Pool expertise towards common purposes such as cost reduction, increased

efficiency, productivity, and improving systems, procedures, and banking

practices.

Project good public image of banking through publicity and public relations.

Encourage sports and cultural activities among bank employees.

33

Globalization of banking in India: International banks established in India since independence. Today all major

international banks have operations in India. International banks aregoverned by

applicable banking law. In addition they also fall under purview of FEMA (Foreign

Exchange Management Act).

With Globalisation, more and more foreign banks would get entry in India. Also,

Major indian nationalized and private banks have overseas operations and

branches.

Importance of international banking in India:

It is important that international banking has wider spread across india without any

hurdles because it a need of the industry and desired growth. Following

factorshighlighted the need and importance:

1. India poised to be the third largest in public private partnership PPP by the

year 2025. PPP solicits participation of private sector enterprises in

infrastructure was so far the monopoly and responsibility of the government.

Private sector participation requires greater role of banks in this process. In

PPP India is only behind US, China and Japan.

2. India has sixth largest in foreign exchange reserve.

3. India is haven for techno-MNCs- third biggest market for computer goods,

cellur industry CAGR- 35%, which is highest in Asia Pacific and Japan.

4. Internationally acknowledged base for ITES (IT enabled services) segment.

5. Identification hub for auto component industry.

6. Foreign corporate in outright acquisitions, M&As and JVs

34

7. Vast industrial7services infrastructure.

Where Do We Stand in the Global Banking Arena?

In the international banking arena, size, innovation, efficiency and best standards

of customer service alone matter. The top banks in the world belong to such

category.

There is no substitute for innovation to survive and lead in the new-age banking.

The list of Top 500 Global Financial Brands 2009 brought out by The Banker

magazine and Brand Finance Plc. reveals that banks such as HSBC, Bank of

America, Wells Fargo, Santander, ICBC, American Express, Citi, BNP Paribas,

China Construction Bank, and Chase are in the top ten league. SBI from India

appears in the top 100 banks. Some of these banks like Citi, Wells Fargo, Bank of

America, HSBC, BNP

Paribas suffered huge credit losses during the crisis period requiring large capital

infusion. Despite the fallout of global downturn, some banks have emerged

winners during 2009. The Banker Awards 2009 enlists banks like Banco Santander

(Western Europe), UniCredit (Central & Eastern Europe), Standard Chartered

Bank (Asia) which emerged as global winners amidst crisis.

Top banks are continuously adapting to changing web technology, applications,

business models and competition. Internet banking has emerged as an important

strategic mode aimed at reaching new generation customers. Banks such as Citi,

HSBC and Standard Chartered are the dominant players in web banking adding

next generation new customers. This medium has been extensively used to

building deeper relationships with the customers, mobilising deposits, generating

35

payment and trading revenue, and cross-selling products. The Annual Survey of

the World's Best Internet Banks

2008, conducted by Global Finance reveals that the top banks in this category are

mainly Citi, HSBC and Standard Chartered. In the Asia-Pacific region, the Chinese

bank, ICBC, emerges as the best consumer internet bank.

If we look at top 100 banks from the emerging market economies, the recent

survey indicates that China is at the top in terms of number of banks in this

category at 14, followed by Brazil and Taiwan with 11 banks each. India has 7

banks that come in the list of top 100 banks of emerging markets.

The top banks are always on the move to improve their standards of operations and

customer delivery. In the world of finance, what matters to customers is service,

quality of investments and trust. The survey by Global Finance has identified the

best banks in 118 countries, as well as the best banks globally based on objective

criteria such as growth in assets, profitability, geographic reach, strategic

relationships, new business development and product innovation. Subjective

criteria included the opinions of equity and credit-rating analysts, banking

consultants and others in the industry, as well as corporate financial executives.

The best banks are those with effective risk management systems, excellent service

and good corporate governance.

One might think that the current global financial crisis may put some brake on the

ongoing financial liberalization process as part of GATS. The current crisis no

doubt would lead to consolidation in global banking and the strong banks would

emerge and dominate the scene. With the proposed improvements in the regulatory

framework and risk management systems, there would be greater transparency in

the global financial system. This should facilitate the WTO process of financial

sector liberalization further, as the rules of the game would become clearer.

36

Global Financial Melt-down & the Future Direction

The crisis has shown the limits of the current regulatory and supervisory

frameworks at both the domestic and international levels. The crisis was

precipitated by monetary excesses in the form of very low interest rates for a long

period in line with the policy pursued by the Federal Reserve and some other

central banks. The low interest rates led to a housing boom which eventually ended

in a bust and was a significant factor in the crisis. The low interest rates also were a

probable factor in excessive risk-taking as people searched for higher yields.

Although open financial markets provide tremendous benefits by lowering the cost

of capital, the crisis has demonstrated that more effective regulation is needed to

realize this potential. The financial innovation and integration have increased the

speed and extent to which shocks are being transmitted across asset classes and

economies. However, it is observed that regulation and supervision remain geared

at individual financial institutions and do not adequately consider the systemic and

international implications of domestic institutions' actions. Moreover, it is felt that

macro-prudential tools did not sufficiently take into account business and financial

cycles, which led to an excessive build-up of leverage.

The global economy is deeply inter-related, rendering it impossible to isolate a

country from the effects of the crisis emanating in major parts of the world. The

resultant capital flow reversals, sharp widening of spreads on sovereign and

corporate debt and abrupt currency depreciations have invalidated the 'decoupling

hypothesis'. Growth prospects of emerging economies were undermined by the

cascading financial crisis.

Although the governments and central banks across countries responded to the

crisis through pro-active and unconventional measures, there has been a

contentious debate on whether these measures are adequate or appropriate and on

37

how abandoning the rule book, driven by short-term gains, is compromising

medium-term sustainability.

The crisis has made clear that new thinking and action are needed in at least three

areas related to the global financial architecture:

the design of financial regulation needs to be improved.

a better way of assessing systemic risk must be found.

mechanisms for more effective, coordinated actions are needed to reduce the

risk of crises and to address them when they occur.

The challenge, therefore, is to design new rules and institutions that reduce

systemic risks, improve financial intermediation, and properly adjust the perimeter

of regulation and supervision, without imposing unnecessary burdens. It is also

viewed that there should be a system of stress testing of financial models,

including resulting credit and market risk exposures so that management and

regulators can understand where the breakeven points are on liquidity, solvency

and capital adequacy and also understand the key drivers or causes to those break

even points. There has been a focused attention on enhanced transparency and

disclosure of information to ensure financial stability and effective and smooth

functioning of the markets.

Impact of Globalisation on Banking Services in India ...

The concept of Globalisation infers that the globe is a single unit which functions

as one when it comes to decision-making. In other words, Globalisation implies the

free movement of goods, services and capital throughout the world. Globalisation

involves the opening up of national economies to global markets. This naturally

and simultaneously results in the simultaneous reduction in the role of the State to

shape national policies. Many Socialists define Globalisation as a primarily

38

economic phenomenon, which involves increasing interaction and integration of

national economic systems. This leads in turn to growth in international trade,

investment and capital flows. Moreover, there is a rapid increase in cross-border

social, cultural and technological exchanges because of the phenomenon of

globalisation.

The sociologist defines globalisation as a decoupling of space and time. With the

advent of instantaneous communications, knowledge, trade and culture can be

shared around the world simultaneously. This will ultimately result in an increase

in international trade, investment and capital flows.

On the other hand, some critics define Globalisation as ''the worldwide drive

towards a globalised economic system, dominated by supranational corporate trade

and banking institutions that are not accountable to the democratic processes or

national governments. Due to Globalization, all important institutions like the

nation, state, family, work, services, trade, leisure, culture, knowledge etc. are

changing. As a result of this, life styles of people throughout the world are also

changing, making the world a single unit when it comes to decision making.

The middle and late 90s witnessed great innovations in financial reforms,

restructuring, convergence globalization etc. These were accompanied by a rapid

revolution in communication technologies. Moreover, a major development was

the evolution of the ''convergence'' of computer and communication technologies,

such as the Internet, mobile / cell phones etc. The arrival of foreign and private

banks with their superior, sophisticated technology-based services forced Indian

Banks also to follow the same by going in for the latest technologies so as to meet

the threat of competition and retain their customer base. This also brought in

revolutionary products and services which have been orchestrated by the Indian

Software Industry.

39

Software Packages for Banking Applications in India had their beginnings in the

mid 80''s. This move was spurred on by RBI and the Rangarajan Committee Report

which decided to computerize the Indian Banking branches in a limited manner.

This move was aimed at promoting competition and allows an easy assessment of

relative vendor capabilities. Gradually, even those who opposed computerization in

government and banks changed their perspective and within a few years our

country became a superpower in Information technology.

The early 90s saw a fall in hardware prices and the advent of cheap and

inexpensive but high-powered PCs and servers. Banks went in for what was called

Total Branch Automation (TBA) Packages.

We are now at the point when we have accepted the use of computers in every

sphere of our activity today.

Categories of Packages:

The IT Packages and services available in India can be broadly classified into the

following 6 types:

1. Stand-alone branch-level packages;

2. Multi-branch solutions;

3. Foreign packages;

4. Packages for specialized niche areas;

5. Service Branch / high-volume transaction processing packages;

6. IT Services;

Thus, we have a wide spectrum of Banking Software available in the market to

fulfill the various needs of the banking Industry. There are number of software

companies, which are developing software for the banking industry.

In today

40

The entire banking sector has undergone a restructuring during recent years as a

result of recent developments. New technologies have added to the competition.

The I-T revolution has made it possible to provide ease and flexibility in operations

to customers thus making life simpler and easier. Rapid strides in information

technology have, in fact, redefined the role and structure of banking in India.

Further, due to exposure to global trends after Information explosion led by

Internet, customers - both Individuals and Corporates - are now demanding better

services with more products from their banks. The financial market has turned into

a buyer's market. Banks are also coping and adapting with time and are trying to

become one-stop financial supermarkets. The market focus is shifting from mass

banking products to class banking with the introduction of value added and

customised products.

Public Sector Banks like SBI have also started focusing on this area. SBI plans to

open 100 new branches called Personal Banking Branches (PBB) this year. The

PBBs will also market SBI's entire spectrum of loan products: e.g. housing loans,

car loans, personal loans, consumer durable loans, education loans, loans against

shares and financing against gold.

Customised banking products, such as Investment Advisory Services; photo-credit

cards; cash Management services; Investment products and Tax Advisory services

have already been introduced by a few foreign and private sector banks. A few

banks have gone in to market mutual fund schemes. Eventually, the Banks plan to

market bonds and debentures, when allowed. Insurance peddling by Banks will be

a reality soon. The recent Credit Policy of RBI announced on April 27, 2000 has

further facilitated the entry of banks in this sector. Banks also offer advisory

services termed as 'private banking' to "high relationship value" clients.

41

The bank of the future has to be essentially a marketing organisation that also sells

banking products. New distribution channels are being used; more & more banks

are introducing services like disbursement and servicing of consumer loans, Credit

card business. Direct Selling Agents (DSAs) of various Banks go out and sell their

products. They make house calls to get the application form filled in properly and

also take your passport-sized photo. Home banking has already become common.

Now, you can order a draft or cash over the phone or internet and have it delivered

home. ICICI was the first among the new private banks to launch its net banking

service, called Infinity. It allows the user to access account information over a

secure line, request cheque books and stop payment, and even transfer funds

between ICICI Bank accounts. Citibank has been offering net banking to

customers.

Products like credit cards, debit cards, flexi deposits, ATM cards, personal loans

including consumer loans, housing loans and vehicle loans have been introduced

by a number of banks.

Advantages for Corporates

Corporates are also deriving profits from the increased variety of products and

competition among the banks. Certificates of deposit, Commercial papers, Non-

convertible Debentures (NCDs) that can be traded in the secondary market are

gaining popularity. Recently, market has also seen major developments in treasury

advisory services. With the introduction of Rupee floating rates for deposits as well

as advances, products like interest rate swaps and forward rate agreements for

foreign exchange, risk management products like forward contracts, option

contracts and currency exchange are offered by almost every authorised dealer

bank in the market. This list of services is still growing.

Conclusion: Unfortunately, several concerns related to the banking sector still

remain. The chief among these is the matter of ownership and control. In the near 42

future, India will be forced to apply the norms of developed countries to the

Banking Industry. Consequently, many Indian banks (including some of the

biggest) will show very poor return ratios and dozens of banks will go bankrupt.

Thus, it becomes imperative that the Banking Industry should streamline itself and

become more compatible with global norms in the fields of operation and services

Indian Banks have huge financial resources at their disposal. We started with

aggregate deposits of about 5000 Crores in the Sixties which increased to 10 Lakh

Crores this millennium. This denotes a 200-hundred-fold growth in three decades.

A major tool which we have at our disposal is our knowledge capital-something

which is being grossly under utilized currently. This is an extremely valuable type

of capital. In banking we are short of intangible assets. Our knowledge capital is

quite crucial to the success of banking in India. This we cannot garner from

outside; neither can we go in for a public issue to mobilise intangible assets.

Therefore banking employees have to embrace the need for higher learning and

better knowledge. Banking in India has immense potential given the population

figures in our country. With a little effort, careful planning and timely legislation

this industry can be brought on par with the best banks in the world.

Source Article by: Rupali Sagar

43

Globalization of Indian Banking Sector-

Challenges & Future Prospects

Source: Dr. R.K. Uppal* Rimpi Kaur**

* Head, Dept. of Economics, D.A.V. College, Malout (Punjab)

**Research Scholar, Punjabi University, Patiala

E-mail rkuppal_mlt@yahoo.com

Mb. 98729-61700, 01637-261188 (R)

Globalization of Indian Banking Sector - Challenges & Future Prospects

_________________________________________________________________

Globalization is both a challenge and an opportunity for Indian banks to gain

strength in the domestic market and increase presence in the global market. On the

basis of various parameters, paper finds that there is a fast penetration of foreign

banks in India and public sector banks, particularly SBI is intensively entering in

foreign countries, same is the case of ICICI Bank as this bank is capturing foreign

markets at a fast pace. At the end, the present paper finds some challenges and

also explores the future opportunities. On the basis of the experience of already

global went banks, paper suggests some strategies that how Indian banks can make

their presence effective in the global market.

__________________________________________________________________44

Introduction

Globalization refers to widening and deeping of international flow of trade, capital,

labour, technology, information and services. Globalization has led to an overall

economic, political and technological integration of the world. In our country, first

economic reforms (1991) gave birth to globalization and second phase of banking

sector reforms strengthened the globalization. Various reform measures introduced

in India have indeed strengthened the Indian banking system in preparation for the

global challenges ahead. The major impact of banking sector reforms can be

viewed from the following chart:

Indian Banking on the Reforms Path

Reforms Initiatives Impact on Banks

1. Deregulation of deposit

interest rate

2. Increase in Capital

Adequacy Ratio

3. Deregulation of lending

rates

4. Lower CRR & SLR

5. Asset classification and

provisioning norms

6. Increase competition

7. Entry into new business

lines

1. Helped banks to gain control over cost of

deposits

2. More stability in the banking system

3. Flexibility to price loan products and

competitive pricing

4. Availability of more funds for lending

5. Encourage banks to strengthen their credit

and this brought down the NPA generate

rate

6. Pressure to retain customers, enhance

45

8. Increased thrust on

banking supervision

and risk management

service quality and efficiency

7. Emerge as financial super markets and build

the top and bottom line

8. Help banks in proper allocation of funds

across various business lines and adapt

global best practices of risk management to

enhance their competitiveness.

Globalization, which is outcome of economic reforms, is both a challenge and an

opportunity for Indian banks to gain strength in the domestic market and increase

presence in the global market. The present paper analyzes the impact of

globalization on Indian banking from the point view of penetration of Indian banks

in foreign countries and compares the performance of Indian banks particularly the

performance of branches operating in foreign countries with that of foreign banks

operating in India and at the end suggests some strategies for the globalization of

Indian banks.

Organization of the paper

After the brief introduction, section II fixed the objectives and methodology of the

study. Section III analyses the results. Section IV finds some challenges and

explores some future opportunities whereas section V suggests some strategies for

the effective globalization of Indian banks. Last part concludes the paper.

Objectives:

The thrust of the paper is to know the extent of globalization of Indian banks and

suggests strategies for the globalization of Indian banks especially in the context of

the issues raised under this paper.

To study and analyze the impact of globalization on Indian banking sector

46

To find the challenges and explore the future opportunities for Indian banks

in the global markets

To suggest some strategies for the globalization of Indian banks

Methodology

The present paper analyzes the performance of Indian banks in comparison to

foreign banks working in our country. The performance of our bank branches in

foreign countries also analyzes in this paper. This study is based on secondary data

and analysis is made at group level. Time period of the study is 2000-01 to 2004-

05. This period has been chosen taking into consideration the following factors:

The process of interest rate liberalization, which started in 1992, was fully

liberalized (especially that of deposit rate) in 1997.

New private sector banks started entering the banking business in a big way

from 1997.

Data Sources:

1. Report on Trend and Progress of Banking in India (Various Issues)

2. Performance Highlights of Banks 2000-2001 to 2004-05 Indian Banking

Association

3. IBA Bulletin, Vol. XXV, No.3, March 2003

4. Indian Bankers, Vol. I, No. 3, March 2006

To make the comparison of performance of Indian and foreign banks in India,

simple and overall %age growth rate is calculated in selected parameters of

performance.

Parameters of the Study

47

The comparative performance of the bank groups is analyzed on the basis of the

following parameters:

1. %age growth in branches of all bank groups’ separately in India and abroad

2. %age growth in business of all bank groups’ separately in India and abroad

3. %age growth in per employee business of all bank groups

4. %age growth in per branch business of all bank groups separately in India

and abroad

5. %age growth in per employee profit/loss of all bank groups

6. %age growth in per branch profit/loss of all bank groups

7. %age growth in investments of all bank groups’ separately in India and

abroad

8. %age growth in fee-based income of all bank groups

Results & Discussion

Penetration of Indian Banks and Foreign Banks

Number of branches of SBI and its associate banks has increased in 2004-05 from

13509 to 13767 i.e. at 1.91 pc rate of growth and the branches of this bank group is

penetrating in global markets also with the growth rate of 3.85 pc as these branches

increased from 52 to 54 during the study period. Similarly, the number of branches

of nationalized banks has increased from 32686 to 33862 at the end of the study

period whereas they are fastly penetrating in foreign countries too at 5.63 pc

growth rate which is higher than the growth rate of branches in India i.e. 3.60 pc.

The penetration of old private sector banks is very less in global market.

Overall, branches of new private sector banks have become almost double during

the study period and show the growth at the rate of 96.78 pc, which is the highest 48

among all the bank groups. This group is fastly spreading their business in rural,

semi-urban, urban and metropolitan cities and capturing Indian market with the

greater share. Some banks have started capturing foreign markets particularly

ICICI Bank is fastly entering in foreign countries at 100 pc growth rate.

Table-I: Bank Group-Wise Percentage Growth Rate of Branches in India and

Abroad

Years

G-I G-II G-III G-IV G-V

India

Abroa

dIndia

Abroa

dIndia

Abroa

dIndia

Abroa

dIndia

2000-

0113509 52 32686 71 4423 1 808 1 190

2001-

02

13542

(0.24)

51

(-1.92)

32710

(0.07)

71

00

4211

(-4.79)

1

(00)

987

(22.1

5)

1

(00)

154

(-

18.95)

2002-

03

13574

(0.24)

48

(-5.88)

33060

(1.07)

70

(-1.41)

3758

(-

10.76)

1

(00)

989

(0.20)

1

(00)

184

(19.48)

2003-

04

13630

(0.41)

48

00

33343

(0.86)

73

(4.29)

4414

(17.46)

0

(-

100.00)

1179

(19.2

1)

2

(100.00

)

205

(11.41)

2004-

05

13767

(1.01)

54

(12.50)

33862

(1.56)

75

(2.74)

4536

(2.76)

0 1590

(34.8

2

00

257

(20.23)

49

6)

Overal

l

Growt

h Rate

(%)

(1.91) (3.85) (3.60) (5.63) (2.55)(-

100.00)

(96.7

8)(100) (7.32)

Source: Performance Highlights of IBA Publications since 2000-01 to 2004-05

Note:

(i) Parentheses values shows simple percent growth rate

(ii) G-I (SBI & its Associates), G-II (Nationalized Banks), G-III (Old Private

Sector Banks), G-IV (New Private Sector Banks) & G-V (Foreign

Banks)

The number of branches of foreign banks are rapidly penetrating in urban and

metropolitan cities of our country. There were only 190 branches in the 2000-01 in

India and in 2004-05 these have become 257. The overall growth rate of foreign

branches in India is 7.32 pc, which is the highest rate among the Indian banking.

Citibank, ABN Amro Bank, Grindlays Bank, Standard Charted Bank are

prominent which are penetrating in our country with increasing number of their

branches in India.

Overall, we may conclude that the presence of foreign banks is rapidly increasing

and they are capturing Indian market in a big way.

Bank Group-Wise Business in India and Abroad (Table-II): At the end of the

study period all the bank groups shows positive growth in business inside and

outside India as it ranges between 68 to 260 pc in India and 56 to 350 pc outside 50

India. New private sector banks are dominating in overall growth rate of business

within the country with the growth at 260.30 pc rate and establishing very effective

place in foreign countries too with 350.47 pc growth in their business outside

India. ICICI, HDFC and UTI Banks are taking a lion’s share in business in foreign

countries. The business of foreign banks in India shows 58.35 pc growth, which is

lesser as compared to business of Indian banks in foreign countries.

Overall, we can say that new private sector banks are taking lead to enter in global

markets in a big way and it is an alarming bell for our public sector banks to

survive in the global market.

Table-II: Bank Group-Wise Percentage Growth Rate of Business in India and

Abroad

Years

G-I G-II G-III G-IV G-V

India Abroa

d

IndiaAbroa

dIndia

Abroa

d

Indi

a

Abro

adIndia

2000-0143980

522703

77173

939757

11135

0369

9300

600

10218

7

2001-02

49432

2

(12.4

0)

21288

(-6.23)

88568

8

(14.7

7)

47444

(19.33)

12009

0

(7.85)

429

(16.26

)

1646

66

(77.0

5)

00

10317

7

(0.97)

2002-03 55907

1

21166 10006

35

47873 14038

6

482 2052

03

00 12146

8

51

(13.1

0)(-0.57)

(12.9

8)(0.90)

(16.9

0)

(12.35

)

(24.6

1)

(17.73

)

2003-04

63082

4

(12.8

3)

24728

(16.83)

11541

10

(15.3

4)

52836

(10.37)

16752

7

(19.3

3)

532

(10.37

)

2432

16

(18.5

2)

2144

13895

2

(14.39

)

2004-05

75222

8

(19.2

5)

38148

(54.27)

13778

05

(19.3

8)

61826

(17.01)

18759

5

(11.9

8)

624

(17.29

)

3351

04

(37.7

8)

9658

(350.

47)

16181

6

(16.45

)

Overall

Growth

Rate

(%)

71.04 68.03 78.53 55.51 68.47 69.11260.3

0

350.4

758.35

Bank Group-Wise Per Employee Business (Table-III): Business (per employee)

is the maximum in public sector banks where the overall growth rate is 156 pc and

93 pc respectively of SBI group and nationalized banks whereas it was only 17 pc

and 30 pc in case of new private sector banks and foreign banks respectively. The

low business per employee in new private sector banks and foreign banks is due to

rapid increase in number of employees as these bank groups are in the expansion

stage.

Table-III: Bank Group-Wise Business Per Employee

(Rs. In Lakhs)

52

Years G-I G-II G-III G-IV G-V

2000-01 160 160 200 749 723

2001-02 182 (13.75) 197 (23.12) 227 (13.50) 906 (20.96) 956 (32.23)

2002-03 205 (12.64) 221 (12.18) 254 (11.89)740 (-

18.32)862 (-9.83)

2003-04 234 (14.15) 256 (15.84) 286 (12.60) 872 (17.84) 987 (14.50)

2004-05 409 (74.49) 308 (20.31) 323 (12.94) 875 (0.34) 940 (-4.76)

Overall

Growth

Rate (%)

155.63 92.50 61.50 16.82 30.01

Bank Group-Wise Per Branch Business in India and Abroad (Table-IV): The

overall growth rate is the maximum in new private sector banks i.e. 83.09 pc in

India and it is varying between 68 to 72 pc in public sector banks.

Table-IV: Bank Group-Wise %age Growth Rate of Per Branch Business in

India and Abroad

Years

G-I G-II G-III G-IV G-V

IndiaAbroa

dIndia

Abroa

dIndia

Abro

ad

Indi

a

Abro

adIndia

2000-

0132.56 436.60 23.61 559.96 25.18

369.0

0

115.

1100 537.83

2001-

02

36.50

(12.1

0)

417.41

(-4.40)

27.08

(14.7

0)

668.23

(19.34)

28.52

(13.2

6)

429.0

0

(16.2

166.

83

(44.9

00 669.98

(24.57)

53

6) 3)

2002-

03

41.19

(12.8

5)

440.96

(5.64)

30.27

(11.7

8)

683.90

(2.35)

37.36

(31.0

0)

482.0

0

(12.3

5)

207.

49

(24.3

7)

00660.15

(-1.47)

2003-

04

46.28

(12.3

6)

515.17

(16.83)

34.61

(14.3

4)

723.78

(5.83)

37.95

(1.58

)

00

206.

29

(-

0.58)

1072.

00677.81

(2.68)

2004-

05

54.64

(18.0

6)

706.44

(37.13)

40.69

(17.5

7)

824.35

(13.90)

41.36

(8.99

)

00

210.

76

(2.17

)

4829.

00

(350.

47)

629.63

(-7.11)

Overal

l

Growt

h Rate

(%)

67.81 61.80 72.34 47.22 64.26 30.6283.0

9

350.4

717.07

But the per branch business of foreign banks is increased at the rate of 17.07 pc in

our country which is the lowest among all the Indian bank groups. In case of per

branch business in foreign countries, new private sector banks show increase of

54

350.47 pc and in case of public sector banks, it is varying between 47.22 to 61.80

pc.

We may conclude that our new generation banks are entering in foreign countries

in a big way with the excellent growth of their business.

Bank Group-Wise Per Employee Profit/Loss (Table-V): It is also the highest in

public sector banks as compared to that of new private sector banks and foreign

banks. The overall growth rate is 124 to 162 pc in public sector banks and was only

60 pc and 75 pc respectively in new private sector banks and foreign banks. Hence,

the profits of public sector banks are growing at an excellent rate of growth as

compared to new private sector banks and foreign banks.

Table-V: Bank Group-Wise Profit Per Employee

(Rs. In Lakhs)

Years G-I G-II G-III G-IV G-V

2000-01 0.78 0.41 2.76 5.15 6.60

2001-02 1.21 (55.13) 0.51 (24.39)1.89 (-

31.52)

4.56 (-

11.46)

12.17

(84.39)

2002-03 1.59 (31.40) 0.65 (27.45) 2.32 (22.75) 6.91 (51.54)15.45

(26.95)

2003-04 2.00 (25.79) 0.78 (20.00) 2.76 (18.97) 6.48 (-6.22)14.35 (-

7.12)

2004-05 2.04 (2.00) 0.92 (17.95)0.57 (-

79.35)8.26 (27.47)

11.52 (-

19.72)

Overall

Growth

161.54 124.39 -79.35 60.39 74.55

55

Rate (%)

Bank Group-Wise Per Branch Profit/Loss (Table-VI): The overall growth in

per branch profits is observed the highest in nationalized banks as it was 366.67 pc

and new private sector banks with the growth rate of 159.49 pc and SBI group with

the growth rate of 156.25 pc are in succession whereas it was negative in old

private sector banks i.e. –36.36 pc and only 55.13 pc in foreign banks. Overall per

branch profits of all bank groups except old private sector banks are growing at

excellent rate of growth.

Table-VI: Bank Group-Wise Per Branch Profit/Loss

(Rs. In Lakhs)

Years G-I G-II G-III G-IV G-V

2000-01 0.16 0.06 0.11 0.79 4.97

2001-02 0.25 (56.25)0.15

(150.00)

0.24

(118.18)0.84 (6.33) 8.55 (72.03)

2002-03 0.33 (32.00) 0.23 (53.33) 0.33 (37.50)1.74

(107.14)9.88 (15.56)

2003-04 0.41 (24.24) 0.33 (43.48) 0.33 (00) 2.28 (31.03) 10.29 (4.15)

2004-05 0.41 (00)0.28 (-

15.15)

0.07 (-

78.79)

2.05 (-

10.09)

7.71 (-

25.04)

Overall

Growth

Rate (%)

156.25 366.67 -36.36 159.49 55.13

56

Bank Group-Wise Investments in India and Abroad (Table-VII): The overall

growth rate in investments is positive in all the bank groups. In case of growth of

investments in India, it is the highest in new private sector banks i.e. 186.61 pc

whereas it was 67 pc and 70 pc respectively in SBI group and nationalized banks.

On the other hand, investments of Indian banks in foreign markets, it is grown at

the highest in case of new private sector banks i.e. 18800 pc rate of which is

unbelievable. But it ranges between 17 to 40 pc in case of public sector banks and

that of foreign banks’ investments in India shows growth at 18.87 pc rate of

growth. Moreover, still investments of our banks in foreign countries are far better

than the investments of foreign banks in our country.

Table-VII: Bank Group-Wise Percentage Growth Rate of Investments in

India and Abroad

Years

G-I G-II G-III G-IV G-V

IndiaAbroa

dIndia

Abroa

dIndia

Abro

ad

Indi

a

Abro

adIndia

2000-

01

15323

13961

23057

96336

2988

0128

3202

18 35763

2001-

02

18095

0

(18.0

9)

4669

(17.87)

25977

0

(12.6

6)

9120

(43.94)

3340

9

(11.8

1)

85

(-

33.59

)

6395

3

(99.7

2)

12

(50.0

0)

32846

(-8.16)

2002-

03

21890

4

4462 31213

4

10167 3991

7

85 6731

8

9 40795

57

(20.9

7)(-4.43)

(20.1

6)(11.48)

(19.4

8)(00)

(5.26

)

(-

25.00

)

(24.20)

2003-

04

24331

0

(11.1

5)

3992

(-

10.53)

37041

0

(18.6

7)

8464

(-

16.75)

4960

9

(24.2

8)

84

(-

1.18)

8035

0

(19.3

6)

361

(3911

.1)

40886

(0.22)

2004-

05

25606

3

(5.24)

4642

(16.28)

39107

4

(5.58)

8896

(15.10)

4560

6

(-

8.07)

76

(-

9.52)

9177

4

(14.2

2)

1512

(318.

84)

42518

(3.99)

Overal

l

Growt

h Rate

(%)

67.11 17.19 69.61 40.40 52.63-

40.63

186.

61

18800

.018.89

Bank Group-Wise Fee-Based Income (Table-VIII): Due to deregulation of

interest rates on deposits and advances, fee-based income has become significant

part of the total income. Overall, growth rate is the highest in new private sector

banks i.e. 373.40 pc and it is the lowest i.e. 26.66 pc in old private sector banks.

This rate is varying between 77 to 94 pc in public sector banks. In case of foreign

banks, it was 53.76 pc during the study period. Hence, we can conclude that except

58

our old private sector banks, all our banks have more growth in their fee-based

income in comparison of foreign banks’ fee-based income in India.

Table-VIII: Bank Group-Wise Fee-Based Income

Years G-I G-II G-III G-IV G-V

2000-01 5356 7159 1039 1060 2513

2001-026017

(12.34)

10525

(47.02)

2150

(106.93)

2113

(99.34)

2963

(17.91)

2002-037998

(32.92)

13273

(36.11)2361 (9.81)

14320

(577.71)3071 (3.64)

2003-0410919

(36.52)

17120

(28.98)2522 (6.82)

4720 (-

67.04)

3834

(24.85)

2004-059467 (-

13.30)

13903 (-

18.79)

1316 (-

47.82)5018 (6.31) 3864 (0.78)

Overall

Growth

Rate (%)

76.76 94.20 26.66 373.40 53.76

We can make the following inferences based on the analysis of the above

parameters:

Indian banks are essentially Indian in their operations and have marginal

presence in the global markets.

New private sector banks are competing successfully with the foreign banks.

New private sector banks are rapidly penetrating in foreign countries

New private sector banks are making heavy investments in foreign countries

Foreign banks are capturing Indian market in a big way

Overall globalization is fastly taking place allover the world

59

On the basis of these aspects, there is a need for Indian banks to look for global

opportunities and build their competitive strength to face the challenges

accordingly.

Table-I: Overall Percentage Growth Rate in Selected Parameters

Years

G-I G-II G-III G-IV G-V

India

Abro

adIndia

Abro

adIndia

Abroa

dIndia

Abro

ad

Indi

a

Branches(1.91

) (3.85)(3.60

)(5.63)

(2.55

)

(-

100.00

)

(96.7

8)(100)

(7.32

)

Business71.04 68.03 78.53 55.51 68.47 69.11

260.3

0

350.4

7

58.3

5

Business per

branch67.81 61.80 72.34 47.22 64.26 30.62 83.09

350.4

7

17.0

7

Profit per

branch

156.2

5NA

366.6

7NA

-

36.36NA

159.4

9NA

55.1

3

Investments67.11 17.19 69.61 40.40 52.63 -40.63

186.6

1

18800

.0

18.8

9

Fee-based

income 76.76 NA 94.20 NA 26.66 NA373.4

0NA

53.7

6

60

Globalization- Its Challenges for Indian Banks

The benefits of globalization have been well documented and are being

increasingly recognized, but at the same time it has thrown many challenges for

Indian banks. It affects the banking industry in one or more of the following ways:

1. Greater and intensive competition

2. Focus on efficiency, productivity and cost reduction

3. Superior risk management system and practices

4. Strengthening service quality, delivery and cross selling of products/services

5. Product innovation as an integral part of the retail banking revolution

6. Upgradation of technological infrastructure

7. Competency building and investment in human capital as a catalyst for

transformation

8. Consolidation within the financial system

9. Opportunity to increase size and scale to gain dominance in the local market

and penetrate into the global markets

10.Transparency, disclosure and market discipline

It is, therefore, imperative for Indian banks to address all the above issues, if they

aspire to play a role in the global arena.

Globalization and Future Opportunities for Indian Banks

Globalization will gain greater speed in the coming years with the opening up of

the financial sectors under WTO regime.

Consolidation of Banks: Consolidation is a crucial preparatory step to be

undertaken by banking sector in India.

Weak banks need to exit and one of the options will be to merge with a

stronger bank. Mergers amongst public sector banks are politically very

61

sensitive, therefore the government has a big role in establishing the

framework, which will include flexible labour laws.

Increased revenue, size and scale

Increased productivity by reducing ‘transaction cost’

Benefits to stakeholders through lesser intermediation cost

Increased ability to meet competition from global banks

Easy mobilizing resources from the market

Asset Quality: Indian banks should concentrate on asset quality and earnings there

from.

Global Players and Customer’s Satisfaction: In the emerging scenario, with more

and more global players operating in India, there has been an urgent need to serve

the customers promptly and efficiently.

Competitiveness in Banks: Domestic banks should begin to make themselves as

competitive as possible. They should also increase their productivity and

profitability because at the present day context, size is no longer a key indicator in

the banking industry.

E-Delivery Channels: The Indian banks particularly public sector banks should

create awareness among the masses about all the e-delivery channels with demo

for how to operate and use. They should provide efficient services through e-

delivery channels.

Autonomy in HRM: Autonomy in HRM areas such as deciding categorization of

branches, vacancy, placements should be given to banks.

Efficient Capital Markets: An efficient capital market should be developed to

channelize private savings into infrastructure financing.

62

Privatization of Public Sector Banks: Productivity, profitability and efficiency is

quite higher in partially privatized public sector banks. The government should

continue the process to make the Indian banks competitive at the global level.

Resources Optimization: Asset optimization, which include unlocking money from

real estate investment to strengthening capital, human resources optimization and

value sourcing with the focus on risk and associated benefits besides cost arbitrage.

Customer Experience: Creating uniform transaction experience, developing

appropriate delivery strategies and strengthening CRM are some of the key

requirements for banks.

Strategies for Globalization of Indian Banks

The following are the strategies for the globalization of Indian banks:

Cadre of Experts

A cadre of experts needs to be built up; personnel should have exposure in

functioning in truly global environment.

Information Technology

Indian banks must build their expertise in rolling out technology and in Basel- II.

IT can explore new possibilities in foreign countries.

International Capital Markets

We should be active in international capital markets, approaching them off and on

for trenches of capital subscription. Indian banks should try to capture at lower

cost.

63

Linkages with other financial organization

Indian banks have linkage with the rest of the finance infrastructure in India such

as term lenders, investment banks, insurance ventures and credit rating agencies.

Together they can face even tough competition at global level.

Strategic alliances

Strategic alliances with national banks in oil rich countries can be very valuable,

especially as Indian and China are becoming large consumers and there is an

expectation of large India – related and Asia- related investments in this sector and

these countries.

Acquisitions of Retail Banks

Acquisitions should be of retail banks in selected markets. The selection will

depend on the ability to implement technology, improve customer service and

upgrade to Basel-II.

Research of Products and Services

Indian banks should make comprehensive research in foreign countries regarding

the financial requirements of the people and then they should enter in a big way.

Prices of Products and Services

At the initial stages Indian banks should provide products and services at

comparatively lower prices to capture their market share.

Change in Mind- Set

The bankers should change their own mindset to win the customers in other

countries. A friendly customers environment should help to penetrate in other

countries.

64

Alliance with Big Houses/Companies

Indian banks should make some alliance with profit making big houses and

companies to capture foreign market.

Effective Advertisements

Indian banks should make effective and attractive advertisements according to the

customer’s tastes regarding our financial products.

Incentives

Indian banks should provide lurement and incentives to the potential customers in

the beginning.

Effective CRM

Indian banks should make effective CRM in foreign countries. It will help to win

potential customers.

Experiences and Lessons from Banks Which Went Global

Going global is the way forward for banks to gain size and scale. It is a natural

progression for any organization. However, there are mixed experiences e.g.

- In India, Grindlays Bank sold its Indian operation to Standard Charted Bank

and exited.

- BNP Paribas, though, present in India for more than hundred years, decided

to shut its Indian operations

- SBI, e.g. had to close its Panama branch for bad external relations

- Though there are 33 foreign banks operating in our country, only top four,

others only in India have marginal presence

- SBI presently has planed to increase its presence in the global market from

the present 54 to 75 branches

65

Some of the lessons that can be drawn are as under:

- A major lesson is that the management processes in the cross-border

initiative should be aligned with the culture. There are two vital aspects,

every country should keep in mind:

(a) Differing national cultures, and

(b)Differing corporate cultures

The failures of Japanese banks in US partly relate to culture mismatch. It is

necessary to announce at the time of acquisition itself as to what the

approach/goals of the acquired entity will be post-acquisition.

- After acquisition, effective methods should be adopted for all the

transactions.

- Risk management needs maximum focus when expanding internationally.

- While entering new areas, especially internationally, there is a need for the

top management to be aware of the emerging areas in finance.

Conclusion

Globalization in its purest form is a global village with no boundaries. The size of

the market is the entire world. Indian banks have negligible presence in the global

market. But foreign countries are penetrating in our country a big way, their

investments are increasing and they are capturing Indian market fastly in urban and

metropolitan cities.

Globalization is both a challenge and an opportunity for Indian banks to gain

strength in the global market. As the legal and state environment is increasingly

becoming conducive what is needed is a mindset to look beyond the horizons.

66

Indian banks today have everything, they need to do only one thing – dream big.

The world will then follow them.

Future Areas for Intensive Research

The government and other various research organizations should make

comprehensive research in the following areas to get the fruits of the globalization:

1. Foreign banks and portfolio investments

2. Indian banks and portfolio investments

3. Profitable segments in foreign countries for investments

4. Possibilities of merger and acquisition of Indian banks

5. Perceptions and expectations about Indian financial products in foreign

countries

Bibliography

Banerjee, S. (2005), “Technological Upgradation: Impact on Service Quality”,

Charted Financial Analyst, (Oct.), pp. 77-80

Batra, G.S. (2000), Globalization and Liberalization - New Developments,

(Deep & Deep Publications: New Delhi)

Kern, H (2005), “Global Retail Banking: Changing Paradigms, Charted

Financial Analyst, (Oct.), pp. 56-58

Mittal, S. (2006), “Globalization: Issues and Challenges”, Charted

Financial Analyst, (Oct.), pp. 42-44

67

Santhanakrishan, S (2005), “Globalization: Impact on Indian Banking”,

Charted Financial Analyst, (Oct.), pp. 61-64

Saez, L. (2005), “Basel II: Implication on Indian Banking”, Charted

Financial Analyst, (Oct.), pp. 74-76

Swain, B. K. (2006), “Globalization of Banking Services: An Overview”,

Paper was presented in International Conference

organized by IILM, New Delhi (17th-18th, Feb.)

Changing Structure of Indian BankingThe banking sector is the most dominant sector of the financial system in India,

and with good valuations and increasing profits, the sector has been among one of

the top performers in the economy. The financial sector liberalisation and entry of

many private banks have brought about considerable changes in the structure of

banking industry.

Although public sector banks (PSBs) dominate the Indian banking system, the

increasing competition in the banking has led to falling share of PSBs and

increasing share of the new private sector banks. The PSBs now (2008-09) account

for 71.8% of the aggregate assets, a decline from 79.5% in 2000-01. In deposits,

the share of PSBs declined from 81.4% to 76.6% during the same period. The new

private sector banks increased their share significantly - from 6% to 15.2% in

assets and from 5.9% to 13.2% in deposits. Interestingly, foreign banks' share in

assets increased only marginally by 0.6% to 8.5%, while in deposits the share

remained the more or less same at about 5.4%. The share of new private banks in

profits has gone up substantially by 6% during the period, while that of PSBs

68

declined by 2.2% and old private sector banks by 3.3%. The old private sector

banks' share in assets and deposits also went down during the period. Thus, it may

be observed that the new private sector banks have dominated the banking industry

in terms of growth in assets, deposits and profit.

Table 1: Indian Banks - Growth in Assets, Deposits & Net Profits (% share)

(2000-01 & 2008-09)

2000-01 2008-09 2000-01 2008-09 2000-01 2008-09

Public Sector Banks 79.51% 71.87% 81.44% 76.61% 67.42% 65.17%

New Private Sector Banks 6.08% 15.18% 5.96% 13.22% 9.99% 16.03%

Old Private Banks 6.53% 4.43% 6.99% 4.90% 7.84% 4.56%

Foreign Banks 7.88% 8.53% 5.62% 5.27% 14.76% 14.23%

100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Category of Banks Assets Deposits Net Profit

Note: Data on assets & deposits are as on March-end of the year.

The Indian banking sector throws open huge potential in the areas of retail

banking, rural banking, investment banking, internet banking, and there is scope

for greater consolidation in the sector. Retail segment has grown manifold and it is

estimated that to grow at a rate of 28-30 per cent during the coming years. It is

providing needof- the-hour services like round-the-clock accessibility through

automated teller machines (ATMs), mobile and internet banking. It is also offering

services like Demat/Depository services, plastic money (credit and debit cards),

and online transfers. Banks have increased their ATM network over the past three

years. The concept of Core Banking Solution (CBS), which enables a customer to

complete numerous banking operations online, has grown significantly especially

in the past 5 years. Electronicfund transfer facilities and mobile banking is

expected to further strengthen the retail banking segment in the future. Further, 69

rural India's credit requirement is estimated to be huge, which offers immense

potential for the banks and corporates alike.

It is estimated that banking, financial services and insurance (BFSI), together

account for 38-40 per cent of India's outsourcing industry. According to a report by

McKinsey and NASSCOM, India has the potential to process 30 per cent of the

banking transactions in the US. Outsourcing by the BFSI to India is expected to

grow at an

annual rate of 30-35 per cent. Also, with numerous mergers and acquisition deals

by Indian corporates, investment banking income has gone up to a record high.

Investment banking revenue from India is estimated to have crossed the USD 1000

million-mark as against USD 400 million in 2006. This surge in income has

propelled India to become one of largest market for investment banking in Asia-

Pacific. Some Indian banks like ICICI Bank, Kotak

Mahindra Bank are already into this space and some banks such as HDFC also are

now planning to expand into this area.

There have been a large number of mergers in international banking and in the

process large banks are growing even bigger as a response to the challenges of

competition Indian Banking - Challenges of Globalization and aimed at

synergising operations and achieving scale economics. All of us would agree that

mergers should, in the normal course, be driven by business needs and should lead

to the growth of stronger and sound banks both in public and private sector.

Mergers amongst strong units can be both a means of strengthening them as also

providing for greater opportunities for competition. Consolidation is seen to be the

next big thing in the banking sector, which is yet to gain pace in India. It is viewed

that there is a need to develop 5-6 big banks in the country through consolidation

in the financial sector to be able to face up to global competition. The issue of

consolidation has been addressed by the Narasimham Committee Report on 70

Banking Sector Reforms, but the same is yet to be pursued vigorously. There have

been some mergers and amalgamations (details of which are given in the tables

below), but not of big scale or size as one would have expected in the light of the

ongoing reform process. The consolidation process in recent years has primarily

been confined to a few mergers in the private sector segment.

Year Target Acquirer

2000 Times Bank HDFC Bank

2001 Bank of Madura (BOM) ICICI Bank

2005 Bank of Punjab (BoP) Centurion Bank

2006 Ganesh Bank of Karundwad Federal bank

2007 Sangli Bank ICICI Bank

2007 Lord Krishna Bank (LKB) Centurion Bank of Punjab (CBoP)

2008 Centurion Bank of Punjab (CBoP) HDFC Bank

Table 2: Bank Mergers : 2000-2008

Year Target Acquirer

1999 Bareilly Corp Bank Bank of Baroda

1999 Sikkim Bank Union Bank of India

2004 Global Trust Bank (GTB) Oriental Bank of Commerce (OBC)

2006 United Western Bank (UWB) IDBI Bank

Table 3: Amalgamation of Private Sector Banks with Public Sector Banks

Year Target Acquirer

2002 ICICI ICICI Bank

2005 IDBI Bank IDBI

1999 Twentieth Century Finance Corp Ltd Centurion Bank

2003 Twentieth Century Finance Corp Ltd IndusInd Bank

2003 Kotak Mahindra Finance Ltd Kotak Mahindra Bank

Table 4: Amalgamation between DFIs / NBFCs and Private Sector Banks71

Any process of consolidation must come out of a felt need for merger rather than

as an imposition from outside. The synergic benefits must be felt by the entities

themselves. There are three aspects to consolidation viz. clear-cut legal and

regulatory regime governing consolidation, enabling policy framework especially

where several banks are owned by Government, and market conditions that

facilitate such consolidation, recognising that all mergers and acquisitions may not

necessarily be in the interest of either the parties concerned or the system as a

whole. In order that

Indian banks are to rise to global size and scale of operations, there is a need to

give thrust on greater consolidation and internationalization of operations, without

of course compromising on quality. Any meaningful consolidation among the

public sector banks must be driven by commercial motivation by individual banks,

with the government and the regulator playing at best a facilitating role.

China's Banking Sector

In the context of analyzing the challenges facing the Indian financial system, I feel

it is pertinenet to look at what is happening in China. Like in India, Chinese

banking sector is characterised by the predominance of the state-owned

commercial banks.

The joint-stock banks and foreign-funded banks have also become more and more

active in the banking sector. Before 1995, People's Bank of China, the central bank

of China, was the sole regulator of China's financial market. In 1995, for prudential

consideration, China decided to adopt a segregated regulatory framework in its

financial system, which led to the establishment of two new regulatory authorities,

namely China Securities Regulatory Commission, and China Insurance Regulatory

Commission, which are responsible for supervising the securities and insurance

sectors respectively, while the People's Bank of China remains as the regulator of

the banking sector. After this systemic adjustment, China's capacity to regulate the 72

financial market and keep away financial risks and crises seems to have improved.

As regards opening up of the sector, way back in 1979, foreign banks were allowed

to set up representative offices in China. The representative office of Japan Export

and Import Bank was established in Beijing, which was the first representative

office of foreign banks in China. In July 1981, foreign banks were allowed to

conduct foreign exchange business in Shenzhen and other Special Economic Zones

(SEZs). In September 1990, Shanghai became the first coastal city to be opened to

foreign banks following five other SEZs, which was further expanded to other

seven coastal cities subsequently. In January 1999, the geographic restrictions on

the establishment of foreign banks were lifted and foreign banks were allowed to

conduct business in all main cities of China. Foreign banks were allowed to

conduct the local currency business on a pilot basis. With the deepening of China's

reform and opening-up process, foreign banks accelerated their entrance into

China's banking market. The regulatory framework of China's banking sector has

been gradually reformed and reinforced consistent with international

practices. Further, China has made commitments to open up the economy and the

banking sector consequent to its accession to the WTO set-up in 2001. While

foreign banks have greater access to Chinese market, Chinese banks are also

accelerating their pace to "go abroad". It is observed that liberalization of the

banking sector has played a major role in improving the function of China's

financial system, which should keep the process going on in China.

Thus, it is clear that China is making all efforts to be a major player in the global

banking sector. India, being only next to China in terms of market size in the

developing world, has the challenge of coping with competition that is going to

emerge in the years to come.

73

References:

RBI, Entry of New Banks in the Private Sector - Discussion Paper, August 2010.

RBI, Monetary and Credit Information Review, Volume I, Issue 6, March 2005.

RBI, Annual Monetary Policy Statement, April 20, 2010

RBI, RBI Bulletin, Various Issues.

Securities Times, "Progress Made in China's Financial Sector Reform" (Beijing:

People's Bank of China).

Landau, Jean-Pierre, "Complexity and the Financial Crisis", Deputy Governor of

the Bank of France, Speech delivered at the Conference organized by Bank of

France and the Deutsche Bundesbank on June 08, 2009.

Leeladhar, V., Indian Financial Sector Reforms, Address by Deputy Governor,

RBI at the International Banking & Finance Conference 2008 organised by the

Indian Merchants' Chamber, Mumbai, April 17, 2008.

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