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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 providesfundamental

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

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 cashmanagement services for customers, reporting the transactions of their accounts

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

hasslefree 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, Indias bankingsystem has several outstanding achievements to its credit. The Banks are the main

participants of the financial system in India. The Banking sector offers severalfacilities and opportunities to

their customers. All the banks safeguards the money and valuables and provideloans,credit, and payment services, such as checking accounts, money orders, and

cashierscheques. The banks also offer investment and insurance products. As a

variety of models for cooperation and integration among finance industries haveemerged, some of the traditional distinctions between banks, insurance companies,

and securities firms have diminished. In spite of these changes, banks continue tomaintain and perform their primary roleaccepting deposits and lending funds

from these deposits.

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.


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

originated in theBank of Calcuttain June 1806, which almost immediately becametheBank of Bengal.This was one of the three presidency banks, the other two

being theBank of Bombayand theBank of Madras,all three of which were

established under charters from theBritish East India Company.The three banksmerged in 1921 to form theImperial Bank of India,which, upon India's

independence, became theState Bank of Indiain 1955. For many years thepresidency banks acted as quasi-central banks, as did their successors, until

theReserve Bank of Indiawas established in 1935.

In 1969 the Indian governmentnationalisedall 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 areallowed to compete and operate ascommercial banks.The Indian banking sector is

made up of four types of banks, as well as the PSUs and the state banks, they havebeen 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 theNational Bank for Agricultureand Rural Developmentwith things likemicrofinance.

History In ancient India there is evidence of loans from theVedicperiod(beginning 1750 BC). Later during theMaurya dynasty(321 to 185 BC), an

instrument called adesha was in use, which was an order on a banker desiring himto 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, therewas considerable use of these instruments. Merchants in large towns gave letters of

credit to one another.

Colonial eraDuring theperiod of British rulemerchants established the Union

Bank ofCalcuttain 1829, first as a private joint stock association, then partnership.

Its proprietors were the owners of the earlier Commercial Bank and the CalcuttaBank, 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 ithad 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
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1845 but failed in 1848, having been insolvent for some time and having used new

money from depositors to pay its dividends.[4]

TheAllahabad Bank,established in 1865 and still functioning today, is the

oldestJoint Stock bankin India, it was not the first though. That honour belongs to

the Bank of Upper India, which was established in 1863, and which survived until1913, when it failed, with some of its assets and liabilities being transferred totheAlliance Bank of Simla.

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

TheComptoir d'Escompte de Parisopened a branch in Calcutta in 1860, andanother inBombayin 1862; branches inMadrasandPondicherry,then a French

possession, followed.HSBCestablished itself inBengalin 1869. Calcutta was themost active trading port in India, mainly due to the trade of theBritish Empire,and

so became a banking centre.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,established in 1881 inFaizabad.It failed in 1958. The next was thePunjabNational Bank,established inLahorein 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 theIndianMutiny,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 someexchange banks and a number of Indianjoint stockbanks. All these banks operatedin different segments of the economy. The exchange banks, mostly owned by

Europeans, concentrated on financing foreign trade. Indian joint stock banks weregenerally under capitalised and lacked the experience and maturity to compete with

the presidency and exchange banks. This segmentation let Lord Curzon toobserve, "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 andcumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired bytheSwadeshimovement. The Swadeshi movement inspired local businessmen and

political figures to found banks of and for the Indian community. A number ofbanks established then have survived to the present such asBank of

India,Corporation Bank,Indian Bank,Bank of Baroda,Canara BankandCentral

Bank of India.
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The fervour of Swadeshi movement lead to establishing of many private banks

inDakshina KannadaandUdupi districtwhich were unified earlier and known bythe name South Canara( South Kanara ) district. Four nationalised banks started

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

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

During theFirst World War(19141918) through the end of theSecond WorldWar(19391945), and two years thereafter until theindependenceof 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 theIndian

economygaining 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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Post-IndependenceThepartition of Indiain 1947 adversely impacted the economiesofPunjabandWest Bengal,paralysing banking activities for months.

India'sindependencemarked the end of a regime of theLaissez-fairefor the Indianbanking. TheGovernment of Indiainitiated measures to play an active role in the

economic life of the nation, and the Industrial Policy Resolution adopted by thegovernment in 1948 envisaged amixed 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:

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

April 1935, but was nationalised on 1 January 1949 under the terms of theReserve 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 inIndia".

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

banks could have common directors.

Nationalization in the 1960sDespite the provisions, control and regulations ofReserve Bank of India,banks in

India except theState Bank of Indiaor SBI, continued to be owned and operated

by private persons. By the 1960s, the Indian banking industry had become animportant tool to facilitate the development of theIndian economy.At the same

time, it had emerged as a large employer, and a debate had ensued about thenationalization of the banking industry.Indira Gandhi,the thenPrime Minister of

India,expressed the intention of theGovernment of Indiain 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 anordinance ('Banking Companies (Acquisition and Transfer of Undertakings)

Ordinance, 1969')) andnationalisedthe 14 largest commercial banks with effectfrom 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
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the step as a "masterstroke of political sagacity."Within two weeks of the issue of

the ordinance, theParliamentpassed the Banking Companies (Acquisition andTransfer of Undertaking) Bill, and it received thepresidentialapproval 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 controlof 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 year1993, the government mergedNew Bank of IndiawithPunjab 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 rateof the Indian economy

Liberalization in the 1990sIn the early 1990s, the then government embarked on a policy ofliberalization,licensing a small number of private banks. These came to be known asNew

Generation tech-savvy banks, and included Global Trust Bank (the first of suchnew generation banks to be set up), which later amalgamated with Oriental Bank

of Commerce,UTI Bank(since renamedAxis Bank),ICICI BankandHDFC Bank.This move, along with the rapid growth in theeconomy of India,revitalised the

banking sector in India, which has seen rapid growth with strong contribution fromall 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 banksmay 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 inIndiacompletely. Bankers, till thistime, were used to the 464 method (Borrow at 4%;Lend at 6%;Go home at 4) of

functioning. The new wave ushered in a modern outlook and tech-savvy methodsof 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.
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Current periodBy 2010, banking in India was generally fairly mature in terms of supply, productrange 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 ofIndia is an autonomous body, with minimal pressure from the government. The

stated policy of the Bank on theIndian Rupeeis to manage volatility but withoutany 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, especiallyretail

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 allowedWarburg Pincusto increase its

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

the RBI announced norms in 2005 that any stake exceeding 5% in the privatesector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are tooaggressive 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 ofonline bankingin India. The use of

computers in the banking sector in India has increased many fold after theeconomic 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 theinternational 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, ReserveBank of India. The major recommendations of this committee were
http://en.wikipedia.org/wiki/Indian_Rupeehttp://en.wikipedia.org/wiki/Indian_Rupeehttp://en.wikipedia.org/wiki/Indian_Rupeehttp://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Warburg_Pincushttp://en.wikipedia.org/wiki/Warburg_Pincushttp://en.wikipedia.org/wiki/Warburg_Pincushttp://en.wikipedia.org/wiki/Kotak_Mahindra_Bankhttp://en.wikipedia.org/wiki/Kotak_Mahindra_Bankhttp://en.wikipedia.org/wiki/Kotak_Mahindra_Bankhttp://en.wikipedia.org/wiki/Online_bankinghttp://en.wikipedia.org/wiki/Online_bankinghttp://en.wikipedia.org/wiki/Online_bankinghttp://en.wikipedia.org/wiki/Online_bankinghttp://en.wikipedia.org/wiki/Kotak_Mahindra_Bankhttp://en.wikipedia.org/wiki/Warburg_Pincushttp://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Indian_Rupee


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introducingMICRtechnology 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 be computerized in theclearing housesof RBI in Bhubaneshwar,Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there

should be National Clearing of inter-citychequesat Kolkata, Mumbai, Delhi,

Chennai and MICR should be made Operational. It also focused oncomputerisation 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 computerisationbegan from 1993 with the settlement between IBA and bank employees'

associations.

In 1994, the Committee on Technology Issues relating toPayment

systems,Cheque ClearingandSecurities Settlementin the Banking Industry(1994) was set up under Chairman W S Saraf. It emphasizedElectronic Funds

Transfer(EFT) system, with the BANKNET communications network as itscarrier. 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 ofATMsinstalled 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 theNationalised banks of India.
http://en.wikipedia.org/wiki/MICRhttp://en.wikipedia.org/wiki/MICRhttp://en.wikipedia.org/wiki/MICRhttp://en.wikipedia.org/wiki/Banking_in_India#cite_note-12http://en.wikipedia.org/wiki/Banking_in_India#cite_note-12http://en.wikipedia.org/wiki/Banking_in_India#cite_note-12http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Payment_systemhttp://en.wikipedia.org/wiki/Payment_systemhttp://en.wikipedia.org/wiki/Payment_systemhttp://en.wikipedia.org/wiki/Payment_systemhttp://en.wikipedia.org/wiki/Clearing_(finance)http://en.wikipedia.org/wiki/Clearing_(finance)http://en.wikipedia.org/wiki/Clearing_(finance)http://en.wikipedia.org/wiki/Settlement_(finance)http://en.wikipedia.org/wiki/Settlement_(finance)http://en.wikipedia.org/wiki/Settlement_(finance)http://en.wikipedia.org/wiki/Electronic_Funds_Transferhttp://en.wikipedia.org/wiki/Electronic_Funds_Transferhttp://en.wikipedia.org/wiki/Electronic_Funds_Transferhttp://en.wikipedia.org/wiki/Electronic_Funds_Transferhttp://en.wikipedia.org/wiki/Automated_teller_machinehttp://en.wikipedia.org/wiki/Automated_teller_machinehttp://en.wikipedia.org/wiki/Automated_teller_machinehttp://en.wikipedia.org/wiki/Automated_teller_machinehttp://en.wikipedia.org/wiki/Electronic_Funds_Transferhttp://en.wikipedia.org/wiki/Electronic_Funds_Transferhttp://en.wikipedia.org/wiki/Settlement_(finance)http://en.wikipedia.org/wiki/Clearing_(finance)http://en.wikipedia.org/wiki/Payment_systemhttp://en.wikipedia.org/wiki/Payment_systemhttp://en.wikipedia.org/wiki/Chequehttp://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Banking_in_India#cite_note-12http://en.wikipedia.org/wiki/MICR


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FINANCIAL SERVICESBanking

India cannot have a healthy economy without a sound and effective bankingsystem. 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 longerconfined 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 thenationalization 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 thebank counter for getting a draft or for withdrawing money from his account.

History of Banking in IndiaThe first bank in India, though conservative, was established in 1786. From 1786till 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 Bankof Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) asindependent 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 ofIndia, 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,

mostly small. To streamline the functioning and activities of commercial banks, theGovernment of India came up with the Banking Companies Act, 1949, which was


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

given to traders.

The government took major initiatives in banking sector reforms afterIndependence. 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 theRBI 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. In1969, 14 commercial banks in the country were nationalized. In the second phaseof 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

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 shelteredfrom 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.


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1975 : Creation of regional rural banks.

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

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 includedin 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 totalnetwork 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 Actof 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 by11,000 percent.

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

Banks in IndiaIn 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:

Public Sector Banks

Private Sector Banks

Cooperative Banks

Regional Rural Banks


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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 theway for a few more foreign banks to start business in India.

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 therecommendations 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 coinsall 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 governments 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 theRBI to come to their help in times of banking crisis, the RBI becomes not only thebanker's bank but also the lender of the last resort.

Controller of Credit:The RBI is the controller of credit, i.e., it has the power to influence the volume ofcredit created by banks in India. It can do so through changing the Bank rate or

through open market operations.


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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 soundbanking 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.

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, increasedefficiency, 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.


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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 banks

Financial services, global financial institutions that engage in multipleactivities such as banking and insurance


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Need of the BanksBefore the establishment of banks, the financial activities were handled by moneylenders 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 wasfully regulated by the government. The organized banking sector works within thefinancial system to provide loans, accept deposits and provide other services to

their customers. The following functions of the bank explain the need of the bankand 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, increasesavings speedily and efficiently.

To avoid focus of financial powers in the hands of a few individuals andinstitutions.

To set equal norms andconditions (i.e. rate of interest, period of lending etc) toall types of customers


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NationalisationBy the 1960s, the Indian banking industry has become an important tool tofacilitate 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 bankingindustry. Indira Gandhi, the-then Prime Minister of India expressed the intention ofthe

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

in a paper entitled " Stray thoughts on Bank Nationalisation" . The paper wasreceived

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

an ordinance and nationalised the 14 largest commercial banks with effect from themidnight of July 19, 1969. Jayaprakash Narayan, a national leader of India,

described thestep as a " Masterstroke of poli tical sagacity" Within two weeks of the issue of the

ordinance, the Parliament passed the Banking Companies (Acquisition andTransfer 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.

Thestated reason for the nationalisation was to give the government more control of

creditdelivery. 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

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

banksand resulted in the reduction of the number of nationalised banks from 20 to 19.

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

theaverage growth rate of the Indian economy. The nationalised banks were credited

bysome; including Home minister P. Chidambaram, to have helped the Indian

economywithstand the global financial crisis of 2007-2009.


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LiberalisationIn the early 1990s, the then Narsimha Rao government embarked on a policy ofliberalisation, 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 OrientalBank ofCommerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This

move along with the rapid growth in the economy of India revolutionized thebanking sector in India which has seen rapid growth with strong contribution from

all the three sectors of banks, namely, government banks, private banks and foreignbanks. The next stage for the Indian banking has been setup with the proposed

relaxation in the norms for Foreign Direct Investment, where all Foreign Investorsin 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) offunctioning.

The new wave ushered in a modern outlook and tech-savvy methods of workingfor 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 privatesector and foreign banks. In terms of quality of assets and capital adequacy, Indian

banks are considered to have clean, strong and transparent balance sheets ascompared 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 theIndian economy expected to be strong for quite some time-especially in its services

sector-the demand for banking services, especially retail banking, mortgages andinvestment services are expected to be strong.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase itsstake 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 sincethe 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 chargedthat the non-government owned banks


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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 effortshave driven defaulting borrowers to suicide.

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,

rulesenforced by Federal and State agencies to govern their operations, service

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

public. Abanker works within the financial system to provide loans, accept deposits, and

provideother 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 publics savings. To control the supply of money and credit in order to achieve a nations broad

economic goal.

To ensure equal opportunity and fairness in the publics access to credit and othervital 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.


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Law of bankingBanking law is based on a contractual analysis of the relationship between thebank and customerdefined 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 thecustomer: 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'saccount.

The bank has a right to combine the customer'saccounts, since each account isjust an aspect of the same credit relationship.

The bank has a lien on cheques deposited to the customer's account, to the extentthat the customer is indebted to the bank.

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

accountunless 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 banksCurrently in most jurisdictions commercial banks are regulated by government

entities

and require a special bank license to operate. Usually the definition of the businessofbanking for the purposes of regulation is extended to include acceptance of

deposits, evenif they are not repayable to the customer's orderalthough money lending, byitself, is


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generally not included in the definition.

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

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

amonopoly on the business of issuing banknotes. However, in some countries this is

notthe case. In UK, for example, the Financial Services Authority licenses banks, and

somecommercial 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 regulatedunderseparate rules. The requirements for the issue of a bank license vary between

jurisdictions

but typically include: Minimum capital

Minimum capital ratio

'Fit and Proper' requirements for the bank's controllers, owners, directors, and/orsenior officers

Approval of the bank's business plan asbeing sufficiently prudent and plausible.

Classification of Banking Industry in IndiaIndian banking industry has been divided into two parts, organized and

unorganized

sectors. The organized sector consists of Reserve Bank of India, CommercialBanks and

Co-operative Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc).The

unorganized sector, which is not homogeneous, is largely made up of moneylenders 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.


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c) Regional rural banks.

d) Other scheduled commercial banks.3. Foreign Banks

4. Non-scheduled banks.

5. Co-operative banks.

Indian Scheduled Commercial BanksThe commercial banking structure in India consists of scheduled commercialbanks, and unscheduled banks.

Scheduled Banks:Scheduled Banks in India constitute those banks which have beenincluded 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

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

Bank ofIndia (subsidiary banks) Act, 1959 (38 of 1959), a corresponding new bank

constitutedunder 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-operativebank. 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 privatesector

banks and foreign banks, i.e. private sector, public sector, and foreign banks comeunder

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 ruralareas,

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


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

sponsoredby Syndicate Bank, State Bank of India, Punjab National Bank, United

Commercial Bank

and United Bank of India. The total authorized capital was fixed at Rs. 1 Crorewhich has

since been raised to Rs. 5 Crores. There are several concessions enjoyed by theRRBs by

Reserve Bank of India such as lower interest rates and refinancing facilities fromNABARD like lower cash ratio, lower statutory liquidity ratio, lower rate of

interest on

loans taken from sponsoring banks, managerial and staff assistance from thesponsoring

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 policiesforthe 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), whichis not

a scheduled bank.

NABARDNABARD is an apex development bank with an authorization for facilitating creditflow

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

villageindustries, handicrafts and other rural crafts. It also has the mandate to support all

otherallied 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 areas2. Bringing about or promoting institutions development and

3. Evaluating, monitoring and inspecting the client banksBesides this fundamental role, NABARD also:

Act as a coordinator in the operations of rural credit institutions


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

Housing, small business and agricultural loans etc.

Co-operative BanksCo-operative banks are explained in detail in SectionII of this chapter

Services provided by banking organizationsBanking 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 demandand

withdrawable by cheques, drafts, orders etc. as per the above definition a bankessentially

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, bankers cheques, moneyorders 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 thegeneral public. Bank offers various types of deposit schemes for security of

money. For keeping valuables bank provides locker facility. The lockers are smallcompartments with dual locking system built into strong cupboards. These are

stored in the banks strong room and are fully secured. Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of the

government disbursements like pension payments and tax refunds also take placethrough banks.

There are several types of banks, which differ in the number of services theyprovide 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 ofsizes, 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.


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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.Communi ty banks are based locally and offer more personal attention, whichmany individuals and small businesses prefer. In recent years, online bankswhich provide all services entirely over the Internethave entered the market,with some success.

However, many traditional banks have also expanded to offer online banking, andsome formerly Internet-only banks are opting to open branches.

Savings banks and savings and l oan associations, sometimes called thrift

institutions, are the second largest group of depository institutions. They were firstestablished ascommunity-based institutions to finance mortgages for people to buy

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

Credit unions are another kind of depository institution. Most credit unions areformed by people with a common bond, such as those who work for the samecompany 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 thanthat demanded by other financial institutions.Federal Reserve banks are Government agencies that perform many financial

servicesfor the Government. Their chief responsibilities are to regulate the banking

industry and

to help implement our Nations monetary policy so our economy can run moreefficiently


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Globalisation of banking sector in

INDIA:This is an era of intense global compitition in international banking.Mergers and acquisitions, as a part of consolidation, are also happening. The major

compititors includeEuropean, Japanese and American Banks.

European Banks:These banks have a solid capital base, strong balance sheet,

and healthy financial condition of home markets due to European Unification.

Dominant banks from Europe are Germanys Deutche bank, Union Bank of

Switzerland, credit suisse, Swiss Bank corporation, and Englands Barclays Bank.

Japanese Banks:Japenese banks are technologically progressive but do not have

history of strong capital bases. Things are changing. Some major banks are Mizuho

Bank The Bank of Tokyo-Mitsobishi, Sumitomo Mitsui Banking corporation, UFJ

Bank.

Us Banks:Weak capital which was mainly due to LDC lending written off, is

improving now and US banks are becoming very strong in international markets.Citibank, J.P. Morgan and Bankers trust are some of the lead banks of US.

::Banks transactions crossing national boundaries is termed as globalisation

of banking.

Corporate explore foreign markets for trade. It is to sell products in wider

markets, procure raw materials and even to shift manufacturing base to

optimize labor and other cost. As these enterprises travel, theyneed banking

services in foreign markets. This is the basic motve for banks to get globalise.

But this is in basic and historical perspective. In the era of globalisation, many

investment and commercial banks have developed themselves as multinational

financial institutions.::


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FACTORS RESPONSIBLE FOR

GLOBALISATION OF BANKING:

Migration of Enterprises:

Optimization of cost of capital:

Diversification benefits:

Regulatory Avoidance:

Expansion of banks custodial function:

Features of Globalised Banks:

1. Currency risk

2.

Complexity of credit risk3. Competition for market share among banks

4. Cyclical nature, with periodic crises

5. Competition for bank loans from the international bond market:6. Importance of international interbank market (IIBM) as source of

liquidity and funding for banks:7. Role of risk management activities (swaps, options, futures):

Impact of Globalisation on Banking Sector in India

Pradip BiswasGeneral Secretary,

Bank Employees Federation of India.There are three distinct spells of development of Banking industry in post

independentIndia, the pre-nationalisation era from 1947 to 1969, the post-nationalisation cum

preliberalisation

era from 1969 to 1991 and the neo-liberalisation era from 1991 onwards. Thefirst phase was mostly city-centric private Banking marked by frequent failures and


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liquidation of Banks and consequent pauperisation of numerous poor and middle

classdepositors and loss of jobs for the employees. The post-nationalisation era saw a

seachange

in the Banking scenario : financial stability of Public Sector Banks (PSBs)controlling more than 84% of Banking business of the country, PSBs commanding

trustand confidence of the Banking-public, expansion of Branch net-work of Banks

particularly in hitherto unbanked rural and semi-urban centres, opening up thebanking

services accessible to the rural poor, expansion of credit to agriculture, small scale

industries and small entrepreneurs, artisanseven to the marginal farmers, smallshopowners,

vegetable vendors etc. Such expansion of Branch network, coupled with such

mass-banking, created considerable job opportunities on the one hand, and, on theother,it helped a green revolution on the agricultural sector, obviating dependence of

import of

foodgrains, as also a spurt in the development of Small and Medium ScaleIndustries. It

also rescued a vast section of the rural poor from the exploitation by village-

money-lenders.By tapping the hitherto untapped huge rural savings, the PSBs could help the

growth of

large-scale and capital intensive industries too. Even the most ardent critics ofPublic

Sector too have had to recognise and appreciate the laudable role of PSBs towardsdevelopment of economic self reliance. During this post nationalization era,

Regional Rural

Banks (RRBs) were established in 1975 onwards under the auspices of PSBs to

cater to thecredit needs of rural-India. Till 1990, priority sector lending constituted over 70%

of the

advance portfolio of RRBs giving further fillip to the rural economy. During thelast four

decades of their productive existence, the PSBs have taken up the services of

employeesand the liability of depositors of a number of Private Banks going on liquidation

due tomismanagement by and the greed of their private owners.


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With the onset of World Bank-IMF dictated reforms, euphemistically called

liberalisation,successive Governments at the centre have consistently been trying to undo all the

good

work of the PSBs as also to dismantle and privatise the PSBs altogether. On 14thAugust

1991, the Government of India (GOI) appointed a Committee headed by Mr. M.

Narashimham (called Narashimham Committee I) to suggest the modusoperandi forreforms of the Banking Sector. On 16th November 1991, the said Committee

submitted its

Repost suggesting downsizing of PSBs through closure of Branches, merger ofPSBs,

reduction of priority sector lending from the then prevailing 40% to 10% of total

advanceportfolio, abolition of Banking Service Recruitment Board, granting of moreautonomy to

PSBs in respect of both financial and administrative matters, to reduce the

supervisory andregulatory control of Reserve Bank of India (RBI), the Central Bank of the

country, and, to

top it all, dilution of Government Holding in PSBs through suitable amendment ofrelevant

legislations. Thereafter, a number of committees, such as Narashimham Committee

II,Khan Committee, Verma Committee, S.C.Gupta Committee, Raghuram Rajan

Committee,Anwarul Hoda Committee, to name a few, have been appointed to assess the

progress in

implementation of the Recommendations of the Narashimham Committee I as

also tosuggest measures for carrying forward the reforms of the Banking Sector further as

per

dictates of the World Bank-IMF.Following the Recommendations of these Committees, successive Governments

have

persistently been trying to carry forward the reforms dictated by World Bank-IMF.In the

process, law has been amended to pave the way for reduction of Govt. holding ofshares in


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PSBs from 100% to 51% and, in pursuance of such amendment, most of the PSBs

(excepttwo major PSBs and two subsidiaries of State Bank of India) have made public

issue of

shares, thus, reducing Government holding. Instead of filling up more than one-hundredthousand

vacant posts through employment, the PSBs have reduced its workforce throughVoluntary Retirement Scheme on the one hand, and, on the other outsourcing even

theregular and core banking jobs to outside agencies. The role of RBI, as the

regulatory and

supervisory authority over the Banks, have been redefined and underminedconsiderably.

RRBs have been directed to give more emphasis on conventional Banking and,

consequently, its priority lending stands reduced to around 40% (from 70%) oftotal advances today.Still, all is not yet lost altogether, as least, so far our country, India, is concerned.

Bank employees in India have been fighting relentlessly against the machinations

of the successive Governments to the reform the Banking Sector at the dictates ofthe World Bank-IMF combine. It is most encouraging that all the nine unions

having all-India presence in the Banking Industryfive Workmens Unions and

four Officers Unions representing almost 100% of the workforce in the Industryhave joined hands to form a United Forum of Bank Unions (UFBU). All the

Unions are, in the main, united in principle, against the reforms. Since the onset of

the reforms regime in 1991, the Bank employees have undertaken, apart from otherforms of struggle-programmes, not less than 19 one-day strike and 3 two-day strike

programmes (total 25 days of strike); these strikes are apart from the strikesundertaken jointly with other sections of Trade Union movement on popular

demands. I am very happy to report before this august house, that the left political

parties in our country have always extended their unequivocal support to all our

struggles/strikes against the World Bank-IMF dictated reforms of the financialsector; the left-parties have also voiced their strongest opposition to such reforms

both inside and out of legislative bodies.

Because of all these strike/struggle of Bank Employees and the role played by theleft parties, the successive Governments have not been able to push through their

much cherished reforms-programme to the fullest extent they wished they could

have done, to dismantle the PSBs that they would have liked. The PSBs still retaintheir Nationalised character, save and except State Bank of Sourastra ( a subsidiary

of State Bank of India) which has been merged with State Bank of India, no otherPSB has so far been merged with any other by way of reform (merger of New


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Bank of India with Punjab National Bank was actuated by commercial

considerations and not by way of reforms; hence no TU opposed the said merger).The top echelons of PSBs, on their part, has not yet been able to introduce

outsourcing to the extent they would have liked. Notwithstanding all their

intentions, GOI has not yet been able to privatize the Pension Fund.The result is there for all of us to see. Because of the presence of a strong and

dominant Public Sector, the financial sector in our country, though affected, hasnot crushed down with the melt down of the financial sector in the United States

and other major economies of the capitalist world; not a single copper of publicmoney has to be spent to dole out/save any PSB, none of the depositors in any

Bank has lost a single farthing of his/her deposit; when the financial giants all over

the world have been happily off-loading their employees in thousands to tide overthe crisis, not a single Bank-employee in India has lost his job just to accommodate

the financial health of his/her employer. Pension, the only postsuperannuation

succor of employees, still remain assured.There is, however, no room to be complacent. The present dispensation at thecentre of our country has not learnt any lesson from the prevailing convulsion in

the world economy and is still hell bent on going full steam with its reforms

agenda. The recent cabinet decision to increase the cap on FDI in insurance sectorfrom 26% to 49%, as also to amend the law to allow proportionate voting rights to

the shareholders in Private Banks are indications of the road-map drawn for the

desired reforms. There is the added danger of their intentions to allowproportionate voting rights to the private shareholders of PSBs by amending the

relevant law. The working class, employees in financial sector in particular, have,

therefore, to carry on the struggle unabated. The left parties of our country havealways remained with us in these struggles and they will continue to do so in

future, we are confident.


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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

7. Vast industrial7services infrastructure.

Indian Banking - Challenges of Globalization


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Indian Banking - Challenges of GlobalizationG.A. Tadas

CENTRE FOR MULTI-DISCIPLINARY DEVELOPMENT RESEARCHDr. B. R. Ambedkar nagar, Near Yalakkishetter Colony, Dharwad-580 004

(Karnataka, India)Phone : 0836-2460453, 2460472

Website : www.cmdr.ac.inStudy Completed Under

Canara Bank Endowment

CMDR Monograph Series No. - 55

CMDR Monograph Series No-55

All rights reserved. This publication may be used with proper citation and due

acknowledgement to the author(s) and the Centre For Multi-Disciplinary

Development Research (CMDR), Dharwad Centre For Multi-Disciplinary Development Research (CMDR), Dharwad

First Published : December 2010



Paper presented at CMDR Seminar on Indian Banking

Dharwad, Karnataka, June 08, 2010

G.A. Tadas*

Managing Director & CEO, IDBI Gilts Ltd.

The global melt-down which started in the US in 2008 has severely affected the

world economy in the past over two years. In the advanced economies, consumerand business confidence dropped to levels not seen in decades. Most worrisomehad been the sudden toll that the crisis began to take on emerging economies,

where in many cases deleveraging and asset sales led to capital flow reversals. Theimmediate impact of the crisis was seen in the UK arising from the concerns that

UK banks had substantial exposure to US sub-prime assets. The real estate priceshad been rising in the UK and the sub-prime crisis led to a correction in the UK

housing prices. This worsened the situation of the UK banks, followed by other

major banks in the rest of Europe.

Following the collapse of Lehman Brothers in 2008, many banks in the US andEurope went bankrupt. Some of the big names include Citigroup, Bear Stearns,

Merrill Lynch, Goldman Sachs, AIG, Lehman Brothers, Freddie Mac, Fannie Mae,RBS, ING Fortis, Deutsche, Barclays, BNP Paribas, Soc Gen, Swiss Re. These

banks lost their credibility causing mutual distrust. The challenge for the

governments was to assess to what extent strengthening regulations would restore

confidence and revive the entire financial system.


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Indian economy since the liberalization of the early 1990s has increasingly become

integrated with the global economy and as such it can not avoid the transmissioneffects of the global crisis. The crisis dampened the growth process in the country

especially during 2008 and 2009, although to a lesser degree due to strong

domestic market. The GDP growth moderated during the first and second quartersof 2008-, and sharply in the third quarter. The services sector, which has emerged

as the prime growth engine for the past over five years slowed down.The Indian corporate sector's access to external funding has markedly increased in

the past few years. A significant portion of the balance financing of corporates'investment came from external sources. While funds were available domestically,

foreign funding was perceived to be less expensive than domestic financing. On

the other hand, in a global market awash with liquidity and on the promise ofIndia's

growth potential, foreign investors and lenders were willing to take risks and

finance investment in India. As a consequence of the global liquidity squeeze,Indian corporate found their overseas financing drying up, forcing them to shifttheir credit demand to the domestic banking sector. This substitution of overseas

financing by domestic financing brought both money markets and credit markets

under pressure. Although the Indian banks have had no direct exposure to the sub-prime mortgage assets or to the failed institutions and have very limited off-

balance sheet activities or securitized assets, the overall credit growth declined and

the banks business shrunk.The Government/ RBI announced fiscal and monetary stimulus package to

mitigate the impact of the crisis. These measures have started making an impact;

the Indian economy has shown signs of revival and is expected to be back onhigher growth of 8.5% during the current year as compared to 6.7% during the

crisis years.In the light of these developments, I present in the following paragraphs the

challenges of globalization for the Indian banking system.

Financial Sector Reforms in IndiaThe financial sector reforms initiated in the early 1990s marked a major break-through in the Indian financial system. The Indian financial system in the pre-

reform period essentially catered to the needs of planned development in a mixed

economy framework where the government sector had a dominant role ineconomic activity. It may be observed that with the decline of the Bretton Woods

system in the 1970s, there started a general trend towards a financial liberalization

in both advanced and emerging markets. While several countries adopted a bigbang approach, others pursued a more gradualist approach. The East Asian crisis of

the late 1990s showed that fast track liberalization without proper sequencing and


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attention to institutional strengthening could derail the growth process. India, as

you know, has been pursuing a more gradualist approach to liberalization.The financial sector reforms (following the recommendations of the Narasimham

Committee Report and several Reserve Bank of India (RBI) initiatives) have

brought about a significant change in the business environment in the financialsector. The financial reforms including deregulation of interest rates, entry of

private sector banks, prudential norms incorporating new capital adequacy andincome recognition and provisioning requirements, liberalisation of norms for

tapping capital market and increasing flexibility afforded to banks for undertakingterm-lending have changed the operating environment for banks and financial

institutions. The Committee on Indian Banking - Challenges of Globalization

Banking Sector Reforms headed by Narasimham again, which presented its Reportin April 1998 (called Narasimham II), further reviewed the progress in reforms in

the banking sector with a view to chart a programme on financial sector reforms

necessary to strengthen India's financial system and make it internationallycompetitive. As a part of the financial sector reforms, the regulatory norms withrespect to capital adequacy, income recognition, asset classification and

provisioning have progressively moved towards convergence with international

best practices. With a view to enhancing efficiency and productivity throughcompetition, guidelines were laid down for establishment of new banks in the

private sector and the foreign banks have been allowed more liberal entry. Since

1993, 12 new private sector banks have been set up.As a major step towards enhancing competition in the banking sector, foreign

direct investment in the private sector banks is now allowed up to 74 per cent,

subject, of course, to conformity with the guidelines issued from time-to-time.Further, as a part of the reforms programme, capital base of the public sector banks

was sought to be expanded with equity participation by private investors up to alimit of 49 per cent.

In February 2005, in fact, the RBI released the roadmap for presence of foreign

banks in India and guidelines on ownership and governance in private sector

banks, which puts in place a framework for ownership and governance of privatebanks and presence of foreign banks in the country. The broad principles

und

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