VIBRATION ANALYSIS OF CYLINDRICAL THIN SHELL

Monday 25 July 2011

Increasing Competition in Banking Sector in India


HISTORY AND DEVELOPMENT OF BANKING INDUSTRY
Finance is the life blood of trade, commerce and industry. Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises.
A bank is a financial institution that serves as a financial intermediary. In other words, bank is a financial organization where people deposit their money to keep it safe.  That’s only part of how a bank works, though.  A bank is a business like a video store, a restaurant, or a skating rink.  The business needs to make enough money to pay the people who work there and the cost of things like electricity, paper, and even paper clips.  If you look at the diagram below, you will see an example of how a bank earns enough money to stay in business. 
In order for a bank to stay open, it needs to get a lot of people to put their money in it. Each bank tries to make THEIR bank look better than all of the others by offering services that some other banks might not have.  Another way to get more people to put their money in the bank is to pay them interest.  Interest is extra money the bank gives you to keep your money there.  This means that you earn money on every dollar you put into the bank. . Now-a-days, bank money acts as the backbone of modern business. Development of any country mainly depends upon the banking system.
The term bank is derived from the French word Banco which means a Bench or Money exchange table. In olden days, European money lenders or money changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging. According to Oxford Dictionary a bank is defined as "an establishment for custody of money, which it pays out on customer's order."
Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record $96.4 trillion while profits declined by 85% to $115bn. Growth in assets in adverse market conditions was largely a result of recapitalisation. EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment banking totaled $66.3bn in 2009, up 12% on the previous year.
The United States has the most banks in the world in terms of institutions (7,085 at the end of 2008) and possibly branches (82,000). This is an indicator of the geography and regulatory structure of the USA, resulting in a large number of small to medium-sized institutions in its banking system. As of Nov 2009, China's top 4 banks have in excess of 67,000 branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy each had more than 30,000 branches—more than double the 15,000 branches in the UK
The economic functions of banks include:
1.      Issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash.

2.      Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economise on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them.

3.      Credit intermediation – banks borrow and lend back-to-back on their own account as middle men.

4.      Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.

5.      Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets).

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet 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 most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money have become the order of the day.
The 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. They are as mentioned below:
  • Early phase from 1786 to 1969 of Indian Banks
  • Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
  • New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at 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. 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 1100 banks, 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 Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in india as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of india to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. 

The following are the 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 : Nationalisation 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 crore.
After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.
Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices.

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 is introduced. The entire system became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

The Banking Industry was once a simple and reliable business that took deposits from investors at a lower interest rate and loaned it out to borrowers at a higher rate.

However deregulation and technology led to a revolution in the Banking Industry that saw it transformed. Banks have become global industrial powerhouses that have created ever more complex products that use risk and securitisation in models that only PhD students can understand. Through technology development, banking services have become available 24 hours a day, 365 days a week, through ATMs, at online bankings, and in electronically enabled exchanges where everything from stocks to currency futures contracts can be traded .
The Banking Industry at its core provides access to credit. In the lenders case, this includes access to their own savings and investments, and interest payments on those amounts. In the case of borrowers, it includes access to loans for the creditworthy, at a competitive interest rate.
Banking services include transactional services, such as verification of account details, account balance details and the transfer of funds, as well as advisory services, that help individuals and institutions to properly plan and manage their finances. Online banking channels have become key in the last 10 years.
The collapse of the Banking Industry in the Financial Crisis, however, means that some of the more extreme risk-taking and complex securitization activities that banks increasingly engaged in since 2000 will be limited and carefully watched, to ensure that there is not another banking system meltdown in the future.
 Mortgage banking has been encompassing for the publicity or promotion of the various mortgage loans to investors as well as individuals in the mortgage business.Online banking services has developed the banking practices easier worldwide. Banking in the small business sector plays an important role. Find various banking services available for small businesses.



BODY CONTROLLER OF BANKS
Bank is an institution that accepts money as a deposit to further lend it out for prodit. Indian banking has evolved in its present form during the British Raj. The structure and pattern of Indian Banking is largely on the British Banking System. The commercial banks in India were started during the second half of the 19th century. The law relating to banking is the outcome of the gradual process of evolution. Before 1944, the Indian Companies Act, 1913, contained special provisions relating to banking companies, which were felt inadequate and were subsequently incorporated in the comprehensive legislation passed in 1949. The Banking Regulation Act, 1949, empowers the RBI to regulate banking activities in India. Since its enforcement in 1949, Banking Regulation Act was suitably amended a number of times to insert new provisions and to amend the existing ones to suit the needs of changing circumstances and to plug the loopholes in the main legislation. The Banking Laws (Amendment) Act, 1968, introduced social control on banks by inserting regulatory provisions of far reaching significance. The Banking Laws (Amendment) Act, 1983 inserted a few new sections besides amending some of the important sections.
BANKING REGULATION ACT, 1949
The legal framework of banking in India can be understood in the Banking Regulation Act, 1949. The Banking Regulation Act, 1949 defines a banking company as a company which transacts the business of banking in India (Section 5-c).

Section 5 (b) of the act defines banking as accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or  otherwise


Section 49 A of the Act prohibits any institution other than a banking company to accept deposit of money from public withdrawable by cheque. Thus, the combination of the functions of acceptance of public deposits and withdrawable of money by cheque by any institution cannot be performed without the approval of Reserve Bank.
A banking company must perform both the essential functions of accepting deposits and lending or investing. Any company which is engaged in the manufacture of goods or carriers on any trade and which accepts deposits of money from the public is important. The banker accepts deposits of money and not of anything else. The word ‘public’ implies that a banker accepts deposits from any one who offers money for such purpose. The banker can refuse to open an account in the name of a person who is considered as an undesirable person such as a thief or a robber. Acceptance of deposits sjpi;d be the known business of a banker. The essential feature of banking business is that the banker does not refund the money on his own accord, even if the period for which it was deposited expired. The depositor must make a demand for the same. The Act also specifies that the withdrawal should be effected through order, cheque, draft or otherwise. It implies that the demand should be made in a proper manner and through an instrument in writing and not merely by verbal order or a telephone message.
Section 7 of the Act, makes it essential for every company carrying on the business of banking in India to use as part of its name at least one of the words- bank, banker, banking or banking company. It also prohibits any other company, or firm, individual, or group of individuals, from using any of these words as part of its/ his name. Under Section 6 of the Act, the following businesses may be undertaken by a banking company.
1.      Borrowing, raising or taking money and lending or advancing money, discounting of bills, granting letter of credit, traveller’s cheques, buying and selling of bullion and species, buying and selling of foreign exchange, providing safe deposit vaults, collection and transmitting money and securities, underwriting and dealing in shares, debentures, bonds and investments of all kinds.

2.      Act as an agent of the government, local authority a person and can carry on agency business

3.      It may contract for public and private loans and negotiate and issue the same

4.      It may insure, guarantee, underwrite, participate in managing and carrying out of any issue of state, municipal or other loans or of shares, debentures and may lend money for the purpose of any such issue.

5.      It may carry on and transact every kind of guarantee and indemnity business

6.      It may manage, sell and realize any property which may come into its possession in satisfaction of its claims.

7.      It may acquire and hold and deal with any property, or any right, title or interest in any such property which may form the security for any loan or advance

8.      It may undertake and execute trusts and undertake the administration of estates as executor, trustee or otherwise

9.      It may acquire, construct and maintain any building for its own purpose

10.  It may sell, improve, manage, develop, exchange, lease, mortgage, dispose of or turn into account or otherwise deal with all or any part of the property and rights of the company.

BUSINESS PROHIBITED FOR A BANKING COMPANY
Section 8, of the Banking Regulation Act, 1949, prohibits a banking company from engaging directly or indirectly in trading activities and undertaking trading risks. However, a banking company is permitted to deal in buying or selling or bartering of goods or engage in any trade or buy, sell or barter goods for others in order to:
a)      Realize the securities given to it or held by it for a loan, if need arised for realization of the amount lent.

b)      In connection with the bills of exchange received for collection or negotiation and undertaking the administrative of estates as executor, trustee etc.

For the purpose of this section, goods, means every kind of movable property, other than actionable claims, stocks, shares, money bullion and species and all other instruments
Section 9, prohibits a banking company from holding any immovable property, howsoever acquired, except as is required for its own use for a period exceeding seven years from the acquisition of the property. This period may be extended upto 12 years by the Reserve bank. Property for its own use can be held by a banking company on a permanent basis.
Section 19, of the Banking Act,(Amended in 1983) provides that a banking company is permitted to form a subsidiary company for any or more of the following purposes.
a)      For undertaking of any business permitted for a banking company
b)      For carrying on the business of banking exclusively outside India (with previous permission of the Reserve Bank)
c)      For undertaking of such other business which, in the opinion of the Reserve Bank would be conductive to the spread of banking in India or to be otherwise useful or necessary in the public interest
The business carried on by such subsidiary company shall not be deemed to be the business of the banking company for the purpose of Section 8
MINIMUM PAID UP CAPITAL AND RESERVES
Section 11, contains provisions to ensure adequacy of minimum paid up capital and reserves. Adequacy of capital is essential for the soundness of a banking company. The banking companies (Amendment) Act, 1962, raised the minimum amount of the value of paid up capital to Rs. 5 lakhs for any Indian Bank commencing business after the commencement of the Act. The term ‘value’ means the real or exchangeable value and not the nominal value which may be shown in the books of the banking company. The real or exchangeable value of capital and reserves is computed by estimating the realizable value of all the assets and deducting therefrom the amounts of outside liabilities. Section 12 also provides that the subscribed capital of a banking company should not be less than one half of its authorized capital and the paid up capital should not be less than one-half of the subscribed capital. Banking companies capital may consist of equity shares or preference shares which were issued prior to 1944. The minimum paid up capital and reserves of different banks are given below.
1.      INDIAN BANKS
A Banking company incorporated in India, should have the minimum aggregate value of its paid up capital and reserves as prescribed in the Act:

a)      If it has places of business in more than one state Rs 5,00,000

b)      If any such place of business is situated in Mumbai or Kolkata or both Rs. 10 lakhs

c)      If it has all its places of business in one state, none of which is situated in the city of Mumbai or Kolkata :

                          i.      In respect of its principal place of  business is Rs. 1 lakh plus

                        ii.      In respect of each of its other places of business situated in the district of principal business is Rs. 10,000 plus

                      iii.      In respect of each place of business situated elsewhere in the state outside the same district, is Rs. 25,000 subject to the total of Rs. 5 lakhs

d)     If it has only one place of business, is Rs. 50,000

e)      If it has all its places of business in one state, one or more of which is, or are situated in the city of Mumbai or Calcutta, Rs. 5 lakhs plus. Inrespect of each place of business situated outside the city of Mumbai or Kolkatta is Rs. 25,000. Subject to a total of Rs. 10 lakhs
The above requirements apply to those banks which were established before, 1962. The Banking Companies (Amendement) Act,1962, raised the minimum amount of the value of the paid up capital to Rs. 5 lakhs for any Indian Bank commencing businesses after that Act.
2.      Foreign Banks
In case of a banking company incorporated outside India, the aggregate value of its paid up capital and reserves shall not be less than Rs. 15 lakhs, and if it has a place of business in the city of Mumbai or Kolkatta, or both Rs. 20 lakhs. The banking company incorporated outside India is also required to deposit with the Reserve Bank either in cash or in the form of unencumbered approved securities, or both an amount equal to the minimum amount specified above. The Act also requires a foreign banking company to deposit with the Reserve Bank at the end of each calendar year an amount equal to 20% of the profit for that year in respect of all businesses transacted through its branches in India. The Central Government may on the recommendation of the Reserve Bank exempt any foreign banking company from making deposit of the above-mentioned part of its profit with the Reserve Bank for a period specified in the order. Such exemption will be granted if the amount deposited by the banking company is considered adequate in relation to its deposit liabilities. The aforesaid amounts deposited by foreign banks with the Reserve Bank shall be an asset of the company, on which the claims of all the creditors of the company in India shall be a first charge in case the company ceases to carry on banking business in India.

LICENSING OF BANKING COMPANIES

Section 22, provides that it is essential for every banking company to hold a license issued by the Reserve Bank. The license is issued by the Reserve Bank after conducting the inspection of the books of accounts of the banking company and on satisfaction of the following conditions:

              i.      That the company will be in a position to pay its present and future depositors in full as their claims accrue

            ii.      That the affairs of the company are not being, or not likely to be conducted in a manner detrimental to the interest of its present or future depositors

          iii.      That the general character of the proposed management of the company will not be prejudicial to the public interest or the interests of the depositors

          iv.      That the company has adequate capital structure and earning prospects

            v.      That the public interest will be served by the grant of a license to the company to carry on banking business in India

          vi.      That the grant of license would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth

In case of granting a license to a banking company incorporated outside India, the following additional conditions should also be satisfied:
              i.      The carrying on of banking business by such company in India will be in the public interest.

            ii.      The government or law of the country in which is incorporated does not discriminate in any way against banking companies registered in india.

          iii.      The company complies with all the provisions of the Act applicable to such companies

A banking company which applies for a license, can carry out its business until it is served with a notice by the Reserve Bank of India that a license cannot be granted to it. The Reserve Bank is also empowered to cancel a license granted to banking company, if at any time, anyone of the above mentioned conditions is not satisfied, or if the company fails to comply with any of the conditions imposed upon it at the time of issue of a license, or it ceases to carry on banking business in India. However, before cancelling a license the Reserve Bank should give the company an opportunity to take necessary steps for complying with or fulfilling such condition as specify the terms for doing so. The Reserve Bank can dispense with this rule in case, it feels that the delay will be prejudicial to the interests of the company’s depositors, or the public. An appeal against the decision of the Reserve Bank may be made with the Central Government by the concerned banking company
OPENING BRANCHES
Section 23, provides that every banking company should take Reserve Bank’s prior permission for opening a new place of business in India, or to change the location of an existing place of business in India. Similar permission is also necessary for Indian banks for opening a new place of business outside India, or for changing the location of an existing place of business outside India. However, for a change of location within the same city, town or village and opening of a temporary place of business for a maximum period of one month within a city, for the purpose of providing banking facilities to the public on the occasion of an exhibition, a conference or a mela, no such permission is required from the Reserve Bank
The Reserve Bank has to take into account the following factors in deciding the application of the bank for opening a branch:
         i.           The financial conditions and history of the company

       ii.           The general character of its management

     iii.           The adequacy of its capital structure and earning prospects

     iv.           The public interest

The Reserve Bank may great permission with certain conditions which should be complied with by the bank, otherwise, the permission may be revoked
MAINTAINENCE OF LIQUID ASSETS
Section 24, of the Banking Regulation Act, (Amendment) of 1983, provides that every banking company is required to maintain in India, in cash, gold or unencumbered approved securities an amount which shall not at the close of business on any day be less than 25 percent of the total of its demand and time liabilities in India. This is also known as ‘Statutory Liquidity Ratio’. The Reserve Bank is empowered to set up this ratio up to 40 percent so as to compel the banks to keep a large proportion of their liabilities in liquid assets. The act also provides that gold and approved securities should be valued at a price not exceeding the current market price. Thus, the Reserve Bank possesses the power to specify, the mode of valuation of approved securities in accordance with the policy requirements. ‘Approved Securities’ means the securities in which the trustee may invest trust money as per the Indian Trust Act, 1982. Unencumbered approved securities of a banking company include its approved securities lodged with other institutions, for securing an advance or any other credit arrangements, to the extent to which securities have not been drawn against, or availed of.
For the purpose of deciding the demand and time liablilities of the Bank of India, the following liabilities shall not be included:   
a)     The paid up capital or reserve or any credit balance in the profit and loss account

b)     Any advance taken from the Reserve Bank, State Bank, IDBI, NABARD, or any other bank notified by the Central Government
The Banking Companies are required to maintain liquid assets including cash, in addition to the statutory reserves. The balance of cash to be maintained by a scheduled bank with the Reserve Bank is known as ‘Cash Reserve Ratio’ (CRR). The ratio has been decided by the Reserve Bank from time to time. Every banking company has to submit to the Reserve Bank a monthly return showing particulars of its assets maintained in accordance with the Act, and its demand and time liabilities in India at the close of business on each alternate Friday, during the month. This return should be submitted within 20 days after the end of the month. The Reserve Bank may also require a banking company to submit a return showing these figures on each day of the month. If on any alternative Friday (or preceding working day), the amount maintained by a banking company at the close of business on that day falls below the minimum prescribed limit, such bank shall be liable to pay the Reserve Bank in respect of that day’s default, Penal interest for that day at the rate of 3 percent p.a. above the Bank Rate on the amount of short fall. If the default occurs again on the next Friday and continues on succeeding alternative Fridays, the rate on penal interest shall be increased to 9% p.a. above the bank rate on each such shortfall in respect of that alternative Friday, and each succeeding alternate Fridays on which the default continues. If the default continues thereafter, every director, manager or secretary of the banking company, who is knowingly and willfully a party to the default, shall be punishable with fine up to Rs. 500 and with a further fine, which may extend to Rs. 500 for each subsequent alternate Friday, on which the default continues. Reserve Bank is also empowered not to change penal interest if it is satisfied with the reason for default.
INSPECTION OF BANKS
Section 35 of the Act, provides that the Reserve Bank, may either at its own initiative or at the instance of the Central Government cause an inspection to be made by one or more of its officers, of any banking company and its books of accounts. Every director, officer or employee of the banking company shall be under an obligation to produce to the Reserve Bank Officer all such books, accounts and other documents in his custody or power and to furnish him with any statements and information relating to the affairs of the banking company. Bank officer is also empowered to examine on oath, any director, officer, or employee of the banking company in relation to its business
Reserve Bank has been empowered to conduct scrutiny of the affairs of the banking companies in addition to conducting regular inspection. If on the basis of inspection report submitted by the Reserve Bank, the Central government is of the opinion that the affairs of the banking company are conducted to the detriment of the interests of its depositors, it may order in writing-
a)      Prohibits the banking company from receiving fresh deposits or

b)      Direct the reserve bank to apply for the winding up of the banking company. However, before passing such an order, the banking company will be given reasonable opportunity to make a representation in connection with the report
Section 35 A, empowers Reserve Bank to issue directions from time to time to banking companies generally or to any banking company in particular, if it is satisfied that such directions as it deems fit are necessary,
a)      In the public interest of banking policy

b)      To prevent the affairs of any banking company being conducted in a manner prejudicial to the interest of a banking companies registered in India

c)      To secure the proper management of any banking company generally


For preventing the affairs of banking company being conducted in a manner detrimental to the interests of the banking company or its depositors, the Reserve Bank may pass order such as:
a)      Requiring the banking company to call a meeting of the Board of Directors to consider any matter

b)      To require an officer of the banking company to discuss any matter with the Reserve Bank officials,

c)      To depute its officers to watch the proceedings at any meeting of the Board of Directors or its committee

d)     To appoint its officers to observe the manner in which the affairs of the banking company, or its offices or branches are being included and to make a report there on,

e)      To require the banking company to make within specified time the changes in the management as pointed out by the Reserve BanK











BANKING IS A NEED OF TIME
Although using a bank is the most common method of storing and accessing your money, there are some alternatives you should consider. If you feel that your bank isn't giving you what you want, then perhaps it is time for a change. Here are some banking alternatives that might be able to offer you the features and services that you require.
Of course, the main reason to use a bank is the fact that banks are widely available, and they are the first option that comes to mind when dealing with finances. In fact, some people aren't even aware that there are alternatives to banking apart from keeping your money at home. Although banking has its uses, it can cost you money for day-to-day financial matters that you can get for less. Bank fees can be extremely expensive, but there are some alternatives.
Credit unions are one alternative to using conventional banks. Unlike banks, credit unions are not for profit organisations that are run by their members. Credit unions are used by people who share a workplace or occupation, or even a religion. They offer many of the same services as banks, but because profit is not their main function they can offer lower fees and higher interest rates on savings than normal banks. Credit unions can be fairly large and organisations, and some offer similar levels of convenience to a regular bank. If you are looking for cheaper fees and better interest rates on savings then a credit union might be right for you. However, credit unions are still small compared to banks, and you cannot simply join the credit union of your choice. You have to meet their specific requirements or be related to someone who is already a member in order to join. Also, you generally have to save money with a credit union before you can have access to other financial products
Perhaps the best alternative to traditional banking is online banking. There are many banks that operate solely online, and there are a lot of benefits to this sort of bank. Although you might not be able to get money as easily as you could with a normal bank, you can transfer funds and pay bills much more efficiently. Also, online banks usually operate all day every day, meaning that you can access your account and carry out transactions whenever you want. For paying bills and transferring money, you can't really beat online banking
Although there are viable alternatives to traditional banking, perhaps the best way to save yourself time and money is to have a combination of accounts. If you are eligible for a credit union, then saving with them is probably the best option as you can get great rates and you might be able to borrow money at a much more reasonable rate if you need to do so in the future. You could combine this with an online account to pay your bills, as this allows you to pay bills quickly and manage your money more effectively so that you always pay on time. Thirdly, having a traditional bank account is usually a good idea, because if any problems arise you can go to your bank and speak to someone face to face. If you look around at all the alternatives to regular banking then you could save yourself money and make banking work more effectively for you.


DIFFERENT TYPES OF BANKS
1.      CENTRAL BANK
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on printing the national currency, which usually serves as the nation's legal tender.
The primary function of a central bank is to provide the nation's money supply, but more active duties include controlling interest rates, and acting as a lender of last resort to the banking sector during times of financial crisis. It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently.
Central banks in most developed nations are independent in that they operate under rules designed to render them free from political interference. Examples include the European Central Bank (ECB), the Bank of England, and the Federal Reserve System of the United States
2.      ADVISING BANK
An advising bank (also known as a notifying bank) advises a beneficiary (exporter) that a letter of credit (L/C) opened by an issuing bank for anapplicant (importer) is available. Advising Bank's responsibility is to authenticate the letter of credit issued by the issuer to avoid fraud. The advising bank is not necessarily responsible for the payment of the credit which it advises the beneficiary of.
The advising bank is usually located in the beneficiary's country. It can be (1) a branch office of the issuing bank or a correspondent bank, or (2) a bank appointed by the beneficiary. Important point is the beneficiary has to be comfortable with the advising bank.
In case (1), the issuing bank most often sends the L/C through its branch office or correspondent bank to avoid fraud. The branch office or the correspondent bank maintains specimen signature(s) on file where it may counter-check the signature(s) on the L/C, and it has a coding system (a secret test key) to distinguish a genuine L/C from a fraudulent one (authentication) .
In case (2), the beneficiary can request the applicant to specify his/her bank (the beneficiary's bank) as the advising bank in an L/C application. In many countries, this is beneficial to the beneficiary, who may avail the reduced bank charges and fees because of special relationships with the bank. Under normal circumstances, advising charges is standard and minimal. In addition, it is more convenient to deal with the beneficiary's own bank over a bank with which the beneficiary does not maintain an account.

3.      COMMERCIAL BANK

A commercial bank (or business bank) is a type of financial institution and intermediary. It is a bank that provides transactional, savings, and money market accounts and that accepts time deposits Commercial banks engage in processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means, issuing bank drafts and bank cheques, accepting money on term deposit, lending money by overdraft, installment loan, or other means, providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures, safekeeping of documents and other items in safe deposit boxes, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a “financial supermarket”, cash management and treasury, merchant banking and private equity financing
Traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.
4.      COMMUNITY DEVELOPMENT BANK
In the United States, community development banks (CDBs or CDFI Banks) are commercial banks that operate with a mission to generate economic development in low- to moderate-income (LMI) geographical areas and serve residents of these communities. In the United States, community development banks are certified as such by the Community Development Financial Institutions Fund, a department within the U.S. Department of the Treasury.
In order to become a certified CDFI, CD Banks must apply to the United States Community Development Financial Institutions Fund. Successful applicants will have a primary mission of promoting community development and principally serve under served markets and provide development services, in addition to meeting other requirements[1]. CDFI Banks provide retail banking services, they usually target customers from "financially underserved" demographics.
While community development banks are one type of community development financial institution, or CDFI,[2] some organizations use the terms interchangeably. grants official certification of CDFI status to eligible CDBs.
Organizers wishing to start a new CDB can seek a state or national bank charter. Federally chartered CDBs are regulated primarily by the Office of the Comptroller of the Currency, like any national bank. According to the OCC Charter Licensing Manual, CDBs are required "to lend, invest, and provide services primarily to LMI individuals or communities in which it is chartered to conduct business." State-chartered community development banks are subject to regulations, qualifications, and definitions that vary from state to state.
The Grameen Bank of Bangladesh is a microfinance organization and community development bank founded by Muhammad Yunus. The bank has grown into a family of over two dozen for-profit and nonprofit enterprises including the Grameen Foundation, and the Grameen Bank and its founder were awarded the Nobel Peace Prize in 2006.
5.      CREDIT UNION
A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members. Many credit unions exist to further community development or sustainable international development on a local level.
Worldwide, credit union systems vary significantly in terms of total system assets and average institution asset size,  ranging from volunteer operations with a handful of members to institutions with several billion dollars in assets and hundreds of thousands of members. Credit unions are typically smaller than banks; for example, the average U.S. credit union has $93 million in assets, while the average U.S. bank has $1.53 billion, as of 2007.
The World Council of Credit Unions (WOCCU) defines credit unions as "not-for-profit cooperative institutions".  In practice however, legal arrangements vary by jurisdiction. For example in Canada credit unions are regulated as for-profit institutions, and view their mandate as earning a reasonable profit to enhance services to members and ensure stable growth.
This difference in viewpoints reflects credit unions' unusual organizational structure, which attempts to solve the principal-agent problem by ensuring that the owners and the users of the institution are the same people. In any case, credit unions generally cannot accept donations and must be able to prosper in a competitive market economy.

6.      CUSTODIAN BANK
A Custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm's or individual's financial assets and is not likely to engage in "traditional" commercial or consumer/retail banking such as mortgage or personal lending, branch banking, personal accounts, ATMs and so forth.
The role of a custodian in such a case would be to hold in safekeeping assets/securities such as stocks, bonds, commodities such as precious metals and currency (cash), domestic and foreign, arrange settlement of any purchases and sales and deliveries in/out of such securities and currency, collect information on and income from such assets (dividends in the case of stocks/equities and coupons (interest payments) in the case of bonds) and administer related tax withholding documents and foreign tax reclamation, administer voluntary and involuntary corporate actions on securities held such as stock dividends, splits, business combinations (mergers), tender offers, bond calls, etc.
It provide information on the securities and their issuers such as annual general meetings and related proxies, maintain currency/cash bank accounts, effect deposits and withdrawals and manage other cash transactions, perform foreign exchange transactions, often perform additional services for particular clients such as mutual funds; examples include fund accounting, administration, legal, compliance and tax support services, provide regular and special reporting on any or all their activities to their clients or authorized third parties such as MAIC Trust Account services for mergers & acquisitions payments.
Custodian banks are often referred to as global custodians if they safekeep assets for their clients in multiple jurisdictions around the world, using their own local branches or other local custodian banks with which they contract to be in their "global network" in each market to hold accounts for their respective clients. Assets held in such a manner are typically owned by larger institutional firms with a considerable amount of investments such as MAIC Trust services & (QI) Qualified Intermediary services banks, insurance companies, mutual funds, hedge funds and pension funds.

7.      DEPOSITORY BANK
A depository bank (U.S. usage) is a bank organized in the United States which provides all the stock transfer and agency services in connection with a depository receipt program. This function includes arranging for a custodian to accept deposits of ordinary shares, issuing the negotiable receipts which back up the shares, maintaining the register of holders to reflect all transfers and exchanges, and distributing dividends in U.S. dollars.

8.      EXPORT CREDIT AGENCY
An export credit agency (known in trade finance as ECA) or Investment Insurance Agency, is a private or quasi-governmental institution that act as an intermediary between national governments and exporters to issue export financing. The financing can take the form of credits (financial support) or credit insurance and guarantees (pure cover) or both, depending on the mandate the ECA has been given by its government. ECAs can also offer credit or cover on their own account. This does not differ from normal banking activities. Some agencies are government-sponsored, others private, and others a bit of both.
ECAs currently finance or underwrite about $430 billion of business activity abroad - about $55 billion of which goes towards project finance in developing countries - and provide $14 billion of insurance for new foreign direct investment, dwarfing all other official sources combined (such as the World Bank and Regional Development Banks, bilateral and multilateral aid, etc.). As a result of the claims against developing countries that have resulted from ECA transactions, ECAs hold over 25% of these developing countries' US$2.2 trillion debt. These data are unreliable in the absence of source, definition, or date.
Export credit agencies use three methods to provide funds to an importing entity one is Direct lending which is the simplest structure whereby the loan is conditioned upon the purchase of goods or services from businesses in the organizing country, second is Financial intermediary loans where the export–import bank lends funds to a financial intermediary, such as a commercial bank, that in turn loans the funds to the importing entity and Interest rate equalization is a commercial lender provides a loan to the importing entity at below market interest rates, and in turn receives compensation from the export–import bank for the difference between the below-market rate and the commercial rate.

9.      INVESTMENT BANKING
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities.
Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933 (Glass–Steagall Act) until 1999 (Gramm–Leach–Bliley Act), the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G8countries, have historically not maintained such a separation.
There are two main lines of business in investment banking. Trading securities for cash or for other securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) is the "sell side", while dealing with pension funds, mutual funds, hedge funds, and the investing public (who consume the products and services of the sell-side in order to maximize their return on investment) constitutes the "buy side". Many firms have buy and sell side components.
An investment bank can also be split into private and public functions with a Chinese wall which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information.
An advisor who provides investment banking services in the United States must be a licensed broker-dealer and subject to Securities & Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulation.[1]

10.  INDUSTRIAL BANK
An industrial loan company (ILC) or industrial bank is a financial institution in the United States that lends money, and may be owned by non-financial institutions. Though such banks offer FDIC-insured deposits and are subject to FDIC and state regulator oversight, a debate exists to allow parent companies such as Wal-Mart to remain unregulated by the financial regulators. "FDIC-insured entities are subject to Sections 23A and 23B of the Federal Reserve Act, which limits bank transactions with affiliates, including the parent company." (FDIC.gov) The ILC is permitted to have branches in multiple states (which is permitted by many states on a reciprocal basis). They are state-chartered, and insured by the Federal Deposit Insurance Corporation. They are currently chartered by seven states, with most chartered by Utah. Other states permitting them
Companies that have set up industrial banks include UBS, General Electric Co., General Motors, Merrill Lynch & Co. Inc., Morgan Stanley, American Express Co. Target Corp, Nordstrom, Harley-Davidson, First Data, UnitedHealth Group, BMW, and Sallie Mae. In May 2005, Warren Buffett's Berkshire Hathaway, Inc. announced plans to operate a Utah industrial bank to handle consumer loans for its R. C. Willey Home Furnishings stores. The Blue Cross and Blue Shield Association, Ford Motor Co., Ceridian Corp. and Home Depot await approval.
However, the assets held by an ILC tend to paint an incomplete picture. The actual loan book amount can be considered more important. In this view, for example, UBS would replace Merrill Lynch as number 1.

11.  MERCHANT BANK
A merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to.
Today, according to the US Federal Deposit Insurance Corporation (acronym FDIC), "the term merchant banking is generally understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies."[1] Bothcommercial banks and investment banks may engage in merchant banking activities. Historically, merchant banks' original purpose was to facilitate and/or finance production and trade of commodities, hence the name "merchant". Few banks today restrict their activities to such a narrow scope.

12.  MUTUAL SAVINGS BANK
A mutual savings bank is a financial institution chartered through a state or federal government to provide a safe place for individuals to save and toinvest those savings in mortgages, loans, stocks, bonds and other securities.
Mutual savings banks were designed to stimulate savings by individuals; the exclusive function of these banks is to protect deposits, make limited, secure investments, and provide depositors with interest. Unlikecommercial banks, savings banks have no stockholders; the entirety of profits beyond the upkeep of the bank belongs to the depositors of the mutual savings bank. Mutual savings banks prioritize security, and as a result, have historically been characteristically conservative in their investments. This conservatism is what allowed mutual savings banks to remain stable throughout the turbulent period of the Great Depression, despite the failing of commercial banks and savings and loan associations.

13.  NATIONAL BANK
In banking, the term national bank carries several meanings:
·         especially in developing countries, a bank owned by the state
·         an ordinary private bank which operates nationally (as opposed to regionally or locally or even internationally)
·         In the United States, an ordinary private bank operating within a specific regulatory structure, which may or may not operate nationally, under the supervision of the Office of the Comptroller of the Currency.
In the past, the term "national bank" has been used synonymously with "central bank", but it is no longer used in this sense today. Some central banks may have the words "National Bank" in their name; conversely if a bank is named in this way, it is not automatically considered a central bank. For example, National-Bank AG in Essen, Germany is a privately owned commercial bank, just like National Bank of Canada of Montreal, Canada. On the other side, National Bank of Ethiopia is the central bank of Ethiopia and National Bank of Cambodia is the central bank of Cambodia.

14.  OFFSHORE BANK
An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act), low or no taxation (i.e. tax havens), easy access to deposits (at least in terms of regulation) and protection against local political or financial instability
While the term originates from the Channel Islands being "offshore" from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra.
Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements, the personal income tax of many countries[2] makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax
For example, are required to declare on penalty of perjury, any offshore bank accounts—which may or may not be numbered bank accounts—they may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows.

15.  POSTAL SAVINGS SYSTEM
Many nations' post offices operated, or continue to operate postal savings systems, to provide depositors who did not have access to banks a safe, convenient method to save money and to promote saving among the poor.



16.  PRIVATE BANK
Private banks are banks that are not incorporated. A private bank is owned by either an individual or a general partner(s) with limited partner(s). In any such case, the creditors can look to both the "entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-partners' assets.
These banks have a long tradition in Switzerland, dating back to at least the revocation of the Edict of Nantes (1685). However most have now become incorporated companies, so the term is rarely true anymore. There are a few private banks remaining in the U.S. One is Brown Brothers Harriman & Co., a general partnership with about 30 members. Private banking also has a long tradition in the UK where Coutts & Co has been in business since 1692.
"Private banks" and "private banking" can also refer to non-government owned banks in general, in contrast to government-owned (or nationalized) banks, which were prevalent in communist, socialist and some social democratic states in the 20th century. Private banks as a form of organization should also not be confused with "Private Banks" that offer financial services to high net worth individuals and others.

17.  RETAIL BANK
Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth.

18.  SAVINGS AND LOAN ASSOCIATION
A savings and loan association (or S&L), also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans. The terms "S&L" or "thrift" are mainly used in the United States; similar institutions in the United Kingdom, Ireland and some Commonwealth countries include building societies and trustee savings banks. They are often mutually held (often called mutual savings banks[citation needed]), meaning that the depositors and borrowers are members with voting rights, and have the ability to direct the financial and managerial goals of the organization, similar to the policyholders of a mutual insurance company. It is possible for an S&L to be a joint stock companyand even publicly traded. However, this means that it is no longer truly an association, and depositors and borrowers no longer have managerial control. By law, thrifts must have at least 65 percent of their lending in mortgages and other consumer loans — making them particularly vulnerable to housing downturns such as the deep one the U.S. has experienced since 2007.

19.  SAVINGS BANK
A savings bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions.
In Europe, savings banks originated in the 19th or sometimes even the 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative, while in others, socially committed individuals created foundations to put in place the necessary infrastructure.

20.  UNIVERSAL BANK
A savings bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions.
In Europe, savings banks originated in the 19th or sometimes even the 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative, while in others, socially committed individuals created foundations to put in place the necessary infrastructure.

TYPES OF BANKS IN INDIA
There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc. On the basis of functions, the banking institutions in India may be divided into the following types:

                                                    Types of Banks

Central Bank                       Development Banks                          Specialised Banks
(RBI, in India)                                                                               (EXIM Bank, NABARD)
                 Commercial Banks                    Co-operative Banks
                (i) Public Sector Banks              (i) Primary Credit Societies
                (ii) Private Sector Banks            (ii) Central Co-operative Banks
                (iii) Foreign Banks                     (iii) State Co-operative Banks
A.    CENTRAL BANK
A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public.  It acts essentially as Government’s banker, maintain deposit accounts of all other banks and advances money to other banks, when needed.  The Reserve Bank of India is the central bank of our country.
EXAMPLE OF CENTRAL BANK (RESERVE BANK OF INDIA)
The Reserve Bank of India was originally constituted as shareholder’s bank in 1935 under the Reserve Bank of India Act, 1934. It has to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. The bank was nationalized on 1st January, 1949. The bank has been performing a number of functions as a Central Banking Authority including the issuing of bank notes. Under the Banking Regulation Act, 1949, the bank is vested with large powers of supervision, control, direction and inspection of scheduled and non-scheduled banks.
The powers originally given to the Reserve Bank have been enhanced and redefined from time to time through legislation under the Act of 1963, the Reserve Bank was granted certain regulatory powers over non-banking institution which accepts deposits. The Act of 1965, vested further powers with the bank in the matter of supervision, control and inspection of cooperative banks.
The Reserve Bank is managed by the Central Board of Directors, Four Local Board Directors and the Committee of the Central Board of Directors. The functions of Local Boards are to advise the Central Board on the matters referred to them. They are also required to perform duties delegated to them. The final control of the Bank vests in the Central Board which comprises of Governor, Four Deputy Governors and Fifteen Directors nominated by the Central Government. The bank has twenty departments and three training establishments at the Central office of the bank
As an apex institution, the RBI has been guiding, monitoring, regulating, controlling and promoting the destiny of the Indian Financial System. The RBI functions within the framework of mixed economy planning. The legal, economic and institutional factors in India have rendered the issue of the independence of the Central Bank almost irrelevant. The RBI has the sole right of issuing currency notes other than one rupee and coins.
The RBI is the banker to the Central and State Governments. It provides all the banking services to the governments such as acceptance of deposits, withdrawal of funds by cheques, receipts and collection of payments on behalf of the government, transfer of funds, payments on behalf of government and management of public debt. The RBI has extensive powers to control commercial banking system under the RBI Act,1934 and Banking Regulation Act 1949. The bank controls the volume of reserves of commercial banks and thereby determines the deposit/ credit creating ability of the banks.
The RBI is required to maintain stability of the external value of the rupee. For this purpose, it has to act as a custodian of the country’s foreign exchange reserves. It is obligatory for the RBI to buy and sell currencies of all the members of the IMF. The RBI has vast powers to supervise and control  the commercial and cooperative banks in the country. The powers include to issue licenses for new banks, to issue licenses for setting up new bank branches, to prescribe minimum requirements regarding paid up capital and reserves, transfer to reserve fund, maintainence of cash reserve and liquid ratio, to inspect the working of banks in India and abroad, to conduct investigations and to control methods of operations of banks.
Credit creation is one of the most important function of a modern bank. The RBI has powers to use almost all quantitative and qualitative methods of credit control. Thus, credit control is considered to be the principal function of a central bank. The RBI has to perform many developmental and promotional functions. Development of the institutional agricultural credit has been a major function of the Central Bank in India. The objective of the RBI’s  policy is to free export sector from the impact of its policy of restricting the domestic credit so that exports do not suffer due to scarcity of finance.
B.     COMMERCIAL BANKS
Commercial banks are the oldest and fastest growing banks in India. They are also most important depositories of public savings and the most important lenders. Commercial banking in India is a unique system in the world. The commercial banking in India has social control and public ownership. The operations of banks have been determined by Lead Bank Scheme, Differential Rate of Interest Scheme, Credit Authorization Scheme, inventory norms and lending system prescribed by the authorities.
Commercial banks are simple business organizations which provide various types of financial services to customers in return for payments in one form or another such as interest, discount, commission, fees etc. Their objective is to make profit. Profitability, liquidity, safety and social welfare are the major principles which commercial banks strive to incorporate in their working. The Indian banking system is of branch banking type and it is characterized by excessive concentration of business in a small number of big public sector banks. There has been a tremendous growth of commercial banks during the past 40 years.
There has been phenomenal increase in bank branches. Banks accept various types of deposits such as demand, saving, fixed and call. Individuals own more than three fourths of these deposits. The commercial banks have developed innovative approaches such as consortium, single window and participatory lending. Banking business is subject to marked seasonal variations. The massive quantitative expansion has not been accompanied by quick, reliable and better customer service. The low efficiency, productivity, over dues, bad debts and defaults are some of the problems of these banks. These banks have diversified  into many related areas such as merchant banking, mutual funds, venture capital, equipment leasing, housing finance, hire purchase credit, either directly or indirectly.
Commercial banks include scheduled, non-scheduled, Indian, foreign, public sector, private sector, and regional rural banks.
a)      Public sector banks
Central Bank of india


Central Bank of India a government-owned bank, is one of the oldest and largest commercial banks in India. It is based in Mumbai. The bank currently has 3,563 branches and 270 extension counters across 27 Indian states.
Mr S Sridhar [Also CMD National Housing Bank][2] has been appointed as the Chairman and Managing Director of state-run Central Bank of India as on 2 March 2009. The post had been lying vacant and the appointment was cleared by the government yesterday, the Bank said in a statement. To improve the Bank's capital adequacy ratio and enable it to support the credit requirements of the productive sectors of the economy, the Centre has recently decided to infuse Rs 1,400 crore in the Bank. Under the proposed capital infusion plan, Central Bank of India will get Rs 700 crore by this month-end, while the balance amount will be made available to the Bank in next fiscal.

Central bank of India is one of 18 Public Sector banks in India to get recapitalisation finance from the government over the next 24 months. The infusion of fund will improve the financial health of the banks as their capital adequacy ratio (CAR) will be raised more than desired level of 12 percent. The increase in CAR of the banks will also enable them to lend more money. The CAR of Central Bank of India was less than 12 percent as on 30 June 2006.

The wholly owned public sector bank, based in Mumbai, will convert an amount of Rs. 800 crore out of its Rs. 1,124.14-crore total equity capital into perpetual non-cumulative preference shares. The preference shares would carry an annual floating coupon rate of eight per cent, which would be benchmarked to 100 basis points above the repo rate. It will shore up the balance-sheet of the bank and enable it to raise capital from the markets.

According to an official statement, the equity capital restructuring would lead to an improvement in the bank's credit rating as also facilitate the adoption of Basel II norms.

For financial year 2008-2009, Central Bank of India's Q3 standalone net profit went up at Rs 353.26 crore from Rs 201.01 crore (YoY). The bank's standalone net interest income, NII was up at Rs 671.94 crore versus Rs 544.85 crore (YoY)
b)     Private sector banks
Axis Bank logo.svg


Axis Bank Limited, formerly UTI Bank, (BSE532215, LSEAXBC) is a financial services firm that had begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the Specified Undertaking of the Unit Trust of India (UTI-I), Life Insurance Corporation of India (LIC), General Insurance Corporation Ltd., National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United India Insurance Company UTI-I holds a special position in the Indian capital markets and has promoted many leading financial institutions in the country. The bank changed its name to Axis Bank in April 2007 to avoid confusion with other unrelated entities with similar name.[2] After the Retirement of Mr. P. J. Nayak, Shikha Sharma was named as the bank's managing director and CEO on 20 April 2009.

As on the year ended 31 March 2009 the Bank had a total income of Indian Rupee symbol.svg13,745.04 crore (US$3.07 billion) and a net profit of Indian Rupee symbol.svg1,812.93 crore (US$404.28 million).
On 24 February 2010, Axis Bank announced the launch of 'AXIS CALL & PAY on atom', a unique mobile payments solution using Axis Bank debit cards. Axis Bank is the first bank in the country to provide a secure debit card-based payment service over IVR.
c)      Foreign banks
ABN AMRO

ABN AMRO Bank N.V. is a Dutch state-owned bank with headquarters in Amsterdam. It was re-established, in its current form, in 2009 following the acquisition and break up of ABN AMRO Group by a banking consortium consisting of Royal Bank of Scotland Group, Santanderand Fortis. Following the collapse of Fortis, the acquirer of the Dutch business, it was nationalized by the Dutch government along with Fortis Bank Nederland.

The bank is a product of a long history of mergers and acquisitions that date back to 1765. In 1991 Algemene Bank Nederland (ABN) andAmsterdam and Rotterdam Bank (AMRO) agreed to merge to create the original ABN AMRO. By 2007 ABN AMRO was the second largest bank in the Netherlands and eighth largest banks in Europe by assets. At that time the magazine The Banker and Fortune Global 500placed the bank at number 15th in the list of world’s biggest banks and it had operations in 63 countries, with over 110,000 employees.

In 2007 the bank was acquired, in what was at that time the biggest bank takeover in history, by a consortium made up of the Royal Bank of Scotland Group, Fortis bank and Banco Santander, of which the first two got into serious trouble as a result of the takeover. The large amount of debt that had been created to fund the takeover had depleted the banks reserves just at the time the Financial crisis of 2007–2010started. As a result the Dutch government took over and nationalized the Dutch parts of the operations which had primarily been allocated to Fortis to stop it failing. The UK government took effective control over the divisions allocated to RBS due to its financial bail-out of the Scottish bank. The remaining parts of ABN AMRO held by the consortiums RFS Holdings B.V., notably the overseas businesses, were merged with RBS, Santander, sold off or shut down.

The Dutch government appointed former Dutch finance minister Gerrit Zalm as CEO to restructure and stabilise the bank and in February 2010 the bank was split into two separate organizations. One owned by the Dutch government called ABN AMRO Bank N.V. and the other owned by The Royal Bank of Scotland Group named The Royal Bank of Scotland N.V. On this date the Dutch owned businesses legally demerged from those owned by RBS.[8] The Dutch government owned the ABN AMRO name and used it for the parts of the bank they purchased while other companies within the Group were renamed or closed down.

In 2010 ABN AMRO Group the owner of ABN AMRO Bank was created by merging the former sections of ABN AMRO Nederland, ABN AMRO Private Banking, together with Fortis Bank Nederland as well as formerly Fortis owned private bank MeesPierson and International Diamond and Jewelry Group. This started operating under the name ABN AMRO on 1 July 2010 at which time Fortis bank name officially ended. The Dutch government has said it would remain state owned at least until 2014 after which it would consider a public stock market listing for the new bank.
C.    DEVELOPMENT BANKS
Development banking was conceived as an instrument for achievement of national economic objectives. The main elements of development planning strategies are government intervention to promote economic growth, high protection to domestic industry, promotion of fixed capital assets through different subsidies and lack of competition as the focus was on planning. The establishment of the International Bank for Reconstruction and Development (IBRD) was a direct result of the perceived inability of the then existing financial system to undertake the task of reconstruction of the war affected economies as also to finance the development process in the newly liberated underdeveloped economies. The Reserve
Bank of India, the Central Monetary Authority in India, took upon itself a developmental role and assumed the responsibility of establishing a string of institutions, which would cater to the growing and diverse financing demands of different sectors. The development paradigm has changed as the government opened up the economy, reduced subsidies, dismantled controls on industry, foreign trade and investment.
Development banks have been set up during the planning period in India. Their emergence and growth have been corollary to the adoption of a planned economic development. They dominate the financial system in India. They are also called Non-Bank Statutory Financial Organisations. They cannot be classified as banks but their names include the term ‘Bank’.
EXAMPLE OF DEVELOPMENT (INDUSTRIAL DEVELOPMENT BANK OF INDIA)
IDBI logo
IDBI Bank Ltd. is a Universal Bank with its operations driven by a cutting edge core Banking IT platform. The Bank offers personalized banking and financial solutions to its clients in the retail and corporate banking arena through its large network of Branches and ATMs, spread across length and breadth of India. We have also set up an overseas branch at Dubai and have plans to open representative offices in various other parts of the Globe, for encasings emerging global opportunities.
As on March 31, 2011, the Bank had a network of 816 Branches and 1372 ATMs. The Bank's total business, during Fy 2010-11, reached Rs. 3,37,584 Crore, Balance sheet reached Rs. 2,53,377 Crore while it earned a net profit of Rs. 1650 Crore (up by 60 %).

Our vision for the Bank is for it to be the trusted partner in progress, by leveraging quality human capital and setting global standards of excellence, to build the most valued financial conglomerate. Our experience of financial markets helps us to effectively cope with challenges and capitalize on the emerging opportunities by participating effectively in our country’s growth process.
The IDBI provides financial support in the form of term loans. The financial assistance is usually provided to the new project as well as for the expansion, modernization and renovationof the existing units. It extends financial assistance to medium andlarge scale projects undertaken by the public limited companies. It also subscribes the issue of shares, debentures and involved in underwriting business. It pays special attention towards mega projects and sophisticated technology promoted by the technocrafts, located in backward areas and exploring the new technology units. It also provides foreign currency loans to the projects for the purchase of fixed assets.
The bank has been operating with term loans, specified sector loans, refinance loans, technical development fund scheme, bills re-discounting scheme, seed capital assistance scheme, development assistance fund scheme.
The objective of IDBI is to provide excellent services t the new enterprises, to build an excellent industrial structure in the country, to provide technical and administrative assistance for the formation of companies or expansion of industries, to conduct market and investment research and surveys in connection with the development of industries., to coordinate, guide and monitor the entire range of credit facilities offered by the other institutions to the small and cottage industries.
D.    CO-OPERATIVE BANKS
Co-operative banks were an integral part of the institutional framework of community development and extension services in the national economic planning of our country. The cooperative banking started in India in 1904, when official efforts were initiated to create new type of institution based on the principles of cooperation. Today cooperative banks form a set of institutions which are engaged in financing rural and agricultural development. They also work on “no profit no loss” basis and they perform all the main banking functions. The cooperative banking system comprises of state cooperative banks, Central Cooperative banks, Urban Cooperative banks, Primary Agricultural Credit Societies and Land Development banks. They have a federal structure of three-tier linkages and vertical integration. Some of the cooperative banks are scheduled banks. To become a scheduled bank, they have to collect deposits of Rs. 100 crores or more. All cooperative banks are subject to monetary policy control. Their interest rates are also regulated by the RBI.
Cooperative banks are managed by the Board of Directors on the principles of cooperation, self help and mutual help. They function as per rule of ‘one-member-one-vote’. They do not pursue the goal of profit maximization. They perform all the main banking functions such as deposit mobilization, supply of credit, provision of transfer of money, etc. They are characterized by functional specialization because the range of services offered by them is narrower. Cooperative banks were doing business mainly in the agriculture and rural sector.
However, today, the urban cooperative banks and central cooperative banks operate in semi-urban and metropolitan areas in order to provide services to the urban people. They are government sponsored, government supported and government subsidized financial agencies in India. They also get financial help from Reserve Bank of India and National Agricultural Bank for Rural Development and State and Central Governments. They can take part in money market as well as capital market.
Cooperative banking structure is federal in character with three-tier linkages between state, district and village level cooperative societies. At the state level there are State Cooperative Banks and State Land Development Banks. At the district level, there are Central Cooperative Banks and Central Land Development Banks. At the village level, there are Primary Agricultural Credit Societies and Primary Land Development Banks. The Urban Cooperative Banks and Primary Cooperative Banks are outside the federal structure. The State Level Cooperative Banks are said to be the apex institutions in the federal structure. However, the apex institution from the point of view of promotion, supply of resources, supervision and control are the State Governments, Reserve Bank and NABARD. The State Cooperative Banks coordinate and regulate the working of Central Cooperative Banks. They act as custodians of surplus funds of the Central Cooperative Banks and supplement them by attracting deposits and by obtaining loans from the Reserve Bank. The Central Cooperative Banks mobilize resources in the districts for financing their members. They also channelize funds from the State Cooperative Banks to Primary Credit Societies. The primary agricultural credit society at the village level form the base of the cooperative banking.
EXAMPLE OF COOPERATIVE OF COOPERATIVE BANKS (REGIONAL RURAL BANKS)
Regional Rural Banks were set up under an Act of Parliament in 1976, with the objective of developing rural economy through promotion of agriculture, trade, commerce, industry and extending credit, particularly to the small and marginal farmers, agricultural labourers, artisans and small and marginal farmers, agricultural labourers, artisans and small entrepreneurs. These banks are small banks. Their authorized capital shall not exceed Rs. 5 crores. Of the issued capital of each Regional Rural Bank, Central Government has to invest minimum of Rs. 25 lakhs and maximum of Rs. One crore. Each Regional Rural Bank is sponsored by a commercial bank who shall hold 35% of the issued capital, the concerned State Government and the Central Government subscribing to 15% and 85% respectively. Additional capital if approved by the concerned State Government and the sponspered bank, shall also be subscribed in the same proportion.
Regional Rural Banks have been gaining greater responsibility in the agricultural development of the country. There are 196 RRBs covering 349 districts of the country. The aggregate deposits and advances of RRBs are in the order of Rs. 1,800 crores each. The RRBs are not restricted by the Statutory Liquidity Ratio or the Cash Reserve Ratio as in the case of commercial banks.
E.     SPECIALISED BANKS
There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity and thus, are called specialized banks.
EXAMPLE OF SPECIALIZED BANKS (EXIM BANK)
Exim bank means Export Import Bank of India. It was set up in January, 1982 as a statutory corporation. It is wholly owned by the Central Government. Its paid up capital was Rs 220.5 crores. Its objective is to grant direct loans in India and outside, for the purpose of exports and imports, refinance bank loans, rediscount usance, export bills, provide overseas investment finance for Indian companies towards their equity participation in joint ventures abroad and guarantee obligations on behalf of project exporters. It also act as a coordinating agency in the field of international finance and undertakes merchant banking activities in relation to export-oriented industries. It provides fund based as well as non-fund based assistance in the foreign trade.
The funds for Exim Bank are raised from share capital, reserves, loan from RBI and government, issue of bonds in domestic and foreign markets and loans from international finance institutions. Funds are provided on deferred payment terms to Indian exporters of plant, equipments and related services which enables the exporter to extend deferred credit to the overseas buyer. They also collects, compiles and disseminates market and credit information in respect of international trade. It helps to plan, finance and promote export-oriented units and encourages export and import by providing technical, administrative and financial assistance.
Exim bank provides financial assistance to the corporate sector involved in export-import business. It also coordinates the working of other financial institutions which are engaged in the foreign trade. It functions as an apex body by assisting and developing the export business. It also undertakes the promotional activities and provides counseling services to the persons and institutions. The bank rediscounts the export bills of banks for a period of 180 days. It is an indirect finance provided to boost the export business. It also arranges the refinance in respect of post-shipment credit facilities. The bank grants the finance in the form of term loans. The financial assistance should be for exports of plants, equipments, machinery, etc. The bank also contributes the equity investment to the Indian promoters in joint ventures abroad. It also participates with the commercial banks to the guarantees issued in foreign currencies on behalf of the Indian exporters and importers. The bank offers the credit facility to the buyers for importing the capital goods. It also offers advisory services to the exporters.






DIFFERENT TYPES OF PRODUCTS
Bank deposits serve different purposes for different people. Some people cannot save regularly; they deposit money in the bank only when they have extra income. The purpose of deposit then is to keep money safe for future needs. Some may want to deposit money in a bank for as long as possible to earn interest or to accumulate savings with interest so as to buy a flat, or to meet hospital expenses in old age, etc. Some, mostly businessmen, deposit all their income from sales in a bank account and pay all business expenses out of the deposits. Keeping in view these differences, banks offer the facility of opening different types of deposit accounts by people to suit their purpose and convenience.
On the basis of purpose they serve, bank deposit accounts may be classified as follows:
1.       Savings Bank Account
If a person has limited income and wants to save money for future needs, the Saving Bank Account is most suited for his purpose. This type of account can be opened with a minimum initial deposit that varies from bank to bank. Money can be deposited any time in this account. Withdrawals can be made either by signing a withdrawal form or by issuing a cheque or by using ATM card. Normally banks put some restriction on the number of withdrawal from this account. Interest is allowed on the balance of deposit in the account. The rate of interest on savings bank account varies from bank to bank and also changes from time to time. A minimum balance has to be maintained in the account as prescribed by the bank.
2.      Current Deposit Account
Big businessmen, companies and institutions such as schools, colleges, and hospitals have to make payment through their bank accounts. Since there are restriction on number of withdrawals from savings bank account, that type of account is not suitable for them. They need to have an account from which withdrawal can be made any number of times. Banks open current account for them. Like savings bank account, this account also requires certain minimum amount of deposit while opening the account. On this deposit bank does not pay any interest on the balances. Rather the accountholder pays certain amount each year as operational charge. For the convenience of the accountholders banks also allow withdrawal of amounts in excess of the balance of deposit. This facility is known as overdraft facility. It is allowed to some specific customers and upto a certain limit subject to previous agreement with the bank concerned.

3.       Fixed Deposit Account
Fixed Deposit Account is also known as Term Deposit Account. Many a time people want to save money for long period. If money is deposited in savings bank account, banks allow a lower rate of interest. Therefore, money is deposited in a fixed deposit account to earn a interest at a higher rate. This type of deposit account allows deposit to be made of an amount for a specified period. This period of deposit may range from 15 days to three years or more during which no withdrawal is allowed. However, on request, the depositor can encash the amount before its maturity. In that case banks give lower interest than what was agreed upon. The interest on fixed deposit account can be withdrawn at certain intervals of time. At the end of the period, the deposit may be withdrawn or renewed for a further period. Banks also grant loan on the security of fixed deposit receipt.

4.       Recurring Deposit Account.
This type of account is suitable for those who can save regularly and expect to earn a fair return on the deposits over a period of time. While opening the account a person has to agree to deposit a fixed amount once in a month for a certain period. The total deposit along with the interest therein is payable on maturity. However, the depositor can also be allowed to close the account before its maturity and get back the money along with the interest till that period. The account can be opened by a person individually, or jointly with another, or by the guardian in the name of a minor. The rate of interest allowed on the deposits is higher than that on a savings bank deposit but lower than the rate allowed on a fixed deposit for the same period.
Recurring Deposit Accounts may be of different types depending on the purpose underlying the deposit. Some of these are as follows:
a)      Home Safe Account (also known as Money Box Scheme):
Small savers find it convenient to deposit money under this scheme. For regular savings, the bank provides a safe or box (Gullak) to the depositor. The safe or box cannot be opened by the depositor, who can put money in it regularly, which is collected by the bank’s representative at intervals and the amount is credited to the depositor’s account. The deposits carry a nominal rate of interest.

b)     Cumulative-cum-Sickness Deposit Account:
Regular deposits made in this type of account serve the purpose of having money to meet large expenses in case there is sudden illness or other unforeseen expenses. A certain fixed sum is deposited at regular intervals in this account. The accumulated deposits over time along with interest can be used for payment of medical expenses, hospital charges, etc.

c)      Home Construction deposit Scheme/Saving Account:
This is also a type of recurring deposit account in which money can be deposited regularly either for the purchase or construction of a flat or house in future. The rate of interest offered on the deposit in this case is relatively higher than in other recurring deposit accounts.
LOANS AND ADVANCES
The term ‘loan’ refers to the amount borrowed by one person from  another. The amount is in the nature of loan and refers to the sum paid to the borrower. Thus. from the view point of borrower, it is ‘borrowing’ and from the view point of bank, it is ‘lending’. Loan may be regarded as ‘credit’ granted where the money is disbursed and its recovery is made on a later date. It is a debt for the borrower. While granting loans, credit is given for a definite purpose and for a predetermined period. Interest is charged on the loan at agreed rate and intervals of payment. ‘Advance’ on the other hand, is a ‘credit facility’ granted by the bank. Banks grant advances largely for short-term purposes, such as purchase of goods traded in and meeting other short-term trading liabilities. There is a sense of debt in loan, whereas an advance is a facility being availed of by the borrower. However, like loans, advances are also to be repaid. Thus a credit facility- repayable in instalments over a period is termed as loan while a credit facility repayable within one year may be known as advances. However, in the present lesson these two terms are used interchangeably.
Utility of Loans and Advances
Loans and advances granted by commercial banks are highly beneficial to individuals, firms, companies and industrial concerns. The growth and diversification of business activities are effected to a large extent through bank financing. Loans and advances granted by banks help in meeting short-term and long term financial needs of business enterprises.
Banks also borrow from other institutions as well as from the Reserve Bank of India. When the Reserve Bank of India lends money to commercial banks, the rate of interest it charges for lending is known as ‘Bank Rate’. The rate at which commercial banks make funds available to people is known as ‘Lending-rate’. The lending rates also vary depending upon the nature of loans and advances. The rates also vary according to the purpose in view. For example if the loan is sanctioned for the purpose of activities for the development of backward areas, the rate of interest is relatively lower as against loans and advances for commercial/business purposes. Similarly for smaller amounts of loan the rate of interest is higher as compared to larger amounts. Again lending rates for consumer durables, e.g. loans for purchase of two-wheelers, cars, refrigerators, etc. are relatively higher than for commercial borrowings.
However, the Reserve Bank of India from time to time announces changes in the interest-rate structure to regulate the lending of funds by banks. Different rates of interest are prescribed for various categories of advances, such as advances to agriculture, small scale industries, road transport, etc. Graded rates of interest are prescribed for backward areas. Lower rate is normally charged from agencies selling food-grains at fixed price through Govt. approved outlets.


TYPES OF LOANS
1.      Loans
Loan is the amount borrowed from bank. The nature of borrowing is that the money is disbursed and recovery is made in instalments. While lending money by way of loan, credit is given for a definite purpose and for a pre-determined period. Depending upon the purpose and period of loan, each bank has its own procedure for granting loan. However the bank is at liberty to grant the loan requested or refuse it depending upon its own cash position and lending policy. There are two types of loan available from banks:
a)      Demand loan
A Demand Loan is a loan which is repayable on demand by the bank. In other words, it is repayable at short-notice. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lumpsum (one time) or as agreed with the bank. For example, if it is so agreed the amount of loan may be repaid in suitable instalments. Such loans are normally granted by banks against security. The security may include materials or goods in stock, shares of companies or any other asset. Demand loans are raised normally for working capital purposes, like purchase of raw materials, making payment of short-term liabilities.
b)     Term loan
Medium and long term loans are called term loans. Term loans are granted for more than a year and repayment of such loans is spread over a longer period. The repayment is generally made in suitable instalments of a fixed amount. Term loan is required for the purpose of starting a new business activity, renovation, modernization, expansion/ extension of existing units, purchase of plant and machinery, purchase of land for setting up of a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and the like.

2.      Cash credit
Cash credit is a flexible system of lending under which the borrower has the option to withdraw the  funds as and when required and to the extent of his needs. Under this arrangement the banker specifies a limit of loan for the customer (known as cash credit limit) up to which the customer is allowed to draw. The cash credit limit is based on the borrower’s need and as agreed with the bank. Against the limit of cash credit, the borrower is permitted to withdraw as and when he needs money subject to the limit sanctioned. It is normally sanctioned for a period of one year and secured by the security of some tangible assets or personal guarantee. If the account is running satisfactorily, the limit of cash credit may be renewed by the bank at the end of year. The interest is calculated and charged to the customer’s account.
Cash credit, is one of the types of bank lending against security by way of pledge or /hypothetication of goods. ‘Pledge’ means bailment of goods as security for payment of debt. Its primary purpose is to put the goods pledged in the possession of the lender. It ensures recovery of loan in case of failure of the borrower to repay the borrowed amount. In ‘Hypothetication’, goods remain in the possession of the borrower, who binds himself under the agreement to give possession of goods to the banker whenever the banker requires him to do so. So hypothetication is a device to create a charge over the asset under circumstances in which transfer of possession is either inconvenient or impracticable.

3.      Overdraft
Overdraft facility is more or less similar to ‘cash credit’ facility. Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to draw over and above the credit balance in his/her account. It is a short-period facility. This facility is made available to current account holders who operate their account through cheques. The customer is permitted to withdraw the amount of overdraft allowed as and when he/she needs it and to repay it through deposits in the account as and when it is convenient to him/her.
Overdraft facility is generally granted by a bank on the basis of a written request by the customer. Sometimes the bank also insists on either a promissory note from the borrower or personal security of the borrower to ensure safety of amount withdrawn by the customer. The interest rate on overdraft is higher than is charged on loan. The following are some of the benefits of cash credits and overdraft:
              i.      Cash credit and overdraft allow flexibility of borrowing, which depends upon the need of the borrower.

            ii.      There is no necessity of providing security and documentation again and again for borrowing funds.

          iii.      This mode of borrowing is simple and elastic and meets the short term financial needs of the business.

4.      Discounting of Bills
Apart from sanctioning loans and advances, discounting of bills of exchange by bank is another way of making funds available to the customers. Bills of exchange are negotiable instruments which enable debtors to discharge their obligations to the creditors. Such Bills of exchange arise out of commercial transactions both in inland trade and foreign trade. When the seller of goods has to realise his dues from the buyer at a distant place immediately or after the lapse of the agreed period of time, the bill of exchange facilitates this task with the help of the banking institution.
Banks invest a good percentage of their funds in discounting bills of exchange. These bills may be payable on demand or after a stated period. In discounting a bill, the bank pays the amount to the customer in advance, i.e. before the due date. For this purpose, the bank charges discount on the bill at a specified rate. The bill so discounted, is retained by the bank till its due date and is presented to the drawee on the date of maturity. In case the bill is dishonoured on due date the amount due on bill together with interest and other charges is debited by the bank to the customers account.
Apart from these the banks also provides financial services to the corporate sector  and business and society
1)      Merchant Banking
In banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and to wealthy individuals. The term can also be used to describe the private equity activities of banking. The chief distinction between an investment bank and a merchant bank is that a merchant bank invests its own capital in a client company whereas an investment bank purely distributes (and trades) the securities of that company in its capital raising role. Both merchant banks and investment banks provide fee based corporate advisory services including in relation to mergers and acquisitions.

2)      Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments.
The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed or an indefinite period of time (called the term of the lease). The consideration for the lease is called rent. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from lawnmowers and washing machines to handbags and jewellry.[1]
Under normal circumstances, a freehold owner of property is at liberty to do what they want with their property, including destroy it or hand over possession of the property to a tenant. However, if the owner has surrendered possession to another (the tenant) then any interference with the quiet enjoyment of the property by the tenant in lawful possession is unlawful.
Similar principles apply to real property as well as to personal property, though the terminology would be different. Similar principles apply to sub-leasing, that is the leasing by a tenant in possession to a sub-tenant. The right to sub-lease can be expressly prohibited by the main lease.
3)      Mutual Funds
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

4)      Money Transfer
Banks are helping business and society for transfer of money from place to place or person to person. For this purpose, Demand Draft, Pay orders, Telegraphic Transfer, Mail Transfer, Credit Cards etc type methods are used

5)      Factoring
Factoring is a financial transaction whereby a business job sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset),[1][2] not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.
The three parties directly involved are: the one who sells the receivable, the debtor, and the factor. The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), to obtain cash. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights and risks associated with the receivables.  Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections. Critical to the factoring transaction, the seller should never collect the payments made by the account debtor, otherwise the seller could potentially risk further advances from the factor. There are three principal parts to the factoring transaction; a.) the advance, a percentage of the invoice face value that is paid to the seller upon submission, b.) the reserve, the remainder of the total invoice amount held until the payment by the account debtor is made and c.) the fee, the cost associated with the transaction which is deducted from the reserve prior to it being paid back the seller. Sometimes the factor charges the seller a service charge, as well as interest based on how long the factor must wait to receive payments from the debtor. The factor also estimates the amount that may not be collected due to non-payment, and makes accommodation for this when determining the amount that will be given to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment

6)      Finance Housing
There are a variety of housing finance schemes started by banks. Such as purchase of new house, construction of new home, home improvement, repairs, extension, land purchase, bridge loans, and balance transfer loans. Commercial banks through their subsidiaries undertake housing finance as a specialized business. Now a days, all the banks are permitted to provide housing finance to the people. They provide housing finance and other related services to the needy people at reasonable rate of interest.

7)      Credit Cards
A Lot of people miscomprehend the usage of credit card thinking that it only augments their expenditure & nothing else, however they are not aware of the proper usage of the card. A Credit Card is plastic money which is used as a way of payment, facilitating you to purchase products/services on credit. It eases your life & your shopping experience is made simpler as you are not required to carry cash at all the places; just swipe your credit card & you are given a free credit period of 50-55 days by the bank. A lot of people think that the credit period starts from the date of purchase which is not correct; you should note that the credit period is calculated from the date of billing and not from the date of purchase. - As soon as you get the credit card, you need to sign on the signature panel - Spend within your credit limit: You should not cross the limit of the credit allotted by the bank as they charge hefty fine from the card holders. - Always check sales vouchers/charge slips and the purchase amount when you sign them. - Change your PIN regularly & do not give out your card number or CVV number (three-digit number) to anyone on the phone, unless you are dealing with a reputable company. - When shopping online, submit credit card details only through secure websites. - Always keep a track of your billing cycle & pay bills on time to avoid interest charges & late fees. - Always scan your credit card statements for unauthorized transactions. If you've been defrauded, contact the issuing bank instantly. - Withdrawing cash from ATM through your credit card is really expensive as there is a fee of Rs 350, plus 3.5 percent interest per day. You must make sure that you withdraw the cash only in an emergency.

8)      Portfolio Management
Portfolio management is a process of investment in securities. It involves a proper investment decision making. It involves proper money management. The objective of this service is to help investors with the expertise of professionals. It involves construction of a portfolio based upon the fact sheet of the investor giving out his objectives, constraints, preferences and tax liability. The portfolio should be reviewed and adjusted from time to time in tune with the market conditions. The portfolio manager is an important person who holds the financial institutions and banks. They handle the funds of the investors for a fee. As per SEBI guidelines, the portfolio manager should get a certificate from the SEBI for rendering the portfolio management services to the clients. The SEBI has framed the code of conduct for the portfolio managers. The violation of the regulations of SEBI is an offence and is punishable under the SEBI Act. Banks usually extend services for managing surplus funds of their corporate customers either directly or through merchant bankers. It involves helping their clients in investing their funds in a manner that balances the liquidity, safety and maximum yield

9)      ATM
One of the channels of banking service delivery is vide the Automated Teller Machine (ATM) whose traditional and primary use is to dispense cash upon insertion of a plastic card and its unique Personal Identification Number (PIN). ATM card is a plastic card with a magnetic strip with the account number of the individual. The bank issues ATM cards to its current and saving accountholders. A typical transaction would be that of cash withdrawal. The bank generally restricts the maximum amount and the frequency with which one can withdraw cash. The amount withdrawn is immediately debited to the concerned account through accounting entries pre programmed on the ATM. Cash or cheques can be deposited through the ATM for the credit to an account. ATMs can be accessed may time. No employee interface is necessary. ATM offers a cost effective solution alternative to labour costs. The scope of frauds, robberies and misappropriation are reduced considerably if the PIN is maintained diligently.

10)  Tele banking
Tele banking is a banking service offered by banks to enable customers to access their accounts for information or transactions. A Telephone PIN (T-PIN) is provided to each accountholder. The customer can call the exclusive tele-banking numbers and provide the details to identify himself to the automated voice. Upon the respective numbers matching the computerized systems, the customer is given access to his account to query or transact on his account. Cash withdrawal and deposit are not enabled through this service but many banks offer a cash delivery or collection service to certain classes of cutomers.

11)  Internet Banking
Internet is one of the channels of service delivery to a banking customer. The access to account information as well as transaction is offered through the worldwide network of computers on the internet. Every bank has special firewalls and its own security measure to protect the accounts from non-authentic use from unauthorized users. Each accountholder is provided a PIN similar to that of the ATM. The access to the account is allowed upon a match of the account details and PIN entered on the computer system. A higher level of security may be reached by an electronic finger print. Account querying as well as transaction are possible on the Internet Banking Platform. The accounting is instantaneous and funds transfers can be effected immediately. Financial services companies are using the Internet as the new distribution channel.



















INNOVATIVE STRATEGIES FOR NEW PRODUCT
These days banks are spending larger and larger percentages of their marketing budgets to acquire customers. These efforts include outbound campaigns, both online as well as through traditional methods. In this culture of instant response and connectedness, customers expect to be able to make decisions when presented with an offer in a very quick manner. However, in many cases the inability to complete the acquisition process due to process that has does not lend itself to support this type of behavior gets in the way of closing the loop. As is demonstrated by the large number of online only banks that are popping up every day, customers are getting more and more comfortable with these types of transactions being handled online. Simply put, the ability to complete the process of account opening online is a price to play in this business these days.

Collabera's solution starts by streamlining the process by separating the require steps from steps that can be completed at a later stage. This streamlined process is then technology enables by leveraging existing platforms or in some cases introducing new platforms that offer more flexible account opening processes. Since the account opening process tends to vary by the product being offered, in some cases providing a seamless and consistent customer experience is achieved via integrating various services into a customer friendly front end. Critical to this strategy is the integration of data flows for customer information across the disparate data stores.

As is well understood, the initial process after the account is setup is a great time to make a impression on the customer. This initial experience establishes the foundation for the future. In our experience, there is an opportunity to do more than just going through a checklist of items that make up the process of on-boarding. The on-boarding process is a great time to gather information from the customer that can then be sent off to the appropriate data stores for consumption by various business functions. In many cases this on-boarding process gets executed in silos.

The Collabera solution focuses on defining the process and then technology enabling it in a way that can cover all bases. The process analysis includes all aspects that are visible to the customer as well as background processes that are triggered as part of this end to end process. The technical aspects focus on integration and data enrichment prior to sharing the information with appropriate resources.

The cost to acquire new customers is higher that it has ever been. Product bundling is emerging as a key tactic in being able to offer products that will increase the "stickiness factor" as well as increasing the revenue per customer metric. Most banks are able to use the results of propensity analysis to understand the most likely portfolio of products that would be of interest to a customer. Using this data to identify the best primary product along with a secondary set of products allows all customer communication to be much more tailored. The result is a higher "redemption rate" on offers to the customer. Executing on this type of a strategy requires a clear understanding of the overall goals, the associated tactics, a clearly defined and completely integrated channel strategy as well as a seamless integration amongst the technology platforms. In many organizations the lack of an overall data strategy can be a challenge.

Collabera has assisted several banks in enabling these type of strategies. In our opinion, traditional approaches to product bundling are limited to prepackaged product bundling solutions. This one size fits all type of solution has yielded some results in the past. However, given the competitive environment these days, more sophisticated approaches are needed.

As banks struggle to increase the revenue per customer, cross sell strategies have emerged as a way of achieving this target. In the past these type of strategies have focused on offering multiple types of products from within a segment of the banks business. Segments of Lines of Business, are typically how the banks have internally organized themselves and no surprise that the lack of customer centricity in this approach failed to deliver on the promise of increasing wallet share by increase cross sell. Customers have looked for solutions that cross multiple aspects of their profile – business and personal. As banks rethink these strategies and align themselves behind better and more robust cross sell strategies, it has become clear that knowing the customer at a deeper level then before is key to success in the pursuit of higher cross sell ratios.

Collabera's solutions associated with cross-sell strategies focus on two aspects. 1) Establishing a process that allows all customer facing function to truly act in a way that will allow them to offer the entire portfolio of products and they are incented to do so 2) Establishing metrics that allow the measurement of these interactions in the form of measureable dashboards such as White Space Analysis.

Banking customers are demanding tools that help manage their finances and detect fraud. Alerts are a tool that can assist by proving timely, meaningful and actionable notifications to customers on events related to their accounts. Alerts can also be used to help customers conveniently transact business; for instance, an alert may prompt a payment of a loan or transfer funds to prevent an overdraft. Furthermore, functionality the functionality of a bank's online/mobile alerts framework could be enhanced greatly by allowing clients to enroll/un-enroll and tailor alerts that meet their needs.
Revenue Growth through Innovative Strategies
In order to ensure customer adoption of these alerts, banks need to create a positive experience for the user by allowing them to manage their alerts in one location. This is best done by combining efforts with various business lines and systems to guarantee that bank customers do not have to go to multiple locations to manage their preferences. Typical lines of business that could dramatically benefit from adopting the alerts functionality are Business Banking, Collections, Credit Card, Debit Card, Deposits, Investments, Lending, Line of Credit (overdraft), Marketing, Mobile Banking, Mortgage, Retail Banking, Security, Web Banking. Email, SMS text messaging, and push notifications are cost effective channels that reach customers quickly, which increase the value of the products offered by many of these business units. The Collabera solution focuses on defining the end-to-end alerts architecture, including the process, technology, system integration, and business change requirements. Collabera leverages its world-class toolkit of best-practice alerts, and helps prioritize the adoption of the alerts functionality that meets the business needs leveraging our proprietary Momentum methodology. Our alerts architecture and design includes all aspects that are visible to the customer as well as background processes that are triggered as part of this end to end solution. A typical business case leveraging the Collabera Alerts framework to monetize and setup a best practice alerts solution within their banking business in mid-tier banks reflects between $5MM and $7MM of revenue over 3 years, as a result of "monetized alerts" fee revenue and overall expense savings.



























INNOVATIVE SERVICES TO CUSTOMERS

A conventional bank may treat its customers as coldly as the cash they deposit or borrow. Many banks have conveniently used control and security as reasons for their remarkably slow and impersonal services. In recent years, other service industries, notably fast-food and airlines, have proven that customer service can be a swift and enjoyable experience for both clients and employees without sacrificing control, costs, and profits. Some banks have finally adopted these new service paradigms and are now benchmarking with non-bank institutions to learn about their best practices.

For instance, BayBanks of Massachusetts, is using the mail-order company L.L. Bean, known for its superb order-taking and service delivery systems, as its model for change. A major result of this functional benchmarking was the establishment of a 24-hour customer service center that can not only respond to queries and complaints but also promote and sell the bank's products and services. The center even allows customers to open a checking account anytime or negotiate an overdraft at 2 am. The ATM was also reconfigured from a mere cash dispenser to a versatile and tireless account executive. The machine can now buy and sell mutual funds. Inspired by L.L. Bean, Bay Banks published a 50-page catalogue to help customers appreciate and select from its more than 160 financial services.

Seafirst Bank in Seattle redefined itself from a "retail bank" to a "retailer" and has benchmarked with retailers known for world class customer service such as fast-food restaurant chains. Inspired by these models, Seafirst instituted a 5-minute guarantee that says "Wait any longer than 5 minutes in line and the bank guarantees $5 to your account." Moreover, if the customer complains of any other inconvenience, he or she gets a $5 "I'm sorry coupon". Its branch offices have official "greeters" to greet and guide customers to the right tellers or desks, much like the guest relations officers (GRO) or receptionists of 5-star hotels. The greeter mans a kiosk at the entrance of the bank. To reinforce this service philosophy, branch managers are rated not only on sales but on service goals. Achieving or even exceeding sales targets without achieving customer satisfaction goals will not entitle a branch manager to receive the bank's prestigious "Gold Club" award. Executives from the CEO down are encouraged and expected to visit branches regularly to monitor service and get a first-hand feel of the action. When Seafirst decided to redesign and re-layout its offices to improve service, it acquired the services of an expert from the Godfather's Pizza chain. One result was making the teller counter waist-high. It is now more open and personal than the traditional counter that is intimidating and creates a barrier between the client and the teller.

Like Seafirst, Citicorp looks as itself as less of a bank and more of a "factory". This factory processes raw materials in the form of documents, application forms, and customer requests and the final product is a satisfied customer. Desks, departments, offices, and other work stations serve as the machines and equipment of this document factory. In reorganizing the bank into a leaner and better service center, the CEO John Reed, who has an engineering background, applied the lessons and practices he learned from his visits to Ford Motor, Cummins Engine, General Electric, Core Industries and Exxon. The first process his reengineered was the back-room operations which consist of many repetitive operations. Back-office of banks are known for snail-pace bureaucracy that hampers front line operations and the ultimate customer service. By applying the concept of "mass production", streamlining, and standardization of tasks, Citicorp aims to remove this critical bottleneck. The bank also benchmarked with Chrysler in getting its functional departments to work effectively as teams.

Others banks, shedding their conservative "finance and control" images, have likewise adopted innovative service strategies and practices. Banco Frances has established an information center or "encyclopaedia" in the waiting lounge. Here customers can browse through various bits and pieces of important service information like the average time to finish a transaction and the company's products and services. Information about the busiest day or days in the branch are displayed so that customers may want to avoid these periods. In the new branches of Garanti Bankasi, phone lines dedicated to customer service were installed. Any customer can pick up this phone and relay his or her a complain, question, or difficulty. The facility is designed to represent the company's commitment to service and also serves as the customer's last resort in case everything else fails.

Similarly, ASB Bank Limited has established a phone center to accept , process, and resolve customer complaints. It also has a customer feedback programme whereby whoever the customer complains to, say a staff employee or manager, will be responsible for giving the client feedback on the status and progress his or her complaint. The bank’s customer service center has created two customer flows or lines to deliver services more effectively. One was for loans and similar products that require customized and personalized services. The other lines was for the standard and repetitive services like deposits and withdrawals. By creating two service environments that cater to two different types of needs, service is enhanced and speeded up.

Bank Pertanian Malaysia (BPM) has extended the concept of "mobile banking." To the convenience and delight of customers living in longhouses along the river banks of the Sarawak river, the bank has launched floating branches on boats that provide full branch bank services. To further enhance service, BPM has also reconfigured its automated teller machines to dispense not only cash, but also commodity prices and information about its products and services. The Korean Technology Banking Corporation (KTB) is setting up a Technology Financing Information Center to serve the various needs of its clients, most of which are setting up joint-ventures overseas. The Center will contain a huge database of information analyzed from various data from internal and external sources. By accessing this database, clients will get information about specific technologies, local information, and other data relevant to the ventures they are setting up. To facilitate processing, development financial institutions like the Industrial Development Bank of India, requires borrowers to submit loan application forms in electronic floppy disks.

Some banks and financial institutions have done such a remarkable job in improving and reinventing customer service that they themselves have become the benchmarks of other companies outside the banking sector. For instance, American Express, the credit card company, is the recognized benchmark to emulate when it comes to improving a company's billing process. Amex's billing is reportedly the fastest and most accurate in the world in any industry. Xerox, the benchmark for many quality practices, used the Amex model in enhancing its billing systems. In China, the benchmark for customer service and customer courtesy is surprisingly a bank: The Industrial and Commercial Bank. Hundreds of retail shops and department stores, many of which are known for rude service, visit the bank's branches to learn a few lessons on satisfying and delighting customers. Before sweeping changes were made, the Industrial and Commercial Bank was also known for bad service and discourteous front line employees who even swear at clients. One radical and highly effective policy it instituted was coming about with a list of words and phrases their employees are forbidden to use when dealing with customers. For instance the popular expression "When will you stop complaining?" is included in the banned list. While other banks may refuse to change or accept soiled or old currency notes, the bank will replace these without question.

Even clearing houses have adopted the new service paradigms to support the banks' initiatives. For instance, the Singapore Clearing House Association has cut the clearing of US$ checks deposited in Singapore from two weeks to 3 days. The new system requires participating banks to open US dollar accounts with Citibank to service their respective clients.

Innovative banking in customer service is indeed a welcome and long-awaited development. We hope that other banks and financial institutions will follow suit soon. Satisfied customers are the best guarantee of stability and growth. As in other service sectors, bank customers deserve the very best. In the past, banks have rarely treated customers as people, preferring to treat them as account numbers, passbooks, and loan applications. Customer service, in contrast to customer processing, is a concept whose time has come for the banking industry world wide.














FUTURE OF BANKING IN RURAL AND URBAN AREAS
The Reserve Bank of India has a mandate to be closely involved in matters relating to rural credit and banking by virtue of the provisions of Section 54 of the RBI Act. The major initiative in pursuance of this mandate was taken with sponsoring of All-India Rural Credit Survey in 1951-52. This study made agency-wise estimates of rural indebtedness and observed that cooperation has failed but it must succeed. The Report of the Committee on Directions is still considered a classic on the subject, and two of the four members were, incidentally, from Andhra Pradesh. This is the origin of the policy of extending formal credit through institutions while viewing local, traditional and informal agencies as usurious. In the first stage, therefore, efforts were concentrated on developing and strengthening cooperative credit structures. The Reserve Bank of India has also been making financial contributions to the cooperative institutions through evolving institutional arrangements, especially for refinancing of credit to agriculture.

While enacting the State Bank of India Act in 1955, the objective was stated to be the extension of banking facilities on a large scale, more particularly, in rural and semi-urban areas. SBI, therefore, became an important instrument of extending rural credit to supplement the efforts of cooperative institutions. In 1969, 14 major commercial banks were nationalised and the objective, inter alia, was "to control the heights of economy". The nationalised banks thus became important instruments for advancement of rural banking in addition to cooperatives and State Bank of India. The next step to supplement the efforts of cooperatives and commercial banks was the establishment of Regional Rural Banks in 1975 in different states with equity participation from commercial banks, Central and State Governments.

By 1982, to consolidate the various arrangements made by the RBI to promote/ supervise institutions and channel credit to rural areas, NABARD was established. Though several efforts were made to increase the flow of institutional credit for agricultural and rural lending, there were mismatches in credit and production. Field studies conducted to determine the reason, revealed that it was due to absence of effective local level planning. It was felt that with the establishment of large network of branches, a system could be adopted to assign specific areas to 45 each bank branch in which it can concentrate on focussed lending and contribute to the development of the area. With a view to implementing this approach, RBI introduced a scheme of "Service Area Approach" for commercial banks. To further supplement the institutional mechanism, the concept of Local Area Banks was taken up in 1996-97 and in-principle approval has been given for 8 Local Area Banks.

As regards cost of credit, for most of the period, the administered interest rate regime was applicable for bank lending and this included concessional terms for priority sector. Currently, all interest rates on bank advances including in rural areas are deregulated and there is no link between priority sector and interest rate, though there are some regulations on interest rates by size of advance i.e. below Rs. 2 lakh in respect of commercial banks.

As regards policy measures to enhance flow of credit to rural areas, apart from availability of credit lines from the Reserve Bank of India, the concept of priority sector was evolved to ensure directed credit. Currently, the stipulation is that domestic commercial banks should extend credit to the extent of 40 per cent of the total net bank credit to priority sector as a whole, of which 18 per cent should be specifically for agriculture. Out of the target of 18 per cent for agriculture, at least 13.5 per cent should be by way of direct loans to agriculture and remaining could be in the form of indirect loans.

Where a bank fails to fulfil its commitment towards priority sector lending, it is currently required to contribute to Rural Infrastructure Development Fund set up by NABARD. NABARD in turn provides these funds to State Governments and state owned corporations to enable them to complete various types of rural infrastructure projects. It is pertinent to recognise that there are a large number of credit linked programmes sponsored by the Government for direct assault on poverty. In programmes relating to self-employment and women welfare, the multiplicity of programmes has been reduced by having a comprehensive and consolidated programme named Swaranjayanti Gram Swarojgar Yojna.

The financial sector reforms, which were introduced from 1991 onwards were aimed at transforming the credit institutions into organisationally strong, financially viable and operationally efficient units. The measures introduced include reduction in budgetary support and concessionality of resources, preparation of Development Action Plans and signing of Memoranda of Understanding with the major controllers, and introduction of prudential norms relating to income recognition and asset classification for RRBs and cooperative banks. The lending rates for these institutions have also been deregulated. Other measures of liberalization include allowing non-target group financing for RRBs, direct financing for SCBs and CCBs, and liberalisation in investment policies and non-fund business.

These measures have contributed to many RRBs turning around and becoming more vibrant institutions. In the case of cooperative banks, there is greater awareness of the problems of officialisation and politicisation and initiatives in this regard include legislative actions on cooperative banks in Andhra Pradesh.

Recently, several policy initiatives have been taken to advance rural banking. These include46  additional capital contribution to NABARD by the RBI and the Government of India, recapitalisation and restructuring of RRBs, simplification of lending procedures as per the Gupta Committee recommendations, preparation of a special credit plans by public sector banks and launching of Kisan Credit Cards. Finally, a scheme linking self help groups with banks has been launched under the aegis of NABARD to augment the resources of micro credit institutions. A Committee has gone into various measures for developing micro credit, and has submitted its report, which is under the consideration of the RBI. In respect of cooperatives, a Task Force under the chairmanship of my esteemed and affectionate colleague Shri Jagdish Capoor, Deputy Governor has been constituted to review the status and make recommendations for improvement.

Undeniably, these initiatives have enabled a very wide network of rural financial institutions, development of banking culture, penetration of formal credit to rural areas and a counter to the dominance of moneylenders. These initiatives have also financed modernisation of rural economies and implementation of anti-poverty and self-employment programmes. However, for the purpose of focussing on the future, generalisation on some concerns regarding the current approach to rural credit and banking would be appropriate.

Firstly, the cooperative banks have different layers and many of them have significantly large non-performing assets (NPAs). Many cooperatives are undercapitalised. The public sector banking system also exhibits NPAs, and some of them have so far been provided with recapitalised funds. The RRBs also exhibit NPAs and these have been recapitalised from the Government of India so far, which would imply a total recapitalisation of double the amount provided by Government of India.

Secondly, according to the All-India Debt and Investment Survey, 1991-92, the share of debt to institutional agencies in the case of rural households has increased marginally from 61.2 per cent to 64 per cent between 1981 and 1991. However, it must be noted that this figure relates to debt outstanding and the overall share of the institutional credit in the total debt market is likely to be smaller than what this figure indicates.

Thirdly, the cost of financial intermediation by the various rural financial institutions is considered to be on the high side. The difference between the cost of resources made available to NABARD by Reserve Bank of India and the commercial rates of interest at which the cooperative banks lend for agriculture in the deregulated interest rate regime is also considered to be on the high side.

Fourthly, empirical studies indicate that institutional credit is more likely to be available for well to do among the rural community.

Fifthly, empirical studies also indicate that relatively backward regions have less access to institutional credit than others do.

Sixthly, the non-availability of timely credit and the cumbersome procedures for obtaining credit are also attributed to the functioning of the financial institutions, though this is equally valid for rural and urban banking

Finally in regard to Government sponsored schemes, there has been overlap in accountability in as much as the beneficiaries are identified on a joint basis. Banks have been indicating that NPAs are proportionately more due to this overlapping.

An important development in the formal segment of the rural financial markets is the growing significance of non-banking financial companies, in particular, in hire purchase and leasing operations. They also finance traders of agricultural inputs and output. The NBFCs have only recently been brought under the regulatory regime of RBI. While their importance is recognized in financing diversified rural agriculture, its extent and scope of operations has not been adequately researched.

Rural Credit Markets : New Realities
As mentioned earlier in the approach to rural banking, the basic thrust of our policy has been to promote institutional credit and eliminate or ignore informal finance. However, in reality, while formal credit has expanded its share, informal finance continues to be significant. The idea of promotion of Self-Help Groups and micro financing is an indirect admission of necessity of informal finance. The future of rural banking cannot be appreciated without fully understanding both formal and informal rural credit markets, especially their linkages. Since in the earlier sections, organisation and functioning of the formal credit system in the rural areas has been explained, in this section nature of informal markets and the linkages will be explored.

The informal financial market which is legal but officially unrecorded comprises unregulated financial activities i.e., outside the orbit of officially regulated financial intermediaries. In the informal financial transactions, one could treat borrowing and lending among friends and relatives as occasional and not part of such an informal market. Consequently, there are three broad types of informal financial transactions, viz., well-defined group, tied-lending/borrowing; and untied lending/borrowing activities.

In the literature on well-defined groups, there are three broad types namely Rotating Savings and Credit Associations (ROSCA); Accumulated Savings and Credit Associations (ASCRA) and hybrid forms of both. There are some variations under each category. Basic characteristics of these groups are that they are voluntary in nature, usually among equals, with little or no outside support or interference. Often, members have some special bonds based on religion, caste, status, neighbourhood, etc. In brief, there is no patronclient framework. In essence, therefore, these arrangements among well-defined groups, though important, should not in my view be included in the concept of informal financial markets. In the recent past, there have been efforts to provide a bridge between formal financial markets and these well-defined groups in the form of ‘micro-finance' initiatives. However, these initiatives do not constitute marketisation of activities of well-defined groups. Thus, the informal financial markets are those which are outside the orbit of officially regulated institutions. These informal debt transactions may involve tied debt transactions and untied debt transactions.

The general approach, at least at the policy level, to informal market whether tied or untied, has not been positive since informal debt market has been historically equated with either landlord or moneylender. The transactions are considered to be expensive, especially in view of what is held to be of usurious nature of interest rates. It is considered to be financing unproductive expenditures since consumption needs are financed. Sometimes, it is said that there are often unequal and exploitative arrangements, say, between the landlord and the tenant or the agricultural labourer. Finally, it is held that, since these are unregulated, they are prima facie not desirable.

Yet, the fact remains that informal debt markets do prevail, and studies have shown that in some areas in our country, they account for 70 to 80 per cent of debt transactions. Studies have also shown that many poor people have no access to institutional credit. The arrangements in informal debt markets are said to be flexible, and sometimes have in-built risk sharing arrangements. These credit arrangements do provide for smoothening of consumption and production requirements. Transaction costs in terms of certainty, timeliness, procedural requirements, number of trips, etc. are somewhat negligible although there may be hidden costs in tied lending. Moreover, while formal markets tend to cater to less risky borrowings, informal markets provide for the more risky borrowings and thus serve a purpose. Finally, it has been stated in the literature that financial repression like directed credit, high reserve ratios, interest rate ceilings, branch licensing, etc. make informal financial markets relatively attractive and popular.

Perhaps, one way of reconciling the conflicting views on usefulness of informal credit is to recognise some emerging realities of both formal and informal markets. This would also help a rethink on approaches to rural credit and rural banking.

First, it is no longer the case that the money lender and informal financing are always synonymous, in view of the dynamics of rural economy already described involving suppliers credit, buyers credit and credit for services sector.

Second, informal markets are less significant now than before, and have to face competition or at least accept benchmarking of formal credit. The concept of monopoly of moneylender in rural areas is not true in many areas now.

Third, when informal financial market is linked to socially undesirable activities, there is certainly a cause for concern though the available evidence shows that such a link is more a metropolitan or urban phenomenon rather than a rural one.

Fourth, bank credit is really not severely restricted to what can be officially determined as productive, since most of the credit-card financing by the banks is, in fact, financing of consumption and at interest rates comparable to those prevailing in the rural informal debt markets. In other words, it is no longer unethical for banks to finance consumption credit through the credit card route. Credit card business, so far, is an essentially urban phenomenon.

Hence, the financing of consumption by informal markets in rural areas cannot be frowned upon when it is being done by banks through their credit card business.

Fifth, the real extent of informal markets is grossly understated in any survey that views data on outstanding debt since the turnover of debt is admittedly much lower for public institutions than for private lending. The turnover-differential is on account of several factors, including preference for short term finance and better recovery-performance in informal markets.

Sixth, the social significance of informal credit is more than its proportion in financial terms since the poorer sections draw far larger amounts from informal than formal markets.

Seventh, a significant part of informal market is through leasing, hire purchase, deferred payment, etc. with finance often provided by NBFCs. The informal market is providing a range of financial products, which the formal banking system is not able to.

Eighth, studies have demonstrated that expansion of literacy and education tends to increase the access of rural folk to formal credit, reduce the informal transaction costs in dealings with formal credit institutions and improves their resistance to malpractices attributable to landlord or moneylender. The exploitative nature of informal markets is more pronounced in tribal or less developed areas while productive nature of informal markets is more pronounced in prosperous villages. Indeed, one can argue that in many areas, the formal credit structure has provided a positive institutional alternative to the moneylenders and thus marginalising his role in providing credit to rural masses.

Linkages in Rural Debt Markets
Having recognised that one cannot wish away informal markets, some tentative generalizations on the relative roles of formal and informal markets and on the linkages between them would also be necessary to capture the emerging but complex realities. Such generalisations are possible on the basis of empirical studies.

First, the formal credit has a tendency to flow more easily to agriculturally developed regions and to relatively larger farmers leaving the backward regions and small farmers to be largely served by the informal market. This phenomenon is generally explained by four factors viz., poor-resource endowment features of the borrower, poor personal factors (education, social contact etc), underdevelopment of a region and higher transaction costs.

Second, as per empirical studies, transaction costs associated with formal credit include fees for procuring necessary certificates (open), travel and related expenses including loss of wages etc., and informal or unofficial commissions (hidden). The transaction costs vary with type of credit agency involved, the type of borrower and farm-size.

Third, uncertainties and delays usually associated with formal credit can also be treated as additions to the transaction costs.

Fourth, the true cost of borrowing from the formal credit system is thus higher than nominal cost if the above informal transaction costs are also included. To the extent some transaction costs are fixed, the effective cost of borrowings for smaller loans tends to be relatively higher than for a larger loan.

Fifth, there are usually hidden costs or concealed interest rates in respect of informal credit also, which have to be added to the nominal costs to arrive at the true cost. These hidden costs generally relate to tied lending, tied to land, labour, input or output. The tied advance in respect of labour is particularly relevant for migratory labour. The hidden costs are usually in the form of undervaluation of labour and output of borrowers and overvaluation of inputs supplied by lender.

Sixth, the choice between formal and informal credit depends on both the access and relative true costs. Thus, recourse to informal credit, admittedly at far higher nominal costs, is to be explained partly in terms of effective costs and the extent of supply of formal credit.

Seventh, in assessing relative roles, both supply and demand side bottlenecks of formal credit need to be appreciated. The former relate to asset-based lending policies and complex formalities and procedures, while the latter relate to poor endowment, lower education and social-contact, usually caste-based in backward regions. Viewed differently, a larger role for informal credit may arise due to low level of commercialisation and monopoly power of moneylender; and it may also arise due to high level of commercialisation of agriculture when supply from formal channel cannot match significant demand for credit.

Eighth, it is also necessary to recognise that, to the extent informal markets tend to lend to borrowers who are relatively less creditworthy, risk-premium is bound to be higher. This would also get reflected in higher nominal interest rates in informal markets and indeed higher true cost, though it may not be so high if it is net of risk premium.

It is clear that the critical issue in respect of informal credit is the manner in which the linkages among the participants in the market operate and result in varying degrees of hidden costs. It is possible to make some exploratory postulates here. First, trader-lenders are likely to provide most of production - credit, while farmer-lender or moneylender is likely to provide most of consumption - credit.

It is, of course, possible that some individuals combine the functions of farmer, trader and moneylender. Second, informal markets are unlikely to finance credit for investment purposes, given the time preference. Third, the levels of education are likely to reduce the scope for gross overvaluation or undervaluation in linked-transactions. Fourth, the inter-linked transactions among parties with equal bargaining power are likely to minimise the hidden costs. Fifth, from the supply side, farmer-lenders may tend to be associated with land and labour market linkages while trader-lender is likely to be associated with input-output markets.

On the demand side, agricultural labour may be associated with land and labour markets while the farmer-cultivator with input-output linkages. In the process, it is likely that a farmer would be a borrower from a trader and a lender to agricultural labour, a common phenomenon in villages. It will, therefore, be over simplification to divide the rural population into lenders and borrowers or exploiters and exploited. Sixth, similarly it is necessary to appreciate the role of linkages in credit-risk-mitigation. In fact, the risk reducing element of linkages are not built into formal credit-channels. Incidentally to the extent the transaction costs are front loaded in respect of formal credit, there is no incentive to repay while the true costs of informal credit are spread out.

Seventh, in terms of bargaining power among the class of borrowers, the agricultural labour and migratory labour appear to be weakest except in agriculturally prosperous areas where labour-shortage is acute to cater to agricultural and other operations. Similarly, the differential in bargaining power between large and small borrowers is similar to that between large corporates and small-industrialists in urban areas.

In brief, the linkages between formal and informal markets are complex, contextual and dynamic. The two markets appear to compete with and also supplement each other.

Technology and Rural Banking
We should recognise that the role of banks, which is central to formal credit in rural areas, is fast changing. Many non-banks are providing avenues for savers and funds for investment purposes. Banks themselves are undertaking non-traditional activities. Banks are also becoming what are called universal banks and are already providing a range of financial services such as investments, merchant banking and even insurance products. Similarly, non banks are also undertaking bank like activities. At present in India, these are mostly confined to urban areas, but they will sooner than later spread to rural areas.

Another development relates to the gradual undermining of the importance of branches of banks. The emergence of new technology allows access to banking and banking services without physical direct recourse to the bank premise by the customer. The concept of Automated Teller Machines (ATMs) is the best example. At present, ATMs are city oriented in our country. It is inevitable that ATMs will be widely used, in semi-urban and rural areas.

The technology-led process is leading us to what has been described as virtual banking. The benefits of such virtual banking services are manifold. Firstly, it confers the advantage of lower cost of handling a transaction. Secondly, the increased speed of response to customer requirements under virtual banking vis-à-vis branch banking can enhance customer satisfaction. Thirdly, the lower cost of operating branch network along with reduced staff costs leads to cost efficiency. Fourthly, it allows the possibility of improved quality and an enlarged range of services being available to the customer more rapidly and accurately at his convenience

Another development relates to the increasing popularity of credit cards, which are bound to reach rural areas. Many Public Sector Banks are already in credit card business. In fact, multipurpose cards could be a facility that IT could usher in for rural population. The potential can be illustrated with SMART cards. SMART cards – which are basically cards using computer circuits in them thereby making them ‘intelligent' – would serve as multipurpose cards. SMART cards are essentially a technologically improved version of credit and debit cards and could be used also as ATM cards.

For the spread of virtual-banking and SMART cards to rural areas, it is essential that electric power and telecom connectivity are continuous and supplies do not drop especially during the hours when a bank's transactional activity is at relatively high levels. The banks could, under such assured supply conditions acquire the required banking software and also put in place the necessary networking for providing anywhere banking facilities in rural and semi-urban areas also.

Like banks in other parts of the world, Indian banks will have to get interested in providing diversified range of financial products and services along with those that they are already providing, by using technological advances. As the level of education in rural areas rises and affluence spreads, customers will start seeking efficient, quicker and low cost services.

As the financial system diversifies and other types of financial intermediaries become active, in rural areas, savers would turn towards mutual funds or the savers themselves decide to deploy part of their financial surpluses into equities and debentures as also other fixed income securities. The bulk of bank deposits in the rural areas are currently longer term deposits and as these come down; there would be a distinct shortening of the average maturity structure of bank deposits with an increase in asset liability mismatches.

·         The spreads that the banks now enjoy will progressively shrink making it more difficult for them to survive. As more and more intermediaries enter rural areas with greater level of technology, traditional banking business will come under pressure. In order to face the competitive pressures being exerted by the recently set up market savvy banks, banks which have extensive branch network in most of the existing and potential rich rural and semi-urban areas may have to provide such services.









ROLE OF FOREIGN BANKS

A large number of foreign banks are now keen on opening shop in India to gain a critical mass by April 2009, when private banking space is expected to open up for foreign players. Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative. The share of foreign banks in the business done in the country (deposits and advances) has been hovering between 5 and 7 per cent during the past decade.

A new rule announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allow them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that foreign banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely.

There are twenty-nine foreign banks are present in India through 273 branches and 871 offsite ATMs. Besides, there are 34 foreign banks operating through representative offices. Four have set up shop in the past one year. They are Banco Bilbao Vizcaya Argentaria, Spain's second largest bank; Italy's Banca di Roma; the Dublin-based Depfa Bank Plc.; and National Australia Bank Ltd. Given a chance, all banks would like to convert their representative offices into branches.

Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches, 83. It is followed by HSBC, which entered India in 1867, with 47 branches. Citibank has 39 branches and ABN Amro, 28 branches. The only other bank that has a double digit branch presence is Deutsche

India's GDP is seen growing at a robust pace of around 7% over the next few years, throwing up opportunities for the banking sector to profit from.

The credit of banks has risen by over 25% in 2004-05 and the growth momentum is expected to continue over the next four to five years.

Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after April 2009.

RBI is following a liberal branch licensing policy for those foreign banks who want to go to the unbanked pockets. They have started sensing enormous business opportunities in financing trade and small and medium sectors in small towns in the world's second fastest growing economy.

India had committed to the World Trade Organzation (WTO) in 1997 to give 12 new branch licenses to foreign banks every year, including those given to new entrants and the existing players. However, the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment to WTO. In fact, in the last four years till October 2007, it has given its nod to 75 new foreign bank branches and many more ATMs (which do not come under WTO norms).

Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches, 83. It is followed by HSBC, which entered India in 1867, with 47 branches. Citibank has 39 branches and ABN Amro, 28 branches. The only other bank that has a double digit branch presence is Deutsche, 11.

Despite their growing presence, foreign banks still have a very small market share in the Indian banking industry—6.11% of total deposits and 6.83% of total loan advances. But their returns from Indian operations are far higher than those of their local counterparts. For instance, the average net profit per branch for foreign banks in India was Rs11.99 crore last year against Rs33 lakh for the public sector banks that account for close to 70% of the industry. The return on assets for foreign banks last year was 1.65% and return on equity, 14.02%. The comparable figures for public sector banks were 0.82% and 13.62%. Now you know why foreign banks are ready to walk the extra mile to do business anywhere in India

The Reserve Bank of India would like foreign banks to get a flavour of semi-urban India and the rural hinterland. Going by the statistics provided in the RBI's annual report, it appears that foreign banks are being gently nudged away from metros, when they apply for permission to open a new branch.

The branches of foreign banks that have been approved between July 2006 and June 2007 are mostly in smaller towns and tier-2 and tier-3 cities. Of the 13 branches for which permission was given, only one branch belonging to Shinhan Bank has been allowed in New Delhi.

Hong Kong and Shanghai Banking Corporation (HSBC) received approvals for three branches in Raipur, Jodhpur and Lucknow. ABN Amro got approvals for branches in Kolhapur, Salem, Udaipur and Ahmedabad. Barclays Bank received approval for branches in Kanchipuram and Bangalore

Most foreign banks follow a strategy of first setting up base in metros – Mumbai, New Delhi, Kolkata and Chennai. Then, in the next stage, they move to the mini-metros such as Bangalore, Hyderabad, Pune and Ahmedabad. Over the last few years, some banks have talked about expanding their reach beyond the conventional circuits of these eight places.

Foreign banks in India have got approval from the Reserve Bank of India to open 10 branches and seven representative offices during the July 2006- June 2007 period. In the calendar year 2006, the RBI issued approvals for opening 13 branches of foreign banks in India. Under the WTO agreements, India is required to allow the opening of 12 foreign branches every year.

A large number of foreign banks are now keen on opening shop in India to gain a critical mass by April 2009, when private banking space is expected to open up for foreign players.

The latest addition to the list of foreign banks wishing to set foot in India is the Royal Bank of Scotland, which has total assets of over $806 billion.

The sudden interest in India follows the Reserve Bank of India's roadmap for according foreign banks greater freedom in India.

Switzerland's UBS, ranked the world's best private bank by EuroMoney magazine, has been preparing itself for India launch. Merrill Lynch and Goldman Sachs too are believed to be showing interest.

It is not known whether they will go alone or partner with an Indian entity in the new venture. Some of the new players are targeting the derivatives market to grow in India. The huge retail space is also an enticing factor.

Merrill Lynch has a joint venture in Indian investment banking space -- DSP Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms.

US-based GE Capital last week announced its intention to set up a bank last week soon after the banking sector roadmap was unveiled. It already has wide presence in consumer finance through GE Capital India.

The RBI roadmap said the removal of limitations on the operations of wholly-owned subsidiaries of foreign banks and treating them on a par with domestic banks to the extent appropriate will be designed and implemented after reviewing the experience till April 2009.

A total of 33 foreign banks are present in India and had total assets of Rs 1,36,315 crore (Rs 1363.15 billion) as at end-March 2004. Roughly they account for about 7 per cent of the total banking space.

The list of foreign players includes banks like Citibank, Bank of America, Bank of Nova Scotia, ABN-AMRO Bank, Deutsche Bank and JPMorgan Chase Bank, which figure in the top 25 global banks ranked by The Banker magazine.

The other top banks like Credit Suisse Group, Industrial and Commercial Bank of China, are still to start banking business in India.

India is expected to find a place in the strategy of these banks given the country's growth prospects. There have been cases of foreign banks closing shops in India too. Dresdner Bank and Commerzbank fall in this category.

India's GDP is seen growing at a robust pace of around 7 per cent over the next few years, throwing up opportunities for the banking sector to profit from.

The credit of banks in India has risen by over 25 per cent in 2004-05 and the growth momentum is expected to continue over the next few years.

Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after April 2009
TABLE 1

FINANCIAL PERFORMANCE OF FOREIGN BANKS IN INDIA
Item
2005-06
2006-07
variation




Absolute
percentage
A.INCOME  (i + ii)
17,662.07
24,959.06
7293.99
41.03
i)Interest Income 
      of which : Interest on Advance
                       Income on Investment    
ii) Other Income
        of which : Commission &Brokerage
12,290.82
7379.75
3,950.57
5,371.25
2,872.39
18,018.92
10,941.49
5,432.04
6,937.14
3,789.29
5728.09
3,561.74
1,481.46
1,565.90
916.89
46.60
48.26
37.50
29.15
31.92
B.EXPENDITURE (i+ii+iii)
14,593.47
20,370.90
5,777.43
39.59
i)Interest Expended
          of which :Interest on Deposits
ii) Provisions and Contingencies
          of  which : Provision for NPAs
iii) Operating Expenses
          of which : Wage Bill
5,149.50
3,161.17
3,589.84
96.43
5,854.13
2,005.17
7,615.02
4,758.24
5,014.65
332.48
7,741.22
3,081.11
2,465.53
1,597.07
1,424.81
236.06
1,887.09
1,075.94
47.88
50.52
39.69
244.81
32.24
53.66
C.PROFIT




i) Operating Profit
ii) Net Profit
6,658.44
3,068.60
9,599.81
4,585.16
2,941.37
1,516.56
44.18
49.42
D.NET INTEREST INCOME/MARGIN
7,141.33
10,403.89
3,262.57
45.69
E.TOTAL ASSETS
1,99,358.03
2,78,016.49
78,658.46
39.46

SOURCE: RBI & BALANCE SHEETS OF RESPECTIVE BANKS

The table 1  which  implies that  income of foreign  bank increased of  41.03 per cent  , while the  expenditure of the  foreign banks  has increased  nearly by 11 per cent. The operating profit amounting Rs. 2941.37 i.e. 44.18 per cent   and there is an increase in net profit amounting to Rs 1516.56 i.e. 49.42 per cent. There also increase in total asset. It may be concluded that there is a sufficient progress in the foreign banks and the overall profitability of foreign banks is good

LIST OF FOREIGN BANKS HAVING REPRESENTATIVE OFFICES IN INDIA AS ON NOVEMBER 3D, 2007
S. No
Name and address of the representative office
Country of   incorporation
Centre
Date of opening
1.
Commonwealth Bank
Australia
Bangalore
7.11.2005
2.
National Bank Australia Ltd       
Australia
Mumbai
3.11.2006
3
Raiffeisen Zentral Bank Osterreich AG      
Austria
Mumbai
1.11.1992
4
Fortis Bank       
Belgium
Mumbai
6.10.1987
5
KB.C. Bank N.V.       
Belgium
Mumbai
1.02.2003
6
Emirates Bank International       
Dubai
Mumbai
16.06.2000
7
Credit Industriel et Commercial    
France
New Delhi
1.04.1997
8
Natixis     
France
Mumbai
4.01.1999
9
Bayerische Hypo - und     Vereinsbank
Germany
Mumbai
12.07.1995
10
DZ Bank AG Deutsche Zentral     
Germany
Mumbai
22.02.1996
11
Landesbank Baden - Wurtlemberg      
Germany
Mumbai
1.11.1999
12
Presdner Bank AG      
Germany
Mumbai
6.09.2002
13
Commerzbank 
Germany
Mumbai
23.12.2002
14
DEPFABank
Ireland
Mumbai
9.2.2007
15
Intesa San paolo Spa
Intesa Sanpaolo Spa
Intesa San paolo Spa
20.01.1991
16
Uni Credito Italiano
Italy
Mumbai
1.08.1998
17
Banca Populare Di Verona E Novara
Italy
Mumbai
18.06.2001
18
BPU Banca -Banche Popolari Unite
Italy
Mumbai
16.01.2006
19
Banca Popolare di Vicenza
ItaIv
Mumbai
29.04.2006
20
Monte Dei Paschi Di Sienna
Italy
Mumbai
07.04.2006
21
Banca di Roma
Italv
Mumbai
17.01.2007
22
Everest Bank Ltd
Nepal
New Delhi
24.03.2004
23
Caixa Geral de Depositos
Portugal
Mumbai Goa (EC)
8.11.1999
24
Vnesheconombank (Bank for Foreign Economic Affairs)
Russia
New Delhi
1.3.1983
25
VTB India(Bank for Foreign Trade)
Russia
New Delhi
May 2005
26
Promsvvazbank
Russia
New Delhi
25.04.2006
27
Banco de Sabadell SA
Spain
New Delhi
2.08.2004
28
Banca Bilbao Vizcava Aroontaria, BBVA
Spain
Mumbai
2.4.2007
29
Hatton National Bank
Sri Lanka
Chennai
1.01.1999
30
UBSAG
Switzerland
Mumbai
24.11.1994
31
Zurcher Kantonalbank
Switzerland
Mumbai
27.06.2006
32
The Bank of New York
USA
Mumbai
27.10.1983
33
Wachovia Bank NA
USA
Mumbai
1.11.1996
34
Svenksa Handelsbanken
Sweden
Mumbai
1.8.2006
35
Westpac
Australia
Mumbai
1.10.2007

CONCLUSION:
Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative. India is expected to find a place in the strategy of these banks given the country's growth prospects. There have been cases of foreign banks closing shops in India too. India's GDP is seen growing at a robust pace of around 7 per cent over the next few years, throwing up opportunities for the banking sector. Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after few years
















CAREERS IN BANKING
Banking is one of the most sought after career choice among the students. It is an entry into a well paid, secure and status career. Though it may appear that these jobs are meant for commerce/economics students but the fact is that majority of bank officers are from different streams of education. Further, it is also not a fact that top positions in Foreign/Multinational Banks are held by MBA's from Premier Management Institutes. Though the Public sector Banks are now appointing management graduates, CAs and CFAs but bright graduates from any subject can get entry in the Public sector Banks through an All India Examination conducted by them.

The emergence of technology-driven new private banks have broadened the scope and range of banking service and entry of Financial Institutions are into the short-term lending business, is resulting in needs for more professionals. Now banks are in the mutual funds , securitisation business credit cards, consumer loans, housing loans, housing loans besides trading in gold and forex activities.

Generally banks look for good communication skills, good interpersonal skills, the ability to deal with customers, an alert nature, and basic knowledge of the industry. However to join foreign or private sector banks at higher than entry level one needs specialisation in some specific areas. For example expertise in project analysis, credit appraisal skills, managing huge loan portfolios general and foreign exchange and money .Good computer knowledge is always preferred.

There are front office personnel in all banks, and then there are supervisors who handle most back office operations like completion of transactions, general ledger work, overall supervision. Banks are now offering good salary packages. Most Public sector officers can begin in the Rs 6000-8000 per month scale. MBAs recruited by private and foreign banks are given plum packages to the extent of about Rs 25000-30000 a month.

Nationalization of the major commercial banks in India in 1969/1980 brought almost the entire banking system within the public sector. State Bank of India being the top commercial bank of the country.

The Private sector with the entry of new banks mostly promoted by the major Financial Institutions like IDBI, ICICI etc has provided competition to both Public sector and Foreign Banks. They are more technology savvy and offer better salaries than Public sector Banks. Unlike public sector banks, the promotional avenues are not time-bound.

Foreign Banks are the most sought after due to their salary packages comparable to the best in the country and better job profiles. However, in addition to personal performance, the job security in these banks is also dependent on various external factors, like the economy of the parent country, performance of the bank worldwide, change in expatriate management etc.

Public sector Banks recruit mainly graduates at the entry level on the basis of All India Level examination. However professionals like engineers, doctors, technologists, lawyers, ex-defence officers etc are recruited on senior positions through All India tests.

Private sector/Foreign Banks prefer to take MBA's, CA's etc at junior positions through Campus recruitment and interviews. However, at the senior positions they opt for experienced bankers. Thus the officers from Public sector Banks become the natural choice for such positions. Thus job-hopping has become an well-accepted norm in the Industry.

Therefore joining a Public sector Bank as Probationary Officer (Direct Officer) on the basis All India exam has become a stepping stone for the career growth in the Banking Industry.


















COMPETITION IN BANKING
Indian banking has come a long way since India embarked on the reforms path about a decade-and-a-half ago in 1991-92. The reforms have unleashed tremendous change in the banking sector. Today, Indian banks are as technology-savvy as their counterparts in developed countries. On the networking front, branch banking –the traditional forte, coupled with ATM networks-the now imperative, have evolved to place the banking services on a new trajectory.

The competitive forces have led to the emergence of Internet and mobile banking too, to let banks attract and retain customers. The banking sector is also gearing up to embrace the Basel II regime, to benchmark with the global standards. Similarly, retail lending has emerged as another major opportunity for banks. All these factors are driving up competition, which in turn forcing banks to innovate. A slew of innovative products, which could not be imagined even a couple of years ago, are a reality now.

Even mundane products like Saving Account, Personal Loans and Home Loans have become subjects of innovation. The Narasimham Committee had proposed wide-ranging reforms for  Improving the financial viability of the banks, Improving the macroeconomic policy framework for banks; Increasing their autonomy from government directions; Allowing a greater entry to the private sector in banking,  Liberalizing the capital markets; Improvement in the financial health and competitive position of the banks and  Furthering operational flexibility and competition among the financial institutions.

A number of reforms initiatives have been taken to remove or minimize the distortions impinging upon the efficient and profitable functioning of banks. These include  Reduction in SLR & CRR,  Transparent guidelines or norms for entry and exit of private sector banks, Public sector banks have been allowed for direct access to capital markets, The regulated interest rates have been rationalized and simplified, Branch licensing policy has been liberalized and A board for Financial Bank Supervision has been established to strengthen the supervisory system of the RBI.

These and other measures that have been taken would help the highly regulated and directed banking system to transform itself into one characterized by openness, competition, prudential and supervisory discipline. They will also make the new challenges particularly the growing demands from customers for high quality services. The objective of this is  to study, describe and analyze the impact of banking sector reforms on  the performance of commercial banks. On the basis of the impact of these reforms, to suggest third new modified reforms in the changing scenario.

By mid-1997, the RBI reported that the reform process had started yielding results. But as observed  by the NC in its second report, the improvement has arrested the deterioration of the system earlier but there is still a considerable distance to traverse. There has been improvement in several of the quantitative indices but there are many areas in which weaknesses still persist. These include customer service, technological up gradation, improvement in house keeping in terms of reconciliation of entries and balancing of books.

The second report was submitted on 23rd April, 1998, which sets the pace for the second generation of banking sector reforms. These include Merge strong banks, close weak banks unviable ones; Two or three banks with international orientation, 8 to 10 national banks and a large number of local banks; Increase Capital Adequacy to match enhanced banking risk;  Rationalize branches and staff, review recruitment; De-politicize Bank Boards under RBI supervision; Integrate NBFCs activities with banks.

But many cities saw no purpose in setting up the second NC on banking sector reforms within six years and before the full implementation of the recommendations of the first report of 1991. Strictly speaking, there were no new recommendations made in the second report except two on Merger of strong units of banks and Adaptation of the “narrow banking” concept to rehabilitate the weak banks.


Various reform measures introduced in India have indeed strengthened the Indian banking system in preparation for the global challenges ahead. Some of the reforms introduced and their impact on banks and furnished in the table (Indian banking on the reforms path) After the brief introduction of theme, section II fixes the objectives, hypotheses and methodology along with  the database. Section III reviews the related studies and section IV highlights the major issues faced by Indian banking sector. Section V analyses the results and discussions whereas section VII exhibits the future agenda for the third reforms and concludes the paper.

Banking in India is poised to enter yet another phase of reforms once the door opens further to foreign players in 2009. This requires further improvement in technology management, human resource management and the ability to foresee rapid changes in the financial landscape and adopt quickly. At present, there is a huge hiatus between the top management earnings of state owned banks and private, as well as foreign banks. Banks have to lay down sound risk management strategies and internal capital adequacy assessment committees to ensure that they do not diverge from the prudential requirements.

Nair (2006) discusses the future challenges of technology in banking. The author also point out how IT posses a bright future in rural banking, but is neglected as it is traditionally considered unviable in the rural segment. A successful bank has to be nimble and agile enough to respond to the new market paradigm and ineffectively controlling risks. Innovation will be the key extending the banking services to the untapped vast potential at the bottom of the pyramid.  Singh (2003) analyzed profitability management of banks under the deregulated environment with some financial parameters of the major four bank groups i.e. public sector banks, old private sector banks, new private sector banks and foreign banks, profitability has declined in the deregulated environment. He emphasized to make the banking sector competitive in the deregulated environment.
 They should prefer non-interest income sources. Singla (2008) examines that how financial management plays a crucial role industrialists growth of banking. It is concerned with examining the profitability position of the selected sixteen banks of banker index for a period of six years (2001-06). The study reveals that the profitability position was reasonable during the period of study when compared with  the previous years. Strong capital position and balance sheet place. Banks in better position to deal with and absorb the economic constant over a period of time. Shroff (2007) gives a summary of how Indian banking system has evolved over the year.

The paper discusses some issues face by these systems. The author also gives examples of comparable banking system for other countries and the lesson learnt. Indian banking is at the threshold of the paradigm shift. The application of technology and product innovations is bringing about structure change in the Indian banking system. Subbaroo (2007) concludes the Indian banking system has undergone transformation itself from domestic banking to international banking. However, the system requires a combination of new technologies, well regulated risk and credit appraisal, treasury management, product diversification, internal control, external regulations and professional as well as skilled human resource to achieve the heights of the international excellence to play its role critically in meeting the global challenge.

This paper mainly concentrates on the major trends that change the banking industry world over, viz. consolidation of players through mergers and acquisitions globalization of players, development of new technology, universal banking and human resource in banking, profitability, rural banking and risk management. Banks will have to gear up to meet stringent prudential capital adequacy norms under Basel I and II, the free trade agreements. Banks will also have to cope with challenges posed by technological innovations in banking Tiwari (2005) proposed a view that among the financial intermediaries banks and financial institutions are vital players in running the funding activities of the industries.


In the bank based system the financial institutions dominate in the aggregate assets of the financial system while in market based system, equity market has largest share of assets in the aggregate assets of the financial system. Uppal  and Kaur  (2007) analysis the efficiency of all the bank groups in the post banking sector reforms era. Time period of study is related to second post banking sector reforms (1999-2000 to 2004-05). The paper concludes that the efficiency of all the bank groups has increased in the  second post banking sector reforms period but these banking sector reforms are more beneficial for new private sector banks and foreign banks. This paper also suggests some measures for the improvement of efficiency of Indian nationalized banks.  The sample of the study in Indian banking industry which comprises five different ownership groups and the ratio method is used to calculate the efficiency of different bank groups. New private sector banks are compelling with foreign banks for continuous improvement in their performance.


The analysis is based on ratio analysis. We used the following parameters to assess the efficiency of Indian bank group’s vis-à-vis their counter parts. Profitability per Employee:  The profit per employee is in the range of Rs.0.41 to 2.32  Crores during the study period in G-I, similarly, it was between Rs.0.77 to 2.04 Crores in G-II, Rs.1.08 to 6.15 Crores in G-III and Rs.8.07 to 15.17  Crores in G-V. The G-I, II (public sector banks), even old private sector banks (G-III) have shown poor efficiency in terms of profit per employee as compared to new private sector banks and foreign banks.

But our new private sector banks are competing with the foreign banks whose average performance is higher (18.14) as compared to foreign banks where average is only 11.68 in at the end of the study period. This overall trend of increasing employee profitability may be attributed to the reduction in the number of employees following the launch of VRS by some of the Indian banks as well as higher profits by the banks. On an average, new private sector banks enjoy a higher increase in their profitability per employee, as compared with their counter part public sector banks.

This may be attributed largely to the better technology that the new private sector banks employ, besides the advantage of carrying no historical baggage. ICICI and HDFC Banks in G-IV are dominating in profit per employee whereas Corporation Bank, OBC and PNB have the higher per employee profit in G-I whereas Punjab & Sindh Bank, UCO Bank and Dena Bank are responsible for lowering the profit per employee.

On average, Indian banks pays less as compared to foreign banks. Among Indian banks, new private sector banks pay on an average Rs.59.83  crores as compared to G-I, II & III who pay Rs.14.00, 14.43 & 18.07  crores respectively. The highest expenses per employee incurred by G-V (foreign banks) having Rs.79.84 crores per employee. G-IV & G-V pays higher and attractive salary to the efficient employees; they also provide better facilities and incentives to their employees. Due to this reason, per employee expenses are higher even return per employee is much higher as compared to their counterparts. Among the Indian banks, average per branch expenses incurred by new private sector banks (G-IV) is at the tune of Rs.1169.06 crores as compared to G-I, II % III with branch expenses

Overall, we may conclude that among the Indian bank groups, new private sector banks had shown excellent growth in their efficiency and this group is competing with foreign banks in terms of many parameters of efficiency. Number of factors are contributing in their excellent efficiency performance like work culture, dedication, loyalty, technology, better facilities, new products/services, management, transparency etc.

Business per Employee: Since different employees in a bank contribute in different ways to the revenues and profits of a bank, it is difficult to come up with one universal metric that captures the business per employee accurately. The business per employee is quite low in G-I, II & III as compared to G-IV & V. The average per employee business is the highest in G-IV i.e. Rs.905.83 crores and G-V has an average of Rs.901.50 crores in the study period. Thus, deposits mobilization and advances per employee are higher in G-IV & V.

These bank groups are providing a better interest on deposits and lower interest on advances; their market policies are quite effective as compared to Indian public sector banks. Hence, the new private sector banks in India have led the way in this regard, because of the better use  of  technology and other infrastructure.


The problem of NPAs is a matter of serious concern. It is a very serious problem for our public sector banks. The report of the RBI on NPAs says that reducing NPAs should be treated as a “national  priority”. The average rate of NPAs is very high i.e. 6.03 pc in old private sector banks where public sector  banks are in succession with 5.29 pc and 4.62 pc in G-I & II respectively, and for this internal and external  factors are responsible.


Internal factors such as business failure, inefficient  management strained  labor relations, inappropriate technology and product obsolescence have also contributed to the rise in NPAs whereas external factors like raw material shortage, price escalation, power shortage, industrial recession, excess capacities and the natural calamities like foods, accidents which leads waiving heavy loans contributed to the rise in NPAs on the books of banks.

A national priority status will have to be accorded to the financial sector reforms to strengthen the foundations of the Indian financial system and gear it to meet the challenges of globalization. The on-going reforms process and the agenda for the future reforms have to focus on making the financial system viable and efficient so that it could contribute to enhancing the competitiveness of the real economy and face the challenges of an increasingly integrated global financial architecture. The future agenda would certainly have address to the following: Policies and strategies to reduce high level of NPAs: High level of NPAs is the most crucial challenge faced by the Indian banking sector.


The banking sector reforms undertaken in India from 1992 onwards were basically aimed at ensuring the safety and soundness of financial institutions and at the same time at making the banking system strong, efficient, functionally diverse and competitive. The reforms included measures for arresting the decline in productivity, efficiency and profitability of the banking sector. Furthermore, it was recognized that the Indian banking system should be in tune with international standards of capital adequacy, prudential regulations, and accounting and disclosure standards. Financial soundness and consistent supervisory practices, as evident in our level of compliance with the Basel Committeeís Core Principles for Effective Banking Supervision, have made our banking system resilient to global shocks.

India has not faced any major economic/financial crises, though in 1990-91, there was some pressure on the external sector with the current account deficit and external debt servicing reaching large proportions. However, due to prudent macroeconomic policies, it was possible to return the country to a sustainable growth path. As well as the long history of regulation and supervision, Indian banks have limited exposure to sensitive sectors such as real estate, equity, etc, strict control over off-balance sheet activities, larger holdings of government bonds (which helps limit credit risk), relatively well diversified credit portfolios, statutory restrictions on connected lending, adequate control over currency and maturity mismatches, etc, which has insulated them from the adverse impact of financial crisis and contagion.


Banks in India have played a significant role in the development of the Indian economy. However, with the structural reforms initiated in the real economy from the early 1990s, it was imperative that a vibrant and competitive financial system should be put in place to sustain the ongoing process of reforms in the real sector. The financial sector reforms have provided the necessary platform for the banking sector to operate on the basis of operational flexibility and functional autonomy, thereby enhancing efficiency, productivity and profitability. The reforms also brought about structural changes in the financial sector and succeeded in easing external constraints on its operation, introducing transparency in reporting procedures, restructuring and recapitalising banks and enhancing the competitive element in the market through the entry of new banks.

The ongoing revolution in information and communication technology has, however, largely bypassed the Indian banking system given the low initial level of automation. The competitive environment created by financial sector reforms has nonetheless compelled the banks to gradually adopt modern technology, albeit to a limited extent, to maintain their market share. Banks continue to be the major financial intermediaries with a share of 64% of total financial assets. However, non-bank financial companies and development finance institutions are also emerging as alternative sources of funding.

In India, foreign banks account for only around 8% of the total assets of the banking system. Further, domestic households are not allowed to place deposits abroad. Similarly, conditions for accessing overseas capital markets by domestic corporates have been stringent, in terms of size, maturity, pricing, etc. The impact of the entry of foreign banks on domestic banks is likely to depend on various factors such as the structure, strength and competitiveness of domestic banks, the share of foreign banks, and the regulatory/supervisory framework. While the entry of foreign banks could definitely improve the competitive environment, they are not likely to weaken domestic banks. With better technology and expertise in offering specialised banking products such as derivatives, advisory services, trade finance, etc, the entry of foreign banks can enhance healthy competition and has a positive spillover effect on the domestic banks.


The domestic banks would be under peer pressure to improve operational efficiency. It needs, however, to be recognised that the banking system in India is quite competitive with the presence of public, private and foreign banks. Thus, the major forces for change in the Indian context have been the following consistent and strong regulatory and supervisory framework;  structural reforms in the real and financial sectors; commitment to adopt and refine regulatory and supervisory standards on a par with international best practices; and competition from foreign banks and new-generation private sector banks.

State banks in India have, over the years, played a very significant role in the development of the economy and in achieving the objectives of the nationalisation undertaken in 1969 and 1980, namely to reach the masses and cater to the credit needs of all segments, including weaker sections, of the economy. The period 1969-90 witnessed rapid branch expansion and an adequate flow of credit to all sectors, including the neglected sectors of the country. From 1990, however, it was recognised that steps were needed to improve the financial health of banks to make them visible, efficient and competitive to serve the emerging needs and enhance the efficiency of the real sector.


While the role of the large state banks has not undergone any structural changes and they continue to serve the varying needs of the economy, what has changed significantly, as a result of the reform process, is the focus on their consolidation, efficiency, resilience, productivity, asset quality and profitability through liberalisation, deregulation and adoption of prudential standards in line with international best practices. As a part of financial sector reforms and with a view to giving the state banks operational flexibility and functional autonomy, partial privatisation has been authorised as a first step, enabling them to dilute the stake of the Indian government to 51%. The government further proposed, in the Union Budget for the financial year 2000-01, to reduce its holding in nationalised banks to a minimum of 33% on a case by case basis.

The major problems for gradual privatisation are likely to be resistance from staff to rationalisation of the branch network and emphasis on higher staff productivity. The optimal size of a bank depends on several factors and differs between countries depending on the level of economic development, the number and diversity of financial institutions/instruments, the competitive situation in the market, etc. Looking at the typical Indian situation, the big banks operating in international markets have to coexist with banks operating only at the national level, regional rural banks and cooperative banks, which will induce the necessary competition in the market.

Most of the state banks have a strong national presence and are catering to the needs of various segments of the economy. We do not expect to split the state banks into smaller entities even after the gradual disinvestment of government equity in them. Rather, there is a possibility of consolidation for synergising business/regional strengths, and efforts in this area may be ìboard-drivenî with the functional autonomy that will emerge as a result of such disinvestment.

Under the Banking Regulation Act, banking companies cannot merge without the approval of the Reserve Bank of India. The government and the Reserve Bank do not play a proactive role in either encouraging or discouraging mergers. It is our endeavour that the government and the RBI should only provide the enabling environment through an appropriate fiscal, regulatory and supervisory framework for the consolidation and convergence of financial institutions, at the same time ensuring that a few large institutions do not create an oligopolistic structure in the market.

Mergers should be based on the need to attain a meaningful balance sheet size and market share in the face of heightened competition and driven by synergies and locational and business-specific complementarities. While there is no regulatory deterrence to bank mergers, their incidence has not been significant and hence no problems have occurred in India. Mergers of banks help to reduce the gestation period for launching/promoting new places of business, strengthen product portfolios, minimise duplication, gain competitive advantage, etc.

They are also recognised as a good strategy for enhancing efficiency. Ideally, mergers ought to be aimed at exploiting synergies, reducing overlap in operations, ìright-sizingî and redeploying surplus staff either by retraining, alternate employment or voluntary retirement, etc. As banks are leveraged and the credibility of the top management has tremendous supervisory implications, we prefer consensual mergers to hostile takeovers. The takeover codes should, therefore, reflect the supervisory concerns.

It has been our  endeavour to preserve the integrity and identity of banks. The activities that the banks and their subsidiaries can undertake are restrictive, to ensure that the interests of existing and future depositors are fully protected. Banks are also not allowed to undertake trading in commodities. In pursuit of these objectives, the merger of a bank with a non-bank is generally not favoured. However, the merger of a non-bank financial company with a bank is allowed subject to the prior approval of the Reserve Bank of India and compliance with all the regulatory and supervisory standards applicable to banks. The issues that may arise in such mergers would be the bank ís ability to comply with statutory and regulatory requirements in respect of liabilities and assets taken over by it from the non-bank.

There is no separate agency/mechanism for preserving competition in the banking sector. Promoting competition is, however, one of the key objectives of financial sector reforms. The entry of new private sector and foreign banks and introduction of new products and technology and operational freedom to banks have ensured a competitive environment in the financial market. India being a geographically vast country with its rural population constituting almost 70% of the total, the role of regional rural banks remains important. The banking sector, characterised by the presence of internationally active banks, national-level banks and regional rural banks, is likely to be preserved to cater to the needs of a varied customer base. Consequent to liberalisation and financial sector reforms, there has been some blurring of distinction between the activities of banks and DFIs.

In particular, the traditional distinction between commercial banking and investment banking has tended to narrow somewhat. Banks have been moving into certain areas which were the exclusive domain of the DFIs, eg project finance and investment banking. DFIs have recently been given the option to convert themselves into universal banks with the RBIís approval. To this end, a DFI would need to prepare a transition path in order to comply fully with the statutory and regulatory requirements applicable to banks. The RBI will consider such requests on a case by case basis.

Domestic banks account for 92% of total banking assets in India. Given the size of the country and the policy to ensure that foreign banks market share does not exceed 15%, domestic banks are likely to dominate the banking markets.

The financial sector reforms have brought about significant improvements in the financial strength and the competitiveness of the Indian banking system. The prudential norms, accounting and disclosure standards, risk management practices, etc are keeping pace with global standards, making the banking system resilient to global shocks. The consolidation and convergence of banks in India has, however, not kept pace with global phenomena. The efforts on the part of the Reserve Bank of India to adopt and refine regulatory and supervisory standards on a par with international best practices, competition from new players, gradual disinvestment of government equity in state banks coupled with functional autonomy, adoption of modern technology, etc are expected to serve as the major forces for change. In the emerging scenario, the supervisors and the banks need to put in place sound risk management practices to ensure systemic stability.